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}
or
For the fiscal year ended December 31, 1993
---------------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from to
----------------------- --------------------
Commission File Number 1-6417
-------------------------------------------------------
GTE CALIFORNIA INCORPORATED
- ------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0510200
- --------------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
One GTE Place, Thousand Oaks, California 91362-3811
- -------------------------------------------------- -----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 805-372-6000
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH WAS REGISTERED
- ---------------------------------- -------------------------------------
FIRST MORTGAGE BONDS--SERIES X, PACIFIC STOCK EXCHANGE
DUE DECEMBER 1, 2001
- ---------------------------------- -------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
5 % SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
7.48 % SERIES CUMULATIVE PREFERRED STOCK $100 PAR VALUE
- -------------------------------------------------------------------
(TITLE OF CLASS)
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
-----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
------ ------
THE COMPANY HAD 69,438,190 SHARES OF $20 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1994.
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING PREFERRED STOCK HELD BY
NON-AFFILIATES AT FEBRUARY 28, 1994, AMOUNTED TO $3,467,459.
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1993
(INCORPORATED IN PARTS I AND II).
PROXY STATEMENT FOR THE ELECTION OF DIRECTORS DATED MARCH 22, 1994
(INCORPORATED IN PARTS III AND IV).
TABLE OF CONTENTS
Item Page
- ----- ----
PART I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
8. Financial Statements and Supplementary Data 5
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
10. Directors and Executive Officers of the Registrant 6
11. Executive Compensation 8
12. Security Ownership of Certain Beneficial Owners and
Management 8
13. Certain Relationships and Related Transactions 8
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 9
PART I
Item 1. Business
GTE California Incorporated (the Company), was incorporated in California in
1929. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
provides communications services in Southern and Central California.
The Company has a wholly-owned subsidiary, GTEL. GTEL comprises the majority
of the Company's nonregulated operations including marketing telecommunications
equipment and other deregulated products and services.
The Company provides local telephone service within its franchise area and
intraLATA (Local Access Transport Area) long distance 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 California 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. End user business and residential customers
are also charged access charges for access to the facilities of the long
distance carriers. The Company also earns other revenues by leasing
interexchange plant facilities and providing such services as billing and
collection and operator services to interexchange carriers, primarily the
American Telephone and Telegraph Company (AT&T). The number of access lines
served has grown steadily from 3,213,645 on January 1, 1989 to 3,714,570 on
December 31, 1993.
The Company's principal line of business is providing telecommunication
services. These services fall into five major classes: local network, network
access, long distance, equipment sales and services and other. Revenues from
each of these classes over the last three years are as follows:
Years Ended December 31
-----------------------------------------
1993 1992 1991
---------- ---------- ----------
(Thousands of Dollars)
Local Network Services $ 975,780 $ 937,797 $ 960,224
% of Total Revenues 34% 32% 32%
Network Access Services $ 616,122 $ 663,154 $ 667,525
% of Total Revenues 21% 23% 23%
Long Distance Services $1,003,154 $1,022,330 $1,010,236
% of Total Revenues 35% 35% 34%
Equipment Sales and Services $ 163,546 $ 180,281 $ 177,891
% of Total Revenues 6% 6% 6%
Other $ 116,176 $ 117,456 $ 148,167
% of Total Revenues 4% 4% 5%
At December 31, 1993, the Company had 14,379 employees. The Company has
written agreements with the Communications Workers of America (CWA) covering
substantially all hourly employees. The current agreements with the CWA expire
in March 1996.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the California Public Utilities
Commission (CPUC) as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate business operations.
Information regarding the Company's activities with the various regulatory
agencies and revenue arrangements with other telephone companies can be found
in Note 10 of the Company's Annual Report to Shareholders for the year ended
December 31, 1993, incorporated herein and filed as Exhibit 13.
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually
all aspects of its business. Specialized communications companies have
constructed new systems in certain markets to bypass the local-exchange
network. Additional competition from interexchange carriers as well as
wireless companies continues to evolve for both intrastate and interstate
communications.
During 1994, the Company began implementation of a re-engineering plan that
will redesign and streamline processes. Implementation of its re-engineering
plan will allow the Company to continue to respond aggressively to these
competitive and regulatory developments through reduced costs, improved service
quality, competitive prices and new product offerings. Moreover,
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services. The re-engineering program
will be implemented over three years. During the year, the Company continued
to introduce new business and consumer services utilizing advanced technology,
offering new features and pricing options while at the same time reducing costs
and prices.
During 1993, the FCC announced its decision to auction licenses during 1994 in
51 major markets and 492 basic trading areas across the United States to
encourage the development of a new generation of wireless personal
communications services (PCS). These services will both complement and compete
with the Company's traditional wireline services. The Company will be
permitted to fully participate in the license auctions in areas outside of
GTE's existing cellular service areas. Limited participation will be permitted
in areas in which GTE has an existing cellular presence.
In Cerritos, California, GTE is testing and comparing the capabilities of
copper wire, coaxial cable, and fiber optics. The Cerritos test has enhanced
GTE's expertise in the areas of pay-per-view video service, video-on-demand and
local video conferencing, and led to a new interactive video service, GTE Main
Street, TM which allows customers to shop, bank and access various other
information services from their homes. In 1992, the FCC issued a "video
dialtone" ruling that allows telephone companies to transmit video signals over
their networks. The FCC also recommended that Congress amend the Cable Act of
1984 to permit telephone companies to supply video programming in their service
areas.
During 1993, the CPUC approved a settlement agreement allowing the Company,
beginning in 1994, to retain 100% of any earnings up to a 15.5% rate of return
on investment while refunding 100% of any earnings above 15.5%. Under its
prior plan, the Company was required to share 50% of any earnings over a 13%
rate of return and refund 100% of any earnings over 16.5%. As part of this
agreement and its normal annual price cap filing, the Company will reduce its
rates by about $100 million in 1994. Additionally, the CPUC is expected to
issue a final decision in early 1994 generally authorizing intralata toll
competition and ordering significant rate restructuring in California.
Although intended to be revenue neutral, the ultimate effect on revenue will
depend, in part, on the extent to which toll and access rate reductions result
in increased calling volumes.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's
domestic telephone operating subsidiaries from providing long distance service
beyond the boundaries of the LATA. This prohibition restricts their direct
provision of long distance service to relatively short distances. The degree
of competition allowed in the intraLATA market is subject to state regulation.
However, regulatory constraints on intraLATA competition will gradually be
relaxed.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
These and other actions to eliminate existing legal and regulatory barriers,
together with rapid advances in technology, are facilitating a convergence of
the computer, media and telecommunications industries. In addition to allowing
new forms of competition, these developments are also creating new
opportunities to develop interactive communications networks. The Company
supports these initiatives to assure greater competition in telecommunications,
provided that overall the changes allow an opportunity for all service
providers to participate equally in a competitive marketplace under comparable
conditions.
Item 2. Properties
The Company's property consists of network facilities (82%), company facilities
(14%), customer premises equipment (1%) and other (3%). From January 1, 1989
to December 31, 1993, the Company made gross property additions of $2.8 billion
and property retirements of $1.8 billion. Substantially all of the Company's
property is subject to liens securing long-term debt. In the opinion of
management, the Company's telephone plant is substantially in good repair.
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 financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholders, page 32,
for the year ended December 31, 1993, incorporated herein and filed as Exhibit
13.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the Registrant's Annual Report to Shareholders, pages 27
to 31, for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Registrant's Annual Report to Shareholders, pages 5 to
25, for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994,
pages 3 to 4, incorporated herein and filed as Exhibit 13A. A complete list of
Executive Officers of the Registrant as of March 1, 1994 is provided below.
Identification of Executive Officers
Year
Assumed
Current
Name Age Position Position with Company
- --------------------------- ---- -------- ----------------------
Larry J. Sparrow (1) 50 1992 Area President - West
Susan L. Clay (2) 48 1993 Acting Regional Vice
President - General
Manager - California
Clark M. Crawford (1) 47 1990 Area Vice President -
General Manager
Jorge Jackson (1)(3) 49 1993 Area Vice President -
Public Affairs
Timothy J. McCallion (1)(4) 40 1993 Area Vice President -
Regulatory and
Governmental Affairs
Robert G. McCoy (1) 49 1992 Area Vice President -
Sales
Richard J. Nordman (1)(5) 44 1993 Area Vice President -
Finance
Kenneth K. Okel (1) 47 1991 Area Vice President -
General Counsel and
Secretary
Ronald E. Pejsa (1)(6) 49 1993 Area Vice President -
Human Resources
Position with
GTE Telephone Operations (7)
----------------------------
Kent B. Foster 50 1989 President
Michael B. Esstman (8) 47 1993 Executive Vice President
- Operations
Thomas W. White 47 1989 Executive Vice President
Guillermo Amore 55 1990 Senior Vice President -
International
Gerald K. Dinsmore (9) 44 1993 Senior Vice President -
Finance and Planning
Robert C. Calafell (10) 52 1993 Vice President - Video
Services
A. T. Jones 54 1992 Vice President -
International
Brad M. Krall (11) 52 1993 Vice President -
Centralized Services
Donald A. Hayes 56 1992 Vice President -
Information Technology
Richard L. Schaulin 51 1989 Vice President - Human
Resources
Clarence F. Bercher 50 1991 Vice President - Sales
Mark S. Feighner 45 1991 Vice President - Product
Management
Geoff C. Gould 41 1989 Vice President -
Regulatory and
Governmental Affairs
G. Bruce Redditt 43 1991 Vice President - Public
Affairs
Richard M. Cahill 55 1989 Vice President and
General Counsel
Leland W. Schmidt 60 1989 Vice President - Industry
Affairs
Paul E. Miner 49 1990 Vice President - Regional
Operations Support
Katherine J. Harless 43 1992 Vice President -
Intermediary Markets
William M. Edwards, III(12) 45 1993 Controller
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years.
Except for duly elected officers and directors, no other employee had a
significant role in decision making.
All officers are appointed for a term of one year.
NOTES:
(1) Individual is an executive officer for West Area which is comprised of
GTE California Incorporated, GTE Hawaiian Telephone Company Incorporated
and GTE Northwest Incorporated.
(2) Susan L. Clay is Acting Regional Vice President - General Manager -
California replacing John C. Appel who was appointed President of GTE
Southwest Incorporated.
(3) Jorge Jackson was appointed Area Vice President - Public Affairs
effective November 21, 1993 to replace Jim J. Parrish who retired.
(4) Timothy J. McCallion was appointed Area Vice President - Regulatory and
Governmental Affairs effective November 21, 1993 replacing Keith M.
Kramer who retired.
(5) Richard J. Nordman was appointed Area Vice President - Finance effective
November 7, 1993 replacing Paul R. Shuell.
(6) Ronald E. Pejsa was appointed Area Vice President - Human Resources
effective October 24, 1993 replacing James R. Poling who retired.
(7) Position is with, and duties are performed at, the GTE Telephone
Operations Headquarters in Irving, Texas.
(8) Michael B. Esstman was appointed Executive Vice President - Operations
effective April 25, 1993 replacing Charles A. Crain who retired on April
1, 1993.
(9) Gerald K. Dinsmore, previously South Area President, was appointed
Senior Vice President - Finance and Planning replacing John L. Hume who
retired.
(10) Robert C. Calafell was appointed Vice President - Video Services
effective March 28, 1993.
(11) Brad M. Krall was appointed Vice President - Centralized Services
effective November 7, 1993.
(12) William M. Edwards, III was appointed Controller effective November 7,
1993 replacing John D. Utzinger.
William E. Starkey retired November 21, 1993, George N. King retired May 21,
1993 and Clark W. Barlow retired August 21, 1993.
William D. Wilson resigned effective November 1, 1993 to accept a new position
in GTE South Incorporated and GTE North Incorporated as Area Vice President -
General Manager - East.
Jerry L. Austin retired November 21, 1993.
Item 11. Executive Compensation
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994,
pages 5 to 13, incorporated herein and filed as Exhibit 13A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994,
page 14, incorporated herein and filed as Exhibit 13A.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994,
pages 3 to 5 and 13, incorporated herein and filed as Exhibit 13A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - Reference is made to the Registrant's Annual
Report to Shareholders, pages 5 - 25, for the year ended December 31,
1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income for the years ended December 31,
1993-1991.
Consolidated Statements of Reinvested Earnings for the years ended
December 31, 1993-1991.
Consolidated Statements of Cash Flows for the years ended December 31,
1993-1991.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules - Included in Part IV of this report for
the years ended December 31, 1993-1991:
Page(s)
-------
Report of Independent Public Accountants 11
Schedules:
V - Property, Plant and Equipment 12-14
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 15
VIII - Valuation and Qualifying Accounts 16
X - Supplementary Income Statement Information 17
Note: Schedules other than those 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.
3* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988 Form
10-K, File No. 1-6417).
4-1* Indenture dated December 1, 1939, between the Company and
Security-First National Bank of Los Angeles, now named Security
Pacific National Bank, Trustee, (Exhibit 7-A, File No. 2-4262), as
supplemented by fifty-one supplemental indentures or deeds of
conveyance (Filed as exhibits to the Form 10-K's for the years
1970, 1971, 1981, 1985 and 1986) and File No. 33-54788 in 1992.
12 Statement of the ratio of earnings to fixed charges.
13 Annual Report to Shareholders for the year ended December 31,
1993, filed herein as Exhibit 13.
13A Proxy Statement for the election of directors dated March 22,
1994, filed herein as Exhibit 13A.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1993.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE California Incorporated:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in GTE California Incorporated and
subsidiary's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 28, 1994. Our
report on the consolidated financial statements includes an explanatory
paragraph with respect to the change in the method of accounting for income
taxes in 1992 as discussed in Note 1 to the consolidated financial statements.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedules listed under Item 14 are the responsibility of
the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state 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 & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
----------------- ----------- ----------- ----------- ------------- -----------
Balance at Additions Retirements Other Debits Balance at
Beginning of at or Sales or (Credits) Close of
Classification Year Cost (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 58,495 $ 1,390 $ -- $ (613) $ 59,272
Buildings 651,604 16,340 2,019 (606) 665,319
Central office equipment 2,750,186 226,447 63,119 (1,639) 2,911,875
Station apparatus 104,215 8,693 2,369 (219) 110,320
Cable, underground conduit and
poles 3,604,984 199,010 23,233 1,784 3,782,545
Furniture and office equipment 310,940 20,958 126,561 3,295 208,632
Vehicles and other work equipment 223,632 6,995 4,168 (426) 226,033
Telephone plant under
construction 98,906 17,036 -- -- 115,942
---------- -------- -------- -------- ----------
Total Telephone Plant 7,802,962 496,869 221,469 1,576 8,079,938
NONREGULATED PLANT 137,120 7,081 6,271 (2,748) 135,182
---------- -------- -------- -------- ----------
Total Property, Plant and
Equipment $7,940,082 $ 503,950 $227,740 $ (1,172) $8,215,120
========== ========= ======== ======== ==========
<FN>
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(2) Primarily represents retirements not charged to reserve and transfers in
accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
----------------- ----------- ----------- ----------- ------------- -----------
Balance at Additions Retirements Other Debits Balance at
Beginning of at or Sales or (Credits) Close of
Classification Year Cost (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 56,366 $ 2,431 $ -- $ (302) $ 58,495
Buildings 625,737 33,680 3,528 (4,285) 651,604
Central office equipment 2,673,804 295,926 241,848 22,304 2,750,186
Station apparatus 87,909 17,984 2,656 978 104,215
Cable, underground conduit and
poles 3,412,646 232,011 52,967 13,294 3,604,984
Furniture and office equipment 339,998 23,403 47,599 (4,862) 310,940
Vehicles and other work equipment 217,273 13,424 8,205 1,140 223,632
Telephone plant under
construction 189,431 (90,662) -- 137 98,906
Property held for future
telephone use 738 (750) -- 12 --
---------- -------- -------- --------- ----------
Total Telephone Plant and
Equipment 7,603,902 527,447 356,803 28,416 7,802,962
NONREGULATED PLANT 128,889 8,588 10,077 9,720 137,120
---------- -------- -------- --------- ----------
Total Property, Plant and
Equipment $ 7,732,791 $ 536,035 $366,880 $ 38,136 $7,940,082
=========== ========= ======== ======== ==========
<FN>
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(2) Represents adjustments in 1992 due to the adoption of SFAS No. 109,
retirements not charged to reserve and transfers in
accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
----------------- ----------- ----------- ----------- ------------- -----------
Balance at Additions Retirements Other Debits Balance at
Beginning of at or Sales or (Credits) Close of
Classification Year Cost (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 55,943 $ 421 $ -- $ 2 $ 56,366
Buildings 608,216 19,935 2,598 184 625,737
Central office equipment 2,743,935 203,955 274,084 (2) 2,673,804
Station apparatus 84,619 3,858 568 -- 87,909
Station connections 415,652 -- 415,652 -- --
Cable, underground conduit and
poles 3,189,625 282,816 59,795 -- 3,412,646
Furniture and office equipment 320,709 22,482 2,928 (265) 339,998
Vehicles and other work equipment 201,482 22,241 7,003 553 217,273
Telephone plant under construction 164,270 25,544 -- (383) 189,431
Property held for future telephone
use 737 -- -- 1 738
---------- -------- -------- --------- ----------
Total Telephone Plant 7,785,188 581,252 762,628 90 7,603,902
NONREGULATED PLANT 113,360 19,984 4,365 (90) 128,889
---------- -------- -------- --------- ----------
Total Property, Plant and
Equipment $7,898,548 $601,236 $766,993 $ -- $7,732,791
========== ======== ======== ========= ==========
<FN>
NOTES:
(1) Represents: All retirements or sales in Column D were charged to
accumulated depreciation (Schedule VI, Note 2).
Retirements include write-offs of customer premises equipment due
to deregulation by the FCC.
(2) Primarily represents prior-year adjustments to conform to the current
year presentation and transfers in accordance with FCC Docket No. 86-
111.
</TABLE>
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------------- -------------- ----------- ----------- ------------ -----------
Additions
Balance at Charged to Retirements Other Balance at
Beginning of Income or Sales Charges Close of
Description Year (Note 1) (Note 2) (Note 2) Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated depreciation and
amortization for the year ended:
December 31, 1993 $2,900,851 $ 582,361 $ 221,940 $ (8,531) $ 3,252,741
========== ========== =========== ============ ===========
December 31, 1992 $2,701,079 $ 561,345 $ 366,885 $ 5,312 $ 2,900,851
========== ========== =========== ============ ===========
December 31, 1991 $2,874,304 $ 592,232 $ 766,517 $ 1,060 $ 2,701,079
========== ========== =========== ============ ===========
</TABLE>
<TABLE>
NOTES:
(1) Reference is made to Note 1 of Notes to Consolidated Financial
Statements with respect to depreciation policy: 1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Total as shown in Consolidated Statements of Income $ 583,066 $ 563,540 $ 591,287
General office allocations (705) (1,235) 220
Other -- (960) 725
----------- ----------- -----------
Total as shown above $ 582,361 $ 561,345 $ 592,232
=========== =========== ===========
(2) Represents: Retirements or sales credited to property, plant
and equipment (Schedule V) $ 227,740 $ 366,880 $ 766,993
Other (5,800) 5 (476)
----------- ----------- -----------
Total as shown above $ 221,940 $ 366,885 $ 766,517
=========== =========== ===========
(3) Represents: Salvage $ 13,969 $ 14,517 $ 12,720
Removal costs (17,095) (26,877) (12,341)
Other (5,405) 17,672 681
----------- ----------- -----------
Total as shown above $ (8,531) $ 5,312 $ 1,060
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------------- ------------- ---------------------- ------------ ------------
Additions
----------------------
Charged Deductions
Balance at Charged to Other from Balance at
Beginning to Accounts Reserves Close of
Description of Year Income (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1993 $ 20,752 $ 85,365 $ 21,209 $ 75,346 $ 51,980
======== ======== ======== ======== ========
December 31, 1992 $ 11,711 $ 83,779 $ 14,993 $ 89,731 $ 20,752
======== ======== ======== ======== ========
December 31, 1991 $ 7,946 $ 80,249 $ 15,770 $ 92,254 $ 11,711
======== ======== ======== ======== ========
<FN>
NOTES:
(1) Recoveries of previously written-off amounts.
(2) Charges for purpose for which reserve was created.
Represents write-offs of receivable accounts.
</TABLE>
<PAGE>
<TABLE>
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------
Column A Column B
--------------- ---------------------------------------------
Item Charged to Operating Expenses
- ------------------------------------------------------------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Maintenance and repairs $ 479,847 $ 449,182 $ 477,754
=========== =========== ===========
Taxes, other than payroll and income taxes,
are as follows:
Real and personal property $ 59,848 $ 62,106 $ 63,133
Other 1,676 1,862 (3,760)
Portion of above taxes charged
to plant and other accounts (8,747) (8,880) (8,432)
----------- ----------- -----------
Total $ 52,777 $ 55,088 $ 50,941
=========== =========== ===========
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE CALIFORNIA INCORPORATED
--------------------------------------
(Registrant)
Date March 21, 1994 By LARRY J. SPARROW
------------------------- ---------------------------------------
LARRY J. SPARROW
Area President - West
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.
LARRY J. SPARROW President and Director March 21, 1994
- ------------------------- (Principal Executive Officer)
LARRY J. SPARROW
GERALD K. DINSMORE Senior Vice President - Finance March 21, 1994
- ------------------------- and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 21, 1994
- ------------------------- (Principal Accounting Officer)
WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 21, 1994
- -------------------------
RICHARD M. CAHILL
CLARK MICHAEL CRAWFORD Director March 21, 1994
- -------------------------
CLARK MICHAEL CRAWFORD
MICHAEL B. ESSTMAN Director March 21, 1994
- -------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 21, 1994
- -------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 21, 1994
- -------------------------
THOMAS W. WHITE
Exhibit 12
<TABLE>
GTE CALIFORNIA INCORPORATED
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------------
1993(a) 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings Available for
Fixed Charges:
Income from continuing
operations (b) $ 437,069 $ 93,619 $ 415,370 $ 442,458 $ 443,865 $ 400,433
Add -
Income taxes 284,528 70,535 237,089 242,724 248,078 219,881
Fixed changes 131,555 131,555 143,359 153,934 152,621 157,229
--------- --------- --------- --------- --------- ---------
$ 853,152 $ 295,709 $ 795,818 $ 839,116 $ 844,564 $ 777,543
Fixed Charges:
Interest charges $ 121,117 $ 121,117 $ 131,527 $ 140,977 $ 139,674 $ 144,229
Portion of rentals
representing interest 10,438 10,438 11,832 12,957 12,947 13,000
--------- --------- --------- --------- --------- ---------
$ 131,555 $ 131,555 $ 143,359 $ 153,934 $ 152,621 $ 157,229
Ratio of Earnings to
Fixed Charges 6.49 2.25 5.55 5.45 5.53 4.95
<FN>
(a) Reflects increased operating expenses related to a one-time restructuring charge
for the implementation of a re-engineering plan, the adoption, effective January 1,
1993, of Statement of Financial Accounting Standards (SFAS) No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions" on a delayed recognition
basis and a one-time charge associated with the enhanced early retirement and
voluntary separation programs completed during the second quarter of 1993. Excluding
these items, the ratio of earnings to fixed charges for the year ended December 31,
1993 would have been 6.49.
(b) Includes allowance for funds used during construction (credits).
</TABLE>
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
of
GTE CALIFORNIA INCORPORATED
For the year ended December 31, 1993
<PAGE>
PRESIDENT'S REPORT
Overall, 1993 was a year of substantial achievement for GTE California. We
continued to improve our position in an increasingly competitive market and were
able to maintain earnings in the face of fires and floods, and an economy that
continues to perform below expectations. Due to efficiencies achieved through
changes in the way we do business, employees were able to increase productivity
and quality while reducing costs. We continued to invest heavily in our
infrastructure, once again commiting about half a billion dollars to network
improvements. We also introduced many advanced products and services for our
customers. The aggressive steps taken by GTE California in 1993 will position us
for market leadership and growth in the years ahead.
FOCUSING ON THE CUSTOMER
During 1993, we continued our efforts to totally re-invent our Company from the
point of view of the customer. With this in mind, we re-engineered our processes
and changed our whole approach to customer service. Instead of multiple
hand-offs and long-term service commitments, we now provide customers with a
single point of contact and, in some cases, virtually immediate service.
For example, we have given the customer one place to call for repair
service--the Customer Care Center. With this concept, our service
representatives will be able to resolve up to 70 percent of repair problems for
customers while they are on the phone. Customer Contact Centers will accomplish
similar goals for order processing and billing requests.
With Express Dialtone, new service can be activated at a given location in a
matter of minutes--saving the customer time and the Company the expense of a
field visit.
We've also revamped service and sales for large business customers by
establishing new Branch Offices that consolidate most services for these key
customers and enable us to be more responsive to all of their telecommunication
needs.
ATTAINING SUPERIOR VALUE
As part of our plan to provide our customers with the best value in
telecommunications, we must continue to reduce costs, and we achieved
significant progress in this area in 1993. We streamlined our administrative
functions, consolidated work groups and divisions, and scrutinized every aspect
of our business for potential cost savings.
-------------- ---------------
| | | |
| | | |
| | | |
-------------- ---------------
Larry J. Sparrow Susan L. Clay
Area President-West Acting Regional Vice President
We were also able to make significant reductions in the work force. Early
retirements, voluntary separation packages and involuntary reductions during
1993 enabled us to reduce the number of people employed by GTE California by
about 1,900.
BUILDING OUR INFORMATION HIGHWAYS
Superior service begins with a superior network, and GTE California invested
$504 million in 1993 in improvements throughout its network. Three more digital
switches were added, bringing our total of switched access lines served by
digital technology to nearly 91 percent.
GTE California also committed to the creation of information highways between
42 communities during the next two years. The plan includes the installation
of at least 16 major fiber optic cable rings and dozens of smaller rings. These
"SONET" rings--representing an investment of $80 million--offer ultra-high
transmission speeds, self-healing capacities, dramatically improved network
reliability, and services such as interactive videoconferencing,
state-of-the-art data transmission capabilities and, eventually,
video-on-demand.
GTE's commitment to the latest technology enabled us to introduce several GTE
SmartCall R services that give customers more convenience, control and security
in their telephone use.
RESPONDING TO COMPETITION
GTE California continues to demonstrate its ability to meet the challenges of
an aggressive and competitive industry. Our bold marketing efforts produced
sales to cellular and radio paging carriers that will produce $33 million in
revenues over the next five years. Agreements were also negotiated with major
long distance carriers that will guarantee the Company $22 million in revenues
over five years.
Sales of CentraNet R, our flagship product, continued to grow in 1993 as we
negotiated service contracts with both the General Services Administration and
Los Angeles County. GTE California also partnered with the City of Long Beach
to install the nation's first citywide Integrated System Digital Network (ISDN)
which will give the city simplified dialing, reduced toll rates, and nearly
unlimited capacity for voice, data and video transmission.
MARSHALLING THE POWER OF OUR EMPLOYEES
All of our achievements were made possible by talented employees that, at every
level, demonstrated dedication, innovation and outstanding teamwork. We were
able to maintain service levels during the floods and fires that devastated
Southern California in 1993. Driven mainly by the dedication and hard work of
our employees, we kept outages to a minimum and responded to the needs of
emergency crews so well that we were commended by both Governor Wilson and the
California Public Utilities Commission.
We are excited about the future of our Company. We are a major player in one of
the world's most dynamic and fastest growing industries, and we are taking the
right steps to ensure our success in the future. We will continue to pursue the
strategies that have made us the provider of choice with our customers in this
evolving era of telecommunications.
LARRY J. SPARROW SUSAN L. CLAY
Area President-West Acting Regional Vice President-
General Manager-California
- ------------------------- TRANSFER AGENT AND REGISTRAR
| | GTE Corporation
| | c/o Bank of Boston
| | P.O. Box 9191
________________________ Boston, Massachusetts 02205-9191
Executive Offices
One GTE Place FOR A COPY OF THE 1993 ANNUAL REPORT
Thousand Oaks, California OF OUR PARENT COMPANY, PLEASE WRITE TO:
91362-3811 GTE Corporation
One Stamford Forum
Stamford, Connecticut 06904
FOR A COPY OF THE 1993 ANNUAL FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, PLEASE WRITE TO:
GTE Telephone Operations
Financial Reporting
P.O. Box 407, MC INAAACG
Westfield, IN 46074
(317) 896-6464
LEADERSHIP
Officers
Larry J. Sparrow
Area President-West
Susan L. Clay
Acting Regional Vice
President-General Manager-
California
Clark Michael Crawford
Area Vice President-
General Manager
Gerald K. Dinsmore
Senior Vice President-Finance
and Planning
Jorge Jackson
Area Vice President-
Public Affairs
Timothy J. McCallion
Area Vice President-Regulatory
and Governmental Affairs
Robert G. McCoy
Area Vice President-Sales
Richard J. Nordman
Area Vice President-Finance
Kenneth K. Okel
Area Vice President-
General Counsel and
Secretary
Ronald E. Pejsa
Area Vice President-
Human Resources
William M. Edwards, III
Controller
__________________________________________________________________________
Board of Directors
Richard M. Cahill
Vice President-General Counsel
GTE Telephone Operations
Clark Michael Crawford
Area Vice President-
General Manager
GTE California Incorporated
Gerald K. Dinsmore
Senior Vice President-
Finance and Planning
GTE Telephone Operations
Michael B. Esstman
Executive Vice President-
Chief Operating Officer
GTE Telephone Operations
Kent B. Foster
President
GTE Telephone Operations
Larry J. Sparrow
Area President-West
GTE California Incorporated
GTE Northwest Incorporated
Chairman of the Board and
Chief Executive Officer
GTE Hawaiian Telephone Company
Incorporated
Thomas W. White
Executive Vice President
GTE Telephone Operations
<PAGE>
FINANCIAL REPORT
_------____________________________________________________________________
Consolidated Statements of Income
Years ended December 31 1993 1992 1991
___________________________________________________________________________
(Thousands of Dollars)
Operating revenues(a):
Local network services $ 975,780 $ 937,797 $ 960,224
Network access services 616,122 663,154 667,525
Long distance services 1,003,154 1,022,330 1,010,236
Equipment sales and services 163,546 180,281 177,891
Other 116,176 117,456 148,167
______________________________________________________________________________
2,874,778 2,921,018 2,964,043
______________________________________________________________________________
Operating expenses (b):
Cost of sales and services 666,772 679,095 702,458
Depreciation and amortization 583,066 563,540 591,287
Marketing, selling, general and
administrative 896,617 902,389 856,443
Restructuring costs 445,175 -- --
______________________________________________________________________________
2,591,630 2,145,024 2,150,188
- ------------------------------------------------------------------------------
Net operating income 283,148 775,994 813,855
______________________________________________________________________________
Other (income) deductions:
Interest expense 121,117 131,527 140,977
Other--net (2,123) (7,992) (12,304)
______________________________________________________________________________
Income before income taxes 164,154 652,459 685,182
______________________________________________________________________________
Income taxes 70,535 237,089 242,724
______________________________________________________________________________
Income before extraordinary charge 93,619 415,370 442,458
______________________________________________________________________________
Extraordinary charge--early retirement
of debt (net of income taxes of
$13,554) 20,214 -- --
______________________________________________________________________________
Net income $ 74,405 $ 415,370 $ 442,458
______________________________________________________________________________
______________________________________________________________________________
(a) Includes billings to affiliates of $136,800, $135,043 and $159,636 for the
years 1993-1991, respectively.
(b) Includes billings from affiliates of $307,083, $305,795 and $272,362 for the
years 1993-1991, respectively.
<PAGE>
Consolidated Statements of Reinvested Earnings
_____________________________________________________________________________
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Thousands of Dollars)
Balance at beginning of year $1,095,625 $1,057,277 $1,136,649
Add--
Net income 73,405 415,370 442,458
Deduct--
Cash dividends declared on
common stock 355,000 372,267 516,620
Cash dividends declared on
preferred stock 4,790 4,755 5,210
_______________________________________________________________________________
Balance at end of year $ 809,240 $1,095,625 $1,057,277
_______________________________________________________________________________
See Notes to Consolidated Financial Statements
Consolidated Balance Sheets
December 31 1993 1992
________________________________________________________________________________
(Thousands of Dollars)
ASSETS
Current Assets:
Cash $ 6,620 $ 12,768
Accounts receivable
Customers (including unbilled revenues) 458,496 476,841
Affiliated companies 8,047 3,171
Other 76,205 63,354
Allowance for uncollectible accounts (51,980) (20,752)
Notes receivable 28,402 --
Materials and supplies, at average cost 37,361 41,976
Deferred income tax benefits 94,459 33,714
Prepayments and other 15,512 9,804
________________________________________________________________________________
673,122 622,876
________________________________________________________________________________
Property, plant and equipment:
Original cost 8,215,120 7,940,082
Accumulated depreciation (3,252,741) (2,900,851)
________________________________________________________________________________
4,962,379 5,039,231
________________________________________________________________________________
Prepaid pension cost 233,640 134,626
________________________________________________________________________________
Other assets 125,630 131,382
________________________________________________________________________________
Total assets $5,994,771 $5,928,115
________________________________________________________________________________
________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 608,157 $ 116,691
Current maturities of long-term debt 85,567 25,970
Accounts payable 125,061 150,246
Affiliate payables and accruals 107,659 106,178
Advanced billings and customer deposits 51,275 45,439
Accrued taxes 86,299 83,600
Accrued interest 8,746 16,092
Accrued payroll and vacations 81,777 79,470
Accrued dividends 111,046 48,144
Accrued restructuring costs and other 279,675 90,515
________________________________________________________________________________
1,545,262 762,345
________________________________________________________________________________
Long-term debt 860,398 1,567,017
________________________________________________________________________________
Deferred credits:
Deferred income taxes 606,955 674,692
Deferred investment tax credits 89,092 113,275
Restructuring costs and other 611,154 242,491
________________________________________________________________________________
1,307,201 1,030,458
________________________________________________________________________________
Shareholders' equity:
Preferred stock 81,866 81,866
Common stock (69,438,190 shares outstanding) 1,388,764 1,388,764
Other capital 2,040 2,040
Reinvested earnings 809,240 1,095,625
________________________________________________________________________________
2,281,910 2,568,295
________________________________________________________________________________
Total liabilities and shareholders' equity $5,994,771 $5,928,115
________________________________________________________________________________
________________________________________________________________________________
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
Years ended December 31 1993 1992 1991
________________________________________________________________________________
(Thousands of Dollars)
Cash flows from operating activities:
Income before extraordinary charge $ 93,619 $ 415,370 $ 442,458
Adjustments to reconcile income before
extraordinary charge to net cash
from operating activities:
Depreciation and amortization 583,066 563,540 591,287
Restructuring costs 445,175 -- --
Deferred income taxes and investment
tax credits (206,475) (9,425) (60,233)
Provision for uncollectible accounts 85,365 83,779 80,249
Change in current assets and
current liabilities (64,124) 12,131 (74,690)
Other--net 55,205 (29,361) (24,553)
________________________________________________________________________________
Net cash from operating activities 991,831 1,036,034 954,518
________________________________________________________________________________
Cash flows from investing activities:
Capital expenditures (503,950) (536,035) (601,236)
Other--net 11,581 (2,822) 10,856
- --------------------------------------------------------------------------------
Net cash used in investing activities (492,369) (538,857) (590,380)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt issued 149,601 50,000 50,000
Early retirement of debts and
related call premium (823,300) -- --
Long-term debt and preferred stock
retired (176,489) (22,205) (185,369)
Dividends paid to shareholders (296,888) (453,149) (495,465)
Increase (decrease) in short-term debt 641,466 (72,709) 271,876
________________________________________________________________________________
Net cash used in financing activities (505,610) (498,063) (358,958)
________________________________________________________________________________
Increase (decrease) in cash (6,148) (886) 5,180
Cash:
Beginning of year 12,768 13,654 8,474
________________________________________________________________________________
End of year $ 6,620 $ 12,768 $ 13,654
________________________________________________________________________________
________________________________________________________________________________
See Notes to Consolidated Financial Statements.
Notes To Consolidated Financial Statements
1. Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE California
Incorporated (the Company) and its wholly-owned subsidiary GTEL. All significant
intercompany transactions have been eliminated. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to $152.7
million, $126.0 million and $159.0 million for the years 1993-1991,
respectively. Such purchases are recorded in the accounts of the Company at cost
including a normal return realized by the affiliates.
The Company is billed for printing and other costs for the production of
telephone directories, 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 $307.1
million, $305.8 million and $272.4 million for the years 1993-1991,
respectively. The amounts charged for these affiliated transactions are based on
a proportional cost allocation method which reflects management's best estimate.
REVENUES
The Company has an agreement with GTE Directories Corporation (100% owned by
GTE), whereby the Company provides its subscriber lists, billing and collection
and other services. Revenues from these services amounted to $136.8 million,
$135.0 million and $159.6 million for the years 1993-1991, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
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 of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant using the straight-line
remaining life method, based upon rates prescribed by the California Public
Utilities Commission (CPUC) and adopted by the Federal Communications Commission
(FCC). The provisions for depreciation and amortization were equivalent to
composite annual rates of 7.4%, 7.4% and 7.8% for the years 1993-1991,
respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the CPUC and Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
accounting recognizes the economic effects of rate regulation by recording costs
and a return on investment as such amounts are recovered through rates
authorized by regulatory authorities. The Company annually reviews the continued
applicability of SFAS No. 71 based upon the current regulatory and competitive
environment.
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, revenue is recognized when products are delivered or services are
rendered to customers. Long-term contracts are generally accounted for using the
percentage-of-completion method with revenues recognized in the proportion that
costs incurred bear to the estimated total costs to completion. Expected losses,
if any, are charged to income currently.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company elected
to adopt this new accounting standard 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 SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits" effective January 1, 1993. SFAS No. 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
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
As further explained in Note 7, during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1,
1992. SFAS No. 109 changed the method by which companies account for income
taxes. Among other things, the Statement requires that deferred tax balances be
adjusted to reflect new tax rates when they are enacted into law. The impact of
this change in accounting on the Company's results of operations was
immaterial.
FINANCIAL INSTRUMENTS
The fair values of financial instruments other than long-term debt, closely
approximate their carrying value. The estimated fair value of long-term debt at
December 31, 1993 and 1992, based on either reference to quoted market prices or
an option pricing model, exceeded the carrying value by approximately $9 million
and $49 million, respectively.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1993 presentation.
2. Restructuring and Merger Costs
Results for 1993 include a one-time pretax restructuring charge of $445.2
million related to the Company's re-engineering plan over the next three years.
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 re-engineering
plan includes $171.6 million to upgrade or replace existing customer service and
administrative systems and enhance network software, $193.4 million for employee
separation benefits associated with workforce reductions and $52.5 million
primarily for the consolidation of facilities and operations and other related
costs.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pretax charge of $34.7 million which
reduced net income by $21.2 million.
In March 1991, the merger of the Company's parent, GTE, and Contel Corporation
(Contel) was consummated. In a decision issued on March 13, 1991 the CPUC
issued a decision that approved a stipulation agreement which tentatively
approved the merger of GTE and Contel. The decision also established a second
phase of the proceeding in which GTE was directed to file a complete showing
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 Contel of
California, Inc. joined with GTE and Contel in filing a comprehensive plan
with the CPUC to merge Contel of California, Inc. into the Company. The filing
also contained detailed information to demonstrate that the parent company
merger should be finally approved.
On December 23, 1993, an Administrative Law Judge issued a proposed Phase II
order allowing the merger of Contel of California, Inc. and GTE California
Incorporated. The order is expected to be finalized in the first quarter of
1994. The proposed order would add a third phase to the merger proceeding in
which the issues of a start-up revenue requirement for Contel's pre-merger
operations and rate integration of the respective company tariffs will be
considered.
3. Preferred Stock
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1993 and 1992 is as follows:
Shares Amount*
- -----------------------------------------------------------------------------
Authorized
$ 20 par value 2,499,174
$100 par value 500,000
- -----------------------------------------------------------------------------
2,999,174
- -----------------------------------------------------------------------------
Outstanding
$20 par value--
4-1/2% Series (issued in 1945) 280,312 $ 5,606
4-1/2% Series (issued in 1956) 718,862 14,378
5 % Series 1,500,000 30,000
$100 par value--
7.48% Series 318,821 31,882
- -----------------------------------------------------------------------------
Total 2,817,995 $81,866
- -----------------------------------------------------------------------------
*Thousands of Dollars
At the Company's option, these series of preferred stock are redeemable at
premiums, in whole or in part, on thirty days notice. The Company purchased
57,365 shares of 7.48% Series during 1991 which were held in treasury and
retired in 1992.
The 4-1/2% Series (1945 issue) is entitled to one vote per share, with the right
to vote cumulatively in the election of directors. Otherwise, the preferred
shareholders have no voting rights.
No shares of preferred stock were reserved for officers and employees, or for
options, warrants, conversions or other rights. The Company is not in arrears
in its dividend payments at December 31, 1993.
4. Common Stock
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $20 pr share. All outstanding shares of common stock are held by
GTE.
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, 1993, $4.8 million of reinvested earnings were restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Company's Articles of Incorporation.
5. Long-Term Debt
Long-term debt outstanding, exclusive of current maturities, is as follows:
December 31 1993 1992
- -----------------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds:
4-1/2% Series P, due 1994 $ -- $ 35,000
4-1/2% Series Q, due 1995 35,000 35,000
5 % Series R, due 1995 40,000 40,000
6 % Series S, due 1996 45,000 45,000
6-1/2% Series T, due 1997 55,000 55,000
7-1/8% Series U, due 1998 60,000 60,000
9-1/4% Series V, due 1999 -- 60,000
7-5/8% Series X, due 2001 50,000 50,000
8-1/2% Series Y, due 2007 -- 125,000
8-7/8% Series Z, due 2008 -- 50,000
10-1/8% Series AA, due 2009 -- 75,000
11 % Series NN, due 2015 -- 75,000
9-3/8% Series PP, due 2026 -- 300,000
8-1/8% Series QQ, due 1996 -- 125,000
7-3/4% Series RR, due 1998 75,000 75,000
8-5/8% Series SS, due 2016 -- 100,000
6-1/4% Series TT, due 1998(a) 150,000 --
- -----------------------------------------------------------------------------
510,000 1,305,000
- -----------------------------------------------------------------------------
Sinking Fund Debenture:
8-7/8%, due 1996 -- 25,500
- -----------------------------------------------------------------------------
Other:
8-5/8% GTE Finance Corporation promissory
note, due 1994 -- 25,000
8.16% GTE Finance Corporation promissory
note, due 1994 -- 25,000
6-1/4% GTE Finance Corporation promissory
note, due 1995 50,000 50,000
Commercial paper refinanced 300,000(b) 150,000(a)
- -----------------------------------------------------------------------------
Capitalized Leases 1,457 2,043
- -----------------------------------------------------------------------------
Total principal amount 861,457 1,582,543
- -----------------------------------------------------------------------------
Discount (1,059) (15,526)
- -----------------------------------------------------------------------------
Total long-term debt $860,398 $1,567,017
- -----------------------------------------------------------------------------
(a) In 1993, the Company issued $150 million of 6-1/4% First Mortgage Bonds, due
1998 to refinance commercial paper.
(b) In 1994, the Company issued $300 million of 5-5/8% Debentures, Series A, due
2001 to refinance commercial paper.
All outstanding Series QQ, 8-1/8% First Mortgage Bonds were retired in 1993 with
proceeds from borrowings of commercial paper.
In November 1993, the Company called $785 million of high-coupon first mortgage
bonds with proceeds from commercial paper borrowings. These bonds had coupons
ranging from 8.5% to 11%. In February 1994, the Company issued $300 million of
5-5/8% Debentures, due 2001 to refinance a portion of the bonds being called.
The Company plans to refinance the remaining called bonds in early 1994 at lower
current interest rates. The cost of calling these bonds is reflected as an
extraordinary after-tax charge of $20.2 million in the Consolidated Statements
of Income.
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.
Debt discount on the Company's outstanding long-term debt is amortized over the
lives of the respective issues.
Maturities, installments and sinking fund requirements (excluding amounts to be
satisfied by securities held by the Company) for the five-year period from
January 1, 1994 are summarized below (in thousands of dollars):
-----------------------------------------
1994 $ 85,567
1995 125,318
1996 45,276
1997 55,290
1998 285,304
-----------------------------------------
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
6. Short-Term Debt
The Company finances part of its construction program through the use of
interim short-term loans which are generally refinanced at a later date by
issues of long-term debt or equity. Information relating to short-term
borrowings is as follows:
1993 1992 1991
- -----------------------------------------------------------------------------
(Thousands of Dollars)
During the year--
Commercial paper--
Maximum month-end balance $843,500(a) $296,434 $282,050
Average monthly balance(b) $189,432 $204,937 $ 82,422
Weighted average interest rate(c) 3.39% 3.83% 5.29%
At December 31--
Balance outstanding--
Note payable to GTE $ 31,857 $ 30,481 $ 57,350
Average interest rate 3.11% 3.99% 5.14%
Commercial paper(d) $576,300 $ 86,210 $282,050
Average interest rate 3.37% 3.53% 4.79%
- -----------------------------------------------------------------------------
(a) Includes commercial paper borrowings used to call $785 million of long-term
debt in November 1993.
(b) Includes $300 million of commercial paper in 1993 which was refinanced in
1994 with 5-5/8% Debentures. Includes $150 million of commercial paper in
1992 which was refinanced in 1993 with 6-1/4% First Mortgage Bonds.
(c) Calculated by dividing the annualized interest expense by the average of the
balances of the debt outstanding at the end of each month.
(d) Excludes $300 million of commercial paper in 1993 which was refinanced in
1994 with 5-5/8% Debentures, which has been included in long-term debt in
1993. Excludes $150 million of commercial paper in 1992 which was
refinanced with 6-1/4% First Mortgage Bonds, which has been included in
long-term debt in 1992.
Unused lines of credit available to the Company to support outstanding
commercial paper and other short-term financing needs are $2.0 million. In
addition, a $2.3 billion line is available to the Company through shared lines
of credit with GTE and other affiliates. These arrangements require payment
of annual commitment fees of .1% of the unused lines of credit.
7. Income Taxes
The provision for income taxes is as follows:
1993 1992 1991
----------------------------------------------------------------------------
(Thousands of Dollars)
Current
Federal $ 206,661 $ 175,492 $ 213,489
State 70,349 71,022 89,468
----------------------------------------------------------------------------
Total 277,010 246,514 302,957
----------------------------------------------------------------------------
Deferred
Federal (138,179) 25,984 (10,541)
State (44,113) (2,556) (13,649)
----------------------------------------------------------------------------
Total (182,292) 23,428 (24,190)
----------------------------------------------------------------------------
Amortization of deferred
investment tax credits (24,183) (32,853) (36,043)
----------------------------------------------------------------------------
Total $ 70,535 $237,089 $242,724
----------------------------------------------------------------------------
The components of deferred income tax expense (benefit) are as follows:
1993 1992 1991
----------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ (21,307) $ 21,875 $(12,553)
Employee benefit obligations (7,725) (14,590) 7,913
Revenues 5,318 9,032 14,817
Prepaid pension cost 9,843 1,307 (7,170)
Restructuring cost (160,312) -- --
Other--net (8,109) 5,804 (27,197)
----------------------------------------------------------------------------
Total $(182,292) $ 23,428 $(24,190)
----------------------------------------------------------------------------
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate is as follows:
1993 1992 1991
----------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 34.0% 34.0%
State income tax, net of
Federal income tax benefits 10.5 6.9 7.3
Amortization of deferred
investment tax credits (14.7) (5.0) (5.2)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes--net 13.3 3.1 3.2
Rate differentials applied to
reversing temporary differences (3.0) (0.9) (2.2)
Other differences--net 1.9 (1.8) (1.7)
----------------------------------------------------------------------------
Effective income tax rate 43.0% 36.3% 35.4%
----------------------------------------------------------------------------
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established
rate-making practices. Since the manner in which income taxes are treated for
rate-making has not changed, pursuant to SFAS No. 71 a corresponding
regulatory asset was also established. In addition, deferred income taxes were
adjusted and a regulatory liability established to give effect to the current
statutory Federal income tax rate and for unamortized investment tax credits.
The net unamortized regulatory asset balance at December 31, 1993 of $2.8
million and the net unamortized regulatory liability balance at
December 31, 1992 of $24.8 million are reflected as other assets and other
deferred credits, respectively, in the accompanying Consolidated Balance
Sheets. These amounts are being amortized over the lives of the related
depreciable assets concurrent with recovery in rates and in conformance with
the provisions of the Internal Revenue Code. The assets and liabilities
established in accordance with SFAS No. 71 have been increased for the tax
effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
1993 1992
--------------------------------------------------
(Thousands of Dollars)
Depreciation and
amortization $ 682,818 $671,308
Employee benefit
obligations (32,430) (24,705)
Prepaid pension cost (21,707) (31,550)
Restructuring cost (160,312) --
Other--net 44,127 25,925
--------------------------------------------------
Total $ 512,496 $640,978
-------------------------------------------------
8. Employee Benefit Plans
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings. 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 corporate detb securities.
The net pension (credit)/expense for 1993-1991 includes the following
components:
1993 1992 1991
- ----------------------------------------------------------------------
(Thousands of Dollars)
Service cost--benefits earned during
the period $ 45,466 $ 46,521 $ 50,479
Interest cost on projected benefit
obligations 105,260 106,468 100,690
Actual return on plan assets (373,149) (130,118) (419,082)
Other--net 148,222 (79,044) 237,322
Net pension (credit)/expense (74,201) (56,173) (30,591)
Adjustment to reflect differing
regulatory treatment 56,044 52,059 46,279
Net pension (credit)/expense
recognized $(18,157) $ (4,114) $ 15,688
- ------------------------------------------------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1993 and 1992
and 8.0% in 1991.
The regulatory adjustment reflects the use of the aggregate cost method as
required by the CPUC. This additional expense represents a liability to the
ratepayers of $263.7 million and $201.2 million at December 31, 1993 and 1992,
respectively, and is reflected in other deferred credits in the accompanying
Consolidated Balance Sheets.
The funded status of the plans at December 31, 1993 and 1992 was as follows:
1993 1992
- ---------------------------------------------------------------------
(Thousands of Dollars)
Plan assets at fair value $2,348,810 $2,342,552
Projected benefit obligation 1,233,202 1,366,588
- ---------------------------------------------------------------------
Excess of assets over projected obligation 1,115,608 975,964
Unrecognized net transition asset (194,456) (247,398)
Unrecognized net gain (687,512) (593,940)
Prepaid pension cost $ 233,640 $ 134,626
- ---------------------------------------------------------------------
The projected benefit obligations at December 31, 1993 and 1992 include
accumulated benefit obligations of $979.7 million and $979.2 million and vested
benefit obligations of $887.5 million and $866.3 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1993 and 1992 were as follows:
1993 1992
- ------------------------------------------------------------------
Discount rate 7.5 % 8.0%
Rate of comparison increase 5.25% 6.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
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, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds amounts
for postretirement benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1993 includes the following components (in
thousands of dollars):
1993
- ----------------------------------------------------------------
Service cost--benefits earned during the period $12,991
Interest cost on accumulated postretirement
benefit obligation 52,325
Actual return on plan assets (2,343)
Amortization of transition obligation 32,735
Postretirement benefit cost $95,708
- ----------------------------------------------------------------
During 1992 and 1991, the cost of postretirement health care and life insurance
benefits on a pay-as-you-go basis was $16.0 million and $13.1 million,
respectively.
The following table sets forth the plans' funded status and the accrued
obligation as of December 31, 1993 (in thousands of dollars):
1993
- -----------------------------------------------------------------
Accumulated postretirement benefit obligation
attributable to:
Retirees $ 514,228
Fully eligible active plan participants 4,223
Other active plan participants 159,527
Total accumulated postretirement benefit obligation 677,978
Fair value of plan assets 70,896
- -----------------------------------------------------------------
Excess of accumulated obligation over plan assets 607,082
Unrecognized transition obligation (518,976)
Unrecognized net loss (53,993)
Accrued postretirement benefit obligation $ 34,113
- -----------------------------------------------------------------
The assumed discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% at December 31, 1993. The expected long-term rate of return
on plan assets was 8.25% for 1993. The assumed health care cost trend rate in
1993 was 13% for pre-65 participants and 9.5% for post-65 retirees, each rate
declining on a graduated basis to an ultimate rate in the year 2004 of 6%. A one
percentage point increase in the assumed health care cost trend rate for each
future year would have increased 1993 costs by $10.6 million and the
accumulated postretirement benefit obligation at December 31, 1993 by $73.6
million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees that are effective January
1, 1995. These changes include, among others, newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
sharing schedule based on a retiree's years of service. The net effect of these
changes reduced the accumulated benefit obligation at December 31, 1993 by
$132.7 million.
SAVINGS PLANS
The Company sponsors 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 contributionsl Matching contributions charged to income were
$10.2 million, $11.2 million and $9.9 million in the years 1993-1991,
respectively.
9. Commitments and Contingencies
The Company's anticipated construction costs for 1994 are approximately $460
million, for which the Company had substantial purchase commitments as of
December 31, 1993.
The Company has noncancelable lease contracts covering certain buildings, office
space and equipment. The lease contracts contain varying renewal options for
terms up to 27 years.
Minimum rental commitments for noncancelable leases for periods subsequent to
December 31, 1993 are as follows (in thousands of dollars):
1994 $14,823
1995 10,440
1996 8,149
1997 3,765
1998 3,540
Thereafter 8,166
- -------------------------------
Total minimum
rental commitments $48,883
- -------------------------------
The total amount of rents charged to expense was $31.3 million, $35.5 million
and $38.9 million for the years 1993-1991, respectively.
10. Regulatory Matters
The Company is subject to regulation by the FCC for interstate business and the
CPUC for intrastate operations.
INTRASTATE SERVICES
Effective January 1, 1990, the CPUC adopted the new regulatory framework (NRF)
for the Company and Pacific Bell. The new framework replaced the traditional
"rate case" process with a framework that is centered around a Price Cap Index
(PCI) mechanism with "sharing" of earnings 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.
Under NRF, rates are adjusted annually by a Price Cap Index, 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 (i.e., directory advertising) are not subject to pricing
limits set by the CPUC.
Under NRF, the Company shares with its customers one half of all intrastate
earnings (those earnings subject to the CPUC regulation) over a 13% rate of
return benchmark level. The Company is required to refund to customers all
earnings over 16.5%. On December 27, 1990, the CPUC issued an order authorizing
the Company to increase its rates in 1991 by a total of $6.9 million based on
the change in the price cap index. The 1992 index adjustment resulted in a rate
reduction of approximately $29.7 million, which the CPUC approved in an order
issued December 18, 1991. The 1993 price cap index adjustment resulted in a rate
increase of $11.0 million, which the CPUC approved in an order issued December
16, 1992. The primary reason for the 1993 increase was due to exogenous recovery
of incremental costs associated with postretirement benefits other than
pensions. In 1991, 1992, and 1993 the Company refunded to its customers $7.6
million, $29.7 million, and $32.5 million, respectively, in accordance with the
"sharing mechanism" of the NRF. The refunds represent 50% of the Company's 1990,
1991 and 1992 intrastate earnings over the 13% rate of return benchmark.
In May 1992, the CPUC initiated a proceeding to review the NRF plan. On
September 1, 1993, the CPUC ordered that modifications be made to the Company's
NRF plan. Effective January 1, 1994, the Company is required to refund to
customers all earnings over a 15.5% rate of return. As part of the settlement
agreement approved by the CPUC, the CPUC eliminated the previous sharing
mechanism where half of any earnings over the 13% rate of return benchmark would
be refunded to ratepayer and the Company agreed to reduce its rates by $53
million. On December 17, 1993, the CPUC approved the Company's 1994 price cap
index filing which resulted in a rate reduction of approximately $100.5 million.
This reduction includes the $53.0 million rate reduction agreed to by the
Company in the NRF review.
A proceeding is currently underway to change the pricing structure of intraLATA
services to reduce cross-subsidies and to align the Company's prices closer to
their underlying costs. This proceeding, which should be concluded in the second
quarter of 1994, is expected to lower the Company's toll and access prices and
raise local rates, thereby placing the Company in a better position for future
competition in the intraLATA market.
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 local
exchange carrier (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.
As a safeguard under its new price cap regulatory plan, the FCC has also adopted
a productivity sharing feature. Because of this feature, under the minimum
productivity-gain option, the Company must share equally with its ratepayers any
realized interstate return above 12.25% up to 16.25%, and all returns higher
than 16.25%, by temporarily lowering prospective prices. During 1994, the FCC is
scheduled to review the LEC price cap plan to determine whether it should be
continued or modified.
In 1992, the Company's rates were voluntarily reduced by $11.1 million effective
July 1, 1992, $6.3 million effective July 17, 1992, $17.6 million effective
October 2, 1992 and $45.0 million effective December 15, 1992.
SIGNIFICANT CUSTOMERS
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities revenues during the years 1993-1991 under
various arrangements and amounted to $282.4 million, $349.1 million and $355.6
million, respectively.
11. Supplemental Cash Flow Disclosures
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
(Increase) decrease in current assets:
Accounts receivable--net $(51,519) $(57,319) $(207,030)
Notes receivable (28,402) 15,207 139,324
Materials and supplies 4,615 29,473 (15,449)
Other current assets (5,708) 14,124 (7,208)
Increase (decrease) in current liabilities:
Accounts payable (25,185) 25,045 (16,826)
Affiliate payables and accruals 1,481 21,884 (2,057)
Advanced billings and customer deposits 5,836 (1,959) (1,045)
Accrued liabilities 32,333 (38,407) 150
Other 2,425 4,083 35,451
- ------------------------------------------------------------------------------
Total $(64,124) $ 12,131 $ (74,690)
- ------------------------------------------------------------------------------
Cash paid during the year for:
Interest $123,560 $128,520 $ 133,784
Income taxes 237,255 280,173 300,889
12. Quarterly Financial Data (Unaudited)
Summarized 1993 and 1992 quarterly financial data is as follows:
Operating Net Operating
Revenues Income Net Income
- ------------------------------------------------------------------------
(Thousands in Dollars)
1993
First Quarter $ 708,073 $ 199,007 $ 102,789
Second Quarter 722,293 171,232 86,000
Third Quarter(a) 707,984 178,839 66,633
Fourth Quarter(b) 736,428 (265,930) (182,017)
- -----------------------------------------------------------------------
Total $2,874,778 $ 283,148 $ 73,405
- -----------------------------------------------------------------------
1992
First Quarter $ 713,565 $ 186,947 $ 95,464
Second Quarter 753,552 228,990 123,566
Third Quarter 718,454 196,864 106,737
Fourth Quarter 735,447 163,193 89,603
- -----------------------------------------------------------------------
Total $2,921,018 $ 775,994 $ 415,370
- -----------------------------------------------------------------------
(a) Net income includes a $20.2 million extraordinary charge for the early
retirement of debt. Income before extraordinary charge is $86.8 million.
(b) Net operating income includes a $445.2 million pretax charge for
restructuring costs which reduced net income by $274.2 million.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
GTE California Incorporated:
We have audited the accompanying consolidated balance sheets of GTE California
Incorporated (a California corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1993 and 1992, and the related
consolidated statements of income, reinvested earnings and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 als
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE California Incorporated and
subsidiary as of December 31, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for postretirement
benefits other than pensions. Also as discussed in Note 1, effective January 1,
1992, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
Management Report
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizatons, 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.
LARRY J. SPARROW
Area President-West
GERALD K. DINSMORE
Senior Vice President-Finance and Planning
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OPERATIONS
GTE California Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation, provides local exchange, network access and long distance
telecommunications services throughout Southern and Central California. The
Company serves over 3.7 million access lines in its operating territories with a
substantial number of these lines in Southern California. The Company also
markets telecommunications equipment and other deregulated products and services
through GTEL, a wholly-pwned subsidiary.
RESULTS OF OPERATIONS
Net income decreased $342 million for the year ended December 31, 1993 compared
to the same peiod in 1992. The 1993 results include a one-time restructuring
charge of $274 million, net of tax, related primarily to a re-engineeering plan.
The re-engineering plan will redesign and streamline processes in order to
improve customer-responsiveness and product quality, reduce the time necessary
to introduce new products and services and further reduce costs. The results
also reflect an extraordinary charge of $20 million, net of tax, related to the
early extinguishment of debt. In November 1993, the Company called several
issues of high-coupon first mortgage bonds. The Company plans to refinance these
bonds during 1994 on a long-term basis at lower current interest rates. Also
included in the 1993 results is a one-time charge of $21 million, net of tax,
associated with the enhanced early retirement and voluntary separation programs
completed during the second quarter.
Excluding the above charges, net income decreased 7% or $27 million in 1993. Net
income in 1992 decreased 6% or $27 million. The 1993 decrease reflects lower
operating revenues due to voluntary rate reductions in an ongoing effort to
price services more competitively and the impact of the adoption of SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
effective January 1, 1993. The 1992 decrease was primarily due to lower
operating revenues refleting 1992 rate reductions, lower directory advertising
revenues and increased income tax expense, partially offset by lower operating
expenses.
Local network service revenues, which are comprised mainly of fees charged to
customers for providing local exchange service, increased 4% or $38 millon for
the year ended December 31, 1993 and decreased 2% or $22 million for the year
ended December 31, 1992. The 1993 increase is primarily due to a rate increase
related to the Company's 1993 price cap index under the new regulatory
framework, continued customer growth, as experienced through an increase in
access lines, and increased revenue from CentraNet R and other enhanced
features. The 1992 decrease was primarily the result of an annual rate reduction
related to the Company's 1992 price cap index under the new regulatory
framework, partially offset by continued customer growth, as experienced through
an increase in access lines.
Network access service revenues represent the local telephone companies' charge
to end users for access to the facilities of long distance carriers and the
charge to long distance carriers for interconnection to local facilities.
Network access service revenues decreased 7% or $47 million for 1993 and less
than 1% or $4 million in 1992, The 1993 decrease is primarily the result of
lower interstate rates partially offset by increased revenue from intralata
cellular services. During 1992, the Company's interstate rates were voluntarily
reduced by $11 million effective July 1, 1992, $6 million effective July 17,
1992, $18 million effective October 2, 1992 and $45 million effective December
15, 1992. The 1992 decrease was primarily due to the reduction of interstate
switched access and common line rates and lower revenues from pooling
arrangements, partially offset by increases in customer and long distance
carrier usage and favorable settlements with a carrier.
The Company's revenues for long distance services from designated geographical
areas are provided under a bill and keep arrangement. Long distance service
revenues decreased 2% or $19 million in 1993 and increased 1% or $12 million in
1992. The 1993 decrease is primarily due to a change in calling patterns. The
1992 increase was primarily due to increased toll usage partially offset by
favorable settlements with another carrier recorded in 1991.
Equipment sales and services revenues decreased 9% or $17 million in 1993 and
increased 1% or $2 million in 1992. The 1993 decrease is primarily due to lower
revenue from sales and rental of single line and key telephone systems and the
CALNET project, a large government contract for the installation of a private
network between state office buildings. Partially offsetting the decrease is
higher revenue from voice message services. The 1992 increase was primarily the
result of higher revenue from the sale of key telephone systems partially offset
by a reduction in billing and collection revenues due to lower contract rates
with AT&T in 1992.
Other revenues decreased 1% or $1 million in 1993 and 21% or $31 million in
1992. These changes are primarily the result of variances in directory
advertising revenue and higher provisioning for uncollectible accounts.
Cost of sales and services decreased 2% or $12 million in 1993 and 3% or $23
million in 1992. The 1993 and 1992 decreases are primarily the result of ongoing
quality and cost control programs, modernization of facilities, and a reduction
in workforce. The 1993 decrease is partially offset by costs associated with the
adoption of SFAS NO. 106 effective January 1, 1993. As a result of the adoption
of the new standard, expenses increased $51 million. The 1992 decrease was
partially offset by higher costs associated with increased product sales.
Depreciation expense increased 3% or $20 million in 1993 and decreased 5% or $28
million in 1992. The 1993 increase is primarily due to an increase in plant
balances and increased rates. The 1992 decrease was the result of completion of
amortization on inside wire in late 1991.
Marketing, selling, general and administrative expenses decreased less than 1%
or $6 million in 1993 and increased 5% or $46 million in 1992. The 1993 decrease
is primarily due to lower advertising costs, ongoing cost control programs, and
a reduction in workforce. The decrease is partially offset by costs of $27
million associated with the adoption of SFAS No. 106. Also partially offsetting
the decrease is a one-time charge of $35 million associated with the enhanced
early retirement and voluntary separation programs offered to eligible employees
during the second quarter of 1993. The 1992 increase was primarily the result of
increased data processing costs and lower billing and collection costs in 1991
due to a favorable settlement with AT&T. This increase was partially offset by a
reserve for restructuring costs associated with the merger of GTE Corporation
and Contel Corporation which was reflected in 1991.
Restructuring costs reflect a one-time charge related to the Company's
re-engineering plan over the next three years. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services, resulting in cumulative savings in excess of the one-time charge. The
re-engineering plan includes $172 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $193
million for employee separation benefits associated with workforce reductions
and $52 million primarily for the consolidation of facilities and operations and
other related costs. The charge for employee separation benefits includes $98
million related to the recognition of previously deferred postretirement health
and life insurance costs for separating employees.
Interest expense decreased 8% or $10 million in 1993 and 7% or $9 million in
1992. The 1993 decrease is due to lower average long-term debt levels and lower
average interest rates. The 1992 decrease was primarily the result of lower
average interest rates on short-term debt, partially offset by an increase in
average short-term debt levels.
Other-net income decreased $6 million in 1993 and $4 million in 1992. The 1993
decrease is primarily due to the gain on disposition of property in 1992. The
1992 decrease reflected lower interest from affiliates due to a decrease in the
note receivable from the parent company.
Income taxes decreased $167 million in 1993 and $6 million in 1992. The
decreases are primarily due to decreases in pretax income and adjustments to
prior years' tax provisions, partially offset by the declining effects of
amortization of deferred investment tax credits and lower reversal of tax rate
differentials on deferred tax balances.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations although external
financing is available. Short-term borrowings can be obtained through commercial
paper borrowings or borrowings from GTE. In addition, a $2.3 billion line of
credit is available to the Company through shared lines of credit with GTE and
other affiliates to support short-term financing needs.
The Company's primary source of funds during 1993 was cash flow from operations
of $992 million compared to $1 billion in 1992.
Capital expenditures represent a significant use of funds during 1993 and 1992
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. Cash
requirements to implement the re-engineering plan are expected to be largely
offset by cost savings. The Company's capital expenditures during 1993 were $504
million compared to $536 million during 1992. The Cmpany's anticipated
construction costs for 1994 are approximately $460 million.
Cash used for financing activities was $506 million in 1993 compared to $498
million in 1992. This included dividend payments of $297 million in 1993
compared to $453 million in 1992. External financing included long-term
borrowings of $150 mililon in 1993 compared to $50 million in 1992. The Company
retired $176 million of long-term debt in 1993 compared to $22 million in 1992,
due to higher scheduled debt maturities. In addition, in November 1993, the
Company called $785 million of high-coupon first mortgage bonds with proceeds
from commercial paper borrowings. These bonds had coupons ranging from 8.5% to
11%. In February 1994, the Company issued $300 million of 5-3/8% Debentures, due
2001 to refinance a portion of the bonds called. The Company plans to refinance
the remaining called bonds in early 1994 at lower current interest rates. The
cost of calling these bonds is reflected as an extraordinary after-tax charge of
$20 million in the Consolidated Statements of Income.
COMPETITION AND REGULATORY TRENDS
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually all
espects of its business. Specialized communications companies have constructed
new systems in certain markets to bypass the local-exchange network. Additional
competition from interexchange carriers as well as wireless companies continues
to evolve for both intrastate and interstate communications.
Implementation of its re-engineering plan will allow the Company to continue to
respond aggressively to these competitive and regulatory developments through
reduced costs, improved service quality, competitive prices and new product
offerings. Moreover, implementation of this program will position the Company to
accelerate delivery of a full array of voice, video and data services. During
the year, the Company continued to introduce new business and consumer services
utilizing advanced technology, offering new features and pricing options while
at the same time reducing costs and prices.
During 1993, the Federal Communications Commission (FCC) announced its decision
to auction licenses during 1994 in 51 major markets and 492 basic trading areas
across the United States to encourage the development of a new generation of
wireless personal communications services (PCS). These services will both
complement and compete with the Company's traditional wireline services. The
Company will be permitted to fully participate in the license auctions in areas
outside of GTE's existing cellular service areas. Limited participation will be
permitted in areas in which GTE has an existing cellular presence.
In Cerritos, California, GTE is testing and comparing the capabilities of copper
wire, coaxial cable, and fiber optics. The Cerritos test has enhanced GTE's
expertise in the areas of pay-per-view video service, video-on-demand and local
video conferencing, and led to a new interactive video service, GTE Main
Street,* which allows customers to shop, bank and access various other
information services from their homes. In 1992, the FCC issued a "video
dialtone" ruling that allows telephone companies to transmit video signals over
their networks. The FCC also recommended that Congress amend the Cable Act of
1984 to permit telephone companies to supply video programming in their service
areas.
During 1993, the California Public Utilities Commission (CPUC) approved a
settlement agreement allowing the Company, beginning in 1994, to retain 100% of
any earnings up to a 15.5% rate of return on investment while refunding 100% of
any earnings above 15.5%. Under its prior plan, the Company was required to
share 50% of any earnings over a 13% rate of return and refund 100% of any
earnings over 16.5%. As part of this agreement and its normal annual price cap
filing, the Company will reduce its rates by about $100 million in 1994.
Additionally, the CPUC is expected to issue a final decision in early 1994
generally authorizing intralata toll competition and ordering significant rate
restructuring in California. Although intended to be revenue neutral, the
ultimate effect on revenue will depend, in part, on the extent to which toll and
access rate reductions result in increased calling volumes.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing switched
access transport services. This ruling complements similar interconnect
arrangements for private line services ordered during 1992. The order encourages
competition for the transport of telecommunications traffic between local
exchange carriers' (LECs) switching offices and interexchange carrier locations.
In addition, the order allows LECs flexibility in pricing competitive services.
These and other actions to eliminate existing legal and regulatory barriers,
together with rapid advances in technology, are facilitating a convergence of
the computer, media and telecommunications industries. In addition to allowing
new forms of competition, these developments are also creating new opportunities
to develop interactive communications networks. The Company supports these
initiatives to assure greater competition in telecommunications, provided that
overall the changes allow an opportunity for all service providers to
participate equally in a competitive marketplace under comparable conditions.
The Company follows the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators. In the event that recoverability of these costs
becomes unlikely or uncertain, whether resulting from actual or anticipated
competition or specific regulatory, legislative or judicial actions, continued
application of SFAS No. 71 would no longer be appropriate. If the Company no
longer qualifies for the provisions of SFAS No. 71, the financial effects of the
required accounting change (which would be non-cash) could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. Substantially alll of the interstate and
intrastate earnings of the Company are regulated under frameworks that provide
for price changes which reflect inflation as well as other factors.
Selected Financial Data
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
(Thousands of Dollars)
Selected Income
Statement Items(a)
Total operating
revenues $2,874,778 $2,921,018 $2,964,043 $2,972,346 $2,857,847
Total operating
expenses 2,591,630 2,145,024 2,150,188 2,163,756 2,115,450
- --------------------------------------------------------------------------------
Net operating income 283,148 775,994 813,855 808,590 742,397
Interest expense 121,117 131,527 140,977 139,674 144,229
Other--net (2,123) (7,992) (12,304) (23,027) (22,146)
Income taxes 70,535 237,089 242,724 248,078 219,881
- --------------------------------------------------------------------------------
Income before
extraordinary charge 93,619 415,370 442,458 443,865 400,433
Extraordinary charge 20,214 -- -- -- --
- --------------------------------------------------------------------------------
Net income $ 73,405 $ 415,370 $ 442,458 $ 443,865 $ 400,433
- --------------------------------------------------------------------------------
Dividends declared
on common stock $ 355,000 $ 372,267 $ 516,620 $ 324,276 $ 267,337
Dividends declared
on preferred stock 4,790 4,755 5,210 5,760 6,921
- --------------------------------------------------------------------------------
(Thousands of Dollars)
Selected Balance
Sheet Items
Investment in
property, plant
and equipment--net $4,962,379 $5,039,231 $5,031,712 $5,024,244 $5,096,362
Total assets 5,994,771 5,928,115 5,916,179 5,839,605 5,831,164
Long-term debt and
preferred stock,
subject to mandatory
redemption 860,398 1,567,017 1,389,404 1,484,825 1,573,117
Common stock,
reinvested earnings
and other capital 2,200,044 2,486,429 2,448,081 2,527,466 2,410,649
- --------------------------------------------------------------------------------
Selected Statistics
Access lines 3,714,570 3,664,645 3,586,785 3,522,795 3,339,531
Access line gain 49,925 77,860 63,990 183,264 125,886
Net investment in
property, plant
and equipment per
access line $ 1,336 $ 1,375 $ 1,403 $ 1,426 $ 1,526
Number of employees 14,379 16,255 17,110 18,717 20,192
Access lines per
employee 258 225 210 188 165
Gross plant
additions
(thousands) $ 503,950 $ 536,035 $ 601,236 $ 542,481 $ 569,234
- --------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
GTE CALIFORNIA INCORPORATED
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration number, or
the Form or Schedule and the date of its filing.
<PAGE>
GTE CALIFORNIA INCORPORATED
ONE GTE PLACE
THOUSAND OAKS, CALIFORNIA 91362-3811
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
TO BE HELD APRIL 13, 1994
Thousand Oaks, California
March 22, 1994
To the Holders of the Cumulative Preferred Stock, $20 Par Value, 4-1/2%
Series, and the Common Stock:
Notice is hereby given that, in accordance with the Bylaws of the Company,
the Annual Meeting of Shareowners of GTE California Incorporated will be
held at the office of the Company, One GTE Place, Thousand Oaks,
California 91362-3811, at 10:00 a.m., on Wednesday, the 13th day of April,
1994, for the purpose of (1) electing a Board of Directors to serve for the
ensuing year and until their successors have been elected and qualified,
(2) voting upon the appointment of Arthur Andersen & Co. as the
independent public accountant for the Company, and (3) transacting such
other business as may properly come before the meeting and any
adjournment thereof. The nominees for election as directors are named in
the attached Proxy Statement, which is a part of this notice. The Board does
not presently know of any other business to be considered.
Only shareowners of record at the close of business on Wednesday, March 9,
1994, will be entitled to vote at the meeting.
Please mark, sign and return the enclosed proxy as promptly as possible. If
you are present at the meeting, you may withdraw your proxy and vote
your shares personally.
KENNETH K. OKEL
Secretary
<PAGE>
GTE CALIFORNIA INCORPORATED
ONE GTE PLACE
THOUSAND OAKS, CALIFORNIA 91362-3811
----------
PROXY STATEMENT
----------
SOLICITATION OF PROXY AND REVOCABILITY
This Proxy Statement is being mailed on approximately March 22, 1994
to shareowners of GTE California Incorporated as of March 9, 1994, in
connection with a solicitation by the Board of Directors of the Company of
proxies in the form enclosed for use at the Annual Meeting of Shareowners
to be held on April 13, 1994, and at any and all adjournments thereof.
If the enclosed form of proxy is marked, signed and returned, it will be
voted as marked. If the enclosed form of proxy is signed and returned, but
is not marked, it will be voted for all nominees listed on the form of proxy
and for approval of the independent public accountant selected by the Board
of Directors. If a shareholder does not return a signed proxy card or does
not attend the Annual Meeting and vote in person, his or her shares will not
be voted. Abstentions are counted towards determining whether a quorum is
present. Shares represented by broker non-votes are not considered present
at the meeting and are not counted towards quorum. In addition,
abstentions and broker non-votes are not counted in determining the number
of shares voted for or against any nominee for director or any proposal. You
are encouraged to mark your form of proxy carefully, in accordance with the
instructions appearing thereon. Any shareowner may revoke such
shareowner's proxy at any time before it is voted. A proxy may be revoked
by a writing delivered to the Secretary of the Company stating that the
proxy is revoked, by a subsequent proxy executed by the person executing
the prior proxy and presented to the meeting, or by voting in person by the
person executing the proxy.
The Company will bear the cost of this solicitation. In addition to
solicitation by mail, directors, officers, and regular employees of the
Company may solicit proxies by telephone, telegram or in person. The
Company will also request brokers or nominees who hold shares of
Cumulative Preferred Stock, $20 Par Value, 4-1/2% Series, in their names to
forward proxy material at the Company's expense to the beneficial owners of
such stock.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Shareowners of record at the close of business on March 9, 1994, of the
280,312 outstanding shares of Cumulative Preferred Stock, $20 Par Value,
4-1/2% Series, and the 69,438,190 outstanding shares of Common Stock are
entitled to notice of and to vote at the meeting. Shareowners have
cumulative voting rights, as described below, in electing directors. No
shareowners shall be entitled to cumulative votes (i.e., cast for any one or
more candidates a number of votes greater than the number of the
shareowner's shares) unless such candidate or candidates' names have been
placed in nomination prior to the voting and the shareowner has given notice
at the meeting, prior to the voting, of the shareowner's intention to
cumulate the shareowner's votes. If any one shareowner has given such
notice, all shareowners may cumulate their votes for candidates who have
been nominated. If voting for directors is conducted by cumulative voting,
each share will be entitled to a number of votes equal to the number of
directors to be elected, which votes may be cast for a single candidate or
may be distributed among two or more candidates in such proportions as the
shareowner may determine. If voting is not conducted by cumulative voting,
each share will be entitled to one vote, and the holders of a majority of the
shares voting at the meeting will be able to elect all of the directors if they
choose to do so. In such event, the other shareowners will be unable to elect
any director or directors. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected. On all
other matters, each share is entitled to one vote.
All of the 69,438,190 outstanding shares of Common Stock are owned of
record and beneficially by GTE Corporation ("GTE"), representing 99.6
percent of the outstanding voting securities of the Company.
VOTING OF PROXIES
The persons named in the enclosed proxy have advised they intend to
vote for the election of the nominees listed below as directors of the
Company. If, in the event of an unexpected occurrence, any nominee should
not be available for election, the proxies will be voted for the election of
such substitute nominee, if any, as the Board of Directors may propose.
Each nominee is at present available for election. The individuals listed
below currently serve as directors of the Company.
If voting for directors is conducted by cumulative voting, the persons
named on the enclosed form of proxy will have discretionary authority to
cumulate votes among the nominees with respect to which authority was not
withheld or, if the form of proxy either was not marked or was marked for
all nominees, among all nominees. In any case, the proxies may be voted for
less than the entire number of nominees if any situation arises which, in the
opinion of the proxy holders, makes such an action necessary or desirable.
BOARD OF DIRECTORS
The directors of the Company are elected annually, and and have five
regularly scheduled meetings each year. The Board also from time to time
holds special meetings. During 1993 there were two special Board meetings
in addition to the five regular meetings. All directors attended at least 75%
of the scheduled Board meetings.
The Board of Directors currently consists of seven directors. However,
the Company only proposes to elect six members at the annual meeting,
thereby leaving one seat on the board vacant. The Company has concluded
that it can operate efficiently with only six directors on the Board in light of
the decision to have only GTE employees serve as directors of the Company.
The six nominees for election to hold office until the next annual election of
directors and until their successors shall be elected and qualified are listed
in the following table. The proxies submitted in response to this Proxy
Statement cannot be voted for a greater number of persons than the number
of nominees named. All of the nominees, with the exception of Mr. Sparrow,
were elected as directors of the Company, effective December 11, 1993,
following the resignations from the Board of Messrs. Donald M. Anderson,
Walter A. Dods, Jr., Ronald J. Hays, William N. Lampson, John N. Lein,
Charles T. Manatt, Archie C. Purvis, Jr. and Gilbert R. Vasquez on
December 10, 1993. Mr. Clark Michael Crawford, an officer of the Company,
who was elected to the Board, effective December 11, 1993, is not standing
for reelection. Also shown on the table are the nominees' ages and principal
occupations or employment during the last five years. Five of the six
nominees are executives of GTE Telephone Operations. The sixth nominee,
Mr. Larry Sparrow, is currently an officer of the Company.
Prior to December 11, 1993, the Board of Directors assigned certain
responsibilities to an Audit Committee, that was established in 1974, and
which met four times in 1993. Its membership was comprised of Donald M.
Anderson, Ronald J. Hays and Gilbert R. Vasquez, outside directors, whose
primary affiliations are with corporations or partnerships. The functions of
the Audit Committee were to review and discuss with the Company's
independent public accountant, Company officers, and internal financial
accounting or auditing personnel the scope and results of independent audits,
the Company's financial and accounting policies, and procedures and
controls, to reasonably assure the validity of the Company's financial
reporting. On December 11, 1993, the Board of Directors voted to eliminate
the Audit Committee concluding that such a committee is no longer
necessary in light of the decision to have only GTE employees serve on the
Board.
<PAGE>
PRINCIPAL OCCUPATIONS; FIRST
POSITIONS WITH THE COMPANY; BECAME
NAME OTHER DIRECTORSHIPS A DIRECTOR
----- --------------------------- ----------
Kent B. Foster Vice Chairman of the Board of 1993
50 Directors of GTE Corporation,
October 1993. President, GTE
Telephone Operations, 1989;
Director, GTE Corporation, 1992;
Director, all GTE domestic
telephone subsidiaries, 1993;
Director, BC Telecom, Inc.;
Director, Compania Anonima
Nacional Telefonos de Venezuela;
Director, National Bank of Texas.
Thomas W. White Executive Vice President, GTE 1993
47 Telephone Operations, 1993; Senior
Vice President-General Office
Staff, GTE Telephone
Operations, 1989; Director, all GTE
domestic telephone
subsidiaries, 1993; Director,
Quebec-Telephone.
Michael B. Esstman Executive Vice President- 1993
47 Operations, GTE Telephone
Operations, 1993; President, Central
Area, GTE Telephone Operations,
1991. President, Contel Eastern
Region, Telephone Operations
Sector, 1983; Director, AG
Communications Systems
Corporation; Director, all GTE
domestic telephone subsidiaries,
1993.
Gerald K. Dinsmore Senior Vice President-Finance and 1993
44 Planning, GTE Telephone
Operations, 1994; Vice President-
Finance, GTE Telephone
Operations, 1993; Vice President-
Intermediary Customer Markets,
GTE Telephone Operations, 1991;
President, South Area, GTE
Telephone Operations, 1992;
Director, all GTE domestic
telephone subsidiaries, 1993.
Richard M. Cahill Vice President-General Counsel, 1993
55 GTE Telephone Operations, 1988;
Director, all GTE domestic
telephone subsidiaries, 1993;
Director, GTE Vantage
Incorporated, 1991; Director, GTE
Intelligent Network Services
Incorporated, 1993.
Larry J. Sparrow Director and President, GTE 1992
50 California Incorporated and GTE
Northwest Incorporated; Director
and Chairman of the Board and
Chief Executive Officer of GTE
Hawaiian Telephone Company
Incorporated, 1992; President, West
Area, GTE Telephone Operations,
1992; Vice President-Regulatory
and Governmental
Affairs, GTE Telephone Operations,
1989; Director, California Chamber
of Commerce; Director, The Los
Angeles Area Chamber of
Commerce; Director, California
Economic Development
Corporation.
DIRECTORS' COMPENSATION
The current directors, all of whom are employees of GTE, are not paid
any fees or remuneration, as such, for service on the Board.
<PAGE>
EXECUTIVE COMPENSATION
REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of GTE California ("GTE California" or the
"Company") has reviewed and approved the annual compensation paid to the
Company's President and Chief Executive Officer, Larry J. Sparrow, and
the other named executive officers of the Company. Mr. Sprarrow and
several of the other executive officers are also executive officers of
affiliates of the Company. The compensation shown, unless otherwise
indicated on the accompanying table, is the Company's pro rata share of
salaries, bonuses and other cash compensation for such executive officers.
The compensation of Mr. Sparrow and the other named executive
officers are recommended to and approved by the Executive Compensation
and Organizational Structure Committee of the Board of Directors of GTE
Corporation (the "Committee"). In the opinion of the Board of GTE
California, the compensation paid to Mr. Sparrow and the other named
executive officers of the Company is reasonable.
Compensation Philosophy
The compensation philosophy of GTE Corporation ("GTE"), in which the
GTE California Board of Directors concurs, is that the compensation for the
executive officers of the Company as a group should be set at a level so that
it attracts superior individuals, rewards sustained performance and
maximizes shareholder value. The Board also believes that because the
Company is a majority-owned subsidiary of GTE, and because most of the
named executive officers are also executive officers of other GTE affiliates,
their compensation should closely resemble the compensation paid to other
similarly situated employees of other GTE subsidiaries. The Board further
believes that the Company benefits from the policy of compensating its
employees on a similar basis to other employees with similar responsibilities
within GTE because it facilitates the ability of GTE to transfer employees
between companies, thereby providing the Company with a large group of
skilled and knowledgeable individuals from which to draw to fill key
vacancies. This policy also serves to attract talented people to GTE
California because they will have an opportunity for additional experience
and promotion throughout all of GTE.
In keeping with this compensation philosophy, the compensation granted
to the Company's executive officers is comprised of three components; base
salary, incentive pay and stock awards.
The first component of executive pay is base salary. The base salary of
the named executive officers is determined by reviewing the individual's
performance as well as the duties and responsibilities of the respective
executive management position. Each management position is given a grade
level with an attendant salary range. The grade levels are determined using
the Hay Job Evaluation System, an orderly and widely recognized system to
establish job levels. The Hay system emphasizes employee relations,
staffing/retention and equal opportunity considerations. The individual's
performance, years of experience and prior salary increase history,
determine where within the salary range the individual's base salary falls.
The grade levels of the executive officers are generally comparable to other
similar management positions within GTE.
The base compensation of Mr. Sparrow and the other named executive
officers increased during 1993, based on their performance and the date of
their last increase. The percentage increases ranged from 4% to 9-1/2% and
were based, in the case of Messrs. Sparrow, Norman, Appel, Crawford and
McCoy, upon the performance of GTE Telephone Operations and GTE
Telephone Operations West Area, consisting of GTE California
Incorporated, GTE Northwest Incorporated, GTE Hawaiian Telephone
Company Incorporated and GTE Alaska (the "GTE West Area") and each
individual's performance. The percentage increases for Messrs. Foster and
White were based on the total performance of GTE Telephone Operations.
The base salaries paid by the Company of the Chief Executive Officer and
the other four highest paid executive officers of GTE California Incorporated
as of December 31, 1993, of one officer who retired November 1993, and of
one officer who resigned October 1993, are included under the "salary"
column of the Summary Compensation table on page 8.
Incentive Compensation
In addition to their base salaries, Mr. Sparrow and the other named
executive officers are eligible to receive payments under two incentive plans,
the Executive Incentive Plan (the "EIP"), and the GTE 1991 Long-Term
Incentive Plan (the "LTIP"). Under the EIP, awards are made, in the case
of Messrs. Sparrow, Norman, Appel, Crawford and McCoy, based upon the
performance of GTE, GTE Telephone Operations and GTE West Area
during the last fiscal year and upon the individual participants achievement
of certain goals for his or her business unit and other individual objectives.
In the case of Messrs. Foster and White, awards are made based on the
total performance of GTE Telephone Operations. No awards are made for
any year in which GTE's return on equity ("ROE") does not exceed 8%.
Awards under the plan would not have been made if the minimum
performance thresholds were not met. However, under the terms of the
EIP, the Committee may also take into consideration extraordinary
circumstances affecting GTE's financial performance and/or ROE. The
Committee may take into account items that were extraordinary,
non-recurring and unrelated to the normal operations of the business. These
items may include the impact of mandated accounting changes, unusual
charges related to acquisitions or divestitures or other unusual events.
The award to Mr. Sparrow under the GTE EIP for 1993 allocated to the
Company was $107,528. This award represents approximately 40% of Mr.
Sparrow's total cash compensation for the year allocated to GTE California.
The award was based on the performance of GTE as a whole as well as Mr.
Sparrow's performance with respect to critical pre-established qualitative
and quantitative objectives related to the GTE West Area established and
approved by the Chief Executive Officer of GTE Telephone Operations and
the Committee. The quantitative objectives included targets for net income
and return on equity, net cash flow and value of service, affirmative action
and employee safety. The qualitative objectives included new product
revenues, product price and positioning, employee satisfaction, process
re-engineering, and the successful completion of the merger between Contel
of the Northwest and GTE Northwest Incorporated. The specific weighting
factors used with respect to the performance measures were 70% based on
the performance of the GTE West Area and 30% based on the performance
of GTE Telephone Operations as a whole. However, in determining Mr.
Sparrow's award for 1993, the Committee gave particular emphasis to the
financial performance of the GTE West Area including GTE California, and
the quality of service provided to customers in the GTE West Area.
EIP awards for the seven most highly compensated executive officers of
GTE California paid by the Company are included in the "Bonus" column of
the Summary Compensation Table on page 8.
The named executive officers also have an opportunity to earn incentive
payment under GTE's 1991 Long-Term Incentive Plan ("LTIP"). The
primary purpose of the LTIP is to offer participants an incentive to achieve
superior returns on equity, thereby helping to assure superior long-term
total return to shareholders. Two types of awards are currently used in the
provision of the LTIP-performance bonuses and stock options which may
include tandem stock appreciation rights ("SARS").
Messrs. Sparrow, Foster and White, who are named in the Summary
Compensation Table, are eligible to receive annual grants of performance
bonuses which are earned during a 36-month performance cycle under the
provision of the LTIP. The performance bonuses are based on GTE's
financial performance during the relevant cycle as measured by GTE's
average return on equity against pre-established target levels. Payouts to
Messrs. Sparrow, Foster and White for the 1991-1993 award cycle are shown
in the Summary Compensation Table on page 8. The Committee has the
discretion to adjust target or performance results to reflect unusual items
that the Committee determines are extraordinary, non-recurring and
unrelated to the normal operations of the business and unanticipated or not
contemplated at the time the targets were originally established. Awards
under the plan would not have been made if the minimum performance
thresholds were not met. The actual dollar value of each award also reflected
stock price changes during the period and included the equivalent of
dividends paid as if they had been reinvested in additional shares of GTE
Common Stock. Awards for the 1993-1995 award cycle are shown in the
Long-Term Incentive Plan Awards Table on page 10.
A larger group of executives, including the seven executive officers
named in the Summary Compensation Table, also normally receive grants of
stock options under the provisions of the LTIP, which may include tandem
SARs as determined by the Committee. In determining the level of stock
option grants, the Committee compared GTE grant levels to competitive
practices with respect to such grants over a period of time, targeting at or
near a median grant posture. As a result grants may vary from year to
year. In determining the number of stock options awarded, the Committee
does not consider the number of options currently held by any individual
participant in the LTIP. Options granted during 1993 to Messrs. Sparrow,
Foster, Norman, Appel, White, Crawford, and McCoy are shown on the
Options/SAR Grants In Last Fiscal Year Table on page 9.
Other Compensation Plans
GTE California also participates in various broad-based GTE employee
benefit plans. Executives participate in these plans on the same terms as
eligible, non-executive employees, subject to any legal limits on the amounts
that may be contributed or paid to executives under the plans. GTE offers
an Employees' Stock Plan pursuant to the provision of Section 423 of the
Internal Revenue Code of 1988, as amended (the "Code"), under which
employees may purchase GTE Common Stock at a discount. The GTE
Savings Plan (the "Savings Plan"), pursuant to the provisions of Section
401(k) of the Code, permits employees to invest in a variety of funds on a
pre- or after-tax basis. Matching contributions under the Savings Plan are
made in GTE Common Stock.
GTE California also maintains pension, insurance and other benefit plans
for its employees.
Larry J. Sparrow, Chairman Michael B. Esstman
Clark Michael Crawford Gerald K. Dinsmore
Kent B. Foster Richard M. Cahill
Thomas W. White
March 17, 1994
<PAGE>
<TABLE>
EXECUTIVE COMPENSATION TABLES
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the
Chief Executive Officer and each of the other seven most highly
compensated executive officers of the Company for services in all capacities
to the Company and its subsidiary.
<CAPTIONS>
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYMENTS
----------------------------------------- ---------------------- --------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER RESERVED ALL OTHER
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS LTIP COMPEN-
POSITION IN GROUP YEAR SALARY($)(1) BONUS($) COMPENSATION($) AWARDS($) SARS(#) PAYMENTS($) SATION($)(7)
------------------ ----- ------------ --------- --------------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow........... 1993 152,277 107,528 11,688 - 14,500 23,723 4,563
Area President-West(2) 1992 141,038 148,586 40,139 - 9,000 32,653 4,186
Kent B. Foster............. 1993 137,534 126,332 4,469 - 58,800 27,823 1,545
President- 1992 124,808 145,822 2,443 - - 45,395 1,589
GTE Telephone Operations 1991 105,154 142,141 8,142 - 133,300 59,315 1,536
James G. Norman ........... 1993 145,039 25,300 66,574 - 2,100 - 3,598
Regional Vice President- 1992 136,246 42,900 5,285 - - - 4,108
Centralized Support 1991 117,652 37,600 6,190 - 2,300 - 3,771
Services(3)
John C. Appel ............. 1993 112,793 42,282 27,801 - 7,300 - 3,392
Regional Vice President- 1992 55,000 68,000 51,512 - - - 3,753
Manager/California(4)
Thomas W. White............ 1993 78,098 67,146 1,730 - 22,600 12,521 1,679
Executive Vice President- 1992 73,908 73,143 991 - - 20,341 1,589
GTE Telephone Operations 1991 65,317 71,302 895 - 57,600 31,484 1,536
Clark Michael Crawford..... 1993 96,317 38,341 2,264 - 4,900 - 2,890
Area Vice President- 1992 114,502 69,228 1,956 - 4,400 - 3,454
General Manager(5) 1991 117,241 75,100 2,237 - 4,300 - 3,789
Robert G. McCoy............ 1993 88,449 33,881 50,973 - 4,000 - 2,653
Area Vice President- 1992 15,612 54,960 195 - 4,400 - 2,480
Sales(6)
<FN>
- ----------
(1) Annual Compensation represents the Company's pro rata share of
salaries, bonuses and other annual compensation. Total annual cash
compensation for Messrs. Sparrow, Foster, Appel, White, Crawford and
McCoy, for whom allocated amounts are shown, is $432,159, $1,129,356,
$225,772, $618,575, $221,055 and $279,792, respectively, for 1993.
(2) Mr. Sparrow became Area President-West in March 1992.
(3) Mr. Norman retired in November 1993. Other annual compensation in
1993 includes $61,260 of banked vacation pay.
(4) Mr. Appel became Regional Vice President-Manager/California in April
1992. Mr. Appel resigned in October 1993 to become the President of
GTE Southwest Incorporated.
(5) In March 1992, Mr. Crawford was appointed Area Vice President-
General Manager performing duties in all GTE and Contel West Area
companies (except Contel of California, Inc.). Previously, he performed
duties for GTE California Incorporated only.
(6) Mr. McCoy became Area Vice President-Sales in October 1992.
(7) All other compensation includes company contributions to defined
contribution plans.
</TABLE>
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to purchase GTE
Common Stock to the named executive officers of the Company in 1993.
Pursuant to Securities and Exchange Commission (the "SEC") rules, the
table also shows the value of the options granted at the end of the option
terms (ten years) if the stock price were to appreciate annually by 5% and
10% respectively. There is no assurance that the stock price will appreciate
at the rates shown in the table. The table also indicates that if the stock
price does not appreciate, there will be no increase in the potential realizable
value of the options granted.
<CAPTIONS>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATE OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS(1) OPTION TERM
------------------------------------------------------------- -----------------------------------
(A) (B) (C) (D) (E) (F) (G) (H)
PERCENT OF
TOTAL OPTIONS/
SARS GRANTED EXERCISE
TO ALL GTE OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 0% 5% 10%
---- ------------ -------------- --------- ----------- --- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow........ 14,500 0.72% $35.0625 02/15/03 $0 $ 319,734 $ 810,269
Kent B. Foster.......... 48,400 2.42 35.0625 02/15/03 0 1,067,249 2,704,621
10,400 0.52 37.6250 10/12/03 0 246,087 623,632
James G. Norman ........ 2,100 0.11 35.0625 02/15/03 0 46,306 117,349
John C. Appel .......... 4,000 0.20 35.0625 02/15/03 0 88,202 223,522
3,300 0.17 38.1250 10/10/03 0 79,123 200,513
Thomas W. White......... 17,600 0.88 35.0625 02/15/03 0 388,091 983,499
5,000 0.25 35.5000 06/02/03 0 111,629 282,890
Clark Michael Crawford.. 4,900 0.20 35.0625 02/15/03 0 108,048 273,815
Robert G. McCoy......... 4,000 0.20 35.0625 02/15/03 0 88,202 223,522
<FN>
- ----------
(1) Under the Long-Term Incentive Plan, options are presently granted with
tandem stock appreciation rights ("SARs"). One-third of these grants
vest annually commencing one year after the date of grant.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table provides information as to options and stock
appreciation rights exercised by each of the named executive officers of the
Company during 1993 and the value of options and stock appreciation rights
held by such officers at year end measured in terms of the closing price of
GTE Common Stock on December 31, 1993.
<CAPTION>
(A) (B) (C) (D) (E)
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
SHARES OPTIONS/SARS AT FY-END AT FY-END ($)
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow........ 0 $ 0 22,700 30,600 $ 66,130 $ 55,068
Kent B. Foster.......... 70,517 1,447,800 99,450 125,450 341,551 212,447
James G. Norman ........ 0 0 1,533 2,867 4,886 2,445
John C. Appel .......... 588 6,875 1,000 8,300 3,188 3,188
Thomas W. White......... 20,000 390,000 63,600 51,400 393,150 91,800
Clark Michael Crawford.. 0 0 4,332 9,268 13,442 13,190
Robert G. McCoy......... 0 0 4,332 8,368 13,442 13,190
</TABLE>
<PAGE>
LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
The GTE 1991 Long-Term Incentive Plan (the "LTIP") provides for awards,
currently in the form of stock options with tandem stock appreciation rights and
cash bonuses, to participating employees. The stock options and stock
appreciation rights awarded under the LTIP to the seven most highly compensated
individuals in 1993 are shown in the table on page 9.
Under the LTIP, performance bonuses are paid in cash based on the
achievement of pre-established goals for GTE's ROE over a three-year
award cycle. Performance bonuses are denominated in units of GTE
Common Stock ("Common Stock Units") and are maintained in a Common
Stock Unit Account.
<TABLE>
At the time performance targets are established for the three-year cycle,
a Common Stock Unit Account is set up for each participant who is eligible
to receive a cash award under the LTIP. An initial dollar amount for each
account is determined based on the competitive performance bonus grant
practices of other major companies in the telecommunications industry and
with other selected corporations that are comparable to GTE in terms of
revenue, market value and other quantitative measures. That amount is
then divided by the average market price of GTE Common Stock for the
calendar week preceding the day the account is established to determine the
number of Common Stock Units in the account. The value of the account
increases or decreases based on the market price of the GTE Common
Stock. An amount equal to the dividends declared on an equivalent number
of shares of GTE Common Stock is added each time a dividend is paid. This
amount is then converted into the number of Common Stock Units obtained
by dividing the amount of the dividend by the average price of the GTE
Common Stock on the composite tape of the New York Stock Exchange on
the dividend payment date and added to the Common Stock Unit Account.
Messrs. Sparrow, Foster and White are the only individuals of the seven
most highly compensated individuals eligible to receive a cash award under
the LTIP. The number of Common Stock Units initially allocated in 1993 to
their accounts and estimated future payouts under the LTIP are shown in
the following table.
<CAPTIONS>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE BASED PLANS(1)
--------------------------------------------------
(A) (B) (C) (D) (E) (F)
PERFORMANCE
NUMBER OF OR OTHER
SHARES, UNITS PERIOD UNTIL
OR OTHER MATURATION
NAME RIGHTS OR PAYOUT THRESHOLD(2) TARGET(3) MAXIMUM(4)
---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Larry J. Sparrow................... 2,000 3 Years 375 1,874
Kent B. Foster(5).................. 6,100 3 years 1,428 7,139
670 2 Years 149 743
326 1 Year 69 343
1,620 26 Months 365 1,827
854 14 Months 183 913
119 2 Months 24 121
James G. Norman ................... 0 N/A 0 0
John C. Appel ..................... 0 N/A 0 0
Thomas W. White(6)................. 2,400 3 Years 562 2,809
471 32 Months 109 545
292 20 Months 64 320
114 8 Months 24 118
C. Michael Crawford................ 0 N/A 0 0
Robert G. McCoy.................... 0 N/A 0 0
<FN>
- ----------
(1) It is not possible to predict future dividends and, accordingly, estimated Common Stock
Unit accruals in this table are calculated for illustrative purposes only and are based
upon the dividend rate and price of GTE Common Stock at the close of business on
December 31, 1993. The target award is the dollar amount derived by multiplying the
Common Stock Unit balance at the end of the award cycle by the price of GTE Common
Stock.
(2) The level of average ROE during this cycle which represents minimum acceptable
performance and which, if attained, results in payment of 20% of the target award.
Below the mnimum acceptable performance level, no award is earned.
(3) The average ROE target during the cycle which represents outstanding GTE
performance and which, if attained, results in payment of 100% of the target award.
(4) This column has intentionally been left blank because it is not possible to determine the
maximum award until the award cycle has been completed. The maximum amount of the
award is limited by the amount the actual ROE exceeds the targeted ROE. If GTE's
average ROE during the cycle exceeds the performance target, additional bonuses may
be earned according to the following schedule:
PERFORMANCE INCREMENT ABOVE ADDED PERCENTAGE
MAXIMUM ROE PERFORMANCE TARGET TO MAXIMUM AWARDS
------------------------------ ----------------
First and Second 0.1%................. +2%
Third and Fourth 0.1%................. +3%
Fifth and above 0.1%................. +4%
For example, if average ROE performance exceeds the ROE target by
0.5%, the performance bonus will equal 114% of the target award.
(5) The award of 6,100 units to Mr. Foster represents the grant for the
1993-95 performance period made while he was President, GTE
Telephone Operations. The other grants shown are incremental, prorated
awards made when his position was reclassified and when he was
promoted to Vice Chairman, GTE Corporation, as well as President,
GTE Telephone Operations and apply to the original targets under the
1993-95, 1992-94 and 1991-93, performance periods.
(6) The award of 2,400 units to Mr. White represents the grant for the
1993-95 performance period made while he was Executive Vice
President, GTE Telephone Operations. The other grants shown are
incremental, prorated awards made when his position was reclassified
and apply to the 1993-95, 1992-94 and 1991-93 performance periods.
</TABLE>
EXECUTIVE AGREEMENTS
GTE has entered into agreements (the "Agreements") with Messrs.
Sparrow, Foster and White regarding benefits to be paid in the event of a
change in control of GTE (a "Change in Control").
A Change in Control is deemed to have occurred if a majority of the
members of the Board do not consist of members of the Incumbent Board
(as defined in the Agreements) or if, in any 12-month period, three or more
directors are elected without the approval of the Incumbent Board. An
individual whose initial assumption of office occurred pursuant to an
agreement to avoid or settle a proxy or other election contest is not
considered a member of the Incumbent Board. In addition, a director who is
elected pursuant to such a settlement agreement will not be deemed a
director who is elected or nominated by the Incumbent Board for purposes
of determining whether a Change in Control has occurred. A Change in
Control will not occur in the following situations: (1) certain merger
transactions in which there is at least 50% GTE shareholder continuity in
the surviving corporation, at least a majority of the members of the board of
directors of the surviving corporation consist of members of the Board of
GTE and no person owns more than 20% (or under certain circumstances, a
lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event this
individual separates from service and has "good reason" for leaving or is
terminated without "cause" within two years after a Change in Control of
GTE.
Good reason for leaving includes but is not limited to the following
events: demotion, relocation or a reduction in total compensation or benefits,
or the entity's failure to expressly assume obligations under the
Agreements. Termination for cause includes certain unlawful acts on the
part of the executive or a material violation of his or her responsibilities to
the Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will
be entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the EIP for the
previous three years. The executive will also continue to receive medical and
life insurance coverage for up to two years and will be provided with
financial and outplacement counseling.
In addition, the Agreements with Messrs. Sparrow, Foster and White
provide that in the event of a separation from service, they will receive
service credit in the following amounts: two times years of service otherwise
credited if the executive has five or fewer years of credited service; 10 years
if credited service is more than five and not more than 10 years; and, if the
executive's credited service exceeds 10 years, the actual number of credited
years of service. These additional years of service will apply towards
vesting, retirement eligibility, benefit accrual and all other purposes under
the Supplemental Executive Retirement Plan and the Executive Retired
Life Insurance Plan. In addition, each executive will be considererd to have
not less than 76 points and 15 years of accredited service for the purpose of
determining his or her eligibility for early retirement benefits. However,
there will be no duplication of benefits.
The Agreements remain in effect until the earlier of July 1 of each
successive year or the date on which the executive reaches age 65, unless
the Agreement is terminated earlier pursuant to its terms. The Agreements
will be automatically renewed on each successive July 1 unless, not later
than December 31 of the preceding year, one of the parties notifies the other
that he does not wish to extend the Agreement. If a Change in Control
occurs, the Agreements will remain in effect until the obligations of GTE (or
its successor) under the Agreements have been satisfied.
RETIREMENT PROGRAMS
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at
age 65, based upon final average earnings and years of employment, is
illustrated in the table below:
PENSION PLAN TABLE
FINAL YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
EARNINGS 15 20 25 30 35
-------- --------- -------- -------- --------- ---------
$ 300,000.......$ 64,229 $ 85,638 $107,048 $ 128,457 $ 149,867
400,000....... 85,979 114,638 143,298 171,957 200,617
500,000....... 107,729 143,638 179,548 215,457 251,367
600,000....... 129,479 172,638 215,798 258,957 302,117
700,000....... 151,229 201,638 252,048 302,457 352,867
800,000....... 172,979 230,638 288,298 345,957 403,617
900,000....... 194,729 259,638 324,548 389,457 454,367
1,000,000....... 216,479 288,638 360,798 432,957 505,117
1,200,000....... 259,979 346,638 433,298 519,957 606,617
1,500,000....... 325,229 433,638 542,048 650,457 758,867
2,000,000....... 433,978 578,638 723,298 867,957 1,012,617
2,500,000....... 542,729 723,638 904,548 1,085,454 1,266,366
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains
a noncontributory pension plan for the benefit of GTE employees based on
years of service. Pension benefits to be paid from this plan and contributions
to this plan are related to basic salary exclusive of overtime, differentials,
incentive compensation (except as otherwise described) and other similar
types of payment. Under this plan, pensions are computed on a two-rate
formula basis of 1.15% and 1.45% for each year of service, with the 1.15%
service credit being applied to that portion of the average annual salary for
the five highest consecutive years that does not exceed the Social Security
Integration Level (the portion of salary subject to the Federal Social
Security Act), and the 1.45% service credit being applied to that portion of
the average annual salary that exceeds said level. As of February 17, 1994,
the credited years of service under the plan for Messrs. Sparrow, Foster,
Norman, Appel, White, Crawford and McCoy are 26, 23, 33, 22, 25, 25 and
7, respectively.
Under federal law, an employee's benefits under a qualified pension plan
such as the GTE Service Corporation plan are limited to certain maximum
amounts. GTE maintains a Supplemental Executive Retirement Plan
("SERP"), which supplements the benefits of any participant in the qualified
pension plan by direct payment of a lump sum or by an annuity, on an
unfunded basis, of the amount by which any participant's benefits under the
GTE Service Corporation pension plan are limited by law. In addition, the
SERP includes a provision permitting the payment of additional retirement
benefits determined in a similar manner as under the qualified pension plan
on remuneration accrued under management incentive plans as determined
by the Committee.
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan ("ERLIP") provides Messrs.
Sparrow, Foster, Norman, Appel, White, Crawford and McCoy a
postretirement life insurance benefit of three times final base salary. Upon
retirement, ERLIP benefits may be paid as life insurance or, optionally, an
equivalent amount may be paid as a lump sum payment equal to the present
value of the life insurance amount (based on actuarial factors and the
interest rate then in effect), as an annuity or as installment payments. If an
optional payment method is selected, the ERLIP benefit will be based on
the actuarial equivalent of the present value of the life insurance amount.
CERTAIN TRANSACTIONS
The Company incurs printing and other costs for the production of
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from affiliated companies. These charges were $307.1
million in 1993.
Affiliated manufacturing companies also supply construction and
maintenance materials, supplies and equipment to the Company. These
purchases were $152.7 million in 1993.
<PAGE>
OWNERSHIP OF STOCK BY DIRECTORS,
NOMINEES FOR DIRECTORS, EXECUTIVE OFFICERS
AND CERTAIN BENEFICIAL OWNERS
The table below sets forth the shares of GTE's Common Stock
beneficially owned by each director, nominee for director, the Chief
Executive Officer and the other four most highly compensated executive
officers and by all directors and executive officers as a group. No director,
nominee for director or executive officer owns as much as one-tenth of one
percent of the total outstanding shares. Unless otherwise indicated, all
persons named in the table have sole voting and investment power with
respect to the shares shown.
PERCENT OF
SHARES TOTAL SHARES
BENEFICIALLY OUTSTANDING
OWNED AS OF AS OF
NAME OF DIRECTOR OR NOMINEE DECEMBER 31, 1993 DECEMBER 31, 1993
- --------------------------- ------------------ -------------------
Kent B. Foster............... 168,299
Thomas W. White ............. 83,071
Michael B. Esstman........... 54,051 No director or
Gerald K. Dinsmore........... 18,503 nominee or executive
Richard M. Cahill............ 37,188 officer owns as much
Larry J. Sparrow(a) ......... 33,749 as 1/10 of 1 percent
-------
394,861
=======
EXECUTIVE OFFICERS(A)(B)
Larry J. Sparrow............. 33,749
Kent B. Foster............... 168,299
James G. Norman ............. 11,852
John C. Appel ............... 5,453
Thomas W. White.............. 83,071
Clark Michael Crawford....... 10,756
Robert G. McCoy.............. 7,678
-------
320,858
=======
All directors and
executive officers
as a group(a)(b)........... 794,164 Represents less
======= than 1/10 of 1 percent
of outstanding
Common Stock
- ----------
(a) Includes shares acquired through participation in GTE's Consolidated
Employee Stock Ownership Plan and/or the GTE Savings Plan.
(b) Included in the number of shares beneficially owned by Messrs.
Sparrow, Foster, Norman, Appel, White, Crawford and McCoy and all
directors and executive officers as a group are 27,533, 115,583, 4,400,
2,333, 69,466, 7,432 and 7,132, respectively, which such persons have the
right to acquire within 60 days pursuant to stock options.
INDEPENDENT PUBLIC ACCOUNTANTS
A proposal will be presented at the meeting that the selection by the
Board of Directors of Arthur Andersen & Co. as the independent public
accountant of the Company be approved by the shareholders of the
Company. An affirmative vote of the holders of a majority of the shares
represented at the meeting will be required for such approval. In the event
such approval is not obtained, selection of the accountant will be
reconsidered by the Board of Directors. Proxies solicited by the Board of
Directors will be voted for the proposal unless marked to the contrary.
A representative of Arthur Andersen & Co. will attend the shareowners'
meeting and will be available to comment or respond to appropriate
questions.
OTHER MATTERS
The Board of Directors does not know of any other matters to be
presented at the meeting. If any other business should properly be brought
before the meeting, it is the intention of the persons named in the proxy to
vote the proxy in accordance with their best judgment on such matters.
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposal which a shareowner intends to present at the next Annual
Meeting of Shareowners, to be held in April 1995, must be received at the
office of the Company by November 22, 1994, if such proposal is to be
considered for inclusion in the Company's proxy statement and form of
proxy relating to that meeting.
A COPY OF THE COMPANY'S ANNUAL REPORT ON THE FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE FREE OF CHARGE BY WRITTEN
REQUEST TO:
GTE TELEPHONE OPERATIONS
FINANCIAL REPORTING
P.O. BOX 407, MC INAAACG
WESTFIELD, INDIANA 46074
(317) 896-6464
By order of the Board of Directors,
Kenneth K. Okel, Secretary
March 22, 1994
