<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1994
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 1-6417
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GTE CALIFORNIA INCORPORATED
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0510200
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
One GTE Place, Thousand Oaks, California 91362-3811
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 805-372-6000
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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FIRST MORTGAGE BONDS, SERIES X, PACIFIC STOCK EXCHANGE
DUE DECEMBER 1, 2001
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Securities registered pursuant to Section 12(g) of the Act:
4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
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4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
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5 % SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
--------------------------------------------------------------------------------
7.48 % SERIES CUMULATIVE PREFERRED STOCK $100 PAR VALUE
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(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
---
THE COMPANY HAD 69,438,190 SHARES OF $20 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING PREFERRED STOCK HELD BY
NON-AFFILIATES AT FEBRUARY 28, 1995, AMOUNTED TO $3,363,744.
DOCUMENT INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 12, 1995
(INCORPORATED IN PART III).
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
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<S> <C> <C> <C>
PART I
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1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
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5. Market for the Registrant's Common Equity and Related
Shareholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
--------
10. Directors and Executive Officers of the Registrant 35
11. Executive Compensation 37
12. Security Ownership of Certain Beneficial Owners
and Management 37
13. Certain Relationships and Related Transactions 37
PART IV
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14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 38
</TABLE>
<PAGE> 3
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 a wide variety of communications services ranging from
local telephone service for the home and office to highly complex voice and
data services for industry. 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 AT&T Corp. The number of access lines served
has grown steadily from 3,339,531 on January 1, 1990 to 3,825,768 on December
31, 1994.
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:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1994 1993 1992
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(Thousands of Dollars)
<S> <C> <C> <C>
Local Network Services $ 964,659 $ 975,780 $ 937,797
% of Total Revenues 33% 34% 32%
Network Access Services $ 669,789 $ 616,122 $ 663,154
% of Total Revenues 23% 21% 23%
Long Distance Services $ 960,571 $1,003,154 $1,022,330
% of Total Revenues 33% 35% 35%
Equipment Sales and Services $ 158,061 $ 163,546 $ 180,281
% of Total Revenues 6% 6% 6%
Other $ 128,650 $ 116,176 $ 117,456
% of Total Revenues 4% 4% 4%
</TABLE>
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<PAGE> 4
At December 31, 1994, the Company had 13,074 employees. The Company has
written agreements with the Communications Workers of America (CWA) covering
substantially all hourly employees. The current agreement between the Company
and the CWA expires in March 1996 and the agreement between GTEL and the CWA
expires in April 1997.
Telephone Competition and Regulatory Developments
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 12 of the Company's consolidated financial statements included in
Item 8.
During 1994, the Company began implementation of a three-year $445 million
re-engineering plan that will redesign and streamline processes. In the
initial year of the plan, $113 million was expended to implement this program.
These expenditures were primarily associated with the consolidation of certain
customer service centers, separation benefits associated with employee
reductions and incremental expenditures to redesign and streamline systems and
processes. During 1995, the level of re-engineering activities and related
expenditures are expected to accelerate as pilot programs are rolled out and
other major initiatives are completed. The overall re-engineering plan remains
on schedule and is expected to be completed by the end of 1996. Continued
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services and to reach its stated
objective of being the easiest company to do business with in the industry.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
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. In 1994, GTE
announced plans to build a new video network over the next 10 years which will
pass seven million homes in 66 key GTE markets. GTE has requested FCC approval
to construct facilities in the initial three markets, including Ventura County,
California, and expects to begin construction in 1995.
In Cerritos, California, GTE concluded testing of the capabilities of copper
wire, coaxial cable and fiber optics for both video and telephony delivery. In
July, 1994, GTE moved to a business-as-usual operation of the Cerritos video
network, including the continued provision of near pay-per-view (Center
Screen(sm)) and interactive (mainStreet(tm)) services. In order to continue to
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<PAGE> 5
provide these services and video signal transport to the local cable operator,
GTE challenged the constitutionality of the federal statute which barred the
participation of telephone companies and their affiliates in the delivery of
video programming directly to customers within their telephone service
territories. As a result of that challenge, the United States District Court
for the Eastern District of Virginia ruled in favor of GTE and declared the
federal statute unconstitutional. The court's decision means that GTE is now
permitted to offer video programming over its own video dialtone networks, as
well as to compete as a franchised cable operator in the Company's telephone
territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Los Angeles, California, to provide advanced communications for
business customers. This program includes sophisticated high-speed, digital
fiber-optic rings, a high-capacity switching network (known as SONET), and a
new centralized operations center that monitors the entire network. These
SONET rings are an integral part of the high-speed information network that
enables GTE to provide advanced services such as high-speed data transmission
and video conferencing.
During 1993, the CPUC approved a New Regulatory Framework (NRF) settlement
agreement allowing GTE California to retain 100% of any earnings up to 15.5%,
beginning in 1994. Under its prior agreement, GTE California was required to
share 50% of any earnings over a 13% rate of return and refund 100% of any
earnings over 16.5%. In September 1994, the CPUC issued a final order that
authorized intraLATA toll competition (without pre-subscription) in California,
effective January 1, 1995. It also provides for rate rebalancing with
significant rate reductions for toll service and access charges while
increasing basic local exchange rates closer to the actual cost of providing
such service. Although the rate rebalancing is intended to be revenue neutral,
its ultimate effect on revenue will depend, in part, on the extent to which
rate reductions result in increased calling volumes. The decision does not
permit rate increases to compensate for competitive losses of market share.
GTE believes that the CPUC has over-estimated the calling volume that will be
stimulated by reduced toll rates and has requested reconsideration of this
aspect of the decision.
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 prices that the
Company may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. The Company may,
within certain ranges, price individual services above or below the overall
cap.
Under its price cap regulatory plan, the FCC also adopted a productivity
sharing feature. 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.
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<PAGE> 6
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under negotiated terms and conditions.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint and GTE Spacenet (both since divested), prohibits
GTE's domestic telephone operating subsidiaries from providing long distance
service beyond the boundaries of the LATA. This prohibition restricts the
Company's 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 are gradually being relaxed.
These and other actions to eliminate the 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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
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<PAGE> 7
Item 2. Properties
The Company's property consists of network facilities (80%), company facilities
(13%), customer premises equipment (1%) and other (6%). From January 1, 1990
to December 31, 1994, the Company made gross property additions of $2.6 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.
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<PAGE> 8
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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for GTE California's Common Stock and
Preferred Stock is the First National Bank of Boston.
GTE Corporation
C/O Bank of Boston
P.O. Box 9191
Boston, MA 02205-9191
10-K REPORT
A copy of the 1994 Annual Report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by writing to:
GTE Telephone Operations
External Reporting
P.O. Box 407, MC: INAAACG
Westfield, IN 46074
(317)896-6464
PARENT COMPANY ANNUAL REPORT
A copy of the 1994 annual report of our parent company may be obtained by
writing to:
GTE Corporation
Corporate Secretary's Office
One Stamford Forum
Stamford, CT 06904
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<PAGE> 9
Item 6. Selected Financial Data
GTE California Incorporated and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
--------------------------------------------------------------------
(Thousands of Dollars)
SELECTED INCOME STATEMENT ITEMS (A)
<S> <C> <C> <C> <C> <C>
Operating revenues $2,881,730 $2,874,778 $2,921,018 $2,964,043 $2,972,346
Operating expenses 2,055,483 2,591,630 2,145,024 2,150,188 2,163,756
---------- ---------- ---------- ---------- ----------
Net operating income 826,247 283,148 775,994 813,855 808,590
Interest expense 102,938 121,117 131,527 140,977 139,674
Other - net (4,696) (2,123) (7,992) (12,304) (23,027)
Income tax provision 293,465 70,535 237,089 242,724 248,078
---------- ---------- ---------- ---------- ----------
Income before
extraordinary charge 434,540 93,619 415,370 442,458 443,865
Extraordinary charge -- 20,214 -- -- --
---------- ---------- ----------- ---------- ----------
Net income $ 434,540 $ 73,405 $ 415,370 $ 442,458 $ 443,865
====================================================================
Dividends declared on common stock $ 387,843 $ 355,000 $ 372,267 $ 516,620 $ 324,276
Dividends declared on preferred
stock 4,784 4,790 4,755 5,210 5,760
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</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
SELECTED BALANCE SHEET ITEMS 1994 1993 1992 1991 1990
----------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Investment in property, plant
and equipment - net $4,837,287 $4,962,379 $5,039,231 $5,031,712 $5,024,244
Total assets 6,067,644 5,968,993 5,928,115 5,916,179 5,839,605
Long-term debt 1,280,157 860,398 1,567,017 1,389,404 1,484,825
Common stock, reinvested
earnings and other capital 2,241,957 2,200,044 2,486,429 2,448,081 2,527,466
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</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------
SELECTED STATISTICS 1994 1993 1992 1991 1990
--------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Access lines 3,825,768 3,714,570 3,664,645 3,586,785 3,522,795
Access line gain 111,198 49,925 77,860 63,990 183,264
Net investment in property, plant
and equipment per access line $ 1,264 $ 1,336 $ 1,375 $ 1,403 $ 1,426
Number of employees 13,074 14,379 16,255 17,110 18,717
Access lines per employee 293 258 225 210 188
Capital expenditures (thousands) $ 467,878 $ 503,950 $ 536,035 $ 601,236 $ 542,481
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</TABLE>
__________
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Net operating income in 1993 included a $445.2 million pretax charge for
restructuring costs which reduced net income by $274.2 million.
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<PAGE> 10
Item 7. 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 (GTE), provides local exchange, network access and long distance
telecommunications services throughout Southern and Central California. The
Company serves over 3.8 million access lines in its operating territories with
a substantial number of those lines in Southern California. The Company also
markets telecommunications equipment and other deregulated products and
services through GTEL, a wholly-owned subsidiary.
RESULTS OF OPERATIONS
Net income in 1994 was $435 million as compared to $73 million in 1993. The
results for 1993 include one-time after-tax charges totaling $315 million to
restructure operations and complete enhanced early retirement and voluntary
separation programs and for the early retirement of high-coupon debt.
Excluding these special items, net income increased 12% or $47 million in 1994
and 7% or $27 million in 1993. The 1994 increase is primarily the result of
ongoing quality and cost control programs and a decrease in interest expense.
The 1993 decrease reflected lower operating revenues due to voluntary rate
reductions and the impact of the adoption of Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" effective January 1, 1993.
OPERATING REVENUES
Operating revenues were $2.88 billion and $2.87 billion in 1994 and 1993,
respectively. This reflects an increase of less than 1% or $7 million in 1994
and a decrease of 2% or $46 million in 1993.
Local network service revenues are comprised mainly of fees charged to
customers for providing local exchange service. These revenues for 1994 and
1993 were $965 million and $976 million, respectively. This reflects a
decrease of 1% or $11 million in 1994 compared to an increase of 4% or
$38 million in 1993. The 1994 decrease is primarily due to a rate reduction
related to the price cap index and the new regulatory framework (NRF) review
partially offset by continued customer growth, as experienced through an
increase in access lines of 3%. The 1993 increase was primarily due to a rate
increase related to the Company's 1993 price cap index under the NRF, continued
customer growth, as experienced through a 3% increase in access lines, and
increased revenue from CentraNet(R) and other enhanced features.
Network access service revenues are fees charged to interexchange carriers that
use the local telecommunication network to provide long distance services to
their customers. In addition, end users pay access fees to connect to the
local network to obtain long distance service. These revenues for 1994 and
1993 were $670 million and $616 million, respectively. This reflects an
increase of 9% or $54 million in 1994 compared to a decrease of 7% or
$47 million in 1993. The 1994 increase is due to an 8% increase in minutes of
use, driven in part by natural disasters in the first half of 1994, partially
offset by lower rates while the 1993 decrease was primarily the result of lower
interstate rates.
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<PAGE> 11
The Company's revenues for long distance services are provided under settlement
arrangements with various telephone companies. These revenues were $961
million and $1.0 billion in 1994 and 1993, respectively. This reflects
decreases of 4% or $43 million in 1994 and 2% or $19 million in 1993. The 1994
decrease is primarily due to rate reductions related to the price cap index and
NRF review. The 1993 decrease was primarily due to a change in calling
patterns.
Equipment sales and service revenues for 1994 and 1993 were $158 million and
$164 million, respectively. This reflects decreases of 3% or $6 million in
1994 and 9% or $17 million in 1993. The 1994 decrease is primarily the result
of a reduction in revenues related to the Cerritos project, GTE's testing
facility in California for various video services, and a decline in revenues
from sales and rental of single line and key telephone systems, partially
offset by an increase in revenue from voice messaging services. The 1993
decrease was primarily the result of a decline in revenues related to the
CALNET project, a large government contract for various video services, and a
decline in revenues from sales and rental of single line and key telephone
systems, partially offset by an increase in revenue from voice messaging
services. Revenue from the CALNET project is recognized on the percentage of
completion method.
Other operating revenues for 1994 and 1993 were $129 million and $116 million,
respectively. This represents an increase of 11% or $13 million in 1994
compared to a decrease of 1% or $1 million in 1993. The 1994 increase is
primarily due to the lower provisions for uncollectible accounts.
OPERATING EXPENSES
Cost of sales and services for 1994 and 1993 was $634 million and $667 million,
respectively. This represents decreases of 5% or $33 million in 1994 and 2% or
$12 million in 1993. These decreases are primarily the result of ongoing
quality and cost control programs resulting in a reduction in workforce. The
1994 decrease also reflects lower switched access expenses and installation and
maintenance costs. The 1993 decrease was 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, cost of sales and services increased
$51 million.
Depreciation and amortization was $580 million and $583 million in 1994 and
1993, respectively. This reflects a decrease of 1% or $3 million in 1994
compared to an increase of 3% or $20 million in 1993. The 1994 decrease is
primarily due to lower average depreciation rates partially offset by higher
average plant balances. The 1993 increase was primarily due to higher average
plant balances and depreciation rates.
Marketing, selling, general and administrative expenses were $842 million and
$897 million in 1994 and 1993, respectively. The 1993 expenses include 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. Excluding this charge, marketing, selling, general and
administrative expenses decreased 2% or $20 million and 4% or $40 million in
1994 and 1993, respectively. These decreases are primarily the result of
ongoing quality and cost control programs resulting in a reduction in
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<PAGE> 12
workforce. The 1993 decrease was also due to lower advertising costs,
partially offset by costs of $27 million associated with the adoption of SFAS
No. 106.
OTHER (INCOME) DEDUCTIONS
Interest expense was $103 million and $121 million in 1994 and 1993,
respectively. This represents a decrease of 15% or $18 million in 1994 and 8%
or $10 million in 1993. These decreases are due to lower average long-term
debt levels and lower average interest rates.
Income tax expense was $293 million and $71 million in 1994 and 1993,
respectively. This reflects an increase of $222 million in 1994 compared to a
decrease of $167 million in 1993. The changes are primarily due to
corresponding changes in pretax income.
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
$2.8 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 was cash from operations of $862 million
in 1994 compared to $992 million in 1993. The decrease is primarily the result
of an increase in receivables, partially offset by an increase in accounts
payable and improved results from operations.
Capital expenditures represent the largest use of funds during 1994, reflecting
the Company's continued growth in access lines and modernization of current
facilities and provisioning of new products and services. The Company's
capital expenditures during 1994 were $468 million compared to $504 million
during 1993. The Company's construction costs for 1995 are expected to
approximate those of 1994. During 1994, the Company received approximately $14
million of proceeds from the sale of 5,400 access lines in California to
Citizens Utilities Company.
Cash used in financing activities was $377 million in 1994 compared to
$506 million in 1993. The Company retired $36 million in long-term debt in
1994 compared to $176 million in 1993. 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%. The cost
of calling these bonds was reflected as an extraordinary after-tax charge of
$20.2 million in the Consolidated Statements of Income. In February, 1994, the
Company issued $300 million of 5 5/8% Debentures, due 2001 to refinance a
portion of the bonds being called. In March and April, 1994, respectively, the
Company issued $250 million of 6 3/4% Debentures due 2004 and $250 million of
8.07% Debentures due 2024 to refinance commercial paper. Dividends of
$370 million were paid to the shareholders in 1994 compared to $297 million in
1993.
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<PAGE> 13
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, but was
subsequently withdrawn from consideration. Telecommunications legislation has
been introduced again in 1995. Federal and state regulatory activity directed
toward changing the traditional cost-based rate of return regulatory framework
for intrastate and interstate telephone services has also continued.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under negotiated terms and conditions.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 12 of the Company's consolidated
financial statements included in Item 8.
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and competing cellular
telephone companies. Competition from IXCs, wireless and cable TV companies,
as well as more recent entry by media and computer companies, is expected to
increase in the rapidly changing telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
-11-
<PAGE> 14
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company
has embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $445 million
re-engineering plan. During 1994, the initial year of the three-year plan,
$113 million was expended as significant progress was made in implementing this
program. These expenditures were primarily associated with the consolidation
of customer contact, network operations and operator service centers,
separation benefits associated with employee reductions and incremental
expenditures to redesign and streamline systems and processes. During 1995,
the level of re-engineering activities and related expenditures are expected to
accelerate as pilot programs are rolled out and other major initiatives are
completed. Continued implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services and to
reach its stated objective of being the easiest Company to do business with in
the industry.
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. In 1994, GTE
announced plans to build a new video network over the next 10 years which will
pass seven million homes in 66 key GTE markets. GTE has requested FCC approval
to construct facilities in the initial three markets, including Ventura County,
California, and expects to begin construction in 1995.
In Cerritos, California, GTE concluded testing of the capabilities of copper
wire, coaxial cable and fiber optics for both video and telephony delivery. In
July, 1994, GTE moved to a business-as-usual operation of the Cerritos video
network, including the continued provision of near pay-per-view (Center
Screen(sm)) and interactive (MainStreet(tm)) services. In order to continue to
provide these services and video signal transport to the local cable operator,
GTE challenged the constitutionality of the federal statute which barred the
participation of telephone companies and their affiliates in the delivery of
video programming directly to customers within their telephone service
territories. As a result of that challenge, the United States District Court
for the Eastern District of Virginia ruled in favor of GTE and declared the
federal statute unconstitutional. The court's decision means that GTE is now
permitted to offer video programming over its own video dialtone networks, as
well as to compete as a franchised cable operator in the Company's telephone
territories.
-12-
<PAGE> 15
During 1994, GTE unveiled its World Class Network in eight key markets,
including Los Angeles, California, to provide advanced communications for
business customers. This program includes sophisticated high-speed, digital
fiber-optic rings, a high-capacity switching network (known as SONET), and a
new centralized operations center that monitors the entire network. These
SONET rings are an integral part of the high-speed information network that
enables GTE to provide advanced services such as high-speed data transmission
and video conferencing.
These and other actions to eliminate the 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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, SFAS No. 71 requires companies to depreciate plant and equipment over
lives approved by regulators which may extend beyond the assets' actual
economic and technological lives. SFAS No. 71 also requires deferral of
certain costs and obligations based upon approvals received from regulators to
permit recovery in the future. Consequently, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, may be
greater than that which would otherwise be recorded by unregulated enterprises.
On an ongoing basis, the Company reviews the continued applicability of SFAS
No. 71 based on the current regulatory and competitive environment. Although
recent developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result, the
Company continues to believe that accounting under SFAS No. 71 is appropriate.
If the Company were to determine that the use of SFAS No. 71 was no longer
appropriate, it would be required to write-off the deferred costs and
obligations referred to above. It may also be necessary for the Company to
reduce the carrying value of its plant and equipment to the extent that it
exceeds fair market value. At this time, it is not possible to estimate the
amount of the Company's plant and equipment, if any, that would be considered
unrecoverable in such circumstances. The financial impact of such a
determination, however, which would be non-cash, could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
-13-
<PAGE> 16
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
GTE California Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (a):
Local network services $ 964,659 $ 975,780 $ 937,797
Network access services 669,789 616,122 663,154
Long distance services 960,571 1,003,154 1,022,330
Equipment sales and services 158,061 163,546 180,281
Other 128,650 116,176 117,456
---------- ---------- ----------
2,881,730 2,874,778 2,921,018
---------- ---------- ----------
OPERATING EXPENSES (b):
Cost of sales and services 634,144 666,772 679,095
Depreciation and amortization 579,867 583,066 563,540
Marketing, selling, general and
administrative 841,472 896,617 902,389
Restructuring costs -- 445,175 --
---------- ---------- ----------
2,055,483 2,591,630 2,145,024
---------- ---------- ----------
NET OPERATING INCOME 826,247 283,148 775,994
---------- ---------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 102,938 121,117 131,527
Other - net (4,696) (2,123) (7,992)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 728,005 164,154 652,459
---------- ---------- ----------
INCOME TAX PROVISION 293,465 70,535 237,089
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE 434,540 93,619 415,370
EXTRAORDINARY CHARGE - EARLY RETIREMENT OF
DEBT (NET OF INCOME TAXES OF $13,554) -- 20,214 --
---------- ---------- ----------
NET INCOME $ 434,540 $ 73,405 $ 415,370
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $124,704, $136,800 and $135,043 for
the years 1994 - 1992, respectively.
(b) Includes billings from affiliates of $190,692, $174,743 and $178,125 for
the years 1994 - 1992, respectively.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 809,240 $1,095,625 $1,057,277
ADD -
Net income 434,540 73,405 415,370
DEDUCT -
Cash dividends declared on common stock 387,843 355,000 372,267
Cash dividends declared on
preferred stock 4,784 4,790 4,755
---------- ---------- ----------
BALANCE AT END OF YEAR $ 851,153 $ 809,240 $1,095,625
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
GTE California Incorporated and Subsidiary
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- ---------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 43,118 $ 6,620
Accounts receivable
Customers (including unbilled revenues) 537,688 458,496
Affiliated companies 10,347 8,047
Other 60,448 76,205
Allowance for uncollectible accounts (38,537) (51,980)
Note receivable from affiliate 21,734 28,402
Materials and supplies 40,303 37,361
Deferred income tax benefits 78,924 94,459
Prepayments and other 16,047 19,562
----------- -----------
770,072 677,172
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,420,252 8,215,120
Accumulated depreciation (3,582,965) (3,252,741)
----------- -----------
4,837,287 4,962,379
----------- -----------
PREPAID PENSION COSTS 323,979 233,640
OTHER ASSETS 136,306 95,802
----------- -----------
TOTAL ASSETS $ 6,067,644 $ 5,968,993
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 146,853 $ 608,157
Current maturities of long-term debt 125,346 85,567
Accounts payable 179,227 125,061
Affiliate payables and accruals 98,984 107,659
Advanced billings and customer deposits 52,072 51,275
Accrued taxes 90,676 86,299
Accrued interest 24,478 8,746
Accrued payroll and vacations 80,151 81,777
Accrued dividends 133,402 111,046
Accrued restructuring costs and other 198,608 279,675
----------- -----------
1,129,797 1,545,262
----------- -----------
LONG-TERM DEBT 1,280,157 860,398
DEFERRED CREDITS:
Deferred income taxes 739,984 696,047
Restructuring costs and other 593,883 585,376
----------- -----------
1,333,867 1,281,423
----------- -----------
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 851,153 809,240
----------- -----------
2,323,823 2,281,910
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,067,644 $ 5,968,993
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTE California Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 434,540 $ 93,619 $ 415,370
Adjustments to reconcile income
before extraordinary charge to net
cash from operating activities:
Depreciation and amortization 579,867 583,066 563,540
Restructuring costs -- 445,175 --
Deferred income taxes and investment
tax credits 6,559 (206,475) (9,425)
Provision for uncollectible accounts 69,168 85,365 83,779
Change in current assets and current
liabilities (184,641) (64,124) 12,131
Other - net (43,573) 55,205 (29,361)
---------- ---------- ----------
Net cash from operating activities 861,920 991,831 1,036,034
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (467,878) (503,950) (536,035)
Proceeds from sale of assets 14,023 -- --
Other - net 5,140 11,581 (2,822)
---------- ---------- ----------
Net cash used in investing activities (448,715) (492,369) (538,857)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 790,406 149,601 50,000
Early retirement of debt and related
call premium -- (823,300) --
Long-term debt retired (35,538) (176,489) (22,205)
Dividends paid to shareholders (370,271) (296,888) (453,149)
Increase (decrease) in short-term debt (761,304) 641,466 (72,709)
----------- ---------- ----------
Net cash used in financing activities (376,707) (505,610) (498,063)
----------- ---------- ----------
INCREASE (DECREASE) IN CASH 36,498 (6,148) (886)
CASH:
Beginning of year 6,620 12,768 13,654
----------- ---------- ----------
End of year $ 43,118 $ 6,620 $ 12,768
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTE California Incorporated and Subsidiary
1. SUMMARY OF SIGNIFICANT 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
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $81.9 million,
$152.7 million and $126.0 million for the years 1994-1992, respectively. Such
purchases are recorded in the accounts of the Company at cost which includes a
normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
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
$190.7 million, $174.7 million and $178.1 million for the years 1994-1992,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $124.7 million, $136.8 million and $135.0 million for
the years 1994-1992, 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 on a straight-line
basis over asset lives approved by regulators. Depreciation is 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
7.1%, 7.4% and 7.4% for the years 1994-1992, 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
-17-
<PAGE> 20
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. Accordingly,
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 to permit recovery of
such amounts in future years. 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 services are rendered or products are
delivered 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 (average 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 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
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
As further explained in Note 8, 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
-18-
<PAGE> 21
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.
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.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $109 million.
The estimated fair value of long-term debt as of December 31, 1993, exceeded
the carrying value by approximately $9 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
where appropriate to conform to the 1994 presentation.
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of
$445.2 million, which reduced net income by $274.2 million, primarily for
incremental costs related to implementation of the Company's three-year
re-engineering plan. The re-engineering plan will redesign and streamline
processes to improve customer-responsiveness and product quality, reduce the
time necessary to introduce new products and services and further reduce costs.
The re-engineering plan included $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.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $113.4 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
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.
-19-
<PAGE> 22
3. PROPERTY REPOSITIONING
On December 31, 1994 the Company sold 5,400 access lines in the state of
California to Citizens Utilities Company for $14 million in cash. This
represents less than 1% of the Company's access lines. The transaction was
accounted for as a sale.
4. PREFERRED STOCK
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
AUTHORIZED
$ 20 par value 2,499,174
$100 par value 500,000
---------
2,999,174
=========
</TABLE>
<TABLE>
<CAPTION>
Shares Amount*
--------- --------
<S> <C> <C>
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
========= =========
</TABLE>
* Thousands of Dollars
There were no retirements, redemptions or other activity for the years
1994-1992.
At the Company's option, these series of preferred stock are redeemable at
premiums, in whole or in part, on thirty days notice.
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, 1994.
5. COMMON STOCK
The authorized common stock of the Company consists of 100,000,000 shares with
a par value of $20 per 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, 1994, $4.8 million was restricted as to the payment of cash
dividends on common stock under the terms of the Articles of Incorporation.
-20-
<PAGE> 23
6. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- ------- -
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS:
4 1/2 % Series Q, due 1995 $ -- $ 35,000
5 % Series R, due 1995 -- 40,000
6 % Series S, due 1996 45,000 45,000
6 3/4 % Series T, due 1997 55,000 55,000
7 1/8 % Series U, due 1998 60,000 60,000
7 5/8 % Series X, due 2001 50,000 50,000
7 3/4 % Series RR, due 1998 75,000 75,000
6 1/4 % Series TT, due 1998 150,000 150,000
----------- ----------
435,000 510,000
DEBENTURES:
5 5/8 % Series A, due 2001 300,000 --
6 3/4 % Series B, due 2004 250,000 --
8.07 % Series C, due 2024 250,000 --
OTHER:
6 1/4% GTE Finance Corporation
promissory note, due 1995 -- 50,000
4 3/8% GTE Finance Corporation
promissory note, due 1997 50,000 --
Short-term debt refinanced in 1994 -- 300,000
CAPITALIZED LEASES 1,140 1,457
----------- ----------
Total principal amount 1,286,140 861,457
DISCOUNT (5,983) (1,059)
----------- ----------
Total long-term debt $ 1,280,157 $ 860,398
=========== ==========
</TABLE>
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%. The cost of calling these bonds is reflected as an
extraordinary after-tax charge of $20.2 million in the Consolidated Statements
of Income. 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 issued in March and April of 1994, $250 million of 6 3/4% Debentures
due 2004 and $250 million of 8.07% Debentures due 2024 also to refinance the
bonds called.
The aggregate principal amounts 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.
-21-
<PAGE> 24
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, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 125,346
1996 45,276
1997 105,289
1998 285,304
1999 67
</TABLE>
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
7. 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, or
equity. Information relating to short-term borrowings is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial paper
Maximum month-end balance $ 990,200 $843,500 $296,434
Average monthly balance $ 273,629 $189,432 $204,937
Weighted average interest rate 3.89% 3.39% 3.83%
AT DECEMBER 31 -
Balance outstanding -
Notes payable to GTE $ 53,274 $ 31,857 $ 30,481
Average interest rate 3.27% 3.11% 3.99%
Commercial paper $ 93,579 $576,300 $ 86,210
Average interest rate 3.55% 3.37% 3.53%
</TABLE>
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 $2.8 billion credit 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.
-22-
<PAGE> 25
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C>
CURRENT
Federal $ 217,520 $ 206,661 $ 175,492
State 69,386 70,349 71,022
------------ ------------ ------------
Total 286,906 277,010 246,514
------------ ------------ ------------
DEFERRED
Federal 18,080 (138,179) 25,984
State 7,770 (44,113) (2,556)
------------ ------------ ------------
Total 25,850 (182,292) 23,428
------------ ------------ ------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (19,291) (24,183) (32,853)
------------ ------------ ------------
Total $ 293,465 $ 70,535 $ 237,089
============ ============ ============
</TABLE>
The components of deferred income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation and
amortization $ (17,103) $ (21,307) $ 21,875
Employee benefit
obligations 5,229 (7,725) (14,590)
Prepaid pension costs 27,366 9,843 1,307
Restructuring costs 24,117 (160,312) --
Other - net (13,759) (2,791) 14,836
------------ ------------ ------------
Total $ 25,850 $ (182,292) $ 23,428
============ ============ ============
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pretax income and income taxes provided in the Consolidated
Statements of Income is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C>
AMOUNTS COMPUTED AT
STATUTORY RATES $ 254,802 $ 57,454 $ 221,836
State income tax, net
of federal income tax
benefits 50,151 17,053 45,187
Amortization of deferred
investment tax credits (19,291) (24,183) (32,853)
Depreciation of telephone
plant construction costs
previously deducted for
tax purposes - net 20,841 21,772 20,226
Rate differentials applied
to reversing temporary
differences (11,461) (4,896) (5,951)
Other differences - net (1,577) 3,335 (11,356)
------------ ------------ ------------
TOTAL PROVISION $ 293,465 $ 70,535 $ 237,089
============ ============ ============
</TABLE>
-23-
<PAGE> 26
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, 1994 of $57.1 million and
the net unamortized regulatory asset balance at December 31, 1993 of $2.8
million are reflected as other assets 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:
<TABLE>
<CAPTION>
1994 1993
--------- -------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 719,319 $ 682,818
Employee benefit obligations (27,201) (32,430)
Prepaid pension costs 19,666 (7,700)
Restructuring costs (136,195) (160,312)
Investment tax credits 69,801 89,092
Other - net 15,670 30,120
--------- ---------
Total $ 661,060 $ 601,588
========= =========
</TABLE>
9. 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 debt securities.
-24-
<PAGE> 27
The components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Benefits earned during the year $ 38,734 $ 45,466 $ 46,521
Interest cost on projected benefit
obligations 90,606 105,260 106,468
Return on plan assets:
Actual 4,474 (373,149) (130,118)
Deferred (185,640) 191,512 (41,895)
Other - net (39,322) (43,290) (37,149)
--------- --------- ---------
Net pension credit (91,148) (74,201) (56,173)
Adjustment to reflect differing
regulatory treatment 46,300 56,044 52,059
--------- --------- ---------
Net pension credit
recognized $ (44,848) $ (18,157) $ (4,114)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for 1993 and 1992.
The regulatory adjustment reflects the use of the aggregate cost method as
required by the CPUC and results in $310.0 million and $263.7 million at
December 31, 1994 and 1993, respectively, being reflected in other deferred
credits in the accompanying Consolidated Balance Sheets.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Plan assets at fair value $ 2,243,960 $ 2,348,810
Projected benefit obligations 1,138,706 1,233,202
----------- -----------
Excess of assets over projected
benefit obligations 1,105,254 1,115,608
Unrecognized net transition asset (173,088) (194,456)
Unrecognized net gain (608,187) (687,512)
----------- -----------
Prepaid pension costs $ 323,979 $ 233,640
=========== ===========
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $888.3 million and $979.7 million and vested
benefit obligations of $794.1 million and $887.5 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
-25-
<PAGE> 28
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. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Benefits earned during the year $ 7,147 $ 12,991
Interest cost on accumulated postretirement
benefit obligations 49,821 52,325
Actual return on plan assets 3,202 (2,343)
Amortization of transition obligation 27,096 32,735
Other - net (11,556) --
--------- ---------
Postretirement benefit cost $ 75,710 $ 95,708
========= =========
</TABLE>
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $16.0 million.
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations
attributable to:
Retirees $ 509,682 $ 514,228
Fully eligible active plan participants 9,357 4,223
Other active plan participants 129,154 159,527
--------- ---------
Total accumulated postretirement benefit
obligations 648,193 677,978
Fair value of plan assets 103,432 70,896
--------- ---------
Excess of accumulated obligations over
plan assets 544,761 607,082
Unrecognized transition obligation (472,480) (518,976)
Unrecognized net loss (28,596) (53,993)
--------- ---------
Accrued postretirement benefit obligations $ 43,685 $ 34,113
========= =========
</TABLE>
-26-
<PAGE> 29
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at
December 31, 1993. The assumed health care cost trend rates in 1994 and 1993
were 12% and 13% for pre-65 participants and 9% and 9.5% for post-65 retirees,
each rate declining on a graduated basis to an ultimate rate in the year 2004
of 6%. A one percentage point increase in the assumed health care cost trend
rate for each future year would have increased 1994 costs by $3.4 million and
the accumulated postretirement benefit obligations at December 31, 1994 by
$44.5 million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes include, among others, newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service. The net
effect of these changes reduced the accumulated postretirement benefit
obligations at December 31, 1993 by $132.7 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $9.9 million, $10.2 million and $11.2 million in
1994-1992, respectively.
10. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment that contain varying renewal options for terms up to 26 years.
Rental expense was $37.4 million, $31.3 million and $35.5 million in 1994-1992,
respectively. Minimum rental commitments for noncancelable leases through 1999
do not exceed $14.0 million annually and aggregate $9.5 million thereafter.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------- ------
(Thousands of Dollars)
<S> <C> <C>
Land $ 59,477 $ 59,272
Buildings 615,414 600,842
Central office equipment 2,811,618 2,744,446
Outside plant 4,013,072 3,892,864
Other 920,671 917,696
----------- -----------
Total property, plant and equipment 8,420,252 8,215,120
Accumulated depreciation 3,582,965 3,252,741
----------- -----------
Net property, plant and equipment $ 4,837,287 $ 4,962,379
=========== ===========
</TABLE>
-27-
<PAGE> 30
12. 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. The new framework replaced the traditional "rate case"
process with a framework that was centered around a Price Cap Index (PCI)
mechanism with "sharing" of intrastate earnings (those earnings subject to the
CPUC regulation) above a benchmark rate of return. This plan is designed to
stimulate productivity and efficiencies with a portion of these gains flowing
directly to the customer. 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 ratepayers 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 million. This reduction includes the $53 million rate
reduction agreed to by the Company in the NRF review.
Under NRF, rates are adjusted annually by the PCI which is based on inflation
minus a productivity improvement factor. Rates for partially competitive
services (i.e. Centrex and custom calling features) may be priced below the
price cap within a range set by the CPUC. Rates are also adjusted for
exogenous events that are beyond the control of management as defined in this
plan. Fully competitive services (eg., directory advertising) are not subject
to pricing limits set by the CPUC.
The 1992 index adjustment resulted in a rate reduction of approximately
$30 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 million,
which the CPUC approved in an order issued December 16, 1992. In 1992 and 1993
the Company refunded to its customers approximately $30 million and $33
million, respectively, in accordance with the "sharing mechanism" of the NRF.
The refunds represented 50% of the Company's 1991 and 1992 intrastate earnings
over the 13% rate of return benchmark.
In September 1994, the CPUC issued a final order that authorized intraLATA toll
competition (without pre-subscription) in California, effective January 1,
1995. It also provides for rate rebalancing with significant rate reductions
for toll service and access charges while increasing basic local exchange rates
closer to the actual cost of providing such service. Specifically, the CPUC
reduced rates for the Company's toll services by an average of 42% and its
switched access rates by more than 50% while offsetting the revenue impacts by
increasing other rates closer to cost. Monthly service rates for flat-rated
residential customers increased from $11.21 to $17.25 while measured business
customers rates increased from $10.46 to $19.22. Although the rate rebalancing
is intended to be revenue neutral, its ultimate effect on revenue will depend,
in part, on the extent to which rate reductions result in increased calling
volumes. The decision does not permit rate
-28-
<PAGE> 31
increases to compensate for competitive losses of market share. GTE believes
that the CPUC has over-estimated the calling volume that will be stimulated by
reduced toll rates and has requested reconsideration of this aspect of the
decision.
The CPUC adopted pricing standards and contracting rules which provide the
Company increased flexibility to respond to competition. Tariff prices for
competitive services can be decreased on ten days notice from a pre-set ceiling
and can subsequently be increased up to the ceiling on 30 days notice.
Contracts can utilize a new "express contracting procedure" which allows
contracts to be effective in 14 days rather than the 40 days previously
required. In addition, "express contracts" do not require CPUC approval.
On October 12, 1994, the CPUC issued a decision which authorizes further
proceedings to be held with regard to a previous Commission decision that
adopted accrual accounting for SFAS 106. The previous CPUC decision permitted
the Company recovery of its SFAS 106 costs as an exogenous factor in annual
price cap filings. This decision reaffirmed the CPUC decision to adopt SFAS
106 for ratemaking purposes. However, the issue of exogenous recovery will be
further reviewed and any revenues collected in rates subsequent to
October 12, 1994, are subject to refund pending further investigation. The
Company is currently recovering $42 million annually in rates for SFAS 106
costs. No amounts related to this matter have been reserved.
In December, 1994, the CPUC issued a decision which adopts an initial
procedural plan to facilitate opening local exchange telecommunications markets
to competition by January 1, 1997. This plan allows parties until March 31,
1995 to negotiate a settlement on implementation issues. If the parties are
unable to resolve the issues, the CPUC will intervene. Concerns to be
addressed include issuing two orders in early 1995 to resolve Open Network
Architecture (ONA) technical issues on expanded interconnection and local
transport restructure. The second order would adopt a methodology for
developing long-run incremental cost studies. One docket will be launched
addressing Universal Service Issues and another docket will be launched
addressing pre-subscription issues. Interested parties will be allowed to
provide recommendations on the scope and content of interim rules for local
competition. The next NRF review proceeding will be initiated in May 1995, if
no settlement can be reached.
On December 7, 1994, the CPUC issued Decision 94-12-003 approving and adopting,
without modification, new depreciation rates for the Company effective January
1, 1995. This decision represents the Company's first uncontested approval of
depreciation rates since the inception of the NRF.
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
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 show that the merger meets certain California
statutory requirements. GTE was also ordered to submit a plan for the merger
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.
-29-
<PAGE> 32
On December 23, 1993, an Administrative Law Judge issued a proposed Phase II
order allowing the merger of Contel of California, Inc. and the Company. 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.
On April 20, 1994 the CPUC issued a decision giving final approval to the
merger of Contel of California, Inc. into the Company. The decision requires
the merging companies to flow through to their ratepayers all of the estimated
savings that will be produced from the merger. This flow through requirement
is based on the CPUC's interpretation of certain statutory requirements. The
CPUC, however, provided the parties with the opportunity to supplement the
evidentiary record to show why the estimated merger savings should be
apportioned between ratepayers and shareholders. That filing was made on April
29, 1994. By making the filing, the effective date of the decision approving
the merger has been delayed. The Company and other interested parties filed
reports and comments pursuant to this proceeding.
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 price cap regulatory plan, the FCC 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 1995,
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 CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities revenues during the years
1994-1992 under various arrangements and amounted to $281.6 million, $282.4
million and $349.1 million, respectively.
-30-
<PAGE> 33
13. 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:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $(148,346) $(51,519) $(57,319)
Notes receivable 6,668 (28,402) 15,207
Materials and supplies (2,942) 4,615 29,473
Prepayments and other current assets 3,515 (5,708) 14,124
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable 54,166 (25,185) 25,045
Affiliate payables and accruals (8,675) 1,481 21,884
Advanced billings and customer deposits 797 5,836 (1,959)
Accrued liabilities 18,483 32,333 (38,407)
Other (108,307) 2,425 4,083
--------- -------- --------
Total $(184,641) $(64,124) $ 12,131
========= ======== ========
CASH PAID DURING THE YEAR FOR:
Interest $ 86,038 $123,560 $128,520
Income taxes 285,390 237,255 280,173
</TABLE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1994 and 1993 quarterly financial data is as follows:
<TABLE>
<CAPTION>
Net
Operating
Operating Income Net Income
Revenues (Loss) (Loss)
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
1994
FIRST QUARTER $ 695,365 $ 199,415 $ 106,956
SECOND QUARTER 688,863 181,421 92,738
THIRD QUARTER 726,655 228,827 118,016
FOURTH QUARTER 770,847 216,584 116,830
----------- ----------- -----------
TOTAL $ 2,881,730 $ 826,247 $ 434,540
=========== =========== ===========
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
=========== =========== ===========
</TABLE>
(a) Net income includes a $20.2 million extraordinary charge for the early
retirement of debt. Income before extraordinary charge was $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.
-31-
<PAGE> 34
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, 1994 and 1993, and the related
consolidated statements of income, reinvested earnings and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE California Incorporated
and subsidiary as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This supporting schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 25, 1995.
-32-
<PAGE> 35
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 Accounts. These statements were prepared in conformity with
generally accepted accounting principles and include amounts that are based on
the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organization 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.
C. MICHAEL CRAWFORD
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
-33-
<PAGE> 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-34-
<PAGE> 37
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held April 12, 1995, pages 3 and 4, which is
incorporated herein by reference. A complete list of executive officers of the
Registrant as of March 1, 1995 is provided below.
The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations
(Telops). Accordingly, the list below contains the names, ages and positions
of the executive officers of both the Company and GTE Telephone Operations.
<TABLE>
<CAPTION>
Identification of Executive Officers
------------------------------------
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- --------------------------
<S> <C> <C> <C> <C>
Kent B. Foster 51 1989 -- President of GTE Telephone
Operations
John C. Appel 46 1994 1995 Senior Vice President -
Regional Operations of GTE
Telephone Operations and the
Company
Mary Beth Bardin (1) 40 1994 1995 Vice President - Public Affairs
of GTE Telephone Operations
and the Company
Clarence F. Bercher 51 1994 1995 President - Consumer
Markets of GTE Telephone
Operations and Vice
President - Consumer Markets
of the Company
Richard M. Cahill 56 1989 1995 Vice President - General
Counsel of GTE Telephone
Operations and the Company
Robert C. Calafell 53 1993 -- Vice President - Video Services
of GTE Telephone Operations
C. Michael Crawford (2) 48 -- 1995 President of the Company
Gerald K. Dinsmore 45 1994 1994 Senior Vice President - Finance
and Planning of GTE Telephone
Operations and the Company
William M. Edwards, III 46 -- 1993 Controller of the Company
Michael B. Esstman 48 1994 -- Executive Vice President -
Customer Segments of GTE
Telephone Operations
Bruce E. Haddad 41 1994 -- Senior Vice President -
International of GTE
Telephone Operations
Donald A. Hayes 57 1992 -- Vice President - Information
Technology of GTE Telephone
Operations
Gregory D. Jacobson 43 -- 1994 Treasurer of the Company
Andrew T. Jones 54 1992 -- Vice President - International
of GTE Telephone Operations
</TABLE>
-35-
<PAGE> 38
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- ---------------------------
<S> <C> <C> <C> <C>
Brad M. Krall 53 1993 1995 Vice President - Centralized
Operations of GTE Telephone
Operations and the Company
Michael J. McDonough 45 1994 1995 President - Business
Markets of GTE Telephone
Operations and Vice
President - Business Markets
of the Company
Paul E. Miner 50 1993 1995 Vice President - Network
Operations Support of GTE
Telephone Operations and the
Company
Richard L. Schaulin 52 1989 1995 Vice President - Human
Resources of GTE Telephone
Operations and the Company
Leland W. Schmidt 61 1989 -- Vice President - Industry
Affairs of GTE Telephone
Operations
Charles J. Somes (3) 49 -- 1995 Secretary of the Company
Larry J. Sparrow 51 1994 1995 President - Carrier
Markets of GTE Telephone
Operations and Vice
President - Carrier Markets
of the Company
Alex Stadler 44 1994 1995 Vice President - Strategy &
Technology Planning of GTE
Telephone Operations and the
Company
Thomas W. White 48 1994 -- Executive Vice President -
Network Operations of GTE
Telephone Operations
</TABLE>
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 employees had a
significant role in decision making.
All officers are appointed for a term of one year.
NOTES:
(1) Mary Beth Bardin was elected Vice President - Public Affairs of GTE
Telephone Operations replacing G. Bruce Redditt who was appointed Vice
President - Public Affairs and Communications, GTE Corporation.
(2) C. Michael Crawford was elected President replacing Larry J. Sparrow who
was elected President - Carrier Markets of GTE Telephone Operations
and Vice President - Carrier Markets of the Company.
-36-
<PAGE> 39
3) Charles J. Somes was elected Secretary replacing Kenneth J. Okel who was
appointed Assistant Vice President and Associate General Counsel -
Regional Operations - Western, GTE Telephone Operations.
Item 11. Executive Compensation
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held April 12, 1995, pages 4 to 16, which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held April 12, 1995, page 16, which is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held April 12, 1995, pages 3, 4 and 17, which is
incorporated herein by reference.
-37-
<PAGE> 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE California Incorporated's
consolidated financial statements and report of independent
accountants thereon in the Financial Statements section included
elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended
December 31, 1994-1992 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one above are omitted as not
applicable, not required, or the information is included in
the consolidated financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1* Agreement of Merger, dated September 10, 1992 between GTE
California Incorporated and Contel of California, Inc.
(Exhibit 2.1 of the 1993 Form 10-K. File No. 1-6417).
3* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988
Form 10-K, File No. 1-6417).
4* Indenture dated as of December 1, 1993 between GTE California
Incorporated and Bank of America National Trust and Savings
Association, as Trustee (Exhibit 4.1 of the Company's
Registration Statement on Form S-3, File No. 33-51541).
27 Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1994.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
-38-
<PAGE> 41
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Thousands of Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
---------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Deductions
Balance at Charged Charged from Balance at
Beginning to to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1994 $ 51,980 $ 69,168 $ 26,867(2) $ 109,478 $ 38,537
========== ========== ============= ========== ===========
December 31, 1993 $ 20,752 $ 85,365 $ 21,209(2) $ 75,346 $ 51,980
========== ========== ============= ========== ===========
December 31, 1992 $ 11,711 $ 83,779 $ 14,993(2) $ 89,731 $ 20,752
========== ========== ============= ========== ===========
Accrued restructuring costs
for the year ended (Note 3):
December 31, 1994 $ 445,175 $ -- $ -- $ 113,397 $ 331,778
========== ========== ========== ========== ===========
December 31, 1993 $ -- $ 445,175 $ -- $ -- $ 445,175
========== ========== ========== ========== ===========
December 31, 1992 $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ===========
</TABLE>
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 2 to the Consolidated Financial Statements included elsewhere
herein.
-39-
<PAGE> 42
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 24, 1995 By C. MICHAEL CRAWFORD
-------------- -----------------------------------
C. MICHAEL CRAWFORD
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
C. MICHAEL CRAWFORD President March 24, 1995
------------------- (Principal Executive Officer)
C. MICHAEL CRAWFORD
GERALD K. DINSMORE Senior Vice President - Finance March 24, 1995
------------------ and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 24, 1995
------------------------- (Principal Accounting Officer)
WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 24, 1995
-------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 24, 1995
-------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 24, 1995
-------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 24, 1995
-------------------------
THOMAS W. WHITE
</TABLE>
-40-
<PAGE> 43
EXHIBIT INDEX
-------------
2.1* Agreement of Merger, dated September 10, 1992 between GTE
California Incorporated and Contel of California, Inc.
(Exhibit 2.1 of the 1993 Form 10-K. File No. 1-6417).
3* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988
Form 10-K, File No. 1-6417).
4* Indenture dated as of December 1, 1993 between GTE California
Incorporated and Bank of America National Trust and Savings
Association, as Trustee (Exhibit 4.1 of the Company's
Registration Statement on Form S-3, File No. 33-51541).
27 Financial Data Schedule.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-1-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 43,118
<SECURITIES> 0
<RECEIVABLES> 647,020
<ALLOWANCES> 38,537
<INVENTORY> 40,303
<CURRENT-ASSETS> 770,072
<PP&E> 8,420,252
<DEPRECIATION> 3,582,965
<TOTAL-ASSETS> 6,067,644
<CURRENT-LIABILITIES> 1,129,797
<BONDS> 1,280,157
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 853,193
<TOTAL-LIABILITY-AND-EQUITY> 6,067,644
<SALES> 2,881,730
<TOTAL-REVENUES> 2,881,730
<CGS> 634,144
<TOTAL-COSTS> 2,055,483
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,938
<INCOME-PRETAX> 728,005
<INCOME-TAX> 293,465
<INCOME-CONTINUING> 434,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,540
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
