-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Xdio6qY24oldXmYiRYVQBxNzsKPhDdko4mXKbX7GP8ejZ3RIpg1lrmn5u9J6A5tI aShHK02actwGIYMKj4UkMQ== 0000950123-95-000437.txt : 19950612 0000950123-95-000437.hdr.sgml : 19950612 ACCESSION NUMBER: 0000950123-95-000437 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950307 SROS: MSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GTE CORP CENTRAL INDEX KEY: 0000040858 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 131678633 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-02755 FILM NUMBER: 95519074 BUSINESS ADDRESS: STREET 1: ONE STAMFORD FORUM CITY: STAMFORD STATE: CT ZIP: 06904 BUSINESS PHONE: 2039652000 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL TELEPHONE & ELECTRONICS CORP DATE OF NAME CHANGE: 19820816 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN INVESTMENT PROGRAMS COMMON STOC DATE OF NAME CHANGE: 19700209 10-K405 1 GTE CORP. - FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 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) One Stamford Forum Stamford, Connecticut 06904 Area Code 203 965-2000 (Address of principal executive offices) (Zip Code) (Telephone Number)
----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Name of each domestic exchange Title of each class on which registered ------------------- --------------------------------------- Common Stock, par value $.05 per share New York Stock Exchange, Inc. Chicago Stock Exchange, Incorporated The Pacific Stock Exchange Incorporated Preferred Stock Purchase Rights New York Stock Exchange, Inc. Chicago Stock Exchange, Incorporated The Pacific Stock Exchange Incorporated $2.00 Convertible No Par Preferred Stock New York Stock Exchange, Inc. 5.00% Cumulative Convertible Preferred Stock, par value $50 per share New York Stock Exchange, Inc.
----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT 4.00% Cumulative Convertible Preferred Stock 4.36% Cumulative Convertible Preferred Stock 4.75% Cumulative Convertible Preferred Stock 5.05% Cumulative Convertible Preferred Stock 5.28% Cumulative Convertible Preferred Stock 5.35% Cumulative Convertible Preferred Stock 5.50% Cumulative Convertible Preferred Stock 4.40% Cumulative Preferred Stock 7.75% Cumulative Preferred Stock 7.85% Cumulative Preferred Stock ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- The aggregate market value of GTE's voting stock held by non-affiliates at January 31, 1995 amounted to $32,727,437,274. GTE had 967,064,265 shares of $.05 par value common stock outstanding at January 31, 1995. Document Incorporated by Reference: GTE's Proxy Statement for Annual Meeting of Shareholders to be held on April 19, 1995 (Incorporated in Part III). 2 PART I Item 1. Business. BUSINESS OF GTE COMPANIES GTE Corporation ("GTE") has two major business segments: telephone operations and telecommunications products and services. GTE also has subsidiaries engaged in financing, insurance, leasing and other activities offering financial and related services primarily to GTE operating companies. One of these subsidiaries, GTE Service Corporation, furnishes at cost, advisory and consulting services related to administration, operations, accounting methods and procedures, insurance, personnel, financing, Federal and state taxes and other matters. GTE and its subsidiaries had approximately 111,000 employees, at December 31, 1994. TELEPHONE OPERATIONS Telephone Operations in the United States GTE's telephone operating subsidiaries in the United States served approximately 17.4 million access lines in 28 states as of December 31, 1994 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 various industries. Subsidiaries accounting for the largest portion of total domestic telephone revenues are GTE California, 21%; GTE North, 20%; GTE Florida, 10%; and GTE Southwest, 9%. The largest cities served include Los Angeles, Long Beach and Santa Monica California; Tampa and St. Petersburg, Florida; Honolulu, Hawaii; Lexington, Kentucky; Fort Wayne, Indiana; and Erie, Pennsylvania. During 1994, GTE substantially completed its previously announced plan to sell or trade a small percentage of local-exchange telephone properties (representing less than five percent of its U.S. access lines) in markets that may be of greater long-term strategic value to other telephone service providers. As part of this program, in 1994 GTE sold 448,000 access lines in nine states for $900 million in cash. In addition, during 1993, GTE sold local-exchange properties serving 530,000 access lines in eight states in return for 90,000 access lines in Illinois, Indiana and Michigan and $1 billion in cash. Local network service revenues are comprised mainly of fees charged to customers for providing local-exchange service within the designated franchise area. GTE telephone subsidiaries also provide toll service within designated geographic areas called Local Access and Transport Areas ("LATAs") 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 by state regulatory commissions. Interstate and intrastate revenues are generated by providing access services to interexchange carriers. The interstate service revenues are -1- 3 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. In most cases the telephone subsidiaries have legal rights to operate in the areas served subject to conditions, restrictions and limitations of various kinds. In some cases, subsidiaries operate at sufferance or under rights which are open to question, and in some cases municipalities have the right to acquire the telephone system within the municipal limits on certain terms and conditions. Advances in technology and an increase in alternative provision of service are beginning to erode certain of the benefits derived from these franchise rights. Rates and Regulation - U.S. The telephone operating subsidiaries in the United States are subject to regulation by the various state regulatory agencies for the majority of their operations. These subsidiaries are also subject to the jurisdiction of the FCC with respect to interstate communications, accounting and related matters. Rates in effect for various services differ among the telephone subsidiaries and among the exchanges within their respective territories, depending upon type of service, size of community and other factors. Federal and state regulatory activity directed toward changing the traditional cost-based rate of return regulatory framework for intrastate and interstate telephone services has continued. Regulatory authorities have adopted various forms of alternative regulation, which provide economic incentives to telephone service providers to improve productivity and provide the foundation for implementing pricing flexibility necessary to address competitive entry into GTE markets. In total, approximately 50 percent of Telephone Operations' U.S. regulated revenues are under some form of alternative regulation. As of January 1, 1995, one-third of GTE's telephone access lines were in five states that have adopted incentive regulation plans for intrastate service, including California, the state containing GTE's largest operation. Beginning in 1994, under an agreement with the California Public Utilities Commission ("CPUC"), GTE California was allowed to retain 100% of any earnings up to a 15.5% rate of return on investment and required to refund 100% of any earnings above 15.5%. As part of this agreement and its normal annual price cap filing, GTE California reduced its rates by about $100 million in 1994. A number of other states are currently investigating whether to authorize local and toll competition. Several have concluded that competition is in the public interest and five states in which GTE provides telephone service, including Florida, have authorized plans that would allow customers to pre-subscribe to a specific carrier to handle intraLATA toll calls. GTE is challenging the implementation of these orders primarily based on the lack of equality since GTE's telephone subsidiaries are prohibited from providing interLATA toll service. -2- 4 For the provision of interstate services, GTE operates under the terms of the FCC's price cap incentive plan. The "price cap" mechanism serves to limit the rates a carrier may charge, rather than just regulating the rate of return which may be achieved. Under this approach, the maximum prices that the LEC may charge are increased or decreased each year by a price index based upon inflation less a predetermined productivity target. LECs may, within certain ranges, price individual services above or below the overall cap. Under its price cap regulatory plan, the FCC also adopted a productivity sharing feature. Under this feature, GTE's telephone subsidiaries must share equally with its ratepayers any realized interstate return on investment above 12.25%. All returns higher than 16.25% result in a reduction in the maximum price which can be charged, that is, the price cap in the subsequent year. The GTE Consent Decree, which was issued in connection with the 1983 acquisition of GTE Sprint and GTE Spacenet (both since divested), prohibits GTE's domestic telephone operating subsidiaries from providing long-distance service beyond the boundaries of the LATA. This prohibition restricts their direct provision of long-distance service to relatively short distances. However, GTE Hawaiian Telephone and GTE Alaska are permitted to provide services between Hawaii, Alaska and international points. Telephone Operations Outside the United States GTE, through its ownership of common stock of Anglo-Canadian Telephone Company ("Anglo"), has voting control of BC TEL and Quebec Telephone. At December 31, 1994, BC TEL served approximately 2.3 million access lines in the province of British Columbia, Canada and Quebec Telephone served approximately 300,000 access lines in the province of Quebec, Canada. In addition, GTE, through GTE Holdings (Canada) Limited, a Canadian holding company, owns the common stock of Compania Dominicana de Telefonos, C. por A., a telephone company furnishing local and long-distance telephone service in the Dominican Republic. This company served approximately 600,000 access lines at December 31, 1994. In late 1991, GTE acquired, through a multinational consortium, a 20.4% ownership interest in Compania Anonima Nacional Telefonos de Venezuela ("CANTV"), the government-owned telephone company in Venezuela. CANTV is the exclusive provider for local, national and international long-distance telephone service in Venezuela. CANTV also provides other telecommunication and related services, including cellular telephone and directory advertising services. GTE and its four consortium partners have a 40% ownership interest and operating control of CANTV, while GTE, as the owner of 51% of the consortium, is managing CANTV. During 1994, CANTV placed approximately 250,000 new lines in service for customers and added almost 5,000 public telephones while continuing to improve the quality of its services and network. CANTV had approximately 2.3 million access lines in service at December 31, 1994. -3- 5 During 1994, difficult economic conditions in Venezuela caused weaker results at CANTV. The weak economic conditions combined with the implementation of currency controls in mid-1994 have effectively closed access to international banking and capital markets. As a result, CANTV has been unable to secure planned financing and is currently in arrears on repayment of principal on its loan obligations. CANTV is engaged in negotiations with major creditors to address these issues and continues to make payments of interest on these obligations. In September 1993, an explosion occurred at a construction site in Venezuela where a subcontractor of a Venezuelan company, AT&T Andinos, was installing a fiber-optic cable for CANTV. In connection with the explosion, two civil lawsuits for wrongful death and personal injury have been brought by one of the injured persons and the estates of two individuals who died from their injuries. The lawsuits were filed in the United States District Court in Miami, Florida, against GTE, CANTV, AT&T and AT&T Andinos. The financial impact of these lawsuits, if any, is not expected to be material to the financial position of CANTV or GTE. Support Services Included in GTE's Telephone Operations are two major unregulated subsidiaries; GTE Data Services Incorporated ("Data Services") and GTE Supply. Data Services, GTE's software development and information processing subsidiary, provides data processing and information management services to GTE's telephone subsidiaries and other non-affiliated companies. GTE Supply is responsible for the procurement and distribution of supplies for GTE's domestic telephone operating companies, as well as other non-affiliated telephone companies. During 1994, Data Services continued to expand the level of service that it provides to non-affiliated companies by winning several new contracts, including one for $19 million to develop a new Medicare transaction system. In addition, work began on a $20 million contract, awarded in late 1993, to provide processing services to National Electronic Information Corp., the nation's largest commercial health care claims clearing house. Data Services also continued its strategic alliance to cooperatively develop, share and market telecommunications information management systems, by providing a license for its Customer Billing Services System to Mercury Communications Ltd. and Bell Canada. During 1994, GTE Supply was awarded a multi-year contract by Cincinnati Bell valued at over $30 million to provide telecommunications equipment and supplies. Telephone Competition and Regulatory Developments GTE's telephone subsidiaries hold franchises, licenses and permits adequate for the conduct of their business in the markets which they serve. Advances in technology, together with a number of regulatory and judicial actions, continue to accelerate and expand the level of competition and opportunities available to GTE. Presently, GTE is subject to competition from numerous sources, including competitive access providers for network access services, specialized communications companies that have constructed new systems in certain markets to bypass the local-exchange network, and -4- 6 competing cellular telephone companies. Competition from interexchange carriers, wireless and cable TV companies, as well as more recent entry by media and computer companies, is expected to increase in the rapidly changing telecommunications marketplace. GTE continues to support greater competition in telecommunications, provided that, overall, the actions to eliminate existing legal and regulatory barriers allow an opportunity for all service providers to participate equally in a competitive marketplace under comparable conditions. Interconnection During 1992-1994, the FCC took a number of steps to increase competition for LEC access services. These steps, known as Expanded Interconnection requirements, allow competing communications carriers to interconnect to the local-exchange network for the purpose of providing switched access transport services and private line services. Expanded Interconnection requires LECs to permit competitors to connect directly to LEC central offices, and to connect to the LEC network under terms and conditions more favorable than those available to other customers. Competitors are thereby able to compete more effectively than previously to replace LEC services between large users and interexchange carriers ("IXCs"), or between large users and the LEC switch. The FCC accompanied its Expanded Interconnection mandate with a slight relaxation of the rigid pricing rules that govern the manner in which LECs price their access services. In 1994, the FCC also reaffirmed the switched access rate structure changes adopted in 1993 that allow LECs to better reflect the actual cost characteristics of transport services and improve the LEC's ability to compete with alternative access providers. Wireless Services In 1994, the FCC initiated spectrum auctions for the development of a new generation of wireless voice, data, and messaging services which are generally referred to as broadband Personal Communications Services ("PCS"). During the fourth quarter of 1994, the FCC began to auction licenses in 51 major markets and 492 basic trading areas. Over 2,000 licenses will be auctioned across the United States, with as many as six new licensees in any one area. PCS will both complement and directly compete with traditional wireline and cellular services. GTE is permitted to fully participate in the PCS auctions in areas outside of its existing cellular areas and is generally permitted limited participation in areas in which GTE has an existing cellular presence. GTE is selectively participating in the auctions, seeking licenses that are of strategic importance to its operations. In Texas, GTE and SBC (formerly Southwestern Bell Corporation) have formed an alliance that will enable both companies to provide wireless services in each others markets. The auctions are expected to continue into mid-1995. Other Federal and State Developments As a consequence of the November 1994 general elections, key committee leadership and control of the legislative process within the 104th Congress have changed. The debate on telecommunications legislation, however, is expected to continue to emphasize the need for increased competition in all -5- 7 markets, streamlined deregulatory language, definitive timetables for allowing entry into open markets, and removal of the telephone company/cable television cross ownership rules. Although passage of telecommunications legislation in 1995 is not assured, there is significant bipartisan support for legislative change in this area. In the absence of Federal legislation in 1994, the Federal and state regulatory commissions and the courts continued to influence industry developments. In June 1994, the U.S. Court of Appeals for the District of Columbia Circuit overturned an earlier order by the FCC establishing the framework used by competing carriers to interconnect to the local-exchange network for the purpose of providing switched access and private line services. The court ruled that mandatory physical collocation was illegal and remanded the issue of virtual collocation to the FCC for further consideration. In July 1994, the FCC adopted a new order that eliminated mandatory physical collocation. On January 13, 1995, the United States District Court for the Eastern District of Virginia issued an injunction declaring that GTE Telephone Operations has the right to provide video programming to the company's in-franchise customers. The court's decision means that GTE is now permitted to offer video programming over its own video dialtone networks, as well as to compete as a franchised cable operator in GTE's telephone territories. The degree of competition allowed in the intraLATA market is subject to state regulation. However, regulatory constraints on intraLATA competition are gradually being relaxed in many of the states in which GTE telephone operating subsidiaries provide service. During 1994, there were several actions in various states which will increase the level of competition that GTE will face in the future and reform GTE's regulatory environment. In September 1994, the CPUC issued a final order that generally authorized toll competition (without pre-subscription) in California, effective January 1, 1995. It also provides for rate rebalancing with significant rate reductions for toll service and access charges while increasing basic local-exchange rates closer to the actual cost of providing such service. Although the rate rebalancing is intended to be revenue neutral, its ultimate effect on revenue will depend, in part, on the extent to which rate reductions result in increased calling volumes. The decision does not permit rate increases to compensate for competitive losses of market share. GTE believes that the CPUC has over-estimated the calling volume that will be stimulated by reduced toll rates and has requested reconsideration of this aspect of the decision. In December 1994, the CPUC adopted an initial procedural plan to begin implementation of its strategy to ensure future development of advanced telecommunications infrastructure and applications within California. This strategy involves opening all local-exchange markets to full competition by January 1, 1997. The CPUC's strategy also recognizes the need to streamline regulation and allow additional pricing flexibility to local-exchange carriers. In other developments, the state regulatory commissions in Florida and Kentucky will require GTE to implement 1+ intraLATA pre-subscription within its service area by December 1996 and June 1998, respectively, permitting customers to choose different carriers for interLATA and intraLATA toll -6- 8 service. These decisions are in addition to similar decisions made earlier by the Alaska, Minnesota and Michigan commissions. GTE plans to challenge these decisions on the grounds that local competition and intraLATA pre-subscription should not be allowed until GTE is permitted to compete in the interLATA market on an equal basis. In Wisconsin, GTE has elected to operate under an incentive regulation plan effective January 1, 1995. This plan, which is the result of legislation passed in 1994, opens all LEC markets to competition, requires mandatory access rate reductions, and freezes basic local rates for three years. In return, GTE will operate under a price cap plan which eliminates traditional rate of return regulation and provides GTE with a greater earnings potential than would have been typical under the former regulatory plan. As the trend towards increased competition continues at both the federal and state levels, GTE will continue to be an active participant in helping shape future policies that address the issues of local and intraLATA competition, universal service goals and support mechanisms, and the necessary changes to GTE's regulatory environment. The increasingly competitive environment provides GTE with both challenges and opportunities. In order to respond aggressively to the competitive developments and benefit from the new opportunities, GTE has embarked on a series of initiatives. Video Services In Cerritos, California, GTE concluded testing of the capabilities of copper wire, coaxial cable and fiber optics for both video and telephony delivery. In July, 1994, GTE moved to a business-as-usual operation of the Cerritos video network, including the continued provision of near pay-per-view (Center ScreenSM) and interactive (mainStreet(TM)) services. In order to continue to provide these services and video signal transport to the local cable operator, GTE challenged the constitutionality of the federal statute which barred the participation of telephone companies and their affiliates in the delivery of video programming directly to customers within their telephone service territories. As a result of that challenge, the United States District Court for the Eastern District of Virginia ruled in favor of GTE and declared the federal statute unconstitutional. This ruling allows GTE to offer video programming in all of its domestic telephone territories and to provide video signal transport to affiliates. In 1994, GTE announced plans to build a new video network over the next ten years which will pass seven million homes in 66 key GTE markets. GTE has requested FCC approval to construct facilities in the initial three markets and expects to begin construction in 1995. During 1995, GTE expects to invest approximately $190 million to build a fiber optic and coaxial cable video network for nearly 300,000 homes in the three initial markets. GTE Interactive Media and Nintendo of America, Inc. announced in January 1995, a joint arrangement to develop, market, publish and distribute video games, as well as to explore new technologies. Nintendo will help GTE gain access to the retail video game distribution channel and GTE will accelerate Nintendo's entry into network gaming. -7- 9 GTE's mainStreet service is an interactive home information, shopping and banking service expected to be offered to 10 million cable subscribers in the top 20 television markets by the end of the decade. Data Services During 1994, GTE Telephone Operations unveiled its World Class Network in eight key markets to provide advanced communications for business customers. This program includes sophisticated high-speed, digital fiber-optic rings, a high-capacity switching network (known as SONET), and a new centralized operations center that monitors the entire network. These SONET rings are an integral part of the high-speed information network that enables GTE's Telephone Operations to provide advanced services such as high-speed data transmission and video conferencing. Restructuring and Cost Control During 1994, GTE began implementation of a three-year $1.4 billion re-engineering plan for its U.S. Telephone Operations. In the initial year of the plan, $343 million was expended to implement this program. These expenditures were primarily associated with the consolidation of certain customer service centers, separation benefits associated with employee reductions and incremental expenditures to redesign and streamline systems and processes. During the year, 67 customer contact, network operations and operator service centers were closed and express dial tone was installed in more than 50% of the access lines served by GTE's U.S. Telephone Operations. Express dial tone enables customers to activate service without a service call. During 1995, the level of re-engineering activities and related expenditures are expected to accelerate as pilot programs are rolled out and other major initiatives are completed. The overall re-engineering plan remains on schedule and is expected to result in annual savings of approximately $1 billion by 1997. Moreover, continued implementation of this program will position GTE to accelerate delivery of a full array of voice, video and data services and to reach its stated objective of being the easiest company to do business with in the industry. GTE intends to continue to respond aggressively to regulatory and legal developments that allow for increased competition and opportunities in the marketplace. GTE expects its financial results to benefit from reduced costs and the introduction of new products and services that will result in increased usage of its telephone and mobile-cellular networks. However, it is likely that such improvements will be offset, in part, by continued strategic pricing reductions and the effects of increased competition. TELECOMMUNICATIONS PRODUCTS AND SERVICES Telecommunications Products and Services includes Personal Communications Services, GTE Airfone, GTE Government Systems and GTE Information Services. Personal Communications Services Personal Communications Services is comprised of GTE Mobilnet ("Mobilnet"), Contel Cellular Inc. ("CCI") and GTE Telecommunications Services Inc. ("GTE TSI"). Mobilnet and CCI provide mobile-cellular telephone service and -8- 10 market cellular products to over 2.3 million subscribers. GTE TSI provides services to the cellular telephone industry throughout North America. Mobilnet and GTE TSI are 100% owned by GTE. CCI is 90% owned by GTE. The remaining shares of CCI are traded on the NASDAQ National Market System. In 1994, GTE reached agreement to acquire the 10% ownership of CCI that it does not already own for approximately $250 million in cash. This transaction is expected to close during the first half of 1995. GTE is the second largest provider of mobile-cellular telephone services in the United States in terms of population in the areas served. GTE holds a controlling interest in 76 metropolitan markets, known as metropolitan statistical areas ("MSAs"), and 38 rural service areas ("RSAs"). Outside the United States, GTE also operates mobile-cellular networks through international subsidiaries and affiliates in Canada, Venezuela, Argentina and the Dominican Republic. In 1994, a GTE-led consortium, Compania de Telefonos del Interior ("CTI"), was awarded two cellular licenses by the National Telecommunications Commission of Argentina, to provide cellular services in the north and south interior regions of Argentina - areas with a total population of 22 million. During the year, construction of the cellular networks was completed and service was initiated. GTE, as operator, has a 25.5% ownership interest in CTI, and holds a ten-year contract to manage the system. CTI has an initial two-year service exclusivity from May 1994. 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 cellular operations serve a population of approximately 53 million "POPs", approximately 19 million of which are in the top 30 U.S. markets. ("POPs" refers to the population of a market area multiplied by a company's percentage ownership in the cellular system serving that market.) In 1994, GTE's U.S. cellular operations increased their customer base by 48% to 2,339,000 customers. GTE's FCC cellular licenses, were generally granted for an initial ten-year term and are renewable for successive ten-year terms. FCC license renewal applications continue to be filed and are presently being processed by the FCC with no opposition. The majority of GTE's FCC cellular licenses will expire and require renewal application filings over the next five-year period. In 1994, GTE commercially deployed a new Cellular Digital Packet Data service ("CDPD") in one of its markets and expects to deploy the service in most of its major markets during 1995. CDPD provides a more cost effective means than traditional circuit switched data for users to remotely access their host systems or other services. The service is also a fast, efficient way for cellular users to transmit short bursts of data, such as credit card verifications for retail businesses, service and order information for field sales representatives and delivery tracking for transportation businesses. Also, in 1994, GTE launched its new Tele-Go service to provide anytime, anywhere personal voice communication services targeted to the residential market. This enhanced service works in concert with local telephone -9- 11 service by providing customers with personal communications that combine the capabilities of both traditional telephone and cellular features. The Tele-Go handset is a standard analog cellular telephone modified to operate as a cordless phone when within range of the Enhanced Cordless Basestation ("ECB") installed in the customer's premises. This provides economical service through access to the Public Switched Telephone Network via the wired telephone service in the home. When outside of the range of the ECB unit, the handset functions as a normal portable cellular telephone. GTE invested more than $50 million during 1994 to bring Tele-Go service to 15 markets by year-end. Nearly 120,000 customers had signed up for this service by December 31, 1994. GTE's cellular operations experience direct competition from the second cellular licensee in each market. Competition is principally on the basis of service quality, price and coverage area. In addition to the direct cellular competitor in each market, Enhanced Specialized Mobile Radio operators also represent potential competition. In 1993, the FCC released a Report and Order to allocate additional frequencies in the 1.8 GHz to 2.1 GHz frequency band to enable up to six additional wireless competitors to enter the market. These new licenses are the subject of auction on the basis of two licenses (each at 30 MHz of spectrum) in each of 51 large service areas across the U.S. called "Major Trading Areas" ("MTAs"), and four licenses (three at 10 MHz of spectrum each and one at 30 MHz) in each of 492 smaller service areas called "Basic Trading Areas" ("BTAs"). Mobile-cellular telephone service providers such as GTE are eligible for these new MTA and BTA licenses in areas where they do not currently have significant cellular holdings and for a single 10 MHz BTA license anywhere. The service offerings at these new frequencies will be similar in nature to mobile-cellular telephone service and will offer direct competition once established. The frequency bands being allocated to these new licenses are currently occupied by point-to-point microwave radio users. GTE, both within its local-exchange telephone operations and its cellular operations, is an extensive user of these facilities for the backhaul of telephone traffic. Under the proposed FCC rules, the incumbent users of these frequencies will be relocated to higher frequencies to make way for the new PCS services. The FCC rules allow for up to a two-year negotiation period between the incumbent and the new licensee and the new licensee is to provide adequate compensation to the incumbent for the cost of that relocation. Failing agreement between the two parties during that two-year negotiation period, the FCC rules provide for a third year for arbitration. The FCC began auctioning these licenses in December 1994 with completion expected during 1995. GTE is selectively participating in these auctions. GTE TSI provides transaction processing, software applications 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 virtually all operational wireline markets and 35% of the non-wireline markets. GTE TSI competes through product innovation, technology deployment, provision of flexible product solutions and quality customer service. -10- 12 GTE Airfone GTE Airfone ("Airfone") 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, have initiated service. At the end of 1994, Airfone service was installed on 2,130 U.S., Canadian and Mexican commercial aircraft. During 1994, Airfone continued deployment of its new advanced digital GenStar System, which enhances quality and makes possible a new array of features to airline passengers. These new features include data and fax service, ground-to-air calling, and a variety of information services. A lighted menu screen makes it easy and efficient for passengers to use these enhanced features. Airfone has been competing for contracts to install its digital GenStar system, and as of December 1994 has won agreements with United, Delta, TWA, US Air Shuttle, Sunbird, Reno, Mexicana, Aeromexico and Varig Airlines. At December 31, 1994, approximately 500 aircraft have been installed with the GenStar System. Also, beginning in 1994, Airfone and Magnavox, pursuant to a joint alliance, began 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 Airfone all-digital GenStar System. As of December 31, 1994, over 100 Magnastar units have been sold. Late in 1993, American Airlines and America West reached an agreement with other providers for onboard telecommunications service. As of December 1994, a majority of their fleets were still equipped with Airfone equipment. Airfone will continue to actively compete for digital service contracts based on quality, reliability, new feature offerings and flexibility for future capabilities. GTE Government Systems GTE Government Systems Corporation ("GSC") develops, manufactures and integrates customized command, control, communications and intelligence systems for the defense and national security agencies of the U.S. Government and selected foreign governments. In addition, GSC provides information systems, telecommunications services and electronic system operation and maintenance support services for civilian agencies of the Federal government and for commercial users, both domestically and internationally. As a major part of this business focus, GSC provides and manages integrated system solutions tailored to customer information processing and telecommunications requirements. During 1994, GSC received orders valued at $1.2 billion, consistent with the previous year despite a declining defense market. As the overall budgets for the defense market continue to decline, GSC is seeking a stronger presence with its traditional military customers and is aggressively offsetting defense declines with market penetration of the civilian agencies -11- 13 of the Federal government and selected niches in the domestic commercial marketplace. Capabilities, products and services are being transitioned to non-defense applications. With technologies and other core competencies, GSC is addressing complex telecommunications and information processing challenges in markets such as health care, banking and finance, public safety and insurance. In addition, GSC is pursuing selected programs and markets in the international defense and commercial telecommunications arenas. Principal U.S. competitors include: LORAL, ITT, Boeing, CSC, Martin-Marietta, AT&T, TRW, Harris, E-Systems, Raytheon and Motorola. Major foreign competitors include Thomson-CSF, Ericsson and Siemens. GTE Information Services GTE Information Services is comprised of GTE Directories Corporation and GTE Card Services. GTE Directories Corporation ("GTE Directories") annually publishes or provides sales and other telephone directory-related services for more than 1,000 different directory titles in 42 states and 13 foreign countries with a total circulation of approximately 46 million copies. A full-service directory publisher for nearly 60 years, GTE Directories publishes, prints, distributes, and sells advertising for telephone directories. GTE Directories competes directly within the Yellow Pages industry which consists of nine major and numerous smaller U.S.-based directory publishers. Indirectly, GTE Directories competes with other advertising-based media such as cable, newspapers, television, radio, and direct mail. GTE Directories has three primary customer groups: the businesses that purchase advertising in its directories and other related products; the consumers who use the directories and other advertising and information services GTE Directories provides; and the telephone companies and other entities that contract for directory publishing production, printing, distribution and/or sales services. In recent years, GTE Directories has developed, tested and supported new products and services that are strategically positioned to increase the use and retention of the printed directory and/or expand its advertiser base. These products and services, such as On Call audiotex services, Quick Tips talking information service, Special Editions direct-mail coupon booklets and Response Plus interactive voice response service, offer useful information to consumers and added flexibility for advertisers. This strategy enables GTE Directories to build stronger customer relationships by providing products that allow year-round customer contact. In 1994, GTE Directories signed a joint venture agreement with BELGACOM, Belgium's official telecommunications provider, for the publication of yellow-pages directories and related products and services. In accordance with the agreement, GTE Directories will acquire a 20 percent ownership interest and provide assistance to BELGACOM's new subsidiary, BELGACOM Directory Services. Also in 1994, GTE Directories won the Malcolm Baldrige National Quality Award in the service category - one of only 22 U.S. corporations and the -12- 14 only directory publishing company to ever win this award. The Baldrige Award is an annual award presented by the U.S. Department of Commerce to recognize U.S. companies that excel in quality management and quality achievement. Under the management of GTE Directories is GTE Card Services. GTE Card Services has been marketing a combination calling card/credit card in conjunction with Associates National Bank since September 1992. With its primary markets in GTE telephone operations' service areas and contiguous areas, GTE Card Services has approximately 900,000 card holders. GTE Card Services also entered the prepaid calling card market in 1994 with the introduction of several GTE prepaid calling cards. The prepaid calling card is a telephone calling card with a preset amount of calling available that is prepaid by the customer when the card is purchased. This card will compete in the long distance market by providing an alternative means of purchasing and controlling long distance usage for both the business and residential user. Prepaid calling cards represent a $4 billion market worldwide, but are relatively new to the U.S. marketplace. GTE Card Services will compete in this marketplace through leverage of GTE's brand name and utilization of GTE's exclusive marketing relationship with the National Football League and other licensees. RECENT DEVELOPMENTS In January 1995, GTE expanded its international presence by entering into a long-term strategic alliance with China United Telecommunications Corporation (UNICOM). UNICOM is a government-established company charged with creating a wireline and wireless full-service telecommunications network throughout China. This joint venture is expected to include telecommunications projects relating to the development of China's "second network". RESEARCH AND NEW PRODUCT DEVELOPMENT 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. The areas of research and product development are focused on telecommunications operations and applications. The key areas of emphasis include: the automation of telecommunication 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 1994 - 1992, expenditures for all company-sponsored research and product development and improvement were approximately $139 million, $135 million and $159 million, respectively. Additionally, approximately $157 million, $204 million and $167 million, respectively, was expended for customer-sponsored research and product development and -13- 15 improvement during the same periods. In total, GTE engaged approximately 1,800 professional scientists and engineers on such activities. 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" - sites, lawfully used in the past, but now determined to require remediation or with respect to some presently or formerly owned sites requiring remediation under the Resource Conservation and Recovery Act ("RCRA"). GTE has reviewed each Superfund and RCRA site in which it has an involvement to establish an expected remediation cost. 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 estimates, number of viable parties involved, degree of GTE's involvement and past experience at sites being remediated. No present value discounting is used. Although the complexity of environmental regulations, and the widespread imposition of multi-party joint and several liabilities at Superfund Sites, makes it difficult to assess GTE's share of liability, management believes it has made adequate provision in its financial statements. While GTE's annual expenditures for site cleanups and environmental compliance have not been and are not expected to be material, they are increasing. These costs include GTE's share of cleanup expenses for Superfund Sites, outlays required to keep existing operations in compliance with increasingly stringent environmental regulations and an underground storage tank replacement program. INDUSTRY SEGMENTS Reference is made to Item 6 "Selected Financial Data" included elsewhere herein for information about GTE's operations by major business segment and GTE's foreign operations for the years 1994-1990. -14- 16 Item 2. Properties. PROPERTIES OF GTE COMPANIES GTE owns no plant, real property, franchises, or concessions except indirectly through its investments in subsidiaries. On a consolidated basis, GTE's property, plant and equipment is summarized as follows at December 31:
1994 1993 --------- --------- (Millions of Dollars) Telephone operations: Land $ 239 $ 236 Buildings 3,000 3,061 Central office equipment 16,008 15,543 Outside plant 18,892 18,192 Other 6,148 6,067 -------- -------- Total 44,287 43,099 Accumulated depreciation (17,656) (16,737) -------- -------- 26,631 26,362 -------- -------- Telecommunications products and services and other: Land 131 125 Buildings 754 668 Network and data processing equipment 2,783 2,826 Furniture and fixtures and leasehold improvements 312 330 Work in progress and other 278 211 -------- -------- Total 4,258 4,160 Accumulated depreciation (1,561) (1,802) -------- -------- 2,697 2,358 -------- -------- Total property, plant and equipment, net $ 29,328 $ 28,720 ======== ========
TELEPHONE OPERATIONS The properties of GTE's telephone subsidiaries consist principally of land, structures and equipment required to provide various telecommunications services and are generally in good operating condition. Substantially all of the properties of the telephone subsidiaries are subject to the liens of their respective mortgages securing funded debt. From January 1, 1990 to December 31, 1994, GTE's telephone subsidiaries made capital expenditures of $17.0 billion for new plant and facilities required to meet telecommunication service needs and to modernize plant and facilities. These additions were equal to 38 percent of gross plant of $44.3 billion at December 31, 1994. Gross retirements amounted to $10.4 billion during the same period. -15- 17 Access lines in service is an important factor in measuring telephone growth. At year-end 1994, access lines served in the United States totaled 17.4 million. In addition, at December 31, 1994, GTE's affiliated telephone companies in Canada, the Dominican Republic and Venezuela served 5.5 million access lines. At December 31, 1994, 91 percent of GTE's U.S. access lines were connected to digital switches, compared with 76 percent in 1990. During 1994, GTE also accelerated the installation of fiber-optic cable, bringing total miles installed throughout GTE's domestic network to 780,000 miles, double the amount installed only three years ago. In view of increased competition and rapid technological change, GTE's telephone subsidiaries continue to seek opportunities to improve recovery of their large investment in telephone plant. Although gross investment in telephone plant increased at a two percent annual rate between 1990 and 1994, 40 percent of GTE's investment in telephone plant had been recovered through depreciation by the end of 1994 compared with only 36 percent in 1990. TELECOMMUNICATIONS PRODUCTS AND SERVICES At year-end 1994, the Telecommunications Products and Services Group operated 15 plants and had 4 laboratories in the United States. OTHER GTE Laboratories Incorporated operates a research facility in Massachusetts. All of the aforementioned properties are generally in good operating condition and adequate to satisfy the needs of the businesses. -16- 18 Item 3. Legal proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. -17- 19 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters. At January 31, 1995, there were approximately 562,000 common shareholders of record. GTE QUARTERLY FINANCIAL DATA GTE Corporation and Subsidiaries (unaudited)
1st QTR 2nd QTR(a) 3rd QTR(b) 4th QTR(c) 1994 1993 1994 1993 1994 1993 1994 1993 -------- -------- -------- -------- -------- -------- -------- -------- (Millions of Dollars, Except Per Share Amounts) Revenues and sales $ 4,746 $ 4,826 $ 4,955 $ 4,916 $ 4,995 $ 4,943 $ 5,248 $ 5,063 Operating income (loss) 1,118 1,101 1,210 1,038 1,246 1,156 1,272 (730) -------- -------- -------- -------- -------- --------- --------- -------- Net income (loss) applicable to common stock Before extraordinary charge $ 500 $ 456 $ 593 $ 433 $ 657 $ 554 $ 691 $ (471) Extraordinary charge--early retirement of debt -- -- -- -- -- (90) -- -- -------- -------- -------- -------- -------- --------- -------- -------- Consolidated $ 500 $ 456 $ 593 $ 433 $ 657 $ 464 $ 691 $ (471) ======== ======== ======== ======== ======== ========= ========= ======== Earnings (loss) per common share Before extraordinary charge $ .52 $ .48 $ .62 $ .46 $ .69 $ .59 $ .72 $ (.50) Extraordinary charge--early retirement of debt -- -- -- -- -- (.10) -- -- -------- -------- -------- -------- -------- --------- --------- -------- Consolidated $ .52 $ .48 $ .62 $ .46 $ .69 $ .49 $ .72 $ (.50) ======== ======== ======== ======== ======== ========= ========= ======== Dividends declared per common share $ .47 $ .455 $ .47 $ .455 $ .47 $ .47 $ .47 $ .47 ======== ======== ======== ======== ======== ========= ========= ======== Stock market price High $35.25 $37.75 $33.63 $37.38 $33.25 $39.00 $31.38 $39.88 Low 30.00 34.13 29.50 34.25 29.88 34.63 29.50 35.00 Close 31.00 37.00 31.00 36.13 30.38 38.38 30.38 35.00 ====== ====== ====== ====== ====== ====== ====== ======
(a) Second quarter 1994 net income includes after-tax gains on sales of non-strategic telephone properties of $71 million, or $.07 per share. Second quarter 1993 operating income includes a pre-tax charge of $74 million resulting from Telephone Operations' voluntary separation programs. This charge reduced net income by $46 million, or $.05 per share (see Notes 3 and 4 to Consolidated Financial Statements). (b) Third quarter 1994 net income includes after-tax gains on sales of non-strategic telephone properties of $48 million, or $.05 per share (see Note 4 to Consolidated Financial Statements). (c) Fourth quarter results include after-tax gains on sales of non-strategic telephone properties of $43 million, or $.05 per share, and $91 million, or $.10 per share, in 1994 and 1993, respectively. Fourth quarter 1993 operating loss includes a pre-tax restructuring charge of $1.8 billion. This charge reduced net income by $1.2 billion, or $1.22 per share (see Notes 3 and 4 to Consolidated Financial Statements). -18- 20 TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for GTE's common stock, preferred stock and no par preferred stock is the First National Bank of Boston. GTE Corporation c/o Bank of Boston P.O. Box 9191 Boston, MA 02205-9191 or GTE Corporation c/o BancBoston Trust Company of New York 55 Broadway New York, NY 10006 For overnight delivery services, use the following address: GTE Corporation c/o The First National Bank of Boston Blue Hills Office Park 105 Royall Street Canton, MA 02021 STOCK OWNERSHIP QUESTIONS Please address questions concerning ownership of common, preferred or no par preferred stock to our Transfer Agent, or call: 1-800-225-5160 in the United States or call 1-617-575-2990 outside of the United States. SHAREHOLDER SYSTEMATIC INVESTMENT PLAN The Shareholder Systematic Investment Plan provides holders of the Corporation's stock with a convenient way to purchase additional common shares. Shareholders wishing information regarding the plan may write to: GTE Corporation c/o Bank of Boston P.O. Box 9092 Boston, MA 02205-9092 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 automatic direct deposit service is offered at no charge. For more information, contact The Bank of Boston at 1-800-225-5160. ANNUAL MEETING The 1995 Annual Meeting of Shareholders will be held on April 19, 1995, at The Italian Center, 1620 Newfield Avenue, Stamford, Connecticut. PRINCIPAL FINANCIAL CONTACT For further information about GTE Corporation and its subsidiaries, please contact: Investor Relations Department GTE Corporation One Stamford Forum Stamford, CT 06904 203-965-2789 Int'l Telex: 4750071 Fax: 203-965-2520 -19- 21 STOCK EXCHANGE LISTINGS The common stock of GTE Corporation (symbol: GTE) is listed on the following major exchanges in the United States: New York Stock Exchange; Chicago Stock Exchange; and Pacific Stock Exchange It also is traded on other, regional exchanges. In Europe, GTE's common stock is listed on the following exchanges: The Stock Exchange, London; Amsterdam Stock Exchange; Basel Stock Exchange; Geneva Stock Exchange Lausanne Stock Exchange; Paris Stock Exchange; and Zurich Stock Exchange Additionally, it is listed on the Tokyo Stock Exchange. The Corporation's 5.00% convertible preferred stock and $2.00 convertible no par preferred stock are listed on the New York Stock Exchange. AUDITORS Arthur Andersen LLP 400 Atlantic Street Stamford, CT 06912 10-K REPORT A copy of our annual report on Form 10-K filed with the Securities and Exchange Commission may be obtained by writing to: Corporate Secretary GTE Corporation One Stamford Forum Stamford, CT 06904 AUDIO ANNUAL REPORT An audio cassette version of the 1994 annual report is available to visually impaired shareholders by contacting: Director, Editorial and Financial Communications Services GTE Corporation One Stamford Forum Stamford, CT 06904 -20- 22 Item 6. Selected Financial Data. BUSINESS GROUP DATA GTE Corporation and Subsidiaries
Five-Year 1994 1993 1992 1991 1990 Annual Growth ------- ------- ------- ------- ------- Rate* (Millions of Dollars, Except Per Share Amounts) RESULTS OF OPERATIONS: Revenues and sales $19,944 $19,748 $19,984 $19,621 $19,157 1.6% Operating income(a) 4,846 2,565 4,216 3,742 3,787 1.3 Net income (loss) applicable to common stock(a) Continuing operations 2,441 972 1,761 1,492 1,579 3.3 Consolidated 2,441 882 (780) 1,543 1,671 -- Earnings (loss) per common share(a) Continuing operations 2.55 1.03 1.95 1.69 1.82 .9 Consolidated 2.55 .93 (.86) 1.75 1.93 -- Common dividends declared per share 1.88 1.85 1.76 1.64 1.52 6.3 Depreciation and amortization 3,432 3,419 3,289 3,254 3,189 2.5 Research and development 139 135 159 155 137 .5 ASSETS AND CAPITAL: Capital expenditures 4,192 3,893 3,909 3,965 4,158 .2 Long-term debt and redeemable preferred stock 12,272 13,175 14,356 16,252 14,130 (1.9) Consolidated assets 42,500 41,575 42,144 42,437 40,178 2.3 Shareholders' equity(a) 10,483 9,593 10,076 11,313 10,727 (.6) CONSOLIDATED RATIOS AND OTHER INFORMATION: Return on common equity(b) 24.8% 8.8% (8.8)% 14.8% 17.1% -- Return on investment(b) 13.1% 6.9% 1.3 % 9.4% 10.4% -- Average common equity 9,838 10,030 8,832 10,434 9,763 .1 Equity ratio 46.2% 42.6% 40.2 % 40.8% 41.5% -- Average investment 25,647 27,322 28,057 29,418 27,354 .2 Employees (in thousands) 111 117 129 159 174 (9.9) ------- ------- ------- ------- ------- ----- INTERNATIONAL OPERATIONS (INCLUDED ABOVE): Revenues and sales $ 2,581 $ 2,482 $ 2,369 $ 2,286 $ 2,129 5.6% Net income 276 328 244 227 240 8.2 Total assets 5,826 6,096 5,963 5,757 4,619 6.5 ======= ======= ======= ======= ======= === CORPORATE AND OTHER: Restructuring and merger costs(a) $ -- $ 72 $ -- $ 97 $ -- -- % Capital expenditures 29 20 24 37 230 -- Total assets 2,285 1,856 2,786 3,689 3,380 (10.2) ======= ======= ======= ======= ======= =====
Notes to Business Group Data appear on pages 21 and 22: * Least-squares method; percentages have been omitted where not meaningful. (a) Net income in 1994 includes after-tax gains of $162 million, or $.17 per share, on sales of certain non-strategic local-exchange telephone properties. Operating income in 1993 was reduced by a $1.8 billion pre-tax restructuring charge primarily for the implementation of a re-engineering plan at Telephone Operations and the reduction in the carrying value of satellite communication and certain other assets to estimated net realizable value (see Note 3). Operating income was also reduced by $74 million for the cost of voluntary separation programs at Telephone Operations. Consolidated net income in 1993 also includes an extraordinary charge of $90 million for the early retirement of high-coupon debt as well as after-tax gains of $91 million on the sales of certain non-strategic local-exchange telephone properties. These special items reduced consolidated net income in 1993 by $1.2 billion, or $1.27 per share. The consolidated net loss in 1992 includes a non-cash, after-tax charge of $2.4 billion, or $2.70 per share, for the cumulative effect of accounting changes for postretirement health care and life insurance benefits and income taxes (see Note 5); and charges totaling $100 million, or $.11 per share, associated with the sale of the Electrical Products Group, which was accounted for as a discontinued operation (see Note 4). Operating income in 1991 was reduced by pre-tax costs of $342 million incurred in connection with the merger and integration of GTE Corporation and Contel Corporation. These costs, net of a gain on the transfer of certain cellular properties, reduced 1991 net income by $204 million, or $.23 per share. -21- 23 BUSINESS GROUP DATA GTE Corporation and Subsidiaries
Five-Year 1994 1993 1992 1991 1990 Annual Growth --------- --------- ---------- --------- --------- Rate* (Millions of Dollars) TELEPHONE OPERATIONS: Revenues and sales Local network services $ 5,345 $ 5,244 $ 5,000 $ 4,792 $ 4,621 4.8% Network access services 4,348 4,398 4,477 4,365 4,248 .8 Toll services 3,296 3,330 3,396 3,488 3,480 (1.0) Equipment sales and services and other 2,916 2,857 2,989 3,007 3,044 (2.1) --------- --------- --------- --------- --------- ---- Total revenues and sales 15,905 15,829 15,862 15,652 15,393 1.1 --------- --------- --------- --------- --------- ---- Operations and maintenance 8,644 8,796 8,979 8,841 8,773 (.1) Depreciation and amortization 3,023 2,969 2,849 2,854 2,849 1.6 Restructuring and merger costs(a) -- 1,370 -- 150 -- -- --------- --------- --------- --------- --------- ---- Operating income 4,238 2,694 4,034 3,807 3,771 -- --------- --------- --------- --------- --------- ---- Capital expenditures 3,398 3,296 3,330 3,491 3,437 (.5) Total assets 33,774 33,746 33,154 32,446 30,390 2.7 Average total capital 22,110 23,244 22,937 23,423 22,521 .6 Return on common equity 19.8% 10.1% 1.6% 15.0% 16.0% -- Access minutes of use (in millions) 58,717 55,476 51,976 47,979 44,533 7.9 Access lines (in thousands) Total(c) 22,859 22,065 21,440 20,490 18,314 5.6 United States(c) 17,442 17,073 16,819 16,233 15,810 2.7 Per employee 252 234 208 191 171 10.1 Employees (in thousands) Total 90 95 104 109 116 (5.5) United States 69 73 81 85 93 (6.6) ========= ========= ========= ========= ========= ==== TELECOMMUNICATIONS PRODUCTS AND SERVICES: Revenues and sales $ 4,039 $ 3,919 $ 4,122 $ 3,969 $ 3,764 4.0% Depreciation and amortization 409 450 440 400 340 11.0 Restructuring and merger costs(a) -- 398 -- 95 -- -- Operating income (loss) 608 (57) 182 32 16 -- Capital expenditures 765 577 555 437 491 15.4 Total assets 6,441 5,973 6,204 6,302 6,408 7.0 Average investment 4,210 4,060 4,252 4,432 3,418 13.4 --------- --------- --------- --------- --------- ---- U.S. Cellular Operations (included above) Service revenues $ 1,539 $ 1,082 $ 853 $ 675 $ 478 39.2% Operating cash flow(d) 559 356 266 183 107 61.3 Operating cash flow margin(e) 36.3% 32.9% 31.2% 27.1% 22.4% -- Adjusted "POPs" (in millions)(f) 53.0 53.0 53.1 52.2 51.7 -- Subscribers (in thousands) 2,339 1,585 1,090 811 594 42.2 ========= ========= ========= ========= ========= ====
Notes to Business Group Data continued from page 21. (b) Excluding the special items described in Note (a), consolidated return on common equity would have been 23.3%, 20.4%, 15.6%, 16.5% and 17.1% while consolidated return on investment would have been 12.5%, 11.2%, 9.5%, 10.1%, and 10.4% in the years 1994-90, respectively. (c) Access lines in 1994 and 1993 exclude 448 thousand and 440 thousand net lines, respectively, sold during those years. Total access lines include 2.3 million, 2.0 million, 1.8 million and 1.6 million lines served by CANTV in Venezuela in 1994-91, respectively. GTE acquired operating control of CANTV in 1991. Excluding the effect of the CANTV acquisition and the access lines sold during 1994 and 1993, the five-year total access line growth rate was 4.0%. (d) Represents operating income before depreciation and amortization. (e) Represents operating cash flow divided by service revenues. (f) Represents total United States population served times GTE's percentage interest in the market. -22- 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. GTE's strategy is based on five major initiatives: enhancing the value of its wireline voice business; accelerating wireless development; aggressively expanding data services; pursuing international opportunities and entering video services. In evaluating opportunities that meet these initiatives, GTE adheres to two clear investment criteria: Investments must be in telecommunications, the company's core business, and they must be expected to earn more than their cost of capital over time. Over the past several years, these initiatives and investment criteria have guided a series of actions designed to further improve GTE's competitive position and enhance its profitability. These actions have included implementation of process re-engineering--which runs through 1996--at Telephone Operations, the sale of non-strategic telephone properties, the investments in CANTV (the Venezuelan telephone company) and CTI (the Argentine cellular consortium), and the divestitures of GTE Spacenet and the Electrical Products Group. In January 1995, GTE expanded its international presence by entering into a long-term strategic alliance with China United Telecommunications Corporation. This joint venture is expected to include projects relating to the development of China's second telecommunications network. Through these and other actions, GTE has sharpened its focus on telecommunications and is better prepared to meet the challenges and opportunities of a more competitive marketplace that offers tremendous potential for profitable growth. GTE's financial objective is to maximize shareholders' long-term total return. During 1994, GTE and most major telecommunications companies experienced declines in their stock prices. As a result, for the five-year period ending in 1994, average annualized total return, consisting of share price appreciation and dividends, was 2.5%, compared with 4.9% for the Regional Bell Operating Companies and 8.7% for the S&P 500 average. This marked the first such period since 1987 that total annualized return to GTE's shareholders did not exceed the return for the S&P 500 average. GTE's policy is to provide a dividend payout ratio at the upper end of the range for comparable companies. Consistent with this policy, GTE maintained its dividend at $1.88 per share in 1994. RETURN ON EQUITY GTE's return on average common equity in 1994 reached 24.8% as compared with 8.8% in 1993. Excluding gains from non-strategic telephone property sales in both years as well as 1993 one-time charges, GTE's return on average common equity was 23.3% in 1994 compared with 20.4% in 1993. The 1994 improvement reflects strong operational performance at all of GTE's business units. CAPITALIZATION GTE targets a capital structure and overall credit position that is appropriate for an "A" rated company. This allows GTE's shareholders to enjoy the benefits of reasonable financial leverage, while also protecting debtholder interests and ensuring ready access to the capital markets. -23- 25 During the year, one rating agency reduced its rating of GTE's senior debt. However, two other agencies maintained their "A" rating and all rating agencies continue to view GTE's debt as investment grade. Total equity as a percentage of total capitalization reached 46.2% in 1994, compared with 42.6% in 1993. This improvement reflects the continued strengthening of GTE's financial position through strong earnings growth, and the 1994 issuance of nearly $500 million of monthly income preferred securities. CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY GTE's cash flow (representing net income plus depreciation and amortization) increased to $5.7 billion in 1994. Net cash from operations, after giving effect to working capital and other requirements, decreased from $5.3 billion in 1993 to $4.7 billion in 1994. This decrease primarily reflects higher tax payments associated with the completion of the eight-year Mobile Subscriber Equipment contract, a major government telecommunications contract, as well as income tax payments related to the gains realized from non-strategic property sales. Cash flows from operations, along with more than $400 million raised through employee stock purchase and dividend reinvestment plans, and $1.2 billion provided from the sales of non-strategic assets, provided the funds required for dividends of $1.8 billion and capital expenditures of $4.2 billion. In 1994, GTE substantially completed its two-year program to sell or trade a small percentage of local-exchange telephone properties that had been identified as non-strategic. A total of 448,000 access lines were sold in 1994, generating $900 million in cash. During 1994, the company completed a financing program that included the issuance of $1.9 billion in long-term debt, primarily related to the refinancing of high-coupon redemptions begun in 1993. Since the beginning of 1992, GTE has reduced total debt by $4.1 billion. The market financing program for 1995 is expected to decrease compared with 1994, reflecting the completion of the high-cost debt refundings. In 1994, GTE reached agreement to acquire the 10% ownership of Contel Cellular Inc. currently held by the public for $25.50 per share, or approximately $250 million in cash. This transaction is expected to close during the first half of 1995. Capital expenditures totaled $4.2 billion in 1994 compared with $3.9 billion in 1993. This increase reflected the expansion of the mobile-cellular and telephone networks to increase capacity and improve service. In 1995, capital expenditures are expected to increase slightly from the 1994 level. Accelerating investment in fiber optics and other enabling technologies for broadband services as well as the continuing expansion and enhancement of the mobile-cellular network is expected to more than offset the declining requirements for conversion to digital switching systems. In 1995, dividends and the capital requirements for GTE's businesses are expected to be funded substantially with cash from operations and proceeds from employee stock purchase and dividend reinvestment plans. However, GTE's strong financial position allows ready access to world wide capital markets for any additional requirements. -24- 26 RESULTS OF OPERATIONS CONSOLIDATED 1994 was an outstanding year for GTE, driven by the record operating results achieved in both Telephone Operations and mobile cellular. These results reflected excellent volume growth, as well as the favorable effects of cost-reduction programs throughout GTE. Excluding properties sold, telephone network usage increased 9.4%, the largest increase since 1990, while access line growth of 4.9% led the industry. Telephone Operations also made significant progress in implementing its three-year re-engineering program. This program is redesigning and streamlining processes to improve customer-responsiveness and product quality, reduce the time necessary to introduce new products and services and further reduce costs. These efforts enabled Telephone Operations to continue to reduce prices to its customers while further improving profitability. GTE's Telecommunications Products and Services businesses also experienced significantly improved profitability, led by the fast growing mobile-cellular business. During 1994, GTE added 754,000 new cellular customers, bringing total U.S. cellular customers to over 2.3 million--more than double the level just two years ago. Consolidated net income in 1994 was $2.5 billion, or $2.55 per share, which included after-tax gains on sales of certain non-strategic local-exchange telephone properties of $162 million, or 17 cents per share. In 1993, consolidated net income was $900 million, or 93 cents per share. Results in 1993 included similar gains of $91 million, or 10 cents per share, as well as one-time after-tax charges totaling $1.3 billion, or $1.37 per share, to restructure operations, complete voluntary separation programs at Telephone Operations and for the early retirement of high-coupon debt. Excluding the impact of these special items, consolidated net income in 1994 was $2.3 billion, or $2.38 per share, an 8% increase over 1993. Consolidated revenues and sales totaled $19.9 billion in 1994 compared with $19.7 billion in 1993. Excluding the revenues from the properties sold, consolidated revenues and sales increased 3% during 1994. This improvement was driven by the strong volume growth in Telephone Operations and higher mobile-cellular revenues. Lower, more competitive telephone pricing, as well as lower government-communication sales resulting from the completion late in 1993 of the Mobile Subscriber Equipment contract, partially offset the strong volume growth in telephone and mobile cellular. Operating income in 1994 reached a record $4.8 billion. Excluding the operating income attributable to the properties sold and other 1993 special items, operating income increased 10% over 1993. Net interest expense declined 12% to $1.1 billion in 1994, reflecting reduced debt levels and the refinancing of high-coupon long-term debt completed early in 1994. TELEPHONE OPERATIONS GTE Telephone Operations provides a wide variety of communications services ranging from local telephone service for the home and office to highly complex voice and data services for industry. In the United States, Telephone Operations served 17.4 million access lines in 28 states at the -25- 27 end of 1994. In addition, GTE's affiliated telephone companies in Canada, the Dominican Republic and Venezuela served 5.5 million access lines. In 1994, revenues from Telephone Operations increased to $15.9 billion, compared with $15.8 billion in 1993. Excluding the revenues from the properties sold, 1994 revenues totaled $15.7 billion, an increase of 3%, reflecting strong growth in unit volumes. Minutes of use of GTE's domestic local-exchange network for long distance calling grew at an annual rate of 9.4% while total access lines increased 4.9% over last year. These strong volume increases were partially offset by lower, more competitive pricing. In 1994, rates were lowered by more than $300 million, continuing the trend over the past several years to price services more competitively. These price reductions have totaled almost $900 million over the last three years. Local revenues increased 2% to $5.3 billion compared with $5.2 billion in 1993. This growth was attributable to placing an additional 957,000 access lines in service in 1994. The increase in access lines in service was partially offset by the 448,000 lines sold during the year. Also contributing to the increase in local revenues is growth from new and non-traditional services. These services, including GTE Personal Secretary, Video Connect and custom calling features such as Caller ID, Call Block and Return Call, have been made possible by enhancements to the existing telephone network. Growth of new and non-traditional services is expected to accelerate over the next several years as enhancements continue to be made to GTE's telephone network. Revenues from network access and toll services of $7.6 billion decreased 1% compared with 1993. This slight decline reflects the impact of the previously discussed sales of non-strategic properties and competitive price reductions, which more than offset the increased usage of GTE's local network for long-distance calling. Equipment sales and services and other revenues increased 2% to $2.9 billion, primarily reflecting growth in billing and other services provided for other telephone companies. Operating income reached a record $4.2 billion, a 5% increase compared with 1993, excluding the operating results of the properties sold and the 1993 special charges. This improvement reflected the increased revenues and continuing control over operating costs. Operating income as a percent of revenues increased to 26.6% in 1994, the fifth consecutive year of improvement. Significant additional cost reductions are expected to be realized in the future as additional re-engineering initiatives are implemented. Productivity improvement continues to be a major objective for Telephone Operations. U.S. access lines per employee, a key indicator of productivity, were 252 at the end of 1994, an 8% increase over 1993 and 51% higher than the same measure only four years ago, excluding properties sold. These improvements reflect the impact of various programs to streamline operations and the initial implementation of the many initiatives underway as part of Telephone Operations' three-year re-engineering program. By the end of 1994, Telephone Operations had reduced its U.S. workforce to approximately 69,000 employees, a 23% reduction over the number of employees only four years ago. As additional re-engineering -26- 28 programs are implemented, the level of workforce reductions is expected to continue. GTE has been increasing the use of state-of-the-art technology to better provide quality services and gain operational efficiencies. Based on independent customer research, GTE Telephone Operations continues to be rated the highest among its peers in providing quality service to its large and medium-business customer markets. By the end of 1994, 91% of the U.S. access lines served by GTE's Telephone Operations were connected to digital switches compared with 76% only four years ago. During 1994, GTE also continued its accelerated installation of fiber-optic cable, bringing total miles installed throughout GTE's U.S. network to 780,000 miles, double the level of only three years ago. During 1994, GTE Telephone Operations unveiled its World Class Network in eight key markets to provide advanced communications for business customers. This program includes sophisticated high-speed, digital fiber-optic rings, a high-capacity switching network (known as SONET), and a new centralized operations center that monitors the entire network. These SONET rings are an integral part of the high-speed information network that enables GTE's Telephone Operations to provide advanced services such as high-speed data transmission and video conferencing. During 1994, difficult economic conditions in Venezuela caused weaker results at CANTV, the Venezuelan telephone company that is operated and 20.4% owned by GTE. The weak economic conditions combined with the implementation of currency controls in mid-1994 have effectively closed access to international banks and capital markets. As a result, CANTV has been unable to secure planned financing and is currently in arrears on repayment of principal on its loan obligations. CANTV is engaged in negotiations with its major creditors to address these issues and continues to make payments of interest on these obligations. 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. In 1994, tariff increases of 59% were implemented, as compared with a local inflation rate of 71%. In addition, at the end of 1994, CANTV obtained approval for a 25% tariff increase, effective January 1, 1995. As a result of these difficult economic conditions, CANTV's results did not contribute to GTE's earnings during 1994. Despite this, CANTV met the majority of its mandates under the Concession Agreement to expand, modernize and improve the telephone network. CANTV's revenues exceeded $1.1 billion in 1994 as strong demand for its telephone and related telecommunications services continued. CANTV has taken steps to redefine and reduce its capital program, where appropriate, while at the same time continuing with its network modernization program. GTE believes that these economic difficulties are temporary and will be corrected, and continues to view its interest in CANTV as an excellent long-term investment. In 1993, revenues from Telephone Operations decreased slightly to $15.8 billion. Excluding the operating results of the properties sold and special items, revenues increased slightly in 1993 as compared to 1992 reflecting volume increases partially offset by continued competitive price -27- 29 reductions, including lower access tariffs charged to long-distance companies. Operating income increased 4% reflecting the higher revenues and the favorable benefits of cost-control and reduction programs. Excluding the properties sold, minutes of use of GTE's domestic local-exchange network for long-distance calling increased 8.0% while total access lines in service increased 4.2%. Results for 1993, however, were significantly affected by the decision to re-engineer the way Telephone Operations provides service to its customers. This decision resulted in a one-time pre-tax charge of $1.4 billion primarily to significantly enhance or replace existing systems, substantially reduce the workforce and consolidate facilities. TELECOMMUNICATIONS PRODUCTS AND SERVICES GTE Telecommunications Products and Services is comprised of units serving the U.S. and international markets and encompasses personal communications services, aircraft-based telecommunications, government and defense communications systems and equipment, telecommunications-based information services and systems and Yellow Pages directories. During 1994, GTE sold its satellite communications and health information services businesses. Revenues and sales from Telecommunications Products and Services increased 3% in 1994 to $4.0 billion compared with $3.9 billion in 1993. This improvement was driven by an increase in mobile-cellular revenues of 41% to $1.7 billion. Lower government-communication sales, resulting from the completion in late 1993 of the eight-year Mobile Subscriber Equipment contract, partially offset the strong mobile-cellular revenue growth. Operating income increased 78%--rising to $608 million in 1994, compared with $341 million a year ago, excluding the one-time 1993 restructuring charge. This substantial improvement reflects the growth in mobile cellular as well as the favorable impact of the restructuring actions, primarily in the satellite-communications business, taken at the end of 1993. Operating income also benefited from cost reductions in the government communications systems business. GTE's U.S. mobile-cellular operations, the fastest growing unit in this group, is the second-largest cellular-telephone operator in terms of "POPs" in the United States--serving a population of some 53 million "POPs." Customer growth continued at a high level throughout 1994 as a record 754,000 customers were added. Total customers served at the end of 1994 were 2,339,000, an increase of 48% over 1993. As a result, market penetration increased to 4.8% in 1994 compared with 3.3% in 1993. Cellular service revenues reached $1.5 billion, a 42% improvement over 1993. During the year, revenues per subscriber averaged $68 per month, compared with $71 per month in 1993. The decline in the average reflects the continuing growth of casual users in the subscriber base. Operating income more than doubled to $294 million while operating cash flows, representing operating income before depreciation and amortization, reached $559 million in 1994, a 57% increase over 1993. This improvement was achieved despite a substantial increase in costs associated with the record customer growth. -28- 30 Outside the United States, GTE also operates mobile-cellular networks serving some 15 million POPs through international affiliates in Canada, the Dominican Republic, Venezuela and Argentina. In Argentina, a GTE-led consortium completed construction of a mobile-cellular telephone network and began providing service to the north and south regions of the country. GTE has a 25.5% ownership stake in the consortium. As of year-end 1994, these international networks served an additional 321,000 customers, a 59% increase over 1993. Results at GTE Directories, one of the largest publishers and distributors of telephone directories, declined in 1994 due to changes in the timing of the publication of certain directories and a decline in the number of orders placed in 1993. However, future orders for Yellow Pages advertising exhibited improvement in the latter part of 1994 reflecting an improving economy. During 1994, GTE Directories won the prestigious Malcolm Baldrige National Quality Award in the service category, exemplifying its commitment to quality. GTE Directories also entered into a joint venture agreement with BELGACOM, Belgium's official telecommunications provider, for the publication of yellow-pages directories and related products and services. At the end of 1994, GTE Directories' contract for the publication of directories in Hong Kong ended. GTE's Government Systems unit received orders valued at $1.2 billion during 1994, slightly more than the previous year. This reflects continued demand for telecommunications equipment and services despite the overall decline in U.S. government defense spending. Profitability at Government Systems improved in 1994 as substantial cost reductions more than offset a decline in revenues. In 1993, revenues and sales from Telecommunications Products and Services were $3.9 billion, a 5% decline from 1992. Lower government-communication sales, resulting from the wind-down of the Mobile Subscriber Equipment contract, more than offset higher revenues from the strong customer growth in the mobile-cellular business. Operating results for 1993 were negatively impacted by a one-time restructuring charge of $398 million. This charge reflected a reduction in the carrying value of satellite communication and certain other assets to net realizable value. Excluding this one-time restructuring charge, operating income increased to $341 million in 1993 compared with $182 million in 1992. This improvement reflected higher revenues and operating efficiencies in mobile cellular as well as cost reductions in the government communications systems business. REGULATORY AND COMPETITIVE TRENDS REGULATORY DEVELOPMENTS: Fundamental changes continue to significantly impact the telecommunications industry and GTE. During 1994, telecommunications legislation that would have changed the way the industry does business passed the House of Representatives, but was subsequently withdrawn from consideration. Telecommunications legislation has been introduced again in 1995. Federal and state regulatory activity directed toward changing the traditional cost-based rate of return regulatory framework for intrastate and interstate telephone services has also continued. Regulatory authorities have adopted various alternative forms of regulation, which -29- 31 provide economic incentives to telephone service providers to improve productivity and provide the foundation for implementing pricing flexibility necessary to address competitive entry into GTE markets. In total, approximately 50% of Telephone Operations' U.S. regulated revenues are under some form of alternative regulation. As of January 1, 1995, one-third of GTE's telephone access lines were in five states that have adopted incentive regulation plans for intrastate service, including California, the state containing GTE's largest operation. Beginning in 1994, under an agreement with the California Public Utilities Commission ("CPUC"), GTE California was allowed to retain 100% of any earnings up to a 15.5% rate of return on investment and refund 100% of any earnings above 15.5%. As part of this agreement and its normal annual price cap filing, GTE California reduced its rates by about $100 million in 1994. In September 1994, the CPUC issued a final order that generally authorizes toll competition (without pre-subscription) in California, effective January 1, 1995. It also provides for rate rebalancing with significant rate reductions for toll service and access charges while increasing basic local exchange rates closer to the actual cost of providing such service. Although the rate rebalancing is intended to be revenue neutral, its ultimate effect on revenue will depend, in part, on the extent to which rate reductions result in increased calling volumes. The decision does not permit rate increases to compensate for competitive losses of market share. GTE believes that the CPUC has over-estimated the calling volume that will be stimulated by reduced toll rates and has requested reconsideration of this aspect of the decision. Many other states are currently investigating whether to authorize local and toll competition. Several have concluded that competition is in the public interest and four states, including Florida, have authorized plans that would allow customers to presubscribe to a specific carrier to handle their toll calls. GTE is challenging these orders primarily based on the lack of equality that prohibits GTE's telephone subsidiaries from providing certain other types of toll service. For the provision of all interstate services, GTE operates under the terms of the Federal Communications Commission ("FCC") price cap incentive plan whereby earnings above a 12.25% rate of return on investment are shared evenly with the customer. Earnings above a rate of return of 16.25% are returned entirely to the customer. In 1994, the FCC released an order allowing competing carriers to interconnect to the local-exchange network for the purpose of providing switched and special access transport services. Under this ruling, competitive carriers are allowed to bypass portions of the local-exchange network. COMPETITION: These recent judicial and regulatory developments, as well as the pace of technological change, have continued to influence industry trends, including accelerating and expanding the level of competition. As a result, GTE's wireline and wireless operations face increasing competition in virtually all aspects of their business. Today, GTE is subject to -30- 32 competition from numerous sources, including competitive access providers for network access services, specialized communications companies that have constructed new systems in certain markets to bypass the local-exchange network, and competing cellular telephone companies. Competition from interexchange carriers, wireless and cable TV companies, as well as more recent entry by media and computer companies, is expected to increase in the rapidly changing telecommunications marketplace. GTE supports greater competition in telecommunications provided that, overall, the actions to eliminate existing legal and regulatory barriers allow an opportunity for all service providers to participate equally in a competitive marketplace under comparable conditions. GTE INITIATIVES: The increasingly competitive environment provides GTE with both challenges and opportunities. In order to respond aggressively to these competitive developments and benefit from the new opportunities, GTE has embarked on a series of initiatives. One such initiative involves the implementation of the $1.4 billion re-engineering plan for its U.S. Telephone Operations. During 1994, the initial year of the three-year plan, $343 million was expended as significant progress was made in implementing this program. These expenditures were primarily associated with the consolidation of certain customer service centers, separation benefits associated with employee reductions and incremental expenditures to redesign and streamline systems and processes. During the year, 67 customer contact, network operations and operator service centers were closed and express dial tone was installed in more than 50% of the access lines served by GTE's U.S. Telephone Operations. Express dial tone enables customers to activate service without a service call. During 1995, the level of re-engineering activities and related expenditures are expected to accelerate as pilot programs are rolled out and other major initiatives are completed. The overall re-engineering plan remains on schedule and is expected to result in annual savings of $1 billion by 1997. Moreover, continued implementation of this program will position GTE to accelerate delivery of a full array of voice, video and data services and to reach its stated objective of being the easiest company to do business with in the industry. During 1994, GTE also announced plans to construct a new fiber-optic and coaxial-cable video network over the next ten years that will pass seven million homes in 66 key GTE markets. GTE has requested FCC approval to construct facilities in the initial three markets and expects to receive approval and begin construction in 1995. In addition, GTE began offering interactive television service to cable television subscribers in Massachusetts through its new interactive video service, mainStreet. This new service, which allows customers to shop, bank and access various other information services from their home, will be available in many other markets within the next three years. Also, early in 1995, GTE and Nintendo, a leader in the video game industry, entered into a joint venture agreement to develop and market video games and explore new technologies. In late 1994, the FCC began to auction new licenses for radio spectrum in 51 major markets and 492 basic trading areas across the United States to encourage the development of a new generation of wireless personal -31- 33 communications services ("PCS"). These services will both complement and compete with traditional wireline services and existing cellular service. GTE has registered with the FCC as a bidder on PCS licenses in each metropolitan trade area ("MTA") in which it is eligible to file, except for the MTAs in Texas, and is selectively participating in the auctions. In Texas, GTE and SBC Communications (formerly Southwestern Bell Corporation) have formed an alliance that will enable both companies to provide wireless services in each other's markets. The auctions are not expected to be completed until later in 1995. In anticipation of these new PCS services, during 1994, GTE introduced its Tele-Go service to provide anytime, anywhere wireless personal communications. This enhanced service works in concert with local telephone service by providing customers with personal communications that combine the capabilities of both wireline and wireless features. Nearly 120,000 customers in 15 markets throughout the United States signed up for this service during its initial roll-out in 1994. GTE expects its future results to benefit from reduced costs and the introduction of these and other new products and services that will result in the increased usage of its wireline and wireless networks. However, it is likely that such improvements will be offset, in part, by continued strategic price reductions and the effects of increased competition. REGULATORY ACCOUNTING GTE's telephone companies follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("FAS 71"). In general, FAS 71 requires companies to depreciate plant and equipment over lives approved by regulators which may extend beyond the assets' actual economic and technological lives. FAS 71 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery in the future. Consequently, the recorded net book value of certain assets and liabilities, primarily telephone plant and equipment, may be greater than that which would otherwise be recorded by unregulated enterprises. On an ongoing basis, GTE reviews the continued applicability of FAS 71 based on the current regulatory and competitive environment. Although recent developments suggest that the telecommunications industry will become increasingly competitive, the degree to which regulatory oversight of local-exchange carriers, including GTE, will be lifted and competition will be permitted to establish the cost of service to the consumer is uncertain. As a result, GTE continues to believe that accounting under FAS 71 is appropriate. If GTE were to determine that the use of FAS 71 was no longer appropriate, it would be required to write-off the deferred costs and obligations referred to above. It may also be necessary for GTE to reduce the carrying value of its plant and equipment to the extent that it exceeds fair market value. At this time, it is not possible to estimate the amount of the company's plant and equipment, if any, that would be considered unrecoverable in such circumstances. The financial impact of such a determination, however, which would be non-cash, could be material. -32- 34 Item 8. Financial Statements and Supplementary Data. Reference is made to the financial statements included elsewhere herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. -33- 35 PART III Item 10. Directors and Executive Officers of the Registrant as of December 31, 1994 (a).
Executive Officers of GTE Date Assumed Name(b) Title Age Present Position ------- ----- --- ---------------- Charles R. Lee Chairman and Chief Executive Officer 55 May 1992 Kent B. Foster Vice Chairman, GTE and President GTE Telephone Operations 51 October 1993 Michael T. Masin (c) Vice Chairman 50 October 1993 Nicholas L. Trivisonno Executive Vice President - Strategic Planning and Group President 47 October 1993 William P. Barr (d) Senior Vice President and General Counsel 44 July 1994 Bruce Carswell (e) Senior Vice President - Human Resources and Administration 65 May 1981 J. Michael Kelly (f) Senior Vice President - Finance 38 February 1994 Terry S. Parker (g) Senior Vice President 50 October 1993 Jeffrey S. Rubin (h) Senior Vice President - Corporate Planning and Development 51 May 1994 John P. Z. Kent Vice President - Taxes 54 July 1989 James Murphy Vice President and Treasurer 57 August 1986 G. Bruce Redditt (i) Vice President - Public Affairs and 44 April 1994 Communications Samuel F. Shawhan, Jr. Vice President - Government Affairs 62 July 1984 William D. Wilson Vice President and Controller 47 June 1994 Marianne Drost Secretary 45 August 1985
- --------------- (a) Reference is made to pages 20 to 26 of GTE's Proxy Statement covering the Annual Meeting of Shareholders to be held on April 19, 1995, which is incorporated herein by reference, for information concerning directors of GTE. (b) With the exception of Michael T. Masin, William P. Barr, J. Michael Kelly, Jeffrey S. Rubin and G. Bruce Redditt, each of the officers named has been employed by GTE or a GTE subsidiary for more than five years. (c) Mr. Masin was elected Vice Chairman on October 20, 1993. He had been a director of GTE since 1989. Prior to joining GTE as Vice Chairman, he was the Managing Partner of the New York Office of O'Melveny & Myers and Co-chair of the firm's international practice group. Mr. Masin joined the firm in 1969 and became a partner in 1977. (d) Mr. Barr was elected Senior Vice President and General Counsel effective July 5, 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. -34- 36 Item 10. Directors and Executive Officers of the Registrant (Continued). (e) Mr. Carswell will retire on March 31, 1995. He will be succeeded on that date by J. Randall MacDonald who is currently serving as Vice President - Employee Relations and Organization Development for GTE Service Corporation. (f) Mr. Kelly was elected Senior Vice President - Finance on February 24, 1994. He had been Vice President and Controller since December 1991 and Vice President-Finance and Business Development for GTE's Telecommunications Products and Services Group since March 1991. Prior to joining GTE, he was Vice President and Controller for Contel Corporation ("Contel") which merged with a subsidiary of GTE in 1991. From 1988 to 1990 he was Controller of Contel Federal Systems. He joined Contel in 1987 as Controller of the Applied Systems Division of Contel Federal Systems. (g) Effective February 3, 1995, Mr. Parker is no longer an executive officer of GTE. (h) Mr. Rubin was elected Senior Vice President - Corporate Planning and Development effective May 2, 1994, and resigned that position effective February 28, 1995. Prior to joining GTE he was Executive Vice President and Chief Financial Officer of NYNEX Corporation since 1993. Mr. Rubin joined NYNEX in 1990 as Vice President - Finance and was named Senior Vice President and Chief Financial Officer in 1992. (i) Mr. Redditt was elected Vice President - Public Affairs and Communications effective April 25, 1994. He had served as Vice President - Public Affairs for the Telops Group since joining GTE from Contel after the merger in 1991. Mr. Redditt previously served as Vice President - Corporate Communications for Contel. -35- 37 Item 11. Executive Compensation. See pages 6 to 18 of GTE's Proxy Statement covering the Annual Meeting of Shareholders to be held on April 19, 1995, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See pages 18 to 20 of GTE's Proxy Statement covering the Annual Meeting of Shareholders to be held on April 19, 1995, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. See page 18 of GTE's Proxy Statement covering the Annual Meeting of Shareholders to be held on April 19, 1995, which is incorporated herein by reference. -36- 38 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 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, 1994 - 1992 (as required): II - Valuation and Qualifying Accounts Note: Schedules other than the one listed above are omitted as not applicable, not required, or the information is included in the consolidated financial statements or notes thereto. 3. Exhibits: See "Index of Exhibits" included elsewhere herein. (b) GTE filed no reports on Form 8-K during the fourth quarter of 1994. -37- 39 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) By /s/ William D. Wilson ---------------------------------- (William D. Wilson) Vice President and Controller Date February 28, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (1) Principal executive officer: Date February 28, 1995 By /s/ Charles R. Lee ---------------------------------- (Charles R. Lee) Chairman of the Board and Chief Executive Officer (2) Principal financial officer: Date February 28, 1995 By /s/ J. Michael Kelly ---------------------------------- (J. Michael Kelly) Senior Vice President - Finance (3) Principal accounting officer: Date February 28, 1995 By /s/ William D. Wilson ---------------------------------- (William D. Wilson) Vice President and Controller -38- 40 SIGNATURES - (Continued): (4) Directors: Date March 4, 1995 By /s/ Edwin L. Artzt ------------------------------- (Edwin L. Artzt - Director) Date March 4, 1995 By /s/ James R. Barker ------------------------------- (James R. Barker - Director) Date March 4, 1995 By /s/ Edward H. Budd ------------------------------- (Edward H. Budd - Director) Date March 4, 1995 By /s/ Kent B. Foster ------------------------------- (Kent B. Foster - Director) Date March 7, 1995 By /s/ James L. Johnson ------------------------------- (James L. Johnson - Director) Date March 4, 1995 By /s/ Richard W. Jones ------------------------------- (Richard W. Jones - Director) Date March 4, 1995 By /s/ James L. Ketelsen ------------------------------- (James L. Ketelsen - Director) Date February 28, 1995 By /s/ Charles R. Lee ------------------------------- (Charles R. Lee - Director) Date February 28, 1995 By /s/ Michael T. Masin ------------------------------- (Michael T. Masin - Director) Date March 4, 1995 By /s/ Sandra O. Moose ------------------------------- (Sandra O. Moose - Director) Date March 4, 1995 By /s/ Russell E. Palmer ------------------------------- (Russell E. Palmer - Director) Date March 4, 1995 By /s/ Howard Sloan -------------------------------- (Howard Sloan - Director) -39- 41 SIGNATURES - (Continued): (4) Directors - (Continued): Date March 4, 1995 By /s/ Robert D. Storey ---------------------------------- (Robert D. Storey - Director) Date March 4, 1995 By /s/ James W. Walter ---------------------------------- (James W. Walter - Director) Date , 1995 By -------- ---------------------------------- (Charles Wohlstetter - Director) -40- 42 CONSOLIDATED STATEMENTS OF INCOME GTE Corporation and Subsidiaries
Years Ended December 31 ----------------------- 1994 1993 1992 ---- ---- ---- (Millions of Dollars) REVENUES AND SALES: Telephone operations $15,905 $15,829 $15,862 Telecommunications products and services 4,039 3,919 4,122 ------- ------- ------- Total revenues and sales 19,944 19,748 19,984 ------- ------- ------- COSTS AND EXPENSES: Telephone operations 11,667 11,765 11,828 Telecommunications products and services* 3,431 3,578 3,940 Restructuring costs -- 1,840 -- ------- ------- ------- Total costs and expenses 15,098 17,183 15,768 ------- ------- ------- Operating income 4,846 2,565 4,216 ------- ------- ------- OTHER (INCOME) DEDUCTIONS: Interest expense--net 1,059 1,197 1,332 Other--net (196) (190) 130 ------- ------- ------- Total other (income) deductions 863 1,007 1,462 ------- ------- ------- Income before income taxes 3,983 1,558 2,754 Income tax provision 1,532 568 967 ------- ------- ------- Income from continuing operations 2,451 990 1,787 Discontinued operations -- ------- (48) Extraordinary charge--early retirement of debt -- (90) (52) Cumulative effect of accounting changes -- -- (2,441) ------- ------- ------- Net income (loss) 2,451 900 (754) Preferred stock dividends of parent 10 18 26 ------- ------- ------- Net income (loss) applicable to common stock $ 2,441 $ 882 $ (780) ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE: Continuing operations $ 2.55 $ 1.03 $ 1.95 Discontinued operations -- -- (.05) Extraordinary charge--early retirement of debt -- (.10) (.06) Cumulative effect of accounting changes -- -- (2.70) ------- ------- ------- Consolidated $ 2.55 $ .93 $ (.86) ======= ======= ======= Average common shares outstanding (in millions) 958 945 905 ======= ======= =======
*Includes cost of sales of $2,897, $3,036 and $3,143 for the years 1994-92, respectively. See Notes to Consolidated Financial Statements. -41- 43 CONSOLIDATED BALANCE SHEETS GTE Corporation and Subsidiaries
December 31 ----------- 1994 1993 ---- ---- (Millions of Dollars) ASSETS CURRENT ASSETS: Cash and temporary cash investments $ 323 $ 322 Receivables, less allowances of $207 and $231 4,022 3,900 Inventories 676 659 Deferred income tax benefits 321 264 Other 292 803 -------- -------- Total current assets 5,634 5,948 -------- -------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Telephone operations 44,287 43,099 Accumulated depreciation (17,656) (16,737) -------- -------- 26,631 26,362 -------- -------- Telecommunications products and services and other 4,258 4,160 Accumulated depreciation (1,561) (1,802) -------- -------- 2,697 2,358 -------- -------- Total property, plant and equipment, net 29,328 28,720 -------- -------- INVESTMENTS AND OTHER ASSETS: Franchises, goodwill and other intangibles 2,149 2,102 Investments in unconsolidated companies 1,551 1,431 Prepaid pension costs and deferred charges 3,004 2,462 Long-term receivables and other assets 834 912 -------- -------- Total investments and other assets 7,538 6,907 -------- -------- Total assets $ 42,500 $ 41,575 ======== ========
See Notes to Consolidated Financial Statements. -42- 44 CONSOLIDATED BALANCE SHEETS GTE Corporation and Subsidiaries
December 31 ----------- 1994 1993 ---- ---- (Millions of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations, including current maturities $ 2,042 $ 1,644 Accounts and payrolls payable 2,229 1,968 Accrued taxes 871 1,108 Dividends payable 472 469 Accrued restructuring costs 436 540 Advance billings 390 432 Accrued interest 238 227 Other 1,543 1,545 ------- ------- Total current liabilities 8,221 7,933 ------- ------- LONG-TERM DEBT 12,163 13,019 ------- ------- RESERVES AND DEFERRED CREDITS: Deferred income taxes 3,522 3,128 Employee benefit obligations 4,651 4,667 Restructuring costs and other 1,729 1,973 ------- ------- Total reserves and deferred credits 9,902 9,768 ------- ------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 1,622 1,106 ------- ------- PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION 109 156 ------- ------- SHAREHOLDERS' EQUITY: Preferred stock 10 111 Common stock--shares issued and outstanding 965,084,925 and 951,761,892 48 48 Amounts paid in, in excess of par value 7,627 7,309 Reinvested earnings 3,422 2,769 Guaranteed ESOP obligations (624) (644) ------- ------- Total shareholders' equity 10,483 9,593 ------- ------- Total liabilities and shareholders' equity $42,500 $41,575 ======= =======
See Notes to Consolidated Financial Statements. -43- 45 CONSOLIDATED STATEMENTS OF CASH FLOWS GTE Corporation and Subsidiaries
Years Ended December 31 ----------------------- 1994 1993 1992 ---- ---- ---- (Millions of Dollars) CASH FLOWS FROM OPERATIONS: Income from continuing operations $ 2,451 $ 990 $ 1,787 Adjustments to reconcile income to net cash from operations: Depreciation and amortization 3,432 3,419 3,289 Restructuring costs -- 1,840 -- Deferred income taxes 248 (864) 37 Change in current assets and current liabilities, excluding the effects of acquisitions and dispositions (1,029) (13) (268) Other--net (362) (95) (13) ------- ------- ------- Net cash from operations 4,740 5,277 4,832 ------- ------- ------- CASH FLOWS FROM INVESTING: Capital expenditures (4,192) (3,893) (3,909) Acquisitions and investments (244) (46) (84) Proceeds from sales of assets 1,163 2,267 662 Other--net 4 (66) 55 ------- ------- ------- Net cash used in investing (3,269) (1,738) (3,276) ------- ------- ------- CASH FLOWS FROM FINANCING: GTE common stock issued 422 383 1,513 Long-term debt and preferred securities issued 2,345 2,325 590 Long-term debt and preferred securities retired (2,481) (4,836) (2,002) Dividends to shareholders of parent (1,806) (1,744) (1,572) Increase (decrease) in short-term obligations, excluding current maturities 25 304 (254) Other--net 25 (3) 6 ------- ------- ------- Net cash used in financing (1,470) (3,571) (1,719) ------- ------- ------- Increase (decrease) in cash and temporary cash investments 1 (32) (163) CASH AND TEMPORARY CASH INVESTMENTS: Beginning of year 322 354 517 ------- ------- ------- End of year $ 323 $ 322 $ 354 ======= ======= =======
See Notes to Consolidated Financial Statements. -44- 46 CONSOLIDATED SUMMARY OF PREFERRED STOCK AND LONG-TERM DEBT GTE Corporation and Subsidiaries
December 31 ----------- 1994 1993 ---- ---- (Millions of Dollars) PREFERRED STOCK: GTE CORPORATION No Par; $2.475 series, 4,000,000 shares outstanding at December 31, 1993 $ -- $ 100 Other convertible and nonconvertible preferred stock at various rates 10 11 ------------ --------- $ 10 $ 111 ------------ --------- PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION: GTE CORPORATION Par value $50 per share; 1,459,000 shares authorized at December 31, 1994: Nonconvertible 1,459,000 and 1,681,000 shares outstanding, average rate 7.81% $ 73 $ 84 TELEPHONE SUBSIDIARIES Average rates 5.91% and 6.83% 36 72 ------------ --------- $ 109 $ 156 ============ ========= LONG-TERM DEBT (EXCLUSIVE OF CURRENT MATURITIES): GTE CORPORATION Sinking fund debenture, maturing in 2017, at a rate of 10.75% $ 200 $ 200 Debentures, maturing 1998 through 2023, average rate 9.03% 3,350 3,350 Guaranteed ESOP obligations, maturing 1996-2005, average rate 9.67% 649 669 Other debt, average rate 3.19% -- 553 ------------ --------- 4,199 4,772 ------------ --------- TELEPHONE SUBSIDIARIES First mortgage bonds, sinking fund debentures and notes, maturing through 2031, average rates 7.74% and 7.66% 7,108 6,768 ------------ --------- OTHER SUBSIDIARIES Sinking fund debentures and notes, maturing through 2010, average rates 7.60% and 8.08% 933 1,552 ------------ --------- Total principal amount 12,240 13,092 Less: discount and premium--net (77) (73) ------------ --------- Total long-term debt $ 12,163 $ 13,019 ============ =========
See Notes to Consolidated Financial Statements. -45- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTE Corporation and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of GTE Corporation and subsidiaries ("GTE") include the accounts of all majority-owned subsidiaries. Investments in 20% to 50% owned companies are accounted for on the equity basis. Investments of less than 20% are generally accounted for on the cost basis. All significant intercompany items have been eliminated, except for sales of construction and maintenance equipment and supplies by majority-owned subsidiaries to regulated telephone subsidiaries. These sales amounted to $638 million, $696 million and $738 million in 1994-92, respectively, and were made at prices which compare favorably with those at which comparable equipment and supplies could have been obtained elsewhere. Reclassifications of prior year data have been made in the accompanying consolidated financial statements where appropriate to conform to the 1994 presentation. REGULATORY ACCOUNTING GTE's telephone subsidiaries follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("FAS 71"). This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, FAS 71 requires companies to depreciate plant and equipment over lives approved by regulators. It also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. GTE's telephone subsidiaries annually review the continued applicability of FAS 71 based upon the current regulatory and competitive environment. REVENUE RECOGNITION Revenues are generally 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 subsidiaries provide for depreciation on a straight-line basis over asset lives approved by regulators. Other subsidiaries provide for depreciation over the estimated useful lives of assets using the straight-line method. Depreciation provisions in 1994-92 for GTE's telephone subsidiaries were equivalent to a composite average percentage of 7.0%, 6.9% and 6.9%, respectively. -46- 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Franchises, goodwill and other intangibles arising from acquisitions are amortized on a straight-line basis over the periods to be benefited, or 40 years, whichever is less. Amortization expense was $71 million, $83 million and $89 million in 1994-92, respectively. FOREIGN CURRENCY TRANSLATION Assets and liabilities of subsidiaries operating in foreign countries, except those operating in highly inflationary economies, are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in shareholders' equity. Gains and losses resulting from foreign currency transactions are included in net income. Translation gains and losses of affiliates operating in highly inflationary economies are included in net income as they occur. FINANCIAL INSTRUMENTS GTE enters into a variety of financial instruments to hedge its exposure to fluctuations in interest and foreign exchange rates. Amounts to be paid or received under interest rate swaps are accrued as interest expense. Gains or losses on foreign currency contracts are recognized based on changes in exchange rates, as are offsetting foreign exchange gains or losses on the foreign currency obligations being hedged. EMPLOYEE BENEFIT PLANS Pension and postretirement health care and life insurance benefits earned during the year as well as interest on the accumulated benefit obligations are accrued currently. Prior service costs and credits resulting from changes in benefits are amortized over the average remaining service period of the employees expected to receive the benefits. INCOME TAXES Income tax expense is based on reported earnings before income taxes. Deferred income taxes are established for all temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and for tax purposes. Deferred tax balances are adjusted to reflect tax rates, based on currently enacted tax laws, that will be in effect in the years in which the temporary differences are expected to reverse. Non-U.S. subsidiaries compute taxes at rates in effect in the countries in which they operate. Earnings of these subsidiaries may also be subject to additional income and withholding taxes when they are distributed as dividends. These additional taxes, net of applicable tax credits, are accrued currently, except with respect to earnings which are not expected to be remitted because they are permanently reinvested. Undistributed earnings of non-U.S. subsidiaries deemed to be permanently reinvested were approximately $385 million at December 31, 1994. COMPUTER SOFTWARE The cost of computer software for internal use, except initial operating system software, is charged to expense as incurred. Initial operating system software is capitalized and amortized over the life of the related hardware. -47- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS PER SHARE Earnings per common share is computed by dividing net income (loss) applicable to common stock by the weighted average number of common shares outstanding during the period. Common share equivalents have been excluded from this computation as they do not have a dilutive effect of 3% or more. CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments include cash and investments in short-term, highly liquid securities which generally have maturities when purchased of three months or less. INVENTORIES Inventories are stated at the lower of cost or net realizable value. Cost of inventories is determined principally by the average or first-in, first-out method of inventory valuation. 2. INVESTMENTS IN UNCONSOLIDATED COMPANIES In early 1994, a GTE-led international consortium, Compania de Telefonos del Interior ("CTI") was awarded two licenses to provide cellular services in the north and south interior regions of Argentina. Since that time, CTI completed construction of its initial networks, finalized interconnect agreements with the respective local exchange wireline carriers and initiated service. GTE, as manager, has a leading 25.5% ownership interest in CTI. As of December 31, 1994, GTE had an investment of $77 million in CTI and guaranteed $59 million of its debt. GTE, as operator, also has a 20.4% ownership interest in Compania Anonima Nacional Telefonos de Venezuela ("CANTV"), the Venezuelan telephone company. CANTV is the exclusive provider for local, national long-distance and international long-distance telephone service in Venezuela. CANTV also provides other telecommunication and related services, including cellular telephone and directory advertising services. As of December 31, 1994, GTE had an investment in CANTV of $1.1 billion. GTE accounts for its investments in CTI and CANTV using the equity method. GTE's equity in the results of CTI and CANTV is included in "Other--net" in the accompanying consolidated statements of income. In addition to CTI and CANTV, GTE holds interests in several cellular partnerships that are accounted for using the equity method. In 1992, GTE sold for $530 million, or approximately book value, its remaining 19.9% interest in US Sprint, a joint venture formed in 1986 to market long-distance telephone and data-transmission services. 3. RESTRUCTURING COSTS Results for 1993 include one-time restructuring costs of $1.8 billion, which reduced net income by $1.2 billion, or $1.22 per share. -48- 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These restructuring costs included $1.4 billion at Telephone Operations primarily to implement its re-engineering plan. This plan is intended to redesign and streamline processes in order to improve customer-responsiveness and product quality, reduce the time necessary to introduce new products and services and further reduce costs. The re-engineering plan included $680 million to upgrade or replace existing customer service and administrative systems and enhance network software, $410 million for employee separation benefits associated with workforce reductions and $210 million primarily for the consolidation of facilities and operations and other related costs. Implementation of the re-engineering plan began during 1994 and is expected to be completed by the end of 1996. Reductions of approximately 17,000 Telephone Operations employees are expected during that time. During 1994, 67 customer contact, network operations and operator service centers were closed and employee reductions of nearly 3,000 occurred. During the year, expenditures of $343 million were made in connection with the implementation of the re-engineering plan. These expenditures were primarily associated with the closure and relocation of the various centers described above, separation benefits from employee reductions and incremental expenditures to redesign and streamline processes. The level of re-engineering activities and related expenditures are expected to accelerate in 1995. The 1993 restructuring charge also included a $400 million reduction in the carrying value of satellite communication assets of GTE Spacenet ("Spacenet") and certain other assets to estimated net realizable value. This action primarily reflected the development of alternative transmission methods through technological advances and increased competition. During 1994, GTE sold Spacenet at a price that approximated its book value. During 1993, Telephone Operations offered various voluntary separation programs to its domestic workforce. These programs resulted in a pre-tax charge of $74 million which reduced net income by $46 million, or $.05 per share. 4. PROPERTY REPOSITIONING AND DISCONTINUED OPERATIONS In December 1992, GTE announced a plan to pursue the sale or trade of local-exchange telephone properties (representing less than 5% of its U.S. access lines) in markets that may be of greater long-term strategic value to other telephone service providers. GTE substantially completed this program during 1994 with the sale of local-exchange telephone properties serving 448,000 access lines in nine states for $900 million in cash. During 1993, GTE sold local-exchange telephone properties serving 530,000 access lines in eight states in return for 90,000 access lines in Illinois, Indiana and Michigan and $1 billion in cash. As a result of these transactions, GTE recorded pre-tax gains in 1994 and 1993 of $264 million and $168 million, respectively, which are included in "Other--net" in the accompanying consolidated statements of income. -49- 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For comparability, the following table includes pro forma adjustments to remove, from each of the three years presented, the operating results of the properties sold, through the date of sale. In addition, the table has been adjusted to exclude the 1993 impact of the one-time restructuring charge and the charge associated with the Telephone Operations' voluntary separation programs as described in Note 3 (in millions of dollars):
1994 1993 1992 ------- ------- ------- Revenues and Sales Telephone operations $15,717 $15,203 $15,144 Telecommunications products and services 4,039 3,919 4,122 ------- ------- ------- Total revenues and sales $19,756 $19,122 $19,266 ======= ======= ======= Operating Income Telephone operations $ 4,186 $ 4,005 $ 3,862 Telecommunications products and services 608 341 182 ------- ------- ------- Total operating income $ 4,794 $ 4,346 $ 4,044 ======= ======= =======
In January 1993, GTE sold its worldwide Electrical Products Group ("EPG"). The aggregate sales price, which included the assumption of debt, totaled approximately $1.2 billion. As a result, in December 1992, GTE recorded after-tax charges totaling $100 million, including an extraordinary charge of $52 million resulting from the early retirement of high-coupon debt and a $48 million charge associated with the sale of EPG. The EPG charge was net of $315 million of after-tax gains resulting from the settlement of active and retired employee pension obligations. Revenues and sales of EPG were $2.2 billion in 1992. 5. ACCOUNTING CHANGES In 1992, GTE adopted Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") and No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 106 requires the expected cost of postretirement health care and life insurance benefits to be recognized during the years that employees render service. GTE adopted FAS 106 on the immediate recognition basis effective January 1, 1992 and recorded a one-time, non-cash charge of $2.3 billion (net of deferred tax benefits of $1.4 billion), or $2.59 per share, to give effect to past service costs. Pursuant to FAS 71, a regulatory asset was not recorded due to GTE's assessment of the long-term competitive environment and the uncertainties surrounding the timing and extent of recovery. FAS 109 changed the method by which companies account for income taxes. Among other things, the statement requires that deferred tax balances be adjusted to reflect new tax rates when they are enacted into law. The cumulative prior years' effect of this change reduced net income by $100 million, or $.11 per share, in 1992. -50- 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. SHAREHOLDERS' EQUITY PREFERRED STOCK Preferred stock has voting rights generally on an equal basis with common stock. Dividends are cumulative on all preferred stock. COMMON STOCK The authorized common stock of GTE at December 31, 1994 consisted of two billion shares with a par value of $.05 per share. The following table sets forth the actual number of shares of common stock issued during each of the last three years (in thousands of shares):
1994 1993 1992 ------ ------ ------ Employee stock purchase plan 4,344 5,835 9,050 Dividend reinvestment plan 5,504 4,695 4,735 Public offering -- -- 33,000 Other 3,475 1,702 3,838 ------ ------ ------ Total 13,323 12,232 50,623 ====== ====== ======
In 1992, GTE sold 33 million shares of its common stock in a public offering at a price of $32.875 per share. The net proceeds of $1.1 billion were used to reduce short-term obligations. As of December 31, 1994, 42 million shares were reserved for issuance under various employee benefit and stock purchase plans and the dividend reinvestment plan. AMOUNTS PAID IN, IN EXCESS OF PAR VALUE The following table sets forth the activity in amounts paid in, in excess of par value during each of the last three years (in millions of dollars):
1994 1993 1992 ------ ------ ------ Balance, beginning of year $7,309 $7,134 $6,232 Issuance of common stock 395 201 1,009 Other (77) (26) (107) ------ ------ ------ Balance, end of year $7,627 $7,309 $7,134 ====== ====== ======
Amounts paid in, in excess of par value includes the cumulative foreign currency translation adjustment of $(207) million, $(168) million and $(126) million at December 31, 1994-92, respectively, and the cumulative unrealized gains (losses) on investments in debt and equity securities of $(22) million and $16 million at December 31, 1994 and 1993, respectively. -51- 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REINVESTED EARNINGS The following table sets forth the activity in reinvested earnings during each of the last three years (in millions of dollars):
1994 1993 1992 ------ ------ ------ Balance, beginning of year $2,769 $3,621 $5,977 Net income (loss) applicable to common stock 2,441 882 (780) Cash dividends declared on common stock (1,800) (1,748) (1,590) Other 12 14 14 ------ ------ ------ Balance, end of year $3,422 $2,769 $3,621 ====== ====== ======
STOCK OPTION PLANS GTE maintains stock option plans for management employees. The options may be granted separately or in conjunction with stock appreciation rights. The options allow the purchase of GTE common stock at the market price on the date of grant and have a term of 10 years. The options vest over periods not exceeding four years. The number of shares that are available for granting in each year is limited to four tenths of one percent of GTE's outstanding common stock as of December 31 of the preceding year. Any unused amount is carried forward and made available for granting in the subsequent year. The following table summarizes stock option activity during each of the last three years (number of options in thousands):
Stock Options Average Price ------------- ------------- Balance, January 1, 1992 8,768 $26.10 Options granted 876 32.11 Options exercised (1,737) 20.99 Options cancelled or forfeited (179) 28.22 ------ ------ Balance, December 31, 1992 7,728 27.88 Options granted 1,989 35.24 Options exercised (1,195) 23.99 Options cancelled or forfeited (50) 23.21 ------ ------ Balance, December 31, 1993 8,472 30.19 Options granted 4,118 32.53 Options exercised (173) 25.09 Options cancelled or forfeited (153) 33.12 ------ ------ Balance, December 31, 1994 12,264 $31.01 ====== ======
At December 31, 1994, 6.3 million options were exercisable. -52- 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHAREHOLDER RIGHTS PLAN GTE maintains a shareholder rights plan to protect shareholders against unsolicited attempts to acquire control of GTE that do not offer what GTE believes to be an adequate price to all shareholders. Under the plan, each outstanding share of GTE Common Stock originally had associated with it a right to purchase, upon the occurrence of certain events ("Rights"), one one-thousandth of a share of Series A Participating No Par Preferred Stock ("Preferred Stock") at $200. As a result of the 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 will become exercisable only if a person or group, without GTE's consent, commences a tender or exchange offer for, or acquires 20% or more of the voting power of GTE, or acquires 10% or more of the voting power of GTE and executes an agreement with GTE to effect a merger or other business combination. In the event that a person or group acquires 20% or more of GTE's voting power without GTE's consent (the "Acquiring Person"), each holder of a Right, other than the Acquiring Person will be entitled to acquire that number of one one-thousandth of a share of Preferred Stock equal to the number of shares of GTE's Common Stock having a market value of twice the exercise price of the Rights. Similarly, if without GTE's consent, GTE is acquired in a merger or other business combination transaction, each holder of a Right will be entitled to acquire voting shares of the acquiring company at twice the value of the exercise price. The Rights may be redeemed by GTE at a price of $.01 per right, at any time prior to any person or group acquiring 10% or more of GTE's voting power without GTE's consent, and will expire on December 7, 1999. 7. MINORITY INTERESTS AND REDEEMABLE PREFERRED STOCK During 1994, a subsidiary of GTE issued $489 million of monthly income preferred securities with a cumulative annual dividend rate of 9.25%, and a maturity of 30 years. Preferred securities of subsidiaries of $770 million and $313 million at December 31, 1994 and 1993, respectively, are included in "Minority Interests in Equity of Subsidiaries" in the accompanying consolidated balance sheets. Certain outstanding preferred stock issues of GTE are redeemable upon notice at the option of the company, in whole or in part, at a premium and certain issues may be redeemed without premiums through annual sinking funds. GTE redeemed 222,000 shares in 1994; 222,000 shares in 1993; and 177,000 shares in 1992 of its preferred stock. Preferred shares redeemed by GTE's telephone subsidiaries totaled 1,697,657 in 1994; 242,974 in 1993; and 406,898 in 1992. The aggregate redemption requirements for preferred stock subject to mandatory redemption for GTE and its telephone subsidiaries are approximately $9 million in each of the next five years. GTE's aggregate voluntary redemption price at December 31, 1994, was $112 million, including $38 million for its telephone subsidiaries. -53- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. DEBT Estimated payments of long-term debt during the next five years are: $603 million in 1995; $369 million in 1996; $677 million in 1997; $1.4 billion in 1998; and $1.1 billion in 1999. GTE's telephone subsidiaries finance part of their construction programs through the use of short-term loans, including commercial paper, which are refinanced at later dates by issues of long-term debt or equity. During 1993, GTE redeemed prior to scheduled maturity, $2.1 billion of high-coupon first-mortgage bonds of five of its telephone subsidiaries. As a result, an after-tax extraordinary charge of $90 million (net of tax benefits of $53 million), or $.10 per share, was recorded to reflect the expenses of calling these bonds. Total short-term obligations, including loans for construction expected to be refinanced, were as follows (in millions of dollars):
1994 1993 ------ ------ Commercial paper--average rates 6.0% and 3.5% $1,411 $1,326 Notes payable to banks--average rates 8.3% and 9.5% 28 88 Current maturities of long-term debt 603 230 ------ ------ Total $2,042 $1,644 ====== ======
GTE and its subsidiaries had available lines of credit aggregating $4.1 billion at December 31, 1994. 9. FINANCIAL INSTRUMENTS GTE enters into interest rate and foreign currency contracts in order to reduce its exposure to fluctuations in interest and foreign exchange rates. At December 31, 1994, GTE had entered into interest rate swap agreements to convert $469 million of floating rate long-term and short-term debt to fixed rates. In connection with a foreign currency bond maturing in July 1995, GTE entered into a swap agreement with a bank whereby it receives applicable foreign currency amounts to meet annual interest payments and repay the principal at maturity in exchange for payments of U.S. dollar amounts. At December 31, 1994, the principal amount of the outstanding contract was $112 million. The risk associated with these off-balance sheet financial instruments arises from the possible inability of counterparties to meet the contract terms and from movements in interest and exchange rates. GTE carefully evaluates and continually monitors the creditworthiness of its counterparties and believes the risk of non-performance is remote. -54- 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair values of financial instruments, other than long-term debt, closely approximate their carrying value. As of December 31, 1994, the estimated fair value of long-term debt based on either quoted market prices or an option pricing model was lower than the carrying value by approximately $300 million. The estimated fair value of long-term debt as of December 31, 1993, exceeded the carrying value by approximately $1.2 billion. 10. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS Most subsidiaries have trusteed, noncontributory, defined benefit pension plans covering substantially all employees. The benefits to be paid under these plans are generally based on years of credited service and average final earnings. GTE's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to provide the plans with assets sufficient to meet the benefit obligations of the plans. The assets of the plans consist primarily of corporate equities, government securities and corporate debt securities. The components of the net pension credit for 1994-92 were as follows (in millions of dollars):
1994 1993 1992 ------ -------- ------ Benefits earned during the year $ 269 $ 295 $ 288 Interest cost on projected benefit obligations 542 584 602 Return on plan assets: Actual (29) (2,073) (732) Deferred (971) 1,110 (201) Other--net (168) (174) (197) ----- ----- ----- Net pension credit $(357) $ (258) $(240) ===== ======= =====
The expected long-term rate of return on plan assets was 8.5% for 1994 and 8.25% for 1993 and 1992. The funded status of the plans and the prepaid pension costs at December 31, 1994 and 1993, were as follows (in millions of dollars):
1994 1993 ------- ------- Plan assets at fair value $11,950 $12,840 Projected benefit obligations 6,724 7,391 ------- ------- Excess of assets over projected obligations 5,226 5,449 Unrecognized net transition asset (644) (778) Unrecognized net gain (2,270) (2,797) ------- ------- Prepaid pension costs $ 2,312 $ 1,874 ======= =======
-55- 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The projected benefit obligations at December 31, 1994 and 1993, include accumulated benefit obligations of $5.1 billion and $5.5 billion and vested benefit obligations of $4.5 billion and $4.9 billion, respectively. Assumptions used to develop the projected benefit obligations at December 31, 1994 and 1993 were as follows:
1994 1993 ---- ---- Discount rate 8.25% 7.50% Rate of compensation increase 5.50% 5.25%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Substantially all of GTE's employees are covered under postretirement health care and life insurance benefit plans. In addition, many retirees outside the U.S. are covered by government-sponsored and administered programs. The health care benefits paid under the GTE plans are generally based on comprehensive hospital, medical and surgical benefit provisions. GTE funds amounts for postretirement benefits as deemed appropriate from time to time. The postretirement benefit cost for 1994-92 included the following components (in millions of dollars):
1994 1993 1992 ----- ----- ----- Benefits earned during the year $ 57 $ 96 $ 97 Interest on accumulated post- retirement benefit obligations 259 290 293 Actual return on plan assets 6 (6) (4) Amortization of prior service benefits (54) (4) -- Other--net (14) 2 -- ----- ----- ----- Postretirement benefit cost $ 254 $ 378 $ 386 ===== ===== =====
The following table sets forth the plans' funded status and the accrued obligations as of December 31, 1994 and 1993 (in millions of dollars):
1994 1993 ---- ---- Accumulated postretirement benefit obligations attributable to: Retirees $2,731 $2,723 Fully eligible active plan participants 234 231 Other active plan participants 912 1,106 ------ ------ Total accumulated postretirement benefit obligations 3,877 4,060 Fair value of plan assets 244 181 ------ ------ Excess of accumulated obligations over plan assets 3,633 3,879 Unrecognized prior service benefits 656 710 Unrecognized net loss (99) (345) ------ ------ Accrued postretirement benefit obligations $4,190 $4,244 ====== ======
-56- 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The assumed discount rates used to measure the accumulated postretirement benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31, 1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and 13% for pre-65 participants and 9% and 9.5% for post-65 retirees, each rate declining on a graduated basis to an ultimate rate in the year 2004 of 6%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased 1994 costs by $33 million and the accumulated postretirement benefit obligations as of December 31, 1994 by $343 million. During 1993, GTE made certain changes to its postretirement health care and life insurance benefits for non-union employees retiring on or after January 1, 1995. These changes include, among others, newly established limits to GTE's annual contribution to postretirement medical costs and a revised cost sharing schedule based on a retiree's years of service. The net effect of these changes reduced the accumulated postretirement benefit obligations at December 31, 1993 by $710 million. The resulting unrecognized prior service benefits are being amortized over the average remaining service lives of the employees. SAVINGS AND STOCK OWNERSHIP PLANS GTE sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, GTE provides matching contributions in GTE common stock based on qualified employee contributions. Matching contributions charged to income were $76 million, $66 million and $72 million in the years 1994-92, respectively. GTE maintains an Employee Stock Ownership Plan ("ESOP"). In 1989, the ESOP borrowed $700 million to acquire, at market value, 24.6 million shares of GTE common stock, which will be used to meet GTE's contributions to certain employee savings plans through the year 2004. The unpaid balance of the loan, which has been guaranteed by GTE, is included in the accompanying consolidated balance sheets as long-term debt with a similar reduction in shareholders' equity. The debt service payments, including interest, made by the ESOP for the years 1994-92 totaled $84 million, $81 million and $77 million, respectively. These payments were funded by $46 million, $46 million and $44 million of dividends accumulated on the GTE stock held by the ESOP and by $38 million, $35 million and $33 million of cash contributions by GTE in 1994-92, respectively. 11. LEASE COMMITMENTS GTE has non-cancelable leases covering certain buildings, office space and equipment. Rental expense was $419 million, $459 million, and $590 million in 1994-92, respectively. Minimum rental commitments under non-cancelable leases through 1999 do not exceed $200 million annually and aggregate $804 million thereafter. -57- 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INTEREST EXPENSE--NET The components of interest expense-net are as follows (in millions of dollars):
1994 1993 1992 ---- ---- ---- Interest expense $1,139 $1,298 $1,475 Interest income (52) (61) (100) Allowance for funds used and interest capitalized during construction (28) (40) (43) ------ ------ ------ Total $1,059 $1,197 $1,332 ====== ====== ======
13. OTHER--NET The components of other--net are as follows (in millions of dollars):
1994 1993 1992 ----- ----- ---- General and administrative corporate expenses $ 206 $ 204 $187 Minority interests 140 112 112 Preferred dividends of subsidiaries 18 22 23 Equity in income of unconsolidated companies (74) (164) (93) Gains on sales of non-strategic telephone properties (264) (168) -- Gains on sales of non-strategic cellular properties and other (222) (196) (99) ------ ----- ---- Total $(196) $(190) $130 ===== ===== ====
14. INCOME TAXES Income from continuing operations before income taxes is as follows (in millions of dollars):
1994 1993 1992 ------ ------ ------ Domestic $3,475 $1,002 $2,300 Foreign 508 556 454 ------ ------ ------ Total $3,983 $1,558 $2,754 ====== ====== ======
-58- 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The income tax provision (benefit) is as follows (in millions of dollars):
1994 1993 1992 ---- ---- ---- Current: Federal $ 927 $1,088 $ 655 Foreign 192 183 171 State and local 165 161 104 ------ ------ ----- 1,284 1,432 930 ------ ------ ----- Deferred: Federal 269 (682) 105 Foreign (1) 2 1 State and local 56 (100) 35 ------ ------ ----- 324 (780) 141 ------ ------- ----- Amortization of deferred investment tax credits--net (76) (84) (104) ------ ------ ----- Total $1,532 $ 568 $ 967 ====== ====== =====
The amortization of deferred investment tax credits--net, relates to the amortization of investment tax credits previously deferred by GTE's regulated telephone subsidiaries. The components of the deferred income tax provision (benefit) are as follows (in millions of dollars):
1994 1993 1992 ---- ----- ----- Depreciation and amortization $(88) $ 32 $ 125 Employee benefit obligations (3) (80) (114) Restructuring costs 299 (667) -- Prepaid pension costs 144 111 75 Other--net (28) (176) 55 ---- ----- ----- Total $324 $(780) $ 141 ==== ===== =====
-59- 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between taxes computed by applying the statutory federal income tax rate to pre-tax income and income taxes provided in the consolidated statements of income is as follows (in millions of dollars):
1994 1993 1992 ---- ---- ---- Amounts computed at statutory rates $1,394 $545 $936 State and local income taxes, net of federal tax benefits 144 40 91 Depreciation of telephone plant construction costs previously deducted for tax purposes--net 42 48 46 Minority interests and preferred stock dividends of subsidiaries 39 40 40 Amortization of investment tax credits--net (76) (84) (104) Rate differentials applied to reversing temporary differences (34) (30) (35) Other differences--net 23 9 (7) ------ ---- ---- Total provision $1,532 $568 $967 ====== ==== ====
The tax effects of temporary differences that give rise to the current deferred income tax benefits and deferred income tax liabilities at December 31, 1994 and 1993 are as follows (in millions of dollars):
1994 1993 ------- ------- Depreciation and amortization $ 4,165 $ 4,180 Employee benefit obligations (1,853) (1,850) Restructuring costs (368) (667) Prepaid pension costs 783 639 Investment tax credits 226 321 Other--net 248 241 ------- ------- Total $ 3,201 $ 2,864 ======= =======
-60- 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. SUPPLEMENTAL CASH FLOW DISCLOSURES The changes in current assets and current liabilities, excluding the effects of acquisitions and dispositions, and the cash paid for interest and income taxes are as follows (in millions of dollars):
1994 1993 1992 ------- ------ ------ (Increase) decrease from current assets: Receivables--net $ (554) $ (706) $ (231) Other current assets (4) 168 69 Increase (decrease) from current liabilities: Accrued taxes and interest (209) 465 (41) Other current liabilities (262) 60 (65) ------- ------ ------ Net cash used $(1,029) $ (13) $ (268) ======= ====== ====== Cash paid during the year for: Interest $ 1,084 $1,373 $1,477 Income taxes 1,598 880 1,016
16. BUSINESS GROUP DATA Business segment data is shown on pages 21 and 22 of this Report. -61- 63 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of GTE Corporation: We have audited the consolidated financial statements of GTE Corporation (a New York corporation) and subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, as set forth on pages 21 and 22 and pages 41 through 61 of this report. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 5 to the consolidated financial statements, effective January 1, 1992, the company changed its methods of accounting for postretirement benefits other than pensions and for income taxes. Our audit was 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 audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Stamford, Connecticut January 26, 1995 64 Schedule II Page 1 GTE CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1994 - 1992 (Millions of Dollars)
======================================================================================================================== Column A Column B Column C Column D Column E -------- -------- Additions -------- -------- -------------------------- Balance at Charged Charged to Deductions Balance at Beginning (Credited) to Other from End of Description of Year Income Accounts Reserves (1) Year - ------------------------------------------------------------------------------------------------------------------------ December 31, 1994 Allowance for uncollectible accounts $ 231 $ 344 $ 120(2) $ 488 $ 207 ====== ====== ===== ====== ====== Accrued discontinuance and business repositioning costs $ 297 $ 55 $ 5(3) $ 55 $ 302 ====== ====== ===== ====== ====== Accrued telephone restructuring costs (4) $1,370 -- -- $ 413(5) $ 957 ====== ====== ===== ====== ====== December 31, 1993 Allowance for uncollectible accounts $ 154 $ 329 $ 124(2) $ 376 $ 231 ====== ====== ===== ====== ====== Accrued discontinuance and business repositioning costs $ 373 -- $ 109(3) $ 185 $ 297 ====== ====== ===== ====== ====== Accrued telephone restructuring costs (4) -- $1,370 -- -- $1,370 ====== ====== ===== ====== ====== December 31, 1992 Allowance for uncollectible accounts $ 115 $ 311 $ 219(2) $ 491 $ 154 ====== ====== ===== ====== ====== Accrued discontinuance and business repositioning costs $ 352 $ 197 $ 123(6) $ 299 $ 373 ====== ====== ===== ====== ======
The accompanying notes are an integral part of this schedule. 65 Schedule II Page 2 GTE CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1994-1992 ================================================================================ NOTES: (1) Charges for purpose for which reserve was created. (2) Recoveries of amounts written off in prior years. (3) Primarily reclassifications from other accounts. (4) See Note 3 to the Consolidated Financial Statements included elsewhere herein. (5) Primarily represents prepaid pension costs associated with early retirement programs related to the Contel merger. (6) Includes expenditures of $343 million in connection with the implementation of Telephone Operations' re-engineering plan (see Note 3 to the Consolidated Financial Statements included elsewhere herein). 66 INDEX OF EXHIBITS
Exhibit Number Description - ------- ------------------------------------------------------------------- 3.1(a) Articles of Incorporation, as restated 3.2 Certificate of Amendment of the Certificate of Incorporation of GTE Corporation (filed January 19, 1995) 3.3(b) By-Laws of GTE Corporation 10-1(c) Material Contracts - Deferred Compensation Plan for Directors 10-2(d) Material Contracts - Agreements Between GTE and Key Executives 10-3(e) Material Contracts - Supplemental Executive Retirement Plan 10-4(f) Material Contracts - Long-Term Incentive Plan 10-5(g) Material Contracts - Executive Incentive Plan 10-6(h) Material Contracts - Executive Retired Life Insurance Plan 10-7(i) Material Contracts - Phantom Stock Plan 10-8(j) Material Contracts - Director's Retirement Plan 10-9(k) Material Contracts - Charitable Awards Program 10-10 Material Contracts - Salary Deferral Plan 10-11 Material Contracts - Executive Severance and Employment Agreements between GTE Service Corporation and Michael T. Masin 10-12 Material Contracts - Employment Agreement between GTE Service Corporation and Jeffrey S. Rubin 10-13 Material Contracts - Employment Agreement between GTE Service Corporation and William P. Barr 10-14 Material Contracts - Consulting Agreement between GTE Service Corporation and Edward C. Schmults 11 Statement re: Calculation of Earnings (Loss) Per Common Share 12 Statement re: Calculation of the Ratio of Earnings to Fixed Charges 21 Significant Subsidiaries of Registrant 23 Consent of Independent Public Accountants 27 Financial Data Schedule
- -------------------- (a) GTE's restated Articles of Incorporation (except for the amendment, 3.2 above, filed with this Form 10-K) were filed as an exhibit to GTE's registration statement on Form S-3 (File No. 33-50263), and are incorporated herein by reference. An amendment was filed with GTE's 1993 Form 10-K, and is incorporated herein by reference. (b) GTE's By-Laws were filed as exhibits to GTE's registration statement on Form S-3 (File No. 33-50263), and are incorporated herein by reference. An amendment was filed with GTE's 1993 Form 10-K, and is incorporated herein by reference. (c) GTE's Deferred Compensation Plan for Directors was filed as an exhibit to GTE's 1992 Form 10-K and is incorporated herein by reference. (d) Agreements with certain key executives of GTE were filed as exhibits to GTE's Form 8-K filed on September 11, 1987, GTE's 1989, 1990, 1991, 1992 and 1993 Forms 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 1993 and 1992 Forms 10-K, and are incorporated herein by reference. An amendment dated January 2, 1994 is filed herewith. (f) GTE's Long-Term Incentive Plan was filed as an exhibit to GTE's Proxy Statement covering the Annual Meeting of Shareholders held on May 15, 1991, and is incorporated herein by reference. (g) GTE's Executive Incentive Plan was filed as an exhibit to GTE's 1993 Proxy Statement, and is incorporated herein by reference. (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 1993 and 1992 Forms 10-K, and are incorporated herein by reference. (i) GTE's Phantom Stock Plan was filed as an exhibit to GTE's 1992 Form 10-K, and is incorporated herein by reference. (j) GTE's Director's Retirement Plan was filed as an exhibit to GTE's 1992 Form 10-K, and is incorporated herein by reference. Amendments dated June 2, 1994 and August 4, 1994 are filed herewith. (k) GTE's Charitable Awards Program was filed as an exhibit to GTE's 1992 Form 10-K, and is incorporated herein by reference. EX-3.2 2 CERTIFICATE OF AMENDMENT OF CERTIF. OF INCORP. 1 Exhibit 3.2 (Filed January 19, 1995) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF GTE CORPORATION UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW WE, THE UNDERSIGNED, WILLIAM D. WILSON and MARIANNE DROST, being respectively the Vice President and Controller and the Secretary of GTE CORPORATION, hereby certify: I. The name of the Corporation is GTE Corporation (originally incorporated as General Telephone Corporation). II. The Certificate of Incorporation of the Corporation was filed by the Department of State on the 25th day of February, 1935. III. The Certificate of Incorporation is amended to eliminate from the enumeration and description of shares which the Corporation is authorized to issue 13,984 shares of the class of Preferred Stock, $50.00 par value per share, and 23,140 shares of the class of No Par Preferred Stock, as follows: 5,992 shares of 5.00% Convertible Preferred Stock 646 shares of 4.00% Convertible Preferred Stock 188 shares of 5.05% Convertible Preferred Stock 4 shares of 5.35% Convertible Preferred Stock 7,085 shares of 4.74% Convertible Preferred Stock 31 shares of 5.28% Convertible Preferred Stock 38 shares of 4.36% Convertible Preferred Stock ------ 13,984 TOTAL ------ 23,140 shares of $2.00 Convertible No Par Preferred Stock ------ 37,124 TOTAL ======
The removal of the above-described shares, which have been converted into shares of Common Stock during the calendar year ending December 31, 1994, is authorized by subparagraph (8) of paragraph (b) of Section 801 of the Business Corporation Law and paragraph (e) of Section 515 of the Business Corporation Law. Accordingly, Article 4 of the Certificate of Incorporation, as heretofore added to or amended by certificates filed pursuant to law, is amended to read in its entirety as follows: 2 "4. The aggregate number of shares which the Corporation shall have authority to issue is 2,021,171,940 shares of which 9,313,871 shares of the par value of $50.00 each shall be Preferred Stock, 11,858,069 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." The foregoing amendment of the Certificate of Incorporation was authorized by resolution of the Board of Directors. IN WITNESS WHEREOF, we have made and subscribed this certificate this 18th day of January 1995, and we affirm the statements contained herein are true under the penalties of perjury. William D. Wilson ----------------------------- WILLIAM D. WILSON Vice President and Controller Marianne Drost ----------------------------- MARIANNE DROST Secretary EX-10.3 3 MATERIAL CONTRACTS - SUPPLEMENTAL EXEC. RETIREMENT 1 EXHIBIT 10-3 AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN RESOLVED FURTHER: That effective January 3, 1994, the GTE Service Corporation Supplemental Executive Retirement Plan ("Supplemental Plan") is amended by adding to the Supplemental Plan a new Article IX to read as set forth below. Article IX shall be deemed to be deleted and shall cease to be effective at the time and in the manner set forth in Section 3 of Article XXIII of the Service Corporation Plan. ARTICLE IX. Special Provisions Relating to Article XXIII of the Basic Pension Plan A. An EERP-Eligible Participant who Retires as a Special Retiree under the EERP pursuant to Article XXIII of the Basic Pension Plan shall be an "Employee" under Section E of Article II hereof. Such Employee's enhanced age and Accredited Service pursuant to Article XXIII of the Basic Pension Plan shall apply to the calculation of his Excess Pension and Supplemental Pension in the same manner as the enhanced age and Accredited Service apply under such Article XXIII and such Employee's Transition Annuity pursuant to such Article XXIII shall be considered part of such Employee's pension under the Basic Pension Plan for purposes of this Plan. B.1. An Eligible Participant who Separates as a Special Separatee under the ISEP pursuant to Appendix B of Article XXIII of the Basic Pension Plan shall be an "Employee" under Section E of Article II hereof and shall be an eligible Employee under Article III hereof regardless of whether he is eligible to receive a Pension under the Basic Pension Plan. In determining an eligible Employee's Supplemental Pension or Excess Pension, a) the Employee's SEP Annuity pursuant to Article XXIII of the Basic Pension Plan shall not be treated as a pension paid by the Basic Pension Plan, and b) in the case of an Employee who is not eligible to receive a Pension under the Basic Pension Plan, any incentive or bonus payment, including any award under the Executive Incentive Plan or Unit Incentive Plan, shall not be included in Remuneration for purposes of determining the Employee's Supplemental Pension; provided that any such award under the Executive Incentive Plan or Unit Incentive Plan shall be taken into account in determining the Employee's ISEP Supplemental Annuity as provided in Section B.2. of this Article IX. 2. The Supplemental Pension of an Employee described in Section B.1. shall be increased by the ISEP Supplemental Annuity, which shall be equal to the greater of a) an annuity equal to the excess of 2 (1) the actuarial equivalent of a fixed lump sum amount equal to the lesser of (a) 1.2 multiplied by the Employee's SERP Modified Average Annual Compensation, or (b) the Employee's SERP Modified Average Annual Compensation multiplied by the sum of (i) 0.037 multiplied by the Employee's Accredited Service (not in excess of 10 years) and (ii) 0.047 multiplied by the Employee's Accredited Service (in excess of 10 years); over (2) the SEP Annuity under the Basic Pension Plan; for purposes of this Section B.2., the Employee's SERP Modified Average Annual Compensation shall be calculated in the same manner as the Employee's Modified Average Annual Compensation is calculated under Article XXIII of the Basic Pension Plan except that the Employee's rate of compensation for any month shall be increased by the Employee's award for the month under the Executive Incentive Plan or Unit Incentive Plan, if any; the Employee's award for a month shall be determined by dividing the award, if any, that the Employee earns for the calendar year in which the month occurs by the number of months that the Employee worked during such calendar year; or b) an annuity equal to the excess of (1) the actuarial equivalent of a fixed lump sum amount equal to (a) the Employee's annual rate of compensation (determined by including only the types of remuneration included in determining Average Annual Compensation under the Basic Pension Plan) as of the day immediately preceding the Employee's Separation Date, as defined in Article XXIII of the Basic Pension Plan, plus the award, if any, that the Employee earned under the Executive Incentive Plan or the Unit Incentive Plan for the calendar year that ended on the most recent December 31st that preceded the Employee's Separation Date, multiplied by (b) the Payment Ratio for the Employee's salary level; over (2) the SEP Annuity under the Basic Pension Plan. The Payment Ratio for each salary level shall be as follows:
Salary Level Payment Ratio ------------ ------------- under grade 10 0 10-12 1/2 13-15 3/4 16 and above 1
3 For purposes of this Section B.2., actuarial equivalence shall be determined in the same manner as it is determined for purposes of calculating the SEP Annuity under Article XXIII of the Basic Pension Plan. C.1. An Eligible Participant who Separates as a Special Separatee under the ISEP pursuant to Appendix A of Article XXIII of the Basic Pension Plan shall be an "Employee" under Section E of Article II hereof and shall be an eligible Employee under Article III hereof regardless of whether he is eligible to receive a Pension under the Basic Pension Plan. In determining an eligible Employee's Supplemental Pension or Excess Pension, a) the Employee's SEP Annuity pursuant to Article XXIII of the Basic Pension Plan shall not be treated as a pension paid by the Basic Pension Plan, and b) in the case of an Employee who is not eligible to receive a Pension under the Basic Pension Plan, any incentive or bonus payment, including any award under the Executive Incentive Plan or Unit Incentive Plan, shall not be included in Remuneration for purposes of determining the Employee's Supplemental Pension. 2. The Supplemental Pension of an Employee described in Section C.1. shall be increased by the ISEP Supplemental Annuity, which shall be equal to the greater of a) an annuity equal to the excess of (1) the actuarial equivalent of a fixed lump sum amount equal to the lesser of (a) 1.2 multiplied by the Employee's Modified Average Annual Compensation, or (b) the Employee's Modified Average Annual Compensation multiplied by the sum of (i) 0.037 multiplied by the Employee's Accredited Service (not in excess of 10 years) and (ii) 0.047 multiplied by the Employee's Accredited Service (in excess of 10 years); over (2) the SEP Annuity under the Basic Pension Plan; or b) an annuity equal to the excess of (1) the actuarial equivalent of a fixed lump sum amount equal to (a) the Employee's annual rate of compensation (determined by including only the types of remuneration included in determining Average Annual Compensation under the Basic Pension Plan) as of the day immediately preceding the Employee's Separation Date, as defined in Article XXIII of the Basic Pension Plan, multiplied by (b) the Payment Ratio for the Employee's salary level; over 4 (2) the SEP Annuity under the Basic Pension Plan. For purposes of this Section C.2., the Payment Ratio and actuarial equivalence shall be determined in the same manner as they are determined under Section B.2. EX-10.8 4 AMENDMENTS TO DIRECTOR'S RETIREMENT PLAN 1 EXHIBIT 10-8 AMENDMENTS TO DIRECTOR'S RETIREMENT PLAN (Dated June 2, 1994) RESOLVED: That the Committee recommends that the Board of Directors amend Sections 3 and 4 of Article II of the Retirement Plan for Non-Employee Members of the Board of Directors of GTE Corporation to increase the surviving spouse benefit percentage therein from fifty percent (50%) to one hundred percent (100%), effective for payments made pursuant to Sections 3 and 4 of Article II on or after August 4, 1994. RESOLVED: That, effective August 4, 1994, Sections 3 and 4 of Article II of the Retirement Plan for Non-Employee Members of the Board of Directors of GTE Corporation ( the "Directors' Retirement Plan") are amended for Directors who retire after the effective date to increase the surviving spouse benefit percentage therein from fifty percent (50%) to one hundred percent (100%), for all retirement pension payments made pursuant to the Directors' Retirement Plan, but in no event beyond the Maximum Period of Payment. (Dated August 4, 1994) FURTHER RESOLVED: That the officers of the Corporation are hereby authorized to make, execute, acknowledge, and deliver all instruments, to make all technical and conforming changes in the Directors' Retirement Plan, and to take all other actions necessary to carry out the foregoing resolution. EX-10.10 5 MATERIAL CONTRACTS - SALARY DEFERRAL PLAN 1 Exhibit 10-10 GTE EXECUTIVE SALARY DEFERRAL PLAN JULY 1, 1994 2 GTE EXECUTIVE SALARY DEFERRAL PLAN TABLE OF CONTENTS
PAGE ARTICLE I INTRODUCTION 3 1.01 Name of Plan 3 1.02 Purpose of Plan 3 1.03 Gender and Number 3 1.03 Effective Date 3 ARTICLE II DEFINITIONS 4 ARTICLE III ELIGIBILITY AND ELECTION TO DEFER 9 3.01 Eligibility 9 3.02 Salary Deferral Amounts 9 3.03 Election to Defer 9 3.04 Designation of Beneficiaries 11 ARTICLE IV ACCOUNTS AND INTEREST 12 4.01 Accounts 12 4.02 Interest 12 4.03 Matching Contributions 13 4.04 Hypothetical Nature of Accounts and Investments 14 ARTICLE V PAYMENTS 15 5.01 Exclusive Entitlement to Payment 15 5.02 Method of Payment 15 5.03 Payment Commencement Year 15 5.04 Interim Payments 17 5.05 Limitations on Rights to Payment 17 ARTICLE VI MISCELLANEOUS 19 6.01 Plan Administration 19 6.02 Appeals Procedure 19 6.03 Change in Control 20 6.04 Securities Law Restrictions 20 6.05 Rights Not Assignable 20 6.06 Inability to Locate Participants and Beneficiaries 21 6.07 Withholding Taxes 21 6.08 Certain Rights Reserved 21 6.09 Severability 21 6.10 Titles and Headings Not to Control 22 6.11 Governing Law 22
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 are 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. 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 12b-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 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. 5 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 (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 6 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. 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. 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. 7 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 in accordance with Section 1.03 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 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. Except as provided in Section 2.29, "Section" shall mean a section of the Plan. 2.29. SECTION 16. "Section 16" shall mean section 16 of the Securities Exchange Act of 1934, as amended from time to time. 2.30. SECTION 16 PERSON. "Section 16 Person" shall mean a Participant who is an "officer" or "director" of the Company within the meaning of Section 16. 2.31. SECTION 16 RELEASE DATE. "Section 16 Release Date" shall mean, with respect to a Participant who is a Section 16 Person, the first day that is more than six months after the date on which the Participant is no longer a Section 16 Person. 2.32. 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. 8 2.33. TERMINATION. "Termination" shall mean a separation from service with the Company for any reason other than Retirement, Termination for Cause, or death. 2.34. 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. 2.35. 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. 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 50% (or such greater or 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 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, and if so the 10 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, in the case of a Section 16 Person, no such election shall be made prior to such Participant's Section 16 Release Date; and provided further 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. (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; 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); and provided further that, in the case of a Section 16 Person, a modification with respect to any portion of a Participant's account that is treated as if held in GTE Common Stock shall not be made prior to the Participant's Section 16 Release Date. 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. 11 (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; provided that, in the case of a Section 16 Person, no such election shall be made prior to such Participant's Section 16 Release Date. 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, in the case of a Section 16 Person, no such election shall be made prior to such Participant's Section 16 Release Date; and provided further 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, if upon removal of the prohibition referred to in the first sentence of this subsection (f) the Participant is a Section 16 Person, no such election shall be made prior to such Participant's Section 16 Release Date; and provided further 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. 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. (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 13 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, with respect only to the Plan Year ending December 31, 1994, the Participant may defer up to 12% of his Matchable Compensation; and provided further that such hypothetical shares shall be credited with respect to all Plan Years 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 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 limits 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. 14 (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. 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. * 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 under the schedule. For example, the respective fractions under a five-year schedule of annual installments are 1/5 for the first installment, 1/4 for the second installment, 1/3 for the third installment, 1/2 for the fourth installment, and 1/1 for the fifth and final installment. 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 16 Section 3.03(a)(5). (a) FIXED COMMENCEMENT YEAR. A Participant may select a specific year for the commencement of payments; provided that, in the case of a Section 16(b) Person, the payment commencement date with respect to any Annual Deferrals treated as if held in GTE Common Stock must be at least six months after the end of the Plan Year to which the deferral election applies; and provided further 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 ten (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. (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. 17 (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; provided that, in the case of a Section 16 Person, no such election shall be made prior to such Participant's Section 16 Release Date with respect to any portion of the Participant's account that is treated as if held in GTE Common Stock; and provided further that, if an election is made pursuant to this paragraph (C) by a Participant who is not a Section 16 Person at the time of election, but who subsequently becomes a Section 16 Person, such election shall be suspended with respect to any portion of the Participant's account that is treated as if held in GTE Common Stock until the electing Participant's Section 16 Release Date. 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; provided that, in the case of a Section 16 Person, no such payment shall be made before the Participant's Section 16 Release Date with respect to any portion of such Participant's account that is treated as if held in GTE Common Stock. 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, in the case of a Section 16 Person, no election shall be made before the Participant's Section 16 Release Date with respect to any portion of such Participant's account that is treated as if held in GTE Common Stock; and provided further 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 2.34 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. (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 18 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. 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 ERISA 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 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 20 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(f), 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. (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. 21 6.04. SECURITIES LAW RESTRICTIONS. Notwithstanding any other provision of the Plan, no provision hereof shall be applied in a manner that would cause a Participant or former Participant to be deemed to have made a purchase or sale of an equity security of GTE Corporation that would be subject to Section 16 or the rules, regulations, or interpretations thereunder. 6.05. 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. 6.06. 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. 6.07. 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. 6.08. 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. 6.09. 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 22 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. 6.10. 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. 6.11. 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. 23 Exhibit 10-11 [GTE LETTERHEAD] October 20, 1994 Mr. Michael T. Masin GTE Corporation One Stamford Forum Stamford, CT 06904 Dear Mike: For your records, I am pleased to confirm certain items relating to the terms of your employment when you joined GTE. The specific details are set forth below. BASE COMPENSATION: Your initial annual salary was $550,000. EXECUTIVE INCENTIVE PLAN (EIP): In accordance with the terms of EIP, you will be a participant in that plan. LONG-TERM INCENTIVE PLAN (LTIP): On October 13, 1993, the Executive Compensation and Organizational Structure Committee of the Board of Directors ("ECO") approved your participation in the GTE Long-Term Incentive Plan (LTIP) and has authorized the following performance awards. Assuming that you remain in the employ of GTE until the end of each cycle, you will be a full participant in the 1992-1994 and 1993-1995 award cycles. PENSION ARRANGEMENT: You are eligible to participate in the GTE Service Corporation Plan for Employees' Pensions ("Qualified Plan") and the GTE Supplemental Executive Retirement Plan ("SERP"). In addition, 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 GTE at least until age 55 (or are involuntarily terminated for other than cause before age 55), you will receive a single life annuity pension of $200,000 per year when you leave GTE. In the event of your death and you have not elected a lump sum pension payment, your wife will receive this benefit unreduced for the remainder of her life. Further, if you remain with GTE at least until age 60, and thereafter, are involuntarily terminated for other than cause without satisfying the eligibility requirements for an early retirement pension, you will be deemed to have satisfied the requirements for an early retirement pension payable from SERP (less any offsets for benefits due to you from the Qualified Plan). There shall be no duplication of benefits between the early retirement benefit described in the preceding sentence and the pension payable from the Qualified Plan or SERP. 24 GTE BOARD OF DIRECTORS STATUS: While you continue as a member of the GTE Board of Directors as a GTE employee, you will no longer be eligible to receive compensation for attendance and participation at GTE Board of Directors meetings. In this connection, you will be eligible to receive your Director's Pension under the terms of the current Retirement Plan for Non-employee Members of the Board of Directors of GTE Corporation upon your ceasing to be a member of the GTE Board. In the event of your death while an employee of GTE, your wife's survivor Director's Pension benefit will be determined as if you were an active Non-Employee Member of the Board of Directors. Your benefits under the plan, including survivor benefits, will be based on your annual retainer and service as a Non-Employee Member of the Board of Directors. Your deferrals will continue in accordance with the terms of the Deferred Compensation Plan for Non-Employee Members of the Board of Directors of GTE Corporation. EXECUTIVE SEVERANCE AGREEMENT: You will be covered by a GTE Executive Severance Agreement which provides particular severance benefits in the event of a Change in Control (as defined therein) of GTE Corporation. Mike, I am very pleased that you have joined GTE in the Office of the Chairman and am looking forward to working with you. GTE is a great company with many strengths and offers many challenges in the telecommunications field. We are confident that your skills and experience will be a significant asset to GTE's management team in meeting the challenges that lie ahead. If you should have any questions regarding the contents of this letter, please contact me or Bruce Carswell. Sincerely, /S/ Charles R. Lee - ------------------ Charles R. Lee CRL/kc cc: B. Carswell 25 EXECUTIVE SEVERANCE AGREEMENT This AGREEMENT ("Agreement") dated October 20, 1994, by and between GTE Service Corporation, a New York corporation (the "Company"), and Michael T. Masin (the "Executive"). W I T N E S S E T H: WHEREAS, the Company recognizes the valuable services that the Executive has rendered to GTE Corporation, a New York corporation and the Company's sole shareholder ("GTE"), the Company, and their affiliates (GTE, the Company, and their affiliates being hereinafter referred to collectively as the "GTE Group") and desires to be assured that the Executive will continue to attend to the business and affairs of the GTE Group without regard to any potential or actual change in control of GTE; and WHEREAS, the Executive is willing to continue to serve the GTE Group, 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 GTE Group 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 26 - 2 - (b) (i) within two years after the Change in Control, the GTE Group 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 GTE Group 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 GTE Group 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 GTE Group other than by reason of Retirement or Disability. Section 1.2. Change in Control. A "Change in Control" shall 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 27 - 3 - nomination for election is approved as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Securities Exchange Act of 1934, as amended from time to time) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed not to have been approved by a majority of the Incumbent Board for purposes hereof; or (c) members of the Incumbent Board cease for any reason to constitute at least a majority of the Board; "Incumbent Board" shall mean individuals who, as of the close of business on April 20, 1994, 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 28 - 4 - 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 subparagraph (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 subparagraph (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 29 - 5 - (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 subparagraph (d)(i) of the definition of "Change in Control" herein. "Person" shall mean any individual, firm, corporation, partnership, joint venture, association, trust, or other entity; and a Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," any securities: (x) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (y) which such Person or any of such Person's Affiliates or Associates has (i) the right or obligation to acquire (whether such right or obligation is exercisable or effective immediately or only after the passage of time) pursuant to any agreement, arrangement, or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights (other than the rights granted pursuant to the Rights Plan), warrants or options, or otherwise; provided that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," securities tendered 30 - 6 - pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (ii) the right to vote pursuant to any agreement, arrangement, or understanding (whether or not in writing); provided that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this clause (y) if the agreement, arrangement, or understanding to vote such security (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulation of the Securities Exchange Act of 1934, as amended from time to time, and (B) is not also then reportable by such person on Schedule 13D under the Securities Exchange Act of 1934, as amended from time to time (or any comparable or successor report); or (z) which are beneficially owned, directly or indirectly, by any other person (or any affiliate or associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement, or understanding (whether or not in writing), or with which such Person or any of such Person's Affiliates or Associates have otherwise formed a group for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (ii)(A) of subparagraph (y), above), or disposing of any securities of GTE. "Rights Plan" means the Rights Agreement, dated as of December 7, 1989, between GTE and State Street Bank and Trust Company, as it may be amended from time to time, or any successor thereto. 31 - 7 - "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 GTE Group 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 GTE Group's expense, or (b) engages (except by reason of incapacity due to illness or injury) in a material violation of his responsibilities to the GTE Group that results in a material injury to the GTE Group. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a Notice of Termination, consisting of a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of GTE's Board of Directors at a duly held meeting of the Board of Directors (with reasonable notice to the Executive and an opportunity for the Executive, together with counsel, to be heard before the Board of Directors), finding that the Executive has engaged in the conduct set forth above in this Section 1.3 and specifying the particulars thereof in detail. GTE's Board of Directors may not delegate or assign its duties under this Section 1.3. Section 1.4. Termination for Good Reason. The Executive shall have a Good Reason for terminating employment with the GTE Group 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 GTE Group 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 32 - 8 - 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 GTE Group in the Executive's total compensation, which shall be deemed, for this purpose, to be equal to his base salary plus the greater of (i) the most recent award that he has earned under the GTE Corporation Executive Incentive Plan, as amended from time to time, or any successor thereto (the "EIP"), or (ii) an EIP award equal to the Executive's Average Percentage of the annual value (i.e., the dollar amount) of the normal payment under the EIP for the Executive's salary level (such annual value and normal payment being those that are in effect under the EIP immediately before the date on which the Change in Control occurs for the Executive's salary level immediately before the date on which the Change in Control occurs). For purposes of this paragraph (d), the Executive's "Average Percentage" means the average of the Executive's Annual Percentages for the Determination Years. For purposes of this paragraph (d), the Executive's "Annual Percentage" for each Determination Year means a fraction (expressed as a percentage), the numerator of which is the EIP award earned by the Executive for such Determination Year, and the denominator of which is the annual value of the normal payment under the EIP for the Executive's salary level (such annual value and normal payment being those that were in effect under the EIP for such Determination Year for the Executive's salary level for such Determination 33 - 9 - 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 GTE Group 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 GTE Group 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 GTE Group 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 GTE Group provides the Executive with substantially equivalent benefits; 34 - 10 - (h) the GTE Group'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 GTE Group'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 GTE Group 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 GTE Group of any agreement (including this Agreement) between it and the Executive. Notwithstanding the foregoing, no action by the GTE Group 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 GTE Group 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 35 - 11 - 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 GTE Group 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 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: (i) two, multiplied by (ii) a fraction (not exceeding one), the numerator of which is the number of whole months (not exceeding 24) from the date of the Qualifying Termination to the Executive's 65th birthday and the denominator of which is 24, multiplied by (iii) 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 36 - 12 - (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 37 - 13 - 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; provided, that if, before a Change in Control occurs, the Executive elects to have such payment made in installments, the Company shall make the payment in monthly installments. The number of monthly installments shall be equal to the numerator of the fraction prescribed by subsection (a)(ii) of this Section 2.1, and the monthly installments shall begin on the first day of the first month that commences after the Qualifying Termination occurs. If the Company makes 38 - 14 - installment payments to the Executive in accordance with this subsection (b), interest shall accrue on the unpaid balance of the installments, commencing on the date of the Qualifying Termination. The interest shall accrue and be compounded monthly. The interest rate shall be equal to 120 percent of the publicly announced Chemical Bank prime rate prevailing on the first business day of each month, effective for the ensuing month. The interest rate shall be adjusted at the beginning of each month. The amount of each installment shall be equal to (i) the unpaid balance of the payment prescribed by subsection (a) of this Section 2.1, plus the interest that has accrued thereon as of the close of the preceding month, divided by (ii) the number of monthly installments that have not yet been paid pursuant to this subsection (b). (c) The Executive also may elect, before a Change in Control occurs, to have only a portion of the payment prescribed by subsection (a) paid in installments, and if he makes such an election, the amount of the lump-sum payment and the amount of each installment (as each would otherwise be determined in accordance with the preceding provisions of this Section 2.1 if the payment were made entirely in a lump sum or entirely in installments, respectively) shall each be reduced pro tanto. (d) The Executive may revoke or modify any election made under subsection (b) or subsection (c) of this Section 2.1 at any time before a Change in Control occurs. 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 39 - 15 - 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. 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 1994. 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 40 - 16 - 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 GTE Group (including, but not limited to, health, life insurance, pension, savings, stock, and stock ownership plans, but excluding the GTE Group's short-term and long-term disability plans) in which he participated immediately before the Change in Control, for the number of months in the numerator of the fraction prescribed by Section 2.1(a)(ii) hereof; (b) for purposes of determining the Executive's benefits under all defined benefit pension plans maintained by the GTE Group, including the appropriate GTE Group Supplemental Executive Retirement Plan, 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 installments, regardless of any election he makes to receive such amount in a lump sum in accordance with Section 2.1; (c) if the Executive has not completed at least 10 years of service for purposes of determining whether he has a nonforfeitable interest in his accrued benefit under a funded defined benefit pension plan maintained by the Company in which he participated immediately before the Change in Control, then in addition to any service credit that the Executive receives pursuant to Section 2.5(a) hereof, the Executive shall receive credit 41 - 17 - for each year of service with which he is otherwise credited (without regard to Section 2.5(a) hereof) for vesting, retirement eligibility, benefit accrual, and all other purposes under the plan, under the GTE Service Corporation Supplemental Executive Retirement Plan, and under the GTE Executive Retired Life Insurance Plan (or any predecessor or successor thereto) in accordance with the following table: Years of Service Otherwise Credited Service Credited Without Regard to Pursuant to this Section 2.5(a) Section 2.5(c) ------------------ ---------------- 5 or less 2 times years of service otherwise credited more than 5, but not more than 10 10 years of service more than 10 years of service otherwise credited; and (d) 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 GTE Group's defined benefit pension plans (including, but not limited to, the appropriate GTE Group Supplemental Executive Retirement Plan), for purposes of determining his eligibility for benefits under the GTE Executive Retired Life Insurance Plan (or any predecessor or successor thereto) and for purposes of determining his eligibility for benefits under GTE's post retirement medical 42 - 18 - benefits plan (as in effect immediately prior to the Change in Control). To the extent that the GTE Group'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 GTE Service Corporation Supplemental Executive Retirement Plan and, in the case of GTE's post retirement medical benefits plan as specified in Section 2.5(d), if the benefit cannot be provided on a tax-free basis, the Company shall provide such benefit on a basis that avoids an adverse income tax effect upon the Executive (for example, by purchasing third party insurance). 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 the GTE Group is otherwise required to provide under any other contract, agreement, policy, plan, or arrangement; provided that, this Section 2.6 shall not apply to the pension benefit described in the second and third sentences of the Pension Arrangement paragraph of the October 12, 1994 letter from Charles R. Lee to the Executive. ARTICLE III EFFECT ON HUMAN RESOURCES 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 under any other GTE Group severance or salary continuation plan or policy. 43 - 19 - ARTICLE IV TAX MATTERS 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 GTE Group 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 44 - 20 - payment together with interest thereon. The interest shall accrue and be compounded monthly. The interest rate shall be equal to 120 percent of the publicly announced Chemical Bank prime rate prevailing on 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, 1994, if no Change in Control has occurred before that date; (b) the Executive's attainment of age 65, if no Change in Control has occurred between the date hereof and the Executive's 65th birthday; (c) the termination of the Executive's employment with the GTE Group for any reason prior to a Change in Control; (d) the GTE Group's termination of the Executive's employment for Cause, or the Executive's resignation for other than Good Reason, following a Change in Control and the Company's and the Executive's fulfillment of all of their obligations hereunder; and (e) 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, 1994, 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 45 - 21 - 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. 46 - 22 - 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. 47 - 23 - 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 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 48 - 24 - no such arrangement shall relieve or discharge the Company of its obligations hereunder except to the extent that such payments or benefits are actually made or provided. Section 6.12. Captions. The captions to the respective articles and sections of this Agreement are intended for convenience of reference only and have no substantive significance. Section 6.13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute a single instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GTE SERVICE CORPORATION By: /s/ Bruce Carswell --------------------- Bruce Carswell By: /s/ Michael T. Masin --------------------- Michael T. Masin /ljr 49 Exhibit 10-12 [GTE CORPORATION LETTERHEAD] April 20, 1994 Mr. Jeffrey S. Rubin 847 Sasco Hill Road c/o P.O. Box 1078 Southport, CT 06490 Dear Jeff: Pursuant to your conversation with Nick Trivisonno, this is to confirm our offer of employment to you to join GTE Corporation as Senior Vice President-Corporate Planning and Development, effective on May 2, 1994 or a mutually agreeable date. Details regarding the specific compensation, pension and benefit provisions in connection with this position are provided in this letter and the attached brochures. 1. BASE COMPENSATION: Your initial annual salary will be $360,000. The GTE salary level for the position is 23 with a 1994 salary range of $277,000 minimum, $362,000 midpoint and $447,000 maximum. 2. EXECUTIVE INCENTIVE PLAN (EIP): Your position is in the Corporation's Executive Incentive Plan. For 1994, the EIP payout range consists of a minimum of $83,000, a norm of $166,000 and a maximum payout opportunity of $332,000. The bonus opportunity at 130% of norm for the full 1994 year is $215,800. Your actual payout for 1994 will be pro-rated against a full year's participation. You are guaranteed a 1994 minimum payout of 130% on a pro-rated basis. Further details of the plan are provided in the attached booklet. 3. LONG-TERM INCENTIVE PLAN (LTIP): In this position you will be a participant in GTE's Long-Term Incentive Plan which includes stock option grants and performance bonus units. Effective on your date of hire, you will be granted an option to purchase 40,400 shares of GTE Common Stock at a price per share based on the average of the high and low prices of GTE Common Stock on the NYSE Composite listing on that date. This grant also includes associated Tandem Stock Appreciation Rights (SAR's) and will vest on a one-third per year basis over a period of three years. 50 Jeffrey S. Rubin April 20, 1994 Page 2 In addition, effective with your date of hire, you will be eligible to participate on a prorated basis in the three current cycles of the GTE Performance Bonus Plan based on a January 1, 1994 participation date. The payment of these cycles is based on the Corporation's achievement of pre-established performance targets. As of January 1, 1994 the Executive Compensation and Organizational Structure Committee revised the grant opportunities beginning with the 1994-1996 cycle and approved additional grant opportunities for the 1992-1994 and 1993-1995 cycles. The details of these performance bonus opportunities are outlined in the attachment to this letter. Further details regarding both aspects of the Long-Term Incentive Plan will be provided to you under separate cover. 4. PENSION PLAN: As an employee of GTE, you will be eligible to participate in the GTE Pension Plan. Details of the plan are provided in the attached booklet. 5. EXECUTIVE RETIREMENT LIFE INSURANCE PLAN (ERLIP): You will participate in the GTE Executive Retirement Life Insurance Plan as it exists at the time of retirement. It currently provides you, upon retirement from GTE, post-retirement life insurance equivalent to three times your final base salary. The Plan also provides options to convert the death benefit to other forms of payment using actuarial equivalents. Details of the plan are provided in the attached booklet. 6. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP): In addition to participating in the GTE pension plan for salaried employees, at the time of your retirement from GTE, your basic pension will be supplemented by an additional pension payment based on the provision of SERP with respect to the inclusion of bonuses in pension calculations. Details of the plan are provided in the attached booklet. 7. OTHER BENEFIT PLANS: As an employee of GTE Service Corporation you will be entitled to a full range of benefits as detailed in the GTE Choices Benefits Program Summary booklet enclosed with this letter. GTE reserves the right to modify or terminate any plan offering, including any of the executive benefit plans described above. 51 Jeffrey S. Rubin April 20, 1994 Page 3 8. SPECIAL CONSULTANT ASSIGNMENT - If you have remained in the continuous active employment of GTE until age 62, and desire to remain with GTE in a different role, you may resign your then current position and serve as an employee-consultant for GTE at a rate of $10,000 per year (but in no event less than the applicable minimum wage then in effect) until you reach age 65. While you must be available to GTE for assignments for the entire work year (2080 hours), we do not expect to utilize your services for more than 5 days per month. In consideration of the special assignment, you will retire from service with GTE at your normal pension retirement date, age 65, or you may leave earlier under a vested pension if you so desire. During the special consultant assignment period, you will continue to accrue pension credit and participate in the active employee medical plan, however, you will not participate in any GTE Executive Compensation Plans such as EIP or receive new LTIP Performance Awards or option grants. Upon reaching age 65, you will retire under the GTE Service Corporation Plan for Employees' Pensions and SERP and participate under the terms of the GTE Service Corporation Retiree Medical Plan, if any, then in effect. You will not be entitled to any qualified or non-qualified, voluntary or involuntary separation or enhanced retirement programs or plans offered or maintained by GTE either during the special assignment period or at the end of such period. Details on scheduling and assignments will be mutually agreed upon closer to the date of expected performance of the special assignments and it is anticipated that you will report to N.L. Trivisonno or another member of the Office of the Chairman. This letter does not constitute a contract of employment. At all times, commencing with your initial hire, you will remain an employee at will, that is, GTE may terminate your employment with or without notice or cause and you are free to resign with or without notice. 9. MISCELLANEOUS - This offer of employment is contingent upon successful completion of a medical evaluation which includes a screen for illegal substances. Your continued employment is contingent upon completion of a background investigation. In addition, Federal law requires that eligibility to work in the United States be verified for all new employees. So that we can comply with this regulation, please review the enclosed Employment Eligibility form, complete part one, and bring the form, along with the appropriate document(s) with you on your first day of employment. 52 Jeffrey S. Rubin April 20, 1994 Page 4 Jeff, Nick Trivisonno and the members of the Office of the Chairman are very pleased that you are joining GTE. As you are well aware, this is a period of accelerated change in the telecommunications industry. Needless to say, GTE faces many opportunities and challenges. We believe GTE has the management and assets to make the most of the opportunities ahead and we look forward to your contribution. If any aspects of this letter raise questions, please contact me. To indicate your acceptance of the position, please return the signed acceptance to me and retain one copy for your records. Very truly yours, /s/ Bruce Carswell BC:jy Attachments I agree to the terms and conditions as set forth in this letter and accept the position of Senior Vice President-Corporate Planning and Development. /s/ Jeffrey S. Rubin 4/21/94 - --------------------------- ------------- Jeffrey S. Rubin Date cc: N. L. Trivisonno 53 Attachment to GTE Employment Offer Letter to Jeffrey S. Rubin from Bruce Carswell dated April 20, 1994. PERFORMANCE BONUS GRANT OPPORTUNITIES ---------------------------------------
Initial Value Expected Performance Cycle/Award Period No. Units at $32.4375 (1) Factor (2) - ------------------ --------- --------------- -------------------- 1994 - 1996 Cycle 4700 $152,000 100% 1993 - 1995 Cycle 1732 $ 56,200 87% and 1994 - 1995 Award Period 1700 $ 55,100 100% 1992 - 1994 Cycle 867 $ 28,100 70% and 1994 Award Period 1700 $ 55,100 100%
(1) Based on the average of the high and low prices of GTE Common Stock on the NYSE Composite Listing for the date of the 1994 grant (February 17, 1994). (2) Estimate based on current financial outlook, that can vary based on actual performance. 54 Exhibit 10-13 [GTE CORPORATION LETTERHEAD] June 30, 1994 Mr. William P. Barr 1200 Daleview Drive McLean, Virginia 22102 Dear Bill: This is to confirm our offer to you to join GTE Corporation as Senior Vice President and General Counsel, to include management responsibility for the operations of GTE's Washington, D.C. office, effective July 5, 1994. Details regarding the specific compensation, pension and benefit provisions in connection with this position are provided in this letter and the attached brochures. BASE COMPENSATION: Your initial annual salary will be $370,000. The GTE salary level for the position is 23, with a 1994 salary range of $277,000 minimum, $362,000 midpoint and $447,000 maximum. SIGNING BONUS: In recognition of business opportunities you may have forgone in accepting this position with GTE, as soon as practicable after July 5, 1994, you will be paid a $100,000 signing bonus. This signing bonus will not be deemed compensation under GTE pension, welfare, or executive benefit plans. EXECUTIVE INCENTIVE PLAN (EIP): In your role as Senior Vice President and General Counsel, you will be a participant in the Corporation's Executive Incentive Plan. For 1994, the EIP payout range consists of a minimum of $83,000, a norm of $166,000 and a maximum payout opportunity of $332,000. The bonus opportunity at 130% of the norm for the full 1994 year is $215,800. Assuming you remain in the employ of GTE through year-end 1994, you are guaranteed a 1994 minimum payout of 130% on a six month pro-rated basis, that is, an award of not less than $107,900. LONG-TERM INCENTIVE PLAN (LTIP): In this position you will be a participant in GTE's Long-Term Incentive Plan, which includes stock option grants and performance bonus units. Effective July 5, 1994, you will be granted an option to purchase 60,000 shares of GTE Common Stock at a price per share based on the average of the high and low prices of GTE Common Stock on the NYSE Composite listing on that date. This grant also includes associated tandem Stock Appreciation Rights (SAR's) and will vest on a one-third per year basis over a period of three years. With respect to the performance bonus units, effective July 5, 1994, you will be eligible for full participation in the three current cycles of the GTE Long-Term Performance Bonus Plan. For the 1992-1994 performance cycle, you will receive 2,600 performance bonus units plus 1,700 supplemental units, for a total of 4,300 units. For the 1993-1995 cycle, you will receive 2,400 performance bonus units plus 1,700 supplemental units, for a total of 4,100 units. For the 1994-1996 cycle you will receive 4,700 units. The payment of these cycles is based on the Corporation's achievement of pre-established performance targets and assumes you remain in the employ of GTE until the end of each cycle. Further details regarding the Long-Term Incentive Plan will be provided to you under separate cover. 55 PENSION BENEFITS: As an employee of GTE, you will be eligible to participate in both the basic GTE Pension Plan and the Supplemental Executive Retirement Plan (SERP). GTE BASIC PENSION PLAN: GTE's Basic Pension Plan provides for a basic service pension based on your highest five consecutive years' base salary, your years of accredited service and the social security integration level in the year you retire. Full details of the Basic Pension Plan are provided in an attached booklet. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP): At the time of your retirement from GTE, your basic pension will be supplemented by an additional pension payment based on the provisions of SERP with respect to the inclusion of bonuses in pension calculations. Details of the plan are provided in an attached booklet. EXECUTIVE RETIREMENT LIFE INSURANCE PLAN (ERLIP): You will participate in the GTE Executive Retirement Life Insurance Plan, which currently provides you, upon retirement from GTE or attaining age 60 with at least 10 years of service, post-separation life insurance equivalent to three times your final base salary. The Plan also provides options to convert the death benefit to other forms of payment using actuarial equivalents. Details of the plan are provided in the attached booklet. OTHER BENEFIT PLANS: As an employee of GTE Service Corporation you will be entitled to a full range of benefits as detailed in the GTE Choices Benefits Program Summary booklet enclosed with this letter. GTE reserves the right to modify or terminate any plan offering, including any of the executive benefits plans described above. TEMPORARY HOUSING: Since you will be spending a considerable portion of your time in the on-site management of the GTE Washington, D.C. office, GTE will provide you with temporary housing accommodations in the Stamford, Connecticut area and reimbursement for related transportation expenses for a period of time extending through approximately June, 1995. RELOCATION: You are also eligible for full relocation benefits. Please contact Bill Macauley, Director-Staffing and Development, at (203) 965-3571 when you are ready to begin the relocation process. The attached Employee Relocation Guide will provide a brief overview of the relocation assistance available to you. MISCELLANEOUS: Your continued employment is contingent upon completion of a background investigation. In addition, Federal law requires that eligibility to work in the United States be verified for all new employees. So that we can comply with this regulation, please review the enclosed Employment Eligibility form, complete part one, and bring the form, along with the appropriate document(s) with you on your first day of employment. Nothing in this letter shall give you the right to be retained in the service of GTE or deny GTE the right to discharge you at any time. Similarly, this letter does not limit your right to terminate employment with GTE at any time. 56 Bill, Mike Masin, Chuck Lee and the other members of the Office of the Chairman are very pleased that you are joining GTE. As you are well aware, this is a period of accelerated change in the telecommunications industry. Needless to say, GTE faces many opportunities and challenges. We believe GTE has the management and assets to make the most of the opportunities ahead and we look forward to your contribution. If any aspect of this letter raises questions, please contact me. To indicate your acceptance of the position, please return the signed acceptance to me and retain one copy for your records. Sincerely, /s/ Bruce Carswell Bruce Carswell BC/mbd Attachments I agree to the terms and conditions as set forth in this letter and accept the position of Senior Vice President and General Counsel. /s/ William P. Barr July 5, 1994 - ------------------- ----------------- William P. Barr Date cc: M. T. Masin 57 Exhibit 10-14 [GTE CORPORATION LETTERHEAD] CONFIDENTIAL March 22, 1994 Mr. Edward C. Schmults GTE Service Corporation One Stamford Forum Stamford, CT 06904 Dear Ed: On behalf of GTE, I want to express my gratitude for your many years of valuable service now that you have elected to resign from your current position, effective June 1,1994, as Senior Vice President and General Counsel. In order to assist in the transition of your responsibilities, we have mutually agreed that following your resignation you will serve as an employee-consultant for the Office of the Chairman until your retirement on November 30, 1994. Subsequent to your retirement, you will serve as a non-employee consultant until December 31, 1995. This Agreement supersedes and replaces your employment letter of February 15, 1984 and clarifies the terms of your consultant Agreement. 1. You will serve as an employee-consultant from June 1, 1994 to November 30, 1994 and your annual base salary will remain at $478,000 until November 30, 1994. Subject to the terms of the GTE Executive Incentive Plan ("EIP"), you will continue to participate in EIP for the full 1994 plan year; however, you will not participate in EIP thereafter. 2. You will serve as a non-employee consultant for the period December 1, 1994 to December 31, 1995 and you will be paid $25,000 per month. During this period and thereafter, you will not participate in any GTE benefit or executive compensation plans. 3. Subject to the terms of the GTE Long-Term Incentive Plan ("LTIP"), you will continue to fully participate in the 1992-1994 LTIP award cycle and on a prorated basis (to November 30, 1994) in the 1993-1995 award cycle, however, in 1994 and thereafter you will receive no option grants or participate in any performance award programs commencing in 1994 or thereafter. Since you are retiring and electing to receive your pension benefits in 1994, you will have a five-year period (but not to exceed the initial term of the option) from November 30, 1994 to exercise any 58 E. C. Schmults March 22, 1994 Page 2 outstanding LTIP options that are or become exercisable within the five-year period. 4. You will continue to participate in the GTE Service Corporation Plan for Employees' Pensions until November 30, 1994. You will receive a special pension benefit calculated under the provisions of the GTE Supplemental Executive Retirement Plan ("SERP") based on 21 years of service and the average of your eligible compensation during the five consecutive years of employment in which you received your highest rates of pay. Under the provisions of SERP, an offset for your qualified pension plan benefits will be calculated and applied against the special pension benefit. The special pension benefit will be paid from the general assets of GTE and is payable after your retirement on November 30, 1994. 5. After your retirement, you will have the opportunity to elect COBRA for an 18-month period. If you so elect, GTE will reimburse you for the cost of your COBRA coverage. After the 18-month period, GTE will provide retiree medical benefit coverage under a special arrangement comparable to the GTE Service Corporation Retiree Medical Plan, in effect in 1994. Any service-linked contributions required under the special retiree medical arrangement will be calculated based on 21 years of service and with respect to changes in the GTE Service Corporation Retiree Medical Plan in the future, you will have considered to have retired in 1994. The COBRA reimbursement and provision of special retiree medical coverage will be considered as taxable income to you. 6. Your benefit under the GTE Executive Retired Life Insurance Plan will be calculated based on a base salary of $478,000 and your current GTE salary grade level, 25 and is payable after your retirement on November 30, 1994. Estimates of your special pension and ERLIP benefits along with a description of retiree medical benefits are set forth in attachment A. GTE understands that you consider it extremely important that payments under this paragraph and paragraph 4 be made in 1994. The Human Resources Department will provide you the appropriate election form to permit a December 1, 1994 benefit commencement date. As long as you execute and return the forms for processing within the specified time periods, GTE will take all reasonable steps to assure that you will receive such payments in 1994. 7. In the event that GTE offers new executive plans or additional benefits under existing executive plans during 1994 and thereafter, you will not participate in such plans or receive such benefits. Further, from June 2, 1994 and thereafter, you will not be entitled to accrue additional vacation pay, to participate in either the short or long-term disability plan and will no longer be covered by your GTE Executive Severance Agreement or any other severance agreement relating to change in 59 E. C. Schmults March 22, 1994 Page 3 control. However, you will receive financial counseling for 1994 at the current level of reimbursement. 8. As both an employee and non-employee consultant, you agree to make yourself available to GTE for the performance of consulting assignments for up to six days per month, or more at the mutual convenience of the parties. The days selected to perform consulting shall be mutually agreed upon and we will work around any conflict with your schedule. Any travel or related expenses for GTE consulting assignments must be pre-approved by the Office of the Chairman. As a non-employee consultant GTE does not retain or exercise the right to direct, control, or supervise you as to the details and means by which the consulting services contracted for are accomplished. You and GTE agree that as a non-employee-consultant you will serve as an independent contractor in the performance of your duties under this Agreement. 9. As both an employee and non-employee consultant, you agree that among other policies and guidelines, the GTE Conflict of Interest Guidelines and the Business and Scientific Information Policy will continue to apply to you. Therefore, you agree not to directly or indirectly compete with GTE while you are receiving benefits under this Agreement or under any deferral plan. If you violate the provisions of this paragraph 9, your status as an employee or consultant shall terminate and the benefits provided under this Agreement shall cease immediately. 10. In the event of your death before December 1, 1994, the following will occur: base salary and pension accruals will cease as of the date of your death, and your surviving spouse will be entitled to a Spouse's Pension benefit based on the special pension benefit provisions of paragraph 4, that is, the SERP benefit based on 21 years of service. All other company benefits your surviving spouse (or beneficiary) are entitled to receive shall be provided in accordance with the terms of each plan in which you were participating immediately prior to your death. In the event of your death during your the non-employee consultancy period, all unearned monthly payments will cease. In the event of your disability during the terms of this Agreement, you will continue to receive the benefits under this Agreement. 11. This Agreement sets forth your entire separation arrangement with GTE. You agree to waive any rights to payment of benefits pursuant to any GTE severance, retirement incentive or salary continuation, plan, policy, practice or program (offered on a qualified or non-qualified, voluntary or involuntary basis). 12. GTE devotes considerable time and resources projecting itself as a responsible, law-abiding business entity (operating in the United States and worldwide). You agree to take no action that would cause GTE 60 E. C. Schmults March 22, 1994 Page 4 (including its employees, directors, and shareholders) embarrassment or humiliation, or otherwise cause or contribute to GTE (including its employees, directors, and shareholders) being held in disrepute by the general public or GTE's clients, shareholders, customers, federal or state regulatory agencies, employees, agents, officers, or directors. Further, you agree that if an inquiry is made concerning your separation from the GTE, you will respond that you were treated fairly by GTE, and you will not release or provide any comments, information, or statements unfavorable to GTE. In turn, members of the Office of the Chairman and the GTE Policy Committee will not release or provide any comments, information or statements unfavorable to you. 13. You agree not to disclose the terms of this Agreement except to your attorney, financial advisor, or members of your immediate family (spouse, children, siblings). Ed, as you are aware, by signing this Agreement and agreeing to receive the additional benefits provided thereunder, you acknowledge that your decision to terminate is voluntary and you release GTE Service Corporation and its affiliates from any claims and causes of action you may have with regard to your resignation from employment, including, but not limited to claims of age discrimination. If you have any questions regarding this release, I suggest you review this Agreement with your personal attorney. You have 21 days to sign this Agreement (with a 7-day period to revoke). If you fail to sign the Agreement, or if you sign, and revoke the Agreement within 7 days of signing it, this Agreement shall be void and you will not receive any of the additional benefits contained herein. If this Agreement meets your understanding, please sign in the space provided below. We appreciate your past contributions to the company and look forward to working with you in your new assignment as an employee-consultant. /s/ Michael T. Masin - --------------------- Michael T. Masin I have read, understand and agree to the terms of this Agreement. /s/ Edward C. Schmults - ---------------------- Edward C. Schmults EX-11 6 CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE 1 EXHIBIT 11 Page 1 GTE CORPORATION AND SUBSIDIARIES CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE (1) (In Thousands)
Years ended December 31 ------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Net income (loss) from: Continuing operations $2,440,869 $971,978 $1,760,704 $1,491,317 $1,578,599 Discontinued operations - - (48,000) 51,499 91,933 Extraordinary charge - early retirement of debt - (89,990) (52,000) - - Cumulative effect of accounting changes - - (2,440,612) - - ---------- --------- ----------- ---------- ---------- Consolidated net income (loss) 2,440,869 881,988 (779,908) 1,542,816 1,670,532 ---------- --------- ----------- ---------- ---------- Adjustments to net income (loss): Add: Preferred dividend requirements on dilutive convertible preferred stocks 621 237 827 1,048 1,241 Interest expense, net of tax effect, on employees' stock plans 1,441 1,915 6,257 4,778 5,079 ---------- --------- ----------- ---------- ---------- Total adjustments 2,062 2,152 7,084 5,826 6,320 ---------- --------- ----------- ---------- ---------- Adjusted consolidated net income (loss) from: Continuing operations 2,442,931 974,130 1,767,788 1,497,143 1,584,919 Discontinued operations - - (48,000) 51,499 91,933 Extraordinary charge - early retirement of debt - (89,990) (52,000) - - Cumulative effect of accounting changes - - (2,440,612) - - ---------- --------- ----------- ---------- ---------- Adjusted consolidated net income (loss) $2,442,931 $884,140 ($772,824) $1,548,642 $1,676,852 ========== ========= =========== ========== ========== Average common shares 957,948 944,678 904,516 881,727 866,790 ---------- --------- ----------- ---------- ---------- Adjustments to common shares: Add: Dilutive convertible preferred stocks 572 288 772 973 1,161 Employees' stock and stock option plans 3,340 4,024 7,808 7,513 6,142 ---------- --------- ----------- ---------- ---------- Total adjustments 3,912 4,312 8,580 8,486 7,303 ---------- --------- ----------- ---------- ---------- Adjusted average common shares 961,860 948,990 913,096 890,213 874,093 ========== ========= =========== ========== ========== EARNINGS (LOSS) PER COMMON SHARE: Primary (2) Continuing operations $2.55 $1.03 $1.95 $1.69 $1.82 Discontinued operations - - (0.05) 0.06 0.11 Extraordinary charge - early retirement of debt - (0.10) (0.06) - - Cumulative effect of accounting changes - - (2.70) - - ---------- --------- ----------- ---------- ---------- Consolidated $2.55 $0.93 ($0.86) $1.75 $1.93 ========== ========= =========== ========== ========== Fully diluted (3) Continuing operations $2.54 $1.02 $1.94 $1.68 $1.81 Discontinued operations - - (0.05) 0.06 0.11 Extraordinary charge - early retirement of debt - (0.09) (0.06) - - Cumulative effect of accounting changes - - (2.68) - - ---------- --------- ----------- ---------- ---------- Consolidated $2.54 $0.93 ($0.85) $1.74 $1.92 ========== ========= =========== ========== ==========
The accompanying notes are an integral part of this schedule. 2 EXHIBIT 11 Page 2 GTE CORPORATION AND SUBSIDIARIES CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE - Continued NOTES: (1) Average common shares and per share amounts reflect the 2-for-1 stock split which became effective on May 23, 1990. (2) Computed by dividing net income (loss) applicable to common stock for the years by the average common shares outstanding. Common stock equivalents are excluded from this computation since they do not have a 3% dilutive effect. (3) Computed assuming conversion or exercise of those preferred stocks and stock plans that would have a dilutive effect. (a) Average common shares outstanding are adjusted to reflect the shares which would be issued upon conversion of preferred stocks using the "if converted" method. Equivalent common shares to be added to average shares for the employees' stock plans and stock ownership plan are computed according to the "treasury stock" method. (b) Net income (loss) for the years is adjusted to reflect the increase in income for the preferred dividends declared for the years on the convertible preferred stocks, and the interest accrued, net of tax effect, on funds received from installments under the employees' stock plans. EX-12 7 CALC. OF THE RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 GTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF THE RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) (Unaudited)
Years Ended December 31 ------------------------------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Net earnings available for fixed charges: Income from continuing operations $2,450,779 $ 989,803 $1,787,035 $1,528,102 $1,622,261 Add (deduct) - Income taxes 1,532,482 567,747 966,589 662,860 697,963 Interest expense 1,139,233 1,298,234 1,475,670 1,574,746 1,510,909 Capitalized interest (net of amortization) (6,045) (3,421) (4,931) (14,791) (18,316) Preferred stock dividends of subsidiaries 18,252 22,162 23,429 25,317 28,697 Additional income requirement on preferred stock dividends of subsidiaries 11,426 12,739 12,671 11,006 12,357 Minority interests 140,464 112,335 112,425 103,626 83,471 Portion of rent expense representing interest 139,715 153,058 196,533 210,698 206,959 ---------- ---------- ---------- ---------- ---------- 5,426,306 3,152,657 4,569,421 4,101,564 4,144,301 Deduct - Minority interests (242,937) (236,944) (248,979) (247,284) (224,240) ---------- ---------- ---------- ---------- ---------- Adjusted earnings available for fixed charges from continuing operations $5,183,369 $2,915,713 $4,320,442 $3,854,280 $3,920,061 ========== ========== ========== ========== ========== Fixed Charges: Interest charges $1,139,233 $1,298,234 $1,475,670 $1,574,746 $1,510,909 Preferred dividends of subsidiaries 18,252 22,162 23,429 25,317 28,697 Additional income requirement on preferred dividends of subsidiaries 11,426 12,739 12,671 11,006 12,357 Portion of rent expense representing interest 139,715 153,058 196,533 210,698 206,959 ---------- ---------- ---------- ---------- ---------- 1,308,626 1,486,193 1,708,303 1,821,767 1,758,922 Deduct - Minority interests (68,096) (78,421) (86,504) (89,479) (91,730) ---------- ---------- ---------- ---------- ---------- Adjusted fixed charges $1,240,530 $1,407,772 $1,621,799 $1,732,288 $1,667,192 ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges - continuing operations 4.18 2.07 2.66 2.22 2.35 ========= ========== ========== ========== ==========
EX-21 8 SIGNIFICANT SUBSIDIAREIS OF REGISTRANT 1 EXHIBIT 21 GTE CORPORATION AND SUBSIDIARIES Significant Subsidiaries of Registrant at December 31, 1994
Percent of Voting Control Owned by Company(a) Incorporated In Direct Parent ---------- --------------- ----------------- Contel Corporation Delaware 100.00 Contel Cellular Inc. Delaware 97.80 Contel of California, Inc. California 100.00 Contel Federal Systems, Inc. Delaware 100.00 GTE Government Systems Corporation Delaware 100.00 GTE Telecom Incorporated Delaware 100.00 GTE Products of Connecticut Corporation Connecticut 100.00 GTE Laboratories Incorporated Delaware 100.00 GTE Leasing Corporation Delaware 100.00 Anglo-Canadian Telephone Company Quebec 86.39 BC TELECOM Inc. Canada 50.47 BC TEL Canada 100.00 Microtel Limited Canada 100.00 Canadian Telephones and Supplies Ltd. British Columbia 100.00 Quebec-Telephone Quebec 50.63 GTE Holdings (Canada) Limited Canada 100.00 Compania Dominicana de Telefonos, C. por A. Dominican Republic 100.00 GTE International Telecommunications Incorporated Delaware 100.00 GTE Venezuela Incorporated Delaware 100.00 VenWorld Telecom, C.A. Venezuela 51.00 Compania Anonima Nacional Telefonos de Venezuela (CANTV) Venezuela 40.00 GTE California Incorporated California 99.60 GTE Florida Incorporated Florida 100.00 GTE Midwest Incorporated Delaware 100.00 GTE North Incorporated Wisconsin 100.00 GTE Northwest Incorporated Washington 100.00 GTE South Incorporated Virginia 100.00 GTE Southwest Incorporated Delaware 100.00 GTE Hawaiian Telephone Company Incorporated Hawaii 100.00 GTE Data Services Incorporated Delaware 100.00 GTE Finance Corporation Delaware 100.00 GTE Information Services Incorporated Delaware 100.00 GTE Directories Corporation Delaware 100.00 GTE Intelligent Network Services Incorporated Delaware 100.00 GTE Investment Management Corporation Delaware 100.00 GTE Main Street Incorporated Delaware 100.00 GTE Mobile Communications Incorporated Delaware 100.00 GTE Airfone Incorporated Delaware 100.00 GTE Mobile Communications International Incorporated Delaware 100.00 CTI Compania de Telefonos del Interior S.A. Argentina 23.00 GTE Mobilnet Incorporated Delaware 100.00 GTE Cellular Communications Corporation California 100.00 GTE Realty Corporation Delaware 100.00 GTE REinsurance Company Limited Bermuda 100.00 GTE Service Corporation New York 100.00 GTE Telecom Marketing Corporation Delaware 100.00 GTE Vantage Incorporated Delaware 100.00
- ------------------ (a) GTE's share of the earnings of all subsidiaries listed are included in GTE's consolidated financial statements. EX-23 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated January 26, 1995, on the consolidated financial statements and supporting schedules 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. 33-1521) 2. Form S-8 of GTE Corporation (File No. 33-20178) 3. Form S-8 of GTE Corporation (File No. 33-29419) 4. Form S-8 of GTE Corporation (File No. 33-34756) 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-3 of GTE Corporation (File No. 33-40247) 8. Form S-8 of GTE Corporation (File No. 33-46612) 9. Form S-3 of GTE Corporation (File No. 33-50263) 10. Form S-8 of GTE Corporation (File No. 33-50111) 11. Form S-3 of GTE Corporation (File No. 33-53495) ARTHUR ANDERSEN LLP Stamford, Connecticut March 7, 1995 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 323 0 4,022 0 676 5,634 48,545 19,217 42,500 8,221 12,163 48 109 10 10,425 42,500 19,944 19,944 15,098 15,098 863 0 1,059 3,983 1,532 2,451 0 0 0 2,451 2.55 2.54
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