<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 0-1245
CONTEL OF CALIFORNIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-1789511
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
16071 Mojave Drive, Victorville, California 92392
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 619-245-0511
Securities registered pursuant to Section 12(b) of the act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
------- -------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
-------
THE COMPANY HAD 2,503,667 SHARES OF $5 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 29, 1996. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
THE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
<S> <C> <C>
Part I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders - This item has
been omitted in accordance with the relief provisions under General
Instruction J of Form 10-K
Part II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data - This item has been omitted in accordance
with the relief provisions under General Instruction J of Form 10-K
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
8. Financial Statements and Supplementary Data 11
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III
The following items have been omitted in accordance with the relief
provisions under General Instruction J of Form 10-K:
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
</TABLE>
<PAGE> 3
PART I
Item 1. Business
Contel of California, Inc. (the Company) is a wholly-owned subsidiary of GTE
Corporation (GTE), and provides communications services in California, Nevada
and Arizona.
The Company was incorporated in California in 1954. Since its incorporation,
twenty-three independent telephone companies have been merged into the Company
to form the present entity.
On April 20, 1994, the California Public Service Commission (CPUC) issued a
decision giving final approval to the merger of the Company into GTE
California. The decision requires the merging companies to flow through to
their ratepayers all of the estimated savings that would be produced from the
merger. This flow through requirement is based on the CPUC's interpretation of
certain statutory requirements. The CPUC, however, provided the parties with
the opportunity to supplement the evidentiary record to show why the estimated
merger savings should be apportioned between ratepayers and shareholders. That
filing was made on April 29, 1994. By making the filing, the effective date of
the decision approving the merger was delayed. The Company and other
interested parties have filed reports and comments pursuant to this proceeding.
On October 5, 1995, the Governor of the State of California signed a law which
clarifies the authority of the CPUC to allocate utility merger benefits between
ratepayers and shareholders with not less than 50% going to the ratepayers.
The new law became effective January 1, 1996. A decision approving the merger
under the terms of the amended legislation is expected during the second
quarter of 1996.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. The Company provides local telephone
service within its franchise area and intraLATA (Local Access Transport Area)
toll service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of the states in which the Company operates is provided
through connection with interexchange (long distance) common carriers. These
common carriers are charged fees (access charges) for interconnection to the
Company's local facilities. Business and residential customers also pay access
charges to connect to the local network to obtain long distance service. The
Company earns other revenues by leasing interexchange plant facilities and
providing such services as billing and collection and operator services to
interexchange carriers. At December 31, 1995, the Company served 389,603
access lines in its service territories.
At December 31, 1995, the Company had 1,192 employees.
The Company has written agreements with the Communications Workers of America
(CWA) and the International Brotherhood of Electrical Workers (IBEW). The
current agreements with the CWA and the IBEW units expire on September 6, 1996.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona as to its intrastate business operations and by
the Federal Communications Commission (FCC) as to its interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass
1
<PAGE> 4
the local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), 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.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including California and Nevada. In addition,
eight states, including Arizona, have concluded that intraLATA 1+ competition
is in the public interest. These states have authorized plans that would allow
customers to pre-subscribe to a specific carrier to handle their intraLATA toll
calls. Pre-subscribed customers will simply dial "1" before the telephone
number in order to complete intraLATA calls. The Telecommunications Act
requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
Federal and state regulatory activity directed toward changing the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service 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.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in toll services (without customer
pre-subscription) became effective in California. The order also provided for
rate rebalancing with significant rate reductions for toll services and access
charges while increasing basic local service rates closer to the actual cost of
providing such service. Although this rate rebalancing was intended by the
CPUC to be revenue neutral, the actual increase in volumes did not fully
compensate for the toll and access rate reductions. As expected, revenues
decreased by approximately $38 million in 1995 as a result of the
implementation of this order.
2
<PAGE> 5
For the provision of interstate access services, the Company 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 local-exchange carrier (LEC) may charge are increased or decreased
each year by a price index based upon inflation less a predetermined
productivity target. LECs have limited pricing flexibility provided they do not
exceed the allowed price cap. The FCC is considering how the price cap plan
should be modified in the future in order to adapt the system to the emergence
of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company 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 networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $49 million
re-engineering program. Since the program began in 1994, costs of $28.5
million have been charged to the restructuring reserve -- $17.3 million
related to customer service processes, $8.1 million related to administrative
processes and $3.1 million related to the consolidation of facilities and
operations and other related costs. These costs were primarily associated with
the closure and relocation of various centers, software enhancements and
separation benefits associated with workforce reductions. The continued
implementation of this program positions the Company 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.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
3
<PAGE> 6
Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of the
aforementioned properties, located in the states of California, Nevada and
Arizona, are generally in good operating condition and are adequate to satisfy
the needs of the business. Substantially all of the Company's property is
subject to the liens of its respective mortgages securing funded debt. From
January 1, 1991 to December 31, 1995, the Company made capital expenditures of
$283.2 million for new plant and facilities required to meet telecommunication
service needs and to modernize plant and facilities. These additions were
equal to 31% of gross plant of $915.3 million at December 31, 1995.
In response to recently enacted and pending legislation and the increasingly
competitive environment, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71) in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 to the Company's
consolidated financial statements included elsewhere herein for further detail.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's consolidated financial
statements.
4
<PAGE> 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock, should be contacted with any questions relating to
shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
1-617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Mail Stop 52-02-60
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks, and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1995 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE through the
following universal resource:
http://www.gte.com
5
<PAGE> 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
Contel of California, Inc. (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services in
the states of California, Nevada and Arizona. At December 31, 1995, the
Company served 389,603 access lines in its service territories.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994
------ -----
<S> <C> <C>
Net income (loss) $(77.9) $65.7
</TABLE>
The net loss for 1995 includes an extraordinary after-tax charge of $127.6 for
the discontinuance of Statement of Financial Accounting Standards No. 71
"Accounting for the Effects of Certain Types of Regulation" (FAS 71) in the
fourth quarter of 1995. Excluding this charge, net income decreased 24% or $16
in 1995. The decrease is primarily due to the Implementation Rate Design (IRD)
discussed below, partially offset by a one-time support payment of $31.9 from
the California High Cost Fund received in December 1995, as discussed below.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in toll services (without customer
pre-subscription) became effective in California. The order also provided for
rate rebalancing with significant rate reductions for toll service and network
access service while increasing basic local service rates closer to the actual
cost of providing such service. Although this rate rebalancing was intended by
the CPUC to be revenue neutral, the actual increase in volumes did not fully
compensate for the toll and access rate reductions. Total revenues decreased
approximately $38 in 1995 as a result of the implementation of this order.
REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994
------ ------
<S> <C> <C>
Local services $149.2 $ 97.3
Network access services 103.8 136.8
Toll services 61.9 108.0
Other services and sales 28.6 29.8
------ ------
Total revenues and sales $343.5 $371.9
</TABLE>
Total revenues and sales decreased 8% or $28.4 in 1995.
Local service revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. Local service
revenues increased 53% or $51.9 in 1995. This increase is primarily the result
of a one-time support payment of $31.9 recorded in December 1995 from the
California High Cost Fund, a fund established to subsidize rural providers for
the costs of providing universal service, and $17.3 in rate increases
associated with the IRD. This increase is also due to a 3% growth in access
lines, which generated $2.4 of additional revenues.
6
<PAGE> 9
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local exchange network in providing long
distance services. In addition, business and residential customers pay access
fees to connect to the local network to obtain long distance service. Network
access service revenues decreased 24% or $33 in 1995. This decrease is
primarily the result of $24 in rate reductions associated with the previously
mentioned IRD, $5.1 of lower revenues attributable to the interstate sharing
requirements of the FCC price cap plan for the 1994-1995 tariff year and $3 of
lower support payments received from the Universal Service Fund. These
decreases are partially offset by a 10% increase in minutes of use, which
generated $3.1 of additional revenues.
Toll service revenues are based on fees charged for service beyond a customer's
local calling area but within the local access transport area (LATA). Toll
service revenues decreased 43% or $46.1 in 1995. This decrease is primarily
the result of $31.4 in rate reductions associated with the previously mentioned
IRD and $8.1 of lower transitional support payments received from Pacific Bell
as a result of the Company's exit from the California state intraLATA toll pool
in 1994. Transitional support payments will continue through 1997 with
increasingly lower payments in each of the years 1996 and 1997.
Other services and sales revenues decreased 4% or $1.2 in 1995. This decrease
is primarily due to lower rent revenues of $0.7 due to the cancellation of
interexchange carrier facility leases by AT&T Corp. in 1994.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994
------ ------
<S> <C> <C>
Cost of services and sales $121.8 $123.8
Selling, general and administrative 55.7 60.3
Depreciation and amortization 69.5 64.6
------ ------
Total operating costs and expenses $247.0 $248.7
</TABLE>
Total operating costs and expenses decreased 1% or $1.7 in 1995. This decrease
is primarily related to $10.7 of lower labor and benefits costs associated with
the Company's re-engineering plan and a $2.1 decrease in end user
uncollectibles. These decreases are partially offset by $7.4 in nonrecurring
favorable settlement activities recorded in 1994 and a $4.9 increase in
depreciation expenses, primarily related to increased gross plant balances.
OTHER EXPENSES
Income taxes were $35.8 and $46.1 for 1995 and 1994, respectively, reflecting a
decrease of 22% or $10.3. This decrease is primarily related to the decrease
in pre-tax income.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona as to its intrastate business operations and by
the Federal Communications Commission (FCC) as to its interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass
7
<PAGE> 10
the local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), 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.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including California and Nevada. In addition,
eight states, including Arizona, have concluded that intraLATA 1+ competition
is in the public interest. These states have authorized plans that would allow
customers to pre-subscribe to a specific carrier to handle their intraLATA toll
calls. Pre-subscribed customers will simply dial "1" before the telephone
number in order to complete intraLATA calls. The Telecommunications Act
requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
Federal and state regulatory activity directed toward changing the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service 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.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in toll services (without customer
pre-subscription) became effective in California. The order also provided for
rate rebalancing with significant rate reductions for toll services and access
charges while increasing basic local service rates closer to the actual cost of
providing such service. Although this rate rebalancing was intended by the
CPUC to be revenue neutral, the actual increase in volumes did not fully
compensate for the toll and access rate reductions. As expected, revenues
decreased by approximately $38 million in 1995 as a result of the
implementation of this order.
8
<PAGE> 11
For the provision of interstate access services, the Company 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 have
limited pricing flexibility provided they do not exceed the allowed price cap.
The FCC is considering how the price cap plan should be modified in the future
in order to adapt the system to the emergence of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company 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 networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $49 re-engineering
program. Since the program began in 1994, costs of $28.5 have been charged to
the restructuring reserve -- $17.3 related to customer service processes, $8.1
related to administrative processes and $3.1 related to the consolidation of
facilities and operations and other related costs. These costs were primarily
associated with the closure and relocation of various centers, software
enhancements and separation benefits associated with workforce reductions. The
continued implementation of this program positions the Company 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.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
9
<PAGE> 12
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. Historically, the Company has used a methodology
similar to FAS 121 in determining the amount of an impairment. Accordingly,
the issuance of FAS 121 will not have a significant impact on the Company's
consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
10
<PAGE> 13
Item 8. Financial Statements and Supplementary Data
Contel of California, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ----------------------- --------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales:
Local services $ 149,205 $ 97,349 $ 94,586
Network access services 103,825 136,769 139,822
Toll services 61,854 108,008 124,780
Other services and sales 28,599 29,798 31,779
--------- -------- --------
Total revenues and sales 343,483 371,924 390,967
--------- -------- --------
Operating costs and expenses (a):
Cost of services and sales 121,841 123,777 121,927
Selling, general and administrative 55,663 60,323 58,448
Depreciation and amortization 69,496 64,637 58,431
Restructuring -- -- 48,987
--------- -------- --------
Total operating costs and expenses 247,000 248,737 287,793
--------- -------- --------
Operating income 96,483 123,187 103,174
Other expense:
Interest - net 10,913 11,321 10,708
--------- -------- --------
Income before income taxes 85,570 111,866 92,466
Income taxes 35,831 46,120 37,397
--------- -------- --------
Income before extraordinary charge 49,739 65,746 55,069
Extraordinary charge (127,620) -- --
--------- -------- --------
Net income (loss) $(77,881) $ 65,746 $ 55,069
========= ======== ========
</TABLE>
(a) Includes billings from affiliates of $16,442, $13,929 and $14,305 for the
years 1995-1993, respectively.
See Notes to Consolidated Financial Statements.
11
<PAGE> 14
Contel of California, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------- -------- --------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 2,139 $ 2,244
Receivables, less allowances of $4,895 and $3,523 120,872 75,579
Inventories and supplies 652 2,134
Deferred income tax benefits 18,432 6,793
Other 841 228
-------- --------
Total current assets 142,936 86,978
-------- --------
Property, plant and equipment, net 280,157 524,215
Deferred income tax benefits and other assets 16,331 39,883
-------- --------
Total assets $439,424 $651,076
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable to affiliates $ 51,838 $ 67,703
Accounts payable 32,318 26,825
Affiliate payables and accruals 3,173 6,341
Advanced billings and customer deposits 5,633 4,069
Taxes payable 21,943 6,814
Accrued interest 2,389 2,697
Accrued payroll costs 9,369 7,280
Dividends payable -- 15,261
Accrued restructuring costs 20,455 12,730
Other 21,986 13,509
-------- --------
Total current liabilities 169,104 163,229
-------- --------
Non-current liabilities:
Long-term debt 90,000 90,000
Deferred income taxes and investment tax credits 5,781 108,402
Employee benefit obligations 60,516 57,564
Restructuring costs -- 9,580
Other liabilities 5,828 5,562
-------- --------
Total non-current liabilities 162,125 271,108
-------- --------
Shareholder's equity:
Common stock (2,503,667 shares issued) 12,518 12,518
Additional paid-in capital 78,917 78,917
Retained earnings 16,760 125,304
-------- --------
Total shareholder's equity 108,195 216,739
-------- --------
Total liabilities and shareholder's equity $439,424 $651,076
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE> 15
Contel of California, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
- ----------------------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operations:
Income before extraordinary charge $ 49,739 $ 65,746 $ 55,069
Adjustments to reconcile income before extraordinary
charge to net cash from operations:
Depreciation and amortization 69,496 64,637 58,431
Deferred income taxes (3,447) 24,767 (19,678)
Restructuring costs -- -- 48,987
Provision for uncollectible accounts 5,072 4,788 6,479
Change in current assets and current liabilities:
Receivables - net (50,365) 1,725 (24,129)
Other current assets 869 654 348
Accrued taxes and interest 14,821 (27,871) (28,443)
Other current liabilities 12,828 (44,982) (11,132)
Other - net 1,854 36,116 51,704
-------- -------- --------
Net cash from operations 100,867 125,580 137,636
-------- -------- --------
Investing:
Capital expenditures (39,183) (52,317) (60,400)
-------- -------- --------
Cash used in investing (39,183) (52,317) (60,400)
-------- -------- --------
Financing:
Long-term debt and preferred stock retired -- (8,010) (27,630)
Dividends (45,924) (61,906) (91,519)
Net change in affiliate notes (15,865) (1,171) 40,504
-------- -------- --------
Net cash used in financing (61,789) (71,087) (78,645)
-------- -------- --------
Increase (decrease) in cash and temporary investments (105) 2,176 (1,409)
Cash and temporary investments:
Beginning of year 2,244 68 1,477
-------- -------- --------
End of year $ 2,139 $ 2,244 $ 68
======== ======== ========
Cash paid during the year for:
Interest $ 11,685 $ 11,999 $ 12,370
Income taxes 22,823 49,129 70,895
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE> 16
Contel of California, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------- ---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Shareholder's equity, December 31, 1992 $12,518 $78,917 $ 146,075 $ 237,510
Net income 55,069 55,069
Dividends declared (106,572) (106,572)
------- ------- --------- ---------
Shareholder's equity, December 31, 1993 12,518 78,917 94,572 186,007
Net income 65,746 65,746
Dividends declared (35,014) (35,014)
------- ------- --------- ---------
Shareholder's equity, December 31, 1994 12,518 78,917 125,304 216,739
Net loss (77,881) (77,881)
Dividends declared (30,663) (30,663)
------- ------- --------- ---------
Shareholder's equity, December 31, 1995 $12,518 $78,917 $ 16,760 $ 108,195
======= ======= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE> 17
Contel of California, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Contel of California, Inc. (the Company) 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 various industries. At
December 31, 1995, the Company served 389,603 access lines in the states of
California, Nevada and Arizona. The Company is a wholly-owned subsidiary of
GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect the reported amounts. Actual results
could differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Contel Advanced Systems, Inc. All significant
intercompany transactions have been eliminated.
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2). The 1995
financial presentation reflects account classifications consistent with
unregulated enterprises operating in a competitive environment. Specifically,
uncollectible revenue accounts have been reclassified from revenues and sales
to selling, general and administrative expenses. Reclassifications of
prior-year data have been made, where appropriate, to conform to the 1995
presentation.
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies, which are not subsidiaries of the Company, supply
construction and maintenance equipment, supplies and electronic repair services
to the Company. These purchases and services amounted to $9.8 million, $11.5
million and $11.7 million for the years 1995-1993, respectively. Such
purchases and services are recorded in the accounts of the Company at cost
which includes a normal profit realized by the affiliates.
The Company is billed for data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$16.4 million, $13.9 million and $14.3 million for the years 1995-1993,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's consolidated financial statements include allocated expenses
based on the sharing of certain executive, administrative, financial,
accounting, marketing, personnel, engineering and other support services being
performed at consolidated work centers among the domestic GTE Telephone
Operating Companies. The amounts charged for these affiliated transations are
based on a proportional cost allocation method as filed with the Federal
Communications Commission (FCC).
TELEPHONE PLANT
The Company has historically provided for depreciation on a straight-line basis
over asset lives approved by regulators. Beginning in 1996, the Company will
provide for depreciation on a straight-line basis over the estimated economic
lives of its assets (see Note 2). Maintenance and repairs are charged to
income as incurred. Additions to,
15
<PAGE> 18
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales or
extraordinary retirements of property where profit or loss is recognized.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112), effective
January 1, 1993. FAS 112 requires employers to accrue the future cost of
benefits provided to former or inactive employees and their dependents after
employment but before retirement. Previously, the cost of these benefits was
charged to expense as paid. The impact of this change in accounting on the
Company's results of operations was immaterial.
INCOME TAXES
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax- sharing agreement with GTE and
remits tax payments to GTE based on its tax liability on a separate company
basis.
Deferred tax assets and liabilities are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely.
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.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
16
<PAGE> 19
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. Historically, the Company has used a methodology
similar to FAS 121 in determining the amount of an impairment. Accordingly,
the issuance of FAS 121 will not have a significant impact on the Company's
consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
2. EXTRAORDINARY CHARGE
In response to recently enacted and pending legislation (see Note 11) and the
increasingly competitive environment, the Company discontinued the use of FAS
71 in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $127.6 million (net of tax benefits
of $87.8 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. The amount of the charge was
based on an analysis of the discounted cash flows expected to be generated by
the embedded telephone plant and equipment over their remaining economic lives.
In addition to the one-time charge, the Company, beginning in 1996, will
shorten the depreciable lives of its telephone plant and equipment as follows
as a result of the discontinuance of FAS 71:
<TABLE>
<CAPTION>
Depreciable Lives
-----------------------------
Average
Asset Category Before After
-------------- ------- -----
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
17
<PAGE> 20
3. RESTRUCTURING COSTS
Results for 1993 include one-time pre-tax restructuring costs of $49 million,
which reduced net income by $30.2 million, primarily for incremental costs
related to implementation of the Company's three-year re-engineering plan. The
re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The
implementation of the plan is expected to result in costs of $33.8 million to
re-engineer customer service processes and $12.1 million to re-engineer
administrative processes. The restructuring costs also include $3.1 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 substantially completed by the end of 1996.
Costs of $28.5 million have been incurred since the plan's inception including
$17.3 million related to customer service processes, $8.1 million related to
administrative processes and $3.1 million related to the consolidation of
facilities and operations and other related costs. These expenditures were
primarily associated with the closure and relocation of various service
centers, software enhancements and separation benefits related to employee
reductions.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pre-tax charge of $3 million which
reduced 1993 net income by $1.8 million.
4. PREFERRED STOCK
On March 1, 1994, the Company redeemed all outstanding shares of preferred
stock with cash from operations.
5. COMMON STOCK
The authorized common stock of the Company at December 31, 1995 and 1994
consisted of 3,000,000 shares with a par value of $5 per share. All
outstanding shares of common stock are held by the Parent Company.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1995, all retained earnings were restricted as to the payment
of cash dividends on common stock under the most restrictive terms of the
Company's indentures. In addition, as a result of the discontinuance of FAS 71
discussed in Note 2, the Company is currently restricted from making a full
payment of cash dividends on common stock.
18
<PAGE> 21
6. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
7.625 % Series J, due 1997 $10,000 $10,000
9.45 % Series V, due 1997 10,000 10,000
9.41 % Series W, maturing through 2014 40,000 40,000
9.44 % Series X, due 2015 30,000 30,000
------- -------
Total 90,000 90,000
Less: current maturities of long-term debt -- --
------- -------
Total long-term debt $90,000 $90,000
======= =======
</TABLE>
During 1994, the Company retired $2.8 million of 9.25% First Mortgage Bonds due
2001 and $3 million of 8.75% Sinking Fund Debentures.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None
of the securities shown above were held in sinking or other special funds of
the Company or pledged by the Company. Substantially all of the Company's
telephone plant is subject to the liens of the indentures under which the bonds
listed above were issued.
Estimated payments of long-term debt during the next five years aggregate to
$22.5 million.
The Company finances part of its construction program through the use of
short-term notes payable to affiliates which are generally refinanced at a
later date by issues of long-term debt or equity. During 1995, the Company
supplemented its internal generation of cash with funds borrowed from GTE.
These arrangements require payment of interest based on prevailing commercial
paper rates. As of December 31, 1995 and 1994, the short-term notes payable
with GTE were $51.8 million and $67.7 million, respectively, with average
interest rates of 6.1% and 3.3%.
7. FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1995 and 1994, the
estimated fair value of long-term debt based on either reference to quoted
market prices or an option pricing model, exceeded the carrying value by
approximately $15 million and $4 million, respectively.
19
<PAGE> 22
8. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $ 29,677 $ 16,621 $ 46,368
State 9,601 4,732 12,442
-------- -------- --------
39,278 21,353 58,810
-------- -------- --------
Deferred:
Federal (1,702) 20,919 (14,218)
State (59) 5,612 (5,343)
-------- -------- --------
(1,761) 26,531 (19,561)
-------- -------- --------
Amortization of deferred investment tax credits (1,686) (1,764) (1,852)
-------- -------- --------
Total $ 35,831 $ 46,120 $ 37,397
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 29,950 $ 39,153 $ 32,363
State income taxes, net of federal income tax benefits 6,202 6,724 4,615
Amortization of deferred investment tax credits (1,686) (1,764) (1,852)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net 2,047 2,189 1,822
Rate differentials applied to reversing temporary (692) (932) (453)
differences
Other differences - net 10 750 902
-------- -------- --------
Total provision $ 35,831 $ 46,120 $ 37,397
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the deferred income
tax benefits and deferred income tax liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 3,300 $ 129,401
Employee benefit obligations (15,124) (14,659)
Prepaid pension costs (5,183) (2,816)
Restructuring costs (8,339) (9,094)
Investment tax credits 5,782 8,695
Other - net (9,282) (9,918)
--------- ---------
Total $(28,846) $ 101,609
========= =========
</TABLE>
20
<PAGE> 23
9. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. The benefits to be paid under these plans are
generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
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 fixed income investments.
The components of the net pension (credit) expense for 1995-1993 were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 2,143 $ 4,325 $ 4,238
Interest cost on projected benefit obligations 13,782 10,770 10,839
Return on plan assets:
Actual (31,238) 489 (27,181)
Deferred 15,920 (15,482) 13,990
Other - net (781) (2,168) (1,525)
-------- -------- --------
Net pension (credit) expense $ (174) $(2,066) $ 361
======== ======== ========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1995 and
1994, and 8.25% for 1993.
The funded status of the plans and the pension liability at December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 103,006 $ 143,683
========= =========
Accumulated benefit obligations $ 114,666 $ 155,290
========= =========
Plan assets at fair value $ 166,053 $ 205,743
Less: projected benefit obligations 133,577 181,918
--------- ---------
Excess of assets over projected benefit obligations 32,476 23,825
Unrecognized net transition asset (1,079) (1,931)
Unrecognized net gain (45,450) (36,321)
--------- ---------
Total - net $(14,053) $(14,427)
========= =========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Discount rate 7.50% 8.25%
Rate of compensation increase 5.25% 5.50%
</TABLE>
21
<PAGE> 24
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). FAS 106 requires that the expected
costs of these benefits be charged to expense during the years that the
employees render service. The Company elected to adopt FAS 106 on the delayed
recognition method and commencing January 1, 1993, began amortizing the
estimated unrecorded accumulated postretirement benefit obligation over twenty
years. Prior to the adoption of FAS 106, the cost of these benefits was
charged to expense as paid.
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1995-1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 938 $ 1,532 $ 2,153
Interest cost on accumulated postretirement benefit 8,748 7,577 8,372
obligations
Actual return on plan assets (3,090) 593 --
Amortization of transition obligation 3,315 4,003 4,622
Other - net 1,102 (4,871) --
------- ------- -------
Total - net $11,013 $ 8,834 $15,147
======= ======= =======
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $ 94,670 $105,165
Fully eligible active plan participants 3,338 6,225
Other active plan participants 17,142 10,802
-------- --------
Total accumulated postretirement benefit obligations 115,150 122,192
Less: fair value of plan assets 27,509 19,111
-------- --------
Excess of accumulated obligations over plan assets 87,641 103,081
Unrecognized transition obligation (55,149) (59,675)
Unrecognized net gain (loss) 9,591 (4,683)
-------- --------
Total $ 42,083 $ 38,723
======== ========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1995 and 8.25% at December 31,
1994. The assumed health care cost trend rates in 1995 and 1994 were 11% and
12%, respectively, for pre-65 participants and 8.5% and 9.0%, respectively, 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 1995 costs by
$0.8 million and the accumulated postretirement benefit obligations at December
31, 1995 by $9.3 million.
22
<PAGE> 25
During 1993, the Company 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 the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE Common
Stock based on qualified employee contributions. Matching contributions
charged to income were $0.7 million in each of the years 1995-1993.
10. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is summarized as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Land $ 4,046 $ 4,043
Buildings 50,197 49,863
Plant and equipment 804,958 796,047
Other 56,090 59,273
-------- --------
Total 915,291 909,226
Accumulated depreciation (see Note 2) 635,134 385,011
-------- --------
Total property, plant and equipment - net $280,157 $524,215
======== ========
</TABLE>
Depreciation provisions in 1995-1993 were equivalent to a composite annual
percentage of 7.6%, 7.3% and 6.9%, respectively.
23
<PAGE> 26
11. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the state regulatory
commissions in California, Nevada and Arizona. The Company is subject to
regulation by the Federal Communications Commission (FCC) for its interstate
business operations.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
state regulatory orders. The Company also provides long distance access
services directly to interexchange carriers (IXCs) and other customers who
provide service between LATAs.
New Regulatory Framework (NRF)
Effective January 1, 1990 the California Public Utilities Commission (CPUC)
adopted the NRF for GTE in Phase II of the Alternative Regulatory Proceeding.
The new framework replaced the traditional "rate case" process with a framework
that centers around a Price Cap Index (PCI) mechanism with "sharing" of
intrastate earnings (those earnings subject to CPUC regulation) above a
benchmark rate of return. This plan is designed to stimulate productivity and
efficiencies with a portion of these gains flowing directly to the customer.
During 1993, the CPUC approved a NRF settlement agreement allowing GTE
California Incorporated (GTE California) to retain 100% of any earnings up to
15.5% beginning in 1994. Under its prior agreement, GTE California was
required to share 50% of any earnings over a 13% rate of return and refund 100%
of any earnings over 16.5%. A policy order issued by the CPUC on July 24,
1991, urged the Company to adopt the NRF for the Company's operations to be
effective no later than January 1, 1994. The Company has requested that it be
allowed to adopt GTE California's NRF.
Under the NRF, rates are adjusted annually by the PCI, which is based on
inflation minus a productivity improvement factor. Rates for partially
competitive services (i.e. Centrex and custom calling features) may be priced
below the price cap within a range set by the CPUC. Rates are also adjusted
for exogenous events that are beyond the control of management as defined in
this plan. Fully competitive services (e.g., directory advertising) are not
subject to pricing limits set by the CPUC.
Several regulatory proceedings are underway in California to determine terms
and conditions for unbundling of GTE's network, to consider additional pricing
flexibility under the CPUC's NRF, to modify the NRF to reflect the new
competitive marketplace, to institute intraLATA 1+ dialing parity provisions
and to establish final rules and obligations for Universal Service funding.
Implementation Rate Design (IRD)
In September 1994, the CPUC issued a final order that authorized intraLATA toll
competition (without customer pre-subscription) in California, effective
January 1, 1995, associated with the IRD. The final order 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 this rate rebalancing was intended by the CPUC
to be revenue neutral, the actual increase in volumes did not fully compensate
for the toll and access rate reductions. The decision did not permit rate
increases to compensate for competitive losses of market share. Toll revenues
decreased approximately $38 million in 1995 as a result of the implementation of
this order.
In compliance with CPUC decision D.94-09-065 (IRD), the Company filed a general
rate case on December 6, 1995. The Company proposes to recover $45.3 million
of revenue requirement from a combination of increases to basic exchange rates
and universal high cost fund which is currently under review by the CPUC.
24
<PAGE> 27
Competition
In December 1994, the CPUC issued a decision which adopted an initial
procedural plan to facilitate opening local-exchange telecommunications
markets to competition by January 1, 1997. On April 26, 1995, the CPUC issued
a formal rulemaking proceeding and investigation as a procedural vehicle to
develop and adopt rules for local competition. The rulemaking document
contained proposed interim rules which authorized competitive LECs to seek
authority to offer local-exchange services beginning in June 1995. The
parties filed comments on the proposed rules on May 24, 1995. The Company's
comments asserted the need for evidentiary hearings to address critical issues
such as regulatory parity and interconnection prior to the authorization of
local competition. On July 19, 1995, the CPUC issued interim Universal Service
rules and obligations as a precursor to local competition. The CPUC is
expected to adopt final Universal Service rules and obligations by July 1996.
On July 24, 1995, the CPUC issued interim rules for local competition which
permit facilities-based local competition in Pacific Bell and GTE California
franchised service areas effective January 1, 1996, with resale authority
granted two months later. The CPUC reiterated its goal of opening the service
areas of small and mid-sized LECs, including the Company's service areas, to
full competition, effective January 1, 1997. Local competition in the
Company's service areas could occur earlier depending on the final effective
date of the pending merger discussed below.
Merger
In March 1991, the merger of Contel Corporation (Contel) and GTE was
consummated. In an interim decision issued on March 13, 1991, the CPUC
approved a stipulation agreement which tentatively approved the merger of GTE
and Contel. The interim decision also established a second phase of the
proceeding in which GTE was directed to show that the merger meets certain
California statutory requirements. GTE was also ordered to submit a plan for
the merger of any of the Contel and GTE regulated California subsidiaries. On
September 14, 1992, the Company and GTE California joined with GTE and Contel
and filed a comprehensive plan with the CPUC to merge the Company into GTE
California.
On April 20, 1994, the CPUC issued a decision giving final approval to the
merger of the Company into GTE California. The decision requires the merging
companies to flow through to their ratepayers all of the estimated savings that
would be produced from the merger. This flow through requirement is based on
the CPUC's interpretation of certain statutory requirements. The CPUC,
however, provided the parties with the opportunity to supplement the
evidentiary record to show why the estimated merger savings should be
apportioned between ratepayers and shareholders. That filing was made on April
29, 1994. By making the filing, the effective date of the decision approving
the merger was delayed. The Company and other interested parties have filed
reports and comments pursuant to this proceeding. On October 5, 1995, the
Governor of the State of California signed a law which clarifies the authority
of the CPUC to allocate utility merger benefits between ratepayers and
shareholders with not less than 50% going to the ratepayers. The new law
became effective January 1, 1996. A decision approving the merger under the
terms of the amended legislation is expected during the second quarter of 1996.
In addition, merger applications were filed with the Arizona Corporation
Commission (ACC) on October 4, 1993 and the Nevada Public Service Commission
(NPSC) on April 2, 1993. These applications were approved during 1994 but were
made subject to final approval in California. The Company currently
anticipates, subject to receipt of the final approval from the CPUC, that the
merger will be consummated in the second half of 1996.
25
<PAGE> 28
INTERSTATE SERVICES
For the provision of interstate services, the Company 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 price that the
LEC may charge is 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.
In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options reflected an increase to the 3.3% productivity factor
used since 1991. The Company selected a 5.3% productivity factor, with no
sharing required, in each of its tariff entities for use in the 1995-1996
tariff year. Under the interim rules, the Company filed tariffs to reduce
rates by $1.5 million annually, effective August 1, 1995. On September 20,
1995, the FCC released its proposed rulemaking proceeding on price caps which
proposes specific changes to reflect and encourage emerging competition in
local and access services markets and to establish the path towards decreased
regulation of LECs' services. On September 27, 1995, the FCC solicited
comments on a number of specific issues regarding methods for establishing the
price caps, such as productivity measurements, sharing, the common line formula
and exogenous costs. The Company anticipates the FCC will issue an order prior
to the July 1996 annual filing.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1995-1993 under
various arrangements and amounted to $39.3 million, $50.2 million and $33
million, respectively.
26
<PAGE> 29
12. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $4.5 million, $3.5 million and $3.2 million
in 1995-1993, respectively. Minimum rental commitments for noncancelable
leases through 2000 do not exceed $0.1 million annually and aggregate $0.1
million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
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, the
Company's operations face increasing competition in virtually all aspects of
its business. The Company 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.
27
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Contel of California, Inc.:
We have audited the accompanying consolidated balance sheets of Contel of
California, Inc. (a California corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 Contel of California, Inc. and
subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1995 the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation".
Our 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 a required 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
Dallas, Texas
January 24, 1996
28
<PAGE> 31
MANAGEMENT REPORT
To Our Shareholder:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report on
Form 10-K, including the consolidated financial statements covered by the
Report of Independent Public Accountants. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
JAMES F. MILES
President
MICHAEL W. BOLLINGER
Assistant Vice President - Controller
29
<PAGE> 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
30
<PAGE> 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See Contel of California, Inc.'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
financial statements for the years ended December 31,
1995-1993 (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 financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1* Agreement of Merger, dated September 10, 1992 between
GTE California Incorporated and Contel of California,
Inc. (Exhibit 2.1 of the 1993 Form 10-K. File No.
0-1245)
3* Articles of Incorporation and Bylaws (incorporated by
reference from the Registration Statement of the
Company, File No. 2-52487, effective January 14,
1975)
10 Material Contracts - Agreements Between GTE and
Certain Executive Officers
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1995, the Company filed a report on Form 8-K dated
November 9, 1995, under Item 5 "Other Events". Financial
information was filed with this report.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
31
<PAGE> 34
Contel of California, Inc. and Subsidiary
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
Deductions
Balance at from
Beginning Charged to Charged to Reserves Balance at
Description of Year Income Other Accounts (Note 1) Close of Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:
December 31, 1995 $ 3,523 $ 5,072 $2,795 (2) $ 6,495 $ 4,895
==========================================================================
December 31, 1994 $ 3,592 $ 4,788 $1,220 (2) $ 6,077 $ 3,523
==========================================================================
December 31, 1993 $ 3,321 $ 6,479 $6,196 (2) $12,404 $ 3,592
==========================================================================
Accrued restructuring costs for the
years ended (Note 3):
December 31, 1995 $22,310 $ -- $ -- $ 1,855 $20,455
==========================================================================
December 31, 1994 $48,987 $ -- $ -- $26,677 $22,310
==========================================================================
December 31, 1993 $ -- $48,987 $ -- $ -- $48,987
==========================================================================
</TABLE>
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 3 to the consolidated financial statements included elsewhere
herein.
32
<PAGE> 35
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.
CONTEL OF CALIFORNIA, INC.
------------------------------------
(Registrant)
Date March 26, 1996 By James F. Miles
-------------- ------------------------------------
James F. Miles
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
James F. Miles President and Director March 26, 1996
- ---------------------- (Principal Executive Officer)
James F. Miles
Michael W. Bollinger Assistant Vice President - Controller March 26, 1996
- ---------------------- (Principal Financial and Accounting
Michael W. Bollinger Officer)
Michael B. Esstman Director March 26, 1996
- ----------------------
Michael B. Esstman
Geoffrey C. Gould Director March 26, 1996
- ----------------------
Geoffrey C. Gould
33
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------- ------------------------------------------------------
<S> <C>
10 Material Contracts - Agreements Between GTE and
Certain Executive Officers
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated as of January 8, 1996, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
the "Executive".
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the Company,
but desires assurance that he will not be materially disadvantaged by a change
in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued service
to the Company and the mutual agreements herein contained, the Company and the
Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. The Company shall not be
required to provide any benefits to the Executive pursuant to this Agreement
unless a Qualifying Termination occurs before the Agreement expires in
accordance with Section 6.1 hereof. For purposes of this Agreement, a
Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good
Reason arises, and (B) the Executive terminates employment
with the Company within (I) six months after the Good Reason
arises or (II) two years after the Change in Control,
whichever occurs later;
provided, that a Qualifying Termination shall not occur if the Executive's
employment with the Company terminates by reason of the Executive's Retirement,
Disability, or death. A Qualifying Termination may occur even though the
Executive retires from employment with the Company other than by reason of
Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of securities of
GTE by any Person, immediately after which such Person,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE
representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time,
would cause the Person to constitute an "Acquiring Person" (as
such term is defined in the Rights Plan); provided that, in
determining whether a Change in Control has occurred, the
acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change
in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the
"Incumbent Board" (as defined below) then serving as members
of the Board, are elected within any single 12-month period to
serve on the Board; provided that an individual whose election
or nomination for election is approved as a result of either
an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the Securities Exchange Act of
1934, as amended from time to time) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest"),
including by
<PAGE> 2
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have
been approved by a majority of the Incumbent Board for
purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board"
shall mean individuals who, as of the close of business on
April 19, 1995, are members of the Board; provided that, if
the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at
least three-quarters of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further that no
individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other
actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving
unless
(A) the shareholders of GTE, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation,
or reorganization, at least 50 percent of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger, consolidation, or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation, or reorganization
constitute at least a majority of the board of directors of
the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary
of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any
subsidiary of GTE, or any Person who, immediately prior to
such merger, consolidation, or reorganization, had Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of
"Change in Control") or more of the Voting Power) has
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition
of "Change in Control") or more of the combined Voting Power
of the Surviving Corporation's then outstanding voting
securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of GTE to any Person (other
than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether
such right or obligation is exercisable or effective
immediately or only after the passage of time) pursuant to any
agreement, arrangement, or understanding (whether or not in
<PAGE> 3
writing) or upon the exercise of conversion rights, exchange
rights, rights (other than the rights granted pursuant to the
Rights Plan), warrants or options, or otherwise; provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," securities tendered pursuant to a tender
or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement, or understanding
(whether or not in writing); provided that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (ii) if the agreement,
arrangement, or understanding to vote such security (A) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations of the
Securities Exchange Act of 1934, as amended from time to time,
and (B) is not also then reported by such person on Schedule
13D under the Securities Exchange Act of 1934, as amended from
time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement, or understanding
(whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise
formed a group for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and State Street Bank and Trust Company (now administered by
the First National Bank of Boston), as it may be amended from time to time, or
any successor thereto.
"Voting Power" means the voting power of all securities of GTE then
outstanding generally entitled to vote for the election of directors of GTE.
Section 1.3. Termination for Cause. The Company shall have Cause
to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a notice, consisting of a copy of a resolution duly
adopted by the affirmative vote of not less than three quarters of the entire
membership of GTE's Board of Directors at a duly held meeting of the Board of
Directors (with reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board of Directors)
("Notice of Termination"), finding that the Executive has engaged in the
conduct set forth above in this Section 1.3 and specifying the particulars
thereof in detail. GTE's Board of Directors may not delegate or assign its
duties under this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment,
represents a demotion from the Executive's status or
position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment,
are inconsistent with the Executive's status or position(s) in
effect immediately before the Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the
Executive's employment for Cause or as a result of the
Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be
equal to his base salary plus the greater of (i) the most
recent award that he has earned under the GTE Corporation
Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs)). For
<PAGE> 4
purposes of this paragraph (d), the Executive's "Average
Percentage" means the average of the Executive's Annual
Percentages for the Determination Years. For purposes of this
paragraph (d), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a
percentage), the numerator of which is the EIP award earned by
the Executive for such Determination Year, and the denominator
of which is the annual value of the normal payment under the
EIP for the Executive's salary level (such annual value and
normal payment being those that were in effect under the EIP
for such Determination Year for the Executive's salary level
for such Determination Year). For purposes of this paragraph
(d), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Change in
Control occurs (or, if less, the number of those three plan
years during which the Executive was a participant in the
EIP);
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan in
which the Executive is participating at the time of the Change
in Control (or plans or arrangements providing the Executive
with substantially equivalent benefits) other than as a result
of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on
at least as favorable a basis as was the case on the date of
the Change in Control, or that would materially reduce the
Executive's benefits in the future under the Plan or deprive
him of any material benefits that he enjoyed at the time of
the Change in Control, except to the extent that such action
or inaction by the Company is required by the terms of the
Plan as in effect immediately before the Change in Control, or
is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal
Revenue Code, and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
(h) the Company's failure to provide and credit the Executive with
the number of days of paid vacation, holiday, or leave to
which he is then entitled in accordance with the Company's
normal vacation, holiday, or leave policy in effect
immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 25 miles of where his principal
office was located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company as provided by
Section 6.3 hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 1.3 hereof
or that does not afford the Executive the procedural
protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including this
Agreement) between it and the Executive.
Notwithstanding the foregoing, no action by the Company shall give rise to a
Good Reason if it results from the Executive's termination for Cause,
Retirement, or death, and no action by the Company specified in paragraphs (a)
through (d) of the preceding sentence shall give rise to a Good Reason if it
results from the Executive's Disability. A Good Reason shall not be deemed to
be waived by reason of the Executive's continued employment as long as the
termination of the Executive's employment occurs within the time prescribed by
Section 1.1(b)(ii)(B) hereof. For purposes of this Section 1.4, "Plan" means
any compensation plan, such as an incentive, stock option, or restricted stock
plan, or any employee benefit plan, such as a thrift, pension, profit-sharing,
stock bonus, long-term performance award, medical, disability, accident, or
life insurance plan, or a relocation plan or policy, or any other plan, program
or policy of the Company that is intended to benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or
injury) on a full- time basis for six consecutive months.
Section 1.7. Notice. If a Change in Control occurs, the Company
shall notify the Executive of the
<PAGE> 5
occurrence of the Change in Control within two weeks after the Change in
Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the
Base Amount. The Base Amount shall be an amount equal to the
greater of:
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the
Executive's Average Percentage of the annual value (i.e., the
dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs). For purposes of this paragraph
(A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination
Years. For purposes of this paragraph (A), the Executive's
"Annual Percentage" for each Determination Year means a
fraction (expressed as a percentage), the numerator of which
is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual
value of the normal payment under the EIP for the Executive's
salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year
for the Executive's salary level for such Determination Year).
For purposes of this paragraph (A), a "Determination Year"
means each of the last three EIP plan years ending before the
date on which the Change in Control occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II)
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP
immediately before the date on which the Qualifying
Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying
Termination occurs). For purposes of this paragraph (B), the
Executive's "Average Percentage" means the average of the
Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual
Percentage" for each Determination Year means a fraction
(expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and
the denominator of which is the annual value of the normal
payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in
effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For
purposes of this paragraph (B), a "Determination Year" means
each of the last three EIP plan years ending before the date
on which the Qualifying Termination occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant
to subsection (a) of this Section 2.1 in a lump sum within 30
days of the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs); such coverage shall end upon the earlier of
(a) the expiration of 24 months after the Qualifying Termination or (b)(i) with
respect to medical insurance coverage, the date on which the Executive first
becomes eligible for medical insurance coverage provided by a firm that employs
him following the Qualifying Termination, or (ii) with respect to life
insurance coverage, the date on which the Executive first becomes eligible for
life insurance coverage provided by such firm.
<PAGE> 6
Section 2.3. Outplacement Counseling. If the Executive incurs a
Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during 1995. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the
outplacement counseling that this Section 2.3 otherwise requires the Company to
provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility,
benefit accrual, and all other purposes, under all employee
benefit plans sponsored by the Company (including, but not
limited to, health, life insurance, pension, savings, stock,
and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he
participated immediately before the Change in Control, for 24
months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company,
including the GTE Service Corporation Supplemental Executive
Retirement Plan ("SERP"), the Executive's compensation shall
include the amount payable to the Executive pursuant to
Section 2.1 hereof, and for purposes of this subsection (b),
the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount
payable to the Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of
determining his eligibility for early retirement benefits
under the Company's defined benefit pension plans (including,
but not limited to, the SERP) and for purposes of determining
his eligibility for benefits under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this
Section 2.5 and the compensation recognized under subsection (b) of this
Section 2.5, nothing in this Section 2.5 shall prevent the Executive from
receiving any benefits to which the Executive is entitled under any defined
benefit or defined contribution pension plan maintained by the Company,
including the SERP (as such benefits are modified by this Agreement) in any
form permitted by such plans (including but not limited to a lump-sum
distribution) immediately following the Executive's Qualifying Termination. To
the extent that the Company's tax-qualified retirement plans cannot provide the
benefits specified by this Section 2.5 without jeopardizing the tax
qualification of such plans, the Company shall provide such benefits under the
SERP.
Section 2.6. Nonduplication.
(a) Nothing in this Agreement shall require the Company to make
any payment or to provide any benefit or service credit that
GTE or the Company is otherwise required to provide under any
other contract, agreement, policy, plan, or arrangement.
Section 2.7. Prior Agreement. This Agreement supersedes any prior
Executive Severance Agreement entered into between the Company and the
Executive ("Prior Agreement"). On and after the date of this Agreement, such
Prior Agreement shall have no force or effect.
<PAGE> 7
ARTICLE III
EFFECT ON HUMAN RESOURCES POLICY 104
Section 3.1. Effect on Policy 104. If the Executive becomes
entitled to receive benefits hereunder, the Executive shall not be entitled to
any benefits under GTE Human Resources Policy 104, as amended from time to
time, or any successor policy, or under any other Company severance or salary
continuation policy (including but not limited to any benefits pursuant to an
involuntary separation program or similar program maintained under a pension
plan sponsored by the Company).
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of
his continued service to the Company or severance payments in consideration of
his past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal fees
and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal
fees and expenses.
Section 5.3. Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. The amount of any payment provided for
herein shall not be reduced by any remuneration that the Executive may earn
from employment with another employer or otherwise following his Qualifying
Termination.
Section 5.4. Interest. If the Company fails to make, or cause to
be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest
rate shall be equal to 120 percent of the prime rate as reported by The Wall
Street Journal for the first business day of each month, effective for the
ensuing month. The interest rate shall be adjusted at the beginning of each
month.
Section 5.5. Authority. The execution of this Agreement has been
authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 1999, if no Change in Control has occurred before that date; (b)
the termination of the Executive's employment with the Company for any reason
prior to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good
<PAGE> 8
Reason, following a Change in Control and the Company's and the Executive's
fulfillment of all of their obligations hereunder; and (d) the expiration
following a Change in Control of two years and six months and the fulfillment
by the Company and the Executive of all of their obligations hereunder.
Notwithstanding the foregoing, commencing on July 1, 1999, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall supersede the
terms of any plan or arrangement (other than this Agreement) that is affected
by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to
setoff against any obligations or to assignment by operation of law. Any
attempt, voluntary or involuntary, to effect any action specified in the
immediately preceding sentence shall be void. However, this Section 6.6 shall
not prohibit the Executive from designating one or more persons, on a form
satisfactory to the Company, to receive amounts payable to him under this
Agreement in the event that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this Agreement
shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, One Stamford Forum, Stamford,
Connecticut 06904, Attention: Corporate Secretary. Notices to the Executive
shall be deemed given when personally delivered or sent by certified or
registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall be
effective unless in writing and signed by both the Company and the Executive.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this
Agreement or any subsequent breach. No failure on the part of either the
Company or the Executive to exercise, and no delay in exercising, any right or
remedy
<PAGE> 9
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain
in full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to cause
any agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Definitions. All upper case terms used herein shall
have the meaning set forth in this Agreement.
Section 6.13. Captions. The captions to the respective articles
and sections of this Agreement are intended for convenience of reference only
and have no substantive significance.
Section 6.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: J. Randall MacDonald
----------------------
J. Randall MacDonald
Senior VP-Human Resources
and Administration
By: Marianne Drost
----------------------
Marianne Drost
VP and Associate General
Counsel-Finance & Corporate
Secretary
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