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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: DECEMBER 31, 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
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.05 per share New York Stock Exchange, Inc.
Chicago Stock Exchange, Incorporated
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Chicago Stock Exchange, Incorporated
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of GTE's voting stock held by non-affiliates at
January 31, 1999 amounted to $65,325,179,937.
GTE had 969,040,882 shares of $.05 par value common stock outstanding (excluding
22,741,309 treasury shares) at January 31, 1999.
DOCUMENT INCORPORATED BY REFERENCE:
GTE's Proxy Statement covering its 1999 Annual Meeting of Shareholders
(Incorporated in Part III).
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PART I
Item 1. Business
GTE Corporation and subsidiaries ("GTE" or "the Company") is a leading
telecommunications provider with one of the industry's broadest arrays of
products and services. It is one of the world's largest telecommunications
companies, with 1998 revenues of more than $25 billion. GTE's national and
international operations serve approximately 30 million telephone access lines
through subsidiaries in the United States, Canada and the Dominican Republic,
and an affiliate in Venezuela. GTE is a leading wireless operator in the United
States, with more than 4.8 million wireless customers and the opportunity to
serve 61.4 million potential wireless customers. When we refer to "potential
wireless customers" in this document, we mean the number of people living in the
relevant area served by our wireless operations, adjusted to reflect our
ownership interests in those wireless operations.
Outside the United States, GTE operates wireless networks serving approximately
2.8 million customers with 23.4 million potential wireless customers through
subsidiaries in Canada, the Dominican Republic and Argentina, and affiliates in
Venezuela and Taiwan. GTE also participates in a venture which operates a paging
network in China.
GTE provides data services, including dial-up Internet access for residential
and small business consumers, and Web-based applications for Fortune 500
companies. GTE is also a leader in government and defense communications systems
and equipment, directories and telecommunications-based information services and
systems. GTE and its subsidiaries had approximately 120,000 employees, at
December 31, 1998.
NATIONAL
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Network Services
GTE's telephone operating subsidiaries in the United States served approximately
23.5 million access lines in 28 states as of December 31, 1998 and provided many
types of communications services, ranging from local telephone service for the
home and office to highly complex voice and data services for business.
Subsidiaries accounting for the largest portion of total Network Services
revenues are GTE California, 22%; GTE North, 21%; GTE Southwest, 13%; and GTE
Florida, 11%. The largest cities served are Los Angeles, Long Beach and Santa
Monica, California; Tampa and St. Petersburg, Florida; Honolulu, Hawaii;
Lexington, Kentucky; Fort Wayne, Indiana; and Erie, Pennsylvania.
Local services revenues are composed mainly of fees charged to customers for
providing local exchange services within designated franchise areas. GTE
telephone subsidiaries also provide toll services within designated geographic
areas under agreements with connecting local exchange carriers (LECs) in
conformity with individual state regulatory orders. GTE and other LECs
compensate each other pursuant to access charge tariffs that are subject to
review and approval by state regulatory commissions.
Network access services revenues are generated by providing access services to
interexchange carriers. The interstate portion of these service revenues is
based on switched, common-line, and special access tariffs approved by the
Federal Communications Commission (FCC). The FCC tariffs include end-user access
charges to residential and business customers. State access is based on similar
rate structures that are subject to approval by state regulatory commissions.
With the passage of the Telecommunications Act of 1996 (the Telecommunications
Act), enacted on February 8, 1996, the telephone subsidiaries are free to
operate in the areas served and to extend service to other areas subject to
conditions, restrictions and limitations of various kinds. Advances in
technology and an increase in alternative provision of service are beginning to
erode certain of the benefits previously derived from franchise rights granted
by states or municipalities. In some cases, municipalities have the right to
acquire the telephone system within the municipal limits on certain terms and
conditions.
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Also included in GTE's Network Services is one major unregulated affiliate: GTE
Supply. GTE Supply is responsible for the procurement and management of
inventory and supplies for GTE's domestic telephone companies, as well as other
GTE subsidiaries. GTE Supply also sells material and logistic services to third
parties.
During 1997, GTE Supply implemented its multi-year agreement with BellSouth
Telecommunications under which GTE Supply manages the procurement, inventory and
distribution of equipment and materials required for BellSouth
Telecommunications' network construction and operations, and contract management
services. Revenues associated with this contract were approximately $481 million
during 1998.
GTE Wireless
GTE is one of the leading providers of cellular services in the United States in
terms of population in the areas served. Wireless Services is composed of GTE
Wireless Products and Services (GTE Wireless) and GTE Telecommunications
Services Inc (GTE TSI). Wireless Services includes 800 MHz cellular voice and
data transmission services, 1.8 GHz Personal Communications Services (PCS) and
cellular transaction processing and support services provided by GTE TSI. GTE
Wireless provides cellular and PCS services and products to more than 4.8
million subscribers through its 800 MHz operations and PCS services.
GTE manages or controls cellular operations in 70 metropolitan markets, known as
metropolitan statistical areas (MSAs), and 52 rural service areas (RSAs). GTE's
ownership position in U.S. markets was obtained through the FCC lottery and
settlement process as well as through purchases and exchanges of licenses with
other cellular service providers. GTE's 800 MHz cellular operations serve a
population of approximately 52 million POPs, approximately 18 million of which
are in the top 30 U.S. markets, including San Francisco, Houston, Cleveland, San
Diego, Tampa, San Jose and Indianapolis.
GTE also owns and operates the PCS licenses in the Cincinnati, Seattle and
Spokane Major Trading Areas (MTAs) which cover approximately 9 million POPs. The
Cincinnati and Seattle MTAs were purchased in 1995 in connection with the first
of the FCC's auctions of 1.8 GHz PCS licenses. The Spokane MTA was purchased in
1996, subsequent to the FCC auction.
Cellular and PCS licenses were granted for an initial 10-year term and are
renewable for successive 10-year terms. To date, GTE's cellular licenses have
been renewed by the FCC without opposition.
In 1996, GTE Wireless began to deploy Code Division Multiple Access (CDMA)
digital technology in its markets. As of December 31, 1998, GTE Wireless is
commercially providing CDMA service in 24 markets, with nearly all cell sites in
core markets providing digital service. GTE Wireless will continue to deploy
CDMA over the next several years. CDMA technology allows for clearer calls,
enhanced security, greater functionality and additional capacity to process more
calls. GTE Wireless is currently testing CDMA technology for wireless data
applications as well as offering Cellular Digital Packet Data services in
focused market segments. CDMA data service allows secure digital dial-up access
using a CDMA handset, without requiring additional equipment.
GTE Wireless owns and operates cellular systems through wholly-owned
subsidiaries and partnerships with other entities. Wireless services are
marketed to businesses and consumers, directly and through authorized agents,
and to wholesalers that resell GTE's wireless services. GTE's retail wireless
services are marketed and sold under the GTE brand. GTE Wireless capitalizes on
expanding marketplace opportunities through segment-based marketing to increase
marketing effectiveness. This value-based marketing strategy focuses on
higher-value customers to increase revenues.
GTE Wireless is also committed to strengthen its position in the industry by
aggressively managing operations to achieve cost efficiencies. Process
improvements increased productivity, resulting in improvements to operating cash
flow margins and cash costs per customer.
GTE's cellular operations have always experienced direct competition from the
second cellular licensee in each market. However, the wireless services industry
in the U.S. is becoming increasingly competitive as a result of the FCC's
auctions of six additional PCS licenses beginning in 1995. As a result, by
December 31, 1998, GTE
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Wireless had five to seven competitors in major markets. Competition is
principally on the basis of service quality, packaging capabilities, price and
coverage area. As new entrants invest in the expansion of their networks, they
will be able to provide increasingly competitive service offerings.
Added competition has enabled the wireless industry to grow faster in terms of
revenue generated and size of customer base. The PCS networks have increased the
overall supply of wireless capacity. This increase in supply has led to lower
prices for consumers, making wireless services more affordable to the general
population.
GTE TSI provides transaction processing, software applications, fraud detection
tools and network support services that facilitate the "roaming" of cellular
subscribers and the management of cellular markets. GTE TSI serves both large
and small customers in a significant portion of the domestic wireless market.
GTE TSI competes through product innovation, technology deployment, provision of
flexible product solutions and quality customer service.
GTE Internetworking
GTE Internetworking offers a wide range of Internet and internetworking services
and solutions, including dedicated, dial-up access to the Internet and a variety
of value-added Internet services such as managed network security, virtual
private networks, web server and applications hosting, digital certificates,
systems integration services and enhanced Internet services, including IP fax
and Internet call waiting. During 1998, GTE Internetworking grew its subscriber
base for dial-up Internet access by over 100% to approximately 500,000 and had
over 800 web hosting and security customers.
GTE Internetworking supports its service offerings with a high bandwidth network
infrastructure, four network operations centers, 10 web hosting and server
operations centers, and a technical support organization. It is currently
participating in a major build out of a nationwide fiber-optic network, with
planned completion by mid-1999. This new network infrastructure is a
self-healing SONET ring network operating at bandwidths of up to OC-192 with
17,000 miles connecting over 100 metropolitan areas.
GTE Internetworking has an ongoing agreement with America Online (AOL) to
build, maintain, and operate a significant portion of AOL's nationwide,
high-speed, dial-in network. The contract with AOL includes substantial
pass-through costs to GTE Internetworking for telecommunications circuits and
other services provided by local and interexchange carriers. In 1998, GTE
Internetworking's relationship with AOL continued to expand, with the total
contract amount valued at over $1 billion through June 2002.
GTE Internetworking draws upon its expertise in funded research and development
of advanced technologies, including wireless communications, high-speed router
technology, network security, and speech processing. It is currently focused on
satellite and terrestrial wireless data protocols, advanced quality of service
architecture, certificate authority, and speech enhanced IP services, such as
unified messaging. These capabilities are used to differentiate GTE
Internetworking's position in the marketplace and are also sought after by the
U.S. Government and large commercial organizations.
Principal competitors in the internetworking services and solutions market may,
in general, be divided into the following five groups: (1) telecommunications
companies, regional Bell operating companies, and various cable companies; (2)
Internet access and enhanced services providers; (3) on-line services providers;
(4) value-added network providers and systems integrators; and (5) research and
development organizations, and engineering services providers in the government
market. The primary factors of competition are price, quality of service,
technical expertise, quality of network backbone and infrastructure, and quality
and scope of sales, marketing, and distribution channels.
Technology and Systems
GTE Technology and Systems is primarily composed of GTE Government Systems
Corporation, a provider of communications and intelligence systems to the
military and Federal government. GTE Government Systems develops, manufactures
and integrates customized command, control, communications and intelligence
systems for
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the defense and national security agencies of the U.S. Government and selected
foreign governments. In addition, GTE Government Systems provides information
systems, telecommunications services and electronic system operation and
maintenance support services for civilian agencies of the Federal government and
for commercial users, both domestically and internationally. As a major part of
this business focus, GTE Government Systems provides and manages integrated
system solutions tailored to customer information processing and
telecommunications requirements. During the first quarter of 1998, the Company
committed to a repositioning plan that resulted in a decision to sell the
operations of GTE Government Systems. The Company expects to consummate the
sale during 1999.
During 1998, GTE Government Systems received orders valued at $1.5 billion, a 7%
increase compared with 1997. GTE Government Systems is strengthening its
presence with traditional military customers while aggressively attempting to
offset a declining defense market by broadening its penetration of the civilian
agencies of the Federal government. GTE Government Systems is exploiting
selected niches in the domestic commercial marketplace and transitioning its
capabilities, products and services to non-defense applications. GTE Government
Systems is addressing complex telecommunications and information processing
needs in markets such as weather, aviation and public safety/law enforcement in
addition to pursuing selected programs and markets in the international defense
and commercial telecommunications arenas.
GTE Government Systems' principal U.S. competitors include CSC, Lockheed Martin,
AT&T, TRW, Harris, EDS, Raytheon and Motorola. Major foreign competitors include
Thomson-CSF, Ericsson and Siemens.
GTE's research and development work is centered principally at GTE Laboratories
Incorporated. Activities in research and new product development and improvement
are also conducted at the various GTE business units. Both research and product
developments are focused on telecommunications operations and applications. The
key areas of emphasis include: the automation of telecommunications operations,
network management, intelligent network migration, broadband information
transport, network architecture design and planning, wireless communications,
advanced database capabilities, network quality improvements, exchange video
distribution and support for industry standards development.
For the years 1998-1996, expenditures for all company-sponsored research and
product development and improvement were $159 million, $122 million and $122
million, respectively. Additionally, $220 million, $162 million and $126
million, respectively, was expended for customer-sponsored research and product
development and improvement during the same periods. GTE engaged over 2,000
professional scientists and engineers on such activities.
GTE Communications
One of the most significant impacts of the Telecommunications Act's passage was
the removal of certain restrictions that prohibited GTE from jointly marketing
the products and services of its regulated local telephone subsidiaries with
those of its interexchange subsidiaries. In light of this, GTE created a
national sales and marketing organization called GTE Communications Corporation
(GTECC) to compete in the new, highly competitive telecommunications
environment. GTECC is composed of three primary operating segments: 1) General
Markets, composed of long-distance services, competitive local exchange carrier
(CLEC) activities for consumer and small businesses, and Card Services; 2)
Strategic Markets which services medium and large businesses; and 3) Video
Services.
General Markets
GTE's CLEC is certified to offer competitive local exchange services in 24
states, and has applications pending in several others. In 1998 GTE's CLEC was
operational in California, Florida, Texas, Indiana, Kentucky, Tennessee,
Illinois and Washington. Service in additional states is planned to begin during
1999. The CLEC markets value-added telecommunications products and services
nationwide to communications intensive residential and small business customers.
These product and service offerings include local, long-distance, wireless,
data, Internet-access and paging services. The CLEC has developed integrated
systems to market, fulfill, service and bill these various products to
customers. Competition is primarily from incumbent local exchange carriers,
other CLECs, cable
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television companies that offer local telephone service, as well as
interexchange carriers (IXCs) branching out into bundled product offerings.
GTE Long Distance (GTELD) began operations in March 1996. It operates primarily
as a switchless reseller of national and international long-distance services.
In 1998, GTELD began moving a small amount of traffic to its own network and in
1999 plans to migrate additional traffic. GTELD provides service in all 50
states to residential and business customers, including long-distance services,
calling cards, 800/888 services and operator services to its customers. GTELD is
also authorized to provide operator services to customers of other carriers in
46 states. Principal competitors include AT&T, MCI/WorldCom and Sprint, in
addition to smaller, regional telecommunications providers. Additional
competition is expected when the regional Bell operating companies are permitted
to offer in-region long-distance services. Competition is based on price and
pricing plans, types of services offered, customer services and communications
quality, reliability and availability.
GTE Card Services entered the prepaid phone card market in late 1994 with the
introduction of several GTE prepaid calling cards. The prepaid phone card is a
telephone calling card with a preset amount of calling available that is paid
for by the customer at the time of purchase. This card competes in the
long-distance market by providing an alternative means of purchasing and
controlling long-distance usage for both the business and residential user. GTE
Card Services competes in this marketplace by leveraging GTE's brand name and
utilization of GTE's exclusive marketing relationships with various licensees.
In addition, GTE Card Services has marketed a combination calling card/credit
card in conjunction with Associates National Bank since 1992.
Strategic Markets
The Strategic Markets segment initially operated as a provider of network
monitoring services and voice and data equipment (CPE) sales to medium and large
businesses. Strategic Markets continues to expand its offering to medium and
large businesses and now provides customized telecommunications solutions
including long-distance, Internet-access and other data products. GTECC's
Strategic Markets competes as a national total service provider. The Strategic
Markets segment will begin selling local services in the San Francisco area in
1999 utilizing a GTE local switch. Competitors, generally not full service
providers, are incumbent local exchange carriers, IXCs, CLECs, VARs (value-added
resellers), and other CPE equipment providers.
Video Services
The Telecommunications Act eliminated the telephone company programming ban and
allowed GTE the flexibility to choose to enter the wireline video distribution
business through an open video platform arrangement or via a standard cable
television operation. GTE made its initial entry into the video market as a
franchised cable TV operator. The legislation also allows GTE to deploy video
networks that are more fully integrated with its telephone operations. Several
regulatory proceedings are pending that will address the rules associated with
such integration. In the regulatory arena, pending action by the courts and
several open FCC proceedings will be closely monitored to continuously validate
GTE's video entry position. Proceedings have been opened to address various
issues including video and telephony joint use facility cost allocation and
transaction rules, new advanced services rules, rules concerning exclusive
contracts for multi-dwelling units and cable inside wiring, implementation of
video close captioning requirements and digital must carry rules, revisions to
existing cable/multi-point distribution service cross-ownership rules, and the
establishment of rules for local, multi-point distribution services.
At the end of 1998, GTE had been granted nine video franchises in the Pinellas
County, Florida market and five video franchises in the Ventura County,
California market. Video services offerings have also been launched utilizing
digital wireless technology (MMDS) in Oahu, Hawaii and direct broadcast
satellite technology.
Directories
GTE Directories Corporation is a leader in linking buyers and sellers through a
spectrum of multi-media advertising ranging from the traditional Yellow Pages
advertising, to interactive Web-based services to cable TV advertising. GTE
Directories, with over 60 years experience, is one of the world's largest
directory publishing companies,
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providing sales, publishing and other related services for nearly 1,600
directory titles in 47 states and 14 other countries, with a total circulation
of approximately 60 million copies.
In the U.S., GTE Directories is a significant competitor in the $11.5 billion
Yellow Pages industry, along with six major and numerous smaller directory
publishers. The deregulation of the telecommunications industry in the U.S. has
contributed to the growth in competition in the directory industry, making it
easier for smaller publishers to produce complete and accurate directories.
Internationally, GTE Directories has operations in Europe, Asia and Latin
America. In 1997, GTE Directories joined with Swedish telecom group Telia AB to
acquire Polska, Poland's largest directory publisher. Additionally, GTE
Directories acquired a majority interest in Herold Business Data, Austria's
leading directory publisher, and partnered with the Austrian national telephone
company to produce directories for the country. These two acquisitions
complemented GTE Directories' other European operations. Also in 1997, GTE
Directories assumed management responsibility for the directory publishing unit
of CODETEL, the national telephone company in the Dominican Republic and a
wholly-owned subsidiary of GTE, adding to its existing Latin American operations
in Belize and Costa Rica.
GTE New Media Services, an operating affiliate of GTE Directories, develops and
markets Internet-based interactive directory and shopping services for
advertisers and consumers. In 1996, it introduced GTE SuperPages(R) service, an
Internet-based Yellow Pages and web-site directory that contains over 11 million
businesses nationwide and a search capability that locates over 1.5 million
business web sites on the Internet. SuperPages(R) has been widely recognized as
a premier service of its kind.
GTE Directories is distinguishing itself from the competition by offering the
advertiser unique "bundles" of media. To date, GTE Directories has been
successful in developing Yellow Pages and Internet advertising packages for its
advertisers. Additionally, the expansion in both electronic media and cable
television positions GTE Directories as the best source for multiple shopping
tools that link buyers and sellers. Finally, GTE Directories is joining forces
with other affiliates to offer a complete package of telecommunications goods
and services in the marketplace.
For segment reporting purposes, the financial results of directory companies
operating outside of the U.S. have been included in International Operations.
The financial results of the domestic directory activities have been included in
both Network Services and Other National based on the revenue sharing
arrangements that have been established by GTE Directories and Network Services.
GTE Airfone
GTE Airfone Incorporated operates a telecommunications service for passengers on
board aircraft under a license granted by the FCC in 1991. Five other licenses
have been granted by the FCC for air-to-ground service, and two companies,
In-Flight Phone Corporation and Claircom, initiated service. During 1995, MCI
purchased part ownership in In-Flight, while Claircom merged with AT&T to become
known as AT&T Wireless. In January 1997, In-Flight Phone Corp. filed for
bankruptcy under Chapter 11. Recently, AT&T Wireless announced the sale of their
business to Iridium effective October, 1999. On April 2, 1998, GTE announced its
plan to sell GTE Airfone. Currently, discussions are being conducted with
several parties with an interest in the air-to-ground communications industry.
GTE expects to complete the sale of GTE Airfone during 1999.
During 1998, GTE Airfone continued deployment of its new advance digital GenStar
System to its contracted airlines. Currently, GTE Airfone has agreements with
United, Continental, Delta, Delta Shuttle, TWA, US Airways, Reno Air, Midwest
Express, US Airways Shuttle, Air Wisconsin, Mexicana and Aeromexico. As of
December 31, 1998, 2,214 commercial aircraft have been installed with the
GenStar System in the United States, Canada and Mexico.
GTE Airfone also offers airborne telecommunications equipment and installations
to airlines in Europe and Asia. In Europe, GTE Airfone's customers include: Air
France/Air Inter Europe, Alitalia, British Airways and Turkish Airlines. In
Asia, GTE Airfone's customers include: Cathay Pacific, China Southern and Thai
Airways.
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GTE Airfone and Raytheon Systems (formerly Hughes Defense Communications),
pursuant to a joint venture alliance, have continued marketing the MagnaStar
digital product for the corporate general aviation market. The MagnaStar System
includes a digital radio, designed by Magnavox, which links exclusively to the
GTE Airfone all-digital GenStar System. As of December 31, 1998, approximately
1,200 Magnastar units have been sold and installed.
GTE Airfone will continue to compete for digital service contracts and initiate
marketing programs designed to promote system usage based on enhanced quality,
reliability, new feature offerings and the flexibility for future capabilities.
Current features include data and fax service, conference calling, ground-to-air
calling, seat-to-seat calling, and a variety of information services.
Additionally, the data transport speed from a user laptop computer was increased
to 9.6 Kbps, the fastest in the air-to-ground industry. A lighted menu on the
handset screen also makes it easy and efficient for passengers to use these
enhanced features.
INTERNATIONAL
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GTE, through its International Operations, provides telecommunications services
in Canada, Venezuela, Argentina, and the Dominican Republic, and offers paging
services in twenty major metropolitan areas in China. As of December 31, 1998,
GTE's international operations served approximately 6.1 million access lines and
provided wireless and paging services to over 3.0 million customers.
As of year-end 1998, GTE had voting control of BC TELECOM, Inc. (BC TELECOM)
through its ownership of common stock of Anglo-Canadian Telephone Company. At
December 31, 1998, BC TELECOM served approximately 2.5 million access lines in
the province of British Columbia, Canada and provided cellular services to
approximately 479,000 subscribers. Beginning in 1994 with the introduction of
equal access for long-distance services, BC TELECOM has been impacted by the
effects of competition in its markets. During 1997, a series of regulatory
rulings were announced which opened the telecommunications industry in British
Columbia to full competition in 1998. The regulatory reforms establish a
framework, including the implementation of a price cap regime, under which new
competitors can immediately enter the market. BC TELECOM is aggressively
addressing competition in the long-distance market through the implementation of
various customer retention and winback initiatives.
On January 31, 1999, BC TELECOM and TELUS Corporation merged to form a public
company, BCT.TELUS Communications Inc. (BCT.TELUS). GTE owns approximately 26.7%
of BCT.TELUS which is the second largest domestic Canadian telecommunications
provider with the financial capacity and other capabilities to enable it to
compete in all the major Canadian markets as a provider of communications
services. BCT.TELUS will initially operate in the Canadian provinces of British
Columbia and Alberta.
Also, through its ownership of common stock of Anglo-Canadian Telephone Company,
GTE has voting control of Quebec Telephone (Quebec Tel). At December 31, 1998,
Quebec Tel served approximately 298,000 access lines in the province of Quebec,
Canada and provided cellular services to approximately 29,000 customers.
In addition, GTE, through GTE Holdings (Canada) Limited, a Canadian holding
company, owns 100% of the common stock of Compania Dominicana de Telefonos, C.
por A. (CODETEL), a telephone company providing local, wireless and national and
international long-distance telephone service in the Dominican Republic. This
company served approximately 676,000 access lines and 100,000 cellular customers
at December 31, 1998. CODETEL has experienced competition in its international
toll and local and national markets. However, the entrance of competitors is
being addressed through enhancements and expansion of the network, the
implementation of bundled service offerings and aggressive pricing solutions.
GTE owns, directly and indirectly through a multinational consortium, a 26.4%
ownership interest in Compania Anonima Nacional Telefonos de Venezuela (CANTV),
the telephone company in Venezuela. Under a concession granted by law, CANTV is
a full service telecommunications provider offering local, wireless and domestic
and international long-distance service throughout Venezuela on an exclusive
basis until October 2000, except in limited circumstances. Beginning in October
2000, however, CANTV will be subject to direct competition for these services.
CANTV also offers paging services, public telephones, private networks, data
transmission, directory
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services and other value added services. CANTV had approximately 2.6 million
access lines in service at December 31, 1998 and served approximately 648,000
cellular subscribers.
Due to the high level of inflation experienced in Venezuela, CANTV's results are
substantially influenced by its ability to increase tariffs. CANTV operates
under a Concession Agreement with the Venezuelan government that provides, among
other things, for quarterly tariff increases based on the previous rates of
inflation in Venezuela. The ability to obtain timely tariff increases will
depend largely on the position of the newly elected president. The poor economic
environment, influenced by the falling oil price, has also negatively impacted
CANTV's ability to collect its receivables on a timely basis. Management is
actively addressing this issue.
In 1998, the Venezuelan currency devalued 12%. However, due to the mix of local
currency and U.S. dollar denominated assets and liabilities, the devaluation did
not have a significant impact on GTE's results.
In 1994, a GTE-led consortium, Compania de Telefonos del Interior (CTI), was
awarded two cellular licenses by the National Telecommunications Commission of
Argentina. The concession allows CTI to provide cellular services in the north
and south interior regions of Argentina--areas with a total population of 22
million. Competition began in CTI's markets in April 1996 as the cellular
subsidiaries of the local exchange telephone companies entered the market. GTE
holds a ten-year contract to manage CTI's network on behalf of the consortium.
During 1998, GTE's ownership percentage in CTI increased from 25.5% to 47.6% as
a result of acquiring one of its partner's ownership position and converting
certain debt to equity. On January 4, 1999, the GTE ownership interest
increased to approximately 58% as a result of additional debt conversions.
During 1998, CTI nearly doubled its customer base and as of December 31, 1998,
CTI served over 591,000 cellular customers.
GTE also has offices in Beijing, China and Sao Paulo, Brazil. These operations
are chartered with pursuing business development opportunities within the
telecommunications market of each respective country. The first opportunity,
announced in December 1995, was the establishment of a joint venture between GTE
China and Guangzhou Guangtong Resources Co. to construct and operate a wireless
paging system that currently serves 20 metropolitan areas, including Beijing. At
the end of 1998, approximately 274,000 paging customers were served by this
network.
In Japan, GTE holds a minority interest in nine cellular partnerships created by
Nissan Motor Corp. LTD and Japan Telecom Co. LTD to provide 1.5 GHz
digital-cellular services throughout Japan. In addition, GTE participates, as a
minority owner, in a cellular partnership composed of a consortium of Japanese
companies that provides 1.9 GHz digital-cellular service.
In 1997, the government of Taiwan awarded a nationwide license for digital
cellular communications services to a consortium, Pacific Cellular Corporation,
in which GTE has an 11.5% interest. During 1997, GTE assisted in the design,
build-out and operation of the system, and service was launched in January 1998.
By year-end 1998, Pacific Cellular Corporation had approximately 900,000
wireless subscribers.
REGULATORY AND COMPETITIVE TRENDS
As was the case in 1997, much of 1998's regulatory and legislative activity at
both the state and federal levels was a direct result of the Telecommunications
Act. Along with promoting competition in all segments of the telecommunications
industry, the Telecommunications Act was intended to preserve and advance
universal service.
In 1998, GTE continued to meet the wholesale requirements of new competitors.
GTE signed more than 750 interconnection agreements with other carriers,
providing them the capability to purchase unbundled network elements (UNEs),
resell retail services and interconnect facilities-based networks. Several of
these interconnection agreements were the result of the arbitration process
established by the Telecommunications Act, and incorporated prices or terms and
conditions based upon the FCC rules that were subsequently overturned by the
Eighth Circuit Court (Eighth Circuit) in July 1997. GTE challenged a number of
such agreements in federal district courts during 1997.
8
<PAGE> 10
The Company's position in these challenges was supported by the Eighth Circuit's
July 1997 decision stating that the FCC had overstepped its authority in several
areas concerning implementation of the interconnection provisions of the
Telecommunications Act. In January 1999, the U.S. Supreme Court (Supreme Court)
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit on many of the FCC rules related to
pricing and costing, that had previously been reversed by the Eighth Circuit on
jurisdictional grounds. The pricing rules established by the FCC will now be
remanded back to the Eighth Circuit for a determination on the merits. On the
other hand, the Supreme Court vacated the FCC rules requiring incumbent local
exchange carriers (LECs) to provide unbundled network elements to competitive
LECs. This latter ruling will be the subject of continued proceedings before the
FCC and the state commissions concerning what elements will have to be offered
under what conditions. Pending the final rulemaking by the FCC on the provisions
of unbundled network elements, GTE will continue to provide individual unbundled
network elements under existing interconnection agreements.
Concurrent with competitors' entry into GTE markets, the Company has continued
its own expansion into local, long-distance, Internet-access, wireless and video
services both within and outside its traditional operating areas. GTE now
provides long-distance and dial-up Internet-access services to approximately 2.7
million and 500,000 customers, respectively.
Interstate Access Revision
Access charge reform continued to be a major issue in 1998. Effective January
1998, the FCC altered the structure of access charges that the Company collects
by reducing and restructuring the per-minute charges paid by long-distance
carriers and implementing new per-line charges. The FCC also created an access
charge structure that resulted in different access charges for primary and
secondary residential access lines and single and multi-line business access
lines. In aggregate, the annual reductions in usage-sensitive access charges
paid by long-distance carriers were intended to be offset by new per-line
charges and additional charges paid by end-user customers. Effective July 1998,
access charges were further reduced in compliance with FCC requirements to
reflect the impacts of access charge reform and in making the Company's 1998
Annual Filing. Similar filings during 1997 had already resulted in price
reductions.
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 May 1997 Access Reform Order before the Eighth Circuit
based on the premise that the FCC did not eliminate the universal service
subsidies hidden within interstate access charges (as directed by the
Telecommunications Act), and the FCC created additional subsidy charges paid
only by business and multi-line residential customers. In August 1998, the
Eighth Circuit denied all of the petitions for review of the Access Reform
Order. In October 1998, the FCC began a proceeding to refresh the record used in
the 1997 access charge reform proceedings. The FCC will determine whether to
retain or modify its market-based access charge reform approach, or to adopt a
prescriptive approach. In addition, the FCC will decide whether the 6.5%
productivity offset should be changed. An order is expected to be released prior
to July 1999.
Universal Service
In May 1997, the FCC released a decision relating to implementation of the
Telecommunications Act's provisions on universal service. GTE and numerous other
parties have challenged the FCC's decision before the U.S. Court of Appeals for
the Fifth Circuit on the grounds that the FCC did not follow the requirements of
the Telecommunications Act to develop a sufficient, explicit and competitively
neutral universal service program. Oral arguments were held in December 1998. A
final decision on the appeal is expected in 1999.
In its Order on Reconsideration of the May 1997 decision dated July 1998, the
FCC referred some key issues back to the Federal-State Joint Board (Joint Board)
on universal service. The Joint Board issued its Second Recommended Decision in
November 1998. The recommendations were generic in nature and require further
development. Comments and reply comments on the Joint Board's recommendations
were filed in late December 1998 and January 1999, respectively. An order from
the FCC is expected in the second quarter of 1999, which may reject or change
the Joint Board's recommendations.
9
<PAGE> 11
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs by the first quarter of 1999 and a
revenue benchmark by mid-1999. For this reason, the FCC moved the implementation
date of the new universal service mechanism for nonrural carriers to July 1999.
The Company filed a Petition for Reconsideration in December 1998, stating that
the adopted model is incomplete and requires additional time for proper
evaluation. GTE is currently awaiting action from the FCC.
Price Cap
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis. The price
caps for a variety of service categories change annually using a price cap index
that is a function of inflation less a predetermined productivity offset. The
FCC's May 1997 Price Cap Order revised the price cap plan for incumbent price
cap LECs by adopting a productivity offset of 6.5%. In June of 1997, GTE and
several other parties challenged the FCC's Price Cap Order before the Court of
Appeals for the District of Columbia Circuit. The issue presented for review was
whether, in computing its new 6.5% productivity offset, the FCC arbitrarily
manipulated the evidence to achieve a predetermined outcome. Oral arguments are
set for the first quarter of 1999 with a decision expected later in the year.
Advanced Data Service
In August 1998, the FCC released a Memorandum Opinion and Order finding that the
pro-competitive provisions of the Telecommunications Act apply equally to
advanced services and circuit-switched voice services. In comments filed in
September 1998, GTE outlined a comprehensive plan to rapidly deploy advanced
data services, such as asymmetric digital subscriber line (ADSL) service, in a
framework that permits real competition between incumbents and competitors. The
matter is pending before the FCC. In October 1998, the FCC found in favor of
GTE's position that ADSL service is interstate in nature and properly tariffed
at the federal level. The FCC specifically concluded that traffic to an Internet
Service Provider (ISP) does not terminate at the ISP's local server but
continues on to the ultimate destination or destinations at distant interstate
or international websites accessed by the end-user.
Number Portability
In December 1998, the FCC released a Memorandum Opinion and Order regarding cost
recovery for the deployment of local number portability (LNP). This order
follows the FCC's Third Report and Order, which determined that carriers may
recover carrier specific costs directly related to the provision of long-term
LNP via a federally tariffed end-user monthly charge beginning no earlier than
February 1999. GTE filed a LNP tariff and instituted an end-user number
portability fee per line, which began appearing on customer bills in March 1999.
The FCC is investigating the costs supporting the filing.
Internet Service Traffic
On February 25, 1999 the FCC adopted an order finding that dial-up ISP-bound
traffic is largely interstate based on a traditional examination of the
end-to-end nature of the communication. In this ruling the FCC made it clear
that its actions will not subject the Internet to regulation or eliminate the
current Enhanced Service Provider exemption. The order stated that in the
absence of a federal rule, existing state arbitration decisions on the issue may
be appropriate under certain conditions. GTE is currently reviewing its existing
contracts and commission orders and will take further action as necessary. The
order also contained a Notice of Proposed Rulemaking to consider the appropriate
compensation for this traffic in the future. GTE has appealed the FCC's
conclusion that it does not have to set a rate after it finds the traffic to be
jurisdictionally interstate.
International
The global communications industry is in the midst of a major transformation
away from serving the regulatory-driven needs of the telecommunications market.
This new marketplace will be characterized by demand for both expanded basic
communications services in developing markets and a wide range of new services
for the delivery of data, voice, multimedia, and information services to a
variety of different customers. In addition, the FCC's new foreign participation
rules, adopted to implement the United States' World Trade Organization
commitments, significantly liberalized the policies for international
telecommunications and satellite services. Since adopting the new rules in
November 1997, the FCC has granted over 700 applications to foreign and domestic
applicants to provide international service in the United States.
Throughout Latin America, telecommunications providers will be faced with a
series of challenges, new opportunities, and deregulation in 1999. In Venezuela,
a new president was recently elected seeking a fundamental restructuring of the
Venezuelan state, including the National Assembly. In addition, recent actions
by CONATEL (Venezuela's telecommunications regulatory body) included approval of
draft Interconnection Regulations, the implementation of expanded local calling
areas, and the development of a new telephone numbering plan.
10
<PAGE> 12
Deliberations between CANTV (an affiliate of GTE) and CONATEL on the opening of
competitive telecommunications in Venezuela will begin in 1999.
In Argentina, hearings have begun to discuss the new licensing plans and
regulatory framework, which will promote a more competitive Argentine
telecommunications market. The decisions resulting from these hearings will
influence the rules of the marketplace in which GTE's cellular subsidiary, CTI,
and three other full-service providers will compete by November 1999. In the
Dominican Republic, a new Telecommunications Law was enacted, which, when
implemented, will help eliminate subsidies from local service and create a new
regulatory body composed of members from both the public and private sectors.
CODETEL, a wholly-owned subsidiary of GTE, operates in the Dominican Republic.
GTE's position is growing in Asia, where the Company provides PCS service in
Taiwan and paging service in China. From this base in Asia, GTE will continue to
share in the region's growth.
In Canada, GTE already provides a wide range of telecommunications services
through its BC TELECOM Inc. (BC TELECOM) and Quebec Telephone (Quebec Tel)
operations. On January 31, 1999, BC TELECOM, a majority-owned investment of GTE,
and TELUS Corporation (TELUS) merged in order to better leverage the synergies
between the two companies, as well as take advantage of the opening of
competition throughout the Canadian telecommunications market. (See "1999
Developments" in Item 7 for further information on this merger.) Quebec Tel will
also be subject to the continued pro-competitive changes in regulation.
As can be seen in these activities around the globe, GTE continues its
development of new telecommunications business opportunities throughout the
world in order to secure a strategic position for the dynamic future ahead.
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own. The merger is subject to shareholder and regulatory
approvals.
ENVIRONMENTAL MATTERS
GTE and some of its present and former subsidiaries, along with other unrelated
corporations, have been named as potentially responsible parties at a number of
Federal and state "Superfund" sites. These are sites which, although lawfully
used in the past, were determined to require remediation. Remediation activities
by GTE also continue at some present or formerly owned sites pursuant to other
federal or state environmental statutes or regulations. GTE has reviewed the
sites in which it has an involvement to establish expected remediation costs.
Based on this review, the remediation cost at any individual site or at all
sites in the aggregate is not expected to be material. Factors used to evaluate
expected GTE costs include remediation and investigation cost estimates as well
as legal fees, the number of viable parties involved, the degree of GTE's
involvement and past experience. No present value discounting is used. Although
the complexity of environmental regulations and the widespread imposition of
multi-party joint and several liability at Superfund sites make it difficult to
assess GTE's share of liability, management believes it has made adequate
provision in the financial statements.
GTE's annual expenditures for site cleanups and environmental compliance have
not been and are not expected to be material. These costs include GTE's share of
cleanup and other expenses at remediation sites and outlays required to keep
existing operations in compliance with increasingly stringent environmental
regulations.
11
<PAGE> 13
Item 2. Properties
PROPERTIES OF GTE COMPANIES
GTE Corporation owns no plant, real property, franchises, or concessions except
indirectly through its subsidiaries. The properties of GTE's subsidiaries
consist principally of land, structures and equipment required to provide
various wireline and wireless telecommunications services. Substantially all of
the properties of the U.S. telephone subsidiaries are subject to the liens of
their respective mortgages securing funded debt.
From January 1, 1994 to December 31, 1998, GTE had capital expenditures of $23.0
billion for new plant and facilities required to meet the telecommunications
services needs of its expanding customer base, to provide new and enhanced
services and to modernize plant and facilities. These additions were equal to
39% of gross plant of $59.7 billion at December 31, 1998.
At year-end 1998, GTE's local exchange network included access lines in the
United States of approximately 23.5 million. In addition, at December 31, 1998,
local exchange networks operated by GTE's subsidiaries and affiliates in Canada,
the Dominican Republic and Venezuela served an additional 6.1 million access
lines. At December 31, 1998, all of GTE's U.S. access lines were connected to
digital switches. At December 31, 1998, GTE's wireless network composed
approximately 7% of GTE's total gross plant. This network provides service to
4.8 million U.S. customers, and has the potential of serving 61.4 million
domestic customers. In addition, during 1997 and 1998, GTE invested
approximately $900 million to build a 17,000 mile nationwide fiber-optic network
to provide high-speed data transmission services. Additional investments in
undersea cable expanded the reach of the nationwide network into Europe, Asia
and Latin America. At year-end 1998, GTE had 19 laboratory locations in the U.S.
All of these properties are generally in good operating condition and adequate
to satisfy the needs of the businesses.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
<PAGE> 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
At January 31, 1999, there were approximately 453,000 common shareholders of
record.
QUARTERLY FINANCIAL DATA (UNAUDITED)
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1st Qtr (a) 2nd Qtr 3rd Qtr 4th Qtr
----------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1998
Revenues and sales $ 5,885 $ 6,277 $ 6,480 $ 6,831
Operating income 592 1,432 1,650 1,662
Net income (loss) (178) 673 822 855
Earnings (loss) per common share:
Basic $ (.18) $ .70 $ .85 $ .89
Diluted $ (.18) $ .69 $ .85 $ .88
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 60.50 $ 64.38 $ 58.69 $ 71.81
Low 47.94 55.25 46.75 53.94
Close 59.88 55.63 55.00 65.00
</TABLE>
(a) In the first quarter of 1998, the Company recorded pretax special charges of
$755 million ($482 million after-tax), and after-tax extraordinary charges
of $320 million (see Notes 3 and 4 to the Consolidated Financial
Statements).
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1997
Revenues and sales $ 5,281 $ 5,692 $ 5,940 $ 6,347
Operating income 1,346 1,406 1,487 1,372
Net income 665 671 756 702
Earnings per common share:
Basic $ .69 $ .70 $ .79 $ .73
Diluted $ .69 $ .70 $ .79 $ .73
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 49.38 $ 47.50 $ 48.38 $ 52.25
Low 43.13 41.13 42.88 40.50
Close 46.63 43.88 45.38 52.25
</TABLE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
GTE Corporation
1255 Corporate Drive
Irving, TX 75038
972/507-5000
INFORMATION VIA THE INTERNET
World Wide Web users can access information about GTE at: http://www.gte.com
SHAREHOLDER SYSTEMATIC INVESTMENT PLAN
Under this plan, GTE shareholders may reinvest their dividends or make optional
payments toward the purchase of additional shares of common stock. Shareholders
wishing information about this plan should contact BankBoston, N.A. at
800/225-5160.
DIVIDEND DIRECT DEPOSIT SERVICE
GTE offers its registered shareholders the option of having dividends deposited
directly into their checking or savings accounts at any financial institution
participating in the Automated Clearing House (ACH) system. This service is
provided at no charge. To sign up for this service, shareholders should contact
BankBoston, N.A. at 800/225-5160.
DIVIDENDS AND EARNINGS
GTE has generally paid its dividends on the first day of January, April, July
and October. Earnings have generally been announced the third week of January,
April, July and October. Shareholders may call 800/225-5160 at BankBoston, N.A.
to hear quarterly financial highlights.
SHAREHOLDER SERVICES
BankBoston, N.A., Transfer Agent and Registrar for GTE's common stock, should be
contacted with any questions relating to shareholder accounts. This includes:
<TABLE>
<S> <C> <C> <C>
o Account Information o Dividends o Market Prices o Transfer Instructions
o Statements and Reports o Change of Address o Lost Certificates
</TABLE>
Shareholders may call toll free at 800/225-5160 any time, seven days a week.
Customer Service Representatives are available Monday through Friday between the
hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
781/575-2990.
Or write to:
BankBoston, N.A.
c/o EquiServe, L.P.
P.O. Box 8031
Boston, MA 02266-8031
Shareholders with e-mail addresses can send inquiries to http://www.equiserve.
com
For overnight delivery services, use the following address:
BankBoston, N.A.
c/o EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Mail Stop 4502-60
Canton, MA 02021
13
<PAGE> 15
The BankBoston, N.A. address where shareholders, banks and brokers may deliver
certificates:
Securities Transfers and Reporting Services
100 William St., Galleria
New York, NY 10038
INVESTOR RELATIONS
Security analysts, institutional investors and other members of the financial
community requesting information about GTE should contact:
Investor Relations Department
GTE Corporation
1255 Corporate Drive
Irving, TX 75038
972/507-2789
International Telex: 4750071
Fax: 972/507-2520
http://www.gte.com
STOCK EXCHANGE LISTINGS
GTE Corporation (symbol: GTE) is listed on the New York Stock Exchange, the
Chicago, Pacific and other regional stock exchanges in the United States and on
stock exchanges in Amsterdam, Basel, Geneva, Lausanne, London, Paris, Zurich and
Tokyo.
AUDITORS
Arthur Andersen LLP
901 Main Street
Dallas, TX 75202
REQUESTS FOR ANNUAL REPORTS
Shareholders may obtain an additional printed copy of this annual Form 10-K or a
copy of the annual report by calling 800/225-5160.
An audiocassette version of the 1998 annual report is available to visually
impaired shareholders by contacting:
Public Affairs and Communications
GTE Corporation
1255 Corporate Drive
Irving, TX 75038
972/507-5369
OTHER SECURITIES
Questions regarding the bonds, debentures and preferred securities of GTE or its
subsidiaries should be directed to:
Treasury Department
Capital Markets
GTE Corporation
1255 Corporate Drive
Irving, TX 75038
972/507-5038
PRODUCTS AND SERVICES HOTLINE
Shareholders may call 800/828-7280 to receive information concerning GTE
products and services.
DIVERSITY AT GTE
GTE strives to be a workplace of choice in which people of diverse backgrounds
are valued, challenged, acknowledged and rewarded, leading to higher levels of
fulfillment and productivity. A copy of our Diversity at GTE brochure is
available upon request from the Corporate Secretary's office.
14
<PAGE> 16
Item 6. Selected Financial Data
GTE Corporation and Subsidiaries
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues and sales $ 25,473 $ 23,260 $ 21,339 $ 19,957 $ 19,528
- -------------------------------------------------------------------------------------------------------------------
Cost of services and sales 10,741 9,203 8,071 7,537 7,677
Selling, general and administrative 4,821 4,560 4,010 3,689 3,667
Depreciation and amortization 3,820 3,886 3,770 3,675 3,432
Special charges 755 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Operating income 5,336 5,611 5,488 5,056 4,752
- -------------------------------------------------------------------------------------------------------------------
Net income (loss)
Income before extraordinary charges 2,492(a) 2,794(a) 2,798(b) 2,538(b) 2,441(b)
Consolidated 2,172(c) 2,794 2,798 (2,144)(d) 2,441
Basic earnings (loss) per common share
Income before extraordinary charges 2.59(a) 2.92(a) 2.89(b) 2.62 (b) 2.55(b)
Consolidated 2.26(c) 2.92 2.89 (2.21)(d) 2.55
Diluted earnings (loss) per common share
Income before extraordinary charges 2.57(a) 2.90(a) 2.88(b) 2.61 (b) 2.54(b)
Consolidated 2.24(c) 2.90 2.88 (2.20)(d) 2.54
Common dividends declared per share 1.88 1.88 1.88 1.88 1.88
Book value per share 9.06 8.39 7.62 7.05(d) 10.85
Average common shares outstanding
(in millions)
Basic 963 958 969 970 958
Diluted 968 962 972 973 961
ASSETS AND CAPITAL
Consolidated assets 43,615 42,142 38,422 37,019(d) 42,500
Long-term debt 15,418 14,494 13,210 12,744 12,163
Shareholders' equity 8,766 8,038 7,336 6,871(d) 10,483
Net cash from operations 5,890 6,164 5,899 5,033 4,740
Capital expenditures 5,609 5,128 4,088 4,034 4,192
CONSOLIDATED RATIOS AND
OTHER INFORMATION
Return on common equity 27.3% 37.6% 40.2% (20.3)%(d) 24.8%
Return on investment 10.9% 14.5% 15.6% (4.2)%(d) 13.1%
Average common equity 7,962 7,433 6,960 10,539 9,838
Equity ratio 35.4% 36.5% 38.1% 37.9%(d) 46.2%
Average investment 28,662 26,857 24,395 27,150 25,647
Research and development 159 122 122 137 139
Employees (in thousands)
Total 120 114 102 106 111
United States 98 94 83 85 89
Access minutes of use (in millions) 87,943 79,086 70,452 64,193 59,247
Access lines (in thousands)
Total 29,594 27,670 25,766 24,050 22,739
United States 23,473 21,539 20,007 18,512 17,427
Wireless subscribers (in thousands)
Total 7,567 5,701 4,445 3,547 2,660
United States 4,817 4,487 3,749 3,011 2,339
Adjusted "POPs" (in millions) (e)
Total 84.8 78.9 78.3 76.7 68.0
United States 61.4 61.3 61.9 61.7 53.0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Selected Financial Data appear on the following page.
15
<PAGE> 17
(a) 1998 includes after-tax special charges of $482 million, or $.50 per share,
as well as after-tax losses associated with data initiatives of $407
million, or $.42 per share, in 1998 and $242 million, or $.26 per diluted
share ($.25 per basic share), in 1997.
(b) 1996, 1995 and 1994 include after-tax gains of $8 million, or $.01 per
share; $11 million, or $.01 per share; and $162 million, or $.17 per share,
respectively, on sales of nonstrategic domestic telephone properties.
(c) In addition to the items discussed in (a), 1998 includes after-tax
extraordinary charges of $320 million, or $.33 per share resulting from the
discontinued use of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71),
by GTE's Canadian operations, and the early retirement of long-term debt
and preferred stock.
(d) During 1995, GTE's domestic telephone operating companies discontinued the
use of SFAS No. 71 resulting in a noncash, after-tax extraordinary charge
of $4.6 billion or $4.77 per diluted share ($4.79 per basic share). In
addition, GTE redeemed long-term debt and preferred stock resulting in an
after-tax extraordinary charge of $41 million or $.04 per share.
(e) Represents population available to be served times GTE's percentage
interest in wireless markets.
16
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RETURN TO SHAREHOLDERS
The primary objective of GTE Corporation ("GTE" or "the Company") is to maximize
shareholders' long-term total return, consisting of share-price appreciation and
dividends. Total return to GTE shareholders in 1998 was 29% compared with 20% in
1997. Average total return over the past three years was 19%. These measures
include share-price appreciation during the period and assume that actual
dividends paid were reinvested in GTE stock at the market price at the time of
payment.
CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Revenues and Sales
Years Ended December 31,
--------------------------------------------------------------------------
(Dollars in Millions) 1998 % 1997 % 1996 %
---------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Network Services $ 15,248 60 $ 14,524 62 $ 13,555 64
Wireless Products and Services 3,070 12 2,922 13 2,634 12
Data Products and Services 784 3 279 1 -- --
Other National Operations 3,137 12 2,647 12 2,412 11
-------- -------- -------- -------- -------- --------
Total National Operations 22,239 87 20,372 88 18,601 87
International Operations 3,334 13 2,902 12 2,711 13
Corporate and other, including (100) -- (14) -- 27 --
eliminations
-------- -------- -------- -------- -------- --------
Total revenues $ 25,473 100 $ 23,260 100 $ 21,339 100
======== ======== ======== ======== ======== ========
</TABLE>
Consolidated revenues in 1998 grew 9.5% as compared with 1997. This growth was
primarily driven by growth in domestic access lines and minutes of use, as well
as demand for long-distance service offerings.
Consolidated net income in 1998 was $2.2 billion, or $2.24 per diluted share.
This represents a decrease of $.66 per diluted share compared with consolidated
net income in 1997 of $2.8 billion, or $2.90 per diluted share. Net income for
1998 includes the effects of after-tax special charges of $482 million, or $.50
per diluted share, and extraordinary charges of $320 million, or $.33 per
diluted share. Consolidated net income for 1998 and 1997 also includes $407
million, or $.42 per diluted share, and $242 million, or $.26 per diluted share,
respectively, of start-up losses related to GTE's Data Products and Services
unit that was formed in mid-1997. While the continued investment in the
high-growth data sector of the telecommunications industry is essential to
achieving GTE's growth objectives, over the past two years, these start-up
losses have offset the strong performance of GTE's traditional core operations.
Losses are expected to decline during 1999 as the Data Products and Services
unit moves out of its start-up phase.
The 1998 special charges related to the continuation of GTE's strategic
initiatives as discussed below. The 1998 extraordinary charges related to the
discontinuance of regulatory accounting principles at the Company's Canadian
telephone operations and the redemption of high-coupon debt and preferred stock
prior to their stated maturity.
17
<PAGE> 19
STRATEGIC INITIATIVES
GTE's domestic strategy is to profitably offer a complete bundle of high-growth
telecommunications services nationwide. Consistent with this strategy, as
permitted by the Telecommunications Act of 1996 (the Telecommunications Act),
GTE launched nationwide long-distance telephone service in early 1996. To
accelerate its strategic transformation, in 1997, GTE created a national sales
and marketing organization to market its products and services both inside and
outside of its traditional franchise areas and made significant investments in
enhanced data and leading-edge, Internet-based products and services. These
investments included the purchase of a nationwide fiber-optic network and the
acquisition of BBN Corporation, a leading provider of Internet-based services.
Consistent with GTE's decision to focus its resources on higher-growth segments
of the industry, in late 1997, GTE began a comprehensive review of its core
operations to identify business activities that were no longer strategic or were
inconsistent with its growth objectives. As a result of the completion of the
initial phase of this review during the first quarter of 1998, the Company
committed to a plan to sell or exit various business activities and reduce costs
through employee reductions and related actions. As a result of these actions,
during the first quarter of 1998, the Company recorded a pretax charge of $755
million, $482 million after-tax, or $.50 per diluted share, for the year.
Net Assets Held for Sale
During the first quarter of 1998, the Company committed to a repositioning plan
that resulted in a decision to sell GTE Government Systems Corporation, a
supplier of government and defense communications systems; GTE Airfone
Incorporated, a provider of aircraft-passenger telecommunications; and
approximately 1.6 million domestic access lines located in 13 states. In
aggregate, these transactions are expected to generate for the Company after-tax
cash proceeds in excess of $3 billion. The sale of GTE Government Systems and
GTE Airfone are expected to close in 1999 and, accordingly, their net assets
have been reclassified to "Net assets held for sale" in the consolidated balance
sheets. Due to the regulatory approvals that are required, it is projected that
most of the sales of local access lines will close in 2000. As a result, the net
book value of these lines, which approximates $1.6 billion, continues to be
reported in "Property, plant and equipment, net" in the consolidated balance
sheets. The Company intends to continue to operate all of these assets until
sold. Based on the decision to sell, however, the Company stopped recording
depreciation expense for these assets. This lowered depreciation expense by
approximately $100 million for the year.
During 1998-1996, GTE Government Systems and GTE Airfone generated combined
revenues of approximately $1.6 billion, $1.4 billion and $1.3 billion,
respectively, and operating income of approximately $160 million, $80 million
and $50 million, respectively. Due to the centralized manner in which GTE's
local telephone companies are managed and since the access lines to be sold
represent portions of states rather than entire operating companies, revenues
and operating income applicable to the access lines to be sold are not readily
determinable. The 1.6 million access lines represent approximately 7% of the
average domestic lines that GTE Network Services had in service during 1998.
Special Charges - asset impairments and exit costs
Based on the decision to sell, the Company recorded a pretax charge of $200
million to reduce the carrying value of GTE Airfone's assets to estimated net
sales proceeds. No charge was recorded for GTE Government Systems or the access
lines to be sold because their estimated fair values were in excess of their
carrying values.
During the first quarter of 1998, the Company also committed to a plan to exit
a number of other nonstrategic business activities. As a result, the Company
recorded a pretax charge of $156 million to reduce the carrying value of
affected assets to expected net salvage value and to recognize costs resulting
from the exit plan. The major components of the charge include:
o the write-off of network equipment and supplies for discontinued wireless
products and services ($81 million);
o the shutdown of business units developing interactive video products and
services and excess printing facilities ($42 million); and
o the write-off of impaired assets in Latin America ($33 million).
GTE expects that the assets affected by these actions will be sold or discarded
within a year of the decision to exit the activities to which they relate.
After completing the review of its operations, the Company also decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that it had
built over the past three years in certain test markets. Although the Company is
obligated to, and will continue to, use the existing HFC networks to provide
video services in these markets, technological innovations have created
alternative ways for the Company to deliver video and high-speed data services
in the future at a significantly lower overall cost. Due to the significant
change in the scale of the HFC networks and the effect on future revenues and
expenses, the Company recorded a pretax charge for impairment of approximately
$161 million based on estimated future cash flows. At December 31, 1998, these
networks, which have generated operating losses of approximately $86 million,
had a net book value of approximately $250 million.
Special Charges - employee related and other actions
During the first quarter of 1998, the Company also decided to consolidate
facilities and centralize or eliminate a variety of employee functions and, as a
result, recorded a $107 million pretax charge. During the second half of the
year, the Company closed several administrative facilities, including its
corporate headquarters in Connecticut and approximately 140 domestic retail
stores and other locations operated by its National Operations. The cost of
these actions is composed primarily of employee severance, outplacement and
benefit continuation costs for approximately 1,700 employees and other costs to
exit locations no longer used by the Company. At December 31, 1998, 1,587
employees had been separated. The Company anticipates that an additional
2,500-3,500 employee separations and related actions will occur during the first
quarter of 1999 and that additional charges of approximately $100-$150 million
after-tax will be necessary as the plans are finalized.
The Company also recorded a pretax charge of approximately $131 million related
to nonrecurring federal and state regulatory rulings affecting its Network
Services unit. Approximately two thirds of this charge relates to nonrecurring
access rate refunds applied by the FCC retroactively in 1997, which the Company
has contested in the courts. In addition, the charge also included the write-off
of mandated costs, including generic software, and other costs incurred by the
Company for which revenue recovery was not allowable under the regulatory
process.
Special Charges - by category and business unit
The following summarizes the special charges by major category and by business
unit affected:
<TABLE>
<CAPTION>
Initial Charge Cash Payments Remaining Liability
-------------- ------------- -------------------
(Dollars in Millions)
<S> <C> <C> <C>
Major Category:
Asset impairments $ 483 $ -- $ --
Exit costs 34 10 24
Employee related and other actions
Severance 77 33 44
Other 30 22 8
Other actions 131 94 37
------- ------- -------
Total $ 755 $ 159 $ 113
======= ======= =======
Business Unit:
National Operations
Network Services $ 171 $ 124 $ 38
Wireless Products and Services 91 9 25
Other National Operations 397 7 --
International Operations 38 -- 11
Corporate and other 58 19 39
------- ------- -------
Total $ 755 $ 159 $ 113
======= ======= =======
</TABLE>
The $58 million included in "Corporate and other" relates to severance and
related costs associated with the closing of several administrative facilities,
including the Company's corporate headquarters and worldwide training facility
in Connecticut.
There have been no adjustments to the liability as originally recorded.
RESULTS OF OPERATIONS
The following discussion covers the separate results of GTE's National and
International Operations and makes reference to a new segment reporting concept
adopted in 1998. As discussed more fully in Note 15 to the consolidated
financial statements, GTE has four reportable segments. Three reportable
segments are within GTE's National Operations and the fourth reportable segment
is GTE's International Operations.
NATIONAL OPERATIONS
The results of GTE's National Operations include the results of the Network
Services, Wireless Products and Services, and Data Products and Services
reportable segments, as well as the results of smaller business units, including
GTE Technology and Systems, GTE Communications Corporation, GTE Directories
Corporation and GTE Airfone.
NETWORK SERVICES
Network Services provides wireline communication services within its operating
areas, including local telephone service, toll calls within franchised areas
and access services that enable long-distance carriers to complete calls to or
from locations outside of GTE's operating areas. Network Services also provides
complex voice and data services to businesses, billing and collection,
operator-assistance and inventory management services to other
telecommunications companies.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Local services $ 5,814 $ 5,530 $ 5,130
Network access services 5,316 4,896 4,589
Toll services 859 1,251 1,525
Directory services and other 3,259 2,847 2,311
-------------- -------------- --------------
Total revenues 15,248 14,524 13,555
Intersegment revenues (305) (220) (92)
-------------- -------------- --------------
Total external revenues $ 14,943 $ 14,304 $ 13,463
============== ============== ==============
</TABLE>
Local services
Local service revenues are earned from providing local telephone service and
from value-added services. Value-added services include products such as Caller
ID and Call Waiting.
Higher usage of our network was the primary reason for the increase in local
service revenues in 1998 and 1997. This growth was generated by an increase in
switched access lines in service of 4.6% in 1998 and 5.5% in 1997. Access line
growth reflects higher demand by Internet Service Providers (ISPs), and
additional residential lines, including second lines. Revenue growth in 1998 and
1997 was also boosted by increased revenues from value-added services. These
services contributed revenue growth of $91 million in 1998 and $127 million in
1997.
Network access services
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local network to provide long-distance services
to their customers. Cellular providers and other local telephone companies also
pay access charges for cellular and toll calls transported or terminated by the
Company. Special access revenues arise from access charges paid by carriers and
end-users with private networks who access the Company's local network.
Network access service revenues increased $258 million and $227 million in 1998
and 1997, respectively, due to higher customer demand as reflected by growth in
access minutes of use of 11.2% in 1998 and 12.3% in 1997. Growth in access
revenues in 1998 and 1997 also reflects higher network usage by alternative
providers of intraLATA toll services. Special access revenues, driven by growing
demand for increased bandwidth by high-capacity users, increased $151 million
and $141 million in 1998 and 1997, respectively. In addition, 1998 revenue
reflects $98 million from CyberPop(SM), a service which creates a point of
presence for ISPs that operate in or near GTE's markets. Revenue growth was
negatively impacted in both years by price reductions mandated by federal
18
<PAGE> 20
and state regulation. The impact of price cap filings reduced interstate access
rates $140 million and $60 million in 1998 and 1997, respectively (see
"Regulatory and Competitive Trends--Price Cap" for additional information). In
1997, the Federal Communications Commission (FCC) also ordered significant
changes that altered the structure of access charges collected by the Company.
As a result of the order, usage-sensitive access charges paid by long-distance
carriers were reduced by $338 million in 1998. This reduction was partially
offset by $298 million of new per-line charges to long-distance carriers and
increased charges paid by the end-user customer (see "Regulatory and Competitive
Trends--Interstate Access Revision" for additional information). Intrastate
access charges were also reduced by $102 million in 1998 and $62 million in 1997
as a result of state regulatory proceedings.
Toll services
Toll services revenue is earned primarily from calls made outside a customer's
local calling area but within the same LATA (intraLATA). LATAs are geographic
areas that were defined by the FCC in the 1980s.
Toll revenues decreased in 1998 and 1997 due to lower toll volumes resulting
from competition. By August 1997, all of GTE's operating areas were open to toll
competition. Prior to full competition, intraLATA toll calls were completed by
the Company, unless the customer dialed a code to access a different carrier.
The ability to preselect a competing carrier changed this and enabled customers
to complete toll calls using another carrier without having to dial an access
code. Revenue reductions from intraLATA toll competition were partially offset
by increased network access revenues for usage of our network by alternative
providers of intraLATA toll services.
Toll revenues also declined in both years because of company-initiated and
regulatory-mandated rate reductions. The Company continues to implement price
reductions on certain long-distance services as part of its response to
competition. Partially offsetting the toll erosion in Network Services was $280
million of higher revenues related to GTE's long-distance service (see "Other
National Operations" for additional information).
Directory services and other
Directory services revenues result primarily from publication rights received
from GTE Directories Corporation (included in the discussion of "Other National
Operations") for sales of Yellow Pages advertising to customers in Network
Services' operating areas. Directory services revenues remained relatively
constant in both 1998 and 1997.
Other revenues include nonregulated sales and services such as inventory
management and purchasing services, telephone equipment sales, public telephone
revenues, billing and collection and operator services provided to
affiliates and third parties.
Revenues from inventory management and purchasing services increased by $281
million in 1998 and $300 million in 1997, and billing and collection revenues
increased by $74 million in 1998 and $26 million in 1997, as a result of
recently acquired third-party and affiliated customers.
Public telephone revenues increased $34 million and $57 million in 1998 and
1997, respectively. These increases were related to the Telecommunications Act,
which mandated compensation to payphone service providers for credit card and
toll-free calls originating from payphones. Prior to the Telecommunications Act,
the Company was not compensated for such calls. Revenues in 1998 and 1997 also
increased due to higher sales of advanced products, including paging and voice
mail.
Intersegment revenues
Intersegment revenues at Network Services primarily represent local telephone
services provided at market rates to GTE Communications, which markets bundled
telecommunications services, and sales of inventory management services
provided to affiliates.
19
<PAGE> 21
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 5,485 $ 5,028 $ 4,884
Selling, general and administrative 2,184 2,165 2,140
Depreciation and amortization 2,591 2,605 2,642
Special charges 171 -- --
-------------- -------------- --------------
Total operating costs and expenses $ 10,431 $ 9,798 $ 9,666
============== ============== ==============
</TABLE>
Cost of services and sales
The 1998 and 1997 increases were primarily driven by growth in inventory
management and purchasing services to third-party customers and higher volumes.
The 1998 increase is also due to the recording of pension settlement gains in
1997, which resulted from lump-sum payments from the Company's pension plan to
separated employees. These increases was partially offset by productivity
improvements.
Selling, general and administrative
Selling, general and administrative costs remained relatively constant in all
years. The slight increase in 1998 was driven primarily by sales growth and new
initiative support costs. This increase was partially offset by lower
advertising and marketing costs.
Depreciation and amortization
Depreciation and amortization decreased in 1997 from 1996 reflecting a reduction
in depreciation rates to reflect higher salvage values for outside plant. The
1998 decrease primarily resulted from the discontinuation of depreciation
expense for nonstrategic domestic access lines held for sale. In 1998, GTE
announced its plan to sell approximately 1.6 million nonstrategic domestic
access lines. Based on the decision to sell these access lines, the Company
ceased recording depreciation expense. The decrease in both years was partially
offset by the depreciation of capital additions, reflecting growth in the demand
for access lines and data services.
WIRELESS PRODUCTS AND SERVICES
Wireless Products and Services provides wireless communications services (both
voice and data) within licensed areas in the U.S., sells cellular telephones and
accessories and provides support services to other cellular telephone companies.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Service revenues $ 2,687 $ 2,549 $ 2,347
Equipment sales and other 383 373 287
-------------- -------------- --------------
Total revenues $ 3,070 $ 2,922 $ 2,634
============== ============== ==============
</TABLE>
The growth in service revenues was primarily attributable to the growth in GTE's
wireless customer base of 7.4% in 1998 and 19.7% in 1997. Total U.S. customers
served reached 4.8 million and 4.5 million in 1998 and 1997, respectively. In
both 1998 and 1997, revenue growth resulting from the increased customer base
was somewhat offset by a decline in revenues per customer per month, reflecting
the increasing level of competition in the wireless industry. However, 1998
results reflect profitable growth by focusing on higher-value customers
utilizing a value-based marketing strategy.
20
<PAGE> 22
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 1,049 $ 1,083 $ 908
Selling, general and administrative 848 974 846
Depreciation and amortization 435 428 398
Special charges 91 -- --
-------------- -------------- --------------
Total operating costs and expenses $ 2,423 $ 2,485 $ 2,152
============== ============== ==============
</TABLE>
Cost of services and sales
Cost of services and sales decreased slightly in 1998 as compared with 1997
despite an increased customer base. The increased volumes were offset by reduced
costs for cellular phones, favorable interconnection fees, lower fraud losses
and increased productivity throughout the organization. Cost of services and
sales also includes approximately $69 million of gains on the sale of assets in
1998. The 1997 increase over 1996 reflects higher equipment and operations costs
due to a larger customer base, partially offset by lower roaming costs and lower
fraud losses.
Selling, general and administrative
The 1998 decrease is attributable to lower customer acquisition and retention
costs, including lower costs due to increased productivity in the retail
channel. The 1997 increase reflects higher customer acquisition and retention
costs, increased sales and marketing efforts to aggressively grow and retain the
customer base and higher general and administrative costs to support a larger
customer base.
Depreciation and amortization
Depreciation and amortization increased in both 1998 and 1997 as a result of
continuing investment in the wireless network to provide greater capacity. The
1998 increase is partially offset by lower depreciation expense due to the
discontinuation of the Tele-Go product offering and the write-off of affected
network equipment and supplies, which is included in the special charges.
DATA PRODUCTS AND SERVICES
The Data Products and Services segment offers a wide range of advanced data and
Internet-related services, including dedicated and dial-up access to the
Internet, managed network security, Web-server hosting, application development
and systems integration services. During 1998, GTE expanded its business service
offerings to include E-Commerce Hosting, Virtual Private Networks, Global Remote
Access and Digital Certificates. Data Products and Services also includes the
investment in GTE's nationwide fiber-optic network. More than two thirds of the
planned 17,000 miles of this network is operational. Additional investments in
undersea cable expand the reach of the nationwide network into Europe, Asia and
Latin America. During the latter half of 1998, the Company began migrating its
customers' data and voice traffic to the network from leased facilities and
began providing access and transport services to other ISPs and
telecommunications carriers.
GTE's Data Products and Services segment was created in mid-1997 after the
acquisition of BBN Corporation. This segment does not include the results of
GTE's traditional local data businesses, such as T-1 connections and ISDN
dedicated access, which continue to be reflected in the Company's Network
Services segment.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997
------------------- -------------------
(Dollars in Millions)
<S> <C> <C>
Data revenues $ 784 $ 279
Intersegment revenues (36) (11)
---------------- ----------------
Total external revenues $ 748 $ 268
================ ================
</TABLE>
21
<PAGE> 23
Revenues for 1998 reflect a full year of activity, whereas 1997 revenues
reflect only a partial year, as described above. The increase in 1998 is also
due to sales of access and transport services to other ISPs and carriers and
the expanded relationship with America Online (AOL), for which GTE provides
national network deployment services in support of AOL's dial-up network. The
increase also reflects customer growth and revenues derived from newly
introduced Internet-based products and services for both consumers and
businesses.
Intersegment revenues reflect affiliate activity between Data Products and
Services and other entities within National Operations.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
------ ------
(Dollars in Millions)
<S> <C> <C>
Cost of services and sales $ 754 $ 376
Selling, general and administrative 428 162
Depreciation and amortization 128 88
------ ------
Total operating costs and expenses $1,310 $ 626
====== ======
</TABLE>
Total operating costs and expenses for 1998 reflect a full year of activity,
whereas 1997 reflects only a partial year, as described above.
Cost of services and sales
Cost of services and sales consists primarily of the cost of leasing
telecommunication circuits and labor and expenses of operating the network
infrastructure and supporting customers. The results reflect the growth in the
cost of the network infrastructure and personnel to support a growing customer
base and service offerings introduced during the year. Cost of services and
sales also reflects the continued expansion of dial-up networks operated for
AOL.
Selling, general and administrative
Selling, general and administrative costs are driven by customer growth,
higher new product development costs and continued investment in the Company's
sales and marketing infrastructure, including expansion of sales channels,
advertising costs and other promotional activities related primarily to
Internet-based services for consumers and businesses.
Depreciation and amortization
Depreciation and amortization reflects the continuing investment in the network
and other infrastructure necessary to support the growth in customers and
services. Capital expenditures during 1998 and 1997 collectively totaled over
$900 million, primarily associated with the build-out of the 17,000 mile
fiber-optic network.
OTHER NATIONAL OPERATIONS
GTE's Other National Operations include: GTE Technology and Systems, GTE
Communications Corporation, GTE Directories Corporation and GTE Airfone.
Eliminations for intersegment activity occurring within National Operations are
also included in Other National Operations.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Technology and Systems $ 1,423 $ 1,271 $ 1,204
Communications 1,063 630 333
Other, including eliminations 651 746 875
-------------- -------------- --------------
Total revenues $ 3,137 $ 2,647 $ 2,412
============== ============== ==============
</TABLE>
22
<PAGE> 24
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 2,347 $ 1,879 $ 1,442
Selling, general and administrative 635 561 369
Depreciation and amortization 196 250 260
Special charges 397 -- --
-------------- -------------- --------------
Total operating costs and expenses $ 3,575 $ 2,690 $ 2,071
============== ============== ==============
</TABLE>
Technology and Systems is primarily composed of GTE Government Systems. As
previously discussed, the Company has committed to a plan to sell its Government
Systems unit. The Company expects to consummate the sale during 1999.
GTE Communications Corporation includes GTE's national sales and marketing
organization, which enables GTE to expand its business beyond its traditional
operating boundaries. GTE established this organization during 1997, to take
advantage of the new opportunities available as a result of the changing
regulatory environment. GTE Communications Corporation also includes GTE Long
Distance, which provides long-distance services to customers in all 50 states,
and GTE Video Services, which provides video services to residential and
business customers primarily in California, Florida and Hawaii.
GTE Communications Corporation revenues grew $433 million, or 69%, during 1998.
Revenues from long-distance operations grew $280 million, or 88%, during 1998,
due to a 59% increase in the number of customers. Significant market share
increases in GTE's franchised territories, coupled with a significant
improvement in the rate of customer churn, contributed to this growth. Costs
associated with the start up of the national sales and marketing organization
and costs for the acquisition of long-distance customers contributed to
increased operating losses compared with 1997.
Included in other revenues is GTE Directories Corporation, which publishes
telephone directories and develops and markets online advertising and
information services; and GTE Airfone, a provider of airborne communications
services. In the first quarter of 1998, GTE announced its intention to dispose
of GTE Airfone. Based on the decision to sell, the Company recorded a pretax
charge of $200 million to reduce the carrying value of GTE Airfone's assets to
estimated net sales proceeds. This amount is included in the special charges of
$397 million. Also included is a pretax charge of approximately $161 million
resulting from the Company's decision to scale back the deployment of hybrid
fiber coax (HFC) video networks that it had built over the past three years in
certain test markets. See the discussion of asset impairments on page 18 for
further information. The remaining $36 million of the special charges relates to
the decision to exit various business units involved in the development of
interactive video products and services and to close excess printing facilities
in the U.S.
INTERNATIONAL OPERATIONS
GTE's International Operations provide telecommunications services in Canada,
the Dominican Republic and Argentina and operate directory advertising
companies in Europe and Central America through consolidated subsidiaries. GTE
also participates in ventures/consortia that are accounted for on the equity
basis. These investments include a full-service telecommunications company in
Venezuela, a paging network in China and a nationwide digital-cellular network
in Taiwan. In the fourth quarter of 1998, GTE increased its ownership interest
in CTI Holdings, S.A. (CTI) and changed its method of accounting for this
investment from the equity basis to full consolidation. This change in
accounting had no impact on net income. CTI provides cellular services in the
north and south interior regions of Argentina.
23
<PAGE> 25
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Local services $ 1,219 $ 1,076 $ 930
Toll services 907 883 932
Wireless services 422 265 215
Directory services and other 786 678 634
-------------- -------------- --------------
Total revenues $ 3,334 $ 2,902 $ 2,711
============== ============== ==============
</TABLE>
Local services
Local service revenues are based on fees charged to customers for providing
local telephone service within designated franchise areas. Local service
revenues increased in 1998 due to a rate increase in Canada and an increase in
access lines in service. Partially offsetting this revenue growth was a
decrease of approximately $83 million in 1998 due to unfavorable exchange rates.
Toll services
Toll, or long-distance, service revenues are based on fees charged for calls
made to a location outside of a customer's local calling area. Toll service
revenues increased in 1998 primarily due to a change in the manner of reporting
toll settlements by the Canadian operations. Early in 1998, Canadian carriers
began reporting toll settlements on a gross revenue and expense basis.
Previously, the carriers recorded toll settlements on a net basis (see
offsetting increase in "Cost of services and sales" below). Toll revenues,
excluding the modified settlement reporting, declined in 1998 and 1997 due to
company-initiated rate reductions partially offset by higher toll volumes. GTE's
International Operations continue to implement price reductions on certain
domestic and international toll services in response to competition.
Additionally, toll revenues reflect a decrease of approximately $50 million in
1998 due to unfavorable exchange rates.
Wireless services
Wireless services primarily represent cellular, PCS and paging services. The
consolidation of CTI's operating revenues, in the fourth quarter of 1998,
resulted in an increase in reported revenues of $121 million. Also contributing
to wireless revenue growth in 1998 was an increase in wireless customers in
Canada and the Dominican Republic, partially offset by a decrease of
approximately $22 million due to unfavorable exchange rates.
Directory services and other
Directory services and other revenues result primarily from sales of Yellow
Pages advertising to local and national businesses. The increase in 1998
directory services revenues was primarily driven by operations in Austria and
Poland, that were acquired late in 1997, as well as higher directory advertising
sales in the Costa Rican operation. Directory services revenues in 1997
increased as compared with 1996 due to higher directory advertising sales.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 1,147 $ 882 $ 842
Selling, general and administrative 856 771 715
Depreciation and amortization 459 523 463
Special charges 38 -- --
-------------- -------------- --------------
Total operating costs and expenses $ 2,500 $ 2,176 $ 2,020
============== ============== ==============
</TABLE>
Cost of services and sales
The 1998 increase in cost of services and sales was primarily driven by higher
operating costs associated with the change in the reporting of toll settlements
in early 1998 (see offsetting increase in "Toll services" above), as well as
24
<PAGE> 26
higher customer acquisition costs related to an increase in wireless customers
during the year. Additionally, cost of services and sales increased by $51
million as a result of the consolidation of CTI in the fourth quarter of 1998.
Selling, general and administrative
Selling, general and administrative expenses in both 1998 and 1997 increased
primarily due to higher selling expenses related to the growth in customer
additions. Approximately $30 million of the 1998 increase was a result of the
consolidation of CTI in the fourth quarter of 1998.
Depreciation and amortization
Depreciation and amortization increased in 1997 as compared with 1996 due to the
shortening of the depreciable lives of telephone plant, primarily in Canada. In
1998, the effect of shorter lives was offset by a reduction in the carrying
value of plant due to the discontinuation of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71).
Special charges
The special charges relate to the write-off of impaired assets in Latin America,
related primarily to the decision to exit nonstrategic business activities in
the Dominican Republic ($33 million) and for employee severance and related
actions ($5 million).
Equity Income
Equity income in 1998 increased $25 million from 1997 due to reduced losses for
CTI for the first nine months of the year. As previously discussed, in the
fourth quarter of 1998, GTE changed its method of accounting for this investment
from the equity basis to full consolidation due to increased ownership of CTI.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Cash flows from (used in):
Operations $ 5,890 $ 6,164 $ 5,899
Investing (5,508) (5,893) (4,277)
Financing (466) (125) (1,549)
</TABLE>
OPERATIONS
GTE's primary source of funds during 1998 was cash from operations of $5.9
billion compared with $6.2 billion in 1997. The decrease in cash from operations
primarily reflects an increase in the Company's working capital requirements,
including increased funding of GTE's postretirement liabilities in 1998 and
costs associated with growing GTE's data initiatives and its national marketing
and sales organization. The increase in 1997 from 1996 reflects the improved
operating results from the National and International Operations.
INVESTING
Capital expenditures totaled $5.6 billion in 1998, a 9% increase from the $5.1
billion spent in 1997. The majority of the 1998 new investments were made to
acquire facilities and develop and install applications 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 GTE's national
fiber-optic data network. GTE expects capital expenditures to remain at
approximately the same level in 1999. Cash used in investing activities was
favorably impacted in 1998 due to the sales of certain nonstrategic wireless
properties. In 1997, GTE expended over $900 million to acquire new operations,
primarily BBN Corporation, in connection with the Company's data initiatives.
As previously announced, GTE has committed to a plan to sell GTE Government
Systems, GTE Airfone and approximately 1.6 million domestic access lines over
the next two years. These transactions are expected to generate after-tax
proceeds in excess of $3 billion. Cash generated from these dispositions will be
partially used to fund the Company's growth strategy. As announced in July 1998,
GTE has also agreed to acquire approximately
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40% of the Puerto Rico Telephone Company (PRTC) for approximately $350 million.
This transaction closed in the first quarter of 1999.
FINANCING
In 1997-95, GTE announced plans to repurchase up to 20, 25 and 20 million
shares, respectively, of its currently issued common stock from time to time,
depending on market conditions. The shares will be used to satisfy the
requirements of GTE's employee benefit and dividend reinvestment programs. Of
the announced repurchase plans, a total of 38.8 million shares had been
repurchased under the 1996 and 1995 programs. Cash used for the purchase of
these shares was $1.7 billion through 1997. GTE did not repurchase any shares in
1998.
GTE targets a financial profile including capitalization and credit ratios that
are appropriate for an "A" rated telecommunications corporation. This allows
GTE's shareholders to enjoy the benefits of prudent and reasonable financial
leverage, while also protecting debtholder interest and providing ready access
to the capital markets. During July 1998, several rating agencies placed GTE, as
well as certain GTE operating subsidiaries, on their "Watch" list for a
potential debt rating increase as a result of the proposed merger with Bell
Atlantic Corporation.
During 1998, GTE maintained its two syndicated credit facilities totaling $4.0
billion, including a five-year line of $2.5 billion for GTE and a 364-day line
of $1.5 billion for certain domestic telephone operating subsidiaries. Under
current terms and conditions, the $2.5 billion line will mature in June 2002 and
the $1.5 billion line, which the Company expects to renew, will mature in June
1999. Fifty-four banks representing 12 countries participate in these
syndicated facilities, which are used primarily to back up commercial paper
borrowings. In August 1998, GTE negotiated bilateral credit agreements for an
additional $1.0 billion in credit capacity. These facilities, which are shared
by GTE and certain domestic telephone operating subsidiaries, are aligned with
the maturity date of the existing 364-day line. The additional capacity provides
greater flexibility to incur additional indebtedness of a shorter-term duration
during periods when it may not be desirable to access the capital markets to
refinance short-term debt. GTE and certain of its domestic telephone operating
subsidiaries have shelf registration statements filed with the Securities and
Exchange Commission that total $2.4 billion as of December 31, 1998.
In 1999, the funding of dividends and capital requirements for GTE's businesses
will be substantially sourced by cash from operations, although GTE's strong
financial position allows ready access to worldwide capital markets for any
additional cash requirements.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
REGULATORY AND COMPETITIVE TRENDS
As was the case in 1997, much of 1998's regulatory and legislative activity at
both the state and federal levels was a direct result of the Telecommunications
Act. Along with promoting competition in all segments of the telecommunications
industry, the Telecommunications Act was intended to preserve and advance
universal service.
In 1998, GTE continued to meet the wholesale requirements of new competitors.
GTE signed more than 750 interconnection agreements with other carriers,
providing them the capability to purchase unbundled network elements (UNEs),
resell retail services and interconnect facilities-based networks. Several of
these interconnection agreements were the result of the arbitration process
established by the Telecommunications Act, and incorporated prices or terms and
conditions based upon the FCC rules that were subsequently overturned by the
Eighth Circuit Court (Eighth Circuit) in July 1997. GTE challenged a number of
such agreements in federal district courts during 1997.
The Company's position in these challenges was supported by the Eighth Circuit's
July 1997 decision stating that the FCC had overstepped its authority in several
areas concerning implementation of the interconnection provisions of the
Telecommunications Act. In January 1999, the U.S. Supreme Court (Supreme Court)
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit on many of the FCC rules related to
pricing and costing, that had previously been reversed by the Eighth Circuit on
jurisdictional grounds. The pricing rules established by the FCC will now be
remanded back to the Eighth Circuit for a determination on the merits. On the
other hand,
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the Supreme Court vacated the FCC rules requiring incumbent local exchange
carriers (LECs) to provide unbundled network elements to competitive LECs. This
latter ruling will be the subject of continued proceedings before the FCC and
the state commissions concerning what elements will have to be offered under
what conditions. Pending the final rulemaking by the FCC on the provisions of
unbundled network elements, GTE will continue to provide individual unbundled
network elements under existing interconnection agreements.
Concurrent with competitors' entry into GTE markets, the Company has continued
its own expansion into local, long-distance, Internet-access, wireless and video
services both within and outside its traditional operating areas. GTE now
provides long-distance and dial-up Internet-access services to approximately
2.7 million and 500,000 customers, respectively.
INTERSTATE ACCESS REVISION
Access charge reform continued to be a major issue in 1998. Effective January
1998, the FCC altered the structure of access charges that the Company collects
by reducing and restructuring the per-minute charges paid by long-distance
carriers and implementing new per-line charges. The FCC also created an access
charge structure that resulted in different access charges for primary and
secondary residential access lines and single and multi-line business access
lines. In aggregate, the annual reductions in usage-sensitive access charges
paid by long-distance carriers were intended to be offset by new per-line
charges and additional charges paid by end-user customers. Effective July 1998,
access charges were further reduced in compliance with FCC requirements to
reflect the impacts of access charge reform and in making the Company's 1998
Annual Filing. Similar filings during 1997 had already resulted in price
reductions.
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 May 1997 Access Reform Order before the Eighth Circuit
based on the premise that the FCC did not eliminate the universal service
subsidies hidden within interstate access charges (as directed by the
Telecommunications Act), and the FCC created additional subsidy charges paid
only by business and multi-line residential customers. In August 1998, the
Eighth Circuit denied all of the petitions for review of the Access Reform
Order. In October 1998, the FCC began a proceeding to refresh the record used in
the 1997 access charge reform proceedings. The FCC will determine whether to
retain or modify its market-based access charge reform approach, or to adopt a
prescriptive approach. In addition, the FCC will decide whether the 6.5%
productivity offset should be changed. An order is expected to be released prior
to July 1999.
UNIVERSAL SERVICE
In May 1997, the FCC released a decision relating to implementation of the
Telecommunications Act's provisions on universal service. GTE and numerous other
parties have challenged the FCC's decision before the U.S. Court of Appeals for
the Fifth Circuit on the grounds that the FCC did not follow the requirements of
the Telecommunications Act to develop a sufficient, explicit and competitively
neutral universal service program. Oral arguments were held in December 1998. A
final decision on the appeal is expected in 1999.
In its Order on Reconsideration of the May 1997 decision dated July 1998, the
FCC referred some key issues back to the Federal-State Joint Board (Joint Board)
on universal service. The Joint Board issued its Second Recommended Decision in
November 1998. The recommendations were generic in nature and require further
development. Comments and reply comments on the Joint Board's recommendations
were filed in late December 1998 and January 1999, respectively. An order from
the FCC is expected in the second quarter of 1999, which may reject or change
the Joint Board's recommendations.
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs by the first quarter of 1999 and a
revenue benchmark by mid-1999. For this reason, the FCC moved the
implementation date of the new universal service mechanism for nonrural
carriers to July 1999. The Company filed a Petition for Reconsideration in
December 1998, stating that the adopted model is incomplete and requires
additional time for proper evaluation. GTE is currently awaiting action from
the FCC.
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PRICE CAP
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis. The price
caps for a variety of service categories change annually using a price cap index
that is a function of inflation less a predetermined productivity offset. The
FCC's May 1997 Price Cap Order revised the price cap plan for incumbent price
cap LECs by adopting a productivity offset of 6.5%. In June of 1997, GTE and
several other parties challenged the FCC's Price Cap Order before the Court of
Appeals for the District of Columbia Circuit. The issue presented for review was
whether, in computing its new 6.5% productivity offset, the FCC arbitrarily
manipulated the evidence to achieve a predetermined outcome. Oral arguments are
set for the first quarter of 1999 with a decision expected later in the year.
ADVANCED DATA SERVICE
In August 1998, the FCC released a Memorandum Opinion and Order finding that the
pro-competitive provisions of the Telecommunications Act apply equally to
advanced services and circuit-switched voice services. In comments filed in
September 1998, GTE outlined a comprehensive plan to rapidly deploy advanced
data services, such as asymmetric digital subscriber line (ADSL) service, in a
framework that permits real competition between incumbents and competitors. The
matter is pending before the FCC. In October 1998, the FCC found in favor of
GTE's position that ADSL service is interstate in nature and properly tariffed
at the federal level. The FCC specifically concluded that traffic to an ISP does
not terminate at the ISP's local server but continues on to the ultimate
destination or destinations at distant interstate or international websites
accessed by the end-user.
NUMBER PORTABILITY
In December 1998, the FCC released a Memorandum Opinion and Order regarding cost
recovery for the deployment of local number portability (LNP). This order
follows the FCC's Third Report and Order, which determined that carriers may
recover carrier-specific costs directly related to the provision of long-term
LNP via a federally tariffed end-user monthly charge beginning no earlier than
February 1999. GTE filed a LNP tariff and instituted an end-user number
portability fee per line, which began appearing on customer bills in March 1999.
The FCC is investigating the costs supporting the filing.
INTERNET SERVICE TRAFFIC
On February 25, 1999 the FCC adopted an order finding that dial-up ISP-bound
traffic is largely interstate based on a traditional examination of the
end-to-end nature of the communication. In this ruling the FCC made it clear
that its actions will not subject the Internet to regulation or eliminate the
current Enhanced Service Provider exemption. The order stated that in the
absence of a federal rule, existing state arbitration decisions on the issue may
be appropriate under certain conditions. GTE is currently reviewing its existing
contracts and commission orders and will take further action as necessary. The
order also contained a Notice of Proposed Rulemaking to consider the appropriate
compensation for this traffic in the future. GTE has appealed the FCC's
conclusion that it does not have to set a rate after it finds the traffic to be
jurisdictionally interstate.
INTERNATIONAL
The global communications industry is in the midst of a major transformation
away from serving the regulatory-driven needs of the telecommunications market.
This new marketplace will be characterized by demand for both expanded basic
communication services in developing markets and a wide range of new services
for the delivery of data, voice, multimedia, and information services to a
variety of different customers. In addition, the FCC's new foreign participation
rules, adopted to implement the United States' World Trade Organization
commitments, significantly liberalized the policies for international
telecommunications and satellite services. Since adopting the new rules in
November 1997, the FCC has granted over 700 applications to foreign and domestic
applicants to provide international service in the United States.
Throughout Latin America, telecommunications providers will be faced with a
series of challenges, new opportunities, and deregulation in 1999. In Venezuela,
a new president was recently elected seeking a fundamental restructuring of the
Venezuelan state, including the National Assembly. In addition, recent actions
by CONATEL (Venezuela's telecommunications regulatory body) included approval of
draft Interconnection Regulations, the implementation of expanded local calling
areas, and the development of a new telephone numbering plan. Deliberations
between CANTV (an affiliate of GTE) and CONATEL on the opening of competitive
telecommunications in Venezuela will begin in 1999.
In Argentina, hearings have begun to discuss the new licensing plans and
regulatory framework, which will promote a more competitive Argentine
telecommunications market. The decisions resulting from these hearings will
influence the rules of the marketplace in which GTE's cellular subsidiary, CTI,
and three other full-service
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providers will compete by November 1999. In the Dominican Republic, a new
Telecommunications Law was enacted, which, when implemented, will help eliminate
subsidies from local service and create a new regulatory body composed of
members from both the public and private sectors. CODETEL, a wholly-owned
subsidiary of GTE, operates in the Dominican Republic.
GTE's position is growing in Asia, where the Company provides PCS service in
Taiwan and paging service in China. From this base in Asia, GTE will continue to
share in the region's growth.
In Canada, GTE already provides a wide range of telecommunications services
through its BC TELECOM Inc. (BC TELECOM) and Quebec Telephone (Quebec Tel)
operations. On January 31, 1999, BC TELECOM, a majority-owned investment of
GTE, and TELUS Corporation (TELUS) merged in order to better leverage the
synergies between the two companies, as well as take advantage of the opening
of competition throughout the Canadian telecommunications market. (See "1999
Developments" for further information on this merger.) Quebec Tel will also be
subject to the continued pro-competitive changes in regulation.
As can be seen in these activities around the globe, GTE continues its
development of new telecommunications business opportunities throughout the
world in order to secure a strategic position for the dynamic future ahead.
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for a combination of the two companies. Under terms of the agreement,
which was unanimously approved by the boards of directors of both companies, GTE
shareholders will receive 1.22 shares of Bell Atlantic stock for each GTE share
they own. The merger is subject to shareholder and regulatory approvals. The
merger agreement requires the consent of several regulatory and governmental
agencies, including the Department of Justice (DOJ), FCC and various state
public utility commissions (PUCs). In August 1998, GTE and Bell Atlantic advised
the DOJ of the merger. On October 2, 1998, GTE and Bell Atlantic filed for
approval of the merger with the FCC and notified and/or filed for approval of
the parent company merger in every state PUC and the District of Columbia where
required. The DOJ and FCC reviews will continue into 1999. As of December 31,
1998, GTE had completed, or substantially completed, merger approvals in 34
states. The Company anticipates the remaining states will approve the merger
sometime in 1999.
1999 DEVELOPMENTS
On January 31, 1999, BC TELECOM, a majority-owned investment of GTE, merged
with TELUS to create a growth-oriented telecommunications company. The merged
company is called BCT.TELUS Communications, Inc. Initially, BCT.TELUS will
provide a full range of voice and data communications services over both
wireline and wireless networks in the Canadian provinces of British Columbia
and Alberta. Under the terms of the merger agreement, GTE's ownership interest
in the merged company is approximately 26.7%. Accordingly, during the first
quarter of 1999, GTE will deconsolidate BC TELECOM and account for its
investment in BCT.TELUS using the equity method of accounting. As a result, GTE
expects to record a one-time, noncash gain of approximately $300 million
after-tax in the first quarter of 1999.
In Puerto Rico, GTE agreed to purchase a 40% interest in PRTC from the
government of Puerto Rico. PRTC is currently the largest provider of local
telephone service across Puerto Rico and also competes with several other
companies in long-distance and cellular services. This acquisition, which closed
in the first quarter of 1999, will play a key role in GTE's Latin American
strategy.
During the first quarter of 1999, GTE also continued the review of its
operations and cost structure to ensure they were consistent with its growth
objectives. In connection with this ongoing review, GTE expects that additional
one-time charges of approximately $150-$225 million after-tax will be recorded
during the first quarter of 1999. This charge is expected to include
approximately $100-$150 million after-tax related to the separation of
2,500-3,500 employees and associated facilities costs. The
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components of the charge will include separation and related benefits such as
outplacement and benefit continuation costs and the cost of assets or facilities
that will no longer be used by the Company.
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.
In 1997, GTE's Year 2000 methodology and processes were certified by the
Information Technology Industry Association of America. GTE presently expects
that the essential functions of its telecommunications businesses will complete
Year 2000 testing by June 30, 1999.
State of Readiness
GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for which
GTE is responsible; 2) systems that directly support GTE's telecommunications
network operations and interactions with customers; 3) systems and products that
support GTE's national and international business units; 4) legacy software that
supports basic business operations, customer premise equipment and
interconnection with other telecommunications carriers; and 5) systems that
support GTE's physical infrastructure, financial operations and facilities.
Company-wide, essential remediation was approximately 76% complete as of
December 31, 1998. In addition to the essential remediation budget, GTE has set
aside funds equivalent to approximately 12% of the Company's overall Year 2000
budget. These funds are planned for verification, problem resolution and
administrative program closeout in the last six months of 1999 and to address
contingencies and millennium program operations and control through March 2000.
GTE's portion of the PSTN in the United States has been upgraded substantially
for Year 2000; 92% of GTE's access lines are already operational using Year 2000
compliant central office switches. Additionally, over 95% of the Company's
essential legacy software has been remediated. Over the next six months, the
focus will be on deployment and testing of these systems throughout GTE's
operations.
GTE's Year 2000 program has been organized into five phases as follows:
Awareness: program definition and general education; Assessment: analysis and
prioritization of systems supporting the core business; Renovation: rectifying
Year 2000 issues; Validation: testing the Year 2000 solutions; Implementation:
placing the tested systems into production. Awareness and Assessment are more
than 95% complete; System Renovation, including supplier products, is
approximately 89% complete; Validation, including enterprise testing in
operational environments, and
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Implementation, including regional deployment, are approximately 60% complete.
It is anticipated that the Renovation, Validation and Implementation phases for
essential functions will be complete in June 1999.
In summary, compliant product deployment and enterprise testing for most of
GTE's domestic telecommunications-related businesses, including national and
international interoperability and validation, are presently expected to be
complete by the end of June 1999. BBN Corporation, a provider of Internet-based
services acquired by GTE in 1997, is presently targeting completion of its key
infrastructure systems by the end of September 1999. As previously mentioned
(see "Financial Condition--Investing"), in July 1998, GTE agreed to acquire
approximately 40% of PRTC. This transaction closed in the first quarter of 1999.
The cost of GTE's Year 2000 program includes the cost for the PRTC Year 2000
program, which is expected to be complete by the end of the third quarter of
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 December 31, 1998,
Year 2000 compliant versions, or suitable alternatives, for 99% of these vital
supplier products have been provided and are currently undergoing certification
testing by GTE.
Use of Independent Verification and Validation
GTE's Year 2000 program management office has established a 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. This quality assurance process is expected to be
completed in August 1999. Separately, GTE's corporate internal auditors conduct
periodic reviews and report significant findings, if any, to business unit and
corporate management and the audit committee of the Board of Directors. Program
status is also reported each quarter to the Company's external auditors.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is approximately
$370 million. Through December 31, 1998, expenditures totaled $219 million. Year
2000 remediation costs are expensed in the year incurred. GTE has not elected to
replace or accelerate the planned replacement of systems due to the Year 2000
issue.
Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000 to
1,200 full-time equivalent workers (both company employees and contractors).
Approximately 12% of these full-time equivalent workers are engaged in all
aspects of program management; 30% are engaged in legacy system conversion; 25%
are involved in external supplier management; 30% are involved in testing at all
levels; and 3% are addressing contingency planning and interoperability
operations both nationally and internationally. Approximately 75% of GTE's
program effort involves U.S. domestic operations of all types.
Risks of Year 2000 Issues
GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios." To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to threaten
GTE's present schedule. GTE's program and plans currently indicate a compliant
network infrastructure to be deployed by the end of June 1999. A general,
unspecific, schedule shift that would erode progress beyond January 1, 2000,
cannot reasonably be calculated. If, however, there were a schedule delay
lasting no more than six months, such schedule erosion would likely affect only
nonessential systems due to the prioritization of work schedules.
Other scenarios might include a possible but presently unforeseen failure of key
supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.
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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 impact analysis;
coordination with other (non-PSTN) telecommunications providers; a Year 2000
"war room" operation to provide high-priority recovery support, plans for key
personnel availability, command structures and contingency traffic routing; and
plans for round-the-clock, on-call repair teams.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this SOP,
effective January 1, 1999, GTE will be required to capitalize and amortize the
cost of all internal-use software, including network-related software it now
expenses. During 1998, the Company expensed network-related software of
approximately $200 million.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, which is effective January 1, 2000.
FORWARD-LOOKING STATEMENTS
GTE estimates that consolidated earnings per share will grow 13% to 15% in 1999
and beyond. Contributing to this growth is the expected turnaround in start-up
costs associated with GTE's data initiatives and bundled telecom offerings
through our national sales and marketing organization. In addition, this growth
reflects cost-cutting initiatives, including programs to reduce expenses and
decrease the number of contractors and employees, primarily through attrition
and other voluntary efforts, in the U.S. The Company expects a one-time charge
in the first quarter of 1999 to recognize these cost-cutting initiatives. GTE
also expects to record a noncash gain of approximately $300 million in the
first quarter of 1999 resulting from the merger of BC TELECOM and TELUS.
Consolidated revenues are expected to grow in the high single digits through
1999, rather than the 10% to 12% previously estimated. This reduction is due to
the Company's plan to moderate the expansion of its national sales and
marketing operation, and increase focus on the roll-out of the Company's
long-distance activities within bundled telecom offerings.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, the Company has made forward-looking statements. These statements
are based on the Company's estimates and assumptions and are subject to certain
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company, as
well as those statements preceded or followed by the words "anticipates,"
"believes," "estimates," "expects," "hopes," "targets" or similar expressions.
For each of these statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: 1) materially adverse changes in economic
conditions in the markets served by the Company 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, including arbitration 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, joint ventures, noncontrolled investments 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, long-distance 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. Whether the Company
realizes the benefits of these initiatives depends on GTE's ability to
successfully develop the network facilities and systems required to provide
these enhanced services, the success of its marketing initiatives, the levels of
demand that are created for these services and the level of competition the
Company faces as it seeks to penetrate new markets and emerging markets for new
products and services. While GTE's management believes that it will be
successful in implementing these new initiatives, there are uncertainties
associated with its ability to increase revenue and income growth rates to the
levels targeted through these initiatives and its ability to do so within the
planned timeframes or investment levels.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
GTE views derivative financial instruments as risk management tools and, in
accordance with Company policy, does not utilize them for speculative or trading
purposes. GTE is also not a party to any leveraged derivatives. GTE is exposed
to market risk from changes in interest rates and foreign currency exchange
rates, as well as changes in the market price of GTE's common stock. GTE manages
its exposure to market risks through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments that have been authorized pursuant to the Company's policies and
procedures. The use of these derivatives allows GTE to reduce its overall
exposure to market risk, as the gains and losses on these contracts
substantially offset the gains and losses on the liabilities being hedged. In
addition, GTE enters into derivative financial instruments with a diversified
group of major financial institutions in order to manage its exposure to
nonperformance on such instruments.
GTE uses derivative financial instruments to manage its exposure to interest
rate movements and to reduce borrowing costs. GTE's net exposure to interest
rate risk primarily consists of floating rate instruments that are benchmarked
to U.S. and European short-term money market interest rates. GTE manages this
risk by using interest rate swaps to convert floating rate long-term and
short-term debt to synthetic fixed rate instruments. GTE also uses forward
interest rate swaps and forward contracts to sell U.S. Treasury bonds to hedge
interest rates on anticipated long-term debt issuances.
Based on GTE's interest rate sensitive derivative financial instruments
outstanding at December 31, 1998, a 100 basis point increase in interest rates
as of December 31, 1998, would result in a net gain to GTE of $31 million.
Conversely, a 100 basis point decrease in interest rates would result in a net
loss to GTE of $32 million. Any increase or decrease in the market value of
GTE's interest rate sensitive derivative financial instruments would be
substantially offset by a corresponding decrease or increase in the market value
of the underlying liability or anticipated debt issuance.
GTE uses foreign currency derivative instruments to reduce its exposure to
adverse changes in foreign currency rates. The use of these derivatives allows
GTE to reduce its overall exposure to exchange rate fluctuations, as the gains
and losses on these contracts substantially offset the gains and losses on
assets and liabilities being hedged. The Company's exposure to foreign exchange
rates primarily exists with respect to loans denominated in British pounds and
short-term investments denominated in Canadian dollars. As of December 31, 1998,
GTE's exposure resulting from fluctuations in foreign currency exchange rates
was not material.
In the past, GTE issued stock options to certain of its employees that had
tandem stock appreciation rights. To minimize GTE's exposure to compensation
expense related to these stock appreciation rights, GTE purchased long-term call
options on its common stock. As a result of these purchases, a $5 change in the
per-share price of GTE's common stock would impact GTE's pretax earnings by
approximately $35 million, as of December 31, 1998. However, gains and losses
recognized on the call options would be substantially offset by increased or
decreased compensation expense related to stock appreciation rights.
33
<PAGE> 35
Item 8. Financial Statements and Supplementary Data
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ------------- ------------ -------------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C>
REVENUES AND SALES $ 25,473 $ 23,260 $ 21,339
OPERATING COSTS AND EXPENSES
Cost of services and sales 10,741 9,203 8,071
Selling, general and administrative 4,821 4,560 4,010
Depreciation and amortization 3,820 3,886 3,770
Special charges 755 -- --
-------- -------- --------
Total operating costs and expenses 20,137 17,649 15,851
-------- -------- --------
OPERATING INCOME 5,336 5,611 5,488
OTHER (INCOME) EXPENSE
Interest - net 1,253 1,145 1,026
Other - net 38 48 50
-------- -------- --------
Income before income taxes 4,045 4,418 4,412
Income taxes 1,553 1,624 1,614
-------- -------- --------
Income before extraordinary charges 2,492 2,794 2,798
Extraordinary charges (320) -- --
-------- -------- --------
NET INCOME $ 2,172 $ 2,794 $ 2,798
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary charges $ 2.59 $ 2.92 $ 2.89
Extraordinary charges (.33) -- --
-------- -------- --------
NET INCOME $ 2.26 $ 2.92 $ 2.89
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary charges $ 2.57 $ 2.90 $ 2.88
Extraordinary charges (.33) -- --
-------- -------- --------
NET INCOME $ 2.24 $ 2.90 $ 2.88
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS)
Basic 963 958 969
Diluted 968 962 972
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 36
GTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------ ---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 467 $ 551
Receivables, less allowances of $395 and $333 4,785 4,782
Inventories and supplies 668 846
Deferred income tax benefits 167 51
Net assets held for sale 274 --
Other 420 307
-------- --------
Total current assets 6,781 6,537
-------- --------
Property, plant and equipment, net (including $1,600 held
for sale at December 31, 1998, see Note 11) 24,866 24,080
Prepaid pension costs 4,927 4,361
Franchises, goodwill and other intangibles 3,144 3,232
Investments in unconsolidated companies 2,210 2,335
Other assets 1,687 1,597
-------- --------
Total assets $ 43,615 $ 42,142
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term obligations, including current maturities $ 4,148 $ 3,398
Accounts payable and accrued expenses 4,138 4,672
Taxes payable 1,071 771
Dividends payable 470 466
Other 528 534
-------- --------
Total current liabilities 10,355 9,841
-------- --------
Long-term debt 15,418 14,494
Employee benefit plans 4,404 4,756
Deferred income taxes 1,948 1,782
Minority interests 1,984 2,253
Other liabilities 740 978
-------- --------
Total liabilities 34,849 34,104
-------- --------
Shareholders' equity
Common stock - 991,374,778 and 984,252,887 shares issued 50 49
Additional paid-in capital 7,884 7,560
Retained earnings 2,740 2,372
Accumulated other comprehensive loss (375) (243)
Guaranteed ESOP obligations (509) (550)
Treasury stock - 23,377,388 and 26,253,088 shares, at cost (1,024) (1,150)
-------- --------
Total shareholders' equity 8,766 8,038
-------- --------
Total liabilities and shareholders' equity $ 43,615 $ 42,142
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 37
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ -------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C>
OPERATIONS
Income before extraordinary charges $ 2,492 $ 2,794 $ 2,798
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 3,820 3,886 3,770
Special charges 755 -- --
Deferred income taxes 471 456 415
Change in current assets and current liabilities,
excluding the
effects of acquisitions and dispositions:
Receivables - net (767) (622) (571)
Other current assets (5) (220) 26
Accrued taxes and interest 381 86 (109)
Other current liabilities (662) 325 (220)
Other - net (595) (541) (210)
------- ------- -------
Net cash from operations 5,890 6,164 5,899
------- ------- -------
INVESTING
Capital expenditures (5,609) (5,128) (4,088)
Acquisitions and investments (121) (927) (476)
Proceeds from sales of assets 209 73 337
Other - net 13 89 (50)
------- ------- -------
Net cash used in investing (5,508) (5,893) (4,277)
------- ------- -------
FINANCING
Common stock issued 447 288 444
Purchase of treasury stock -- (576) (967)
Dividends paid (1,807) (1,802) (1,825)
Long-term debt issued 3,934 2,407 2,038
Long-term debt retired (1,988) (2,417) (582)
Increase (decrease) in short-term obligations,
excluding current maturities (978) 2,015 (725)
Other - net (74) (40) 68
------- ------- -------
Net cash used in financing (466) (125) (1,549)
------- ------- -------
Increase (decrease) in cash and cash equivalents (84) 146 73
Cash and cash equivalents:
Beginning of year 551 405 332
------- ------- -------
End of year $ 467 $ 551 $ 405
======= ======= =======
CASH PAID DURING THE YEAR FOR
Interest $ 1,321 $ 1,282 $ 1,088
Income taxes 854 1,057 1,325
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 38
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Guaranteed
Common Paid-In Earnings Comprehensive ESOP Treasury
Stock Capital (Deficit) Income (Loss) Obligations Stock Total
---------- --------- ----------- ------------- ------------ --------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1995 $ 49 $ 8,221 $ (534) $ (172) $ (603) $ (90) $ 6,871
Net income 2,798 2,798
Dividends declared (915) (905) (1,820)
Common and treasury stock
issued under employee
and shareholder plans
(11,570,646 shares) 110 340 450
Purchase of treasury stock
(23,533,200 shares) (1,006) (1,006)
Other 11 4 28 43
--------- -------- --------- --------- -------- -------- ---------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1996 49 7,416 1,370 (168) (575) (756) 7,336
Net income 2,794 2,794
Dividends declared (1,800) (1,800)
Common and treasury stock
issued under employee
and shareholder plans
(6,620,993 shares) 146 142 288
Purchase of treasury stock
(11,719,200 shares) (536) (536)
Other (2) 8 (75) 25 (44)
--------- -------- --------- --------- -------- -------- ---------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1997 49 7,560 2,372 (243) (550) (1,150) 8,038
Net income 2,172 2,172
Dividends declared (1,811) (1,811)
Common and treasury stock
issued under employee
and shareholder plans
(9,997,591 shares) 1 320 126 447
Other 4 7 (132) 41 (80)
--------- -------- --------- --------- -------- -------- ---------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1998 $ 50 $ 7,884 $ 2,740 $ (375) $ (509) $ (1,024) $ 8,766
========= ======== ========= ========== ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 39
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ----------- ----------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
Net income $ 2,172 $ 2,794 $ 2,798
Other comprehensive income (loss):
Foreign currency translation adjustments (144) (90) 19
Unrealized gains (losses) on securities, net of taxes of $6, $8 and $(8) 12 15 (15)
---------- --------- ---------
Other comprehensive income (loss) (132) (75) 4
---------- --------- ---------
Comprehensive income $ 2,040 $ 2,719 $ 2,802
========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE> 40
GTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE Corporation and subsidiaries ("GTE" or "the Company") is one of the world's
largest telecommunications companies with an array of products and services that
is among the broadest in the industry. GTE's National and International
Operations serve approximately 30 million telephone access lines through
subsidiaries in the United States, Canada and the Dominican Republic, and an
affiliate in Venezuela. GTE is a leading wireless operator in the United States,
with more than 4.8 million wireless customers and the opportunity to serve 61.4
million potential wireless customers. Outside the United States, GTE operates
wireless networks serving approximately 2.8 million customers with 23.4 million
potential wireless customers through subsidiaries in Canada, the Dominican
Republic and Argentina, and affiliates in Venezuela and Taiwan. GTE also
participates in a venture which operates a paging network in China. GTE provides
data services, including dial-up Internet access for residential and small
business consumers and Web-based applications for Fortune 500 companies. GTE is
also a leader in government and defense communications systems and equipment,
directories and telecommunications-based information services and systems.
BASIS OF PRESENTATION
GTE prepares its consolidated financial statements in accordance with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect reported amounts. Actual results could differ from those
estimates.
The consolidated financial statements of GTE include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated. Investments in 20%- to 50%-owned companies and less than 20%-owned
cellular partnerships over which the Company exercises significant influence are
accounted for on the equity basis (see Note 5). Other investments of less than
20% are accounted for on the cost basis.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1998 presentation.
REVENUE RECOGNITION
Revenues are recognized when services are rendered or products are delivered to
customers. Long-term contracts are accounted for using the
percentage-of-completion method, with revenues recognized in the proportion that
costs incurred bear to the estimated total costs at completion. Expected losses
on such contracts, if any, are charged to income currently.
DEPRECIATION AND AMORTIZATION
GTE's telephone operating subsidiaries depreciate assets using the remaining
life methodology and straight-line depreciation rates. This method depreciates
the remaining net investment in telephone plant, less anticipated net salvage
value, over remaining economic asset lives. This method requires the periodic
review and revision of depreciation rates.
The economic asset lives used by our telephone subsidiaries are as follows:
Average lives (in years)
------------------------
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
39
<PAGE> 41
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on disposition are amortized with the
remaining net investment in telephone plant. When depreciable telephone plant is
retired outside the normal course of business, for example if a local exchange
is sold, any resulting gain or loss is included in operating income.
Property and equipment of other subsidiaries is depreciated on a straight-line
basis over the following estimated useful lives: buildings, 20 to 40 years;
cellular and data network equipment, 5 to 10 years; furniture and fixtures and
other equipment, 3 to 5 years.
When depreciable assets of other subsidiaries are retired or otherwise disposed
of, the related cost and accumulated depreciation are deducted from the plant
accounts and any resulting gain or loss is included in operating income.
Franchises, goodwill and other intangibles are amortized on a straight-line
basis over the periods to be benefited or 40 years, whichever is less.
Amortization expense for consolidated subsidiaries was $131 million, $96 million
and $90 million in 1998-96, respectively. Accumulated amortization was $819
million and $677 million at December 31, 1998 and 1997, respectively. Goodwill
resulting from investments in unconsolidated subsidiaries is amortized on a
straight-line basis over the periods to be benefited or 40 years, whichever is
less.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using the exchange rates in effect at the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. For most subsidiaries and affiliates,
the effects of exchange rate fluctuations on translating foreign currency assets
and liabilities into U.S. dollars are included in the other comprehensive income
component of shareholders' equity. For those affiliates operating in highly
inflationary economies, gains and losses associated with the effects of exchange
rate fluctuations on translating foreign currency assets and liabilities into
U.S. dollars are included in net income.
COMPREHENSIVE INCOME
Effective January 1, 1998, GTE adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting comprehensive income and its components. Included in
other comprehensive income are unrealized gains and losses on securities that
the Company intends to hold to maturity and foreign currency translation gains
and losses. Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses are recognized when significant pension obligations are settled and the
gain or loss is determinable.
VALUATION OF ASSETS
The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is
made based on estimated future cash flows, salvage value or expected net sales
proceeds depending on the circumstances. In instances where goodwill has been
recorded in connection with impaired assets, the carrying amount of the goodwill
is first eliminated before any reduction to the carrying value of tangible or
identifiable intangible assets. GTE's policy is to record asset impairment
losses, and any subsequent adjustments to such losses as initially recorded, as
well as net gains or losses on sales of assets as a component of operating
income. Under Accounting Principles Board Opinion No. 17, "Intangible Assets,"
the Company also annually evaluates the future period over which the benefit of
goodwill will be received, based on future cash flows, and changes the
amortization life accordingly.
INCOME TAXES
Deferred tax assets and liabilities are established for temporary differences
between the way certain income and expense items are reported for financial
reporting and tax purposes. Deferred tax assets and liabilities are subsequently
adjusted, to the extent necessary, to reflect tax rates expected to be in effect
when the temporary differences reverse. A valuation allowance is established for
deferred tax assets for which realization is not likely.
40
<PAGE> 42
Deferred income taxes were not provided on undistributed earnings of foreign
subsidiaries of approximately $488 million at December 31, 1998, as such
earnings are expected to be permanently reinvested.
EARNINGS PER COMMON SHARE
All earnings per share computations and presentations are in accordance with
SFAS No. 128, "Earnings per Share" (see Note 14).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
FINANCIAL INSTRUMENTS
GTE uses a variety of financial instruments to hedge its exposure to
fluctuations in interest and foreign exchange rates and in compensation expense
related to GTE's common stock price appreciation. The Company does not use
financial instruments for speculative or trading purposes, nor is the Company a
party to leveraged derivatives. Amounts to be paid or received under interest
rate swaps are accrued as interest expense. Gains or losses on foreign exchange
contracts are recognized based on changes in exchange rates, as are offsetting
foreign exchange gains or losses on the foreign currency obligations being
hedged. Gains or losses on long-term call options on GTE's common stock, which
hedge GTE's exposure to compensation expense related to outstanding stock
appreciation rights (SARs) and other stock-based compensation, are recognized
based on fluctuations in the market price of GTE's common stock. Gains or losses
recognized on call options offset compensation expense in GTE's consolidated
statements of income.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
SOFTWARE
GTE classifies software as either network-related or non-network related. For
network-related software, initial operating systems software is capitalized and
amortized over the life of the related hardware. All other network-related
software, including right-to-use fees, is expensed as incurred. Non-network
related software, which includes billing and administrative systems, is
capitalized and amortized over useful lives ranging from 3 to 5 years. Software
maintenance costs are expensed as incurred. During 1998-1996, non-network and
maintenance-related software expenditures were $516 million, $376 million and
$168 million, respectively, of which $243 million and $149 million were
capitalized in 1998 and 1997, respectively, associated with the implementation
of new administrative systems within the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this SOP,
effective January 1, 1999, GTE will be required to capitalize and amortize the
cost of all internal-use software, including network-related software it now
expenses. During 1998, the Company expensed network-related software of
approximately $200 million.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires entities that use derivative
instruments to measure these instruments at fair value and record them as assets
or liabilities on the balance sheet. It also requires entities to reflect the
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, which is effective
January 1, 2000.
41
<PAGE> 43
2. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own. The merger is subject to shareholder and regulatory
approvals.
3. STRATEGIC INITIATIVES
GTE's domestic strategy is to profitably offer a complete bundle of high-growth
telecommunications services nationwide. Consistent with this strategy, as
permitted by the Telecommunications Act of 1996, GTE launched nationwide
long-distance telephone service in early 1996. To accelerate its strategic
transformation, in 1997, GTE created a national sales and marketing organization
to market its products and services both inside and outside of its traditional
franchise areas and made significant investments in enhanced data and
leading-edge, Internet-based products and services. These investments included
the purchase of a nationwide fiber-optic network and the acquisition of BBN
Corporation, a leading provider of Internet-based services. Consistent with
GTE's decision to focus its resources on higher-growth segments of the industry,
in late 1997, GTE began a comprehensive review of its core operations to
identify business activities that were no longer strategic or were inconsistent
with its growth objectives. As a result of the completion of the initial phase
of this review during the first quarter of 1998, the Company committed to a plan
to sell or exit various business activities and reduce costs through employee
reductions and related actions. As a result of these actions, during the first
quarter of 1998, the Company recorded a pretax charge of $755 million, $482
million after-tax, or $.50 per diluted share, for the year.
NET ASSETS HELD FOR SALE
During the first quarter of 1998, the Company committed to a repositioning plan
that resulted in a decision to sell GTE Government Systems Corporation, a
supplier of government and defense communications systems; GTE Airfone
Incorporated, a provider of aircraft-passenger telecommunications; and
approximately 1.6 million domestic access lines located in 13 states. In
aggregate, these transactions are expected to generate for the Company after-tax
cash proceeds in excess of $3 billion. The sale of GTE Government Systems and
GTE Airfone are expected to close in 1999 and, accordingly, their net assets
have been reclassified to "Net assets held for sale" in the consolidated balance
sheets. Due to the regulatory approvals that are required, it is projected that
most of the sales of local access lines will close in 2000. As a result, the net
book value of these lines, which approximates $1.6 billion, continues to be
reported in "Property, plant and equipment, net" in the consolidated balance
sheets. The Company intends to continue to operate all of these assets until
sold. Based on the decision to sell, however, the Company stopped recording
depreciation expense for these assets. This lowered depreciation expense by
approximately $100 million for the year.
During 1998-1996, GTE Government Systems and GTE Airfone generated combined
revenues of approximately $1.6 billion, $1.4 billion and $1.3 billion,
respectively, and operating income of approximately $160 million, $80 million
and $50 million, respectively. Due to the centralized manner in which GTE's
local telephone companies are managed and since the access lines to be sold
represent portions of states rather than entire operating companies, revenues
and operating income applicable to the access lines to be sold are not readily
determinable. The 1.6 million access lines represent approximately 7% of the
average domestic lines that GTE Network Services had in service during 1998.
SPECIAL CHARGES - ASSET IMPAIRMENTS AND EXIT COSTS
Based on the decision to sell, the Company recorded a pretax charge of $200
million to reduce the carrying value of GTE Airfone's assets to estimated net
sales proceeds. No charge was recorded for GTE Government Systems or the access
lines to be sold because their estimated fair values were in excess of their
carrying values.
42
<PAGE> 44
During the first quarter of 1998, the Company also committed to a plan to exit
a number of other nonstrategic business activities. As a result, the Company
recorded a pretax charge of $156 million to reduce the carrying value of
affected assets to expected net salvage value and to recognize costs resulting
from the exit plan. The major components of the charge include:
o the write-off of network equipment and supplies for discontinued wireless
products and services ($81 million);
o the shutdown of business units developing interactive video products and
services and excess printing facilities ($42 million); and
o the write-off of impaired assets in Latin America ($33 million).
GTE expects that the assets affected by these actions will be sold or discarded
within a year of the decision to exit the activities to which they relate.
After completing the review of its operations, the Company also decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that it had
built over the past three years in certain test markets. Although the Company is
obligated to, and will continue to, use the existing HFC networks to provide
video service in these markets, technological innovations have created
alternative ways for the Company to deliver video and high-speed data services
in the future at a significantly lower overall cost. Due to the significant
change in the scale of the HFC networks and the effect on future revenues and
expenses, the Company recorded a pretax charge for impairment of approximately
$161 million based on estimated future cash flows. At December 31, 1998, these
networks, which have generated operating losses of approximately $86 million,
had a net book value of approximately $250 million.
SPECIAL CHARGES - EMPLOYEE RELATED AND OTHER ACTIONS
During the first quarter of 1998, the Company also decided to consolidate
facilities and centralize or eliminate a variety of employee functions and, as a
result, recorded a $107 million pretax charge. During the second half of the
year, the Company closed several administrative facilities, including its
corporate headquarters in Connecticut and approximately 140 domestic retail
stores and other locations operated by its National Operations. The cost of
these actions is composed primarily of employee severance, outplacement and
benefit continuation costs for approximately 1,700 employees and other costs to
exit locations no longer used by the Company. At December 31, 1998, 1,587
employees had been separated. The Company anticipates that an additional
2,500-3,500 employee separations and related actions will occur during the first
quarter of 1999 and that additional charges of approximately $100-$150 million
after-tax will be necessary as the plans are finalized.
The Company also recorded a pretax charge of approximately $131 million related
to nonrecurring federal and state regulatory rulings affecting its Network
Services unit. Approximately two thirds of this charge relates to nonrecurring
access rate refunds applied by the FCC retroactively in 1997, which the Company
has contested in the courts. In addition, the charge also included the write-off
of mandated costs, including generic software, and other costs incurred by the
Company for which revenue recovery was not allowable under the regulatory
process.
SPECIAL CHARGES - BY CATEGORY AND BUSINESS UNIT
The following summarizes the special charges by major category and by business
unit affected:
<TABLE>
<CAPTION>
Initial Charge Cash Payments Remaining Liability
-------------- ------------- -------------------
(Dollars in Millions)
<S> <C> <C> <C>
Major Category:
Asset impairments $ 483 $ -- $ --
Exit costs 34 10 24
Employee related and other actions
Severance 77 33 44
Other 30 22 8
Other actions 131 94 37
------- ------- -------
Total $ 755 $ 159 $ 113
======= ======= =======
Business Unit:
National Operations
Network Services $ 171 $ 124 $ 38
Wireless Products and Services 91 9 25
Other National Operations 397 7 --
International Operations 38 -- 11
Corporate and other 58 19 39
------- ------- -------
Total $ 755 $ 159 $ 113
======= ======= =======
</TABLE>
The $58 million included in "Corporate and other" relates to severance and
related costs associated with the closing of several administrative facilities,
including the Company's corporate headquarters and worldwide training facility
in Connecticut.
There have been no adjustments to the liability as originally recorded.
4. EXTRAORDINARY CHARGES
During the first quarter of 1998, GTE recorded after-tax extraordinary charges
of $320 million (net of tax benefits of $256 million), or $.33 per diluted
share.
Approximately $300 million of the charge related to the discontinuation of SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation," by GTE's
Canadian operations. The decision by GTE's Canadian subsidiaries to discontinue
using regulatory accounting practices was in response to rulings by the Canadian
regulatory commission in March of 1998 that opened the Canadian
telecommunications market to full competition. Under SFAS No. 71, certain assets
were depreciated and certain expenses were recognized over a longer period of
time than would have been the case in a competitive environment. This charge
includes a reduction in the net carrying value of property, plant and equipment
of $270 million to reflect impairment based on the estimated cash flows that the
assets are expected to generate in a competitive environment and a reduction in
costs that had been capitalized based on the expectation of future recovery of
approximately $30 million.
In addition, during the first quarter of 1998, GTE called $800 million of
high-coupon debt and preferred stock prior to their stated maturity date,
resulting in a one-time, after-tax extraordinary charge of $20 million.
43
<PAGE> 45
5. INVESTMENTS IN UNCONSOLIDATED COMPANIES
GTE's investments in companies accounted for on the equity basis at December 31,
were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(Dollars in Millions)
<S> <C> <C>
CANTV $ 1,751 $ 1,645
CTI Holdings, S.A. -- 208
Other investments 459 482
---------- ---------
Total $ 2,210 $ 2,335
========== =========
</TABLE>
Compania Anonima Nacional Telefonos de Venezuela (CANTV) is the primary provider
of local telephone service and national and international long-distance service
in Venezuela. CANTV also provides cellular, Internet-access and directory
advertising services. On December 22, 1998, GTE increased its ownership interest
in CANTV from 25.9% to 26.4%. At December 31, 1998 and 1997, GTE's investment in
CANTV included unamortized goodwill of $765 million and $787 million,
respectively.
CTI Holdings, S.A. (CTI), is a consortium providing cellular services in the
north and south interior regions of Argentina. During 1998, GTE increased its
ownership interest in CTI and assumed management control through the conversion
of debt to equity, and through the purchase of additional shares. As a result,
in the fourth quarter of 1998, GTE changed the accounting for its investment in
CTI from the equity method to full consolidation. The consolidation of CTI,
which increased the Company's revenues and operating income by $126 million and
$17 million, respectively, during 1998 had no effect on net income. As of
December 31, 1998, CTI had total assets of approximately $1.1 billion, including
$700 million of net property, plant and equipment, and long-term debt of $712
million.
Other investments represent cellular partnerships in the U.S. and other
international investments.
At December 31, 1998, GTE had a 50.8% ownership interest in BC TELECOM, Inc.
(BC TELECOM), a full-service telecommunications provider in the province of
British Columbia, Canada. On January 31, 1999, BC TELECOM and TELUS Corporation
merged to form a public company called BCT.TELUS Communications, Inc. GTE's
ownership interest in the merged company, BCT.TELUS, is approximately 26.7%
and, as such, during the first quarter of 1999, the Company will change the
accounting for its investment from full consolidation to the equity method. In
1998, GTE's consolidated results include the following amounts related to BC
TELECOM: revenues of $2.2 billion, operating income of $589 million, total
assets of $2.6 billion, including $1.7 billion of net property, plant and
equipment, and long-term debt of $686 million.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
The authorized common stock of GTE at December 31, 1998, consisted of two
billion shares with a par value of $.05 per share. In 1997, GTE's Board of
Directors authorized the repurchase of up to 20 million shares of currently
issued GTE common stock in the open market or in privately negotiated
transactions.
ADDITIONAL PAID-IN CAPITAL
Dividends for the first and second quarters of 1996 were paid entirely from
additional paid-in capital as a result of the extraordinary charges taken as of
December 31, 1995, in connection with the discontinuance of SFAS No. 71 for
domestic telephone subsidiaries. Beginning in the third quarter of 1996,
dividends were paid from retained earnings.
44
<PAGE> 46
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes cumulative foreign currency
translation adjustments of $(407) million, $(263) million and $(173) million at
December 31, 1998-96, respectively (see Note 1); and cumulative unrealized gains
on investments in securities of $32 million, $20 million and $5 million at
December 31, 1998-96, respectively.
7. STOCK OPTION AND SHAREHOLDER RIGHTS PLANS
STOCK OPTION PLANS
GTE maintains broad-based stock option plans that cover substantially all
employees. Prior to 1997, options were granted separately or in conjunction with
stock appreciation rights (SARs). Beginning in 1997, the granting of SARs was
discontinued. In 1997, shareholders approved the GTE Corporation 1997 Long-Term
Incentive Plan (the LTIP). Each option granted under the LTIP conveys the right
to purchase, at fair market value on the date of the grant, shares of GTE common
stock. Generally, options have a term of 10 years and become vested over a
period not to exceed seven years. The LTIP plan, as approved, authorizes GTE to
issue up to 43 million common shares. Through December 31, 1998, options have
been granted to purchase 27.2 million shares. In addition, 19.4 million options
have been granted under predecessor plans.
The following table summarizes stock option activity during each of the last
three years (number of options in thousands):
<TABLE>
<CAPTION>
Stock Average
Options Price
-------------- ------------
<S> <C> <C>
Balance, December 31, 1995 15,434 $ 32.21
Options granted 13,268 41.96
Options exercised (2,634) 30.29
Options cancelled or forfeited (154) 37.51
-------- ---------
Balance, December 31, 1996 25,914 37.36
Options granted 22,208 45.28
Options exercised (3,951) 33.58
Options cancelled or forfeited (1,046) 40.31
-------- ---------
Balance, December 31, 1997 43,125 41.71
Options granted 14,703 53.97
Options exercised (8,672) 39.34
Options cancelled or forfeited (2,461) 44.78
-------- ---------
Balance, December 31, 1998 46,695 $ 45.85
======== =========
</TABLE>
At December 31, 1998, 17.6 million options were exercisable.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, GTE continues to apply the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). In accordance with
APB 25, compensation expense is not recognized for stock options on the date of
grant since it is GTE's practice to grant options with an exercise price equal
to the fair market value of its common stock on the date of grant. Under SFAS
No. 123, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service or vesting period. Had compensation
cost for GTE's stock options been determined under SFAS No. 123, based on the
fair
45
<PAGE> 47
market value at the grant dates, GTE's proforma net income and diluted earnings
per share at December 31 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C>
Net Income
As reported $ 2,172 $ 2,794 $ 2,798
Proforma 2,113 2,769 2,776
Diluted Earnings Per Share
As reported $ 2.24 $ 2.90 $ 2.88
Proforma 2.18 2.88 2.86
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for those options granted in 1998-1996: expected volatility of 18%,
expected maturities of seven years, risk-free interest rates equal to the yield
on seven-year U.S. Treasury notes on the grant date and expected dividend yield
of approximately 3%.
SHAREHOLDER RIGHTS PLAN
GTE maintains a shareholder rights plan. Under the original provisions of this
plan, a right to purchase one one-thousandth of a share of series A
participating no par preferred stock for $200 (a "Right") was granted for each
outstanding share of GTE common stock. As a result of a two-for-one stock split
effected after the adoption of the plan, each share of GTE common stock is
currently entitled to one-half of a Right. The Rights become exercisable only if
a person or group, without GTE's prior consent, (i) acquires or commences a
tender or exchange offer for 20% or more of GTE common stock, or (ii) acquires
10% or more of GTE common stock and executes an agreement with GTE to effect a
merger or other business combination. The Rights have certain anti-takeover
effects designed to cause substantial dilution to a person or group that
attempts to acquire GTE on terms not approved by GTE's Board of Directors. The
Rights may be redeemed by GTE at a price of $.01 per Right, at any time prior to
becoming exercisable. Under this plan, Rights that are not redeemed or exercised
will expire on December 7, 1999.
8. MINORITY INTERESTS
Minority interests in equity of subsidiaries as of December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(Dollars in Millions)
<S> <C> <C>
Minority interests in consolidated subsidiaries:
BC TELECOM (50.8% GTE ownership) $ 550 $ 789
Quebec Telephone (50.1% and 50.6% GTE ownership, respectively) 85 85
Cellular partnerships and other 159 170
Preferred securities issued by subsidiaries 1,190 1,209
---------------- ---------------
Total minority interests $ 1,984 $ 2,253
================ ===============
</TABLE>
Preferred securities issued by subsidiaries include two issues, Series A and B,
totaling $1.0 billion of Monthly Income Preferred Securities. These securities,
issued by GTE Delaware, a limited partnership holding solely GTE junior
subordinated debentures, are subject to optional redemption at a price of $25
per share. Series A and B become callable beginning October 17, 1999, and March
6, 2000, respectively, and have cumulative annual dividend rates of 9.25% and
8.75% and mature in 2024 and 2025, respectively.
46
<PAGE> 48
9. DEBT
Long-term debt as of December 31, was as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
(Dollars in Millions)
<S> <C> <C>
GTE Corporation:
Debentures, maturing 2000 through 2028, average rates 7.9% and 8.7% $ 5,300 $ 4,150
Guaranteed ESOP obligations, maturing 1999 through 2005, average rate 9.7% 555 555
Other borrowings, maturing 2000 through 2010, average rates 6.9% and 6.1% 805 807
-------- --------
6,660 5,512
Telephone Subsidiaries:
First mortgage bonds, debentures and notes, maturing through 2031,
average rates 7.1% and 7.5% 8,347 7,412
Other Subsidiaries:
Debentures and notes, maturing through 2012, average rates 10.1% and 7.3% 1,340 696
Commercial paper expected to be refinanced on a long-term basis,
average rates 4.5% and 6.0% 217 1,963
-------- --------
Total principal amount 16,564 15,583
Unamortized premium and (discount) - net (59) 13
-------- --------
Total 16,505 15,596
Less: Current maturities 1,087 1,102
-------- --------
Total long-term debt $ 15,418 $ 14,494
======== ========
</TABLE>
Estimated payments of long-term debt during the next five years are: $1.1
billion in 1999; $1.1 billion in 2000; $884 million in 2001; $805 million in
2002; and $661 million in 2003.
GTE's telephone subsidiaries finance part of their construction programs through
the use of short-term loans, including commercial paper, which are refinanced at
later dates by the issuance of long-term debt or equity. As a result of this
practice, at times, the Company has negative working capital. First mortgage
bonds issued by GTE's telephone subsidiaries are secured by a lien on
substantially all telephone property, plant and equipment.
Total short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- ----------------
(Dollars in Millions)
<S> <C> <C>
Commercial paper - average rates 5.4% and 6.1% $ 3,056 $ 2,259
Notes payable - average rates 3.7% and 6.9% 5 37
Current maturities of long-term debt 1,087 1,102
---------------- ----------------
Total short-term obligations $ 4,148 $ 3,398
================ ================
</TABLE>
At December 31, 1998, GTE had lines of credit totaling $5.0 billion available to
provide backup to its commercial paper program. No amounts had been drawn
against these lines of credit at December 31, 1998.
10. FINANCIAL INSTRUMENTS
As of December 31, 1998 and 1997, GTE had entered into interest rate swap
agreements primarily to convert floating rate long-term and short-term debt to
fixed rates. Additionally, GTE had entered into forward interest rate swap
agreements and forward contracts to sell U.S. Treasury Bonds to hedge against
changes in market interest rates on planned long-term debt issuances expected to
be completed within the next 12 months. GTE used forward foreign exchange
contracts to offset foreign exchange gains or losses on the foreign currency
obligations
47
<PAGE> 49
being hedged and used long-term call options on GTE common stock to hedge
exposure to compensation expense related to outstanding stock appreciation
rights.
As of December 31, 1998 and 1997, GTE had the following financial instruments in
effect:
<TABLE>
<CAPTION>
Notional Expiration Weighted-Average
Amount Dates Pay Rate
--------------------- ---------- ----------------
(Dollars in Millions)
<S> <C> <C> <C>
Interest rate swaps:
Pay fixed
1998 $ 648 1999-2008 6.3%
1997 1,212 1998-2008 6.3%
Pay floating
1998 $ 124 1999-2001
1997 214 1998-2001
Forward interest rate swap agreements:
1998 $ 100 1999 6.2%
1997 1,460 1998-2000 7.0%
Forward foreign exchange contracts:
1998 $ 409 2004
1997 579 1998-2004
Call options on GTE common stock:
1998 $ 315 1999-2006
1997 380 1998-2006
</TABLE>
GTE has entered into domestic interest rate swaps and forward interest rate swap
agreements, where GTE pays fixed rates, as indicated in the previous table, and
receives floating rates, primarily based on three-month LIBOR. At December 31,
1998 and 1997, the three-month LIBOR was 5.1% and 5.8%, respectively.
GTE's Canadian telephone subsidiaries have entered into interest rate swaps,
where GTE pays floating rates, primarily Banker's Acceptance rates, and receives
fixed Canadian Dollar treasury rates. At December 31, 1998 and 1997, the
Banker's Acceptance rate was 5.1% and 4.8%, respectively.
Gains and losses recognized upon the expiration or settlement of forward
interest rate swap agreements and forward contracts to sell U.S. Treasury Bonds
are amortized over the life of the associated long-term debt issuance as a
decrease or increase to interest expense. For 1998 and 1997, the net gains
(losses) that are being amortized over future periods were $(85) million and $2
million, respectively.
The risk associated with these financial instruments arises from the possible
inability of counterparties to meet the contract terms and from movements in
interest and exchange rates as well as the market price of GTE's common stock.
GTE carefully evaluates and continually monitors the creditworthiness of its
counterparties and believes the risk of nonperformance is remote.
The fair values of other financial instruments included in the consolidated
balance sheets, other than long-term debt, closely approximate their carrying
value. As of December 31, 1998 and 1997, the estimated fair value of long-term
debt based on either quoted market prices or an option pricing model, exceeded
its carrying value by approximately $1.5 billion and $600 million, respectively.
48
<PAGE> 50
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(Dollars in Millions)
<S> <C> <C>
Land $ 349 $ 369
Buildings 4,397 4,534
Plant and equipment 51,489 45,715
Work in progress and other 3,454 5,872
-------- --------
Total 59,689 56,490
Accumulated depreciation (34,823) (32,410)
-------- --------
Total property, plant and equipment - net $ 24,866 $ 24,080
======== ========
</TABLE>
At December 31, 1998, total property, plant and equipment - net included
approximately $1.6 billion of access lines and related equipment held for sale
(see Note 3). This represents gross assets of $4.4 billion less accumulated
depreciation of $2.8 billion.
12. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
GTE sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for its employees. Substantially all GTE employees
are covered under defined benefit pension plans and postretirement health care
and life insurance plans. Pension plans are generally noncontributory.
Postretirement health care plans are generally contributory and include a limit
on GTE's share of the cost for recent and future retirees. All of the following
information is presented in accordance with the revised disclosure requirements
of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of plan assets for the years ended December
31, and a statement of funded status as of December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
-------------------- -----------------------------
1998 1997 1998 1997
------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Benefit obligation at January 1 $ 8,649 $ 8,067 $ 4,104 $ 4,065
Service cost 293 259 44 43
Interest cost 651 618 234 240
Plan amendments 10 206 (34) --
Actuarial (gain) loss 527 347 (272) (43)
Benefits paid (792) (545) (230) (222)
Curtailments and settlements (85) (339) (2) (11)
Assets held for sale (435) -- (175) --
Other (29) 36 32 32
------- ------- ------- -------
Benefit obligation at December 31 $ 8,789 $ 8,649 $ 3,701 $ 4,104
======= ======= ======= =======
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------------- -----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Fair value of plan assets at January 1 $ 16,934 $ 15,097 $ 524 $ 416
Actual return on plan assets 2,511 2,689 83 44
Company contributions 45 105 217 253
Benefits paid (792) (545) (230) (222)
Settlements (63) (379) -- --
Assets held for sale (626) -- (71) --
Other (60) (33) 33 33
-------- -------- -------- --------
Fair value of plan assets at December 31 $ 17,949 $ 16,934 $ 556 $ 524
======== ======== ======== ========
Funded status as of December 31 $ 9,160 $ 8,285 $ (3,145) $ (3,580)
Unrecognized transition asset (244) (318) -- --
Unrecognized prior service cost (benefit) 241 261 (626) (731)
Unrecognized (gain) loss (4,626) (4,171) (50) 248
-------- -------- -------- --------
Net amount recognized $ 4,531 $ 4,057 $ (3,821) $ (4,063)
======== ======== ======== ========
</TABLE>
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------------- -----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Prepaid pension costs $ 4,927 $ 4,361 $ -- $ --
Accrued benefit liability (396) (304) (3,821) (4,063)
-------- -------- -------- --------
Net amount recognized $ 4,531 $ 4,057 $ (3,821) $ (4,063)
======== ======== ======== ========
</TABLE>
The following table provides the components of net periodic benefit cost for the
years ended December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
--------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 293 $ 259 $ 250 $ 44 $ 43 $ 49
Interest cost 651 618 593 234 240 255
Expected return on plan assets (1,307) (1,193) (1,136) (39) (32) (22)
Amortization of:
Transition asset (76) (89) (96) -- -- --
Prior service cost (benefit) 26 9 9 (79) (75) (53)
Net gain (60) (42) (51) (9) (4) (1)
Curtailments and settlements (35) (269) (70) (2) -- --
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ (508) $ (707) $ (501) $ 149 $ 172 $ 228
======= ======= ======= ======= ======= =======
</TABLE>
In addition to the net periodic benefit costs reported in the previous table,
GTE recognized one-time costs for special termination benefits provided under
voluntary and involuntary separation programs of $19 million, $64 million and
$20 million in 1998-1996, respectively. Curtailment and settlement gains or
losses related to these programs, divestitures occurring during the period and
benefit obligations settled through the purchase of annuities for certain
retiree pensions are reflected in the above table.
50
<PAGE> 52
The weighted-average assumptions used in measuring the Company's benefit
obligations as of December 31 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 7.00% 7.25% 7.00% 7.25%
Rate of compensation increase 4.75% 5.00% -- --
</TABLE>
The expected return on pension plan assets for 1998 and 1997 was 9.00%. The
expected return on other postretirement benefits plan assets for 1998 and 1997
was 8.00%.
The assumed health care cost trend rate is 6.75% in 1999 and is assumed to
decrease gradually to an ultimate rate of 5.50% in the year 2004. A one
percentage point change in the assumed health care cost trend rate would have
the following effects on the Company's other postretirement benefits:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
(Dollars in Millions)
<S> <C> <C>
Effect on 1998 service and interest costs $ 25 $ (23)
Effect on postretirement benefit obligation as of December 31, 1998 241 (223)
</TABLE>
SAVINGS AND STOCK OWNERSHIP PLANS
GTE sponsors employee savings plans under section 401(k) of the Internal Revenue
Code. The plans cover substantially all full-time employees. Under the plans,
GTE provides matching contributions in GTE common stock based on qualified
employee contributions. Matching contributions charged to income were $95
million, $76 million and $80 million in the years 1998-96, respectively.
GTE also maintains an Employee Stock Ownership Plan (ESOP). In 1989, the ESOP
borrowed $700 million to acquire, at market value, 24.6 million shares of GTE
common stock, which will be used to meet GTE's contributions to certain employee
savings plans through the year 2004. The unpaid balance of the loan, which has
been guaranteed by GTE, is included in the accompanying consolidated balance
sheets as long-term debt and short-term obligations with a similar reduction in
shareholders' equity. The debt service payments, including interest, made by the
ESOP for the years 1998-96 totaled $100 million, $96 million and $92 million,
respectively. These payments were funded by $47 million, $49 million and $45
million of dividends accumulated on the GTE stock held by the ESOP and by $53
million, $47 million and $47 million of cash contributions by GTE in 1998-96,
respectively.
13. INCOME TAXES
Income before income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Domestic $3,246 $3,720 $3,799
Foreign 799 698 613
------ ------ ------
Total $4,045 $4,418 $4,412
====== ====== ======
</TABLE>
51
<PAGE> 53
The income tax provision (benefit) before extraordinary charges is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Current:
Federal $ 612 $ 725 $ 851
Foreign 293 256 241
State and local 177 187 107
------- ------- -------
1,082 1,168 1,199
------- ------- -------
Deferred:
Federal 451 451 399
Foreign (14) (26) (38)
State and local 56 65 97
------- ------- -------
493 490 458
------- ------- -------
Amortization of deferred investment tax credits (22) (34) (43)
------- ------- -------
Total provision $ 1,553 $ 1,624 $ 1,614
======= ======= =======
</TABLE>
The amortization of deferred investment tax credits relates to the amortization
of investment tax credits previously deferred by GTE's telephone subsidiaries.
A reconciliation between taxes computed by applying the statutory federal income
tax rate to pretax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 1,416 $ 1,546 $ 1,544
State and local income taxes, net of federal benefit 151 164 133
Minority interests and preferred stock dividends 54 44 44
Amortization of investment tax credits (22) (34) (43)
Other differences - net (46) (96) (64)
------- ------- -------
Total provision $ 1,553 $ 1,624 $ 1,614
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred income
tax (benefits) and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(Dollars in Millions)
<S> <C> <C>
Depreciation and amortization $ 1,625 $ 1,830
Employee benefit obligations (1,810) (1,873)
Prepaid pension costs 1,688 1,439
Other - net 278 335
------- -------
Net deferred tax liability $ 1,781 $ 1,731
======= =======
</TABLE>
14. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is calculated in a similar
manner except that the weighted-average number of common shares outstanding
during the period includes the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised. The number of
shares included in diluted earnings per common share for the potential issuance
of common shares was 5.2 million in 1998, 4.3 million in 1997, and 3.4 million
in 1996. Certain outstanding options to purchase common shares were not included
in the computation of diluted earnings per common share because to do so would
have been anti-dilutive for the period, including 1.0 million shares during
1998, 8.5 million shares during 1997, and 8.7 million shares during 1996.
52
<PAGE> 54
15. SEGMENT REPORTING
Effective December 31, 1998, GTE adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial reports.
The Company has two operating units, its National Operations and its
International Operations, and a Corporate group. The National Operations are
further segmented along product lines although certain activities such as
marketing and data processing are managed on a common basis. The costs of
activities managed on a common basis are allocated to the product segments based
on usage, where possible, or other factors depending on the nature of the
activity. The International Operations are organized by country. For the most
part, the National and the International Operations are independent of each
other and the various countries comprising the International Operations are
independent of each other. Affiliated transactions that occur are based on
market prices.
The three major product segments (reportable segments) within National
Operations are Network Services, Wireless Products and Services, and Data
Products and Services.
Network Services provides wireline communication services within franchised
areas. These services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of GTE's operating areas. Network Services also provides
complex voice and data services to businesses, billing and collection, operator
assistance and inventory management services to other telecommunications
companies and receives revenues in the form of a publication right from an
affiliate that publishes telephone directories in its operating areas. The
intersegment revenues at Network Services primarily represent local telephone
services provided at market rates to GTE's national sales and marketing
organization, which markets bundled telecommunication services, and sales of
inventory management services to other GTE companies.
Wireless Products and Services provides wireless communications services (both
voice and data) within licensed areas in the U.S., sells cellular telephones and
accessories and provides support services to other cellular telephone companies.
The Data Products and Services segment offers a wide range of advanced data and
Internet-related services, including dedicated and dial-up access to the
Internet and a variety of value-added Internet services such as managed network
security, Web-server hosting, application development and systems integration
services. GTE's Data Products and Services segment was created in 1997 after the
acquisition of BBN Corporation.
The Company's National Operations also include GTE Technology and Systems, GTE
Communications Corporation, GTE Directories Corporation and GTE Airfone. GTE
Technology and Systems is primarily composed of GTE Government Systems, a
provider of communications and intelligence systems to the military and federal
government. GTE Communications provides nationwide long-distance service, video
services in selected markets and bundled telecommunications services through
its national sales and marketing organization. GTE Directories publishes
telephone directories for which it receives advertising revenue and develops
and markets online advertising and information services for consumers and
advertisers on the Internet. The advertising revenue for directories published
in Network Services' operating areas is split and a portion is recognized as
revenue by Network Services (approximately 60%) and a portion is recognized as
revenue by GTE Directories (approximately 40%). GTE Airfone provides
aircraft-passenger telecommunications services.
The national sales and marketing organization was created during the second half
of 1997 and has incurred significant start-up costs as it grows GTE's
long-distance customer base and develops the employee skills and systems
capabilities necessary to offer bundled telecommunications services on one bill.
GTE's International Operations (the fourth reportable segment) provide
telecommunications services in Canada, the Dominican Republic and Argentina and
operate directory advertising companies in Europe and Central America through
consolidated subsidiaries. GTE also participates in ventures/consortia that are
accounted for on the equity basis. These
53
<PAGE> 55
investments include a full-service telecommunications company in Venezuela, a
paging network in China and a nationwide digital-cellular network in Taiwan.
As described in Note 3, during the year, the Company decided to sell
approximately 1.6 million domestic access lines, as well as GTE Government
Systems and GTE Airfone, and to exit certain other business activities. The
amount of the special charge applicable to each business segment that was
recorded to recognize the effect of these decisions is included in operating
income in the following tables.
Accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). Operating income
includes profit on sales to affiliates. The related intersegment eliminations
for National Operations are included in Other National Operations.
Segment results for the periods ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
NATIONAL OPERATIONS:
NETWORK SERVICES
Revenues and sales
Local services $ 5,814 $ 5,530 $ 5,130
Network access services 5,316 4,896 4,589
Toll services 859 1,251 1,525
Directory services and other 3,259 2,847 2,311
-------- -------- --------
Total revenues 15,248 14,524 13,555
Intersegment revenues (305) (220) (92)
-------- -------- --------
Total external revenues $ 14,943 $ 14,304 $ 13,463
======== ======== ========
Operating income (a) $ 4,817 $ 4,726 $ 3,889
Special charges 171 -- --
Depreciation and amortization 2,591 2,605 2,642
Capital expenditures 3,362 3,245 2,581
Total assets 23,287 22,883 21,602
WIRELESS PRODUCTS AND SERVICES
Revenues and sales
Service revenues $ 2,687 $ 2,549 $ 2,347
Equipment sales and other 383 373 287
-------- -------- --------
Total revenues $ 3,070 $ 2,922 $ 2,634
======== ======== ========
Operating income (a) $ 647 $ 437 $ 482
Special charges 91 -- --
Depreciation and amortization 435 428 398
Capital expenditures 461 396 671
Total assets 5,783 5,889 6,087
DATA PRODUCTS AND SERVICES
Revenues and sales
Data revenues $ 784 $ 279 $ --
Intersegment revenues (36) (11) --
-------- -------- --------
Total external revenues $ 748 $ 268 $ --
======== ======== ========
Operating loss $ (526) $ (347) $ --
Depreciation and amortization 128 88 --
Capital expenditures 593 326 --
Total assets 2,041 1,284 --
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
OTHER NATIONAL OPERATIONS
Revenues and sales
GTE Technology and Systems $ 1,423 $ 1,271 $ 1,204
GTE Communications 1,063 630 333
Other, including eliminations 651 746 875
-------- -------- --------
Total revenues $ 3,137 $ 2,647 $ 2,412
======== ======== ========
Operating income (loss) (a) $ (438) $ (43) $ 341
Special charges 397 -- --
Depreciation and amortization 196 250 260
Capital expenditures 481 477 209
Total assets 2,556 1,871 1,471
INTERNATIONAL OPERATIONS:
Revenues and sales
Local services $ 1,219 $ 1,076 $ 930
Toll services 907 883 932
Wireless services 422 265 215
Directory services and other 786 678 634
-------- -------- --------
Total revenues $ 3,334 $ 2,902 $ 2,711
======== ======== ========
Operating income (a) $ 834 $ 726 $ 691
Special charges 38 -- --
Depreciation and amortization 459 523 463
Equity income 110 85 87
Capital expenditures 657 648 580
Revenues by country
Canada $ 2,415 $ 2,262 $ 2,191
Dominican Republic and other 919 640 520
-------- -------- --------
Total revenues $ 3,334 $ 2,902 $ 2,711
======== ======== ========
Assets by country
Canada $ 2,979 $ 3,847 $ 3,984
Venezuela 1,727 1,622 1,464
Argentina 1,129 217 116
Dominican Republic and other 1,450 1,191 952
-------- -------- --------
Total assets $ 7,285 $ 6,877 $ 6,516
======== ======== ========
CONSOLIDATED REVENUES $ 25,473 $ 23,260 $ 21,339
CONSOLIDATED OPERATING INCOME (a) 5,336 5,611 5,488
TOTAL SPECIAL CHARGES 755 -- --
CONSOLIDATED ASSETS 43,615 42,142 38,422
</TABLE>
(a) Includes special charges in 1998.
55
<PAGE> 57
16. COMMITMENTS AND CONTINGENCIES
GTE has noncancelable operating leases covering certain buildings, office space
and equipment. Rental expense was $464 million, $399 million and $392 million in
1998-96, respectively. Minimum rental commitments under noncancelable leases are
$249 million, $213 million, $179 million, $127 million and $99 million for the
years 1999-2003, respectively, and aggregate $738 million thereafter.
GTE and its subsidiaries and affiliates are subject to a number of proceedings
arising out of the conduct of its business, including those relating to
regulatory actions, commercial transactions, government contracts and
environmental, safety and health matters. Management believes that the ultimate
resolution of these matters will not have a materially adverse effect on the
results of operations or the financial position of GTE.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, GTE's National
and International Operations face increasing competition in virtually all
aspects of their business. In addition, to achieve its growth objectives, GTE
has made significant investments to expand its service capability in the area of
data communications and to establish a national sales and marketing organization
to provide a bundle of voice and data communication products to customers. 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.
17. ADDITIONAL INCOME STATEMENT INFORMATION
The table below provides additional financial information related to GTE's
consolidated income statements:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Interest expense $ 1,397 $ 1,283 $ 1,146
Interest capitalized (27) (48) (61)
Interest income (117) (90) (59)
------- ------- -------
Total Interest - net $ 1,253 $ 1,145 $ 1,026
======= ======= =======
Minority interests $ 290 $ 245 $ 239
Preferred dividends 8 12 17
Equity in income of unconsolidated companies (240) (217) (201)
Other (income) expense (20) 8 (5)
------- ------- -------
Total Other - Net $ 38 $ 48 $ 50
======= ======= =======
</TABLE>
56
<PAGE> 58
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1st Qtr (a) 2nd Qtr 3rd Qtr 4th Qtr
----------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1998
Revenues and sales $ 5,885 $ 6,277 $ 6,480 $ 6,831
Operating income 592 1,432 1,650 1,662
Net income (loss) (178) 673 822 855
Earnings (loss) per common share:
Basic $ (.18) $ .70 $ .85 $ .89
Diluted $ (.18) $ .69 $ .85 $ .88
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 60.50 $ 64.38 $ 58.69 $ 71.81
Low 47.94 55.25 46.75 53.94
Close 59.88 55.63 55.00 65.00
</TABLE>
(a) In the first quarter of 1998, the Company recorded pretax special charges of
$755 million ($482 million after-tax), and after-tax extraordinary charges
of $320 million (see Notes 3 and 4).
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1997
Revenues and sales $ 5,281 $ 5,692 $ 5,940 $ 6,347
Operating income 1,346 1,406 1,487 1,372
Net income 665 671 756 702
Earnings per common share:
Basic $ .69 $ .70 $ .79 $ .73
Diluted $ .69 $ .70 $ .79 $ .73
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 49.38 $ 47.50 $ 48.38 $ 52.25
Low 43.13 41.13 42.88 40.50
Close 46.63 43.88 45.38 52.25
</TABLE>
57
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of GTE Corporation:
We have audited the accompanying consolidated balance sheets of GTE Corporation
(a New York corporation) and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, as set forth under Item 8 of this report. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting schedule listed under Item
14 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
supporting schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Dallas, Texas ARTHUR ANDERSEN LLP
January 28, 1999
58
<PAGE> 60
MANAGEMENT REPORT
To Our Shareholders:
The management of GTE is responsible for the integrity and objectivity of the
financial and operating information contained in this annual report, including
the consolidated financial statements covered by the Report of Independent
Public Accountants. These statements were prepared in conformity with generally
accepted accounting principles and include amounts that are based on the best
estimates and judgments of management.
The Company has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company also has instituted
policies and guidelines that require employees to maintain the highest level of
ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with management, the internal auditors and
the independent public accountants to review internal accounting controls, audit
results and accounting principles and practices, and annually recommends to the
Board of Directors the selection of independent public accountants.
Charles R. Lee
Chairman and
Chief Executive Officer
Daniel P. O'Brien
Executive Vice President - Finance
and Chief Financial Officer
59
<PAGE> 61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
60
<PAGE> 62
PART III
Item 10. Directors and Executive Officers of the Registrant as of
December 31, 1998 (a).
EXECUTIVE OFFICERS OF GTE
<TABLE>
<CAPTION>
Date Assumed
Name (b) Title Age Present Position
- ------------------------ ---------------------------------------------------- --- ----------------
<S> <C> <C> <C>
Charles R. Lee Chairman and Chief Executive Officer 59 May 1992
Kent B. Foster President 55 June 1995
Michael T. Masin Vice Chairman and President - International 54 June 1995
Thomas W. White Senior Executive Vice President - Market Operations, 52 June 1997
GTE Service Corporation
William P. Barr (c) Executive Vice President - Government and Regulatory 48 June 1997
Advocacy and General Counsel
James A. Attwood, Jr. (d) Executive Vice President - Strategic Development and 40 July 1998
Planning
Armen Der Marderosian Executive Vice President - Technology and Systems 61 June 1997
J. Randall MacDonald Executive Vice President - Human Resources and 50 June 1997
Administration
Daniel P. O'Brien Executive Vice President - Finance and Chief 44 June 1998
Financial Officer
Mary Beth Bardin Senior Vice President - Public Affairs and 44 January 1998
Communications
Paul R. Shuell Vice President and Controller 51 April 1998
Jan L. Deur Acting Treasurer 54 August 1998
</TABLE>
(a) Reference is made to GTE's Proxy Statement covering its 1999 Annual
Meeting of Shareholders, which is incorporated herein by reference, for
information concerning directors of GTE.
(b) Prior to serving as executive officers of GTE, each of the officers
named has been employed in high-level management positions by GTE or a
GTE subsidiary for more than five years, with the exception of William
P. Barr and James A. Attwood, Jr.
(c) Mr. Barr was elected Executive Vice President - Government and
Regulatory Advocacy and General Counsel effective June 5, 1997. He had
served as Senior Vice President and General Counsel since 1994. Prior
to joining GTE, he was a partner in the Washington, D.C. office of the
law firm of Shaw, Pittman, Potts & Trowbridge since 1993. He served as
Attorney General of the United States from 1991 to 1993. Mr. Barr
joined the Department of Justice as Assistant Attorney General in
charge of the Office of Legal Counsel in 1989, and subsequently served
as Deputy Attorney General prior to his appointment as Attorney
General.
(d) Mr. Attwood was appointed Executive Vice President - Strategic
Development and Planning in July 1998. He had previously served as Vice
President - International Business Development. Mr. Attwood joined GTE
in 1996 as Vice President - Corporate Planning and Development after
more than ten years in the investment banking division of Goldman,
Sachs & Co. in New York and Tokyo.
61
<PAGE> 63
Item 11. Executive Compensation
This information is incorporated by reference from GTE's Proxy Statement
covering its 1999 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference from GTE's Proxy Statement
covering its 1999 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference from GTE's Proxy Statement
covering its 1999 Annual Meeting of Shareholders.
62
<PAGE> 64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Consolidated Financial Statements - GTE Corporation and
Subsidiaries:
See GTE's consolidated financial statements and report of
independent public accountants thereon in the Financial Statements
section included elsewhere herein.
2. Financial Statement Schedules:
Schedules Supporting the Consolidated Financial Statements for the
Years Ended December 31, 1998 - 1996 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in
the consolidated financial statements or notes thereto.
3. Exhibits:
See "Index of Exhibits" included elsewhere herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
63
<PAGE> 65
GTE Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------- ----------- ----------------------------- ------------ -------------
Additions
-----------------------------
Balance at Charged Deductions
Beginning Charged to (Credited) to from Balance at
Description of Year Income Other Accounts Reserves (1) Close of Year
- --------------------------------- ---------- ---------- -------------- ------------ -------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
Allowance for uncollectible
accounts $ 333 $ 470 $ 82 (2) $ 490 $ 395
====== ====== ====== ====== ======
Accrued discontinuance and
business repositioning costs $ 239 $ 17 $ 17 (3) $ 50 $ 223
====== ====== ====== ====== ======
Special charge reserve $ -- $ 755 (4) $ -- $ 642 $ 113
====== ====== ====== ====== ======
December 31, 1997
- -----------------
Allowance for uncollectible
accounts $ 299 $ 418 $ 36 (2) $ 420 $ 333
====== ====== ====== ====== ======
Accrued discontinuance and
business repositioning costs $ 254 $ 5 $ -- $ 20 $ 239
====== ====== ====== ====== ======
December 31, 1996
- -----------------
Allowance for uncollectible
accounts $ 263 $ 376 $ 240 (2) $ 580 $ 299
====== ====== ====== ====== ======
Accrued discontinuance and
business repositioning costs $ 258 $ 9 $ 1 $ 14 $ 254
====== ====== ====== ====== ======
Accrued telephone
restructuring costs $ 512 $ -- $ (214)(5) $ 298 $ --
====== ====== ====== ====== ======
</TABLE>
NOTES:
(1) Charges for which reserve was created.
(2) Recoveries of amounts written off in prior years.
(3) Primarily represents a reserve for a retention program established during
1998 related to the proposed merger with Bell Atlantic.
(4) Represents special charges for asset realization, restructuring and
workforce reduction and various other charges (including the impact of
regulatory rulings).
(5) Represents amounts necessary to satisfy commitments related to the
re-engineering program that have been reclassified to accounts payable and
accrued expenses.
64
<PAGE> 66
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE CORPORATION
--------------------------------
(Registrant)
Date March 6, 1999 By /s/ Paul R. Shuell
-------------- --------------------------------
Paul R. Shuell
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Charles R. Lee Chairman of the Board and March 6, 1999
- --------------------- Chief Executive Officer
Charles R. Lee (Principal Executive Officer)
/s/ Daniel P. O'Brien Executive Vice President - March 6, 1999
- --------------------- Finance and Chief Financial Officer
Daniel P. O'Brien (Principal Financial Officer)
/s/ Paul R. Shuell Vice President and Controller March 6, 1999
- --------------------- (Principal Accounting Officer)
Paul R. Shuell
65
<PAGE> 67
SIGNATURES - Continued
----------------------
/s/ Edwin L. Artzt Director March 6, 1999
- --------------------
Edwin L. Artzt
/s/ James R. Barker Director March 6, 1999
- --------------------
James R. Barker
/s/ Edward H. Budd Director March 6, 1999
- --------------------
Edward H. Budd
/s/ Robert F. Daniell Director March 6, 1999
- --------------------
Robert F. Daniell
/s/ Kent B. Foster Director March 6, 1999
- --------------------
Kent B. Foster
/s/ James L. Johnson Director March 6, 1999
- --------------------
James L. Johnson
/s/ James L. Ketelsen Director March 6, 1999
- --------------------
James L. Ketelsen
/s/ Charles R. Lee Director March 6, 1999
- --------------------
Charles R. Lee
/s/ Michael T. Masin Director March 6, 1999
- --------------------
Michael T. Masin
/s/ Sandra O. Moose Director March 6, 1999
- --------------------
Sandra O. Moose
/s/ Russell E. Palmer Director March 6, 1999
- --------------------
Russell E. Palmer
/s/ John W. Snow Director March 6, 1999
- --------------------
John W. Snow
/s/ Robert D. Storey Director March 6, 1999
- --------------------
Robert D. Storey
66
<PAGE> 68
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation, as restated
3.2(a) By-Laws of GTE Corporation
10.1(b) Material Contracts - Deferred Compensation Plan for Non-Employee
Members of the Board of Directors of GTE Corporation
10.2(c) Material Contracts - Form of Executive Severance Agreement
between GTE Service Corporation and certain key executives
10.3(d) Material Contracts - Employment Agreements between GTE Service
Corporation and certain key executives
10.4(e) Material Contracts - Supplemental Executive Retirement Plan
10.5(f) Material Contracts - Long-Term Incentive Plan
10.6(g) Material Contracts - Executive Incentive Plan
10.7(h) Material Contracts - Executive Retired Life Insurance Plan
10.8(i) Material Contracts - Directors' Deferred Stock Unit Plan
10.9(j) Material Contracts - Charitable Awards Program
10.10 Material Contracts - Executive Salary Deferral Plan, as amended
10.11 Material Contracts - Retention Agreement between GTE and Armen
Der Marderosian
Note: Confidential portions of this agreement have been omitted
pursuant to a request for confidential treatment and have been
filed separately with the Securities and Exchange Commission.
10.12 Material Contracts - Form of Retention Agreement between GTE and
each of Charles R. Lee, Kent B. Foster, Michael T. Masin, Thomas
W. White, William P. Barr, James A. Attwood, Jr., J. Randall
MacDonald and Daniel P. O'Brien
10.13 Material Contracts - Form of Retention Agreement between GTE and
each of Mary Beth Bardin, Paul R. Shuell and Jan L. Deur
11 Statement re: Calculation of Earnings (Loss) per Common Share
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
21 Significant Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- -----------
(a) GTE's By-Laws were filed as an exhibit to GTE's registration statement
on Form S-3 (File No. 33-61661). An amendment to GTE's By-Laws was
filed as an exhibit to GTE's 1997 Form 10-K. These documents are
incorporated herein by reference.
(b) GTE's Deferred Compensation Plan for Non-Employee Members of the Board
of Directors of GTE Corporation was filed as an exhibit to GTE's 1997
Form 10-K, and is incorporated herein by reference. An amendment to this
plan is filed with this Form 10-K.
(c) Form of Executive Severance Agreement with each of Armen Der
Marderosian and Thomas W. White is filed with this Form 10-K. Form of
Executive Severance Agreements with certain key executives of GTE
(except for those previously discussed in this note) were filed as
exhibits to GTE's Form 10-Q for the quarter ended September 30, 1998,
and are incorporated herein by reference.
(d) Employment Agreements between GTE Service Corporation and each of
Charles R. Lee, Kent B. Foster and Michael T. Masin are filed with this
Form 10-K. Employment Agreements with certain key executives of GTE
(except for those previously discussed in this note) were filed as
exhibits to GTE's Form 10-Q for the quarter ended September 30, 1998 and
GTE's 1997 Form 10-K, and are incorporated herein by reference.
(e) GTE's Supplemental Executive Retirement Plan was filed as an exhibit to
GTE's 1991 Form 10-K, and is incorporated herein by reference.
Amendments were filed with GTE's 1992, 1993 and 1994 Forms 10-K, and
are incorporated herein by reference.
(f) GTE's Long-Term Incentive Plan was filed as an exhibit to GTE's 1997
Proxy Statement, and is incorporated herein by reference. An amendment
to this plan is filed with this Form 10-K.
(g) GTE's Executive Incentive Plan was filed as an exhibit to GTE's 1997
Proxy Statement, and is incorporated herein by reference. An amendment
to this plan is filed with this Form 10-K.
(h) GTE's Executive Retired Life Insurance Plan was filed as an exhibit to
GTE's 1991 Form 10-K, and is incorporated herein by reference.
Amendments were filed with GTE's 1992 and 1993 Forms 10-K, and are
incorporated herein by reference.
(i) GTE's Directors' Deferred Stock Unit Plan was filed as an exhibit to
GTE's 1997 Form 10-K, and is incorporated herein by reference.
(j) GTE's Charitable Awards Program was filed as an exhibit to GTE's 1992
Form 10-K, and is incorporated herein by reference.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
GTE CORPORATION
1. The name of the Corporation is GTE Corporation.
2. The purposes of the Corporation shall be as follows:
A. To acquire and hold securities of telephone and/or other communication
corporations and corporations owning securities of telephone and/or other
communication corporations.
B. To subscribe for, underwrite, invest in, purchase or otherwise acquire,
own, hold, sell, assign, deal in, exchange, transfer, mortgage, pledge or
otherwise dispose of, any securities created or issued by any public, municipal,
quasi-public or private corporation of any kind wherever organized (including,
without limiting the generality of the foregoing, the corporations described in
the foregoing paragraph "A"), or by any national, state or local government or
by any partnership or individual, and to lend money upon the security of, and
acquire and hold as pledgee or mortgagee or otherwise, any such securities, and
to issue, in exchange for any such securities, its own securities; while the
owner or holder of any such securities, or any interest therein, to
<PAGE> 2
possess and to exercise in respect thereof all the rights, powers and privileges
incident to such ownership or interest; to guarantee the payment of dividends on
any shares of the capital stock of any corporation in which this Corporation may
at any time have an interest, and to become surety in respect of, endorse or
guarantee in any lawful manner the payment of the principal of or interest on
any bonds, debentures, notes, or other evidences of indebtedness created, issued
or incurred by any corporation, partnership or individual, any of whose
securities are at any time held by or for this Corporation or in which this
Corporation may at any time have an interest, and to become surety for or
guarantee in any lawful manner the carrying out and performance of any and all
contracts, leases and obligations of every kind of any such corporation,
partnership or individual; to lend money to and/or otherwise aid in any lawful
manner any corporation, partnership or individual whose securities may at any
time be held by or for this Corporation or in which this Corporation may at any
time have an interest, and to do any acts and things permitted by law and
designed to protect, preserve, improve or enhance the value of any such
securities or interest.
C. To improve, manage, develop, sell, assign, transfer, lease, mortgage,
pledge or otherwise dispose of or deal with all or any part of the property of
this Corporation, and from time to time to vary any investment or employment of
funds of this Corporation.
D. To investigate and report with respect to, and to undertake, carry on,
aid, assist or participate in the reorganization or liquidation of any
corporation in which this Corporation may at any time have an interest, and for
that purpose and to the extent then permitted to corporations organized under
the Business Corporation Law of the State of New York, to take charge of the
properties, manage the affairs and conduct the business of any such corporation;
and, in connection with the foregoing, to purchase or otherwise acquire, hold,
own, develop, improve, lease, exchange, sell, mortgage, convey or otherwise
dispose of and deal in and with lands and leaseholds and any interests and
rights in real or personal property wheresoever situated, and also any
franchises, rights, licenses or privileges necessary or appropriate for any of
the purposes in this paragraph "D" expressed.
E. To acquire the good-will, rights, property, business and franchises, of
any person, partnership or corporation whatsoever, now or hereafter engaged in
any business which this Corporation may lawfully conduct; to pay therefor in
cash or in property or in securities of this Corporation or otherwise, in the
manner provided by law; to hold, utilize, enjoy, and in any manner dispose of,
the whole or any part of the rights and property so acquired; to assume in
connection therewith any liabilities of any such person, partnership or
corporation; and to conduct in any lawful manner the whole or any part of the
business thus acquired.
F. To borrow money for any of the purposes of this Corporation, and to
issue its bonds, debentures, notes or other obligations therefor, and to secure
the same by pledge or mortgage of the whole or any part of the property of this
Corporation either real or personal, or to issue its bonds, debentures, notes or
other obligations without any such security; and to sell, pledge, hypothecate or
otherwise dispose of any or all such bonds, debentures, notes and other
obligations in such manner and upon such terms and at such prices as the Board
of Directors shall determine.
G. To organize, or cause to be organized, under the laws of any state,
district, territory, province, country or nation a corporation or corporations
for the purpose of accomplishing any or all of the purposes for which this
Corporation is organized, and to dissolve, wind up, liquidate, merge or
consolidate any such corporation or corporations, or to cause the same to be
dissolved, wound up, liquidated, merged or consolidated.
H. To have one or more offices, and to carry on and conduct any or all of
its operations and business, and, without restriction or limit as to amount, to
purchase, lease or otherwise acquire, hold, own, mortgage, sell, convey, lease
or otherwise dispose of, real and personal property of every class and
description, in any part of the world.
I. To carry on any other lawful business whatsoever incidental to the
accomplishment of the purposes hereinbefore set forth; to do any and all such
things as are necessary or convenient to the attainment of the purposes of this
Corporation, or any of them, to the same extent as a natural person might
lawfully do in any part of the world, insofar as such acts are permitted to be
done by a corporation organized under the Business Corporation Law of the State
of New York.
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The foregoing paragraphs of this Article 2 shall be construed as defining
both the purposes and the powers of this Corporation, but the foregoing
enumeration of specific purposes and powers shall not be held to limit or
restrict in any manner the powers of this Corporation, but is in furtherance of,
and in addition to, the general powers conferred upon corporations organized
under the Business Corporation Law of the State of New York.
It is intended that none of the purposes and powers specified in the
several paragraphs of this Article 2 shall, except as herein otherwise expressly
provided, in anywise be limited or restricted by reference to or inference from
the terms of any other of said paragraphs, and that each of the purposes and
powers specified in this Article 2 shall be regarded as independent purposes and
powers.
This Corporation shall not have the power to construct, maintain or operate
any public utility.
3. The office of the Corporation is to be located in the City of New York,
County of New York, State of New York.
4. The aggregate number of shares which the Corporation shall have
authority to issue is 2,020,945,266 shares, of which 9,217,764 shares of the par
value of $50.00 each shall be Preferred Stock, 11,727,502 shares without par
value shall be No Par Preferred Stock and 2,000,000,000 shares of the par value
of $.05 each shall be Common Stock.
5. The designations, preferences, privileges and voting powers of the
shares of each class of the Corporation (including all shares of Preferred Stock
and No Par Preferred Stock irrespective of series), and the restrictions or
qualifications thereof, are as follows:
[A-1] Preferred Stock. The shares of Preferred Stock may be issued from
time to time in one or more series and, subject to the provisions of the
following paragraphs "(1)" to "(4)" inclusive, and to the provisions of Parts
[A-2] through [A-5] of this Article 5, the Board of Directors is hereby
expressly authorized to fix from time to time before issuance the designations,
preferences and privileges of the shares of each series of the Preferred Stock,
and the restrictions or qualifications thereof. The Preferred Stock shall rank
pari passu with the No Par Preferred Stock referred to in Parts [A-2] through
[A-5] of this Article 5 in right of payment of dividends and upon liquidation,
dissolution or winding up of the Corporation, as set forth in Part [A-3] of this
Article 5. Accordingly, certain preferences and privileges set forth in this
Part [A-1] with respect to the Preferred Stock are subject to the further
limitations referred to in Parts [A-2] through [A-5] of this Article 5 to which
reference is hereby made.
(1) Each series shall be designated so as to distinguish the shares thereof
from the shares of all other series. All shares of the Preferred Stock of all
series shall be of equal rank and all shares of any particular series of the
Preferred Stock shall be identical except as to the date or dates from which
dividends thereon shall be cumulative as hereinafter in paragraph "(2)"
provided. The shares of the Preferred Stock of different series may vary as to
the following preferences and privileges, and restrictions and qualifications
thereof:
(a) The annual dividend rate (within such limits as shall be permitted
by law) for the particular series and the date from which dividends on all
shares of such series issued prior to the record time for the first
dividend for such series shall be cumulative;
(b) The redemption price or prices for the particular series;
(c) The amount or amounts per share for the particular series payable
to the holders thereof upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided, however, that the
amount or amounts per share payable to the holder of any Preferred Stock
upon any involuntary liquidation, dissolution or winding up of the
Corporation shall not be fixed at more than Fifty Dollars ($50) per share;
(d) The terms and amount of any sinking fund provided for the purchase
or redemption of shares of the particular series; and
(e) The conversion or other special privileges, and the restrictions
or qualifications thereof, if any, of the particular series.
(2) The holders of each series of the Preferred Stock at the time
outstanding shall be entitled to receive, but only when and as declared by the
Board of Directors, out of funds legally available for the payment of
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dividends, cumulative preferred dividends, at the annual dividend rate for the
particular series fixed therefor as herein provided, payable quarter-yearly on
the first days of January, April, July and October in each year, to the
stockholders of record on the respective dates, not exceeding forty (40) days
preceding such dividend payment dates, fixed for the purpose by the Board of
Directors. The dividends on shares of all series of the Preferred Stock shall be
cumulative. In the case of all shares of each particular series, the dividends
on shares of such series shall be cumulative:
(a) If issued prior to the record time for the first dividend on the
shares of such series, then from the date for the particular series fixed
therefor as herein provided;
(b) If issued during the period commencing immediately after a record
time for a dividend and terminating at the close of the payment date for
such dividend, then from such dividend payment date; and
(c) Otherwise from the quarter-yearly dividend payment date next
preceding the date of issue of such shares.
Unless dividends on all outstanding shares of each series of the Preferred
Stock, at the annual dividend rate and from the dates for accumulation thereof
fixed as herein provided shall have been paid for all past quarter-yearly
periods and shall have been declared and paid or provided for the then current
quarterly-yearly dividend period, but without interest on cumulative dividends,
no dividends shall be paid or declared and no other distribution shall be made
on any shares of any class of capital stock of the Corporation ranking junior to
the Preferred Stock, and no such shares ranking junior to the Preferred Stock
shall be purchased or otherwise acquired for value by the Corporation. The
holders of the Preferred Stock of any series shall not be entitled to receive
any dividends thereon other than the dividends referred to in this paragraph
"(2)" and in paragraph "(1)" of Part [A-3].
(3) The Corporation, by action of its Board of Directors, may redeem the
whole or any part of any series of the Preferred Stock, at any time or from time
to time, by paying in cash the redemption price of the shares of the particular
series fixed therefor as herein provided, together with a sum in the case of
each share of each series so to be redeemed, computed at the annual dividend
rate for the series of which the particular share is a part from the date from
which dividends on such share became cumulative to the date fixed for such
redemption, less the aggregate of the dividends theretofore or on such
redemption date paid thereon. Notice of each such redemption shall be given to
the holders of record of the shares to be redeemed. Each such notice shall be
given by mail and may be given in such other manner as may be prescribed by the
By-Laws or by resolution of the Board of Directors, at least thirty (30) days
and not more than ninety (90) days prior to the date fixed for such redemption.
Any notice to be given by mail shall be deemed given when mailed to the holders
of the shares of stock being redeemed of record at the time of mailing, at their
respective addresses as the same shall then appear on the books of the
Corporation; but in the case of notice by mail, no accidental failure to mail
such notice to any one or more such holders shall affect the validity of the
redemption of any shares of the Preferred Stock so to be redeemed. In case of
the redemption of a part only of any series of the Preferred Stock at the time
outstanding, the Corporation shall select, pro rata or by lot, as and in such
manner as the Board of Directors may determine, the shares so to be redeemed.
The Board of Directors shall have full power and authority, subject to the
limitations and provisions herein contained, to prescribe the manner in which,
and the terms and conditions upon which, the shares of the Preferred Stock shall
be redeemed from time to time. If notice of redemption shall have been given,
and if on or before the redemption date specified in such notice all funds
necessary for such redemption (including any dividend payable on such redemption
date) shall have been set aside by the Corporation, separate and apart from its
other funds, in trust for the account of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then,
notwithstanding that any certificate for such shares so called for redemption
shall not have been surrendered for cancellation, from and after the date fixed
for redemption, the shares represented thereby shall no longer be deemed
outstanding, the right to receive dividends thereon shall cease to accrue and
all rights with respect to such shares so called for redemption shall forthwith
on such redemption date cease and terminate, except only the right of the
holders thereof to receive, out of the funds so set aside in trust, the amount
payable upon redemption thereof, without interest, and except such conversion
privileges, if any, as may be exercisable after the redemption date; provided,
however, that the Corporation may, after giving notice of any such redemption as
hereinbefore provided or after giving to the bank or trust company hereinafter
referred to irrevocable
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authorization to give such notice, and, at any time prior to the redemption date
specified in such notice, deposit in trust, for the account of the holders of
the shares to be redeemed, all funds necessary for such redemption (including
any dividend payable on such redemption date) with a bank or trust company in
good standing, organized under the laws of the United States of America or of
the State of New York doing business in the Borough of Manhattan, The City of
New York, having capital, surplus and undivided profits aggregating at least
$2,000,000, designated in such notice of redemption, and, upon such deposit in
trust, all shares with respect to which such deposit shall have been made shall
no longer be deemed to be outstanding, and all rights with respect to such
shares shall forthwith cease and terminate, except only the right of the holders
thereof to receive, out of the funds so deposited in trust, from and after the
date of such deposit, the amount payable upon the redemption thereof, without
interest, and except such conversion privileges, if any, as may be exercisable
after the date of such deposit. The holders of any such Preferred Stock shall
not be entitled to any interest allowed by such bank or trust company on funds
so deposited, but any such interest shall be paid to the Corporation. In case
the conversion privilege of any share of Preferred Stock of a series having
conversion privileges is exercised after funds necessary for the redemption
thereof shall have been set apart or deposited in trust as above provided, then
out of the funds so set apart or deposited in respect of such share an amount
equal to the redemption price thereof, together with an amount equal to accrued
dividends on such share from the date of conversion to the redemption date,
shall, upon such exercise, revert or be repaid to the Corporation free and clear
of any such trust, and the remainder of such funds so set apart or deposited in
respect of such share shall be paid to the holder of such share upon such
conversion. Nothing herein contained shall limit any legal right of the
Corporation to purchase or otherwise acquire any shares of the Preferred Stock.
(4) Before any amount shall be paid to, or any assets distributed among,
the holders of shares of any class of stock ranking junior to the Preferred
Stock, upon any liquidation, dissolution or winding up of the Corporation, and
after paying or providing for the payment of all creditors of the Corporation,
the holders of each series of the Preferred Stock at the time outstanding shall
be entitled to be paid in cash the amount for the particular series fixed
therefor as herein provided, together with a sum in the case of each such share
of each series, computed at the annual dividend rate for the series of which the
particular share is apart, from the date from which dividends on such share
became cumulative to the date fixed for the payment of such distributive amount,
less the aggregate of the dividends theretofore or on such date paid thereon.
The holders of the Preferred Stock of any series shall not be entitled to
receive any amounts with respect thereto upon any liquidation, dissolution or
winding up of the Corporation other than the amounts referred to in this
paragraph and in paragraph "(2)" of Part [A-3]. Neither the consolidation or
merger of the Corporation with any other corporation or corporations, nor the
sale or transfer by the Corporation of all or any part of its assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation.
[A-2] No Par Preferred Stock. The No Par Preferred Stock shall rank pari
passu with the Preferred Stock referred to in Parts [A-1] and [A-3] through
[A-5]of this Article 5 in right of payment of dividends and upon liquidation,
dissolution or winding up of the Corporation, as set forth in Part [A-3] of this
Article 5. Accordingly, certain preferences and privileges set forth in this
Part [A-2] with respect to the No Par Preferred Stock are subject to the further
limitations referred to in Parts [A-1] and [A-3] through [A-5] of this Article 5
to which reference is hereby made.
(1) The shares of No Par Preferred Stock may be issued from time to time in
one or more series. All shares of No Par Preferred Stock of all series shall
rank equally and be identical in all respects except that the Board of Directors
is authorized to fix the number of shares in each series, the designation
thereof and, subject to the provisions of this Article 5, the relative rights,
preferences and limitations of each series and the variations in such rights,
preferences and limitations as between series and specifically is authorized to
fix with respect to each series:
(a) the dividend rate on the shares of such series and the date or
dates from which dividends shall be cumulative;
(b) the times when, the prices at which, and all other terms and
conditions upon which, shares of such series shall be redeemable;
(c) the amounts which the holders of shares of such series shall be
entitled to receive upon the liquidation, dissolution or winding up of the
Corporation, which amounts may vary depending on whether
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such liquidation, dissolution or winding up is voluntary or involuntary
and, if voluntary, may vary at different dates; provided, however, that the
amount or amounts per share payable to the holder of any No Par Preferred
Stock upon any involuntary liquidation, dissolution or winding up of the
Corporation shall not be fixed at more than One Hundred Dollars ($100) per
share;
(d) whether or not the shares of such series shall be subject to the
operation of a purchase, retirement or sinking fund and, if so, the extent
to and manner in which such purchase, retirement or sinking fund shall be
applied to the purchase or redemption of the shares of such series for
retirement or for other corporate purposes and the terms and provisions
relative to the operation of the said fund or funds;
(e) whether or not the shares of such series shall be convertible into
or exchangeable for shares of any other class or series and, if so, the
price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same;
(f) the restrictions, if any, upon the payment of dividends or making
of other distributions on, and upon the purchase or other acquisition of,
shares of Common Stock;
(g) the restrictions, if any, upon the creation of indebtedness, and
the restrictions, if any, upon the issue of any additional shares ranking
on a parity with or prior to the shares of such series in addition to the
restrictions provided for in this Article 5;
(h) the voting powers, if any, of the shares of such series in
addition to the voting powers provided for in this Article 5; provided,
however, that no holder of shares of No Par Preferred Stock shall be
entitled to more than one vote for each $50 which would be payable to him
with respect to such shares upon any involuntary liquidation, dissolution
or winding up of the Corporation; and
(i) such other rights, preferences and limitations as shall not be
inconsistent with this Article 5.
(2) All shares of any particular series shall rank equally and be identical
in all respects except that shares of any one series issued at different times
may differ as to the date from which dividends shall be cumulative.
(3) Dividends on shares of No Par Preferred Stock of each series shall be
cumulative from the date or dates fixed with respect to such series and shall be
paid or declared or set apart for payment for all past dividend periods and for
the current dividend period before any dividends (other than dividends payable
in shares of Common Stock) shall be declared or paid or set apart for payment on
shares of capital stock ranking junior to the No Par Preferred Stock. Whenever,
at any time, full cumulative dividends for all past dividend periods and for the
current dividend period shall have been paid or declared and set apart for
payment on all then outstanding shares of No Par Preferred Stock and all
requirements with respect to any purchase, retirement or sinking fund or funds
for all series of shares of No Par Preferred Stock shall have been complied
with, the Board of Directors (subject to the provisions of paragraph "(2)" of
Part [A-1]) may declare dividends on shares of capital stock ranking junior to
the No Par Preferred Stock and the shares of No Par Preferred Stock shall not be
entitled to share therein.
(4) Upon any liquidation, dissolution or winding up of the Corporation, the
holders of shares of No Par Preferred Stock of each series shall be entitled to
receive the amounts to which such holders are entitled as fixed with respect to
such series, including all dividends accumulated to the date of final
distribution, before any payment or distribution of assets of the Corporation
shall be made to or set apart for the holders of shares of capital stock ranking
junior to the No Par Preferred Stock and after such payments shall have been
made in full to the holders of shares of No Par Preferred Stock, the holders of
shares of capital stock ranking junior to the No Par Preferred Stock shall be
entitled to receive (subject to the provisions of paragraph "(4)" of Part [A-1])
any and all assets remaining to be paid or distributed to shareholders and the
holders of shares of No Par Preferred Stock shall not be entitled to share
therein. For the purposes of this paragraph, the voluntary sale, conveyance,
lease, exchange or transfer of all or substantially all the property or assets
of the Corporation or a consolidation or merger of the Corporation with one or
more other corporations (whether or not the Corporation is the corporation
surviving such consolidation or merger) shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary.
(5) To the extent that any shares of any series of No Par Preferred Stock
are hereafter caused to be issued by the Board of Directors of the Corporation
and by the terms of any such series the shares of such
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series are made convertible into shares of Common Stock, Preferred Stock, or
other series of No Par Preferred Stock of the Corporation, the Board of
Directors may, by certificate of amendment under the New York Business
Corporation Law and in accordance with the provisions of such Law, increase the
authorized shares of any such classes or series to such number as will be
sufficient, when added to the previously authorized but unissued shares of such
class or series, to satisfy the conversion privileges of any such share of No
Par Preferred Stock.
[A-3] Additional Provisions Applicable to Both Preferred Stock and No Par
Preferred Stock.
(1) All shares of every series of Preferred Stock and No Par Preferred
Stock shall be of equal rank, preference and priority as to dividends
irrespective of whether or not the rates of dividends to which the same shall be
entitled shall be the same, and no dividends shall be declared on any series of
Preferred Stock or No Par Preferred Stock in respect of any quarter-yearly
dividend period unless there shall likewise be declared on all shares of all
series of the Preferred Stock and the No Par Preferred Stock at the time
outstanding, like proportionate dividends, ratably, in proportion to the
respective annual dividend rates fixed therefor, in respect of the same
quarter-yearly dividend period, to the extent that such shares are entitled to
receive dividends for such quarter-yearly dividend period.
(2) All shares of every series of Preferred Stock and No Par Preferred
Stock shall be of equal rank, preference and priority as to the net assets of
the Corporation of the proceeds thereof to which the same shall be entitled the
liquidation, dissolution or winding up of the Corporation and no payments on
account of the distributive amounts relating thereto shall be made to the
holders of any series of Preferred Stock or No Par Preferred Stock unless there
shall likewise be paid at the same time to the holders of each other series of
Preferred Stock and No Par Preferred Stock at the time outstanding like
proportionate distributive amounts, ratably, in proportion to the full
distributive amounts to which they are respectively entitled as herein provided.
(3) If in any case the amounts payable with respect to any requirements to
retire shares of Preferred Stock and No Par Preferred Stock are not paid in full
in the case of all series with respect to which such requirements exist, the
number of shares to be retired in each series of each such class shall be in
proportion to the respective amounts which would be payable on account of such
requirements if all amounts payable were paid in full.
[A-4] Common Stock. The following provisions are applicable to the Common
Stock.
(1) Whenever the full dividends on all series of Preferred Stock and No Par
Preferred Stock and on all other capital stock ranking senior to the Common
Stock at the time outstanding for all past quarter-yearly dividend periods and
for the then current quarter-yearly dividend period shall have been paid or
declared and set apart for payment, then such dividends (payable in cash, stock
or otherwise) as may be determined by the Board of Directors may be declared and
paid on the Common Stock, but only out of funds legally available for the
payment of dividends; provided, however, that, so long as any shares of the
Preferred Stock shall be outstanding, the Corporation shall not pay any
dividends (other than dividends payable in shares of the Common Stock) upon, or
make any other distribution upon, or make any payment in the purchase or
redemption of, any shares of any class of stock of the Corporation ranking
junior to the Preferred Stock, unless, immediately after such dividend payment,
distribution, or payment in purchase or redemption (herein referred to as
Restricted Payments), both of the following conditions shall obtain:
(a) The aggregate amounts of all such Restricted Payments made by the
Corporation subsequent to December 31, 1939, which have been charged to any
account other than earned surplus will not exceed $2,000,000; and
(b) The amount of the surplus of the Corporation (whether earned
surplus or paid-in surplus or otherwise) remaining legally available for
the payment of dividends shall be at least equal to three years' dividend
requirements on all then outstanding shares of Preferred Stock.
(2) In the event of any liquidation, dissolution or winding up of the
Corporation, all assets and funds of the Corporation remaining after paying or
providing for the payment of all creditors of the Corporation and after paying
or providing for the payment to the holders of shares of all series of Preferred
Stock and No Par Preferred Stock and all other capital stock ranking senior to
the Common Stock of the full distributive
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amounts to which they are respectively entitled as herein provided, shall be
divided among and paid to the holders of the Common Stock according to their
respective rights and interests.
[A-5] General Provisions. The following provisions are applicable to one
or more classes of the Corporation's capital stock, as indicated in each case.
(1) No holder of stock of any class of the Corporation shall have any
right, as such holder, to purchase or subscribe for any stock of any class or
any obligations convertible into, or any right or option to purchase, stock of
any class which the Corporation may at any time issue or sell, but any and all
such stock, obligations, rights, and/or options may be issued and disposed of by
the Board of Directors to such persons, firms and corporations, and for such
lawful consideration and on such terms as the Board of Directors, in its
discretion, may determine, without first offering the same or any thereof to the
stockholders or any class of stockholders.
(2) (A) Except as otherwise provided in this paragraph "(2)", each
stockholder of record shall be entitled to one vote for every share of Preferred
Stock and to one vote for every share of Common Stock standing in his name on
the stock books of the Corporation on the date for the determination of
stockholders entitled to vote. Each holder of record of shares of each series of
No Par Preferred Stock shall have such voting rights, if any, as shall be
specified by the Board of Directors in the resolutions creating such series,
except that no such holder shall be entitled to more than one vote for each $50
which would be payable to him with respect to such shares upon any involuntary
liquidation, dissolution or winding up of the Corporation; and provided,
further, that in any election of Directors provided for in this paragraph "(2)"
and in any vote on any of the matters referred to in part "(H)" hereof, each
such holder shall be entitled to one vote per share for each $50 which would be
payable to him upon any such liquidation, dissolution or winding up.
(B) If and when dividends payable on the Preferred Stock and No Par
Preferred Stock shall be in default in an amount equivalent to four (4)
quarter-yearly dividends on all shares of all series of the Preferred Stock and
No Par Preferred Stock at the time outstanding, the number of Directors of the
Corporation shall thereupon, and until all dividends in default on the Preferred
Stock and No Par Preferred Stock shall have been paid, be two more than the full
number constituting the Board of Directors immediately prior to such default,
and until such dividends shall have been paid as aforesaid, the holders of all
shares of the Preferred Stock and No Par Preferred Stock, voting together as one
class, shall be entitled to elect two members of the Board of Directors and the
holders of the Common Stock, voting separately as a class, shall be entitled to
elect the remaining Directors of the Corporation.
(C) If and when all dividends then in default on the Preferred Stock and No
Par Preferred Stock at the time outstanding shall be paid (and such dividends
shall be declared and paid out of any funds legally available therefor as soon
as reasonably practicable), the Preferred Stock and No Par Preferred Stock shall
thereupon be divested of any special right with respect to the election of
Directors provided in part "(B)" hereof, the voting power of the Preferred
Stock, the No Par Preferred Stock and the Common Stock shall revert to the
status existing before the occurrence of such default, and the number of
Directors of the Corporation shall be reduced by two; but always subject to the
same provisions for vesting such special rights in the Preferred Stock and No
Par Preferred Stock in case of further like default or defaults in dividends
thereon. Upon the termination of any such special right upon payment of all
accumulated and defaulted dividends on such stock, the terms of office of all
persons who may have been elected Directors of the Corporation by vote of the
Holders of the Preferred Stock and the No Par Preferred Stock, as a class,
pursuant to such special right shall forthwith terminate.
(D) In case of any vacancy in the Board of Directors occurring among the
Directors elected by the holders of the Preferred Stock and the No Par Preferred
Stock, as a class, pursuant to part "(B)" hereof, the holders of the Preferred
Stock and No Par Preferred Stock then outstanding and entitled to vote may elect
a successor to hold office for the unexpired term of the Director whose place
shall be vacant. In all other cases, any vacancy occurring among the Directors
shall be filled by the vote of a majority of the remaining Directors.
(E) Whenever the holders of the Preferred Stock and the No Par Preferred
Stock, as a class, become entitled to elect Directors of the Corporation
pursuant to either part "(B)" or "D" hereof, a meeting of the holders of the
Preferred Stock and No Par Preferred Stock shall be held any time thereafter
upon call by the holders of not less than 1,000 shares of the Preferred Stock
and No Par Preferred Stock or upon call by the Secretary of the Corporation at
the request in writing of any holder of Preferred Stock or No Par Preferred
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Stock addressed to him or her at the principal office of the Corporation. At all
meetings of stockholders held for the purpose of electing Directors during such
times as the holders of shares of the Preferred Stock and No Par Preferred Stock
shall have the special right, voting together as one class, to elect Directors
pursuant to part "(B)" hereof, the presence in person or by proxy of the holders
of a majority of the outstanding shares of the Common Stock shall be required to
constitute a quorum of such class for the election of Directors, and the
presence in person or by proxy of the holders of a majority of the outstanding
shares of all series of the Preferred Stock and No Par Preferred Stock shall be
required to constitute a quorum of such class for the election of Directors;
provided, however, that the absence of a quorum of the holders of stock of
either the Preferred Stock and No Par Preferred Stock as a class or the Common
Stock shall not prevent the election at any such meeting or adjournment thereof
of Directors by the other such class if the necessary quorum of the holders of
stock of such other class is present in person or by proxy at such meeting; and
provided further that in the absence of a quorum of the holders of stock of
either such class, a majority of those holders of the stock of such class who
are present in person or by proxy shall have power to adjourn the election of
the Directors to be elected by such class from time to time without notice other
than announcement at the meeting until the holders of the requisite number of
shares of such class shall be present in person or by proxy.
(F) So long as any shares of the Preferred Stock or No Par Preferred Stock
of any series are outstanding, the By-Laws of the Corporation shall contain
provisions which, considering the minimum and maximum number of Directors
permitted by the Certificate of Incorporation or other certificate filed
pursuant to law, will at all times assure the increase in the number of
Directors provided for in part "(B)" of this paragraph "(2)" and the decrease in
such number provided for in part "(C)" of this paragraph "(2)", in each case at
the times and on the conditions there set forth and without the necessity in
either case of special action on the Part of the stockholders or the Directors
of the Corporation to effect such increase or decrease.
(G) So long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the written consent or the affirmative vote of
the holders of at least two-thirds of the total number of shares of Preferred
Stock then outstanding, authorize preferred stock having priority with respect
to the existing Preferred Stock or otherwise change the relative rights,
preferences or limitations of the class of Preferred Stock.
(H) So long as any shares of No Par Preferred Stock are outstanding, the
Corporation shall not (a) without the affirmative vote or consent of the holders
of at least two-thirds of all the shares of No Par Preferred Stock at the time
outstanding (i) authorize shares of stock ranking prior to the shares of No Par
Preferred Stock or (ii) change any provision of this Article 5 so as to affect
adversely the shares of No Par Preferred Stock; (b) without the affirmative vote
or consent of the holders of at least two-thirds of any series of shares of No
Par Preferred Stock at the time outstanding, change any of the provisions of
such series so as to affect adversely the shares of such series; (c) without the
affirmative vote or consent of the holders of at least a majority of all the
shares of No Par Preferred Stock at the time outstanding (except as otherwise
provided in this Article 5) (i) increase the authorized number of shares of No
Par Preferred Stock or (ii) authorize shares of any other class of stock ranking
on a parity with the shares of No Par Preferred Stock.
(3) The Corporation may, at any time and from time to time, issue and
dispose of any of the authorized and unissued shares of Preferred Stock, No Par
Preferred Stock and Common Stock for such consideration as may be fixed from
time to time by the Board of Directors, subject to any provisions of law then
applicable.
[B] THE RELATIVE RIGHTS, PREFERENCES, PRIVILEGES AND LIMITATIONS OF SERIES
A PARTICIPATING NO PAR PREFERRED STOCK ARE AS SET FORTH BELOW.
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Participating No Par Preferred Stock", without par
value, and the number of shares constituting such series shall be 700,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided that no decrease shall reduce the number of shares of Series
A Participating No Par Preferred Stock to a number less than that of the shares
then outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
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Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of capital stock of the Corporation ranking prior and superior to
the shares of Series A Participating No Par Preferred Stock with respect to
dividends, the holders of shares of Series A Participating No Par Preferred
Stock, in preference to the holders of shares of Common Stock and any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors of the Corporation out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of
January, April, July, and October in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Participating No Par Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
greater of (a) $10.00, or (b) subject to the provision for adjustment
hereinafter set forth, 1,000 times the aggregate per share amount of all
cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock, since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share
of Series A Participating No Par Preferred Stock. In the event the
Corporation shall at any time after December 7, 1989 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each such case, the amount to which holders of shares of Series A
Participating No Par Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event, and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Participating No Par Preferred Stock, as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $10.00 per share on the Series A Participating No Par
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Participating No Par Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Series A Participating No Par Preferred Stock unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Participating No Par
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Participating No Par Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of holders
of shares of Series A Participating No Par Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Participating
No Par Preferred Stock shall have the following voting rights:
(A) Each share of Series A Participating No Par Preferred Stock shall
entitle the holder thereof to 2 votes on all matters submitted to a vote of
the shareholders of the Corporation.
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(B) Except as otherwise provided herein, in the Restated Certificate
or by law, the holders of shares of Series A Participating No Par Preferred
Stock and the holders of shares of Common Stock shall vote together as one
class on all matters submitted to a vote of shareholders of the
Corporation.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Participating No Par Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Participating No Par Preferred Stock outstanding shall have been paid in
full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating No Par
Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Participating
No Par Preferred Stock, except dividends paid ratably on the Series A
Participating No Par Preferred Stock, and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Participating
No Par Preferred Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Participating No Par Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Participating No Par Preferred Stock, or any shares of stock
ranking on a parity with the Series A Participating No Par Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors of the Corporation)
to all holders of such shares upon such terms as the Board of Directors
of the Corporation, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of
the Corporation unless the Corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Participating No Par
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of preferred stock, without par value, of the Corporation and
may be reissued as part of a new series of preferred stock, without par value,
of the Corporation to be created by resolution or resolutions of the Board of
Directors of the Corporation, subject to the conditions and restrictions on
issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating No Par Preferred
Stock unless, prior thereto, the holders of shares of Series A
Participating No Par Preferred Stock shall have received per share (i) in
the case of any involuntary liquidation, dissolution or winding up of the
Corporation, $100 (the "Involuntary Liquidation Preference"), or (ii) in
the case of any voluntary liquidation, dissolution or winding up of the
Corporation, the greater of 1,000 times the exercise price per Right and
1,000 times the payment made per share of Common Stock, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or
not declared, to the date of such payment (the "Voluntary Liquidation
Preference").
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Following the payment of the full amount of the Voluntary Liquidation
Preference or the Involuntary Liquidation Preference, as the case may be,
no additional distributions shall be made to the holders of shares of
Series A Participating No Par Preferred Stock.
(B) In the event there are not sufficient assets available to permit
payment in full of the Liquidation Preference and the liquidation
preferences of all other series or classes of preferred stock of the
Corporation, if any, which rank on a parity with the Series A Participating
No Par Preferred Stock, then such remaining assets shall be distributed
ratably to the holders of such parity shares in proportion to their
respective liquidation preferences.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a small number of shares, then in
each such case the amount to which holders of shares of Series A
Participating No Par Preferred Stock were entitled immediately prior to
such event under clause (ii) of Section 6(A) hereof shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event, and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating No Par Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Participating No Par Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
Section 8. Redemption. The shares of Series A Participating No Par
Preferred Stock shall not be redeemable.
Section 9. Amendment. This Certificate shall not be further amended in
any manner which would materially alter or change the powers, preferences or
special rights of the Series A Participating No Par Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of two-thirds
or more of the outstanding shares of Series A Participating No Par Preferred
Stock voting separately as a class.
Section 10. Fractional Shares. Series A Participating No Par Preferred
Stock may be issued in fractions of a share, which shall entitle the holder, in
proportion to such holders of fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating No Par Preferred Stock.
6. The Secretary of State of the State of New York is designated as the
agent of the Corporation upon whom process against it may be served, and the
post office address to which the Secretary of State shall mail a copy of any
process against the Corporation served upon him is 1255 Corporate Drive,
Irving, Texas 75038.
7. The duration of the Corporation shall be perpetual.
8. A. The number of directors of the Corporation which shall constitute
the entire Board of Directors shall be fixed from time to time by the vote of a
majority of the entire Board of Directors, but such number shall in no case be
less than nine nor more than twenty-one. Any such determination made by the
Board of Directors shall continue in effect unless and until changed by the
Board of Directors, but no such changes shall affect the term of any director
then in office. Upon the adoption of this Article 8, the directors shall be
divided
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into three classes (I, II and III), as nearly equal in number as possible, and
no class shall include less than three directors. The initial term of office for
members of Class I shall expire at the annual meeting of stockholders in April
1987; the initial term of office for members of Class II shall expire at the
annual meeting of stockholders in April 1988; and the initial term of office for
members of Class III shall expire at the annual meeting of stockholders in April
1989. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, and shall
continue to hold office until their respective successors are elected and
qualified. In the event of any increase in the number of directors fixed by the
Board of Directors, the additional directors shall be so classified that all
classes of Directors have as nearly equal numbers of Directors as may be
possible. In the event of any decrease in the number of directors of the
Corporation, all classes of directors shall be decreased equally as nearly as
may be possible.
B. Newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or any other cause shall be filled only by the Board of Directors,
provided that a quorum is then in office and present, or only by a majority of
the directors then in office, if less than a quorum is then in office, or by the
sole remaining director. Directors elected to fill a newly created directorship
or other vacancies shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor has been elected and has qualified.
The directors of any class of directors of the Corporation may be removed by the
stockholders only for cause by the affirmative vote of the holders of at least a
majority of the voting power of all outstanding voting stock.
C. The By-Laws or any By-Law of the Corporation may be adopted, amended or
repealed only by the affirmative vote of not less than a majority of the
directors then in office at any regular or special meeting of directors, or by
the affirmative vote of the holders of at least eighty percent (80%) of the
voting power of all outstanding voting stock at any annual meeting or any
special meeting called for that purpose.
D. Notwithstanding any other provisions of this Certificate or the By-Laws
of the Corporation (and notwithstanding the fact that a lesser percentage or
separate class vote may be specified by law, this Certificate, the By-Laws of
the Corporation or otherwise), the affirmative vote of the holders of at least
eighty percent (80%) of the voting power of all outstanding voting stock shall
be required to adopt any provision inconsistent with, or to amend or repeal,
Paragraphs A to D of this Article 8.
E. Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Article 8 unless expressly
provided by such terms.
9. The Board of Directors shall have power, if the By-Laws so provide, to
hold meetings outside as well as within the State of New York.
10. So far as permitted by law, the Board of Directors shall have power
also to determine from time to time whether and to what extent and at what times
and places and under what conditions and regulations the books, documents and
accounts of this Corporation, or any of them shall be open to the inspection of
stockholders; and no stockholder shall have any right to inspect any books,
documents or accounts of this Corporation, except as conferred by statute or the
By-Laws, or authorized by resolution of the stockholders or the Board of
Directors.
11. A. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any
affirmative vote of holders of a class or series of capital stock of the
Corporation required by law or this Certificate, and except as otherwise
expressly provided in Paragraph B of this Article 11, the Corporation shall not
engage, directly or indirectly, in a Business Combination (as hereinafter
defined) with, or proposed by or on behalf of, a Related Person (as hereinafter
defined) or an Affiliate or Associate (both as hereinafter defined) of a Related
Person without the affirmative vote of the holders of at least eighty percent
(80%) of the voting power of all outstanding voting stock of the Corporation,
voting together as a single class.
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B. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Paragraph A of
this Article 11 shall not be applicable to a particular Business Combination,
and such Business Combination shall require only such affirmative vote, if any,
as is required by law or any other provision of this Certificate, the By-Laws of
the Corporation or otherwise, if all of the conditions specified in any one of
the following Paragraphs (1), (2) or (3) are met:
(1) Approval by Directors. The Business Combination has been
approved by a vote of a majority of all the Continuing Directors (as
hereinafter defined); or
(2) Combination with Subsidiary. The Business Combination is solely
between the Corporation and a subsidiary of the Corporation and such
Business Combination does not have the direct or indirect effect set forth
in Paragraph C(2) (e) of this Article 11; or
(3) Price and Procedural Conditions. All of the following conditions
have been met:
(a) The aggregate amount of (x) cash and (y) fair market value (as
of the date of the consummation of the Business Combination) of
consideration other than cash, to be received per share of Common Stock,
Preferred Stock, No Par Preferred Stock or any other class or series of
preferred stock of the Corporation (any such class or series of
preferred stock being referred to herein as "preferred stock"), in such
Business Combination by holders thereof shall be at least equal to the
highest per share price (including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by or on behalf of the Related
Person for any shares of such class or series of stock acquired by it;
provided, however, that if the highest preferential amount per share of
a series of preferred stock to which the holders thereof would be
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation (regardless
of whether the Business Combination to be consummated constitutes such
an event) is greater than such aggregate amount, holders of such series
of preferred stock shall receive an amount for each such share at least
equal to the highest preferential amount applicable to such series of
preferred stock. The provisions of this Paragraph B(3) shall be required
to be met with respect to every class or series of preferred stock,
whether or not the the Related Person has previously acquired beneficial
ownership of any shares of a particular class or series of preferred
stock.
(b) The consideration to be received by holders of a particular
class or series of outstanding Common Stock or preferred stock shall be
in cash or in the same form as the Related Person has previously paid
for shares of such class or series of stock. If the Related Person has
paid for shares of any class or series of stock with varying forms of
consideration, the form of consideration given for such class or series
of stock in the Business Combination shall be either cash or the form
used to acquire the largest number of shares of such class or series of
stock previously acquired by it. The prices determined in accordance
with Paragraph B(3)(a) above shall be subject to an appropriate
adjustment in the event of any stock dividend, stock split, subdivision,
combination of shares or similar event.
(c) No Extraordinary Event (as hereinafter defined) occurs after
the Related Person has become a Related Person and prior to the
consummation of the Business Combination.
(d) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (or any subsequent provisions replacing such Act,
rules or regulations) is mailed to public stockholders of the
Corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is
required pursuant to such Act or subsequent provisions).
C. CERTAIN DEFINITIONS. For purposes of this Article 11:
(1) A person shall mean any individual, firm, corporation or other
entity, or a group of "persons" acting or agreeing to act together in the
manner set forth in Rule 13d-5 under the Securities Exchange Act of 1934,
as in effect on November 1, 1986.
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(2) The term Business Combination shall mean any of the following
transactions, when entered into by the Corporation or a subsidiary of the
Corporation with, or upon a proposal by or on behalf of, a Related Person:
(a) the merger or consolidation of the Corporation or any
subsidiary of the Corporation; or
(b) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one or a series of transactions) of any assets of the
Corporation or any subsidiary of the corporation having an aggregate
fair market value of $50,000,000 or more, except for sales of goods and
services made in the ordinary course of the Corporation's business,
consistent with past practice; or
(c) the issuance or transfer by the Corporation or any subsidiary
of the Corporation (in one or a series of transactions) of any
securities of the Corporation or that subsidiary, except proportionately
to all stockholders of the Corporation or such subsidiary; or
(d) the adoption of a plan or proposal for the liquidation or
dissolution of the Corporation; or
(e) the reclassification of securities (including a reverse stock
split), recapitalization, consolidation or any other transaction
(whether or not involving a Related Person) which has the direct or
indirect effect of increasing the voting power, whether or not then
exercisable, of a Related Person in any class or series of capital stock
of the Corporation or any subsidiary of the Corporation; or
(f) any agreement, contract or other arrangement providing directly
or indirectly for any of the foregoing.
(3) The term Related Person shall mean any person (other than the
Corporation, a subsidiary of the Corporation or any pension, profit
sharing, employee stock ownership or other employee benefit plan of the
Corporation or a subsidiary of the Corporation or any trustee of or
fiduciary with respect to any such plan acting in such capacity) who is the
direct or indirect beneficial owner (as defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934, as in effect on November
1, 1986) of more than ten percent (10%) of the outstanding capital stock of
the Corporation entitled to vote for the election of directors, and any
Affiliate or Associate of any such person.
(4) The term Continuing Director shall mean any member of the Board of
Directors who is not a Related Person, an Affiliate or Associate or
representative of a Related Person and who was a member of the Board of
Directors immediately prior to the time that the Related Person became a
Related Person, and any successor to a Continuing Director who is not a
Related Person or an Affiliate or Associate of a Related Person and is
recommended to succeed a Continuing Director by a majority of Continuing
Directors who are then members of the Board of Directors.
(5) Affiliate and Associate shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of
1934, as in effect on November 1, 1986.
(6) The term Extraordinary Event shall mean, as to any Business
Combination and Related Person, any of the following events that is not
approved by a majority of all Continuing Directors:
(a) any failure to declare and pay at the regular date therefor any
full quarterly dividend (whether or not cumulative) on outstanding
preferred stock; or
(b) any reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any stock split, stock
dividend or subdivision of the Common Stock); or
(c) any failure to increase the annual rate of dividends paid on
the Common Stock as necessary to reflect any reclassification (including
any reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of
outstanding shares of the Common Stock; or
(d) the receipt by the Related Person, after such Related Person
has become a Related Person, of a direct or indirect benefit (except
proportionately as a shareholder) from any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Corporation or any subsidiary of the
Corporation, whether in anticipation of or in connection with the
Business Combination or otherwise; or
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(e) any increase in the number of shares of Common Stock or
preferred stock of which the Related Person is the beneficial owner,
except as part of the transaction that results in such Related Person
becoming a Related Person and except in a transaction that, after giving
effect thereto, would not result in any increase in the Related Person's
percentage beneficial ownership of any class or series of Common Stock
or preferred stock.
(7) A majority of all Continuing Directors shall have the power to
determine, on the basis of information known to them after reasonable
inquiry, all questions arising under this Article 11, including, without
limitation, the transactions that are Business Combinations, the persons
who are Related Persons, the time at which a Related Person became a
Related Person, whether a person is an Affiliate or Associate of another,
and the fair market value of any assets, securities or other property, and
any such determinations of such directors shall be conclusive and binding.
D. FIDUCIARY OBLIGATIONS OF RELATED PERSONS. Nothing contained in this
Article 11 shall be construed to relieve any Related Person from any fiduciary
obligation imposed by law.
E. FIDUCIARY OBLIGATIONS OF DIRECTORS. The fact that any Business
Combination complies with the provisions of Section B of this Article 11 shall
not be construed to impose any fiduciary duty, obligation or responsibility on
the Board of Directors, or any member thereof, to approve such business
combination or recommend its adoption or approval to the stockholders of the
Corporation, nor shall such compliance limit, prohibit or otherwise restrict in
any manner the Board of Directors, or any member thereof, with respect to
evaluations of or actions and responses taken with respect to such Business
Combination.
F. BOARD CONSIDERATION OF ALL RELEVANT FACTORS. The Board of Directors of
the Corporation, when evaluating any offer of another party to (a) make a tender
or exchange offer for any equity security of the Corporation, (b) merge or
consolidate the Corporation with another corporation, or (c) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Corporation, may, in connection with the exercise of its judgment in determining
what is in the best interests of the Corporation and its stockholders, give due
consideration to (i) all relevant factors, including without limitation the
social, legal, environmental and economic effects on the employees, customers,
suppliers and other affected persons, firms and corporations and on the
communities and geographical areas in which the Corporation and its subsidiaries
operate or are located and on any of the businesses and properties of the
Corporation or any of its subsidiaries, as well as such other factors as the
directors deem relevant, and (ii) not only the consideration being offered in
relation to the then current market price for the Corporation's outstanding
shares of capital stock, but also in relation to the then current value of the
Corporation in a freely negotiated transaction and in relation to the Board of
Directors' estimate of the future value of the Corporation (including the
unrealized value of its properties and assets) as an independent going concern.
G. AMENDMENT, REPEAL, ETC. The affirmative vote of the holders of at
least eighty percent (80%) of the voting power of all outstanding voting stock
of the Corporation, voting together as a single class, shall be required in
order to amend, repeal or adopt any provision inconsistent with this Article 11.
12. In the absence of fraud, no contract or other transaction between this
Corporation and any individual, partnership or corporation shall be affected by
the fact that any director or officer of this Corporation may be interested in
such contract or transaction, whether by reason of being a party thereto or a
partner in, director or officer of, or in any other way connected with, such
partnership or corporation, if such contract or transaction shall be approved or
ratified by the affirmative vote of a majority of the directors present at a
meeting of the Board of Directors at which a quorum shall be present, provided,
however, that the interest of any director or officer in any such contract or
transaction shall be fully disclosed at such meeting and that a director who is
so interested may not be counted at any such meeting for the purpose of
determining the existence of a quorum to consider and vote upon any contract or
transaction in which he is so interested and that the vote of such a director
may not be counted at any such meeting for the purpose of determining the
existence of the affirmative vote of a majority of the directors as aforesaid in
favor of the approval or ratification of any contract or transaction in which he
is so interested.
No director or officer shall liable to account to this Corporation for any
profit realized by him from or through any such contract or transaction of this
Corporation by reason of his interest as aforesaid in such contract or
transaction if such contract or transaction shall be approved or ratified as
aforesaid.
16
<PAGE> 17
No contract or other transaction between this Corporation and any of its
subsidiaries shall in any case be void or voidable or otherwise affected because
of the fact that directors or officers of this Corporation are directors or
officers of such subsidiary, nor shall any such director or officer, because of
such relation, be deemed interested in such contract or other transaction under
any of the provisions of this Article 12, nor shall any such director be liable
to account because of such relation. For the purpose of this Article 12, the
term "subsidiary" shall mean any corporation, more than 50% of whose issued and
outstanding shares having ordinary voting power may at the time be owned by this
Corporation and/or by one or more subsidiaries as said term is herein defined.
13. No director or officer of this Corporation need be a stockholder
therein.
14. A. PREVENTION OF "GREENMAIL". Except as set forth in Paragraph B of
this Article 14, in addition to any affirmative vote of stockholders required by
law or this Certificate, any direct or indirect purchase or other acquisition by
the Corporation of any Equity Security (as hereinafter defined) of any class
from any Interested Person (as hereinafter defined) who has beneficially owned
such securities for less than two years prior to the date of such purchase or
any agreement in respect thereof shall require the affirmative vote of the
holders of at least a majority of the voting power of the then outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock" ), excluding Voting Stock beneficially
owned by such Interested Person, voting together as a single class (it being
understood that for the purposes of this Article, each share of Voting Stock
shall have the number of votes granted to it pursuant to Article 5 of this
Certificate). Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or any agreement with any national securities exchange, or otherwise.
B. WHEN A VOTE IS NOT REQUIRED. The provisions of Paragraph A of this
Article 14 shall not be applicable with respect to:
(1) any purchase or other acquisition of securities made as part of a
tender or exchange offer by the Corporation to purchase securities of the
same class made on the same terms to all holders of such securities and
complying with the applicable requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations);
(2) any purchase or acquisition made pursuant to an open market
purchase program approved by a majority of the Continuing Directors (as
hereinafter defined); or
(3) any purchase or acquisition which is approved by a majority of the
Continuing Directors and which is made at no more than the Market Price, on
the date that the understanding between the Corporation and the Interested
Person is reached with respect to such purchase (whether or not such
purchase is made or a written agreement relating to such purchase is
executed on such date), of shares of the class of Equity Security to be
purchased.
C. CERTAIN DEFINITIONS. For the purposes of this Article 14:
(1) A Person shall mean any individual, firm corporation or other
entity, or a group of persons acting or agreeing to act together in the
manner set forth in Rule 13d-5 under the Securities Exchange Act of 1934,
as in effect on November 1, 1986.
(2) The term Interested Person shall mean any person (other than the
Corporation, a subsidiary of the Corporation or any pension, profit
sharing, employee stock ownership or other employee benefit plan of the
Corporation or a subsidiary of the Corporation or any trustee of or
fiduciary with respect to any such plan acting in such capacity) that is
the direct or indirect beneficial owner (as defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934, as in effect on November
1, 1986) of more than five percent (5%) of the Voting Stock, and any
Affiliate or Associate of any such person.
(3) The term Continuing Director shall mean any member of the Board of
Directors who is not an Interested Person, an Affiliate or Associate or
representative of an Interested Person and who was a member of the Board of
Directors immediately prior to the time that the Interested Person became
an Interested Person, and any successor to a Continuing Director who is not
an Interested Person or an
17
<PAGE> 18
Affiliate or Associate of an Interested Person and is recommended to
succeed a Continuing Director by a majority of Continuing Directors who are
then members of the Board of Directors.
(4) Affiliate and Associate shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of
1934, as in effect on November 1, 1986.
(5) Market Price of shares of a class of Equity Security on any day
shall mean the highest sale price of shares of such class of Equity
Security on such day, or, if that day is not a trading day, on the trading
day immediately preceding such day, on the national securities exchange or
the NASDAQ National Market System on which such class of Equity Security is
traded.
(6) Equity Security shall mean any security described in Section
3(a)(11) of the Securities Exchange Act of 1934, as in effect on November
1, 1986, which is traded on a national securities exchange or the NASDAQ
National Market System.
15. A director of this Corporation shall not be personally liable to the
Corporation or its shareholders for damages, except to the extent such exemption
from liability is not permitted under the New York Business Corporation Law as
the same exists or may hereafter be amended. Any repeal or modification of this
Article or adoption of an inconsistent provision shall not adversely affect any
right or protection of a director of the Corporation in respect of any matter
occurring, or any cause of action, suit or claim that would accrue or arise
prior to such repeal, modification or adoption of an inconsistent provision.
16. Subject to Articles 8 and 11 of this Certificate, the Corporation
reserves the right to amend and alter this certificate or to amend, alter,
change, add to or repeal any provision contained herein, in the manner now or
hereafter prescribed by statute, and all rights conferred upon officers,
directors or stockholders are granted subject to this reservation.
17. All references in this certificate to "articles", "paragraphs" and
other subdivisions are to the corresponding articles, paragraphs and other
subdivisions of this certificate; and, unless the context otherwise requires,
the words "herein", "hereof ", "hereby", "hereunder" and other equivalent words
refer to this certificate and not to any particular subdivision hereof.
18
<PAGE> 19
In this certificate, for all purposes hereof, unless there be something in
the subject or context inconsistent therewith,
(a) The term "security" means any share of stock, bond, debenture,
note, evidence of indebtedness, voting trust certificate, transferable
share however evidenced, and, in general, any instrument commonly known as
a "security", and any certificate of interest or participation in, scrip or
temporary or interim certificate for, receipt or certificate of deposit
for, and any warrant, right or option to subscribe for, purchase or
otherwise acquire, any of the foregoing; and
(b) The term "corporation" means any corporation, association, joint
stock company and similar organization.
19
<PAGE> 1
Exhibit 10.1
AMENDMENT TO THE
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE
MEMBERS OF THE BOARD OF DIRECTORS OF GTE CORPORATION
EFFECTIVE AS OF JANUARY 1, 1998
1. A new Section 4.05 is added to the Plan to read as follows:
"4.05. INTERIM PAYMENTS.
At any time on or after January 1, 1998, a director may elect that 94% of all
(or a designated portion of) his account balance shall be paid to him within 61
days following the filing of such an election; provided that the EVP-HR may
approve or disapprove such election in his sole discretion. If a director
receives a payment pursuant to this Section 4.05, the remaining 6% of the
director's entire account balance (or the designated portion thereof) shall be
permanently forfeited and shall not be paid to, or in respect of; the director."
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated as of January 8, 1996, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
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. The Company shall not be
required to provide any benefits to the Executive pursuant to this Agreement
unless a Qualifying Termination occurs before the Agreement expires in
accordance with Section 6.1 hereof. For purposes of this Agreement, a
Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good
Reason arises, and (B) the Executive terminates employment
with the Company within (I) six months after the Good Reason
arises or (II) two years after the Change in Control,
whichever occurs later;
provided, that a Qualifying Termination shall not occur if the Executive's
employment with the Company terminates by reason of the Executive's Retirement,
Disability, or death. A Qualifying Termination may occur even though the
Executive retires from employment with the Company other than by reason of
Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of securities of
GTE by any Person, immediately after which such Person,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE
representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time,
would cause the Person to constitute an "Acquiring Person" (as
such term is defined in the Rights Plan); provided that, 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
<PAGE> 2
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
April 19, 1995, are members of the Board; provided that, if
the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at
least three-quarters of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further that no
individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other
actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving
GTE, unless
(A) the shareholders of GTE, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation,
or reorganization, at least 50 percent of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger, consolidation, or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation, or reorganization
constitute at least a majority of the board of directors of
the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary
of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any
subsidiary of GTE, or any Person who, immediately prior to
such merger, consolidation, or reorganization, had Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of
"Change in Control") or more of the Voting Power) has
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition
of "Change in Control") or more of the combined Voting Power
of the Surviving Corporation's then outstanding voting
securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of GTE to any Person (other
than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity.
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
<PAGE> 3
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 (ii) 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 reported by such person on Schedule
13D under the Securities Exchange Act of 1934, as amended from
time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement, or understanding
(whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise
formed a group for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and State Street Bank and Trust Company (now administered by
the First National Bank of Boston), 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, 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)
("Notice of Termination"), finding that the Executive has engaged in the
conduct set forth above in this Section 1.3 and specifying the particulars
thereof in detail. GTE's Board of Directors may not delegate or assign its
duties under this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment,
represents a demotion from the Executive's status or
position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment,
are inconsistent with the Executive's status or position(s) in
effect immediately before the Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the
Executive's employment for Cause or as a result of the
Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be
equal to his base salary plus the greater of (i) the most
recent award that he has earned under the GTE Corporation
Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs)). For
<PAGE> 4
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, and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
(h) the Company's failure to provide and credit the Executive with
the number of days of paid vacation, holiday, or leave to
which he is then entitled in accordance with the Company's
normal vacation, holiday, or leave policy in effect
immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 25 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.
Section 1.7. Notice. If a Change in Control occurs, the Company
shall notify the Executive of the
<PAGE> 5
occurrence of the Change in Control within two weeks after the Change in
Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the
Base Amount. The Base Amount shall be an amount equal to the
greater of:
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the
Executive's Average Percentage of the annual value (i.e., the
dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs). For purposes of this paragraph
(A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination
Years. For purposes of this paragraph (A), the Executive's
"Annual Percentage" for each Determination Year means a
fraction (expressed as a percentage), the numerator of which
is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual
value of the normal payment under the EIP for the Executive's
salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year
for the Executive's salary level for such Determination Year).
For purposes of this paragraph (A), a "Determination Year"
means each of the last three EIP plan years ending before the
date on which the Change in Control occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II)
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP
immediately before the date on which the Qualifying
Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying
Termination occurs). For purposes of this paragraph (B), the
Executive's "Average Percentage" means the average of the
Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual
Percentage" for each Determination Year means a fraction
(expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and
the denominator of which is the annual value of the normal
payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in
effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For
purposes of this paragraph (B), a "Determination Year" means
each of the last three EIP plan years ending before the date
on which the Qualifying Termination occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant
to subsection (a) of this Section 2.1 in a lump sum within 30
days of the Qualifying Termination.
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 earlier of
(a) the expiration of 24 months after the Qualifying Termination or (b)(i) with
respect to medical insurance coverage, the date on which the Executive first
becomes eligible for medical insurance coverage provided by a firm that employs
him following the Qualifying Termination, or (ii) with respect to life
insurance coverage, the date on which the Executive first becomes eligible for
life insurance coverage provided by such firm.
<PAGE> 6
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 1995. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the
outplacement counseling that this Section 2.3 otherwise requires the Company to
provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility,
benefit accrual, and all other purposes, under all employee
benefit plans sponsored by the Company (including, but not
limited to, health, life insurance, pension, savings, stock,
and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he
participated immediately before the Change in Control, for 24
months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company,
including the GTE Service Corporation Supplemental Executive
Retirement Plan ("SERP"), the Executive's compensation shall
include the amount payable to the Executive pursuant to
Section 2.1 hereof, and for purposes of this subsection (b),
the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount
payable to the Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of
determining his eligibility for early retirement benefits
under the Company's defined benefit pension plans (including,
but not limited to, the SERP) and for purposes of determining
his eligibility for benefits under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this
Section 2.5 and the compensation recognized under subsection (b) of this
Section 2.5, nothing in this Section 2.5 shall prevent the Executive from
receiving any benefits to which the Executive is entitled under any defined
benefit or defined contribution pension plan maintained by the Company,
including the SERP (as such benefits are modified by this Agreement) in any
form permitted by such plans (including but not limited to a lump-sum
distribution) immediately following the Executive's Qualifying Termination. To
the extent that the Company's tax-qualified retirement plans cannot provide the
benefits specified by this Section 2.5 without jeopardizing the tax
qualification of such plans, the Company shall provide such benefits under the
SERP.
Section 2.6. Nonduplication. Nothing in this Agreement shall
require the Company to make any payment or to provide any benefit or service
credit that GTE or the Company is otherwise required to provide under any other
contract, agreement, policy, plan, or arrangement.
Section 2.7. Prior Agreement. This Agreement supersedes any prior
Executive Severance Agreement entered into between the Company and the
Executive ("Prior Agreement"). On and after the date of this Agreement, such
Prior Agreement shall have no force or effect.
<PAGE> 7
ARTICLE III
EFFECT ON HUMAN RESOURCES POLICY 104
Section 3.1. Effect on Policy 104. If the Executive becomes
entitled to receive benefits hereunder, the Executive shall not be entitled to
any benefits under GTE Human Resources Policy 104, as amended from time to
time, or any successor policy, or under any other 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).
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. The amount of any payment provided for
herein shall not be reduced by any remuneration that the Executive may earn
from employment with another employer or otherwise following his Qualifying
Termination.
Section 5.4. Interest. If the Company fails to make, or cause to
be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest
rate shall be equal to 120 percent of the prime rate as reported by The Wall
Street Journal for the first business day of each month, effective for the
ensuing month. The interest rate shall be adjusted at the beginning of each
month.
Section 5.5. 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, 1999, 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
<PAGE> 8
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, 1999, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall 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
setoff 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, One Stamford Forum, Stamford,
Connecticut 06904, 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.
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
<PAGE> 9
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain
in full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to cause
any agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement 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. Definitions. All upper case terms used herein shall
have the meaning set forth in this Agreement.
Section 6.13. 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 6.14. 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:
----------------------
J. Randall MacDonald
Senior VP-Human Resources
and Administration
By:
----------------------
Marianne Drost
VP and Associate General
Counsel-Finance & Corporate
Secretary
By:
----------------------
Executive
<PAGE> 1
EXHIBIT 10.3
January 14, 1999
Charles R. Lee
[Address]
[Address]
Dear Chuck:
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, GTE can expect your continued leadership for the foreseeable
future as well as your value-added advice and counsel on the broad array of
issues and challenges facing GTE today and in the future.
PURPOSE - Service Corp. enters into this Agreement with you because the
rapidly-changing and increasingly global telecommunications market, which has
resulted from the Telecommunications Act of 1996, and the proposed merger
between GTE Corporation and Bell Atlantic Corporation ("Bell Atlantic") or a
subsidiary of Bell Atlantic (the "Merger") have 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, 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 continue to lead this decision-making process.
For purposes of this Agreement, "GTE" means GTE Corporation, its successors, and
assigns and all of the GTE Companies; "GTE Companies" means all of, and "GTE
Company" means any one of, GTE Corporation, all corporate subsidiaries or other
companies affiliated with GTE Corporation, all companies in which GTE
Corporation directly or indirectly owns a substantial equity interest, and their
successors and assigns, including any company into which GTE Corporation is
merged and its subsidiaries and affiliates. In addition, in this Agreement, on
and after the date on which the Merger is consummated (the "Merger Date"), "GTE
Corporation" includes Bell Atlantic.
<PAGE> 2
Charles R. Lee
January 14, 1999
Page 2
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 engaging in competitive activities,
Service Corp. is providing you with the security of a fixed-term agreement, a
long-term performance incentive, participation in the GTE Merger Implementation
and Retention Incentive Program, and other benefits.
TERM - The term of this Agreement ("Term of Agreement") begins on January 1,
1999, and ends on June 30, 2004. The term of your employment under this
Agreement ("Term of Employment") begins on January 1, 1999. If the Merger Date
does not occur before June 30, 2004, the Term of Employment ends on June 30,
2004. If the Merger Date occurs before June 30, 2004, (i) the Term of Employment
ends on the later of the Merger Date or June 30, 2002; and (ii) you will serve
as a consultant under this Agreement during a term (the "Consulting Term") that
(a) begins immediately following the Term of Employment and (b) ends on June 30,
2004. If the Term of Employment ends on June 30, 2004, it is contemplated that
you and GTE will, shortly before that date, negotiate an extension of this
Agreement on mutually satisfactory terms.
GENERAL - You will continue to serve as Chairman of the Board of Directors of
GTE (the "Board") during the Term of Agreement. For purposes of this Agreement,
from and after the Merger Date, "Board" refers to the Board of Directors of Bell
Atlantic. In addition, you will continue to serve as the Chief Executive Officer
of GTE ("CEO") through the earlier of June 30, 2004, or the Merger Date. If the
Merger Date occurs before June 30, 2002, you will serve as Co-CEO from the
Merger Date through June 30, 2002. If the Merger Date occurs before June 30,
2004, you will serve as a consultant to GTE during the Consulting Term. During
the Term of Employment, you will continue to receive the same benefits as other
senior executives of GTE (except that you will not receive involuntary
separation program ("ISEP") or other separation and severance benefits). In
addition, the terms of your employment and the terms of your service as Chairman
of the Board and as consultant will be governed by the following:
DUTIES AND RESPONSIBILITIES - During the Term of Employment, you will continue
to perform your duties and responsibilities fully and faithfully as Chairman and
CEO of GTE, reporting only to the Board; provided that if the Merger occurs
before July 1, 2002, you will serve as Co-CEO from the Merger Date through
<PAGE> 3
Charles R. Lee
January 14, 1999
Page 3
June 30, 2002. During the Term of Employment, you will continue to devote your
entire business skill, time, and effort diligently to the affairs of GTE in
accordance with the duties assigned to you, and you will perform all such
duties, and otherwise conduct yourself, in a manner reasonably calculated in
good faith by you to promote the best interests of GTE. During the Term of
Employment, except to the extent specifically permitted in writing by the Board,
and except for memberships on boards of directors that you hold on the date of
this Agreement, you will not, directly or indirectly, render any services of a
business, commercial, or professional nature to any other person or organization
other than a GTE Company or a person or organization in which GTE has a
financial interest, whether or not the services are rendered for compensation.
During the Consulting Term, you will continue to serve as Chairman of the Board
and will make yourself available, at GTE's request, to provide consulting
services to GTE. During the Consulting Term, your relationship with GTE will be
that of an independent contractor, and not that of an employee.
LOCATION - During the Term of Employment, you will perform services for GTE at
your current location, at GTE's headquarters, or at any other location
designated by GTE as necessary or appropriate for the discharge of your
responsibilities under this Agreement. In the event of any change in your
principal work location during the Term of Employment, you will be eligible for
relocation assistance under the terms of any GTE relocation policy then
applicable to other senior executives of GTE.
During the Consulting Term, GTE will provide you, at GTE's expense, with
appropriate office space and related administrative support at a mutually
agreeable location. GTE will reimburse you for all reasonable expenses that you
incur in discharging your duties and responsibilities to GTE during the
Consulting Term. At your request, GTE will give you access during the Consulting
Term to GTE's airplane(s) in accordance with the GTE policy for a non-employee
Chairman in effect at the time you make such a request.
In addition, from July 1, 2004, through June 30, 2009, GTE will provide you, at
GTE's expense, with appropriate office space and related administrative support
at a mutually agreeable location.
<PAGE> 4
Charles R. Lee
January 14, 1999
Page 4
BASE SALARY - During the Term of Employment, your annual base salary will not be
less than $1,250,000 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 Employment. GTE's Executive Compensation and
Organizational Structure Committee or its successor (the "ECC") will review your
base salary annually to consider whether you should be awarded a merit increase
in your base salary. In considering whether to grant you a merit increase, the
ECC will take into account, among other factors, your performance, corporate
performance, and market data.
CONSULTING FEE - During the Consulting Term, you will receive a consulting fee
of $250,000 per calendar month, and you will not be entitled to receive, by
reason of your status as Chairman and consultant, any of the compensation or
benefits that GTE provides to employees or to non-employee members of the Board.
Of course, in accordance with this Agreement, you may, during the Consulting
Term, be entitled to certain compensation and benefits by reason of your status
as a former GTE employee.
EIP AND LTIP - During the Term of Employment, on an annual basis, GTE will
provide you with the opportunity to earn an annual bonus in accordance with the
terms and conditions of the GTE Executive Incentive Plan or any successor plan
("EIP"), and an annual grant of a long-term incentive opportunity (currently, a
stock option grant and a performance bonus award) in accordance with the terms
and conditions of the GTE Long-Term Incentive Plan or any successor plan
("LTIP"), at a level that is no less than the total opportunity offered to you
immediately before your execution of this Agreement.
LONG-TERM PERFORMANCE INCENTIVE - Upon your execution of this Agreement, GTE
will credit $10,000,000 to a deferred account (the "Account") for you. The value
of the Account will be adjusted (upward or downward as appropriate) to reflect
the value that the Account would have if the balance in the Account were
invested in a mutual fund designated by you. The Account will be credited with
interest at the "Corporate Average" yield of long-term, high-grade corporate
bonds as reported by Moody's Investors Service, or such other substantially
similar yield as may be designated under the LTIP deferral regulations, from
January 1, 1999, until the date on which your initial mutual fund designation
becomes effective. Quarterly (or more frequently, if permitted by the ECC or its
designee), you may change the designated mutual fund on a prospective basis. The
crediting of interest and investment performance and
<PAGE> 5
Charles R. Lee
January 14, 1999
Page 5
the designation, or change in designation, of a mutual fund pursuant to this
paragraph will be in accordance with any reasonable rules or requirements
imposed by the ECC or its designee.
You will become vested in the value of the Account (the "Account Balance") as
follows: You will become vested in 60% of the value of the Account (the "Account
Balance") if you are actively employed by GTE on December 31, 2001. You will
become 80% vested in the Account Balance if you are actively employed by GTE on
December 31, 2002. You will become 100% vested in the Account Balance if you are
actively employed by GTE on December 31, 2003. Notwithstanding the foregoing, if
the Merger becomes effective, you will become 100% vested in the Account Balance
if you are actively employed by GTE on the later of (i) the Merger Date or (ii)
June 30, 2002.
The Payable Amount, as defined below (if any) will be paid to you (or, in the
event of your death, your beneficiary) in cash as soon as practicable after the
vested percentage of the Account Balance increases in accordance with the
preceding provisions of this Section ("Long-Term Performance Incentive"), except
to the extent that you elect to defer payment in accordance with deferral rules
prescribed by GTE. The amounts to be paid, provided, or credited pursuant to
this Section will not be treated as compensation for purposes of computing or
determining any additional benefit to be paid, provided, or credited under any
savings plan, insurance plan, pension plan, or other employee benefit plan
maintained by GTE.
The Payable Amount will be calculated as follows:
o First, the value of the Account Balance, determined as of the date
on which the vested percentage increases, will be multiplied by
the then-current vested percentage to produce the Vested Balance.
o Second, the Vested Balance will be multiplied by the Performance
Percentage prescribed by the following table to determine the
Cumulative Vested Amount:
<TABLE>
<CAPTION>
EPS Growth Performance Percentage
---------- ----------------------
<S> <C>
At least 10%.........................70%
At least 14.4%......................100%
At least 17.3%......................130%
</TABLE>
<PAGE> 6
Charles R. Lee
January 14, 1999
Page 6
If EPS Growth is less than 10%, the Performance Percentage
will be zero or such higher amount as may be determined by the
ECC. If EPS Growth is between 10% and 14.4% or between 14.4%
and 17.3%, the Performance Percentage will be determined by
linear interpolation. The ECC may adjust the EPS Growth goals
in the table above at any time, and will adjust these goals
after the Merger, as it deems equitable in its sole
discretion.
The ECC will have the sole discretion to determine EPS Growth.
The ECC's determination of EPS Growth, which will be final and
binding, will be made as follows: EPS Growth will measure the
percentage increase in GTE's annual earnings per share ("EPS")
over GTE's EPS for its 1998 fiscal year of $3.07 per share.
GTE's EPS will be determined on the basis of the fully diluted
earnings per share reported in GTE's annual consolidated
financial statements for each year (or, for a period of less
than a full fiscal year, as reported on GTE's Form 10-Q). In
determining EPS Growth, the ECC will have the discretion to
take into consideration any or all of the following: (1) the
effects of business combinations; (2) the effects of
discontinued operations (including loss on disposal of a line
of business or class of customer); (3) changes in accounting
principles; (4) extraordinary items; (5) restructuring
charges; and (6) changes in tax law. Items (1) and (2) will be
as defined in accordance with Generally Accepted Accounting
Principles ("GAAP"), and items (3) through (6) will be as
defined in accordance with GAAP and as defined and as
disclosed in GTE's financial statements. When the ECC
determines EPS Growth, the ECC will determine EPS Growth on
the basis of the compound annual rate of growth over the
entire period since December 31, 1998. If the vested
percentage of the Account Balance increases in accordance with
the preceding provisions of this Section ("Long-Term
Performance Incentive") on a date other than the last day of
GTE's fiscal year, the Performance Percentage will be
determined as of the end of the most recent GTE fiscal quarter
ending on or before such date.
<PAGE> 7
Charles R. Lee
January 14, 1999
Page 7
o Third, the Payable Amount will be calculated by subtracting all
amount(s) previously paid or deferred pursuant to this Section
("Long-Term Performance Incentive"), and the earnings that would
have accrued thereon if such amount(s) had not been paid or
deferred, from the Cumulative Vested Amount. If the Payable Amount
is zero or less, no amount will be paid to you (and you will not
be required to make any payment to GTE) pursuant to this Section.
Attachment A illustrates how the calculations will be made.
MERGER IMPLEMENTATION AND RETENTION INCENTIVE PROGRAM - You will participate in
the GTE Merger Implementation and Retention Incentive Program (the "Program") on
the same terms as other senior executives of GTE. The terms of the Program that
apply to you will be set forth in a separate agreement between you and GTE.
RETIREMENT -
ADDITIONAL PENSION CREDIT - Except as provided in the Section captioned
"Termination of Employment," GTE will provide you with the following pension
benefits if you remain employed by the GTE Companies until the end of the Term
of Employment:
(i) EXTRA SERVICE CREDIT. You will be credited with an extra year of
service for each year that you actually work or consult for the GTE
Companies during the Term of Agreement for purposes of determining your
pension benefits. An extra year of service will be prorated for the
partial year that is included in the Term of Agreement.
(ii) AVERAGE COMPENSATION. Your pension will be calculated on the basis of
the highest of (a) your final year of pensionable compensation as an
employee, (b) your final average three years of pensionable
compensation as an employee, or (c) your final average five years of
pensionable compensation as an employee.
(iii) PENSION COMMENCEMENT DATE. Your pension (calculated in accordance with
the provisions of this Section ("Additional Pension Credit") may
commence immediately following the end of the Term of Employment, or
later, taking into account any service credit to be granted for the
<PAGE> 8
Charles R. Lee
January 14, 1999
Page 8
subsequent Consulting Term (if any) in accordance with the provisions
of paragraph (i), above.
(iv) PLAN AMENDMENT. If any GTE tax-qualified defined benefit plan in which
you participate (the "Qualified Plan") is amended after the date of
this Agreement, your benefits under the GTE Supplemental Executive
Retirement Plan or any successor thereto (the "SERP") will be equal to
the greater of the benefits determined under the terms of the Qualified
Plan in effect on the date of this Agreement or the benefits determined
under the terms of the Qualified Plan and the SERP in effect on the
date as of which your benefits are determined (taking into account in
each case the extra service credit provided by paragraph (i), above,
and the compensation adjustment prescribed by paragraph (ii), above),
offset by any benefits due to you from the Qualified Plan. There will
be no duplication of benefits between the pension benefits prescribed
by the preceding provisions of this paragraph (iv) and the pension
payable from the Qualified Plan or the SERP.
If your employment terminates before the end of the Term of Employment 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 be entitled to the benefits provided by the provisions of this Section
("Additional Pension Credit").
If your employment terminates before the end of the Term of Employment by reason
of your death or Disability (as defined below), you will be credited with an
extra year of service for each year for which you actually worked for the GTE
Companies during the Term of Employment 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 Credit").
Notwithstanding the preceding provisions of this Section ("Additional Pension
Credit"), if you have a Qualifying Termination following a Change in Control (as
those terms are defined in the Executive Severance Agreement between you and GTE
Service Corp., dated June 4, 1998 (the "ESA")), you will be entitled to the
benefits provided by the preceding provisions of this Section as though your
employment continued until June 30, 2004, including the service credit provided
in accordance with this Section, in lieu of the service credit provided by your
ESA; provided that your pension will be payable immediately following
<PAGE> 9
Charles R. Lee
January 14, 1999
Page 9
the Qualifying Termination; provided further that your pensionable compensation
will be deemed equal to 100% of your Base Amount (as defined in your ESA) if
that produces a greater benefit than if your pensionable compensation were
calculated in accordance with paragraph (ii) of this Section; provided, however,
that the foregoing benefits are contingent upon your execution of the release
prescribed by the Section captioned "Release" and your compliance with the
Sections captioned "Covenants" and Confidentiality. However, the other
provisions of your ESA will not be adversely affected by this Agreement.
Notwithstanding the preceding provisions of this Section ("Additional Pension
Credit"), if GTE terminates your employment under this Agreement for any reason
other than death, Disability (as defined below), or Cause (as defined below),
and you do not have a Qualifying Termination following a Change in Control (as
those terms are defined your ESA), you will be entitled to the benefits provided
by the preceding provisions of this Section as though your employment continued
until June 30, 2004, including the service credit provided in accordance with
this Section; provided that your pension will not begin before the Term of
Employment ends; provided further that your pension will be calculated on the
basis of the highest of (a) your final year of pensionable compensation, (b)
your final average three years of pensionable compensation, (c) your final
average five years of pensionable compensation, or (d) your final average five
years of pensionable compensation while you are employed; provided, however,
that the foregoing benefits are contingent upon your execution of the release
prescribed by the Section captioned "Release" and your compliance with the
Sections captioned "Covenants" and "Confidentiality."
For purposes of the preceding provisions of this Section ("Additional Pension
Credit"), "pensionable compensation" means compensation as defined by the
applicable pension plan, and any pensionable compensation paid pursuant to the
Section captioned "Termination Provisions" after your employment terminates will
be treated as paid when it would have been paid if your employment had not
terminated.
The benefits provided by the preceding provisions of this Section ("Additional
Pension Credit") will be paid out of GTE's funded plans, out of GTE's general
assets, or both, at GTE's discretion.
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Charles R. Lee
January 14, 1999
Page 10
FINANCIAL COUNSELING - If you continue as an employee of (or consultant to) GTE
until June 30, 2004, in accordance with this Agreement, then from July 1, 2004,
through June 30, 2006, GTE will provide you with financial counseling assistance
consistent with the GTE policy then in effect for other senior executives,
subject, however, to your execution of the release prescribed by the Section
captioned "Release" and your compliance with the covenants set forth in the
Sections captioned "Covenants" and "Confidentiality."
TERMINATION PROVISIONS -
o CHANGE IN CONTROL - Upon the occurrence of a Qualifying Termination
following a Change in Control (as those terms are defined in your ESA)
during the Term of Employment, you will be entitled to receive additional
pension benefits in accordance with the Section captioned "Additional
Pension Credit." Upon the occurrence of a Qualifying Termination following
a Change in Control during the Term of Employment, you also will become
entitled to receive (1) two years of financial counseling assistance
consistent with the GTE policy then in effect for other senior executives,
and (2) the Long-Term Performance Incentive, payable in accordance with
(and on the date(s) prescribed by) the Section captioned "Long-Term
Performance Incentive" (or, if greater, the amount that would have been
payable in accordance with such Section if the Performance Percentage were
100%), subject in each case to your execution of the release prescribed by
the Section captioned "Release" and your compliance with the covenants set
forth in the Sections captioned "Covenants" and "Confidentiality." 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) during the Term of Employment, except as
provided above in this Section ("Change in Control"), 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.
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Charles R. Lee
January 14, 1999
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o VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this
Agreement at any time by giving the Board 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 GTE benefits will cease to accrue, you will forfeit
all unvested stock options and the then-unvested portion of your Account
Balance (as defined in the Section captioned "Long-Term Performance
Incentive"), you will forfeit all rights under this Agreement which as of
the relevant date have not yet been earned under this Agreement, and you
will not receive any consulting fees. A termination of employment in
accordance with this Section ("Voluntary Termination by You"), including
retirement, will be deemed a "Voluntary Termination."
During the Consulting Term, you may terminate your service as Chairman of
the Board and as consultant to GTE under this Agreement at any time by
giving the Board written notice of intent to terminate, delivered at least
30 calendar days before the effective date of such termination. The
termination will automatically become effective upon the expiration of the
30-day notice period. Upon the effective date of such termination, your
consulting fee will cease to accrue, and your rights to office space,
administrative support, and access to GTE airplane(s) will terminate. For
purposes of this Agreement, if you terminate your service as either
Chairman of the Board or consultant to GTE under this Agreement, you will
be deemed to terminate your service in both capacities.
o TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of Employment,
you terminate employment because of your death or Disability (as defined
below), you will immediately become 100% vested in your Account Balance,
and your Account Balance will be distributed immediately to you (or, in the
event of your death, your beneficiary), based on EPS Growth as of the end
of the most recent GTE fiscal quarter ending on or before the date your
employment terminates. Except as provided by the preceding sentence, if,
during the Term of Employment, you terminate employment on account of death
or Disability (as defined below), your base salary and other GTE benefits
will cease to accrue, you will not receive any consulting fees, and GTE
will pay you or your beneficiary, as appropriate, all benefits to
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January 14, 1999
Page 12
which you or your beneficiary has a right pursuant to GTE's compensation
and benefit plans. For purposes of this Agreement, you will be considered
to have a Disability if an illness or injury prevents you from performing
your duties (as they existed immediately before the illness or injury) on a
full-time basis for six consecutive months.
If, during the Consulting Term, you terminate your service as Chairman of
the Board and as consultant to GTE under this Agreement because of your
death or disability, your consulting fee will cease to accrue, and your
right to office space, administrative support, and access to GTE
airplane(s) will terminate.
o INVOLUNTARY TERMINATION BY GTE - GTE may terminate your employment under
this Agreement at any time, for any reason. However, if GTE terminates your
employment for any reason other than death, Disability (as defined above),
or Cause (as defined below), such termination will be deemed an Involuntary
Termination by GTE, and, subject to your signing and delivering the release
required by the Section captioned "Release" and your compliance with the
covenants set forth in the Sections captioned "Covenants" and
"Confidentiality," you will be entitled to receive the following payments,
credits, and benefits, in lieu of any payment, credit, or benefit otherwise
provided pursuant to the Sections captioned "General," "Base Salary,"
"Consulting Fee," "EIP and LTIP," "Long-Term Performance Incentive," and
"Retirement," provided that each payment, credit, and benefit will be
contingent upon the absence, at the time such payment, credit, or benefit
is due, of any act that would constitute a breach of this Agreement by you,
and provided further that each such payment, credit, or benefit will be
paid or provided at the same time that the payment, credit, or benefit that
it replaces otherwise would have been paid or provided:
o Salary. An amount equal to the salary that would have been paid to
you under the Section captioned "Base Salary" through the
remaining Term of Employment, based on the rate of salary in
effect under such Section immediately prior to your separation
from service with the GTE Companies.
o Consulting Fee. An amount equal to the consulting fees that would
have been paid to you under the Section captioned "Consulting Fee"
through the remainder of the Consulting Term.
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Charles R. Lee
January 14, 1999
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o EIP. An amount equal to the value of the awards that you would
have been entitled to receive under the EIP for the remaining Term
of Employment, equal to 115% of norm (or its equivalent) at your
salary level for each year (but not more than the actual corporate
rating for that year) multiplied by the percentage of the year
that occurs before the end of the Term of Employment. The amounts
determined pursuant to this paragraph will be paid to you in
accordance with the provisions of the EIP that apply from time to
time to other senior executives of GTE.
o Stock Options. Stock appreciation rights ("SARs") with respect to
the same number of shares that are subject to stock options
granted, after the date of your separation from service, pursuant
to the LTIP to the CEO during the Term of Employment. Such SARs
will be subject to the same terms and conditions (including the
date of grant) that apply to such stock options, except that (1)
the SARs will be fully vested at the end of the Term of
Employment, and (2) you will have a period of at least 90 days
following the Term of Employment within which to exercise the
SARs. In addition, with respect to any and all GTE stock options
that are outstanding on the date of your separation from service,
you will be deemed, for purposes of determining the duration of
your right to exercise any and all such stock options, to have
remained in active service with the GTE Companies continuously
through the Term of Employment, and then to have separated from
service with whatever rights would then be applicable to a holder
of such options under the LTIP; provided that at the end of the
Term of Employment, all then-nonvested options will be immediately
vested, and you will have a minimum of 90 days from the end of the
Term of Employment to exercise all then-outstanding GTE stock
options (but not exceeding the maximum exercise period permitted
by the LTIP).
o LTIP Awards. The value of your then-outstanding and future
performance-bonus awards (that is, the cash bonus awards under the
LTIP), if any, which will be deemed equal to 75% of target (or its
equivalent) for your salary level for each award cycle (but not
more than the actual corporate rating for the award cycle)
multiplied by the percentage of the award cycle that occurs before
the end of the Term of Employment; provided that, for purposes of
this paragraph, any target award that has not been established at
your separation from
<PAGE> 14
Charles R. Lee
January 14, 1999
Page 14
service will be deemed to be equal to the target award
established at the time of each award cycle for the CEO. The
amounts determined pursuant to this paragraph ("LTIP Awards")
will be paid to you in accordance with the provisions of the LTIP
that apply from time to time to other senior executives of GTE.
o Long-Term Performance Incentive. The Long-Term Performance
Incentive payments prescribed by the Section captioned "Long-Term
Performance Incentive," paid in accordance with the provisions of
such Section as though you had not separated from service before
the end of the Term of Employment (or, if greater, the amount that
would have been payable in accordance with such Section if the
Performance Percentage were 100%), subject to your execution of
the release prescribed by the Section captioned "Release" and your
compliance with the covenants set forth in the Sections captioned
"Covenants" and "Confidentiality."
o Retirement Benefits. The retirement benefits prescribed by the
next-to-last paragraph of the Section captioned "Additional
Pension Credit," paid in accordance with the terms of that
paragraph.
o Financial Counseling and Outplacement. Financial planning services
for two years, and outplacement services, consistent with GTE
policy then in effect for other senior executives.
o Other Benefits. All other payments, benefits, and grants due you
under this Agreement (but excluding all perquisites, e.g., club
memberships, credit cards, air travel rights, car allowance, and
car service (which will cease)) until the end of the Term of
Employment, as and when such payments, benefits, and grants would
have been provided if your employment under this Agreement had not
been terminated.
Notwithstanding the foregoing provisions of this Section ("Involuntary
Termination by GTE"), 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 bonus award)
that you earn or become entitled to that is attributable to the same period
of
<PAGE> 15
Charles R. Lee
January 14, 1999
Page 15
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 GTE has obligations to you under this Section ("Involuntary
Termination by GTE"), you will keep GTE informed regarding the terms and
conditions of any subsequent employment or self-employment and the
corresponding compensation and benefits earned from such employment or
self-employment, and you will provide or cause to be provided to GTE, in
writing, correct, complete, and timely information concerning the same.
If, during the Consulting Term, GTE terminates your service as Chairman of
the Board and consultant for any reason other than death, disability, or
Cause, you will be entitled to receive an amount equal to the consulting
fees that would have been paid to you during the remainder of the
Consulting Term as and when such fees otherwise would have been paid to
you, subject to your signing and delivering the release required by the
Section captioned "Release" and your compliance with the covenants set
forth in the Sections captioned "Covenants" and "Confidentiality."
o TERMINATION FOR GOOD REASON - You may terminate your employment under this
Agreement for Good Reason by giving the Board 30 calendar days' written
notice of your intent to so terminate which sets forth in reasonable detail
the facts and circumstances deemed to provide a basis for such termination.
For purposes of this Agreement, "Good Reason" means a material breach by
GTE of the terms and conditions of this Agreement.
Notwithstanding the foregoing, GTE will have 15 calendar days from its
receipt of such notice to cure the action specified in the notice. In the
event of a cure by GTE within the 15-day period, the action in question
will not constitute Good Reason.
Except as provided in the preceding paragraph, upon the lapse of the 30
calendar days' notice period, the Good Reason termination will take effect,
and your obligation to serve GTE, and GTE's obligation to employ you, under
the terms of this Agreement will terminate simultaneously, and you will be
deemed to have incurred an Involuntary Termination, with the consequences
described above.
<PAGE> 16
Charles R. Lee
January 14, 1999
Page 16
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.
During the Consulting Term, you may terminate your service as Chairman of
the Board and as a consultant to GTE for Good Reason in accordance with the
procedures that apply to the termination of your employment for Good
Reason, described above in this Section ("Termination for Good Reason"). If
you so terminate your service for Good Reason, you will be entitled to
receive an amount equal to the consulting fees that would have been paid to
you during the remainder of the Consulting Term as and when such fees
otherwise would have been paid to you, subject to your signing and
delivering the release required by the Section captioned "Release" and your
compliance with the covenants set forth in the Sections captioned
"Covenants" and "Confidentiality."
o TERMINATION FOR CAUSE - Nothing in this Agreement prevents GTE from
terminating your employment under this Agreement for Cause. In the event of
your termination for Cause, you will forfeit the then-unvested portion of
your Account Balance, and GTE will pay you your full accrued base salary
and accrued vacation time through the date of your termination, and GTE
will have no further obligations under this Agreement.
For purposes of this Agreement, "Cause" is defined as a good faith
determination by the Board, 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. Notwithstanding the foregoing, you will not
be deemed to have been terminated for Cause unless and until you are
furnished with a notice, consisting of a copy of a resolution duly adopted
by the affirmative vote of not less than three quarters of the entire
membership of the Board at a duly held meeting of the Board (with
reasonable notice to you and an opportunity for you, together with counsel,
to be heard before the Board) finding that you have engaged in the conduct
described in this paragraph and specifying the particulars thereof in
detail. The Board may not delegate or assign its duties under this
paragraph.
Nothing in this Agreement prevents GTE from terminating your service as
Chairman of the Board and consultant under this Agreement for Cause (as
<PAGE> 17
Charles R. Lee
January 14, 1999
Page 17
defined above) during the Consulting Term. In the event of such a
termination for Cause, your consulting fees will cease to accrue, your
rights to office space, administrative support, and access to GTE
airplane(s) will terminate, and GTE will have no further obligations under
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 would preclude the
use of pooling of interest accounting, the ECC may, in its sole discretion,
eliminate or modify that provision to the extent required to allow pooling of
interest accounting. If the Long-Term Performance Incentive is rescinded
pursuant to this Section ("Rescission"), the covenants appearing in paragraphs
(a), (b), and (c) of the Section captioned "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 and/or consulting relationship
unless, at the time you terminate your employment or consulting relationship,
you execute a release satisfactory to GTE releasing GTE, its affiliates,
shareholders, directors, officers, employees, representatives, and agents and
their successors and assigns from any and all employment-related,
consulting-related, or service-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) PROHIBITED CONDUCT - During your employment and/or consulting relationship
with GTE, and for a period ending with the later of (i) 24 months following the
termination of such employment or consulting relationship for any reason or (ii)
June 30, 2004, you, without the prior approval of the Board (provided by a
resolution duly adopted by the affirmative vote of not less than three quarters
of the entire membership of the Board at a duly held meeting of the Board), will
not:
o personally engage in Competitive Activities (as defined below); or
<PAGE> 18
Charles R. Lee
January 14, 1999
Page 18
o work for, own, manage, operate, control, or participate in the
ownership, management, operation, or control of, or provide consulting
or advisory services to, any individual, partnership, firm,
corporation, or institution engaged in Competitive Activities, or any
company or person affiliated with such person or entity engaged in
Competitive Activities; provided that your purchase or holding, for
investment purposes, of securities of a publicly-traded company shall
not constitute "ownership" or "participation in ownership" for purposes
of this paragraph so long as your equity interest in any such company
is less than a controlling interest.
(b) COMPETITIVE ACTIVITIES - For purposes of this Agreement, "Competitive
Activities" means business activities relating to products or services of the
same or similar type as the products or services (i) which are sold (or,
pursuant to an existing business plan, will be sold) to paying customers of one
or more GTE Companies, and (ii) for which you then have responsibility to plan,
develop, manage, market, or oversee, or had any such responsibility within your
most recent 24 months of employment and/or other service with the GTE Companies.
Notwithstanding the previous sentence, a business activity shall not be treated
as a Competitive Activity if the geographic marketing area of the relevant
products or services sold by you or a third party does not overlap with the
geographic marketing area for the applicable products and services of the GTE
Companies.
(c) INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment
and/or consulting relationship with any GTE Company, and for a period ending
with the later of (i) 24 months following the termination of such employment
and/or consulting relationship for any reason or (ii) June 30, 2004, you will
not, without the written approval of the Board (provided by a resolution duly
adopted by the affirmative vote of not less than three quarters of the entire
membership of the Board at a duly held meeting of the Board):
o recruit or solicit any employee of any GTE Company for employment or
for retention as a consultant or service provider;
o hire or participate (with another company or third party) in the
process of hiring (other than for a GTE Company) any person who is then
an employee of any GTE Company, or provide names or other information
about GTE employees to any person or business (other than a GTE
<PAGE> 19
Charles R. Lee
January 14, 1999
Page 19
Company) under circumstances which could lead to the use of that
information for purposes of recruiting or hiring;
o interfere with the relationship of any GTE Company with any of its
employees, agents, or representatives;
o solicit or induce, or in any manner attempt to solicit or induce, any
client, customer, or prospect of a GTE Company (1) to cease being, or
not to become, a customer of a GTE Company or (2) to divert any
business of such customer or prospect from a GTE Company; or
o otherwise interfere with, disrupt, or attempt to interfere with or
disrupt, the relationship, contractual or otherwise, between any GTE
Company and any of its customers clients, prospects, suppliers,
consultants, or employees.
(d) RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or
before your termination of employment and/or consulting relationship with all
GTE Companies for any reason, you will return to the appropriate GTE Company all
property owned by each such company or in which any such company has an
interest, including files, documents, data and records (whether on paper or in
tapes, disks, or other machine-readable form), office equipment, credit cards,
and employee identification cards. You acknowledge that GTE or an applicable GTE
Company is the rightful owner of any programs, ideas, inventions, discoveries,
copyright material, or trademarks that you may have originated or developed, or
assisted in originating or developing, during your period of employment and/or
consulting with any GTE Company, where any such origination or development
involved the use of company time or resources, or the exercise of your
responsibilities for or on behalf of any such company. You will at all times,
both before and after termination of your employment and/or consulting
relationship, cooperate with GTE in executing and delivering documents requested
by any GTE Company, and taking any other actions, that are necessary or
requested by GTE to assist any GTE Company in patenting, copyrighting, or
registering any programs, ideas, inventions, discoveries, copyright material, or
trademarks, and to vest title thereto in the applicable company.
(e) PROPRIETARY AND CONFIDENTIAL INFORMATION - You will at all times preserve
the confidentiality of all proprietary information and trade secrets of any and
all
<PAGE> 20
Charles R. Lee
January 14, 1999
Page 20
GTE Companies, except to the extent that disclosure of such information is
legally required. "Proprietary information" means information that has not been
disclosed to the public and that is treated as confidential within the business
of any GTE Company, such as strategic or tactical business plans; undisclosed
financial data; ideas, processes, methods, techniques, systems, patented or
copyrighted information, models, devices, programs, computer software, or
related information; documents relating to regulatory matters and correspondence
with governmental entities; undisclosed information concerning any past,
pending, or threatened legal dispute; pricing and cost data; reports and
analyses of business prospects; business transactions which are contemplated or
planned; research data; personnel information and data; identities of users and
purchasers of any GTE Company's products or services; and other confidential
matters pertaining to or known by one or more GTE Companies, including
confidential information of a third party which you know or should know a GTE
Company is bound to protect.
(f) WAIVER - Nothing in this Agreement will bar you from requesting, at the time
of your termination of your employment and/or consulting relationship or at any
time thereafter, that the Board, in its sole discretion, waive in writing GTE's
rights to enforce some or all of this Section ("Covenants"). Any such waiver
must be effected by a resolution duly adopted by the affirmative vote of not
less than three quarters of the entire membership of the Board at a duly held
meeting of the Board.
(g) OTHER AGREEMENTS AND POLICIES - 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 subject matter of the foregoing
obligations.
MISCELLANEOUS -
NONDUPLICATION OF BENEFITS/NO SEVERANCE - The payment of any benefits hereunder
will be in lieu of any GTE Involuntary Separation Program ("ISEP") or other
separation or severance benefits and 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 you 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 the ESA or
<PAGE> 21
Charles R. Lee
January 14, 1999
Page 21
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.
FORFEITURE OF DEFERRED AMOUNTS - If you breach any of the obligations set forth
in the Section captioned "Covenants" or engage in serious misconduct that is
contrary to written policies of GTE or is harmful to any GTE Company or its
reputation, you may forfeit all or part of any amounts that you defer or accrue
under any GTE-sponsored deferred compensation program after your execution of
this Agreement and any interest or earnings thereon.
PAYMENTS SUBJECT TO EXCISE TAX - Your ESA provides for the payment of an
additional amount if you receive any amount that is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended.
EFFECT ON EXECUTIVE SEVERANCE AGREEMENT - The execution of this Agreement will
not alter or amend your ESA; provided that the execution of this Agreement, the
provision of compensation and benefits pursuant to this Agreement, and the
assignment to you of duties and responsibilities in accordance with this
Agreement will not create a "Good Reason" for purposes of your ESA.
WAIVER - Failure to insist upon strict compliance with any of the terms,
covenants, or conditions of this Agreement will not be deemed a waiver of such
term, covenant, or condition, nor will any waiver or relinquishment of any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times.
TAXES - GTE may withhold from any benefits payable under this Agreement all
taxes that GTE reasonably determines to be required pursuant to any law,
<PAGE> 22
Charles R. Lee
January 14, 1999
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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 his Agreement to
"Service Corp." will be deemed to refer to the assignee. However, you may not
assign your rights and obligations under this Agreement.
SEVERABILITY - The agreements contained herein and within the release prescribed
by the Section captioned "Release" will each constitute a separate agreement
independently supported by good and adequate consideration, and will each be
severable from the other provisions of the Agreement and such release. If an
arbitrator or court of competent jurisdiction determines that any term,
provision, or portion of this Agreement or such release is void, illegal, or
unenforceable, the other terms, provisions and portions of this Agreement or
such release will remain in full force and effect, and the terms, provisions,
and portions that are determined to be void, illegal, or unenforceable will
either be limited so that they will remain in effect to the extent permissible
by law, or such arbitrator or court will substitute, to the extent enforceable,
provisions similar thereto or other provisions, so as to provide to GTE, to the
fullest extent permitted by applicable law, the benefits intended by this
Agreement and such release.
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January 14, 1999
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ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether
legal, equitable, or otherwise, that each of the parties to this Agreement may
have, you acknowledge that (i) the covenants in the Sections captioned
"Covenants" and "Confidentiality" are essential to the continued good will and
profitability of GTE; (ii) you have broad-based skills that will serve as the
basis for employment opportunities that are not prohibited by the covenants in
the Sections captioned "Covenants" and "Confidentiality;" (iii) when your
employment and/or consulting relationship with GTE terminates, you will be able
to earn a livelihood without violating any of the terms of this Agreement; (iv)
irreparable damage to GTE will result in the event that the foregoing sections
of this Agreement are not specifically enforced and that monetary damages will
not adequately protect GTE from a breach of these sections of the Agreement; (v)
if any dispute arises concerning the violation by you of these provisions of the
Agreement, an injunction may be issued restraining such violation pending the
determination of such controversy, and no bond or other security may be required
in connection therewith; (vi) such covenants will continue to apply after any
expiration, termination, or cancellation of this Agreement; (vii) your breach of
any of such covenants will result in your immediate forfeiture of all rights
under this Agreement; and (viii) in the event of any such breach by you, you
will, at GTE's request, return all payments made pursuant to this Agreement. 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.
SURVIVAL - The provisions in the Sections captioned "Covenants" and
"Miscellaneous" will survive the Term of Agreement. If your employment and/or
consulting relationship with GTE continues after the Term of Agreement, you will
be subject to the obligations imposed by each of such Sections with respect to
such employment and/or consulting relationship. Any obligations that GTE has
incurred under this Agreement to provide benefits that have vested under the
terms of this Agreement (including GTE's obligations in the Section captioned
"Retirement") will likewise survive the Term of Agreement. Except as provided by
the preceding provisions of this Section ("Survival"), the terms of your
employment (if any) after the end of the Term of Employment will not be governed
by this Agreement.
ARBITRATION - Any dispute arising out of or relating to this Agreement, except
any dispute arising out of or relating to the Sections captioned "Covenants" and
"Confidentiality," and any dispute arising out of or relating to your
<PAGE> 24
Charles R. Lee
January 14, 1999
Page 24
employment, except a dispute arising solely out of, or relating solely to, your
ESA, will be settled by final and binding arbitration, which will be the
exclusive means of resolving any such dispute, and the parties specifically
waive all rights to pursue any other remedy, recourse, or relief. With respect
to disputes by GTE arising out of or relating to the Sections captioned
"Covenants" and "Confidentiality," GTE has retained all its rights to legal and
equitable recourse and relief, including but not limited to injunctive relief,
as referred to in Section captioned "Additional Remedies". The arbitration will
be expedited and conducted in the State of New York pursuant to the Center for
Public Resources ("CPR") Rules for Non-Administered Arbitration of Employment
Disputes in effect at the time of notice of the dispute before one neutral
arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties
mutually agree to the appointment of a different neutral arbitrator. The
arbitration will be governed by the Federal Arbitration Act, 9 U.S.C. Sections
1-16, and judgment upon the award rendered by the arbitration may be entered by
any court having jurisdiction. The finding of the arbitrator may not change the
express terms of this Agreement and shall be consistent with the arbitrator's
understanding of the findings a court of proper jurisdiction would make in
applying the applicable law to the facts underlying the dispute. In no event
whatsoever will such an arbitration award include any award of damages other
than the amounts in controversy under this Agreement. The parties waive the
right to recover, in such arbitration, punitive damages. Each party hereby
agrees that the State of New York is the proper venue for any litigation seeking
to enforce any provision of this Agreement or to enforce any arbitration award
under this Section, and each party hereby waives any right it otherwise might
have to defend, oppose, or object to, on the basis of jurisdiction, venue, or
forum nonconveniens, a suit filed by the other party in any federal or state
court in the State of New York to enforce any provision of this Agreement or to
enforce any arbitration award under this Section. Each party also waives any
right it might otherwise have to seek to transfer from a federal or state court
in the State of New York a suit filed by the other party to enforce any
provision of this Agreement or to enforce any arbitration award under this
Section.
ENTIRE AGREEMENT - Except for the terms of the ESA and the other compensation
and benefit plans in which you participate, this Agreement sets forth the entire
understanding of you and GTE, and supersedes all prior agreements and
communications, whether oral or written, between GTE and you. This Agreement
will not be modified except by written agreement of you and GTE.
<PAGE> 25
Charles R. Lee
January 14, 1999
Page 25
Chuck, I believe that this generous offer provides you and your family with
financial security as our industry and GTE evolve. We recognize that 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 and returning this Agreement to
me by January 29, 1999.
Sincerely yours,
Russell E. Palmer,
on behalf of the Executive Compensation
and Organizational Structure Committee
of the Board of Directors of GTE Corporation
J. Randall MacDonald,
on behalf of GTE Corporation
I agree to the terms described above.
- --------------------------------------------
Charles R. Lee
<PAGE> 26
Charles R. Lee
January 14, 1999
Attachment
ATTACHMENT A
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Year(1) Threshold Target Maximum
(10%) (14.4%) (17.3%)
<S> <C> <C> <C>
2001
- Cumulative EPS $11.19 $12.13 $12.77
- Bonus(2) $4.2 $6.0 $7.8
2002
- Cumulative EPS $15.69 $17.39 $18.58
- Bonus(2) $1.4 $2.0 $2.6
2003
- Cumulative EPS $20.64 $23.41 $25.40
- Bonus(2) $1.4 $2.0 $2.6
==============================================================================================
Targets upon Merger
Effective Time
June 30, 2002
- Cumulative EPS $13.44 $14.76 $15.68
- Bonus(2) $2.8 $4.0 $5.2
----------------------------------------------------------------------------------------------
</TABLE>
(1) Performance reflects results for the fiscal year noted
(2) Bonus amounts are before any additional earnings have been calculated
Note: Interpolation would be used for performance in between the points shown on
the chart. Earnings shown assume consistent performance from year to year. The
ECC may adjust the EPS Growth goals at any time, and will adjust these goals
after the Merger, as it deems equitable in its sole discretion.
<PAGE> 27
EXHIBIT 10.3
January 7, 1999
Kent B. Foster
[Address]
[Address]
Dear Kent:
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, GTE can expect your continued leadership for the foreseeable
future as well as your value-added advice and counsel on the broad array of
issues and challenges facing GTE today and in the future.
PURPOSE - Service Corp. enters into this Agreement with you because the
rapidly-changing and increasingly global telecommunications market, which has
resulted from the Telecommunications Act of 1996, and the proposed merger
between GTE Corporation and Bell Atlantic Corporation ("Bell Atlantic") or a
subsidiary of Bell Atlantic (the "Merger") have 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, 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 executive 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 engaging in competitive activities,
Service Corp. is providing you with the security of a fixed-term agreement, a
long-term retention incentive, participation in the GTE Merger Implementation
and Retention Incentive Program, and other benefits.
<PAGE> 28
Kent B. Foster
January 7, 1999
Page 2
GENERAL - Under this Agreement, you will continue as a Corporate Officer and
Senior Executive of GTE. During the Term of Employment (as defined below), you
will continue to receive the same benefits as other senior executives of GTE at
your salary level (except that you will not receive involuntary 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 employment under this Agreement ("Term of Employment") will
commence on October 1, 1998, and end on September 30, 2002.
DUTIES AND RESPONSIBILITIES - You will continue to perform your duties and
responsibilities fully and faithfully (i) as a director, so long as you are
elected and serving, and (ii) as an officer, reporting only to the Board of
Directors of GTE Corporation ("Board") and/or the Chief Executive Officer(s) of
GTE Corporation ("CEO(s)"). You will serve in such executive capacities, with
such titles and authorities, as the Board or the CEO(s) of GTE may from time to
time prescribe, and you will perform all duties incidental to such positions,
shall cooperate fully with the Board and the CEO(s) and will work cooperatively
with the other officers of GTE. You will continue to devote your entire business
skill, time, and effort diligently to the affairs of GTE in accordance with the
duties assigned to you, and you will perform all such duties, and otherwise
conduct yourself, in a manner reasonably calculated in good faith by you to
promote the best interests of GTE. During the Term of Employment, except to the
extent specifically permitted in writing by the Board or the CEO(s), and except
for memberships on boards of directors that you hold on the date of this
Agreement, you will not, directly or indirectly, render any services of a
business, commercial, or professional nature to any other person or organization
other than a GTE Company or a person or organization in which GTE has a
financial interest, whether or not the services are rendered for compensation.
LOCATION - During the Term of Employment, you will perform services for GTE at
your current location, at GTE's headquarters, or at any other location
designated by GTE as necessary or appropriate for the discharge of your
responsibilities under this Agreement. In the event of any change in your
principal work location, you will be eligible for relocation assistance under
the
<PAGE> 29
Kent B. Foster
January 7, 1999
Page 3
terms of any GTE relocation policy then applicable to other senior executives of
GTE at your salary level.
BASE SALARY - During the Term of Employment, your annual base salary will not be
less than $899,000 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 Employment.
EIP AND LTIP - During the Term of Employment, on an annual basis, GTE will
provide you with the opportunity to earn an annual bonus in accordance with the
terms and conditions of the GTE Executive Incentive Plan or any successor plan
("EIP"), and an annual grant of a long-term incentive opportunity (currently a
stock option grant and a cash award) in accordance with the terms and conditions
of the GTE Long-Term Incentive Plan or any successor plan ("LTIP"), in each case
at a level commensurate with the opportunity offered to other GTE senior
executives at your salary level.
LONG-TERM RETENTION INCENTIVE - Upon your execution of this Agreement, GTE will
credit $4,500,000 to a deferred account (the "Account") for you. The value of
the Account will be adjusted (upward or downward as appropriate) to reflect the
value that the Account would have if the balance in the Account were invested in
a mutual fund designated by you. The Account will be credited with interest at
the "Corporate Average" yield of long-term, high-grade corporate bonds as
reported by Moody's Investors Service, or such substantially similar yield as
may be designated under the LTIP deferral regulations, from October 1, 1998,
until the date on which your initial mutual fund designation becomes effective.
Quarterly (or more frequently, if permitted by GTE's Executive Vice President -
Human Resources and Administration or his successor (the "EVP")), you may change
the designated mutual fund on a prospective basis. The crediting of interest and
investment performance and the designation, or change in designation, of a
mutual fund pursuant to this paragraph will be in accordance with any reasonable
rules or requirements imposed by the EVP. You will become vested in 60% of the
value of the Account (the "Account Balance") if you are actively employed by GTE
on September 30, 2001. You will become 100% vested in the Account Balance if you
are actively employed by GTE on September 30, 2002. The vested portion of the
Account Balance will be paid to you (or, in the event of your death, your
beneficiary) in cash as soon as practicable after it becomes vested, except to
<PAGE> 30
Kent B. Foster
January 7, 1999
Page 4
the extent that you elect to defer payment in accordance with deferral rules
prescribed by GTE. The amounts to be paid, provided, or credited pursuant to
this Section will not be treated as compensation for purposes of computing or
determining any additional benefit to be paid, provided, or credited under any
savings plan, insurance plan, pension plan, or other employee benefit plan
maintained by any GTE Company.
MERGER IMPLEMENTATION AND RETENTION INCENTIVE PROGRAM - You will participate in
the GTE Merger Implementation and Retention Incentive Program (the "Program") on
the same terms as other senior executives of GTE at your salary level. The terms
of the Program that apply to you will be set forth in a separate agreement
between you and GTE.
BOARD OF DIRECTORS - After the execution of this Agreement, you will continue to
serve as a member of the Board, and you will be nominated for election to the
Board at the annual meeting of shareowners that occurs upon the expiration of
your current term as a member of the Board after the date of this Agreement. If
you are elected to serve as a member of the Board at such annual meeting, you
also will be nominated for election to the Board at each subsequent meeting of
shareowners that occurs when your then-current term as a member of the Board
expires during the Term of Employment.
RETIREMENT -
ADDITIONAL PENSION AND BENEFIT CREDIT - Except as provided in the Section
captioned "Termination of Employment," GTE will provide you with the following
pension benefits:
(v) EXTRA SERVICE CREDIT. If you remain employed by the GTE Companies until
September 30, 2002, you will be credited with an extra year of service
for each year that you actually work for the GTE Companies during the
Term of Employment for purposes of determining your pension benefits.
(vi) PLAN AMENDMENT. If you remain employed by the GTE Companies until
September 30, 2002, and if any GTE tax-qualified defined benefit plan
in which you participate (the "Qualified Plan") is amended after the
date of this Agreement, your benefits under the GTE Supplemental
Executive
<PAGE> 31
Kent B. Foster
January 7, 1999
Page 5
Retirement Plan or any successor thereto (the "SERP") will be equal to
the greater of the benefits determined under the terms of the
Qualified Plan in effect on the date of this Agreement or the benefits
determined under the terms of the Qualified Plan and the SERP in
effect on the date as of which your benefits are determined (taking
into account in each case the extra service credit provided by
paragraph (i), above), offset by any benefits due to you from the
Qualified Plan. There will be no duplication of benefits between the
pension benefits prescribed by the preceding provisions of this
paragraph (ii) and the pension payable from the Qualified Plan or the
SERP.
If your employment terminates before September 30, 2002, 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 be entitled to the benefits provided by the provisions of paragraphs
(i) and (ii) of this Section ("Additional Pension and Benefit Credit").
If your employment terminates before September 30, 2002, by reason of your death
or Disability (as defined below), 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 Employment for purposes of determining your pension benefits as well as
the benefits provided by the provisions of paragraph (ii) of this Section
("Additional Pension and Benefit Credit"), but you will not be entitled to any
other benefits under the preceding provisions of this Section.
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 the Executive Severance Agreement between
you and GTE Service Corp., dated June 4, 1998 (the "ESA")), you will be entitled
to the benefits provided by the preceding provisions of this Section as though
your employment continued until the end of the Term of Employment, including the
service credit provided in accordance with this Section, in lieu of the service
credit provided by your ESA, subject to your execution of the release prescribed
by the Section captioned "Release" and your compliance with the Sections
captioned "Covenants" and Confidentiality; however, the other provisions of your
ESA will not be adversely affected by this Agreement.
<PAGE> 32
Kent B. Foster
January 7, 1999
Page 6
The benefits provided by the preceding provisions of this Section ("Additional
Pension and Benefit Credit") will be paid out of GTE's funded plans, out of
GTE's general assets, or both, at GTE's discretion.
TERMINATION PROVISIONS -
o CHANGE IN CONTROL - Upon the occurrence of a Qualifying Termination
following a Change in Control (as those terms are defined in your ESA)
during the Term of Employment, you will be entitled to receive a pension
commencing immediately, and you will receive service credit in accordance
with the Section captioned "Additional Pension and Benefit Credit" in lieu
of the service credit provided under your ESA. Upon the occurrence of a
Qualifying Termination following a Change in Control during the Term of
Employment, you also will become entitled to receive the Long-Term
Retention Incentive, payable in accordance with (and on the date(s)
prescribed by) the Section captioned "Long-Term Retention Incentive,"
subject, however, to your execution of the release prescribed by the
Section captioned "Release" and your compliance with the covenants set
forth in the Sections captioned "Covenants" and "Confidentiality." 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) during the Term of Employment, except as
provided above in this Section ("Change in Control"), your entitlement to
benefits will be determined solely by your ESA and any relevant GTE
compensation and benefit plans and award agreements. By way of example, if
a Qualifying Termination occurs as a result of your failure to be nominated
to the Board in accordance with the Section captioned "Board of Directors"
or other Good Reason (as that term is defined in your ESA), except as
provided above in this Section, 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> 33
Kent B. Foster
January 7, 1999
Page 7
o VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this
Agreement at any time by giving the CEO(s) 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 GTE benefits will cease to accrue, you will forfeit
all unvested stock options and the then-unvested portion of your Account
Balance (as defined in the Section captioned "Long-Term Retention
Incentive"), and you will forfeit all rights under this Agreement which as
of the relevant date have not yet been earned under this Agreement. A
termination of employment in accordance with this Section ("Voluntary
Termination by You"), including retirement, will be deemed a "Voluntary
Termination."
o TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of Employment,
you terminate employment because of your death or Disability (as defined
below), you will immediately become 100% vested in your Account Balance,
and your Account Balance will be distributed immediately to you (or, in the
event of your death, your beneficiary). Except as provided by the preceding
sentence, if, during the Term of Employment, you terminate employment on
account of death or Disability (as defined below), your base salary and
other GTE benefits will cease to accrue, and GTE will pay you or your
beneficiary, as appropriate, all benefits to which you or your beneficiary
has a right pursuant to GTE's compensation and benefit plans. For purposes
of this Agreement, you will be considered to have a Disability if an
illness or injury prevents you from performing your duties (as they existed
immediately before the illness or injury) on a full-time basis for six
consecutive months.
o INVOLUNTARY TERMINATION BY GTE - GTE may terminate your employment under
this Agreement at any time, for any reason. However, if GTE terminates your
employment for any reason other than death, Disability (as defined above),
or Cause (as defined below), such termination will be deemed an Involuntary
Termination by GTE, and, subject to signing and delivering the release
required by the Section captioned "Release" and your compliance with the
covenants set forth in the Sections captioned "Covenants" and
Confidentiality," you will be entitled to receive the following payments,
credits, and benefits, in lieu of any payment, credit, or
<PAGE> 34
Kent B. Foster
January 7, 1999
Page 8
benefit otherwise provided pursuant to the Sections captioned "General,"
"Base Salary," "EIP and LTIP," "Long-Term Retention Incentive," and
"Retirement," provided that each payment, credit, and benefit will be
contingent upon the absence, at the time such payment, credit, or benefit
is due, of any act that would constitute a breach of this Agreement by you,
and provided further that each such payment, credit, or benefit will be
paid or provided at the same time that the payment, credit, or benefit that
it replaces otherwise would have been paid or provided:
o Salary. An amount equal to the salary that would have been paid to
you under the Section captioned "Base Salary" through the
remaining Term of Employment, based on the rate of salary in
effect under such Section immediately prior to your separation
from service with the GTE Companies.
o EIP. An amount equal to the value of the awards that you would
have been entitled to receive under the EIP for the remaining Term
of Employment, equal to 115% of norm (or its equivalent) at your
salary level for each year (but not more than the actual corporate
rating for that year) multiplied by the percentage of the year
that occurs before September 30, 2002. The amounts determined
pursuant to this paragraph will be paid to you in accordance with
the provisions of the EIP that apply from time to time to other
senior executives of GTE at your salary level.
o Stock Options. Stock appreciation rights ("SARs") with respect to
the same number of shares that are subject to stock options
granted, after the date of your separation from service, pursuant
to the LTIP to senior executives of GTE at your salary level
during the Term of Employment. Such SARs will be subject to the
same terms and conditions that apply to such stock options, except
that (1) the SARs will be fully vested on September 30, 2002, and
(2) you will have a period of at least 90 days following September
30, 2002, within which to exercise the SARs. In addition, with
respect to any and all GTE stock options that are outstanding on
the date of your separation from service, you will be deemed, for
purposes of determining the duration of your right to exercise any
and all such stock options, to have remained in active service
with the GTE Companies continuously through the Term of
Employment, and then to have separated from
<PAGE> 35
Kent B. Foster
January 7, 1999
Page 9
service with whatever rights would then be applicable to a holder
of such options under the LTIP; provided that on September 30,
2002, all then-nonvested options will be immediately vested, and
you will have a minimum of 90 days from September 30, 2002, to
exercise all then-outstanding GTE stock options (but not
exceeding the maximum exercise period permitted by the LTIP).
o LTIP Awards. The value of your then-outstanding and future
performance-bonus awards (that is, the cash bonus awards under the
LTIP), if any, which will be deemed equal to 75% of target (or its
equivalent) for your salary level for each award cycle (but not
more than the actual corporate rating for the award cycle)
multiplied by the percentage of the award cycle that occurs before
September 30, 2002; provided that, for purposes of this paragraph,
any target award that has not been established at your separation
from service will be deemed to be equal to the target award
established at the time of each award cycle for other senior
executives of GTE at your salary level (as that salary level was
established immediately before your separation from service). The
amounts determined pursuant to this paragraph ("LTIP Awards") will
be paid to you in accordance with the provisions of the LTIP that
apply from time to time to other senior executives of GTE at your
salary level.
o Long-Term Retention Incentive. The Long-Term Retention Incentive
payments prescribed by the Section captioned "Long-Term Retention
Incentive," paid in accordance with the provisions of such Section
as though you had not separated from service before September 30,
2002.
o Financial Counseling and Outplacement. Financial planning services
until September 30, 2002, and outplacement services, consistent
with GTE policy then in effect for other senior executives at your
salary level.
o Other Benefits. All other payments, benefits, and grants due you
under this Agreement (but excluding all perquisites, e.g., club
memberships, credit cards, air travel rights, car allowance, and
car service (which will cease)) until September 30, 2002, as and
when
<PAGE> 36
Kent B. Foster
January 7, 1999
Page 10
such payments, benefits, and grants would have been provided if
your employment under this Agreement had not been terminated.
Notwithstanding the foregoing provisions of this Section ("Involuntary
Termination by GTE"), 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 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 GTE has obligations to you under this Section
("Involuntary Termination by GTE"), you will keep GTE informed
regarding the terms and conditions of any subsequent employment or
self-employment and the corresponding compensation and benefits earned
from such employment or self-employment, and you will provide or cause
to be provided to GTE, 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(s) 30 calendar days' written
notice of your intent to so terminate which sets forth in reasonable detail
the facts and circumstances deemed to provide a basis for such termination.
For purposes of this Agreement, "Good Reason" means a material breach by
GTE of the terms and conditions of this Agreement.
Notwithstanding the foregoing, GTE will have 15 calendar days from its
receipt of such notice to cure the action specified in the notice. In the
event of a cure by GTE within the 15-day period, the action in question
will not constitute Good Reason.
Except as provided in the preceding paragraph, upon the lapse of the 30
calendar days' notice period, the Good Reason termination will take effect,
and your obligation to serve GTE, and GTE's obligation to employ you, under
the terms of this Agreement will terminate simultaneously, and you will be
deemed to have incurred an Involuntary Termination, with the consequences
described above.
<PAGE> 37
Kent B. Foster
January 7, 1999
Page 11
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.
o TERMINATION FOR CAUSE - Nothing in this Agreement prevents GTE from
terminating your employment under this Agreement for Cause. In the event of
your termination for Cause, you will forfeit the then-unvested portion of
your Account Balance, and GTE will pay you your full accrued base salary
and accrued vacation time through the date of your termination, and GTE
will have no further obligations under this Agreement, except as otherwise
provided in the Section captioned "Replacement for Pension Entitlements."
For purposes of this Agreement, "Cause" is defined as a good faith
determination by the CEO(s), 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 GTE's Executive Compensation and Organizational Structure
Committee (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 would preclude the
use of pooling of interest accounting, the ECC may, in its sole discretion,
eliminate or modify that provision to the extent required to allow pooling of
interest accounting. If the Long-Term Retention Incentive is rescinded pursuant
to this Section ("Rescission"), the covenants appearing in paragraphs (a), (b),
and (c) of the Section captioned "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 GTE 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).
<PAGE> 38
Kent B. Foster
January 7, 1999
Page 12
COVENANTS - In consideration for the benefits and agreements described above,
you agree that:
(a) PROHIBITED CONDUCT - During the period of your employment with any GTE
Company, and for a period ending with the later of (i) 24 months following your
termination of employment for any reason from all GTE Companies or (ii)
September 30, 2002, you, without the prior written consent of the CEO(s), will
not:
o personally engage in Competitive Activities (as defined below); or
o work for, own, manage, operate, control, or participate in the
ownership, management, operation, or control of, or provide consulting
or advisory services to, any individual, partnership, firm,
corporation, or institution engaged in Competitive Activities, or any
company or person affiliated with such person or entity engaged in
Competitive Activities; provided that your purchase or holding, for
investment purposes, of securities of a publicly-traded company shall
not constitute "ownership" or "participation in ownership" for purposes
of this paragraph so long as your equity interest in any such company
is less than a controlling interest.
(b) COMPETITIVE ACTIVITIES - For purposes of this Agreement, "Competitive
Activities" means business activities relating to products or services of the
same or similar type as the products or services (i) which are sold (or,
pursuant to an existing business plan, will be sold) to paying customers of one
or more GTE Companies, and (ii) for which you then have responsibility to plan,
develop, manage, market, or oversee, or had any such responsibility within your
most recent 24 months of employment with the GTE Companies. Notwithstanding the
previous sentence, a business activity shall not be treated as a Competitive
Activity if the geographic marketing area of the relevant products or services
sold by you or a third party does not overlap with the geographic marketing area
for the applicable products and services of the GTE Companies.
(c) INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment
with any GTE Company, and for a period ending with the later of (i) 24 months
following your termination of employment for any reason from all
<PAGE> 39
Kent B. Foster
January 7, 1999
Page 13
GTE Companies or (ii) September 30, 2002, you will not, without the written
consent of the CEO(s):
o recruit or solicit any employee of any GTE Company for employment or
for retention as a consultant or service provider;
o hire or participate (with another company or third party) in the
process of hiring (other than for a GTE Company) any person who is then
an employee of any GTE Company, or provide names or other information
about GTE employees to any person or business (other than a GTE
Company) under circumstances which could lead to the use of that
information for purposes of recruiting or hiring;
o interfere with the relationship of any GTE Company with any of its
employees, agents, or representatives;
o solicit or induce, or in any manner attempt to solicit or induce, any
client, customer, or prospect of a GTE Company (1) to cease being, or
not to become, a customer of a GTE Company or (2) to divert any
business of such customer or prospect from a GTE Company; or
o otherwise interfere with, disrupt, or attempt to interfere with or
disrupt, the relationship, contractual or otherwise, between any GTE
Company and any of its customers clients, prospects, suppliers,
consultants, or employees.
(d) RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or
before your termination of employment for any reason with all GTE Companies, you
will return to the appropriate GTE Company all property owned by each such
company or in which any such company has an interest, including files,
documents, data and records (whether on paper or in tapes, disks, or other
machine-readable form), office equipment, credit cards, and employee
identification cards. You acknowledge that GTE or an applicable GTE Company is
the rightful owner of any programs, ideas, inventions, discoveries, copyright
material, or trademarks that you may have originated or developed, or assisted
in originating or developing, during your period of employment with any GTE
Company, where any such origination or development involved the use of company
time or resources, or the exercise of your responsibilities for or on behalf of
any such company. You will at all times, both before and after
<PAGE> 40
Kent B. Foster
January 7, 1999
Page 14
termination of employment, cooperate with GTE in executing and delivering
documents requested by any GTE Company, and taking any other actions, that are
necessary or requested by GTE to assist any GTE Company in patenting,
copyrighting, or registering any programs, ideas, inventions, discoveries,
copyright material, or trademarks, and to vest title thereto in the applicable
company.
(e) PROPRIETARY AND CONFIDENTIAL INFORMATION - You will at all times preserve
the confidentiality of all proprietary information and trade secrets of any and
all GTE Companies, except to the extent that disclosure of such information is
legally required. "Proprietary information" means information that has not been
disclosed to the public and that is treated as confidential within the business
of any GTE Company, such as strategic or tactical business plans; undisclosed
financial data; ideas, processes, methods, techniques, systems, patented or
copyrighted information, models, devices, programs, computer software, or
related information; documents relating to regulatory matters and correspondence
with governmental entities; undisclosed information concerning any past,
pending, or threatened legal dispute; pricing and cost data; reports and
analyses of business prospects; business transactions which are contemplated or
planned; research data; personnel information and data; identities of users and
purchasers of any GTE Company's products or services; and other confidential
matters pertaining to or known by one or more GTE Companies, including
confidential information of a third party which you know or should know a GTE
Company is bound to protect.
(f) WAIVER - Nothing in this Agreement will bar you from requesting, at the time
of your termination of employment or at any time thereafter, that the CEO(s), in
his/their sole discretion, waive in writing GTE's rights to enforce some or all
of this Section ("Covenants").
(g) OTHER AGREEMENTS AND POLICIES - 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 subject matter of the foregoing
obligations.
MISCELLANEOUS -
GTE - For purposes of this Agreement, "GTE" means GTE Corporation, its
successors, and assigns and all of the GTE Companies; "GTE Companies"
<PAGE> 41
Kent B. Foster
January 7, 1999
Page 15
means all of, and "GTE Company" means any one of, GTE Corporation, all corporate
subsidiaries or other companies affiliated with GTE Corporation, all companies
in which GTE Corporation directly or indirectly owns a substantial equity
interest, and their successors and assigns, including any company into which GTE
Corporation is merged and its subsidiaries and affiliates. In addition, in this
Agreement, after the consummation of the Merger, "GTE Corporation" includes Bell
Atlantic. Similarly, after the consummation of the Merger, "Board" refers to the
Board of Directors of Bell Atlantic.
NONDUPLICATION OF BENEFITS/NO SEVERANCE - The payment of any benefits hereunder
will be in lieu of any GTE Involuntary Separation Program ("ISEP") or other
separation or severance benefits and 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 you 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 the 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.
FORFEITURE OF DEFERRED AMOUNTS - If you breach any of the obligations set forth
in the Section captioned "Covenants" or engage in serious misconduct that is
contrary to written policies of GTE or is harmful to any GTE Company or its
reputation, you may forfeit all or part of any amounts that you defer or accrue
under any GTE-sponsored deferred compensation program after your execution of
this Agreement and any interest or earnings thereon.
<PAGE> 42
Kent B. Foster
January 7, 1999
Page 16
PAYMENTS SUBJECT TO EXCISE TAX - Your ESA provides for the payment of an
additional amount if you receive any amount that is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended.
EFFECT ON EXECUTIVE SEVERANCE AGREEMENT - The execution of this Agreement will
not alter or amend your ESA, provided that the execution of this Agreement, and
the provision of compensation and benefits pursuant to this Agreement, will not
create a "Good Reason" for purposes of your ESA.
WAIVER - Failure to insist upon strict compliance with any of the terms,
covenants, or conditions of this Agreement will not be deemed a waiver of such
term, covenant, or condition, nor will any waiver or relinquishment of any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times.
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 his Agreement to
<PAGE> 43
Kent B. Foster
January 7, 1999
Page 17
"Service Corp." will be deemed to refer to the assignee. However, you may not
assign your rights and obligations under this Agreement.
SEVERABILITY - The agreements contained herein and within the release prescribed
by the Section captioned "Release" will each constitute a separate agreement
independently supported by good and adequate consideration, and will each be
severable from the other provisions of the Agreement and such release. If an
arbitrator or court of competent jurisdiction determines that any term,
provision, or portion of this Agreement or such release is void, illegal, or
unenforceable, the other terms, provisions and portions of this Agreement or
such release will remain in full force and effect, and the terms, provisions,
and portions that are determined to be void, illegal, or unenforceable will
either be limited so that they will remain in effect to the extent permissible
by law, or such arbitrator or court will substitute, to the extent enforceable,
provisions similar thereto or other provisions, so as to provide to GTE, to the
fullest extent permitted by applicable law, the benefits intended by this
Agreement and such release.
ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether
legal, equitable, or otherwise, that each of the parties to this Agreement may
have, you acknowledge that (i) the covenants in the Sections captioned
"Covenants" and "Confidentiality" are essential to the continued good will and
profitability of GTE; (ii) you have broad-based skills that will serve as the
basis for employment opportunities that are not prohibited by the covenants in
the Sections captioned "Covenants" and "Confidentiality;" (iii) when your
employment with GTE terminates, you will be able to earn a livelihood without
violating any of the terms of this Agreement; (iv) irreparable damage to GTE
will result in the event that the foregoing sections of this Agreement are not
specifically enforced and that monetary damages will not adequately protect GTE
from a breach of these sections of the Agreement; (v) if any dispute arises
concerning the violation by you of these provisions of the Agreement, an
injunction may be issued restraining such violation pending the determination of
such controversy, and no bond or other security may be required in connection
therewith; (vi) such covenants will continue to apply after any expiration,
termination, or cancellation of this Agreement; (vii) your breach of any of such
covenants will result in your immediate forfeiture of all rights under this
Agreement; and (viii) in the event of any such breach by you, you will, at GTE's
request, return all payments made pursuant to this Agreement. You further
<PAGE> 44
Kent B. Foster
January 7, 1999
Page 18
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.
SURVIVAL - The provisions in the Sections captioned "Covenants" and
"Miscellaneous" will survive the Term of Employment. If your employment
continues after the Term of Employment, you will be subject to the obligations
imposed by each of such Sections with respect to such employment. Any
obligations that GTE has incurred under this Agreement to provide benefits that
have vested under the terms of this Agreement (including GTE's obligations in
the Section captioned "Retirement") will likewise survive the Term of
Employment. Except as provided by the preceding provisions of this Section
("Survival"), the terms of your employment after the end of the Term of
Employment will not be governed by this Agreement.
ARBITRATION - Any dispute arising out of or relating to this Agreement, except
any dispute arising out of or relating to the Sections captioned "Covenants" and
"Confidentiality," and any dispute arising out of or relating to your
employment, except a dispute arising solely out of, or relating solely to, your
ESA, will be settled by final and binding arbitration, which will be the
exclusive means of resolving any such dispute, and the parties specifically
waive all rights to pursue any other remedy, recourse, or relief. With respect
to disputes by GTE arising out of or relating to the Sections captioned
"Covenants" and "Confidentiality," GTE has retained all its rights to legal and
equitable recourse and relief, including but not limited to injunctive relief,
as referred to in Section captioned "Additional Remedies." The arbitration will
be expedited and conducted in the State of New York pursuant to the Center for
Public Resources ("CPR") Rules for Non-Administered Arbitration of Employment
Disputes in effect at the time of notice of the dispute before one neutral
arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties
mutually agree to the appointment of a different neutral arbitrator. The
arbitration will be governed by the Federal Arbitration Act, 9 U.S.C. Sections
1-16, and judgment upon the award rendered by the arbitration may be entered by
any court having jurisdiction. The finding of the arbitrator may not change the
express terms of this Agreement and shall be consistent with the arbitrator's
understanding of the findings a court of proper jurisdiction would make in
applying the applicable law to the facts underlying the dispute. In no event
whatsoever will such an arbitration award include any award of damages
<PAGE> 45
Kent B. Foster
January 7, 1999
Page 19
other than the amounts in controversy under this Agreement. The parties waive
the right to recover, in such arbitration, punitive damages. Each party hereby
agrees that the State of New York is the proper venue for any litigation seeking
to enforce any provision of this Agreement or to enforce any arbitration award
under this Section, and each party hereby waives any right it otherwise might
have to defend, oppose, or object to, on the basis of jurisdiction, venue, or
forum nonconveniens, a suit filed by the other party in any federal or state
court in the State of New York to enforce any provision of this Agreement or to
enforce any arbitration award under this Section. Each party also waives any
right it might otherwise have to seek to transfer from a federal or state court
in the State of New York a suit filed by the other party to enforce any
provision of this Agreement or to enforce any arbitration award under this
Section.
ENTIRE AGREEMENT - Except for the terms of the ESA and the other compensation
and benefit plans in which you participate, this Agreement sets forth the entire
understanding of you and GTE, and supersedes all prior agreements and
communications, whether oral or written, between GTE and you. This Agreement
will not be modified except by written agreement of you and GTE.
Kent, I believe that this generous offer provides you and your family with
financial security as our industry and GTE evolve. We recognize that 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 and returning to me by January
29, 1999.
Sincerely yours,
Charles R. Lee
cc: J.R. MacDonald
I agree to the terms described above.
- -------------------------------------
Kent B. Foster
<PAGE> 46
EXHIBIT 10.3
January 15, 1999
Michael T. Masin
[Address]
[Address]
Dear Mike:
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, GTE can expect your continued leadership for the foreseeable
future as well as your value-added advice and counsel on the broad array of
issues and challenges facing GTE today and in the future.
PURPOSE - Service Corp. enters into this Agreement with you because the
rapidly-changing and increasingly global telecommunications market, which has
resulted from the Telecommunications Act of 1996, and the proposed merger
between GTE Corporation and Bell Atlantic Corporation ("Bell Atlantic") or a
subsidiary of Bell Atlantic (the "Merger") have 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, 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 executive 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 engaging in competitive activities,
Service Corp. is providing you with the security of a fixed-term agreement, a
long-term retention
<PAGE> 47
Michael T. Masin
January 15, 1999
Page 2
incentive, participation in the GTE Merger Implementation and Retention
Incentive Program, and other benefits.
GENERAL - Under this Agreement, you will continue as a Corporate Officer and
Senior Executive of GTE. During the Term of Employment (as defined below), you
will continue to receive the same benefits as other senior executives of GTE at
your salary level (except that you will not receive involuntary 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 employment under this Agreement ("Term of Employment") will
commence on October 1, 1998, and end on September 30, 2002.
DUTIES AND RESPONSIBILITIES - You will continue to perform your duties and
responsibilities fully and faithfully (i) as a director, so long as you are
elected and serving, and (ii) as an officer, reporting only to the Board of
Directors of GTE Corporation ("Board") and/or the Chief Executive Officer(s) of
GTE Corporation ("CEO(s)"). You will serve in such executive capacities, with
such titles and authorities, as the Board or the CEO(s) of GTE may from time to
time prescribe, and you will perform all duties incidental to such positions,
shall cooperate fully with the Board and the CEO(s) and will work cooperatively
with the other officers of GTE. You will continue to devote your entire business
skill, time, and effort diligently to the affairs of GTE in accordance with the
duties assigned to you, and you will perform all such duties, and otherwise
conduct yourself, in a manner reasonably calculated in good faith by you to
promote the best interests of GTE. During the Term of Employment, except to the
extent specifically permitted in writing by the Board or the CEO(s), and except
for memberships on boards of directors that you hold on the date of this
Agreement, you will not, directly or indirectly, render any services of a
business, commercial, or professional nature to any other person or organization
other than a GTE Company or a person or organization in which GTE has a
financial interest, whether or not the services are rendered for compensation.
LOCATION - During the Term of Employment, you will perform services for GTE at
your current location, at GTE's headquarters, or at any other location
designated by GTE as necessary or appropriate for the discharge of your
responsibilities under this Agreement. In the event of any change in your
<PAGE> 48
Michael T. Masin
January 15, 1999
Page 3
principal work location, you will be eligible for relocation assistance under
the terms of any GTE relocation policy then applicable to other senior
executives of GTE at your salary level.
BASE SALARY - During the Term of Employment, your annual base salary will not be
less than $756,000 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 Employment.
EIP AND LTIP - During the Term of Employment, on an annual basis, GTE will
provide you with the opportunity to earn an annual bonus in accordance with the
terms and conditions of the GTE Executive Incentive Plan or any successor plan
("EIP") and an annual grant of a long-term incentive opportunity (currently a
stock option grant and a cash incentive award) in accordance with the terms and
conditions of the GTE Long-Term Incentive Plan or any successor plan ("LTIP"),
in each case at a level commensurate with the opportunity offered to other GTE
senior executives at your salary level.
LONG-TERM RETENTION INCENTIVE - Upon your execution of this Agreement, GTE will
credit $3,500,000 to a deferred account (the "Account") for you. The value of
the Account will be adjusted (upward or downward as appropriate) to reflect the
value that the Account would have if the balance in the Account were invested in
a mutual fund designated by you. The Account will be credited with interest at
the "Corporate Average" yield of long-term, high-grade corporate bonds as
reported by Moody's Investors Service, or such other substantially similar yield
as may be designated under the LTIP deferral regulations, from October 1, 1998,
until the date on which your initial mutual fund designation becomes effective.
Quarterly (or more frequently, if permitted by GTE's Executive Vice President -
Human Resources and Administration or his successor (the "EVP")), you may change
the designated mutual fund on a prospective basis. The crediting of interest and
investment performance and the designation, or change in designation, of a
mutual fund pursuant to this paragraph will be in accordance with any reasonable
rules or requirements imposed by the EVP. You will become vested in 60% of the
value of the Account (the "Account Balance") if you are actively employed by GTE
on September 30, 2001. You will become 100% vested in the Account Balance if you
are actively employed by GTE on September 30, 2002. The vested portion of the
Account Balance will be paid to you (or, in the event of your death, your
beneficiary) in cash as soon as practicable after it becomes vested, except to
<PAGE> 49
Michael T. Masin
January 15, 1999
Page 4
the extent that you elect to defer payment in accordance with deferral rules
prescribed by GTE. The amounts to be paid, provided, or credited pursuant to
this Section will not be treated as compensation for purposes of computing or
determining any additional benefit to be paid, provided, or credited under any
savings plan, insurance plan, pension plan, or other employee benefit plan
maintained by any GTE Company.
MERGER IMPLEMENTATION AND RETENTION INCENTIVE PROGRAM - You will participate in
the GTE Merger Implementation and Retention Incentive Program (the "Program") on
the same terms as other senior executives of GTE at your salary level. The terms
of the Program that apply to you will be set forth in a separate agreement
between you and GTE.
BOARD OF DIRECTORS - After the execution of this Agreement, you will continue to
serve as a member of the Board, and you will be nominated for election to the
Board at the annual meeting of shareowners that occurs upon the expiration of
your current term as a member of the Board after the date of this Agreement. If
you are elected to serve as a member of the Board at such annual meeting, you
also will be nominated for election to the Board at each subsequent meeting of
shareowners that occurs when your then-current term as a member of the Board
expires during the Term of Employment.
RETIREMENT -
ADDITIONAL PENSION AND BENEFIT CREDIT - Except as provided in the Section
captioned "Termination of Employment," GTE will provide you with the following
pension benefits:
(vii) EXTRA SERVICE CREDIT. If you remain employed by the GTE Companies until
September 30, 2002, you will be credited with an extra year of service
for each year that you actually work for the GTE Companies during the
Term of Employment for purposes of determining your pension benefits.
(viii) REPLACEMENT FOR PENSION ENTITLEMENTS. In order to replace certain
pension entitlements that would be payable to you had you remained with
your former employer, if you remain employed by the GTE Companies at
least until age 55 (or are involuntarily terminated without Cause (as
defined below) before age 55), you will receive a single life
<PAGE> 50
Michael T. Masin
January 15, 1999
Page 5
annuity pension of $200,000 per year (or the actuarial equivalent
thereof pursuant to an optional form of payment) when you leave the
GTE Companies. In the event of your death, and if you have not
received a lump-sum pension payment, your then-surviving spouse will
receive this benefit unreduced for the remainder of her life.
(ix) EARLY RETIREMENT BENEFIT. If you remain employed by the GTE Companies
until September 30, 2002, you will be considered to have not less than
76 points and 15 years of Accredited Service for purposes of
determining (a) your eligibility for early retirement benefits under
the GTE Supplemental Executive Retirement Plan or any successor thereto
(the "SERP"), (b) your eligibility for Executive Retirement Life
Insurance Plan ("ERLIP"), retiree medical, and other post-retirement
benefits, as in effect from time to time, and (c) for purposes of
determining the exercisability of stock options.
(x) PLAN AMENDMENT. If you remain employed by the GTE Companies until
September 30, 2002, and if any GTE tax-qualified defined benefit plan
in which you participate (the "Qualified Plan") is amended after the
date of this Agreement, your benefits under the SERP will be equal to
the greater of the benefits determined under the terms of the Qualified
Plan and the SERP in effect on the date of this Agreement or the
benefits determined under the terms of the Qualified Plan in effect on
the date as of which your benefits are determined (taking into account
in each case the extra service credit provided by paragraph (i),
above), offset by any benefits due to you from the Qualified Plan.
There will be no duplication of benefits between the pension benefits
prescribed by the preceding provisions of this paragraph (iv) and the
pension payable from the Qualified Plan or the SERP.
If your employment terminates before September 30, 2002, 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 be entitled to the benefits provided by the provisions of paragraphs
(i), (iii), and (iv) of this Section ("Additional Pension and Benefit Credit").
If your employment terminates before September 30, 2002, by reason of your death
or Disability (as defined below), you will be credited with an extra year of
service for each year for which you actually worked for Service Corp. during
<PAGE> 51
Michael T. Masin
January 15, 1999
Page 6
the Term of Employment for purposes of determining your pension benefits as well
as the benefits provided by the provisions of paragraph (ii) of this Section
("Additional Pension and Benefit Credit"), but you will not be entitled to any
other benefits under the preceding provisions of this Section.
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 the Executive Severance Agreement between
you and GTE Service Corp., dated June 4, 1998 (the "ESA")), you will be entitled
to the benefits provided by the preceding provisions of this Section as though
your employment continued until the end of the Term of Employment, including the
service credit provided in accordance with this Section, in lieu of the service
credit provided by your ESA, subject to your execution of the release prescribed
by the Section captioned "Release" and your compliance with the Sections
captioned "Covenants" and Confidentiality; however, the other provisions of your
ESA will not be adversely affected by this Agreement.
The benefits provided by the preceding provisions of this Section ("Additional
Pension and Benefit Credit") will be paid out of GTE's funded plans, out of
GTE's general assets, or both, at GTE's discretion.
TERMINATION PROVISIONS -
o CHANGE IN CONTROL - Upon the occurrence of a Qualifying Termination
following a Change in Control (as those terms are defined in your ESA)
during the Term of Employment, you will be entitled to receive a pension
commencing immediately, and you will receive service credit in accordance
with the Section captioned "Additional Pension and Benefit Credit" in lieu
of the service credit provided under your ESA. Upon the occurrence of a
Qualifying Termination following a Change in Control during the Term of
Employment, you also will become entitled to receive the Long-Term
Retention Incentive, payable in accordance with (and on the date(s)
prescribed by) the Section captioned "Long-Term Retention Incentive,"
subject, however, to your execution of the release prescribed by the
Section captioned "Release" and your compliance with the covenants set
forth in the Sections captioned "Covenants" and "Confidentiality." Although
you will not be entitled to any additional payments, benefits, or grants
under this
<PAGE> 52
Michael T. Masin
January 15, 1999
Page 7
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) during the Term of Employment, except as
provided above in this Section ("Change in Control"), your entitlement to
benefits will be determined solely by your ESA and any relevant GTE
compensation and benefit plans and award agreements. By way of example, if
a Qualifying Termination occurs as a result of your failure to be nominated
to the Board in accordance with the Section captioned "Board of Directors"
or other Good Reason (as that term is defined in your ESA), except as
provided above in this Section, 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.
o VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this
Agreement at any time by giving the CEO(s) 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 GTE benefits will cease to accrue, you will forfeit
all unvested stock options and the then-unvested portion of your Account
Balance (as defined in the Section captioned "Long-Term Retention
Incentive"), and you will forfeit all rights under this Agreement which as
of the relevant date have not yet been earned under this Agreement. A
termination of employment in accordance with this Section ("Voluntary
Termination by You"), including retirement, will be deemed a "Voluntary
Termination."
o TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of Employment,
you terminate employment because of your death or Disability (as defined
below), you will immediately become 100% vested in your Account Balance,
and your Account Balance will be distributed immediately to you (or, in the
event of your death, your beneficiary). Except as provided by the preceding
sentence, if, during the Term of Employment, you terminate
<PAGE> 53
Michael T. Masin
January 15, 1999
Page 8
employment on account of death or Disability (as defined below), your base
salary and other GTE benefits will cease to accrue, and GTE will pay you or
your beneficiary, as appropriate, all benefits to which you or your
beneficiary has a right pursuant to GTE's compensation and benefit plans.
For purposes of this Agreement, you will be considered to have a Disability
if an illness or injury prevents you from performing your duties (as they
existed immediately before the illness or injury) on a full-time basis for
six consecutive months.
o INVOLUNTARY TERMINATION BY GTE - GTE may terminate your employment under
this Agreement at any time, for any reason. However, if GTE terminates your
employment for any reason other than death, Disability (as defined above),
or Cause (as defined below), such termination will be deemed an Involuntary
Termination by GTE, and, subject to signing and delivering the release
required by the Section captioned "Release" and your compliance with the
covenants set forth in the Sections captioned "Covenants" and
"Confidentiality," you will be entitled to receive the following payments,
credits, and benefits, in lieu of any payment, credit, or benefit otherwise
provided pursuant to the Sections captioned "General," "Base Salary," "EIP
and LTIP," "Long-Term Retention Incentive," and "Retirement," provided that
each payment, credit, and benefit will be contingent upon the absence, at
the time such payment, credit, or benefit is due, of any act that would
constitute a breach of this Agreement by you, and provided further that
each such payment, credit, or benefit will be paid or provided at the same
time that the payment, credit, or benefit that it replaces otherwise would
have been paid or provided:
o Salary. An amount equal to the salary that would have been paid to
you under the Section captioned "Base Salary" through the
remaining Term of Employment, based on the rate of salary in
effect under such Section immediately prior to your separation
from service with the GTE Companies.
o EIP. An amount equal to the value of the awards that you would
have been entitled to receive under the EIP for the remaining Term
of Employment, equal to 115% of norm (or its equivalent) at your
salary level for each year (but not more than the actual corporate
rating for that year) multiplied by the percentage of the year
that occurs before September 30, 2002. The amounts determined
pursuant to this
<PAGE> 54
Michael T. Masin
January 15, 1999
Page 9
paragraph will be paid to you in accordance with the provisions
of the EIP that apply from time to time to other senior
executives of GTE at your salary level.
o Stock Options. Stock appreciation rights ("SARs") with respect to
the same number of shares that are subject to stock options
granted, after the date of your separation from service, pursuant
to the LTIP to senior executives of GTE at your salary level
during the Term of Employment. Such SARs will be subject to the
same terms and conditions that apply to such stock options, except
that (1) the SARs will be fully vested on September 30, 2002, and
(2) you will have a period of at least 90 days following September
30, 2002, within which to exercise the SARs. In addition, with
respect to any and all GTE stock options that are outstanding on
the date of your separation from service, you will be deemed, for
purposes of determining the duration of your right to exercise any
and all such stock options, to have remained in active service
with the GTE Companies continuously through the Term of
Employment, and then to have separated from service with whatever
rights would then be applicable to a holder of such options under
the LTIP; provided that on September 30, 2002, all then-nonvested
options will be immediately vested, and you will have a minimum of
90 days from September 30, 2002, to exercise all then-outstanding
GTE stock options (but not exceeding the maximum exercise period
permitted by the LTIP).
o LTIP Awards. The value of your then-outstanding and future
performance-bonus awards (that is, the cash bonus awards under the
LTIP), if any, which will be deemed equal to 75% of target (or its
equivalent) for your salary level for each award cycle (but not
more than the actual corporate rating for the award cycle)
multiplied by the percentage of the award cycle that occurs before
September 30, 2002; provided that, for purposes of this paragraph,
any target award that has not been established at your separation
from service will be deemed to be equal to the target award
established at the time of each award cycle for other senior
executives of GTE at your salary level (as that salary level was
established immediately before your separation from service). The
amounts determined pursuant to this paragraph ("LTIP Awards") will
be paid to you in accordance with the
<PAGE> 55
Michael T. Masin
January 15, 1999
Page 10
provisions of the LTIP that apply from time to time to other
senior executives of GTE at your salary level.
o Long-Term Retention Incentive. The Long-Term Retention Incentive
payments prescribed by the Section captioned "Long-Term Retention
Incentive," paid in accordance with the provisions of such Section
as though you had not separated from service before September 30,
2002.
o Financial Counseling and Outplacement. Financial planning services
until September 30, 2002, and outplacement services, consistent
with GTE policy then in effect for other senior executives at your
salary level.
o Other Benefits. All other payments, benefits, and grants due you
under this Agreement (but excluding all perquisites, e.g., club
memberships, credit cards, air travel rights, car allowance, and
car service (which will cease)) until September 30, 2002, as and
when such payments, benefits, and grants would have been provided
if your employment under this Agreement had not been terminated.
Notwithstanding the foregoing provisions of this Section ("Involuntary
Termination by GTE"), 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 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 GTE has obligations to you under this Section
("Involuntary Termination by GTE"), you will keep GTE informed
regarding the terms and conditions of any subsequent employment or
self-employment and the corresponding compensation and benefits earned
from such employment or self-employment, and you will provide or cause
to be provided to GTE, in writing, correct, complete, and timely
information concerning the same.
<PAGE> 56
Michael T. Masin
January 15, 1999
Page 11
o TERMINATION FOR GOOD REASON - You may terminate your employment under this
Agreement for Good Reason by giving the CEO(s) 30 calendar days' written
notice of your intent to so terminate which sets forth in reasonable detail
the facts and circumstances deemed to provide a basis for such termination.
For purposes of this Agreement, "Good Reason" means a material breach by
GTE of the terms and conditions of this Agreement.
Notwithstanding the foregoing, GTE will have 15 calendar days from its
receipt of such notice to cure the action specified in the notice. In the
event of a cure by GTE within the 15-day period, the action in question
will not constitute Good Reason.
Except as provided in the preceding paragraph, upon the lapse of the 30
calendar days' notice period, the Good Reason termination will take effect,
and your obligation to serve GTE, and GTE's obligation to employ you, under
the terms of this Agreement will terminate simultaneously, and you will be
deemed to have incurred an Involuntary Termination, with the consequences
described above.
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.
o TERMINATION FOR CAUSE - Nothing in this Agreement prevents GTE from
terminating your employment under this Agreement for Cause. In the event of
your termination for Cause, you will forfeit the then-unvested portion of
your Account Balance, and GTE will pay you your full accrued base salary
and accrued vacation time through the date of your termination, and GTE
will have no further obligations under this Agreement, except as otherwise
provided in the Section captioned "Replacement for Pension Entitlements."
For purposes of this Agreement, "Cause" is defined as a good faith
determination by the CEO(s), 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 GTE's Executive Compensation and Organizational Structure
Committee (the "ECC") determines in its sole discretion that (i) consummation
<PAGE> 57
of a transaction may be contingent upon the parties' ability to use pooling of
interest accounting and (ii) a provision of this Agreement would preclude the
use of pooling of interest accounting, the ECC may, in its sole discretion,
eliminate or modify that provision to the extent required to allow pooling of
interest accounting. If the Long-Term Retention Incentive is rescinded pursuant
to this Section ("Rescission"), the covenants appearing in paragraphs (a), (b),
and (c) of the Section captioned "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 GTE 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) PROHIBITED CONDUCT - During the period of your employment with any GTE
Company, and for a period ending with the later of (i) 24 months following your
termination of employment for any reason from all GTE Companies or (ii)
September 30, 2002, you, without the prior written consent of the CEO(s), will
not:
o personally engage in Competitive Activities (as defined below); or
o work for, own, manage, operate, control, or participate in the
ownership, management, operation, or control of, or provide consulting
or advisory services to, any individual, partnership, firm,
corporation, or institution engaged in Competitive Activities, or any
company or person affiliated with such person or entity engaged in
Competitive Activities; provided that your purchase or holding, for
investment purposes, of securities of a publicly-traded company shall
not constitute "ownership" or "participation in ownership" for purposes
of this paragraph so long as your equity interest in any such company
is less than a controlling interest.
<PAGE> 58
Michael T. Masin
January 15, 1999
Page 13
(b) COMPETITIVE ACTIVITIES - For purposes of this Agreement, "Competitive
Activities" means business activities relating to products or services of the
same or similar type as the products or services (i) which are sold (or,
pursuant to an existing business plan, will be sold) to paying customers of one
or more GTE Companies, and (ii) for which you then have responsibility to plan,
develop, manage, market, or oversee, or had any such responsibility within your
most recent 24 months of employment with the GTE Companies. Notwithstanding the
previous sentence, a business activity shall not be treated as a Competitive
Activity if the geographic marketing area of the relevant products or services
sold by you or a third party does not overlap with the geographic marketing area
for the applicable products and services of the GTE Companies.
(c) INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment
with any GTE Company, and for a period ending with the later of (i) 24 months
following your termination of employment for any reason from all GTE Companies
or (ii) September 30, 2002, you will not, without the written consent of the
CEO(s):
o recruit or solicit any employee of any GTE Company for employment or
for retention as a consultant or service provider;
o hire or participate (with another company or third party) in the
process of hiring (other than for a GTE Company) any person who is then
an employee of any GTE Company, or provide names or other information
about GTE employees to any person or business (other than a GTE
Company) under circumstances which could lead to the use of that
information for purposes of recruiting or hiring;
o interfere with the relationship of any GTE Company with any of its
employees, agents, or representatives;
o solicit or induce, or in any manner attempt to solicit or induce, any
client, customer, or prospect of a GTE Company (1) to cease being, or
not to become, a customer of a GTE Company or (2) to divert any
business of such customer or prospect from a GTE Company; or
o otherwise interfere with, disrupt, or attempt to interfere with or
disrupt, the relationship, contractual or otherwise, between any GTE
Company
<PAGE> 59
Michael T. Masin
January 15, 1999
Page 14
and any of its customers clients, prospects, suppliers, consultants,
or employees.
(d) RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or
before your termination of employment for any reason with all GTE Companies, you
will return to the appropriate GTE Company all property owned by each such
company or in which any such company has an interest, including files,
documents, data and records (whether on paper or in tapes, disks, or other
machine-readable form), office equipment, credit cards, and employee
identification cards. You acknowledge that GTE or an applicable GTE Company is
the rightful owner of any programs, ideas, inventions, discoveries, copyright
material, or trademarks that you may have originated or developed, or assisted
in originating or developing, during your period of employment with any GTE
Company, where any such origination or development involved the use of company
time or resources, or the exercise of your responsibilities for or on behalf of
any such company. You will at all times, both before and after termination of
employment, cooperate with GTE in executing and delivering documents requested
by any GTE Company, and taking any other actions, that are necessary or
requested by GTE to assist any GTE Company in patenting, copyrighting, or
registering any programs, ideas, inventions, discoveries, copyright material, or
trademarks, and to vest title thereto in the applicable company.
(e) PROPRIETARY AND CONFIDENTIAL INFORMATION - You will at all times preserve
the confidentiality of all proprietary information and trade secrets of any and
all GTE Companies, except to the extent that disclosure of such information is
legally required. "Proprietary information" means information that has not been
disclosed to the public and that is treated as confidential within the business
of any GTE Company, such as strategic or tactical business plans; undisclosed
financial data; ideas, processes, methods, techniques, systems, patented or
copyrighted information, models, devices, programs, computer software, or
related information; documents relating to regulatory matters and correspondence
with governmental entities; undisclosed information concerning any past,
pending, or threatened legal dispute; pricing and cost data; reports and
analyses of business prospects; business transactions which are contemplated or
planned; research data; personnel information and data; identities of users and
purchasers of any GTE Company's products or services; and other confidential
matters pertaining to or known by one or more GTE
<PAGE> 60
Michael T. Masin
January 15, 1999
Page 15
Companies, including confidential information of a third party which you know or
should know a GTE Company is bound to protect.
(f) WAIVER - Nothing in this Agreement will bar you from requesting, at the time
of your termination of employment or at any time thereafter, that the CEO(s), in
his/their sole discretion, waive in writing GTE's rights to enforce some or all
of this Section ("Covenants").
(g) OTHER AGREEMENTS AND POLICIES - 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 subject matter of the foregoing
obligations.
MISCELLANEOUS -
GTE - For purposes of this Agreement, "GTE" means GTE Corporation, its
successors, and assigns and all of the GTE Companies; "GTE Companies" means all
of, and "GTE Company" means any one of, GTE Corporation, all corporate
subsidiaries or other companies affiliated with GTE Corporation, all companies
in which GTE Corporation directly or indirectly owns a substantial equity
interest, and their successors and assigns, including any company into which GTE
Corporation is merged and its subsidiaries and affiliates. In addition, in this
Agreement, after the consummation of the Merger, "GTE Corporation" includes Bell
Atlantic. Similarly, after the consummation of the Merger, "Board" refers to the
Board of Directors of Bell Atlantic.
NONDUPLICATION OF BENEFITS/NO SEVERANCE - The payment of any benefits hereunder
will be in lieu of any GTE Involuntary Separation Program ("ISEP") or other
separation or severance benefits and 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 you 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 the 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
<PAGE> 61
Michael T. Masin
January 15, 1999
Page 16
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.
FORFEITURE OF DEFERRED AMOUNTS - If you breach any of the obligations set forth
in the Section captioned "Covenants" or engage in serious misconduct that is
contrary to written policies of GTE or is harmful to any GTE Company or its
reputation, you may forfeit all or part of any amounts that you defer or accrue
under any GTE-sponsored deferred compensation program after your execution of
this Agreement and any interest or earnings thereon.
PAYMENTS SUBJECT TO EXCISE TAX - Your ESA provides for the payment of an
additional amount if you receive any amount that is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended.
EFFECT ON EXECUTIVE SEVERANCE AGREEMENT - The execution of this Agreement will
not alter or amend your ESA, provided that the execution of this Agreement, and
the provision of compensation and benefits pursuant to this Agreement, will not
create a "Good Reason" for purposes of your ESA.
WAIVER - Failure to insist upon strict compliance with any of the terms,
covenants, or conditions of this Agreement will not be deemed a waiver of such
term, covenant, or condition, nor will any waiver or relinquishment of any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times.
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
<PAGE> 62
Michael T. Masin
January 15, 1999
Page 17
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 his Agreement to
"Service Corp." will be deemed to refer to the assignee. However, you may not
assign your rights and obligations under this Agreement.
SEVERABILITY - The agreements contained herein and within the release prescribed
by the Section captioned "Release" will each constitute a separate agreement
independently supported by good and adequate consideration, and will each be
severable from the other provisions of the Agreement and such release. If an
arbitrator or court of competent jurisdiction determines that any term,
provision, or portion of this Agreement or such release is void, illegal, or
unenforceable, the other terms, provisions and portions of this Agreement or
such release will remain in full force and effect, and the terms, provisions,
and portions that are determined to be void, illegal, or unenforceable will
either be limited so that they will remain in effect to the extent permissible
by law, or such arbitrator or court will substitute, to the extent enforceable,
provisions similar thereto or other provisions, so as to provide to GTE, to the
fullest extent permitted by applicable law, the benefits intended by this
Agreement and such release.
ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether
legal, equitable, or otherwise, that each of the parties to this Agreement may
have, you acknowledge that (i) the covenants in the Sections captioned
"Covenants" and "Confidentiality" are essential to the continued good will and
profitability of GTE; (ii) you have broad-based skills that will serve as the
basis for employment opportunities that are not prohibited by the covenants in
the Sections captioned "Covenants" and "Confidentiality;" (iii) when your
employment with GTE terminates, you will be able to earn a livelihood without
<PAGE> 63
Michael T. Masin
January 15, 1999
Page 18
violating any of the terms of this Agreement; (iv) irreparable damage to GTE
will result in the event that the foregoing sections of this Agreement are not
specifically enforced and that monetary damages will not adequately protect GTE
from a breach of these sections of the Agreement; (v) if any dispute arises
concerning the violation by you of these provisions of the Agreement, an
injunction may be issued restraining such violation pending the determination of
such controversy, and no bond or other security may be required in connection
therewith; (vi) such covenants will continue to apply after any expiration,
termination, or cancellation of this Agreement; (vii) your breach of any of such
covenants will result in your immediate forfeiture of all rights under this
Agreement; and (viii) in the event of any such breach by you, you will, at GTE's
request, return all payments made pursuant to this Agreement. 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.
SURVIVAL - The provisions in the Sections captioned "Covenants" and
"Miscellaneous" will survive the Term of Employment. If your employment
continues after the Term of Employment, you will be subject to the obligations
imposed by each of such Sections with respect to such employment. Any
obligations that GTE has incurred under this Agreement to provide benefits that
have vested under the terms of this Agreement (including GTE's obligations in
the Section captioned "Retirement") will likewise survive the Term of
Employment. Except as provided by the preceding provisions of this Section
("Survival"), the terms of your employment after the end of the Term of
Employment will not be governed by this Agreement.
ARBITRATION - Any dispute arising out of or relating to this Agreement, except
any dispute arising out of or relating to the Sections captioned "Covenants" and
"Confidentiality," and any dispute arising out of or relating to your
employment, except a dispute arising solely out of, or relating solely to, your
ESA, will be settled by final and binding arbitration, which will be the
exclusive means of resolving any such dispute, and the parties specifically
waive all rights to pursue any other remedy, recourse, or relief. With respect
to disputes by GTE arising out of or relating to the Sections captioned
"Covenants" and "Confidentiality," GTE has retained all its rights to legal and
equitable recourse and relief, including but not limited to injunctive relief,
as referred to in Section captioned "Additional Remedies." The arbitration will
be expedited and conducted in the State of New York pursuant to the Center for
Public
<PAGE> 64
Michael T. Masin
January 15, 1999
Page 19
Resources ("CPR") Rules for Non-Administered Arbitration of Employment Disputes
in effect at the time of notice of the dispute before one neutral arbitrator
appointed by CPR from the CPR Panel of neutrals unless the parties mutually
agree to the appointment of a different neutral arbitrator. The arbitration will
be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16, and judgment
upon the award rendered by the arbitration may be entered by any court having
jurisdiction. The finding of the arbitrator may not change the express terms of
this Agreement and shall be consistent with the arbitrator's understanding of
the findings a court of proper jurisdiction would make in applying the
applicable law to the facts underlying the dispute. In no event whatsoever will
such an arbitration award include any award of damages other than the amounts in
controversy under this Agreement. The parties waive the right to recover, in
such arbitration, punitive damages. Each party hereby agrees that the State of
New York is the proper venue for any litigation seeking to enforce any provision
of this Agreement or to enforce any arbitration award under this Section, and
each party hereby waives any right it otherwise might have to defend, oppose, or
object to, on the basis of jurisdiction, venue, or forum nonconveniens, a suit
filed by the other party in any federal or state court in the State of New York
to enforce any provision of this Agreement or to enforce any arbitration award
under this Section. Each party also waives any right it might otherwise have to
seek to transfer from a federal or state court in the State of New York a suit
filed by the other party to enforce any provision of this Agreement or to
enforce any arbitration award under this Section.
ENTIRE AGREEMENT - Except for the terms of the ESA and the other compensation
and benefit plans in which you participate, this Agreement sets forth the entire
understanding of you and GTE, and supersedes all prior agreements and
communications, whether oral or written, between GTE and you including, without
limitation, my letter to you dated October 20, 1994. This Agreement will not be
modified except by written agreement of you and GTE.
Mike, I believe that this generous offer provides you and your family with
financial security as our industry and GTE evolve. We recognize that 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 and returning to me by January
29, 1999.
Sincerely yours,
Charles R. Lee
cc: J.R. MacDonald
I agree to the terms described above.
- -----------------------------------------------
Michael T. Masin
<PAGE> 1
Exhibit 10.5
AMENDMENT TO LONG-TERM INCENTIVE PLAN
The definition of "Change in Control" in Section 2 of Appendix A to the GTE
Corporation 1997 Long-Term Incentive Plan is hereby amended, effective January
1, 1999, by replacing the period at the end of paragraph (d)(iii) thereof with a
semicolon and by adding the following paragraph at the end of such definition:
provided that, notwithstanding the preceding provisions of this
definition of "Change in Control," in the case of Awards granted on or
after February 16, 1999, neither (1) the merger between the Corporation
and Bell Atlantic Corporation ("Bell Atlantic") or a subsidiary of Bell
Atlantic, pursuant to the Agreement and Plan of Merger dated as of July
27, 1998, among Bell Atlantic, Beta Gamma Corporation, and the
Corporation (the "Agreement"), as such Agreement may be amended from
time to time (the "Merger") nor (2) any proposal, agreement (including
the Agreement), or action to approve, effectuate, or implement the
Merger nor (3) any change in the membership of the Board as a result of
the Merger shall constitute or create a Change in Control.
<PAGE> 1
Exhibit 10.6
AMENDMENT TO EXECUTIVE INCENTIVE PLAN
The definition of "Change in Control" in Section 2 of Appendix A to the GTE
Corporation 1997 Executive Incentive Plan is hereby amended, effective January
1, 1999, by replacing the period at the end of paragraph (d)(iii) thereof with a
semicolon and by adding the following paragraph at the end of such definition:
provided that, notwithstanding the preceding provisions of this
definition of "Change in Control," in the case of Awards for Plan Years
beginning on or after January 1, 1999, neither (1) the merger between
the Corporation and Bell Atlantic Corporation ("Bell Atlantic") or a
subsidiary of Bell Atlantic, pursuant to the Agreement and Plan of
Merger dated as of July 27, 1998, among Bell Atlantic, Beta Gamma
Corporation, and the Corporation (the "Agreement"), as such Agreement
may be amended from time to time (the "Merger") nor (2) any proposal,
agreement (including the Agreement), or action to approve, effectuate,
or implement the Merger nor (3) any change in the membership of the
Board as a result of the Merger shall constitute or create a Change in
Control.
<PAGE> 1
EXHIBIT 10.10
GTE EXECUTIVE SALARY DEFERRAL PLAN
AMENDED AND RESTATED
EFFECTIVE AS OF SEPTEMBER 1, 1997
<PAGE> 2
GTE EXECUTIVE SALARY DEFERRAL PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I INTRODUCTION PAGE
<S> <C> <C>
Name of Plan 1
Purposes of Plan 1
Gender and Number 1
Effective Date 1
ARTICLE II DEFINITIONS 2
ARTICLE III ELIGIBILITY AND ELECTION TO DEFER
Eligibility 7
Salary Deferral Amounts 7
Election to Defer 7
Designation of Beneficiaries 9
ARTICLE IV ACCOUNTS AND INTEREST
Accounts 10
Interest 10
Matching Contributions 11
Hypothetical Nature of Accounts and Investments 12
ARTICLE V PAYMENTS
Exclusive Entitlement to Payment 13
Method of Payment 13
Payment Commencement 14
Interim Payments 15
Limitations on Rights to Payment 15
ARTICLE VI MISCELLANEOUS
Plan Administration 17
Appeals Procedure 18
Change in Control 18
Rights Not Assignable 19
Inability to Locate Participants and Beneficiaries 19
Withholding Taxes 19
Certain Rights Reserved 19
Severability 20
Titles and Headings Not to Control 20
Governing Law 20
</TABLE>
<PAGE> 3
ARTICLE I
INTRODUCTION
1.01. NAME OF PLAN.
This Plan shall be known as the GTE Executive Salary Deferral Plan.
1.02. PURPOSES OF PLAN.
The purposes of the Plan is to provide certain employees of the Company the
opportunity to elect to defer compensation not otherwise eligible for deferral
under other deferred compensation arrangements maintained by the Company and to
enable such employees to receive the benefit of additional deferred
compensation that is comparable to certain matching contributions that the Code
prevents such employees from receiving under the GTE Savings Plan.
1.03. GENDER AND NUMBER.
Masculine pronouns shall refer to both males and females. The singular form
shall include the plural, where appropriate.
1.04. EFFECTIVE DATE.
The Plan shall be effective as of July 1, 1994. The Plan was amended and
restated effective as of September 5, 1996 and this amendment and restatement
is effective as of September 1, 1997.
<PAGE> 4
ARTICLE II
DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in capitalized form in the Plan, shall have the meanings set forth below.
2.01. AFFILIATE. "Affiliate" shall have the meaning ascribed to such term in
Rule 1 2b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended from time to time.
2.02. ANNUAL DEFERRAL. "Annual Deferral" shall mean the deferral with respect
to a Plan Year elected by a Participant in accordance with Section 3.03.
2.03. ARTICLE. "Article" shall mean an article of the Plan.
2.04. ASSOCIATE. "Associate" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended from time to time.
2.05. BASE AMOUNT "Base Amount" shall mean annual base salary in the amount
of $150,000, as adjusted from time to time pursuant to section 401(a)(17) of
the Code.
2.06 BENEFICIAL OWNER. A Person shall be deemed the "Beneficial Owner" of;
and shall be deemed to "beneficially own," any securities:
(1) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(2) which such Person or any of such Person's Affiliates or Associates
has (A) the right or obligation to acquire (whether such right or obligation is
exercisable or effective immediately or only after the passage of time)
pursuant to any agreement, arrangement, or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange rights, rights
(other than the rights granted pursuant to the Rights Plan), warrants or
options, or otherwise; provided that a Person shall not be deemed the
"Beneficial Owner" of; or to "beneficially own," securities tendered pursuant
to a tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (B) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that a
Person shall not be deemed the "Beneficial Owner" of; or to "beneficially own,"
any security under this clause (B) if the agreement, arrangement, or
understanding to vote such security (i) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Securities
Exchange Act of 1934, as
<PAGE> 5
amended from time to time, and (ii) is not also then reported 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
(3) which are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person or any of
such Person's Affiliates or Associates has any agreement, arrangement, or
understanding (whether or not in writing) or with which such Person or any of
such Person's Affiliates have otherwise formed a group for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy as described
in clause (B)(i) of paragraph (2), above), or disposing of any securities of
GTE Corporation.
2.07. BOARD. "Board" shall mean the Board of Directors of GTE Corporation.
2.08. CHANGE IN CONTROL. A "Change in Control" shall occur when and only
when the first of the following events occurs:
(1) an acquisition (other than directly from GTE Corporation) of
securities of GTE Corporation by any Person, immediately after which such
Person, together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner of securities of GTE Corporation representing 20% 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
Corporation in a Non-Control Acquisition shall not constitute an acquisition
that would cause a Change in Control; or
(2) three or more directors, whose election or nomination for election
is not approved by a majority of the members of the "Incumbent Board" (as
defined below) then serving as members of the Board, are elected within any
single 12-month period to serve on the Board; provided that an individual whose
election or nomination for election is approved as a result of either an actual
or threatened "Election Contest" (as described in Rule 14a-11 promulgated under
the 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
(3) members of the Incumbent Board cease for any reason to constitute
at least a majority of the Board; "Incumbent Board" shall mean individuals who,
as of the close of business on April 20, 1994, are members of the Board;
provided that, if the election, or nomination for election by GTE Corporation's
shareholders, of any new director was approved by a vote of at least
three-quarters of the Incumbent Board, such new director shall, for purposes of
the Plan, be considered as a member of the Incumbent Board; provided further
that no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened Election Contest or other actual or threatened Proxy Contest,
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
<PAGE> 6
(4) approval by shareholders of GTE Corporation of:
(A) a merger, consolidation, or reorganization involving GTE
Corporation, unless
(i) the shareholders of GTE Corporation, immediately before
the merger, consolidation, or reorganization, own directly or
indirectly immediately following such merger, consolidation, or
reorganization, at least 50% of the combined voting power of the
outstanding voting securities of the corporation resulting from
such merger, consolidation, or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the voting securities immediately before such merger,
consolidation, or reorganization;
(ii) individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation, or reorganization constitute at least
a majority of the board of directors of the Surviving Corporation;
and
(iii) no Person (other than GTE Corporation or any Subsidiary,
any employee benefit plan (or any trust forming a part thereof)
maintained by GTE Corporation, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation, or reorganization, had Beneficial Ownership of
securities representing 20% (or such lower percentage the
acquisition of which would cause a Change in Control pursuant to
paragraph (1) of this definition of "Change in Control") or more
of the Voting Power) has Beneficial Ownership of securities
representing 20% (or such lower percentage the acquisition of
which would cause a Change in Control pursuant to paragraph (1) of
this definition of "Change in Control") or more of the combined
voting power of the Surviving Corporation's then outstanding
voting securities;
(B) a complete liquidation or dissolution of GTE Corporation; or
(C) an agreement for the sale or other disposition of all or
substantially all of the assets of GTE Corporation to any Person (other than a
transfer to a Subsidiary).
2.09. CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
2.10. COMMITTEE. "Committee" shall mean the Executive Compensation and
Organizational Structure Committee of the Board, or any successor thereto.
2.11. COMPANY. "Company" shall mean GTE Corporation and its Subsidiaries.
2.12. DISABILITY. "Disability" shall mean "Disability" as that term is
defined in the GTE Service Corporation Plan for Employees' Pensions, as amended
from time to time.
2.13. ELIGIBLE AMOUNT. "Eligible Amount" shall mean that part of an Eligible
Employee's annual base salary from the Company in excess of the Base Amount.
2.14. ELIGIBLE EMPLOYEE. "Eligible Employee" shall mean an employee of the
Company whose annual base salary for services performed for the Company is paid
in United States currency and exceeds the Base Amount.
<PAGE> 7
2.15. GTE COMMON STOCK "GTE Common Stock" shall mean the common stock of GTE
Corporation.
2.16. MATCHABLE COMPENSATION. "Matchable Compensation" shall mean that
portion of the Eligible Amount that does not exceed the amount obtained by
multiplying the Base Amount by the ratio that 235.84 bears to 150.00; provided
that, effective as of January 1, 1998, "Matchable Compensation" shall mean the
Eligible Amount.
2.17. MATCHING PERCENTAGE. "Matching Percentage" shall mean the rate at
which Matchable Compensation shall be matched by the Company under the terms of
the Plan. With respect to each Plan Year, the Matching Percentage shall equal
the rate at which the Company makes Company-Matching Contributions (as defined
in the GTE Savings Plan) under the GTE Savings Plan with respect to that Plan
Year.
2.18. MOODY'S RATE. "Moody's Rate" shall mean the "Corporate Average" yield
of long-term, high-grade corporate bonds as reported by Moody's Investors
Service, or such other substantially similar yield designated by the Plan
Administrator as the applicable interest rate.
2.19. NON-CONTROL ACQUISITION. "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) GTE Corporation or (B) any of its Subsidiaries, (2) GTE
Corporation or any of its Subsidiaries, or (3) any Person in connection with a
Non-Control Transaction.
2.20. NON-CONTROL TRANSACTION "Non-Control Transaction" shall mean a
transaction described in clauses (i) through (iii) of subparagraph (4)(A) of
Section 2.08.
2.21. PARTICIPANT. "Participant" shall mean each Eligible Employee who makes
an election pursuant to Section 3.03 and whose accounts hereunder have a
positive balance.
2.22. PERSON. "Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity.
2.23. PLAN. "Plan" shall mean this GTE Executive Salary Deferral Plan, on
the date of adoption hereof and as it may be amended from time to time.
2.24. PLAN ADMINISTRATOR. "Plan Administrator" shall mean the chief human
resources officer of GTE Service Corporation or any other Person designated by
the Committee to serve as Plan Administrator.
2.25 PLAN YEAR. "Plan Year" shall mean the calendar year, except that the
first Plan Year shall begin on the date determined by the Plan Administrator
and shall end on December 31, 1994.
2.26. RETIREMENT "Retirement" shall mean retirement at age 65 without a
service pension pursuant to a Company-sponsored defined benefit pension plan,
retirement at any age with a service pension
<PAGE> 8
pursuant to a Company-sponsored defined benefit pension plan, or retirement
with a disability pension pursuant to a Company-sponsored disability welfare
benefit plan.
2.27. RIGHTS PLAN "Rights Plan" shall mean the Rights Agreement, dated as of
December 7, 1989, between GTE Corporation and State Street Bank and Trust
Company (now administered by First National Bank of Boston), as it may be
amended from time to time, or any successor thereto.
2.28. SECTION. "Section" shall mean a section of the Plan.
2.29. SUBSIDIARY. "Subsidiary" of any Person shall mean any corporation or
other entity of which at least 80% (or such lesser percentage as the Plan
Administrator may determine) of the voting power of the voting equity
securities or voting interest is owned, directly or indirectly, by such Person.
2.30. TERMINATION. "Termination" shall mean a separation from service with
the Company for any reason other than Retirement, Termination for Cause,
Disability, or death.
2.31. TERMINATION FOR CAUSE. "Termination for Cause" shall mean the
termination by the Company of a Participant by virtue of that Participant's (1)
engagement in unlawful acts intended to result in the substantial personal
enrichment of the Participant at the Company's expense, or (2) engagement
(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. A Participant's voluntary termination of employment with
or Retirement from the Company with the intent to avert a Termination for Cause
shall for purposes of the Plan be deemed a Termination for Cause.
2.32. VOTING POWER. "Voting Power" shall mean the voting power of all
securities of GTE Corporation then outstanding generally entitled to vote for
the election of directors of GTE Corporation.
<PAGE> 9
ARTICLE III
ELIGIBILITY AND ELECTION TO DEFER
3.01. ELIGIBILITY.
(a) Eligible Employees shall be eligible to participate in the Plan.
(b) An employee who first becomes an Eligible Employee other than on
the first day of a Plan Year shall be eligible to participate in the Plan as
soon as administratively practicable after the beginning of the first pay
period in which his annual base salary exceeds the Base Amount.
3.02. SALARY DEFERRAL AMOUNTS.
Each Participant shall be eligible to defer up to 100% (or such lesser
percentage as the Plan Administrator may determine in its sole discretion) of
his Eligible Amount for the Plan Year (or the period thereof during which the
election is in effect); provided that any such deferral must be made in
integral multiples of 1% of the Eligible Amount; and provided further that the
Committee may in its sole discretion at any time or from time to time reduce or
increase the portion of an Eligible Employee's annual base salary that shall
constitute the Eligible Amount
3.03. ELECTION TO DEFER.
(a) A Participant who wishes to defer part of the Eligible Amount that
he will earn during a Plan Year shall submit an election to the Plan
Administrator that satisfies each of the requirements set forth in paragraphs
(1) through (7), below.
(1) DEADLINE FOR SUBMITTING ELECTION. An election with
respect to a Plan Year shall be submitted on or before the September 30th next
preceding the Plan Year with respect to which the election is made or such
other date established by the Plan Administrator in its sole discretion;
provided that
(A) an election with respect to the initial Plan Year
shall be submitted on or before the date determined by the Plan Administrator;
and
(B) an Eligible Employee who first becomes eligible to
participate in the Plan pursuant to Section 3.01(b) must make any election
pursuant to this Section 3.03 for the Plan Year in which he became an Eligible
Employee within 30 days after becoming eligible to participate in the Plan.
An election described in the preceding sentence shall remain in effect until
the beginning of the next succeeding Plan Year and shall be deemed to be
renewed automatically for such next succeeding Plan Year unless revoked by the
Participant by making a new election pursuant to this Section 3.03. An election
to defer receipt of part of the Eligible Amount shall apply only to
compensation earned after
<PAGE> 10
the date the Participant's election is filed with the Plan Administrator.
(2) FORM OF ELECTION. The election shall be in writing and in a form
acceptable to the Plan Administrator.
(3) AMOUNT OF DEFERRAL. The election shall specify the percentage of
his Eligible Amount that the Participant wishes to defer in accordance with
Section 3.02.
(4) TREATMENT OF DEFERRAL. The election shall specify that the Annual
Deferral should be treated as if held entirely in cash, entirely in GTE Common
Stock, or partly in cash and partly in GTE Common Stock (and if so the
percentage allocation between cash and GTE Common Stock in integral multiples
of 1%).
(5) PAYMENT COMMENCEMENT. The election shall specify the year or
events, selected by the Participant in accordance with Section 5.03, as of
which payments with respect to the Annual Deferral are to commence under the
Plan.
(6) METHOD OF PAYMENT. In the case of the election of a fixed
commencement year pursuant to Sections 3.03(a)(5) and 5.03(a), the election
shall specify the method, selected by the Participant in accordance with
Section 5.02, in which payments with respect to the Annual Deferral are to be
made under the Plan.
(7) ELECTION IRREVOCABLE. Except as otherwise specifically provided in
the Plan, the amount of deferral, the treatment of the deferral, the payment
commencement date, and the method of payment elected by a Participant with
respect to an Annual Deferral in accordance with paragraphs (3) through (6),
above, shall not be revocable or subject to modification at any time.
(b) If the Plan Administrator determines, in its sole discretion, that
a Participant has incurred unusual, extraordinary expenses or hardship caused
by events beyond the Participant's control, such as accident or illness, the
Plan Administrator may grant a Participant's request to reduce the amount of
his Annual Deferral at any time, provided that the amount of the reduction must
be limited to the amount reasonably necessary to relieve the hardship or
financial emergency upon which the request is based. A reduction in the
deferral percentage effected pursuant to this subsection shall not otherwise
alter the terms of the Participant's participation in the Plan. The Plan
Administrator may require a Participant who requests a reduction in an Annual
Deferral under this subsection (b) to submit such evidence as the Plan
Administrator, in its sole discretion, deems necessary or appropriate to
substantiate the circumstances upon which the request is based.
(c) A Participant may, within one year prior to normal retirement,
within six months prior to early retirement, or at any time after either form
of retirement, elect that all or part of such portion of his account that is
treated as if held in GTE Common Stock thereafter be treated as being held in
cash or that all or part of such portion of his account that is treated as if
held in cash thereafter be treated as if held in GTE Common Stock; provided
that only one such election may be made in any Plan Year. The effective date of
such a change in hypothetical investment shall be the first day of the next
calendar quarter that begins after the date of the election.
<PAGE> 11
(d) A Participant may submit a request at any time to the Plan
Administrator to modify the payment commencement date, the method of payment,
or both, with respect to the Annual Deferral; provided that only one such
request may be made in any Plan Year; and provided further that the request
must be submitted before any payment is made to the Participant with respect to
the Annual Deferral pursuant to Article V (other than an interim payment
pursuant to Section 5.04). If the modification has the effect of accelerating
all or part of any payment otherwise due the Participant under Article V, the
request shall be subject to the approval of the Plan Administrator, which
approval the Plan Administrator may grant or deny in its sole discretion. If
the modification has the effect of deferring until a later calendar year all or
part of any payment otherwise due the Participant under Article V, the request
shall be granted, provided that the request is submitted at least 60 days
before the last day of the calendar year immediately preceding the calendar
year in which the payment otherwise would have been made to the Participant
under Article V. In no event shall the modification have the effect of
accelerating the first day of the payment commencement year to less than one
year from the date the modification is submitted to the Plan Administrator.
(e) A Participant who has elected that an Annual Deferral be treated
in full or in part as being held in GTE Common Stock may at any time following
a Change in Control make a one-time election to have all or part of such
portion of his account thereafter treated as being held in cash. The effective
date of such a change in hypothetical investment shall be the first day of the
next calendar quarter that begins after the date of the election.
(f) If a Participant becomes subject to a prohibition against
continuing to have all or part of an Annual Deferral being treated as held in
GTE Common Stock because of an actual or potential conflict of interest, he
shall be permitted a one-time election on the occurrence of the prohibition to
have that portion of such Annual Deferral that is treated as if held in GTE
Common Stock thereafter treated as if held in cash; provided that the Plan
Administrator may approve or disapprove such an election in its sole
discretion. The effective date of such an election shall be the first day of
the month next following the month in which the election is received (or, if
later, approved) by the Plan Administrator. Within a reasonable amount of time
from the removal of the prohibition referred to in the first sentence of this
subsection (f), the Participant shall be afforded an election to treat as if
held in GTE Common Stock that portion of his account that was treated as if
held in cash pursuant to the first sentence of this subsection (f); provided
that the Plan Administrator may approve or disapprove such an election in its
sole discretion. The effective date of the election referred to in the
preceding sentence shall be the first day of the calendar quarter next
following the calendar quarter in which such election is received (or, if
later, approved) by the Plan Administrator. The dollar value of the
hypothetical shares of GTE Common Stock with respect to which the elections
described in this subsection (f) are made shall be calculated in accordance
with Section 4.02(b).
3.04. DESIGNATION OF BENEFICIARIES.
A Participant who makes a deferral election pursuant to Section 3.03
may designate one or more beneficiaries under the Plan. Notwithstanding Section
3.03(a)(7), a Participant may, at any time, revoke a prior designation and make
a new designation pursuant to this Section 3.04. Any such designation or
revocation shall be in writing and shall be submitted to the Plan Administrator
prior to the Participant's death in such form and in such manner as is
acceptable to the Plan Administrator.
<PAGE> 12
ARTICLE IV
ACCOUNTS AND INTEREST
4.01. ACCOUNTS.
(a) ESTABLISHMENT OF ACCOUNTS. A separate bookkeeping account shall be
maintained for each Participant. Such account shall be (1) credited with the
amounts deferred by the Participant pursuant to Section 3.03, (2) credited (or
charged, as the case may be) with the hypothetical investment results
determined pursuant to Section 4.02, and (3) charged with the amounts paid by
the Plan to or on behalf of the Participant pursuant to Article V.
(b) SUBACCOUNTS. Within each Participant's account, separate
subaccounts shall be maintained to the extent necessary for the administration
of the Plan. For example, it may be necessary to maintain separate subaccounts
where the Participant has specified different payment commencement dates or
different methods of payment with respect to his Annual Deferrals for different
Plan Years.
4.02. INTEREST.
(a) DEEMED INVESTMENT IN CASH. If an Annual Deferral is treated as if
held in cash, the balance in a Participant's account that is so treated shall
be determined in accordance with the following rules:
(1) CASH CREDITS. Any amount that would have been paid to a
Participant during a calendar quarter but for his deferral election pursuant to
Section 3.03 shall be credited to his account.
(2) INTEREST. Interest shall be credited to the account as follows:
any cash credits during the calendar quarter shall earn interest from the day
they are credited to the Participant's account, and any payments made from the
account will cease to earn interest on the day they are subtracted from the
account. Cash balances under the account as of the end of the immediately
preceding calendar quarter that were not withdrawn during the calendar quarter
shall earn interest for the entire calendar quarter. The rate at which interest
shall be credited for purposes of this section shall be the equivalent of an
annualized rate equal to the Moody's Rate as of the day immediately preceding
the beginning of the applicable calendar quarter.
(b) DEEMED INVESTMENT IN GTE COMMON STOCK. If an Annual Deferral is
treated as if held in GTE Common Stock, the balance in a Participant's account
that is so treated shall be determined in accordance with the following rules:
(1) CONVERSION INTO GTE COMMON STOCK. Any amount that would have
been paid to a Participant during a calendar quarter but for his deferral
election pursuant to Section 3.03 and any matching contributions pursuant to
Section 4.03 shall be converted into an equivalent number of hypothetical
shares of GTE Common Stock (including hypothetical fractional shares) by
dividing the amount deferred for that calendar quarter by the average closing
price of GTE Common Stock, as reported on the composite tape of New York Stock
Exchange issues for the last 20 trading days of the immediately preceding
calendar quarter.
<PAGE> 13
(2) DEEMED REINVESTMENT OF DIVIDENDS. The number of hypothetical
shares of GTE Common Stock credited to a Participant's account pursuant to
paragraph (1), above, shall be increased on each date that a dividend is paid
on GTE Common Stock. The number of additional hypothetical shares of GTE Common
Stock credited to a Participant's account as a result of such increase shall be
determined, first, by multiplying the total number of hypothetical shares of
GTE Common Stock credited to the Participant's account on the dividend record
date by the amount of the dividend declared per share of GTE Common Stock on
the dividend declaration date, and, then, by dividing the product so determined
by the closing price of GTE Common Stock on the composite tape of New York
Stock Exchange issues on the dividend declaration date (or if there was no
reported sale of GTE Common Stock on such date, on the next preceding day on
which there was such a reported sale).
(3) CONVERSION OUT OF GTE COMMON STOCK. The dollar value of the
hypothetical shares of GTE Common Stock credited to a Participant's account on
any date shall be determined by multiplying the number of hypothetical shares
of GTE Common Stock credited to the Participant's account on that date by the
average closing price of GTE Common Stock, as reported on the composite tape of
New York Stock Exchange issues for the last 20 trading days of the immediately
preceding calendar quarter.
(4) EFFECT OF RECAPITALIZATION. In the event of a transaction or
event described in this paragraph (4), the number of hypothetical shares of GTE
Common Stock credited to a Participant's account shall be adjusted in such
manner as the Plan Administrator, in its sole discretion, deems equitable. A
transaction or event is described in this paragraph (4) if and only if (A) it
is a dividend or other distribution (whether in the form of cash, shares, other
securities, or other property), extraordinary cash dividend, recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off combination, repurchase, or exchange of shares or other
securities, the exercisability of stock purchase rights received under the
Rights Plan, the issuance of warrants or other rights to purchase shares or
other securities, or other similar corporate transaction or event, and (B) the
Plan Administrator determines that such transaction or event affects the shares
of GTE Common Stock, such that an adjustment pursuant to this paragraph (4) is
appropriate to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan.
4.03. MATCHING CONTRIBUTIONS.
(a) The Company shall credit to each Participant's account a number of
hypothetical shares of GTE Common Stock equal in value to the Matching
Percentage of the percentage (up to 6%) of the Participant's Matchable
Compensation that the Participant defers for each Plan Year; provided that such
hypothetical shares shall be credited only if the Participant is a participant
in the GTE Savings Plan and is eligible for a Company-Matching Contribution
under the GTE Savings Plan for that Plan Year and has made Elective and
After-Tax Contributions under the GTE Savings Plan for that Plan Year that (i)
in the aggregate equal 6% of the Base Amount and (ii) satisfy the requirements
established in sections 3 .03(a)(2) and 3.03 (a)(4) of the GTE Savings Plan.
(b) The Plan Administrator may credit to a Participant's account, for
equitable reasons and
<PAGE> 14
good cause shown, an additional number of hypothetical shares (including
fractional shares) of GTE Common Stock equal in value to any Company-Matching
Contribution not credited to the Participant's account under the GTE Savings
Plan because of Units placed on such Company-Matching Contributions under the
terms of the Code or the GTE Savings Plan; provided that, to the extent that
the amount of such credit depends on the extent to which the Participant makes
or does not make elective deferrals under the qualified cash or deferred
arrangement under the GTE Savings Plan, the credit shall not be made unless,
for the pertinent Plan Year, the Participant has made the maximum elective
deferral permissible under section 402(g) of the Code or the maximum elective
deferral permitted under the terms of the GTE Savings Plan.
(c) For purposes of subsections (a) and (b), above, the value of a
hypothetical share of GTE Common Stock shall be the average closing price of
GTE Common Stock, as reported on the composite tape of New York Stock Exchange
issues for the last 20 trading days of the immediately preceding calendar
quarter. Hypothetical shares credited to a Participant's account pursuant to
this Section 4.03 shall be credited as of the same date as of which
Company-Matching Contributions are made under the GTE Savings Plan and shall be
treated in accordance with Section 4.02(b).
4.04. HYPOTHETICAL NATURE OF ACCOUNTS AND INVESTMENTS.
Each account and investment established under this Article IV shall be
hypothetical in nature and shall be maintained for bookkeeping purposes only.
Neither the Plan nor any of the accounts established hereunder shall hold any
actual funds or assets. The right of any person to receive one or more payments
under the Plan shall be an unsecured claim against the general assets of GTE
Corporation. Any liability of the Company to any Participant, former
Participant, or beneficiary with respect to a right to payment shall be based
solely upon contractual obligations created by the Plan. Neither the Company,
the Board, nor any other Person shall be deemed to be a trustee of any amounts
to be paid under the Plan. Nothing contained in the Plan, and no action taken
pursuant to its provisions, shall create or be construed to create a trust of
any kind, or a fiduciary relationship, between the Company and a Participant or
any other Person.
<PAGE> 15
ARTICLE V
PAYMENTS
5.01. EXCLUSIVE ENTITLEMENT TO PAYMENT.
A Participant's deferral election pursuant to Section 3.03 shall
constitute a waiver of his right to receive the amount deferred and an
agreement to receive in lieu thereof the amounts payable to him at the times
and in the amounts specified in this Article V. No other amounts shall be due
under the Plan or otherwise as a result of a Participant's deferral election
pursuant to Section 3.03.
5.02. METHOD OF PAYMENT.
The payments to a Participant with respect to an Annual Deferral shall
be made solely in cash pursuant to the method provided for in either paragraph
(a) or (b), below, that is selected by the Participant in accordance with
Section 3 .03(a)(6). A Participant may select different methods of payment with
respect to his Annual Deferrals for different Plan Years.
(a) LUMP SUM. A Participant may elect to receive payment with respect
to an Annual Deferral in a lump sum. The lump sum shall be payable to the
Participant in cash as of the first business day of the payment commencement
year. The lump sum shall equal the portion of the balance in the Participant's
account attributable to the Annual Deferral, determined as of the date of
payment.
(b) INSTALLMENTS. A Participant may elect to receive the payments with
respect to an Annual Deferral either in annual or quarterly installments for a
period of not less than two or more than 20 years; provided that the number of
years elected shall not extend the period of payment beyond the life expectancy
of the Participant as determined under Table V of Treas. Reg. Sec. 1.72-9 (as
amended from time to time), determined on the basis of his age on the date as
of which payments would commence. If the number of years elected by a
Participant would otherwise exceed the limits imposed by the preceding
provisions of this Section 5.02(b), he shall be deemed to have elected the
maximum number of years permitted under such preceding provisions. Installments
shall be payable to the Participant:
(1) if the Participant elects payment commencement in accordance
with Section 5.03 (a), beginning as of the first business day of the year
selected as the payment commencement year; or
(2) if the Participant elects payment commencement in accordance
with Section 5.03(b), beginning as of the time specified in that Section.
Each installment shall equal the portion of the balance in the Participant's
account attributable to the Annual Deferral, determined as of the date the
installment is payable, multiplied by a fraction the numerator of which is one,
and the denominator of which is the excess of the total number of installments
elected by the Participant over the number of installment payments previously
made
<PAGE> 16
under the schedule. For example, the respective fractions under a five-year
schedule of annual installments are 115 for the first installment, 1/4 for the
second installment, 113 for the third installment, 1/2 for the fourth
installment, and 1/1 for the fifth and final installment.
5.03. PAYMENT COMMENCEMENT.
Unless otherwise specifically provided in the Plan (including but not
limited to Section 5.05), the payments to a Participant with respect to an
Annual Deferral shall commence in accordance with paragraph (a), (b), or (c),
below, as selected by the Participant in accordance with Section 3.03(a)(5).
(a) FIXED COMMENCEMENT YEAR. A Participant may select a specific year
for the commencement of payments; provided that, if any of the events described
in paragraph (b), below, occur before the payment commencement date selected
pursuant to this paragraph (a), payment shall commence in accordance with
paragraph (b). A Participant may select different payment commencement years
with respect to his Annual Deferrals for different Plan Years.
(b) RETIREMENT, TERMINATION, DISABILITY, OR DEATH A Participant may
select as the payment commencement date the date of his Retirement,
Termination, Disability, or death.
(1) RETIREMENT. Amounts deferred until Retirement shall be paid in
annual installments over a period of 10 years unless, at least 60 days prior to
Retirement, a request is made to the Plan Administrator asking for a different
schedule of payments in accordance with Section 5.02; provided that the Plan
Administrator may approve or deny such a request in its sole discretion;
provided further that no payment shall be made until the first business day of
the first calendar quarter that begins more than 90 days after the date of
Retirement; and provided further that, if at the time of Retirement payments
have commenced pursuant to paragraph (a) above, such payments will continue
according to the schedule on which they were then being paid.
(2) TERMINATION. A Participant who incurs a Termination shall be
paid any amounts deferred in annual installments over a period of 10 years or
the payment schedule requested, in accordance with Section 5.02, at the time of
Termination, whichever is shorter; provided that the Plan Administrator, in its
sole discretion, may approve or deny any payment schedule requested at the time
of Termination; provided further that no payment shall be made until the first
business day of the first calendar quarter that begins more than 90 days after
the date of Termination; and provided further that, if at the time of
Termination payments have commenced pursuant to paragraph (a), above, such
payments will continue according to the schedule on which they were then being
paid.
(3) DISABILITY. A Participant who incurs a Disability shall be paid
any amounts deferred in annual installments over a period of 10 years; provided
that a Participant at the time of onset of Disability may elect a fewer number
of installments; provided further that the Plan Administrator, in its sole
discretion, may approve or disapprove any payment schedule elected at the time
of onset of Disability; provided further that no payment shall be made until
the first business day of the first calendar quarter that begins after the date
of Disability; and provided further that, if at the time of the onset of the
Disability payment has commenced pursuant to paragraph (a), above, or the
preceding provisions of this paragraph (b), such payments will continue
according to the schedule on which they were then being paid.
<PAGE> 17
(4) DEATH. If a Participant dies before receiving any or all of the
balance in the Participant's account, the entire balance in the Participant's
account shall be paid as soon as practicable after the Participant's death in a
lump sum to the beneficiary designated by the Participant in accordance with
Section 3.04, or, if there is no such beneficiary, to the Participant's estate.
(c) CHANGE IN CONTROL In addition to an election in accordance with
either subsection (a) or (b), above, a Participant may elect that, in the event
of a Change in Control, his entire account balance shall be paid to him within
45 days after such Change in Control.
5.04. INTERIM PAYMENTS.
(a) HARDSHIP. Upon request, the Plan Administrator may permit the
payment of all or part of a Participant's account if the Plan Administrator, in
its sole discretion, determines that the Participant has incurred unusual,
extraordinary expenses or hardship caused by events beyond the Participant's
control, such as accident or illness. The amount that may be withdrawn shall be
limited to the amount reasonably necessary to relieve the hardship or financial
emergency upon which the request is based. The Plan Administrator may require a
Participant who requests a payment under this subsection (a) to submit such
evidence as the Plan Administrator, in its sole discretion, deems necessary or
appropriate to substantiate the circumstances upon which the request is based.
(b) OTHER. At any time, a Participant may elect that 94% of all (or a
designated portion of) his account balance shall be paid to him 61 days
following the filing of such an election; provided that the Plan Administrator
may approve or disapprove such election in its sole discretion. If a
Participant receives a payment pursuant to this subsection (b), the remaining
6% of the Participant's entire account balance (or the designated portion
thereof) shall be permanently forfeited and shall not be paid to, or in respect
of; the Participant.
5.05. LIMITATIONS ON RIGHTS TO PAYMENT.
(a) FORFEITURE OF RIGHTS. A Participant who incurs a Termination for
Cause, or who misuses Company assets or confidential information of the Company
either while employed by the Company or following a separation from service
with the Company, may in the discretion of the Plan Administrator forfeit all
rights to any payments under the Plan that would otherwise be payable to the
Participant or his beneficiaries on or after the initial date of such action by
the Participant. A Participant shall not be deemed to have incurred a
Termination for Cause or to have misused Company assets or confidential
information of the Company within the meaning of this subsection (a) unless and
until there shall have been delivered to him a notice from the Plan
Administrator (after reasonable notice to the Participant and an opportunity
for the Participant, together with counsel, to be heard before the Plan
Administrator), finding that the Participant has misused Company assets or
confidential information of the Company or engaged in the conduct set forth in
Section 2.31 and specifying the particulars thereof in detail; provided that,
after a Change in Control occurs, no Participant shall be determined to have
incurred a Termination for Cause or to have misused Company assets or
confidential information of the Company.
<PAGE> 18
(b) COMPETITIVE CONDUCT. If a Participant engages in any business that
is directly or indirectly competitive with the Company while employed by the
Company or within one year following a separation from service with the Company
for any reason: (1) all interest credited to a Participant's account under
Section 4.02(a) shall be recalculated by using as the applicable interest rate
the Moody's Rate multiplied by 0.8, rather than the Moody's Rate; (2) there
shall be no deemed dividends pursuant to Section 4.02(b); and (3) the
Participant shall be deemed to have elected to receive payments under the Plan
in 10 annual installments, commencing as of the date payment otherwise
commences under the terms of the Plan. The determination of whether a
Participant has engaged in any business that is directly or indirectly
competitive with the Company within the meaning of this Section 5.05(b) shall
be within the sole discretion of the Plan Administrator; provided that, after a
Change in Control occurs, no Participant shall be determined to have engaged in
any business that is directly or indirectly competitive with the Company.
<PAGE> 19
ARTICLE VI
MISCELLANEOUS
6.01. PLAN ADMINISTRATION.
(a) IN GENERAL. Except to the extent the Plan specifically provides
otherwise: (i) the Plan Administrator shall have the discretionary authority to
interpret the Plan and to decide any and all matters arising under the Plan,
including without limitation the right to determine eligibility for
participation, benefits, and other rights under the Plan; the right to
determine whether any election or notice requirement or other administrative
procedure under the Plan has been adequately observed; the right to determine
the proper recipient of any distribution under the Plan; the right to remedy
possible ambiguities, inconsistencies, or omissions by general rule or
particular decision; and the right otherwise to interpret the Plan in
accordance with its terms; and (ii) the Plan Administrator's determination on
any and all questions arising out of the interpretation or administration of
the Plan shall be final, conclusive, and binding on all parties.
(b) PLAN AMENDMENT AND TERMINATION. The Board may amend, suspend, or
terminate the Plan at any time. The Committee may amend the rate of interest
credited pursuant to Section 4.02 and may adopt any other amendments to the
Plan that do not impose material costs on the Company or effect material
increases or decreases in the benefits provided under the Plan. The Plan
Administrator may amend the Plan to enable the Plan and its Participants to
meet the requirements of or to reflect any changes in the securities laws of
the United States, including the rules and regulations thereunder. Upon
termination of the Plan, all amounts deferred before the date of termination,
and any rights to payment with respect to such deferred amounts, shall continue
to be governed by the provisions of the Plan. Notwithstanding anything to the
contrary in this subparagraph (b), no amendment, suspension, or termination of
the Plan shall reduce a Participant's accrued benefits under the Plan prior to
the date of such amendment, suspension, or termination. Although the Plan is
not subject to section 204(g) of the Employee Retirement Income Security Act of
1974 ("ERISA"), the accrued benefits that are protected by the preceding
sentence shall include those accrued benefits that would be protected by
section 204(g) of ERJSA if the Plan were subject to said section 204(g).
(c) RIGHTS PROTECTED FOLLOWING CHANGE IN CONTROL. Notwithstanding any
provision of the Plan to the contrary, no amendment, suspension, or termination
of the Plan, or revocation of any required approval by the Board, the
Committee, or the Plan Administrator, effected after a Change in Control, shall
operate to reduce, eliminate, or otherwise adversely affect any Participant's
or beneficiary's right to receive any payment under the Plan (including,
without limitation, the amount, timing, and method thereof) in accordance with
any deferral election made prior to the date of such amendment, suspension,
termination, or revocation of approval and in accordance with any investment or
payment option permitted (irrespective of any requirement for approval)
pursuant to the Plan as in effect on the date immediately preceding the date on
which the Change in Control occurs. Notwithstanding any provision of the Plan
to the contrary, upon and after a Change in Control, the rights described in
the immediately preceding sentence shall be fully vested, nonforfeitable
contractual rights enforceable by or on behalf of any Participant or former
Participant against GTE Corporation or any successor to all or substantially all
of the business or assets of GTE Corporation. After the date on which a Change
<PAGE> 20
in Control occurs, any Participant, former Participant, or beneficiary (which
terms shall include, for the purposes of this subsection (c), any executor,
personal representative, heir, or legatee of a deceased former Participant) may
apply to the trustee of the GTE Service Corporation Benefits Protection Trust
for assistance (which may include, without limitation, legal counsel and the
institution of litigation) in enforcing the rights of the Participant, former
Participant, or beneficiary under the Plan and pursuing any claims he might have
under the terms of the Plan; provided that any Participant, former Participant,
or beneficiary who applies for such assistance shall be subject to and bound by
any limitations that said trustee may impose. No Participant, former
Participant, or beneficiary shall be required to notify or seek the assistance
of said trustee as a condition of or prerequisite to any other action that might
be taken by or on behalf of the Participant, former Participant, or beneficiary
in order to enforce his rights or pursue his claims under the Plan, and the
fees, expenses, and costs that he may incur in any such other action shall not
be the responsibility of the GTE Service Corporation Benefits Protection Trust
or the trustee thereof.
6.02 APPEALS PROCEDURE.
A claimant who has been denied a claim for benefits, in whole or in
part, may, within a period of 60 days following his receipt of the denial,
request a review of such denial before the Plan Administrator by filing a
written notice with the Plan Administrator. In connection with an appeal, the
claimant (or his authorized representative) may review pertinent documents and
may submit evidence and arguments in writing to the Plan Administrator. The
Plan Administrator may decide the questions presented by the appeal and shall
issue to the claimant a written notice setting forth: (1) the specific reasons
for the decision and (2) specific reference to the pertinent Plan provisions on
which the decision is based. The notice shall be issued within a period of time
not exceeding 60 days after receipt of the request for review; provided that,
if special circumstances should require, such period of time may be extended
for an additional 60 days commencing at the end of the initial 60-day period.
Written notice of any such extension shall be provided to the claimant prior to
the expiration of the initial 60-day period. The decision of the Plan
Administrator shall be final and conclusive.
6.03. CHANGE IN CONTROL.
(a) CHANGE IN CONTROL PROVISIONS. Section 2.08, Section 3.03(e),
Section 5.03(c), the proviso in the last sentence of Section 5.05(a), the
proviso in the last sentence of Section 5.05(b), Section 6.01(c), and this
Section 6.03 (collectively, the "Change in Control Provisions") shall cease to
be effective on July 1, 1995; provided, however, that the Change in Control
Provisions shall automatically become effective for an additional one-year
period beginning on July 1, 1995, and on each anniversary of that date (a
"Renewal Date") unless (i) not later than the December 31st immediately
preceding such Renewal Date, the Board adopts a resolution providing that the
Change in Control Provisions shall not be renewed upon the next succeeding
Renewal Date, and (ii) a Change in Control does not occur prior to such next
succeeding Renewal Date; and provided further that, notwithstanding any
provision hereof to the contrary, if; while the Change in Control Provisions
are in effect, a Change in Control occurs, the Change in Control Provisions
shall be extended so as to remain in effect after the date on which the Change
in Control occurs, until all rights of Participants, former Participants, and
beneficiaries and all liabilities and obligations of GTE Corporation (and any
successor to all or substantially all of GTE's business or assets) under the
Plan have been fully satisfied.
<PAGE> 21
(b) PLAN MODIFICATIONS FOLLOWING CHANGE IN CONTROL. Notwithstanding
any provision of the Plan to the contrary, the Board may amend, modify, or
suspend the Change in Control Provisions at any time before a Change in Control
occurs, but, unless the Change in Control Provisions have ceased to be
effective prior to the date on which a Change in Control occurs, and except as
may be required by law, on and after the date on which a Change in Control
occurs: (1) the Change in Control Provisions shall not be amended, modified,
suspended, or terminated, directly or indirectly, and (2)(A) no other
provisions of the Plan shall be amended, modified, suspended, or terminated,
directly or indirectly, (B) no rules, regulations, or procedures under the Plan
shall be established or modified, (C) no interpretation of the Plan shall be
adopted, (D) no determination under the Plan shall be made, and (E) no
authority or discretion shall be exercised, that would alter the meaning or
operation of the Change in Control Provisions or that would undermine or
frustrate their purposes.
6.04. RIGHTS NOT ASSIGNABLE.
No payment due any Person under the Plan shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge in any other way. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, or charge such payment in any other
way shall be void. No such payment or interest herein shall be liable for or
subject to the debts, contracts, liabilities, or torts of any Participant or
beneficiary. If any Participant or beneficiary becomes bankrupt or attempts to
anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge in
any other way any payment under the Plan, the Plan Administrator may direct
that such payment be suspended and that all future payments to which such
Person otherwise would be entitled be held and applied for the benefit of such
Person, the Person's children or other dependents, or any of them, in such
manner and in such proportions as the Plan Administrator may deem proper.
6.05. INABILITY TO LOCATE PARTICIPANTS AND BENEFICIARIES.
Each Participant or beneficiary entitled to receive payment under the
Plan shall keep the Plan Administrator advised of his current address. If the
Plan Administrator is unable for a period of 36 months to locate a Participant
or beneficiary to whom a payment is due under the Plan, commencing with the
first day of the month as of which such payment first comes due, the total
amount payable to such Participant or beneficiary shall be forfeited. Should
such a Participant or beneficiary contact the Plan Administrator requesting
payment thereafter, the Plan Administrator shall, upon satisfaction of its
requests for any corroborating documentation, restore and pay the forfeited
payment in a lump sum, the value of which shall not be adjusted to reflect any
interest or other type of investment earnings or gains for the period of
forfeiture.
6.06. WITHHOLDING TAXES.
The Plan Administrator may make any appropriate arrangements to deduct
from all Annual Deferrals and payments hereunder any taxes that the Plan
Administrator reasonably determines to be required by law to be withheld from
such Annual Deferrals and payments.
<PAGE> 22
6.07. CERTAIN RIGHTS RESERVED.
Nothing in the Plan shall confer upon any employee of the Company or
other Person the right: (1) to continue in the employment or service of the
Company or affect any right that the Company may have to terminate the
employment or service of (or to demote or to exclude from future participation
in the Plan) any such employee or other Person at any time for any reason; (2)
to participate in the Plan; or (3) to receive an annual base salary of any
particular amount.
6.08. SEVERABILITY.
If any provision of the Plan is held unlawful or otherwise invalid or
unenforceable in whole or in part, such unlawfulness, invalidity, or
unenforceability shall not affect any other provision of the Plan or part
thereof; each of which shall remain in full force and effect. If the making of
any payment or the provision of any other benefit required under the Plan is
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 the Plan, and, if the making of any payment
in full or the provision of any other benefit required under the Plan 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 the Plan.
6.09. TITLES AND HEADINGS NOT TO CONTROL.
The titles to Articles and the headings of Sections, subsections,
paragraphs, and subparagraphs in the Plan are placed herein for convenience of
reference only and, as such, shall have no force or effect in the
interpretation of the Plan.
6.10. GOVERNING LAW.
The Plan and all determinations made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the United
States and, to the extent not preempted thereby, the State of New York.
<PAGE> 23
Exhibit 10.10
AMENDMENTS TO THE
GTE EXECUTIVE SALARY DEFERRAL PLAN
EFFECTIVE AS OF JANUARY 1, 1998
1. Section 2.16 is amended to add the following proviso to the end
thereof:
"provided that, effective as of January 1, 1998, "Matchable
Compensation" shall mean the Eligible Amount."
2. Section 3.02 is amended to read as follows:
"3.02. Salary Deferral Amounts.
Each Participant shall be eligible to defer up to 100% (or such lesser
percentage as the Plan Administrator may determine in its sole
discretion) of his Eligible Amount for the Plan Year (or the period
thereof during which the election is in effect); provided that any such
deferral must be made in integral multiples of 1% of the Eligible
Amount; and provided further that the Committee may in its sole
discretion at any time or from time to time reduce or increase the
portion of an Eligible Employee's annual base salary that shall
constitute the Eligible Amount."
<PAGE> 24
Exhibit 10.10
AMENDMENTS TO THE
GTE EXECUTIVE SALARY
DEFERRAL PLAN
A. Effective as of January 1, 1999:
1. Section 4.02 (b) (3) is amended to read as follows:
"(3) CONVERSION OUT OF GTE COMMON STOCK.
The dollar value of the hypothetical shares of GTE Common
Stock paid to or withdrawn from a Participant's account on any
date shall be determined by multiplying the number of
hypothetical shares of GTE Common Stock paid to or withdrawn
from the Participant's account on that date by the closing
price of GTE Common Stock as reported on the composite tape of
New York Stock Exchange issues on that date."
2. Section 5.02 (b) is amended to read as follows:
"(B) INSTALLMENTS.
A Participant may elect to receive the payments with respect
to a Deferral either in annual, semi-annual, quarterly or
monthly installments for a period of not less than two or more
than 20 years; provided that the number of years elected shall
<PAGE> 25
not extend the period of payment beyond the life expectancy
of the Participant as determined under Table V of Treas. Reg.
section 1.72-9 (as amended from time to time), determined on
the basis of his age on the date as of which payments would
commence. If the number of years elected by a Participant
would otherwise exceed the limits imposed by the preceding
provision of this Section 5.02 (b), he shall be deemed to
have elected the maximum number of years permitted under such
preceding provision. Installments shall be payable to the
Participant:"
3. Section 3.03 (c) is amended to read as follows:
"(c) A Participant may, within one year prior to normal
retirement, within six months prior to early retirement, or at
any time after either form of retirement, elect that all or
part of such portion of his account that is treated as being
held in GTE Common Stock thereafter be treated as being held
in cash or that all or part of such portion of his account
that is treated as if held in cash thereafter be treated as if
held in GTE Common Stock; provided that only one such election
may be made in any Plan Year. The effective date of such a
change in hypothetical investment shall be the date of the
election."
4. Section 4.03 (c) is amended to read as follows:
"(c) For purposes of subsections (a) and (b), above, the value
of a hypothetical share of GTE Common Stock shall be
calculated in the same manner as Matching Contributions under
the GTE Savings Plan are calculated. Hypothetical shares
credited to a Participant's account pursuant to this Section
4.03 shall be credited as of the same date as of which
Company-Matching Contributions are made under the GTE Savings
Plan and shall be treated in accordance with Section 4.02
(b)."
5. Section 5.03 (b) (1) is amended to read as follows:
"(1) RETIREMENT.
Amounts deferred until Retirement shall be paid in annual
installments over a period of 10 years unless, at least 60
days prior to Retirement, a request is made to the Plan
Administrator asking for a different schedule of payments in
accordance with Section 5.02; provided that the Plan
Administrator may approve or deny such a request in its sole
discretion; provided further that no payment shall be made
until the first business day more than 30 days after the date
of Retirement; and provided further that, if at the time of
Retirement payments have commenced pursuant to paragraph (a),
above, such payments will continue according to the schedule
on which they were then being paid."
6. Section 5.03 (b) (2) is amended to read as follows:
"(2) TERMINATION.
<PAGE> 26
A Participant who incurs a Termination shall be paid any
amounts deferred in annual installments over a period of 10
years or the payment schedule requested, in accordance with
Section 5.02, at the time of Termination, whichever is
shorter; provided that the Plan Administrator, in its sole
discretion, may approve or deny any payment schedule requested
at the time of Termination; provided further that no payment
shall be made until the first business day more than 30 days
after the date of Termination; and provided further that, if
at the time of Termination payments have commenced pursuant to
paragraph (a), above, such payments will continue according to
the schedule on which they were then being paid."
7. Section 6.01 is amended to add the following subsection (e):
"(e) GTE Corporation reserves the right to charge fees to
Participants for set-up and/or maintenance of deferral
accounts."
8. Effective as of September 3, 1998:
Section 6.04 is amended to read as follows:
"A Participant's rights and interests under the Plan may not
be assigned or transferred. In the case of any former
Participant's death, payment, if any, under the Plan shall be
made to the Participant's surviving spouse or designated
beneficiary in accordance with the provisions of the Plan.
However, the immediately preceding sentences shall not apply
with respect to an order which satisfies the requirements for
a qualified domestic relations order set forth in Section
206(d)(3)(B)(i) of the Employee Retirement Income Security Act
of 1974, as amended ("QDRO") which is issued with respect to a
Participant's right or interest under the Plan, and benefits
shall be payable to the alternate payee designated in the QDRO
in accordance with the terms and conditions thereof."
<PAGE> 27
Exhibit 10.10
AMENDMENTS TO THE
GTE EXECUTIVE SALARY DEFERRAL PLAN
EFFECTIVE AS OF JANUARY 1, 1998
1. Section 1.02 is amended to read as follows:
"1.02. PURPOSES OF PLAN.
The purposes of the Plan are to provide certain employees of the
Company the opportunity to defer compensation not otherwise eligible
for deferral under other deferred compensation arrangements maintained
by the Company and to enable such employees to receive the benefit of
additional deferred compensation that is comparable to certain
matching contributions that the terms of the GTE Savings Plan and the
Code prevent such employees from receiving under the GTE Savings
Plan."
2. Section 2.05 is amended to read as follows:
"2.05. Base Amount. "Base Amount" shall mean annual base salary in the
amount of $150,000, as adjusted from time to time pursuant to section
401(a)(17) of the Code; provided that if a Participant is not eligible
to participate in the GTE Savings Plan during a Plan Year, the "Base
Amount" for that Participant in that Plan Year shall be zero."
3. Section 2.14 is amended to read as follows:
<PAGE> 28
"2.14. Eligible Employee. "Eligible Employee" shall mean an employee of
the Company (1) whose annual base salary for services performed for the
Company is paid in United States currency and exceeds the Base Amount
or (2) who is designated as an Eligible Employee by the Plan
Administrator."
4. Section 4.03 is amended by redesignating subsection (c) as subsection
(d) and by inserting the following subsection (c) immediately after
subsection (b):
"(c) If the Participant is not eligible to participate in the GTE
Savings Plan, the Company shall credit to the Participant's account a
number of hypothetical shares of GTE Common Stock equal in value to
the Matching Percentage of the percentage (up to 6%) of the
Participant's Matchable Compensation that the Participant defers for
each Plan Year; provided that such hypothetical shares shall be
credited only if the Plan Administrator determines that the
Participant would have been eligible for a Company-Matching
Contribution under the GTE Savings Plan for that Plan Year had the
Participant been eligible to participate in the GTE Savings Plan for
that Plan Year and that the Participant has satisfied any other
requirements that the Plan Administrator imposes in its discretion."
5. Section 4.03(d) is amended by deleting "subsections (a) and (1))," and
replacing that phrase with "subsections (a), (1)) and (c)"."
<PAGE> 1
EXHIBIT 10.11
January 22, 1999 (Revised)
Armen Der Marderosian
[Address]
[Address]
Dear Armen:
I want to personally let you know how much your many contributions to
GTE and your valued leadership have been appreciated. In light of those
accomplishments and your agreement to take on the role of assisting GTE in
connection with the divestiture of Government Systems (the "Galaxy
Transaction"), I want to provide you with an appropriate transition arrangement
in connection with your departure from GTE. This letter (the "Letter Agreement")
sets out the terms of that arrangement.
A. CONTINUED EMPLOYMENT AND SEPARATION
1. SPECIAL ASSIGNMENT PERIOD. From the effective date of this Letter
Agreement through the later of (a) successful completion of a divestiture of all
or substantially all of the assets of Government Systems ("Transaction
Completion") or the decision of the Board of Directors of GTE Corporation to
terminate divestiture efforts, or (b) shareholder approval or termination of the
proposed merger between Bell Atlantic Corporation and GTE (the "Merger"), you
will have primary responsibility for the Galaxy Transaction and will perform
such other duties as directed by me. During this period, referred to as the
"Special Assignment Period," you will remain at your current salary level. In
the event that neither Transaction Completion nor shareholder approval of the
Merger occurs, GTE will provide you with a transition arrangement, the terms of
which will be decided at that time but which will provide benefits which are, at
a minimum, equivalent to those otherwise available to you under GTE's
Involuntary Separation Program ("ISEP") as then in effect.
2. SEPARATION BENEFITS. You will irrevocably terminate your employment
with GTE upon conclusion of the Special Assignment Period. If shareholder
approval of the Merger has occurred at that time, you will receive separation
benefits as set forth in, and in accordance with the terms of, your Executive
Severance Agreement. If shareholder approval has not occurred and you do not
become a "Transferred Employee" (as such term is defined in ISEP) after
completion of the Galaxy Transaction, you will be eligible to receive separation
benefits in accordance with the terms of ISEP or any successor plan which may
exist. Of course, if shareholder approval has not occurred and you become a
Transferred Employee, you will not be eligible for ISEP benefits. You will also
receive a lump sum payment for all accrued, unused (but unpaid) vacation upon
the termination of your employment with GTE, but you will not receive service
credit for same.
<PAGE> 2
Armen Der Marderosian
January 22, 1999 (Revised)
Page 2
3. EIP. You will continue to participate in GTE's Executive Incentive
Plan ("EIP"), or any successor plan which may exist, during the Special
Assignment Period on the same basis as other executives at your level, subject
to the terms of that plan. If your EIP payment for the year in which you
separate from employment has not been paid out as a result of shareholder
approval of the Merger, your award for that year will be prorated based on the
number of calendar months of service you completed in that year. Any amount to
which you are entitled under EIP will be payable at the same time payments are
made to other EIP participants. The Executive Compensation and Organizational
Structure Committee of the Board of Directors of GTE, its designee, its
successor or its successor's designee (the "ECC") will determine the amount of
your actual awards. You will be eligible to defer your EIP award, but you will
not receive a match for those amounts under the company's Equity Participation
Program ("EPP").
4. LTIP. You will continue to participate in GTE's Long Term Incentive
Plan ("LTIP"), or any successor plan that may exist, on the same terms as other
executives at your level during the Special Assignment Period. In the event of
shareholder approval of the Merger, outstanding options will vest and
Performance Bonus Awards will be paid out in accordance with the terms of your
Award Agreements. Following, or in the absence of, shareholder approval, any
outstanding stock options under LTIP will vest immediately upon your separation
from employment, and you will have two years or longer to exercise those
options, subject to the terms of and any restrictions established by the option
agreements. Outstanding LTIP cash awards that have not been paid out as a result
of the shareholder approval of the Merger will be prorated to reflect the number
of actual full months of service you completed in the outstanding cycles. All
payments under LTIP will be paid at the same time payments are made to other
participants. The ECC will determine the amount of your actual awards. You will
be eligible to defer your award, but you will not receive a match under the
company's EPP.
5. TERMINATION OF EMPLOYMENT. In accordance with company policy, GTE
reserves the right to terminate your employment prior to the end of the Special
Assignment Period for Cause, which, for purposes of this Letter Agreement, will
be as determined by your supervisor at the time with the concurrence of the
Executive Vice President - Human Resources and Administration or his successor.
If you are discharged for Cause, elect to resign or retire, or die or become
disabled (within the meaning of GTE's Long Term Disability Plan) prior to the
expiration of the Special Assignment Period, all further obligations under this
Letter Agreement shall cease (except for, in the case of termination due to
death or disability, your right to any prorated Transaction Completion Bonus or
Partial Bonus as provided for below), and you will not be entitled to separation
benefits under this Letter Agreement.
<PAGE> 3
Armen Der Marderosian
January 22, 1999 (Revised)
Page 3
B. TRANSACTION COMPLETION BONUS
1. TRANSACTION COMPLETION BONUS. Subject to the conditions set out
herein, on or about 45 days following the Transaction Completion, you will
receive a special "Transaction Completion Bonus" equal (before withholding of
applicable taxes) to an amount as set forth in either paragraph (a) or (b)
below.
(a) One and one-half times the sum of (i) your base annual salary as of
Transaction Completion and (ii) the prior three-year average corporate
rating under EIP (as of Transaction Completion) for your grade level
multiplied by an amount equal to 100% of norm for that grade level; or
(b) As set out in the chart below, a bonus based on the established
minimum, target, and maximum sales price for Government Systems (as
determined by the Galaxy Transaction documents). If the sales price
falls between minimum and target or target and maximum, the bonus will
be calculated using linear interpolation (see Attachment A).
Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
At the time you execute this Letter Agreement, you must make an
irrevocable election as to which formula you want to be used to
calculate your potential bonus. If you do not make an election at the
time you execute this Letter Agreement, you will be eligible solely for
the bonus set forth in paragraph B(1)(a) above.
2. Partial Bonus. In the event that the Board of Directors of GTE
Corporation decides to terminate efforts to divest all or substantially all of
the assets of Government Systems, on or about 45 days from the date of that
decision (the "Termination Date"), you will receive a special bonus (a "Partial
Bonus") equal, before withholding of applicable taxes, to 25% of the Transaction
Completion Bonus you would have received under option B(1)(a), above, if the
Transaction Completion had occurred on the Termination Date.
3. INVOLUNTARY TERMINATION WITHOUT CAUSE. If, prior to Transaction
Completion or, if applicable, the Termination Date, your employment is
terminated involuntarily without Cause and for reasons other than your death or
disability, you will receive a payment equal to the Transaction Completion
Bonus, or, as the case may be, Partial Bonus, to which you would have been
entitled under the terms of this Letter Agreement had your employment continued
through Transaction Completion or, if applicable, the Termination Date. Payment
will be made at the same time the bonus would have been paid had you remained
employed through Transaction Completion or, if applicable, the
<PAGE> 4
Armen Der Marderosian
January 22, 1999 (Revised)
Page 4
Termination Date. Under no circumstances will your resignation from employment
or retirement for any reason constitute an involuntary termination without Cause
for purposes of the incentive provided for by this Letter Agreement.
4. DEATH OR DISABILITY. If the Galaxy Transaction is completed and you
die or become disabled (within the meaning of GTE's Long Term Disability Plan)
prior to the Transaction Completion, you, or, in the event of your death, your
estate, will receive a prorated Transaction Completion Bonus based on the ratio
of (i) the number of days you remained actively employed between the date of
this Letter Agreement and Transaction Completion to (ii) the number of days
between the date of this Letter Agreement and Transaction Completion. If efforts
to divest all or substantially all of the assets of Government Systems are
terminated, and should you die or become disabled (within the meaning of GTE's
Long Term Disability Plan) prior to the Termination Date, you or, in the event
of your death, your estate, will receive a Partial Bonus equal to the Partial
Bonus you would have received had you remained actively employed through the
Termination Date. The prorated Transaction Completion Bonus or the Partial Bonus
payable under this paragraph shall be paid at the same time such bonus would
have been paid had you remained actively employed through the Transaction
Completion or, if applicable, the Termination Date.
5. CIRCUMSTANCES WHEN NO BONUS WILL BE PAID. Should you resign or
retire for any reason prior to Transaction Completion or, if applicable, the
Termination Date, or should you at any time engage in conduct that would
constitute Cause for your discharge, you will not be eligible to receive any
portion of the Transaction Completion Bonus or Partial Bonus.
6. DEFERRAL. The Transaction Completion Bonus or Partial Bonus, as the
case may be, may be deferred under the EIP deferral regulations, or any
successor arrangement, in accordance with the terms of those regulations.
Amounts deferred under this Letter Agreement shall not, however, be eligible for
match under EPP.
7. PAYMENT TAXABLE/NOT BENEFIT BEARING. Applicable taxes will be
withheld from any bonus payment made pursuant to this Letter Agreement. Neither
the Transaction Completion Bonus nor the Partial Bonus shall be treated as
compensation for purposes of computing or determining any benefit under any
pension, savings, insurance, or other employee compensation or benefit plan
maintained by GTE.
8. NO DUPLICATION OF BENEFITS. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
retention incentive payment provided for by this Letter Agreement and any other
retention incentive program that provides for payment of a retention bonus for
continued employment during any part of the same period covered by this Letter
Agreement. As a result, any bonus payment otherwise due under this Letter
Agreement shall be reduced by any amounts due under any such retention incentive
program.
<PAGE> 5
Armen Der Marderosian
January 22, 1999 (Revised)
Page 5
9. RELEASE REQUIREMENT. Payment of any Transaction Completion Bonus or
Partial Bonus under this Letter Agreement is contingent upon your executing a
release of claims against GTE in a form acceptable to GTE.
I. C. GENERAL PROVISIONS
1. PROHIBITION AGAINST RECRUITING OR HIRING. Commencing on the date of
this Letter Agreement and through the first anniversary of the termination of
your employment for any reason from GTE (which, for purposes of this Letter
Agreement, includes GTE Corporation, any corporate subsidiary or other company
affiliated with GTE Corporation, any company in which GTE Corporation owns
directly or indirectly an equity interest of at least ten percent, and the
successors and assigns of any such company, including, following the Merger,
Bell Atlantic Corporation, its subsidiaries, affiliates, and other related
entities and their successors and assigns) you agree that you will not, without
the prior written consent of the ECC:
(i) Recruit or solicit any employee of GTE for employment or for
retention as a consultant or provider of services;
(ii) Hire, or participate with another company or third party in the
process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or should
know could lead to the use of that information for purposes of
recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
Provided, however, that the provisions of this paragraph will not apply in the
event that you become employed by any entity to which all or substantially all
of the assets of Government Systems are sold.
2. PROHIBITION AGAINST SOLICITING GTE CUSTOMERS. Commencing on the date
of this Letter Agreement and through the first anniversary of the termination of
your employment for any reason from GTE, you agree that you will not solicit or
contact, directly or indirectly, any customer, client, or prospect of GTE with
whom you or any of the GTE employees reporting to you had any contact at any
time during the year preceding your termination for the purpose of inducing such
customer, client, or prospect to cease being, or to not become, a customer or
client of GTE or to divert business from GTE. Provided, however, that the
provisions of this paragraph will not apply in the event that you become
employed by any entity to which all or substantially all of the assets of
Government Systems are sold.
<PAGE> 6
Armen Der Marderosian
January 22, 1999 (Revised)
Page 6
3. CONFIDENTIALITY. You agree that you will not disclose or discuss the
existence or terms of this Letter Agreement under any circumstances where it
reasonably could be expected that such information would, directly or
indirectly, come to the attention of any present or past GTE employee,
consultant, or contractor. You further agree that you will require any person
with whom you share information about this Letter Agreement to adhere to the
same standard of confidentiality.
4. PROPRIETARY INFORMATION. You agree that you will at all times comply
with your obligations under the Employee Agreement Relating to Intellectual
Property (Policy 412) or its equivalent and preserve the confidentiality of all
Proprietary Information and trade secrets of GTE, and the Proprietary
Information and trade secrets of third parties, including customers, that are in
the possession of GTE, by not disclosing the same to any third party or using
the same, or any portion thereof, for the benefit of anyone other than GTE.
"Proprietary Information" means information obtained or developed by you or to
which you had access during your employment with GTE, including, but not limited
to, customer information and trade secrets and proprietary information of GTE
and third parties that has not been fully disclosed in a writing generally
circulated by GTE to the public at large without any restrictions on use or
disclosure. You agree that you will return all copies, in whole or in part, in
any form, of trade secrets or Proprietary Information in your possession or
control upon any termination of employment or upon request by GTE, whichever
occurs earlier, without making or retaining a copy.
5. SURVIVAL OF AND CONSIDERATION FOR COVENANTS. You acknowledge and
agree that the compensation and benefits provided for pursuant to this Letter
Agreement include consideration for the covenants contained in paragraphs 1, 2,
3 and 4 of Section C of this Letter Agreement and that, except as specifically
provided by the terms of this Letter Agreement, the obligations set out in
paragraphs 1, 2, 3 and 4 of Section C of this Letter Agreement survive any
cancellation, termination, or expiration of this Letter Agreement or the
termination of your employment with GTE.
6. BUSINESS DISCRETION OF GTE. Nothing in this Letter Agreement is
intended to limit the discretion of GTE to take any action with regard to the
sale that GTE may consider appropriate, including, without limitation,
postponing Transaction Completion or terminating sales efforts. This Letter
Agreement does not entitle you to remain in the employ of GTE for any minimum or
prescribed period or term and does not modify the at-will status of your
employment.
7. ASSIGNMENT BY GTE. GTE may assign this Letter Agreement without your
consent. You may not assign this Letter Agreement, and no person other than you
(or your estate) may assert your rights under this Letter Agreement.
8. DISPUTE RESOLUTION. You agree that the ECC shall have sole
discretion to interpret this Letter Agreement and to resolve any and all
disputes under this Letter Agreement. You further agree that the ECC's
determination shall be final and binding.
<PAGE> 7
Armen Der Marderosian
January 22, 1999 (Revised)
Page 7
9. WAIVER. The waiver by GTE of any breach of this Letter Agreement
shall not be construed as a waiver of any subsequent breach.
10. GOVERNING LAW. This Letter Agreement shall be interpreted and
enforced in accordance with the laws of the State of New York, disregarding its
choice of law rules.
11. REMEDIES. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Letter Agreement, including other obligations referenced herein. In
the event of a breach of any of your covenants and commitments under this Letter
Agreement, including any other obligations referenced herein, GTE shall not be
obligated to make any payment otherwise required under this Letter Agreement and
may, at GTE's discretion, require you to repay any amounts already paid to you,
including amounts that may have been deferred. In addition, GTE reserves all
rights to seek any and all remedies and damages permitted under law, including,
but not limited to, injunctive relief, equitable relief, and compensatory and
punitive damages.
12. DEFINITIONS/RELATIONSHIP TO OTHER AGREEMENTS. The definitions
contained in this Letter Agreement, including, but not limited to, the
definition of Cause, shall be controlling for purposes of this Letter Agreement.
These definitions shall not be modified by, nor shall they modify, definitions
for terms in any other agreement to which you may be a party.
13. ENTIRE AGREEMENT. You acknowledge and agree that, except for your
Executive Severance Agreement, this Letter Agreement, including the required
release, sets forth the entire understanding of the parties with regard to the
subject matter addressed herein and that this Letter Agreement supersedes all
prior agreements (other than your Executive Severance Agreement) and
communications, whether written or oral, pertaining to the subject matter
described herein. The Letter Agreement shall not be modified except by written
agreement duly executed by you and GTE.
<PAGE> 8
Armen Der Marderosian
January 22, 1999 (Revised)
Page 8
Again, Armen, we appreciate your leadership and valuable contributions
to the company. I hope that the terms of this Letter Agreement and the incentive
just described will provide you with a level of comfort as you continue your
important role at GTE and our efforts to make the transaction a success. If this
Letter Agreement meets with your satisfaction, please sign below, fax a copy to
me no later than 8:00 a.m. EST on Monday, January 25, 1999, and return the
original to me by overnight mail, to be received no later than Tuesday, January
26, 1999.
Sincerely,
Thomas White
TW:jls
I have read, understand, and agree to the terms of this Letter Agreement.
- ------------------------------------
Armen Der Marderosian
- ------------------------------------
Date
I irrevocably elect the following bonus calculation formula for purposes of
determining the amount of any Transaction Completion Bonus, or, in the event of
my death or disability prior to Transaction Completion, any portion thereof, to
which I am entitled under this Letter Agreement.
(a) bonus based on annual salary and average EIP as described
- ------- in paragraph B(1)(a) of this Letter Agreement.
or
(b) bonus based on price obtained at Transaction Completion and
- ------- as described in paragraph B(1)(b) of this Letter Agreement.
- -------------------------------------
Armen Der Marderosian
- -------------------------------------
Date
<PAGE> 1
EXHIBIT 10.12
CONFIDENTIAL
Employee Name
Employee Address
Dear [First Name]:
As you know, on July 27, 1998, GTE Corporation entered into an
Agreement and Plan of Merger (the "Definitive Agreement") with Bell Atlantic
Corporation ("Bell Atlantic"). In line with this decision, the businesses of the
two companies will be merged (the "Merger") on a date yet to be determined ("the
Closing Date"). It is crucial that we continue to conduct business as usual
during the period preceding the Closing Date and that we retain people like
yourself whose skill is essential to our ongoing business efforts and/or the
Merger. This Agreement is intended to provide you with an incentive to continue
your employment through the Closing Date.
1. MERGER BONUS. On or about 45 days following the Closing Date, you
will receive a merger implementation and retention bonus (a "Merger Bonus")
equal (before withholding of applicable taxes) to one and one half times the sum
of (i) your base annual salary as of the Closing Date and (ii) the prior
three-year average corporate rating (as of the date of shareholder approval of
the Merger) under GTE's Executive Incentive Plan ("EIP") for your grade level as
of the Closing Date multiplied by an amount equal to 100% of norm for that grade
level under EIP.
2. INVOLUNTARY TERMINATION WITHOUT CAUSE. If your employment is
terminated involuntarily without Cause (and for reasons other than your death or
disability) prior to the Closing Date, you will receive a payment equal to the
Merger Bonus to which you would have been entitled had your employment continued
through the Closing Date. Payment will be made at the same time such bonuses are
paid to other eligible employees. Under no circumstances will your resignation
from employment or retirement for any reason constitute an involuntary
termination without Cause for purposes of this Agreement.
3. DEATH OR DISABILITY. Should the Merger be concluded as anticipated
and you die or become disabled (within the meaning of GTE's Long Term Disability
Plan) prior to the Closing Date, you, or, in the event of your death, your
estate, will receive a prorated Merger Bonus based on the ratio of (i) the
number of days you remained actively employed between the date of this Agreement
and the Closing Date to (ii) the number of days between the date of this
Agreement and the Closing Date. The prorated Merger Bonus payable under
<PAGE> 2
this paragraph shall be paid at the same time the Merger Bonus is paid to other
eligible employees.
4. CIRCUMSTANCES WHEN NO BONUS WILL BE PAID. You will not receive a
Merger Bonus if the Closing Date does not occur. Should you resign or retire for
any reason prior to the Closing Date or should you at any time engage in conduct
that would constitute Cause, you will not be eligible to receive any portion of
the Merger Bonus. For purposes of this Agreement, Cause means (i) failure to
perform satisfactorily the duties assigned to you; (ii) breach of any of the
terms of this Agreement; (iii) violation of a law (other than a traffic
violation or minor civil offense), whether or not there has been a conviction;
or (iv) breach of any written company policy or agreement, including, but not
limited to, the Employee Agreement Relating to Intellectual Property (Policy
412) or its equivalent (the "Employee Agreement Relating to Intellectual
Property"), or the Standards of Business Conduct, as each is amended from time
to time.
5. PROHIBITION AGAINST RECRUITING OR HIRING. Commencing on the date of
this Agreement, and, in the event your employment is terminated for any reason,
for one year following such termination, you agree that you will not, without
the prior written consent of the Executive Compensation and Organizational
Structure Committee of GTE Corporation's Board of Directors, its designee, its
successor, or its successor's designee (the "ECC"):
(i) Recruit or solicit any employee of GTE (which, for purposes of
this Agreement, includes GTE Corporation, any corporate
subsidiary or other company affiliated with GTE Corporation, any
company in which GTE Corporation owns directly or indirectly an
equity interest of at least ten percent, and the successors and
assigns of any such company, including, following the Merger,
Bell Atlantic Corporation, its subsidiaries, affiliates, and
other related entities and their successors and assigns) for
employment or retention as a consultant or provider of services;
(ii) Hire, or participate with another entity or third party in the
process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or should
know could lead to the use of that information for purposes of
recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
6. PROHIBITION AGAINST SOLICITING GTE CUSTOMERS. Commencing on the date
of this Agreement, and, in the event your employment with GTE is terminated for
any reason, for one year following such termination, you agree that you will not
solicit or contact, directly or indirectly, any customer, client, or prospect of
GTE with whom you or any of the GTE employees reporting to you had any contact
at any time during the year preceding your termination for the purpose of
inducing such customer, client, or prospect to cease being, or to not become, a
customer or client of GTE or to divert business from GTE.
<PAGE> 3
7. CONFIDENTIALITY. You agree that you will not disclose or discuss
either the existence or the terms of this Agreement under any circumstances
where such information could reasonably be expected to, directly or indirectly,
come to the attention of any present or former employee, contractor, or
consultant of GTE. You further agree that you will require anyone with whom you
share information regarding this Agreement to adhere to the same standard of
confidentiality.
8. PROPRIETARY INFORMATION. You agree that you will at all times comply
with your obligations under the Employee Agreement Relating to Intellectual
Property and preserve the confidentiality of all Proprietary Information and
trade secrets of GTE and the Proprietary Information and trade secrets of third
parties, including customers, that are in the possession of GTE by not
disclosing the same to any other party or using the same, or any portion
thereof, for the benefit of anyone other than GTE. "Proprietary Information"
means information obtained or developed by you or to which you had access during
your employment with GTE, including, but not limited to, customer information
and other trade secrets and Proprietary Information of GTE and third parties
that has not been fully disclosed in a writing generally circulated by GTE to
the public at large without any restrictions on use or disclosure. You agree
that you will return all copies, in whole or in part, in any form, of trade
secrets and Proprietary Information in your possession or control in the event
of your termination of employment or upon request by GTE, whichever occurs
earlier, without making or retaining a copy.
9. SURVIVAL OF AND CONSIDERATION FOR COVENANTS. You acknowledge and
agree that any payment made pursuant to this Agreement includes consideration
for the covenants contained in paragraphs 5, 6, 7 and 8 of this Agreement and
that the obligations set out in paragraphs 5, 6, 7, and 8 of this Agreement
survive any cancellation, termination, or expiration of this Agreement or the
termination of your employment with GTE.
10. DEFERRAL. Amounts otherwise payable to you under this Agreement may
be deferred under GTE's EIP deferral regulations, or any successor arrangement,
in accordance with the terms of those regulations. Amounts deferred under this
Agreement shall not, however, be eligible for match under GTE's Equity
Participation Plan.
11. PAYMENT TAXABLE/NOT BENEFIT BEARING. Applicable taxes will be
withheld from any payment made pursuant to this Agreement. Amounts payable under
this Agreement shall not be treated as compensation for purposes of computing or
determining any benefit under any pension, savings, insurance, or other employee
compensation or benefit plan maintained by GTE.
12. NO DUPLICATION OF BENEFITS. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
payment provided for by this Agreement and any other retention incentive program
that provides for payment of a retention bonus for continued employment during
any part of the same time period covered by this Agreement. As a result, any
payment otherwise due under this Agreement shall be reduced by any amounts due
under any such retention incentive program.
<PAGE> 4
13. BUSINESS DISCRETION OF GTE. Nothing in this Agreement is intended
to limit the discretion of GTE to take any action with regard to the Merger that
GTE may consider appropriate, including, without limitation, postponing the
Closing Date or terminating the Definitive Agreement. This Agreement does not
entitle you to remain in the employ of GTE for any minimum or prescribed period
of term and does not modify the at-will status of your employment.
14. ASSIGNMENT BY GTE. GTE may assign this Agreement without your
consent to any company that acquires all or substantially all of the stock or
assets of GTE, or into which or with which GTE is merged or consolidated. This
Agreement may not be assigned by you, and no person other than you (or your
estate) may assert your rights under this Agreement.
15. DISPUTE RESOLUTION. You agree that the ECC shall have sole
discretion to interpret this Agreement and to resolve any and all disputes under
this Agreement, including, but not limited to, issues arising under paragraphs
2, 4, 5, 6, 7 and 8. You further agree that the ECC's determination shall be
final and binding.
16. WAIVER. The waiver by GTE of any breach of this Agreement shall not
be construed as a waiver of any subsequent breach.
17. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York, disregarding its choice of
law rules.
18. REMEDIES. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Agreement, including other obligations referenced herein. In the
event of a breach of any of your covenants and commitments under this Agreement,
including any other obligations referenced herein, GTE shall not be obligated to
make any payment otherwise required under this Agreement and may, at GTE's
discretion, require you to repay any amounts already paid to you, including
amounts that may have been deferred. In addition, GTE reserves all rights to
seek any and all remedies and damages permitted under law, including, but not
limited to, injunctive relief, equitable relief, and compensatory and punitive
damages.
19. DEFINITIONS/RELATIONSHIP TO OTHER AGREEMENTS. The definitions
contained in this Agreement, including but not limited to the definition of
Cause, shall be controlling for purposes of this Agreement. These definitions
shall not be modified by, nor shall they modify, definitions for terms in any
other agreement to which you may be a party.
20. ENTIRE AGREEMENT. You acknowledge and agree that this Agreement
sets forth the entire understanding of the parties with regard to the subject
matter addressed herein and that this Agreement supersedes all prior agreements
and communications, whether written or oral, pertaining to the incentive
described herein. This Agreement shall not be modified except by written
agreement duly executed by you and GTE.
<PAGE> 5
I hope that the terms of this Agreement and the incentive just
described will provide you with a level of comfort as you continue your valuable
contributions to GTE. GTE believes you have made and will continue to make a
difference in our future -- we are truly pleased to have you on our team. If
this Agreement meets with your satisfaction, please sign below and return the
original to me within fifteen (15) business days.
Sincerely,
I have read, understand and agree to the foregoing.
- -------------------------------------------
Employee's Signature
- -------------------------------------------
Date
<PAGE> 1
EXHIBIT 10.13
CONFIDENTIAL
Employee Name
Employee Address
Dear [First Name]:
As you know, on July 27, 1998, GTE Corporation entered into an
Agreement and Plan of Merger (the "Definitive Agreement") with Bell Atlantic
Corporation ("Bell Atlantic"). In line with this decision, the businesses of the
two companies will be merged (the "Merger") on a date yet to be determined ("the
Closing Date"). It is crucial that we continue to conduct business as usual
during the period preceding the Closing Date and that we retain people like
yourself whose skill is essential to our ongoing business efforts and/or the
Merger. This Agreement is intended to provide you with an incentive to continue
your employment through the Closing Date or, should the Definitive Agreement be
terminated, the date of such termination (the "Termination Date").
1. MERGER BONUS. On or about 45 days following the Closing Date, you
will receive a merger implementation and retention bonus (a "Merger Bonus")
equal (before withholding of applicable taxes) to one times the sum of (i) your
base annual salary as of the Closing Date and (ii) the prior three-year average
corporate rating (as of the date of shareholder approval of the Merger) under
GTE's Executive Incentive Plan ("EIP") for your grade level as of the Closing
Date multiplied by an amount equal to 100% of norm for that grade level under
EIP.
2. PARTIAL BONUS. If the Definitive Agreement is terminated, on or
about 45 days following the Termination Date, you will receive, in lieu of the
Merger Bonus described above, a special bonus (a "Partial Bonus") equal (before
withholding of applicable taxes) to 25% of the Merger Bonus you would have
otherwise received had the Closing Date occurred on the Termination Date.
3. INVOLUNTARY TERMINATION WITHOUT CAUSE. If your employment is
terminated involuntarily without Cause (and for reasons other than your death or
disability) prior to the Closing Date or, if applicable, the Termination Date,
you will receive a payment equal to the Merger Bonus or, as the case may be,
Partial Bonus to which you would have been entitled had your employment
continued through the Closing Date or Termination Date. Payment will be made at
the same time such bonuses are paid to other eligible employees. Under no
circumstances will your resignation from employment or retirement for any reason
constitute an involuntary termination without Cause for purposes of this
Agreement.
<PAGE> 2
4. DEATH OR DISABILITY. Should the Merger be concluded as anticipated
and you die or become disabled (within the meaning of GTE's Long Term Disability
Plan) prior to the Closing Date, you, or, in the event of your death, your
estate, will receive a prorated Merger Bonus based on the ratio of (i) the
number of days you remained actively employed between the date of this Agreement
and the Closing Date to (ii) the number of days between the date of this
Agreement and the Closing Date. Should the Definitive Agreement be terminated
and you die or become disabled before the Termination Date, you, or, in the
event of your death, your estate, will receive an amount equal to the Partial
Bonus to which you would have been entitled had you remained actively employed
through the Termination Date. The prorated Merger Bonus or the Partial Bonus
payable under this paragraph shall be paid at the same time the Merger Bonus or
Partial Bonus is paid to other eligible employees.
5. CIRCUMSTANCES WHEN NO BONUS WILL BE PAID. You will not receive a
Merger Bonus if the Closing Date does not occur. Should you resign or retire for
any reason prior to the Closing Date or, if applicable, the Termination Date, or
should you at any time engage in conduct that would constitute Cause, you will
not be eligible to receive any portion of the Merger Bonus or Partial Bonus. For
purposes of this Agreement, Cause means (i) failure to perform satisfactorily
the duties assigned to you; (ii) breach of any of the terms of this Agreement;
(iii) violation of a law (other than a traffic violation or minor civil
offense), whether or not there has been a conviction; or (iv) breach of any
written company policy or agreement, including, but not limited to, the Employee
Agreement Relating to Intellectual Property (Policy 412) or its equivalent (the
"Employee Agreement Relating to Intellectual Property"), or the Standards of
Business Conduct, as each is amended from time to time.
6. PROHIBITION AGAINST RECRUITING OR HIRING. Commencing on the date of
this Agreement, and, in the event your employment is terminated for any reason,
for one year following such termination, you agree that you will not, without
the prior written consent of the Executive Compensation and Organizational
Structure Committee of GTE Corporation's Board of Directors, its designee, its
successor, or its successor's designee (the "ECC"):
(i) Recruit or solicit any employee of GTE (which, for purposes of
this Agreement, includes GTE Corporation, any corporate
subsidiary or other company affiliated with GTE Corporation, any
company in which GTE Corporation owns directly or indirectly an
equity interest of at least ten percent, and the successors and
assigns of any such company, including, following the Merger,
Bell Atlantic Corporation, its subsidiaries, affiliates, and
other related entities and their successors and assigns) for
employment or retention as a consultant or provider of services;
(ii) Hire, or participate with another entity or third party in the
process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or should
know could lead to the use of that information for purposes of
recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
<PAGE> 3
7. PROHIBITION AGAINST SOLICITING GTE CUSTOMERS. Commencing on the date
of this Agreement, and, in the event your employment with GTE is terminated for
any reason, for one year following such termination, you agree that you will not
solicit or contact, directly or indirectly, any customer, client, or prospect of
GTE with whom you or any of the GTE employees reporting to you had any contact
at any time during the year preceding your termination for the purpose of
inducing such customer, client, or prospect to cease being, or to not become, a
customer or client of GTE or to divert business from GTE.
8. CONFIDENTIALITY. You agree that you will not disclose or discuss
either the existence or the terms of this Agreement under any circumstances
where such information could reasonably be expected to, directly or indirectly,
come to the attention of any present or former employee, contractor, or
consultant of GTE. You further agree that you will require anyone with whom you
share information regarding this Agreement to adhere to the same standard of
confidentiality.
9. PROPRIETARY INFORMATION. You agree that you will at all times comply
with your obligations under the Employee Agreement Relating to Intellectual
Property and preserve the confidentiality of all Proprietary Information and
trade secrets of GTE and the Proprietary Information and trade secrets of third
parties, including customers, that are in the possession of GTE by not
disclosing the same to any other party or using the same, or any portion
thereof, for the benefit of anyone other than GTE. "Proprietary Information"
means information obtained or developed by you or to which you had access during
your employment with GTE, including, but not limited to, customer information
and other trade secrets and Proprietary Information of GTE and third parties
that has not been fully disclosed in a writing generally circulated by GTE to
the public at large without any restrictions on use or disclosure. You agree
that you will return all copies, in whole or in part, in any form, of trade
secrets and Proprietary Information in your possession or control in the event
of your termination of employment or upon request by GTE, whichever occurs
earlier, without making or retaining a copy.
10. SURVIVAL OF AND CONSIDERATION FOR COVENANTS. You acknowledge and
agree that any payment made pursuant to this Agreement includes consideration
for the covenants contained in paragraphs 6, 7, 8, and 9 of this Agreement and
that the obligations set out in paragraphs 6, 7, 8, and 9 of this Agreement
survive any cancellation, termination, or expiration of this Agreement or the
termination of your employment with GTE.
11. DEFERRAL. Amounts otherwise payable to you under this Agreement may
be deferred under GTE's EIP deferral regulations, or any successor arrangement,
in accordance with the terms of those regulations. Amounts deferred under this
Agreement shall not, however, be eligible for match under GTE's Equity
Participation Plan.
12. PAYMENT TAXABLE/NOT BENEFIT BEARING. Applicable taxes will be
withheld from any payment made pursuant to this Agreement. Amounts payable under
this Agreement shall not be treated as compensation for purposes of computing or
determining
<PAGE> 4
any benefit under any pension, savings, insurance, or other employee
compensation or benefit plan maintained by GTE.
13. NO DUPLICATION OF BENEFITS. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
payment provided for by this Agreement and any other retention incentive program
that provides for payment of a retention bonus for continued employment during
any part of the same time period covered by this Agreement. As a result, any
payment otherwise due under this Agreement shall be reduced by any amounts due
under any such retention incentive program.
14. BUSINESS DISCRETION OF GTE. Nothing in this Agreement is intended
to limit the discretion of GTE to take any action with regard to the Merger that
GTE may consider appropriate, including, without limitation, postponing the
Closing Date or terminating the Definitive Agreement. This Agreement does not
entitle you to remain in the employ of GTE for any minimum or prescribed period
of term and does not modify the at-will status of your employment.
15. ASSIGNMENT BY GTE. GTE may assign this Agreement without your
consent to any company that acquires all or substantially all of the stock or
assets of GTE, or into which or with which GTE is merged or consolidated. This
Agreement may not be assigned by you, and no person other than you (or your
estate) may assert your rights under this Agreement.
16. DISPUTE RESOLUTION. You agree that the ECC shall have sole
discretion to interpret this Agreement and to resolve any and all disputes under
this Agreement, including, but not limited to, issues arising under paragraphs
3, 5, 6, 7, 8, and 9. You further agree that the ECC's determination shall be
final and binding.
17. WAIVER. The waiver by GTE of any breach of this Agreement shall not
be construed as a waiver of any subsequent breach.
18. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York, disregarding its choice of
law rules.
19. REMEDIES. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Agreement, including other obligations referenced herein. In the
event of a breach of any of your covenants and commitments under this Agreement,
including any other obligations referenced herein, GTE shall not be obligated to
make any payment otherwise required under this Agreement and may, at GTE's
discretion, require you to repay any amounts already paid to you, including
amounts that may have been deferred. In addition, GTE reserves all rights to
seek any and all remedies and damages permitted under law, including, but not
limited to, injunctive relief, equitable relief, and compensatory and punitive
damages.
20. DEFINITIONS/RELATIONSHIP TO OTHER AGREEMENTS. The definitions
contained in this Agreement, including but not limited to the definition of
Cause, shall be controlling
<PAGE> 5
for purposes of this Agreement. These definitions shall not be modified by, nor
shall they modify, definitions for terms in any other agreement to which you may
be a party.
21. ENTIRE AGREEMENT. You acknowledge and agree that this Agreement
sets forth the entire understanding of the parties with regard to the subject
matter addressed herein and that this Agreement supersedes all prior agreements
and communications, whether written or oral, pertaining to the incentive
described herein. This Agreement shall not be modified except by written
agreement duly executed by you and GTE.
I hope that the terms of this Agreement and the incentive just
described will provide you with a level of comfort as you continue your valuable
contributions to GTE. GTE believes you have made and will continue to make a
difference in our future -- we are truly pleased to have you on our team. If
this Agreement meets with your satisfaction, please sign below and return the
original to me within fifteen (15) business days.
Sincerely,
I have read, understand and agree to the foregoing.
- -------------------------------------------
Employee's Signature
- -------------------------------------------
Date
<PAGE> 1
Exhibit 11
GTE CORPORATION AND SUBSIDIARIES
Calculation of Earnings (Loss) per Common Share
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C>
Net income (loss):
Before extraordinary charges $ 2,492 $ 2,794 $ 2,798 $ 2,538 $ 2,441
Extraordinary charges (320) -- -- (4,682) --
------- ------- ------- ------- -------
Consolidated net income (loss) 2,172 2,794 2,798 (2,144) 2,441
------- ------- ------- ------- -------
Adjustments to net income (loss):
Add: Preferred dividend requirements on
dilutive convertible preferred stocks -- -- -- -- 1
Interest expense, net of tax effect, on
employees' stock plans -- -- -- 2 1
------- ------- ------- ------- -------
Total adjustments -- -- -- 2 2
------- ------- ------- ------- -------
Adjusted consolidated net income (loss):
Before extraordinary charges 2,492 2,794 2,798 2,540 2,443
Extraordinary charges (320) -- -- (4,682) --
------- ------- ------- ------- -------
Adjusted consolidated net income (loss) $ 2,172 $ 2,794 $ 2,798 $(2,142) $ 2,443
======= ======= ======= ======= =======
Average Common Shares Outstanding (in millions):
Average basic common shares 963 958 969 970 958
Adjustments to basic common shares:
Add: Employees' stock and stock option plans 5 4 3 3 2
Dilutive convertible preferred stocks -- -- -- -- 1
------- ------- ------- ------- -------
Adjusted average diluted common shares 968 962 972 973 961
======= ======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic (1):
Before extraordinary charges $ 2.59 $ 2.92 $ 2.89 $ 2.62 $ 2.55
Extraordinary charges (.33) -- -- (4.83) --
------- ------- ------- ------- -------
Consolidated $ 2.26 $ 2.92 $ 2.89 $ (2.21) $ 2.55
======= ======= ======= ======= =======
Diluted (2):
Before extraordinary charges $ 2.57 $ 2.90 $ 2.88 $ 2.61 $ 2.54
Extraordinary charges (.33) -- -- (4.81) --
------- ------- ------- ------- -------
Consolidated $ 2.24 $ 2.90 $ 2.88 $ (2.20) $ 2.54
======= ======= ======= ======= =======
</TABLE>
(1) Computed by dividing net income available to common shareholders 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>
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 2,492 $ 2,794 $ 2,798 $ 2,538 $ 2,441
Add (deduct):
Income taxes 1,553 1,624 1,614 1,466 1,532
Interest expense 1,397 1,283 1,146 1,151 1,139
Capitalized interest (net of amortization) (7) (13) (35) (23) (6)
Preferred stock dividends of Parent -- -- -- 6 10
Dividends on preferred securities
of subsidiaries 98 101 106 98 18
Additional income requirement on
preferred dividends of subsidiaries 5 7 10 10 12
Minority interests 199 155 149 145 140
Portion of rent expense representing 155 133 131 128 140
interest
------- ------- ------- ------- -------
5,892 6,084 5,919 5,519 5,426
Deduct - Minority interests (329) (280) (263) (246) (243)
------- ------- ------- ------- -------
Adjusted earnings $ 5,563 $ 5,804 $ 5,656 $ 5,273 $ 5,183
======= ======= ======= ======= =======
Fixed charges:
Interest expense $ 1,397 $ 1,283 $ 1,146 $ 1,151 $ 1,139
Dividends on preferred securities
of subsidiaries 98 101 106 98 18
Additional income requirement on
preferred dividends of subsidiaries 5 7 10 10 12
Portion of rent expense representing interest 155 133 131 128 140
------- ------- ------- ------- -------
1,655 1,524 1,393 1,387 1,309
Deduct - Minority interests (60) (66) (68) (70) (68)
------- ------- ------- ------- -------
Adjusted fixed charges $ 1,595 $ 1,458 $ 1,325 $ 1,317 $ 1,241
======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.49 (a) 3.98 4.27 4.00 4.18
</TABLE>
(a) Excluding pretax special charges of $755 million, or $482 million after-tax
(see Note 3 in Item 8), the Company's ratio of earnings to fixed charges
for the year ended December 31, 1998 would have been 3.96.
<PAGE> 1
Exhibit 21
GTE CORPORATION AND SUBSIDIARIES
Significant Subsidiaries of Registrant at December 31, 1998
<TABLE>
<CAPTION>
Percent of Voting
Control Owned by
Company Incorporated In Direct Parent
- -------------------------------------- --------------- -----------------
<S> <C> <C>
GTE California Incorporated California 99.60
GTE Florida Incorporated Florida 100.00
GTE North Incorporated Wisconsin 100.00
GTE Northwest Incorporated Washington 100.00
GTE South Incorporated Virginia 100.00
GTE Southwest Incorporated Delaware 100.00
GTE Hawaiian Telephone Company Incorporated Hawaii 100.00
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 28, 1999, on the consolidated financial statements
and supporting schedule of GTE Corporation and subsidiaries included in this
Form 10-K, into the following previously filed Registration Statements:
1. Form S-8 of GTE Corporation (File No. 33-20178)
2. Form S-8 of GTE Corporation (File No. 33-65025)
3. Form S-3 of GTE Corporation (File No. 33-63145)
4. Form S-3 of GTE Corporation (File No. 33-61661)
5. Form S-4 of GTE Corporation (File No. 33-37530)
6. Form S-8 of GTE Corporation (File No. 33-39297)
7. Form S-8 of GTE Corporation (File No. 33-50111)
8. Form S-8 of GTE Corporation (File No. 333-31455)
9. Form S-8 of GTE Corporation (File No. 333-31451)
10. Form S-8 of GTE Corporation (File No. 333-43025)
11. Form S-3 of GTE Corporation (File No. 333-31333)
Dallas, Texas ARTHUR ANDERSEN LLP
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 467,000
<SECURITIES> 0
<RECEIVABLES> 5,180,000
<ALLOWANCES> 395,000
<INVENTORY> 668,000
<CURRENT-ASSETS> 6,781,000
<PP&E> 59,689,000
<DEPRECIATION> 34,823,000
<TOTAL-ASSETS> 43,615,000
<CURRENT-LIABILITIES> 10,355,000
<BONDS> 15,418,000
0
0
<COMMON> 50,000
<OTHER-SE> 8,716,000
<TOTAL-LIABILITY-AND-EQUITY> 43,615,000
<SALES> 25,473,000
<TOTAL-REVENUES> 25,473,000
<CGS> 10,741,000
<TOTAL-COSTS> 20,137,000
<OTHER-EXPENSES> 38,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,397,000
<INCOME-PRETAX> 4,045,000
<INCOME-TAX> 1,553,000
<INCOME-CONTINUING> 2,492,000
<DISCONTINUED> 0
<EXTRAORDINARY> 320,000
<CHANGES> 0
<NET-INCOME> 2,172,000
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.24
</TABLE>
