Stock Options Scheme

Telefonica SA 3 November 1999 Over the past few days information has been published in the Spanish press regarding the management retribution system 'The Stock Options Scheme', introduced in 1997 for the management members of the Telefonica Group. This information has only glossed over the surface and has not given sufficient details specifying the objectives and amounts involved which could give rise to misunderstandings. Therefore, as Telefonica has always believed in transparency regarding its activities, the Company would like to clarify any misconception that has arisen. 1. Once the Company had been totally privatized, coinciding with the liberalization of the sector, Telefonica, S.A.'s Board of Director decided that the top management's retribution scheme should be updated in order to achieve the following objectives: - To bing the Company's schemes into line with those of other multinationals both within and outside the sector. - To encourage executive loyalty within an open and highly competitive market. - To bring the interests of the Company's top management into line with those of Telefonica's shareholders. The aforementioned scheme is based on the taking up of call options of the Company's shares by which the amount received by the members of the top team will depend on efficiency of this team as this is directly linked to the share's price. This scheme was approved by the Appointments and Retributions Committee and Board of Telefonica, S.A. at the meeting held on February 26th 1997 and the Spanish Securities Market Commission was duly informed on March 20th 1997. This information has also since been published in subsequent annual report and official prospectus. 2. This scheme therefore grants the Group's 100 most important management members a specific number of call options of Telefonica S.A. shares directly linked with the individual's degree of responsibility. Half of these call options were granted at the trading price of the shares at the moment of the introduction of this scheme, and the other half carried a 50% increase over this price although all the options mature three years from the concession date. The scheme obliges the management member to hold shares in the Company in proportion with the number of call option granted until maturity. Consequently, the retribution that the management member will derive from this scheme, will entirely depend on the performance reflected by the shares's trading price over the aforementioned 3-year period, which therefore means that if the share price does not rise, the individual is not entitled to any payment. 3. In order to hedge the economic risk arising from this scheme, Telefonica S.A., has received the corresponding coverage from two financial entities, with a total cost to the Company of Pesetas 2.7 billion, Pesetas 933 million for each year of the scheme, as stated in the Annual Reports published since the date of the launching of this scheme. Therefore, since the signing of these hedging agreements, this scheme will have no effect whatsoever on the Company's profit and loss accounts, as the amounts to which each executive is entitled at maturity will be paid in their entirety by the aforementioned financial entities. 4. These options are held by Telefonica not by its management members. At maturity the management members will be entitled to the gains as deferred salary retributions, with Telefonica withholding the necessary fiscal amounts.
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