<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 1-6417
GTE CALIFORNIA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0510200
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 214-718-5600
Securities registered pursuant to Section 12(b) of the act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
FIRST MORTGAGE BONDS, SERIES X, DUE 2001
PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
4 1/2% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
5 % SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
7.48 % SERIES CUMULATIVE PREFERRED STOCK $100 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK 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 29, 1996. 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 29, 1996, AMOUNTED TO $3,784,212.
DOCUMENT INCORPORATED BY REFERENCE: PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 10, 1996 (INCORPORATED IN PART III).
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
<S> <C> <C>
Part I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for the Registrant's Common Equity and Related 6
Shareholder Matters
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on 38
Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant 39
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners and Management 41
13. Certain Relationships and Related Transactions 41
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
</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 markets
telecommunications customer premise equipment and other products and services.
On April 20, 1994, the California Public Utilities Commission (CPUC) issued a
decision giving final approval to the merger of Contel of California, Inc. into
the Company (the Merger). The decision requires the merging companies to flow
through to their ratepayers all of the estimated savings that will be produced
from the Merger. 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. On October 5, 1995, the
Governor of the State of California signed a law which clarifies the authority
of the CPUC to allocate utility merger benefits between ratepayers and
shareholders, with not less than 50% going to ratepayers. The new law became
effective January 1, 1996. A decision approving the Merger under the terms of
the amended legislation is expected during the second quarter of 1996. It is
currently anticipated, subject to receipt of this final approval, that the
Merger will be consummated in the second half of 1996.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. The Company provides local telephone
service within its franchise area and intraLATA (Local Access Transport Area)
toll service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of 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. Business and residential customers also pay access charges to
connect to the local network to obtain long distance service. The Company
earns other revenues by leasing interexchange plant facilities and providing
such services as billing and collection and operator services to interexchange
carriers. At December 31, 1995, the Company served 4,009,054 access lines in
its service territories with a substantial number of those lines in Southern
California.
At December 31, 1995, the Company had 12,032 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. Negotiations for a new agreement
between the Company and the CWA began on January 15, 1996.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the CPUC as to its intrastate business
operations and by the Federal Communications Commission (FCC) as to its
interstate operations.
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Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the
local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless and
cable TV companies, as well as more recent entry by media and computer
companies, is expected to increase in the rapidly changing telecommunications
marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including California. In addition, eight states,
none of which are served by the Company, have concluded that intraLATA 1+
competition is in the public interest. These states have authorized plans that
would allow customers to pre-subscribe to a specific carrier to handle their
intraLATA toll calls. Pre-subscribed customers will simply dial "1" before the
telephone number in order to complete intraLATA calls. The Telecommunications
Act requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.
On January 1, 1995, pursuant to an order issued by the CPUC, competition in
toll services (without customer pre-subscription) became effective in
California. The order also provided for rate rebalancing with significant rate
reductions for toll services and access charges while increasing basic local
service rates closer to the actual cost of providing such service. Although
this rate rebalancing was intended by the CPUC to be revenue neutral, the
actual increase in volumes did not fully compensate for the toll and access
rate reductions. Revenues decreased by approximately $194.3 million in 1995 as
a result of the implementation of this order.
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GTE Mobilnet, GTE Card Services and the Company have each requested authority
to provide resale based local-exchange service in other major metropolitan
areas of California, including San Francisco Bay, San Joaquin Valley,
Sacramento, and San Diego.
For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan. The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate
of return which may be achieved. Under this approach, the maximum prices that
the local-exchange carrier (LEC) may charge are increased or decreased each
year by a price index based upon inflation less a predetermined productivity
target. LECs have limited pricing flexibility provided they do not exceed the
allowed price cap. The FCC is considering how the price cap plan should be
modified in the future in order to adapt the system to the emergence of
competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 to the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $445.2 million
re-engineering program. Since the program began in 1994, costs of $240.8
million have been charged to the restructuring reserve -- $154 million related
to customer service processes, $34.3 million related to administrative
processes and $52.5 million related to the consolidation of facilities and
operations and other related costs. These costs were primarily associated with
the closure and relocation of various centers, software enhancements and
separation benefits associated with workforce reductions. The continued
implementation of this program positions the Company to accelerate delivery of
a full array of voice, video and data services and to reach its stated
objective of being the easiest company to do business with in the industry.
Video Services
The Telecommunications Act eliminates the telephone company programming ban and
allows GTE the flexibility to choose whether it will enter the video
distribution business through an open video platform arrangement or via a
standard cable television operation. The legislation also allows GTE to deploy
video networks which are fully integrated with its telephone operations. The
FCC will begin the process of formulating rules with respect to the open video
platform arrangement which will govern provision of such services. In
addition, the FCC has opened two rulemakings to evaluate its cable and
telephone home-wiring rules and other technical standards to reflect the
growing convergence of the telephone and cable industries.
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<PAGE> 6
In May 1995, GTE obtained approval from the FCC to begin construction of its
video dialtone network in Ventura County, California. In December 1995, GTE
negotiated with local governments in California to begin construction of a
traditional cable network in Ventura County, California. The network is
scheduled to begin delivery of video services to customers in 1996.
World Class Network
During 1995, the Company deployed its ISDN-based World Class Network in Los
Angeles, Santa Barbara and San Bernardino, 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 the Company to provide advanced services such as
high-speed data transmission and video conferencing.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
4
<PAGE> 7
Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of the
aforementioned properties, located in the state of California, with a
substantial amount in Southern California, are generally in good operating
condition and adequate to satisfy the needs of the business. Substantially all
of the Company's property is subject to the liens of its respective mortgages
securing funded debt. From January 1, 1991 to December 31, 1995, the Company
made capital expenditures of $2.5 billion for new plant and facilities required
to meet telecommunication service needs and to modernize plant and facilities.
These additions were equal to 29% of gross plant of $8.6 billion at December
31, 1995.
In response to recently enacted and pending legislation and the increasingly
competitive environment, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71) in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 to the Company's
consolidated financial statements included in Item 8.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's consolidated financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
<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 (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock and preferred stock, should be contacted with any
questions relating to shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
1-617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Mail Stop 45-02-60
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1995 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE Corporation through
the following universal resource:
http://www.gte.com
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Item 6. Selected Financial Data
GTE California Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
Selected Income Statement Items (a) 1995 1994 1993(b) 1992 1991
----------------------------------- --------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Revenues and sales $2,801,333 $2,947,947 $2,958,558 $3,001,391 $3,040,837
Operating costs and expenses 2,207,598 2,125,462 2,685,257 2,231,841 2,241,907
--------------------------------------------------------------------
Operating income 593,735 822,485 273,301 769,550 798,930
Interest - net 100,910 94,480 111,909 120,251 125,338
Other - net -- -- (2,762) (3,160) (11,590)
Income taxes 199,703 293,465 70,535 237,089 242,724
--------------------------------------------------------------------
Income before extraordinary charges 293,122 434,540 93,619 415,370 442,458
Extraordinary charges (c) (583,428) -- (20,214) -- --
--------------------------------------------------------------------
Net income (loss) $ (290,306) $ 434,540 $ 73,405 $ 415,370 $ 442,458
====================================================================
Dividends declared on common stock $ 295,200 $ 387,843 $ 355,000 $ 372,267 $ 516,620
Dividends declared on preferred stock 4,784 4,784 4,790 4,755 5,210
<CAPTION>
As of December 31,
--------------------------------------------------------------------
Selected Balance Sheet Items 1995 1994 1993 1992 1991
---------------------------- --------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Property, plant and equipment, net (c) $3,714,439 $4,837,287 $4,962,379 $5,039,231 $5,031,712
Total assets 4,906,098 6,067,644 5,968,993 5,928,115 5,916,179
Long-term debt 1,285,771 1,280,157 860,398 1,567,017 1,389,404
Shareholders' equity 1,733,533 2,323,823 2,281,910 2,568,295 2,529,947
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Operating income in 1993 included a $445.2 million pre-tax charge for
restructuring costs which reduced net income by $274.2 million.
(c) See Note 2 to the consolidated financial statements included in Item 8.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE California Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services
throughout Southern and Central California. At December 31, 1995, the Company
served 4,009,054 access lines in its service territories with a substantial
number of those lines in Southern California. The Company also markets
telecommunications customer premise equipment and other products and services
through GTEL, a wholly-owned subsidiary.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
-------- ------- ------
<S> <C> <C> <C>
Net income (loss) $ (290.3) $ 434.5 $ 73.4
</TABLE>
The net loss for 1995 includes one-time extraordinary charges (net of tax) of
$583.4 related to the discontinuance of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(FAS 71) and the early retirement of debt in the fourth quarter of 1995.
Results for 1993 include a one-time charge (net of tax) totaling $315.6 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 decreased 33% or $141.4 and increased
12% or $45.5 for 1995 and 1994, respectively. The 1995 decrease is the result
of lower operating income primarily due to corresponding decreases in revenues
associated with the Implementation Rate Design (IRD) discussed below. The 1995
decrease is also due to higher labor charges due to flood damage incurred
during the first quarter of 1995 and higher depreciation expense primarily
associated with additions to plant balances during the year. The 1994 increase
is primarily the result of ongoing quality and cost control programs and a
decrease in interest expense.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in toll services (without customer
pre-subscription) became effective in California. The order also provided for
rate rebalancing with significant rate reductions for toll services and access
charges while increasing basic local service rates closer to the actual cost of
providing such service. Although this rate rebalancing was intended by the
CPUC to be revenue neutral, the actual increase in volumes did not fully
compensate for the toll and access rate reductions. Revenues decreased by
approximately $194.3 in 1995 as a result of the implementation of this order.
REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Local services $1,253.9 $ 964.6 $ 975.8
Network access services 708.7 669.8 616.1
Toll services 448.8 960.6 1,003.2
Other services and sales 389.9 352.9 363.5
-------- -------- --------
Total revenues and sales $2,801.3 $2,947.9 $2,958.6
</TABLE>
Total revenues and sales decreased 5% or $146.6 and less than 1% or $10.7
during 1995 and 1994, respectively.
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Local service revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. Local service
revenues increased 30% or $289.3 in 1995 and decreased 1% or $11.2 in 1994.
The increase in 1995 is primarily the result of $275.3 in rate increases
associated with the IRD. The number of access lines increased 5% in 1995
compared to the same period in 1994, which generated $16.1 of additional
revenues. The 1995 increase was partially offset by a $10.4 reduction in
revenues due to more customers electing measured usage rate plans and by a $4.2
reduction in revenues associated with the refund of installation charges to
customers. The 1994 decrease was primarily due to a rate reduction related to
the price cap index and the new regulatory framework (NRF) review partially
offset by an increase in revenues due to a 3% growth in access lines.
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local-exchange network in providing long
distance service. In addition, end users pay access fees to connect to the
local network to obtain long distance service. Network access service revenues
increased 6% or $38.9 and 9% or $53.7 in 1995 and 1994, respectively. Minutes
of use increased 11% in 1995, compared to the same period in 1994. This
increase generated $23 of additional revenues. In addition, the 1995 increase
is due to $22.1 in nonrecurring favorable carrier settlement activities
recorded in the first quarter of 1995, reflecting a switched access meet point
billing settlement with Pacific Bell for the period January 1, 1990 through
December 31, 1994. The increase is also due to the net effect of the May and
August 1995 interstate rate changes that resulted in $11.1 of additional
revenues associated with the FCC Price Cap and $15.9 of additional revenues
associated with the IRD. These increases are partially offset by a $19
reduction in interstate access revenues associated with affiliate audit price
reductions and by $14.5 of carrier billing settlements recorded in the fourth
quarter of 1994. The 1994 increase was 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.
The Company's toll services are based on fees charged for service beyond a
customer's local calling area but within the local access transport area
(LATA). Toll service revenues decreased 53% or $511.8 and 4% or $42.6 in 1995
and 1994, respectively. The decrease for 1995 is primarily the result of
$494.6 in rate reductions associated with the previously mentioned IRD. The
1994 decrease was primarily due to rate reductions related to the price cap
index and NRF review.
Other services and sales revenues increased 10% or $37 in 1995 and decreased 3%
or $10.6 in 1994. The increase for 1995 is primarily due to a $9.1 increase
in revenues associated with the IRD, a $6.9 increase in operator service
revenues, an $11.7 increase in billing and collection revenues and a $9.2
increase in revenues due to growth in voice messaging and radio paging. These
increases are partially offset by $5.2 of lower sales of single line telephone
systems. The 1994 decrease was 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.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cost of services and sales $1,076.8 $1,061.1 $1,092.6
Selling, general and administrative 527.8 484.5 564.4
Depreciation and amortization 603.0 579.9 583.1
Restructuring -- -- 445.2
-------- -------- --------
Total operating costs and expenses $2,207.6 $2,125.5 $2,685.3
</TABLE>
Total operating costs and expenses increased 4% or $82.1 in 1995 and decreased
21% or $559.8 in 1994. Effective January 1, 1995, the Company transitioned to
an Originating Responsibility Plan (ORP) for intraLATA access
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<PAGE> 12
settlement arrangements. As part of this CPUC-ordered rate rebalancing, the
Company incurred $35.9 of intraLATA access charge payments in 1995 for
intraLATA toll calls that were originated by the Company and terminated by
another LEC. In addition, the 1995 increase is also due to a $16 increase in
labor charges related to flood damage incurred during the first quarter of
1995, a $23.1 increase in depreciation primarily associated with additions to
plant balances, $17.5 of higher costs associated with the collection of
interexchange carrier receivables, a $10.1 increase in the provision for
uncollectible accounts and $6.3 related to changes in plan participation in the
Company's incentive compensation programs. These increases are partially
offset by $13.7 of settlement gains which resulted from lump-sum payments from
the Company's pension plans, $8.4 of lower labor and benefit costs associated
with the Company's re-engineering plan, $5 of costs incurred during 1994
related to earthquake damage and $2.9 of insurance proceeds received in 1995
that were related to 1994 earthquake damage. The increases are also partially
offset by a $6.7 increase in pension income and an $11.3 reduction in rent
expense.
Operating costs and expenses for 1993 include a one-time charge of $445.2 to
restructure operations and a one-time charge of $34.7 associated with the
enhanced early retirement and voluntary separation programs offered to eligible
employees during the second quarter of 1993. Excluding these items, operating
costs and expenses decreased 4% or $79.9 in 1994. This decrease was primarily
the result of ongoing quality and cost control programs resulting in a
reduction in workforce. The 1994 decrease also reflected lower switched access
expenses, installation and maintenance costs and lower depreciation expenses,
primarily due to lower composite depreciation rates which were partially offset
by additions to plant balances.
OTHER EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1994 1993
------ ----- ------
<S> <C> <C> <C>
Interest - net $100.9 $ 94.5 $111.9
Income taxes 199.7 293.5 70.5
</TABLE>
Interest - net increased 7% or $6.4 in 1995 and decreased 16% or $17.4 in 1994.
The 1995 increase is primarily due to higher average long-term debt balances.
The 1994 decrease was due to lower average long-term debt levels and lower
average interest rates.
Income taxes decreased $93.8 in 1995 and increased $223 in 1994. These changes
are primarily due to corresponding changes in pre-tax income. The 1995
decrease is partially offset by lower amortization of investment tax credits.
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. A $3,490 line of credit is
available to the Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs. Subsequent to the filing of
its Registration Statement on Form S-3 on February 16, 1996, the Company has
shelf registration statements for an additional $500 of debentures.
The Company's primary source of funds during 1995 was cash from operations of
$772.2 compared to $851.3 in 1994. The decrease is primarily the result of
lower results from operations associated with the IRD. Cash from operations is
also being utilized to fund the Company's re-engineering plan.
The Company used $393.5 and $438.4 in investing activities during 1995 and
1994, respectively. The Company's capital expenditures during 1995 were $399
compared to $452.5 in 1994. The declining requirements for modernization of
current facilities offset the expenditures associated with continued growth in
access lines and introduction of new products and services, including broadband
digital services. During 1994, the Company received approximately $14 of
proceeds (which approximated net book value) from the sale of 5,400 access
lines in
10
<PAGE> 13
California to Citizens Utilities Company. The Company's anticipated
construction costs for 1996 are expected to approximate those of 1995.
Cash used in financing activities was $390.7 in 1995 compared to $376.4 in
1994. In December 1995, the Company called $75 of long-term debt prior to
stated maturity with proceeds from commercial paper borrowings. The Company
retired an additional $75.3 in long-term debt in 1995 compared to $35.5 in
1994. In February 1994, the Company issued $300 of 5-5/8% Debentures, due
2001. In March and April, 1994, respectively, the Company issued $250 of
6-3/4% Debentures due 2004 and $250 of 8.07% Debentures due 2024 to refinance
commercial paper. Dividends of $344.6 were paid to the shareholders in 1995
compared to $370.3 in 1994.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the CPUC as to its intrastate business
operations and by the Federal Communications Commission (FCC) as to its
interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the local-
exchange network. In addition, competition from alternative local-exchange
carriers (ALECs), interexchange carriers (IXCs), wireless and cable TV
companies, as well as more recent entry by media and computer companies, is
expected to increase in the rapidly changing telecommunications marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including California. In addition, eight states,
none of which are served by the Company, have concluded that intraLATA 1+
competition is in the public interest. These states have authorized plans that
would allow customers to pre-subscribe to a specific carrier to handle their
11
<PAGE> 14
intraLATA toll calls. Pre-subscribed customers will simply dial "1" before the
telephone number in order to complete intraLATA calls. The Telecommunications
Act requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.
On January 1, 1995, pursuant to an order issued by the CPUC, competition in
toll services (without customer pre-subscription) became effective in
California. The order also provided for rate rebalancing with significant rate
reductions for toll services and access charges while increasing basic local
service rates closer to the actual cost of providing such service. Although
this rate rebalancing was intended by the CPUC to be revenue neutral, the
actual increase in volumes did not fully compensate for the toll and access
rate reductions. As expected, revenues decreased by approximately $194.3 in
1995 as a result of the implementation of this order.
GTE Mobilnet, GTE Card Services and the Company have each requested authority
to provide resale based local-exchange service in other major metropolitan
areas of California, including San Francisco Bay, San Joaquin Valley,
Sacramento, and San Diego.
For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan. The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate
of return which may be achieved. Under this approach, the maximum prices that
the local exchange carriers (LECs) may charge are increased or decreased each
year by a price index based upon inflation less a predetermined productivity
target. LECs have limited pricing flexibility provided they do not exceed the
allowed price cap. The FCC is considering how the price cap plan should be
modified in the future in order to adapt the system to the emergence of
competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 to the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
12
<PAGE> 15
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $445.2
re-engineering program. Since the program began in 1994, costs of $240.8 have
been charged to the restructuring reserve -- $154 related to customer service
processes, $34.3 related to administrative processes and $52.5 related to the
consolidation of facilities and operations and other related costs. These
costs were primarily associated with the closure and relocation of various
centers, software enhancements and separation benefits associated with
workforce reductions. The continued implementation of this program positions
the Company to accelerate delivery of a full array of voice, video and data
services and to reach its stated objective of being the easiest company to do
business with in the industry.
Video Services
The Telecommunications Act eliminates the telephone company programming ban and
allows GTE the flexibility to choose whether it will enter the video
distribution business through an open video platform arrangement or via a
standard cable television operation. The legislation also allows GTE to deploy
video networks which are fully integrated with its telephone operations. The
FCC will begin the process of formulating rules with respect to the open video
platform arrangement which will govern provision of such services. In
addition, the FCC has opened two rulemakings to evaluate its cable and
telephone home-wiring rules and other technical standards to reflect the
growing convergence of the telephone and cable industries.
In May 1995, GTE obtained approval from the FCC to begin construction of its
video dialtone network in Ventura County, California. In December 1995, GTE
negotiated with local governments in California to begin construction of a
traditional cable network in Ventura County, California. The network is
scheduled to begin delivery of video services to customers in 1996.
World Class Network
During 1995, the Company deployed its ISDN-based World Class Network in Los
Angeles, Santa Barbara and San Bernardino, 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 the Company to provide advanced services such as
high-speed data transmission and video conferencing.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. In discontinuing the application of FAS 71, the
Company used a methodology similar to FAS 121 in determining the amount of
asset impairments. Accordingly, the issuance of FAS 121 will not have a
significant impact on the Company's consolidated financial statements.
13
<PAGE> 16
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
14
<PAGE> 17
Item 8. Financial Statements and Supplementary Data
GTE California Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales (a):
Local services $1,253,896 $ 964,659 $ 975,780
Network access services 708,745 669,789 616,122
Toll services 448,796 960,571 1,003,154
Other services and sales 389,896 352,928 363,502
---------- ---------- ----------
Total revenues and sales 2,801,333 2,947,947 2,958,558
---------- ---------- ----------
Operating costs and expenses (b):
Cost of services and sales 1,076,787 1,061,059 1,092,559
Selling, general and administrative 527,813 484,536 564,457
Depreciation and amortization 602,998 579,867 583,066
Restructuring -- -- 445,175
---------- ---------- ----------
Total operating costs and expenses 2,207,598 2,125,462 2,685,257
---------- ---------- ----------
Operating income 593,735 822,485 273,301
Other (income) expense:
Interest - net 100,910 94,480 111,909
Other - net -- -- (2,762)
---------- ---------- ----------
Income before income taxes 492,825 728,005 164,154
Income taxes 199,703 293,465 70,535
---------- ---------- ----------
Income before extraordinary charges 293,122 434,540 93,619
Extraordinary charges (583,428) -- (20,214)
---------- ---------- ----------
Net income (loss) $ (290,306) $ 434,540 $ 73,405
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $122,591, $124,704, and $136,800 for the
years 1995 - 1993, respectively.
(b) Includes billings from affiliates of $212,070, $190,692, and $174,743 for
the years 1995 - 1993, respectively.
See Notes to Consolidated Financial Statements.
15
<PAGE> 18
GTE California Incorporated and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
----------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 31,126 $ 43,118
Receivables, less allowances of $56,810 and $38,537 554,271 572,310
Inventories and supplies 31,022 40,303
Deferred income tax benefits 81,181 78,924
Other 13,906 18,152
---------- ----------
Total current assets 711,506 752,807
---------- ----------
Property, plant and equipment, net 3,714,439 4,837,287
Prepaid pension costs 443,591 323,979
Other assets 36,562 153,571
---------- ----------
Total assets $4,906,098 $6,067,644
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 221,518 $ 272,199
Accounts payable 126,391 179,227
Affiliate payables and accruals 113,112 98,984
Advanced billings and customer deposits 65,738 52,072
Taxes payable 67,808 90,676
Accrued interest 22,836 24,478
Accrued payroll costs 100,041 89,918
Dividends payable 88,754 133,402
Accrued restructuring costs 204,430 109,050
Other 87,422 79,791
---------- ----------
Total current liabilities 1,098,050 1,129,797
---------- ----------
Non-current liabilities:
Long-term debt 1,285,771 1,280,157
Deferred income taxes 316,716 739,984
Employee benefit obligations 98,676 36,983
Restructuring costs -- 222,728
Other liabilities 373,352 334,172
---------- ----------
Total non-current liabilities 2,074,515 2,614,024
---------- ----------
Shareholders' equity:
Preferred stock 81,866 81,866
Common stock (69,438,190 shares issued) 1,388,764 1,388,764
Additional paid-in capital 2,040 2,040
Retained earnings 260,863 851,153
---------- ----------
Total shareholders' equity 1,733,533 2,323,823
---------- ----------
Total liabilities and shareholders' equity $4,906,098 $6,067,644
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 19
GTE California Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
----------------------- --------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operations:
Income before extraordinary charges $ 293,122 $ 434,540 $ 93,619
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 602,998 579,867 583,066
Deferred income taxes 37,756 6,559 (206,475)
Restructuring costs -- -- 445,175
Provision for uncollectible accounts 79,293 69,168 85,365
Change in current assets and current liabilities:
Receivables - net (41,784) (141,621) (79,921)
Other current assets 13,527 555 (1,093)
Accrued taxes and interest (24,447) 22,614 30,743
Other current liabilities (119,953) (66,628) (13,853)
Other - net (68,265) (53,720) 54,713
--------- --------- ----------
Net cash from operations 772,247 851,334 991,339
--------- --------- ----------
Investing:
Capital expenditures (399,018) (452,470) (497,403)
Proceeds from sale of assets -- 14,023 --
Other - net 5,469 -- 5,338
--------- --------- ----------
Net cash used in investing (393,549) (438,447) (492,065)
--------- --------- ----------
Financing:
Long-term debt issued -- 790,724 149,789
Long-term debt retired (150,347) (35,538) (961,489)
Dividends (344,632) (370,271) (296,888)
Increase (decrease) in short-term obligations,
excluding current maturities 104,289 (761,304) 641,466
Other - net -- -- (38,300)
--------- --------- ----------
Net cash used in financing (390,690) (376,389) (505,422)
--------- --------- ----------
Increase (decrease) in cash and temporary investments (11,992) 36,498 (6,148)
Cash and temporary investments:
Beginning of year 43,118 6,620 12,768
--------- --------- ----------
End of year $ 31,126 $ 43,118 $ 6,620
========= ========= ==========
Cash paid during the year for:
Interest $ 109,320 $ 86,038 $ 123,560
Income taxes 181,157 285,390 237,255
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 20
GTE California Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
--------- ----------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1992 $ 81,866 $ 1,388,764 $ 2,040 $1,095,625 $2,568,295
Net income 73,405 73,405
Dividends declared (359,790) (359,790)
-------- ----------- ------- ---------- ----------
Shareholders' equity, December 31, 1993 81,866 1,388,764 2,040 809,240 2,281,910
Net income 434,540 434,540
Dividends declared (392,627) (392,627)
-------- ----------- ------- ---------- ----------
Shareholders' equity, December 31, 1994 81,866 1,388,764 2,040 851,153 2,323,823
Net loss (290,306) (290,306)
Dividends declared (299,984) (299,984)
-------- ----------- ------- ---------- ----------
Shareholders' equity, December 31, 1995 $ 81,866 $ 1,388,764 $ 2,040 $ 260,863 $1,733,533
======== =========== ======= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE> 21
GTE California Incorporated and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE California Incorporated (the Company) provides communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. At December 31, 1995, the Company served
4,009,054 access lines in the state of California. The Company is a
wholly-owned subsidiary of GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, GTEL. All significant intercompany transactions
have been eliminated.
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2). The 1995
financial presentation reflects account classifications consistent with
unregulated enterprises operating in a competitive environment. Specifically,
uncollectible revenue accounts have been reclassified from revenues and sales
to selling, general and administrative expenses. Reclassifications of
prior-year data have been made, where appropriate, to conform to the 1995
presentation.
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies, which are not subsidiaries of the Company, supply
construction and maintenance equipment, supplies and electronic repair services
to the Company. These purchases and services amounted to $94.8 million, $81.9
million and $152.7 million for the years 1995-1993, respectively. Such
purchases and services are recorded in the accounts of the Company, at cost,
which includes a normal 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
$212.1 million, $190.7 million and $174.7 million for the years 1995-1993,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's consolidated financial statements include allocated expenses
based on the sharing of certain executive, administrative, financial,
accounting, marketing, personnel, engineering, and other support services being
performed at consolidated work centers among the domestic GTE Telephone
Operating Companies. The amounts charged for these affiliated transactions are
based on a proportional cost allocation method as filed with the Federal
Communications Commission.
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 $122.6 million, $124.7 million and $136.8 million for
the years 1995-1993, respectively.
19
<PAGE> 22
TELEPHONE PLANT
The Company has historically provided for depreciation on a straight-line basis
over asset lives approved by regulators. Beginning in 1996, the Company will
provide for depreciation on a straight-line basis over the estimated economic
lives of its assets (see Note 2). Maintenance and repairs of property 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 or extraordinary retirements of
property where profit or loss is recognized.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers. 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.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112) effective January
1, 1993. FAS 112 requires employers to accrue the future cost of benefits
provided to former or inactive employees and their dependents after employment
but before retirement. Previously, the cost of these benefits was charged to
expense as paid. The impact of this change in accounting on the Company's
results of operations was immaterial.
INCOME TAXES
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and
remits tax payments to GTE based on its tax liability on a separate company
basis.
Deferred tax assets and liabilities are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
20
<PAGE> 23
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. In discontinuing the application of FAS 71, the
Company used a methodology similar to FAS 121 in determining the amount of
asset impairments. Accordingly, the issuance of FAS 121 will not have a
significant impact on the Company's consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
21
<PAGE> 24
2. EXTRAORDINARY CHARGES
In response to recently enacted and pending legislation (see Note 11) and the
increasingly competitive environment, the Company discontinued the use of FAS
71 in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $583.2 million (net of tax benefits
of $406.1 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. The amount of the charge was
based on an analysis of the discounted cash flows expected to be generated by
the embedded telephone plant and equipment over their remaining economic lives.
In addition to the one-time charge, the Company, beginning in 1996, will
shorten the depreciable lives of its telephone plant and equipment as follows
as a result of the discontinuance of FAS 71:
<TABLE>
<CAPTION>
Depreciable Lives
------------------------
Average
Asset Category Before After
------------------- ------- -----
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
In addition, during 1995, the Company redeemed prior to stated maturity, $75
million of long-term debt. This redemption resulted in an after-tax
extraordinary charge of $0.2 million (net of tax benefits of $0.1 million).
During 1993, the Company redeemed prior to stated maturity, $785 million of
high-coupon first-mortgage bonds. These redemptions resulted in an after-tax
extraordinary charge of $20.2 million (net of tax benefits of $13.6 million).
22
<PAGE> 25
3. RESTRUCTURING COSTS
Results for 1993 include one-time pretax restructuring costs 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
implementation of the plan is expected to result in costs of $288.7 million to
re-engineer customer service processes and $104 million to re-engineer
administrative processes. The restructuring costs also include $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 substantially completed by the end of 1996.
Costs of $240.8 million have been incurred since the plan's inception including
$154 million related to customer service processes, $34.3 million related to
administrative processes and $52.5 million related to the consolidation of
facilities and operations and other related costs. These expenditures were
primarily associated with the closure and relocation of various service
centers, software enhancements and separation benefits related to employee
reductions.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pretax charge of $34.7 million which
reduced 1993 net income by $21.2 million.
23
<PAGE> 26
4. PREFERRED STOCK
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Authorized:
$ 20 par value 2,499,174
$100 par value 500,000
---------
2,999,174
=========
<CAPTION>
Shares Amount
--------- -------
(Thousands of Dollars)
<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>
There were no retirements, redemptions or other activity for the years
1995-1993.
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, 1995.
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, 1995, $9.6 million was restricted as to the payment of cash
dividends on common stock under the most restrictive terms of the Articles of
Incorporation.
24
<PAGE> 27
6. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
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
6 1/4 % Series TT, due 1998 150,000 150,000
---------- ----------
360,000 510,000
---------- ----------
Debentures:
5 5/8 % Series A, due 2001 300,000 300,000
6 3/4 % Series B, due 2004 250,000 250,000
8.07 % Series C, due 2024 250,000 250,000
---------- ----------
800,000 800,000
---------- ----------
Other:
6.25 % GTE Finance Corporation promissory note, due 1995 -- 50,000
7.38 % GTE Finance Corporation promissory note, due 1997 50,000 50,000
6.60 % GTE Finance Corporation promissory note, due 2000 50,000 --
Commercial paper expected to be refinanced on a long-term basis 75,000 --
Capitalized leases 1,139 1,486
---------- ----------
Total principal amount 1,336,139 1,411,486
Less: discount (5,092) (5,983)
---------- ----------
Total 1,331,047 1,405,503
Less: current maturities of long-term debt (45,276) (125,346)
---------- ----------
Total long-term debt $1,285,771 $1,280,157
========== ==========
</TABLE>
Long-term debt as of December 31, 1995 includes $75 million of commercial paper
which the Company anticipates refinancing during the first half of 1996 as
further discussed in Note 7.
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. Debt discount on the Company's
outstanding long-term debt is amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.
Estimated payments of long-term debt during the next five years are $45.3
million in 1996; $105.3 million in 1997; $210.3 million in 1998; $0.1 million
in 1999 and $50 million in 2000.
25
<PAGE> 28
Total short-term obligations as of December 31, were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rates 5.75% and 3.55% $125,130 $ 93,579
Notes payable to affiliate - average rates 6.10% and 3.27% 51,112 53,274
Current maturities of long-term debt 45,276 125,346
-------- --------
Total $221,518 $272,199
======== ========
</TABLE>
A $3.5 billion credit line is available to the Company through shared lines of
credit with GTE and other affiliates. Most of these arrangements require
payment of annual commitment fees of .1% of the unused lines of credit.
7. FINANCIAL INSTRUMENTS
During 1995, the Company entered into forward contracts to sell $75 million of
U.S. Treasury Bonds in order to hedge against future changes in market interest
rates related to the debt the Company has called and anticipates refinancing
during the first half of 1996. Any gain or loss recognized upon the expiration
or settlement of the forward contracts will be amortized over the life of the
associated refinanced debt as an offset or addition to interest expense.
The risk associated with these off-balance sheet financial instruments arises
from the possible inability of counterparties to meet the contract terms and
from movements in interest rates. The Company carefully evaluates and
continually monitors the creditworthiness of its counterparties and believes
the risk of non-performance is remote.
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying values. As of December 31, 1995, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, exceeded the carrying value by approximately $39 million.
The estimated fair value of long-term debt as of December 31, 1994 was lower
than the carrying value by approximately $109 million.
26
<PAGE> 29
8. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $119,640 $217,520 $ 206,661
State 42,307 69,386 70,349
-------- -------- ---------
161,947 286,906 277,010
-------- -------- ---------
Deferred:
Federal 39,595 18,080 (138,179)
State 14,960 7,770 (44,113)
-------- -------- ---------
54,555 25,850 (182,292)
-------- -------- ---------
Amortization of deferred investment tax credits (16,799) (19,291) (24,183)
-------- -------- ---------
Total $199,703 $293,465 $ 70,535
======== ======== =========
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $170,814 $254,802 $ 57,454
State income taxes, net of federal tax benefits 37,224 50,151 17,053
Amortization of deferred investment tax credits (16,799) (19,291) (24,183)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net 15,817 20,841 21,772
Rate differentials applied to reversing temporary differences (6,897) (11,461) (4,896)
Other differences, including settlements of prior year
tax issues (456) (1,577) 3,335
-------- -------- --------
Total provision $199,703 $293,465 $ 70,535
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $280,045 $ 719,319
Employee benefit obligations (74,051) (27,201)
Prepaid pension costs 55,977 19,666
Restructuring costs (83,918) (136,195)
Investment tax credits 43,726 69,801
Other - net 13,756 15,670
-------- ---------
Total $235,535 $ 661,060
======== =========
</TABLE>
27
<PAGE> 30
9. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors noncontributory defined benefit 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
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The components of the net pension credit for 1995-1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 30,338 $ 38,734 $ 45,466
Interest cost on projected benefit obligations 94,735 90,606 105,260
Return on plan assets:
Actual (471,234) 4,474 (373,149)
Deferred 284,187 (185,640) 191,512
Other - net (44,706) (39,322) (43,290)
--------- --------- ---------
Total - net $(106,680) $ (91,148) $ (74,201)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1995 and
1994, and 8.25% for 1993.
The funded status of the plans and the net prepaid pension cost at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 931,289 $ 794,143
========== ==========
Accumulated benefit obligations $1,032,737 $ 888,321
========== ==========
Plan assets at fair value $2,579,600 $2,243,960
Less: projected benefit obligations 1,290,989 1,138,706
---------- ----------
Excess of assets over projected benefit obligations 1,288,611 1,105,254
Unrecognized net transition asset (149,172) (173,088)
Unrecognized net gain (695,848) (608,187)
---------- ----------
Total - net $ 443,591 $ 323,979
========== ==========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Discount rate 7.50% 8.25%
Rate of compensation increase 5.25% 5.50%
</TABLE>
28
<PAGE> 31
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). FAS 106 requires that the expected
costs of 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 FAS 106, the cost of
these benefits was charged to expense as paid.
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1995-93 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 6,344 $ 7,147 $ 12,991
Interest cost on accumulated postretirement benefit obligations 47,454 49,821 52,325
Actual return on plan assets (16,386) 3,202 (2,343)
Amortization of transition obligation 25,729 27,096 32,735
Other - net 8,246 (11,556) --
-------- -------- --------
Total - net $ 71,387 $ 75,710 $ 95,708
======== ======== ========
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $ 486,119 $ 509,682
Fully eligible active plan participants 13,513 9,357
Other active plan participants 146,824 129,154
--------- ---------
Total accumulated postretirement benefit obligations 646,456 648,193
Less: fair value of plan assets 146,136 103,432
--------- ---------
Excess of accumulated obligations over plan assets 500,320 544,761
Unrecognized transition obligation (424,284) (472,480)
Unrecognized net gain (loss) 10,174 (48,205)
--------- ---------
Total $ 86,210 $ 24,076
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1995 and 8.25% at December 31,
1994. The assumed health care cost trend rates in 1995 and 1994 were 11% and
12%, respectively, for pre-65 participants and 8.5% and 9%,respectively, for
post-65 retirees, each rate declining on a graduated basis to an ultimate rate
in the year 2004 of 6%. A one percentage point increase in the assumed health
care cost trend rates for each future year would have increased 1995 costs by
$4.2 million and the accumulated postretirement benefit obligation as of
December 31, 1995 by $51.9 million.
29
<PAGE> 32
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for nonunion employees retiring on or after January
1, 1995. These changes include, among others, newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
cost sharing schedule based on a retiree's years of service.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $10.5 million, $9.9 million and $10.2 million in the
years 1995-93, respectively.
10. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is summarized as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 59,329 $ 59,477
Buildings 619,571 615,414
Plant and equipment 7,034,436 6,783,030
Other 883,664 962,331
----------- -----------
Total 8,597,000 8,420,252
Accumulated depreciation (see Note 2) (4,882,561) (3,582,965)
----------- -----------
Total property, plant and equipment - net $ 3,714,439 $ 4,837,287
=========== ===========
</TABLE>
Depreciation provisions in 1995-1993 were equivalent to composite average
percentages of 7.2%, 7.1% and 7.4%, respectively.
30
<PAGE> 33
11. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the California Public
Utilities Commission (CPUC). The Company is subject to regulation by the
Federal Communications Commission (FCC) for its interstate business operations.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company also provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
state regulatory orders.
New Regulatory Framework (NRF)
Effective January 1, 1990, the CPUC adopted the NRF for the Company. The new
framework replaced the traditional "rate case" process with a framework that
centers around a Price Cap Index (PCI) mechanism with "sharing" of intrastate
earnings (those earnings subject to CPUC regulation) above a benchmark rate of
return. This plan is designed to stimulate productivity and efficiencies with
a portion of these gains flowing directly to the customer. 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, which required the Company 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 (ROR) benchmark would be refunded to
ratepayers.
Under the NRF, rates are adjusted annually by the PCI which is based on
inflation minus a productivity improvement factor. Rates for partially
competitive services (i.e., Centrex and custom calling features) may be priced
below the price cap within a range set by the CPUC. Rates are also adjusted
for exogenous events that are beyond the control of management as defined in
this plan. Fully competitive services (e.g., directory advertising) are not
subject to pricing limits set by the CPUC.
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. 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. On December 21,
1994, the CPUC approved the Company's 1995 price cap index filing which
resulted in a rate reduction of $12 million. On December 20, 1995, the CPUC
approved the 1996 price cap index filing whereby the CPUC modified the terms of
the Company's price cap based incentive regulation plan in recognition of
growing competition. In 1996, the Company was ordered to continue to use a
price cap with a productivity factor of 4.6% as an offset to inflation to
adjust its prices for 1996. The impact of this order would result in a $47.1
million rate reduction. In 1997 and 1998, the Company's rates for monopoly and
partially competitive services will be frozen. In its ruling, however, the
CPUC indicated that it would also consider modifying its price cap order to
allow the Company to suspend the price cap formula in 1996. On December 21,
1995, the Company filed its petition requesting suspension of the price cap
formula for 1996. The Company's 1996 Price Cap reduction of $47.1 million has
been suspended pending the outcome of this petition. A decision is expected by
the end of the second quarter of 1996
Several regulatory proceedings are underway in California to determine the
terms and conditions for unbundling GTE's network, to consider additional
pricing flexibility under the CPUC's NRF to modify the NRF to reflect the new
competitive marketplace, to institute intraLATA 1+ dialing parity provisions
and to establish final rules and obligations for Universal Service funding.
31
<PAGE> 34
Implementation Rate Design (IRD)
In September 1994, the CPUC issued a final order that authorized intraLATA toll
competition (without pre-subscription) in California, effective January 1,
1995, associated with the IRD. The final order also provides for rate
rebalancing with significant rate reductions for toll service and access
charges while increasing basic local-exchange rates closer to the actual cost
of providing such service. 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-rate residential customers
increased from $11.21 to $17.25 while measured business customers' rates
increased from $10.46 to $19.22. Although this rate rebalancing was intended by
the CPUC to be revenue neutral, the actual increase in volumes did not fully
compensate for the toll and access rate reductions. This decision did not
permit rate increases to compensate for competitive losses of market share.
Revenues decreased by approximately $194.3 million in 1995 as a result of the
implementation of this order. The Company's request for reconsideration of
this aspect of the order was denied on February 7, 1996.
On September 1, 1995, the Company and Pacific Bell filed a joint motion
requesting the CPUC to modify the IRD decision to reflect the actual increase
in calling being experienced as a result of the toll and switched access price
decreases ordered in the IRD decision. The estimated calling stimulation
contained in the IRD decision has proven to be far in excess of what the market
is experiencing. The recovery mechanism proposed by the Company in the joint
motion would increase some discrete rates that were proposed by the Company in
the IRD but not adopted, with the remainder being recovered via an increase in
the surcharge mechanism. It is not known when the CPUC will issue a decision
on this matter.
Competition
In December 1994, the CPUC issued a decision which adopted an initial
procedural plan to facilitate opening local- exchange telecommunications
markets to competition by January 1, 1997. On April 26, 1995, the CPUC issued
a formal rulemaking proceeding and investigation as a procedural vehicle to
develop and adopt rules for local competition. The rulemaking document
contained proposed interim rules that authorized competitive LECs to seek
authority to offer local- exchange services beginning in June 1995. The
parties filed comments on the proposed rules on May 24, 1995. The Company's
comments asserted the need for evidentiary hearings to address critical issues
such as regulatory parity and interconnection prior to the authorization of
local competition. On July 19, 1995 the CPUC issued interim Universal Service
rules and obligations as a precursor to local competition. The CPUC is
expected to adopt final Universal Service rules and obligations by July 1996.
The CPUC issued interim rules for local competition on July 24, 1995, which
permitted facilities-based local competition on January 1, 1996, with resale
authority granted two months later. On September 1, 1995, the Company filed
with the CPUC for a certificate of public convenience and necessity (CPCN)
which would enable the Company to compete within certain Pacific Bell
franchised service areas to provide customers with facilities-based and
resale-based local-exchange services, high-speed digital private line services,
and intraLATA toll services. Pacific Bell and over 60 other carriers have made
similar filings seeking a CPCN to compete in both GTE and Pacific Bell service
territories. On December 20, 1995, the CPUC approved the Company's request to
provide intraLATA toll, high-speed digital private line services, and
facilities-based local services outside of its current franchise areas in
competition with other LECs. On February 23, 1996, the CPUC approved the
Company's request to provide resale-based local services outside of its current
franchise areas. On March 13, 1996, the CPUC adopted interim resale rates and
rules, effective March 31, 1996, allowing competitive LECs to begin providing
service.
On February 23, 1996, the CPUC also adopted additional local competition rules
addressing interconnection terms and conditions, joint provisioning of access
services, information-mass announcement services and additional intercompany
arrangements.
32
<PAGE> 35
Merger
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 Contel of California, Inc. into GTE California Incorporated. On September
14, 1992 the Company and Contel of California, Inc. joined with GTE and Contel
in filing a comprehensive plan with the CPUC to merge Contel of California,
Inc. into the Company (the Merger).
On December 23, 1993, an Administrative Law Judge issued a proposed Phase II
order approving the Merger. 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. 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. On
October 5, 1995, the Governor of the State of California signed a law which
clarifies the authority of the CPUC to allocate utility merger benefits between
ratepayers and shareholders, with not less than 50% going to ratepayers. A
final CPUC decision approving the Merger under the terms of the amended
legislation is expected during the second quarter of 1996. It is currently
anticipated, subject to receipt of this final approval, that the Merger will be
consummated in the second half of 1996.
Other Matters
On October 12, 1994, the CPUC issued a decision which authorized further
proceedings to be held with regard to a previous CPUC decision that adopted
accrual accounting for FAS 106, which permitted the Company to recover its FAS
106 costs as an exogenous factor in annual price cap filings. This decision
reaffirmed the CPUC decision to adopt FAS 106 for rate making 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 $30
million annually in rates for FAS 106 costs.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. LECs have limited pricing
flexibility provided they do not exceed the allowed price cap.
In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options reflected an increase to the 3.3% productivity factor
used since 1991. The Company selected a 4.0% productivity factor for use in
the 1995-1996 tariff year. The Company must share with customers 50% of
returns over a 12.25% ROR and up to a 13.25% ROR, and share with customers 100%
of returns over a 13.25% ROR. Since the Company's access fees were priced
significantly below the FCC's maximum price,
33
<PAGE> 36
the Company was permitted to file tariffs effective May 24, 1995 to increase
rates $26 million, annually. In addition, the Company filed tariffs effective
August 1, 1995 under the interim rules to reduce rates $21.4 million, annually.
On September 20, 1995, the FCC released its proposed rulemaking proceeding on
price caps which proposes specific changes to reflect and encourage emerging
competition in local and access services markets and to establish the path
towards decreased regulation of LECs' services. On September 27, 1995, the FCC
solicited comments on a number of specific issues regarding methods for
establishing the price caps, such as productivity measurements, sharing, the
common line formula and exogenous costs. The Company anticipates the FCC will
issue an order prior to the July 1996 annual filing.
In May 1995, GTE obtained approval from the FCC to begin construction of its
video dialtone network in Ventura County, California. In December 1995, GTE
negotiated with local governments in California to begin construction of a
traditional cable network in Ventura County, California. This network is
scheduled to begin delivery of video services to customers in 1996.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1995-1993 under
various arrangements and amounted to $225 million, $281.6 million and $282.4
million, respectively.
34
<PAGE> 37
12. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $26.1 million, $37.4 million and $31.3
million in 1995-1993, respectively. Minimum rental commitments for
noncancelable leases through 2000 do not exceed $14.3 million annually and
aggregate $11.8 million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. The Company supports greater competition in telecommunications
provided that, overall, the actions to eliminate existing legal and regulatory
barriers allow an opportunity for all service providers to participate equally
in a competitive marketplace under comparable conditions.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1995 and 1994 quarterly financial data is as follows:
<TABLE>
<CAPTION>
Revenues Operating Net Income
and Sales Income (Loss)
---------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
1995
First Quarter $ 684,761 $172,649 $ 87,903
Second Quarter 681,367 131,848 60,636
Third Quarter 706,184 180,406 90,175
Fourth Quarter (a) 729,021 108,832 (529,020)
---------- -------- ---------
Total $2,801,333 $593,735 $(290,306)
========== ======== =========
1994
First Quarter $ 714,319 $198,405 $ 106,956
Second Quarter 708,006 180,480 92,738
Third Quarter 745,554 228,276 118,016
Fourth Quarter 780,068 215,324 116,830
---------- -------- ---------
Total $2,947,947 $822,485 $ 434,540
========== ======== =========
</TABLE>
(a) Net income includes $583.4 million of extraordinary charges for the
discontinuance of FAS 71 and the early retirement of debt. Income before
these extraordinary charges was $54.4 million.
35
<PAGE> 38
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, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements and the schedule and exhibit 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 and exhibit 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, 1995, and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1995, the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation".
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 24, 1996
36
<PAGE> 39
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 on
Form 10-K, 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.
M. L. KEITH, JR.
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
37
<PAGE> 40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
<PAGE> 41
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 10, 1996, pages 3 and 4, which is
incorporated herein by reference. A complete list of executive officers of the
Registrant as of March 1, 1996 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.
Accordingly, the list below contains the names, ages and positions of the
executive officers of both the Company and GTE Telephone Operations (Telops) as
of March 1, 1996.
39
<PAGE> 42
Identification of Executive Officers
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------------
the
Name Age Telops Company Position
---------------------------- --- ------ ------- -----------------------------------------------
<S> <C> <C> <C> <C>
Thomas W. White (1) 49 1995 -- President of GTE Telephone Operations
John C. Appel (2) 47 1996 1996 Executive Vice President - Network Operations
of GTE Telephone Operations and the Company
Mary Beth Bardin 41 1994 1995 Vice President - Public Affairs of GTE
Telephone Operations and the Company
C. F. Bercher 52 1994 1995 Vice President - Consumer Markets of GTE
Telephone Operations and the Company
Richard M. Cahill 57 1988 1995 Vice President - General Counsel of GTE
Telephone Operations and the Company
Gerald K. Dinsmore 46 1994 1994 Senior Vice President - Finance and Planning of
GTE Telephone Operations and the Company
William M. Edwards, III 47 -- 1993 Controller of the Company
Michael B. Esstman 49 1994 -- Executive Vice President - Customer Segments of
GTE Telephone Operations
Gregory D. Jacobson 44 -- 1994 Treasurer of the Company
M.L. Keith, Jr. (3) 53 -- 1995 President of the Company
Brad M. Krall 54 1993 1995 Vice President - Centralized Operations of GTE
Telephone Operations and the Company
Michael J. McDonough 46 1994 1995 Vice President - Business Markets of GTE
Telephone Operations and the Company
Richard L. Schaulin 53 1989 1995 Vice President - Human Resources of GTE
Telephone Operations and the Company
Charles J. Somes 49 -- 1994 Secretary of the Company
Larry J. Sparrow 52 1994 1995 Vice President - Carrier Markets of GTE
Telephone Operations and the Company
Alex Stadler 45 1994 1995 Vice President - Strategy and Technology
Planning of GTE Telephone Operations and the
Company
</TABLE>
(1) Thomas W. White was appointed President of GTE Telephone Operations
replacing Kent W. Foster, who was appointed President of GTE Corporation.
(2) John C. Appel was appointed Executive Vice President - Network Operations
of GTE Telephone Operations, replacing Thomas W. White, who was
appointed President of GTE Telephone Operations.
(3) M. L. Keith, Jr. was appointed President of the Company, replacing C.
Michael Crawford who was appointed Vice President - Information
Technology of GTE Telephone Operations and the Company.
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.
40
<PAGE> 43
Item 11. Executive Compensation
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held April 10, 1996, 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 10, 1996, 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 10, 1996, pages 3, 4 and 17, which is
incorporated herein by reference
41
<PAGE> 44
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,
1995-1993 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
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 Cali-
fornia Incorporated and Bank of America National Trust and
Savings Association, as Trustee, dated as of December 1,
1993 (Exhibit 4.1 of the Company's Registration Statement
on Form S-3, File No. 33-51541, filed with the Securities
and Exchange Commission on December 17, 1993)
10 Material Contracts - Agreements Between GTE and Certain
Executive Officers
12 Statements re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
23 Consent of Independent Public Accountants
26 Revised Form of Invitation for Bids pertaining to
Registration Statements on Form S-3 (File Nos. 33-51541
and 333-1001)
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1995, the Company filed a report on Form 8-K,
dated November 9, 1995, under Item 5 "Other Events". Financial
information was filed with this report.
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commission as designated.
42
<PAGE> 45
GTE California Incorporated and Subsidiary
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Deductions
Balance at Charged to from Balance at
Beginning Charged 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 years ended:
December 31, 1995 $ 38,537 $ 79,293 $84,332 (2) $145,352 $ 56,810
==============================================================================
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
==============================================================================
Accrued restructuring costs for the
years ended (Note 3):
December 31, 1995 $331,778 $ -- $ -- $127,348 $204,430
==============================================================================
December 31, 1994 $445,175 $ -- $ -- $113,397 $331,778
==============================================================================
December 31, 1993 $ -- $445,175 $ -- $ -- $445,175
==============================================================================
</TABLE>
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 3 to the consolidated financial statements included elsewhere
herein.
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE CALIFORNIA INCORPORATED
---------------------------
(Registrant)
Date March 21, 1996 By M.L. Keith, Jr.
-------------- ---------------------------
M.L. Keith, Jr.
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>
M. L. Keith, Jr. President March 21, 1996
------------------------------- (Principal Executive Officer)
M. L. Keith, Jr.
Gerald K. Dinsmore Senior Vice President - Finance and March 21, 1996
------------------------------- Planning and Director
Gerald K. Dinsmore (Principal Financial Officer)
William M. Edwards, III Controller March 21, 1996
------------------------------- (Principal Accounting Officer)
William M. Edwards, III
John C. Appel Director March 21, 1996
-------------------------------
John C. Appel
Richard M. Cahill Director March 21, 1996
-------------------------------
Richard M. Cahill
Michael B. Esstman Director March 21, 1996
-------------------------------
Michael B. Esstman
Thomas W. White Director March 21, 1996
-------------------------------
Thomas W. White
</TABLE>
44
<PAGE> 47
EXHIBIT INDEX
Exhibit
Number Description
------- -------------------------------------------------------
10 Material Contracts - Agreements Between GTE and
Certain Executive Officers
12 Statements re: Calculation of the Ratio of Earnings to
Fixed Charges
23 Consent of Independent Public Accountants
26 Revised form of Invitation for Bids pertaining to
Registration Statements on Form S-3 (File Nos.
33-51541 and 333-1001)
27 Financial Data Schedule
<PAGE> 1
Exhibit 10
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated as of January 8, 1996, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
the "Executive".
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the Company,
but desires assurance that he will not be materially disadvantaged by a change
in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued service
to the Company and the mutual agreements herein contained, the Company and the
Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. The Company shall not be
required to provide any benefits to the Executive pursuant to this Agreement
unless a Qualifying Termination occurs before the Agreement expires in
accordance with Section 6.1 hereof. For purposes of this Agreement, a
Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good
Reason arises, and (B) the Executive terminates employment
with the Company within (I) six months after the Good Reason
arises or (II) two years after the Change in Control,
whichever occurs later;
provided, that a Qualifying Termination shall not occur if the Executive's
employment with the Company terminates by reason of the Executive's Retirement,
Disability, or death. A Qualifying Termination may occur even though the
Executive retires from employment with the Company other than by reason of
Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of securities of
GTE by any Person, immediately after which such Person,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE
representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time,
would cause the Person to constitute an "Acquiring Person" (as
such term is defined in the Rights Plan); provided that, in
determining whether a Change in Control has occurred, the
acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change
in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the
"Incumbent Board" (as defined below) then serving as members
of the Board, are elected within any single 12-month period to
serve on the Board; provided that an individual whose election
or nomination for election is approved as a result of either
an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the Securities Exchange Act of
1934, as amended from time to time) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest"),
including by
<PAGE> 2
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have
been approved by a majority of the Incumbent Board for
purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board"
shall mean individuals who, as of the close of business on
April 19, 1995, are members of the Board; provided that, if
the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at
least three-quarters of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further that no
individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other
actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving
unless
(A) the shareholders of GTE, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation,
or reorganization, at least 50 percent of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger, consolidation, or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation, or reorganization
constitute at least a majority of the board of directors of
the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary
of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any
subsidiary of GTE, or any Person who, immediately prior to
such merger, consolidation, or reorganization, had Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of
"Change in Control") or more of the Voting Power) has
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition
of "Change in Control") or more of the combined Voting Power
of the Surviving Corporation's then outstanding voting
securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of GTE to any Person (other
than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether
such right or obligation is exercisable or effective
immediately or only after the passage of time) pursuant to any
agreement, arrangement, or understanding (whether or not in
<PAGE> 3
writing) or upon the exercise of conversion rights, exchange
rights, rights (other than the rights granted pursuant to the
Rights Plan), warrants or options, or otherwise; provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," securities tendered pursuant to a tender
or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement, or understanding
(whether or not in writing); provided that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (ii) if the agreement,
arrangement, or understanding to vote such security (A) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations of the
Securities Exchange Act of 1934, as amended from time to time,
and (B) is not also then reported by such person on Schedule
13D under the Securities Exchange Act of 1934, as amended from
time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement, or understanding
(whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise
formed a group for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and State Street Bank and Trust Company (now administered by
the First National Bank of Boston), as it may be amended from time to time, or
any successor thereto.
"Voting Power" means the voting power of all securities of GTE then
outstanding generally entitled to vote for the election of directors of GTE.
Section 1.3. Termination for Cause. The Company shall have Cause
to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a notice, consisting of a copy of a resolution duly
adopted by the affirmative vote of not less than three quarters of the entire
membership of GTE's Board of Directors at a duly held meeting of the Board of
Directors (with reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board of Directors)
("Notice of Termination"), finding that the Executive has engaged in the
conduct set forth above in this Section 1.3 and specifying the particulars
thereof in detail. GTE's Board of Directors may not delegate or assign its
duties under this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment,
represents a demotion from the Executive's status or
position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment,
are inconsistent with the Executive's status or position(s) in
effect immediately before the Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the
Executive's employment for Cause or as a result of the
Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be
equal to his base salary plus the greater of (i) the most
recent award that he has earned under the GTE Corporation
Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs)). For
<PAGE> 4
purposes of this paragraph (d), the Executive's "Average
Percentage" means the average of the Executive's Annual
Percentages for the Determination Years. For purposes of this
paragraph (d), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a
percentage), the numerator of which is the EIP award earned by
the Executive for such Determination Year, and the denominator
of which is the annual value of the normal payment under the
EIP for the Executive's salary level (such annual value and
normal payment being those that were in effect under the EIP
for such Determination Year for the Executive's salary level
for such Determination Year). For purposes of this paragraph
(d), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Change in
Control occurs (or, if less, the number of those three plan
years during which the Executive was a participant in the
EIP);
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan in
which the Executive is participating at the time of the Change
in Control (or plans or arrangements providing the Executive
with substantially equivalent benefits) other than as a result
of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on
at least as favorable a basis as was the case on the date of
the Change in Control, or that would materially reduce the
Executive's benefits in the future under the Plan or deprive
him of any material benefits that he enjoyed at the time of
the Change in Control, except to the extent that such action
or inaction by the Company is required by the terms of the
Plan as in effect immediately before the Change in Control, or
is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal
Revenue Code, and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
(h) the Company's failure to provide and credit the Executive with
the number of days of paid vacation, holiday, or leave to
which he is then entitled in accordance with the Company's
normal vacation, holiday, or leave policy in effect
immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 25 miles of where his principal
office was located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company as provided by
Section 6.3 hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 1.3 hereof
or that does not afford the Executive the procedural
protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including this
Agreement) between it and the Executive.
Notwithstanding the foregoing, no action by the Company shall give rise to a
Good Reason if it results from the Executive's termination for Cause,
Retirement, or death, and no action by the Company specified in paragraphs (a)
through (d) of the preceding sentence shall give rise to a Good Reason if it
results from the Executive's Disability. A Good Reason shall not be deemed to
be waived by reason of the Executive's continued employment as long as the
termination of the Executive's employment occurs within the time prescribed by
Section 1.1(b)(ii)(B) hereof. For purposes of this Section 1.4, "Plan" means
any compensation plan, such as an incentive, stock option, or restricted stock
plan, or any employee benefit plan, such as a thrift, pension, profit-sharing,
stock bonus, long-term performance award, medical, disability, accident, or
life insurance plan, or a relocation plan or policy, or any other plan, program
or policy of the Company that is intended to benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or
injury) on a full- time basis for six consecutive months.
Section 1.7. Notice. If a Change in Control occurs, the Company
shall notify the Executive of the
<PAGE> 5
occurrence of the Change in Control within two weeks after the Change in
Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the
Base Amount. The Base Amount shall be an amount equal to the
greater of:
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the
Executive's Average Percentage of the annual value (i.e., the
dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs). For purposes of this paragraph
(A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination
Years. For purposes of this paragraph (A), the Executive's
"Annual Percentage" for each Determination Year means a
fraction (expressed as a percentage), the numerator of which
is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual
value of the normal payment under the EIP for the Executive's
salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year
for the Executive's salary level for such Determination Year).
For purposes of this paragraph (A), a "Determination Year"
means each of the last three EIP plan years ending before the
date on which the Change in Control occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II)
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP
immediately before the date on which the Qualifying
Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying
Termination occurs). For purposes of this paragraph (B), the
Executive's "Average Percentage" means the average of the
Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual
Percentage" for each Determination Year means a fraction
(expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and
the denominator of which is the annual value of the normal
payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in
effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For
purposes of this paragraph (B), a "Determination Year" means
each of the last three EIP plan years ending before the date
on which the Qualifying Termination occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant
to subsection (a) of this Section 2.1 in a lump sum within 30
days of the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs); such coverage shall end upon the earlier of
(a) the expiration of 24 months after the Qualifying Termination or (b)(i) with
respect to medical insurance coverage, the date on which the Executive first
becomes eligible for medical insurance coverage provided by a firm that employs
him following the Qualifying Termination, or (ii) with respect to life
insurance coverage, the date on which the Executive first becomes eligible for
life insurance coverage provided by such firm.
<PAGE> 6
Section 2.3. Outplacement Counseling. If the Executive incurs a
Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during 1995. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the
outplacement counseling that this Section 2.3 otherwise requires the Company to
provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility,
benefit accrual, and all other purposes, under all employee
benefit plans sponsored by the Company (including, but not
limited to, health, life insurance, pension, savings, stock,
and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he
participated immediately before the Change in Control, for 24
months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company,
including the GTE Service Corporation Supplemental Executive
Retirement Plan ("SERP"), the Executive's compensation shall
include the amount payable to the Executive pursuant to
Section 2.1 hereof, and for purposes of this subsection (b),
the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount
payable to the Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of
determining his eligibility for early retirement benefits
under the Company's defined benefit pension plans (including,
but not limited to, the SERP) and for purposes of determining
his eligibility for benefits under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this
Section 2.5 and the compensation recognized under subsection (b) of this
Section 2.5, nothing in this Section 2.5 shall prevent the Executive from
receiving any benefits to which the Executive is entitled under any defined
benefit or defined contribution pension plan maintained by the Company,
including the SERP (as such benefits are modified by this Agreement) in any
form permitted by such plans (including but not limited to a lump-sum
distribution) immediately following the Executive's Qualifying Termination. To
the extent that the Company's tax-qualified retirement plans cannot provide the
benefits specified by this Section 2.5 without jeopardizing the tax
qualification of such plans, the Company shall provide such benefits under the
SERP.
Section 2.6. Nonduplication.
(a) Nothing in this Agreement shall require the Company to make
any payment or to provide any benefit or service credit that
GTE or the Company is otherwise required to provide under any
other contract, agreement, policy, plan, or arrangement.
Section 2.7. Prior Agreement. This Agreement supersedes any prior
Executive Severance Agreement entered into between the Company and the
Executive ("Prior Agreement"). On and after the date of this Agreement, such
Prior Agreement shall have no force or effect.
<PAGE> 7
ARTICLE III
EFFECT ON HUMAN RESOURCES POLICY 104
Section 3.1. Effect on Policy 104. If the Executive becomes
entitled to receive benefits hereunder, the Executive shall not be entitled to
any benefits under GTE Human Resources Policy 104, as amended from time to
time, or any successor policy, or under any other Company severance or salary
continuation policy (including but not limited to any benefits pursuant to an
involuntary separation program or similar program maintained under a pension
plan sponsored by the Company).
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of
his continued service to the Company or severance payments in consideration of
his past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal fees
and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal
fees and expenses.
Section 5.3. Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. The amount of any payment provided for
herein shall not be reduced by any remuneration that the Executive may earn
from employment with another employer or otherwise following his Qualifying
Termination.
Section 5.4. Interest. If the Company fails to make, or cause to
be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest
rate shall be equal to 120 percent of the prime rate as reported by The Wall
Street Journal for the first business day of each month, effective for the
ensuing month. The interest rate shall be adjusted at the beginning of each
month.
Section 5.5. Authority. The execution of this Agreement has been
authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 1999, if no Change in Control has occurred before that date; (b)
the termination of the Executive's employment with the Company for any reason
prior to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good
<PAGE> 8
Reason, following a Change in Control and the Company's and the Executive's
fulfillment of all of their obligations hereunder; and (d) the expiration
following a Change in Control of two years and six months and the fulfillment
by the Company and the Executive of all of their obligations hereunder.
Notwithstanding the foregoing, commencing on July 1, 1999, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall supersede the
terms of any plan or arrangement (other than this Agreement) that is affected
by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to
setoff against any obligations or to assignment by operation of law. Any
attempt, voluntary or involuntary, to effect any action specified in the
immediately preceding sentence shall be void. However, this Section 6.6 shall
not prohibit the Executive from designating one or more persons, on a form
satisfactory to the Company, to receive amounts payable to him under this
Agreement in the event that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this Agreement
shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, One Stamford Forum, Stamford,
Connecticut 06904, Attention: Corporate Secretary. Notices to the Executive
shall be deemed given when personally delivered or sent by certified or
registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall be
effective unless in writing and signed by both the Company and the Executive.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this
Agreement or any subsequent breach. No failure on the part of either the
Company or the Executive to exercise, and no delay in exercising, any right or
remedy
<PAGE> 9
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain
in full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to cause
any agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Definitions. All upper case terms used herein shall
have the meaning set forth in this Agreement.
Section 6.13. Captions. The captions to the respective articles
and sections of this Agreement are intended for convenience of reference only
and have no substantive significance.
Section 6.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: J. Randall MacDonald
----------------------
J. Randall MacDonald
Senior VP-Human Resources
and Administration
By: Marianne Drost
----------------------
Marianne Drost
VP and Associate General
Counsel-Finance & Corporate
Secretary
<PAGE> 1
Exhibit 12
GTE California Incorporated and Subsidiary
STATEMENTS OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1995 1994 1993(a) 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $293,122 $434,540 $389,019 $ 93,619 $415,370 $442,458
Add - Income tax expense 199,703 293,465 255,035 70,535 237,089 242,724
- Fixed charges 117,090 115,405 131,550 131,550 143,359 153,934
-------- -------- -------- -------- -------- --------
Adjusted earnings: $609,915 $843,410 $775,604 $295,704 $795,818 $839,116
======== ======== ======== ======== ======== ========
Fixed charges:
Interest expense $108,378 $102,938 $121,117 $121,117 $131,527 $140,977
Portion of rent expense
representing interest 8,712 12,467 10,433 10,433 11,832 12,957
-------- -------- -------- -------- -------- --------
Adjusted fixed charges: $117,090 $115,405 $131,550 $131,550 $143,359 $153,934
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED
CHARGES: 5.21 7.31 5.90 2.25 5.55 5.45
</TABLE>
(a) Results for 1993 exclude an after-tax restructuring charge of approximately
$274.2 million for the implementation of a re-engineering plan and a
one-time after-tax charge of approximately $21.2 million related to the
enhanced early retirement and voluntary separation programs offered to
eligible employees in 1993.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 24, 1996, on the consolidated financial statements
and supporting schedule of GTE California Incorporated and subsidiaries
included in this Form 10-K, into the Registration Statement filed on Form S-3
(File No. 333-1001).
ARTHUR ANDERSEN LLP
Dallas, Texas
March 21, 1996
<PAGE> 1
Exhibit 26
GTE CALIFORNIA INCORPORATED
Invitation For Bids For the Purchase of
$___,000,000 _____% Debentures, Series _, Due ____
GTE CALIFORNIA INCORPORATED (the "Company") is inviting bids from
certain investment banks ("Invited Bidders"), each of whom may bid either
individually (a "Sole Bidder") or as part of a group of bidders for which the
Invited Bidder serves as the representative of such group (the
"Representative"), subject to the terms and conditions stated herein, for the
purchase from it of $___,000,000 aggregate principal amount of its ____%
Debentures, Series _, Due ____ (the "Debentures").
1. Information Respecting the Company and the Debentures.
Invited Bidders may examine, at the office of the Secretary of the
Company, 600 Hidden Ridge, Irving, Texas 75038, or at the office of GTE Service
Corporation, 10th Floor, One Stamford Forum, Stamford, Connecticut 06904
(Telephone (203) 965-2986), on any business day between 10:00 A.M. and 4:00
P.M., the following:
(a) the Registration Statement on Form S-3 (including the
Prospectus, documents incorporated by reference and exhibits), with
respect to the Debentures;
(b) the Restated Articles of Incorporation of the Company, as
amended;
(c) a copy of the Indenture dated as of December 1, 1993
(herein called the "Indenture") under which the Debentures are to be
issued, together with the resolution of the Board of Directors of the
Company specifically authorizing the issuance of the Debentures;
(d) the form of Purchase Agreement (including the Standard
Purchase Agreement Provisions (February 1996 Edition)) to be used in
submitting bids for the purchase of the Debentures;
(e) the form of questionnaire to be provided by each of the
bidders; and
(f) memoranda prepared by counsel to the Company with respect
to the status of the Debentures under securities or blue sky laws of
certain jurisdictions.
Copies of said documents in reasonable quantities (except the Restated
Articles of Incorporation of the Company, the Indenture, and other exhibits to
the Registration Statement) will be supplied upon request, so long as
available, to Invited Bidders.
The Company reserves the right to amend the Registration Statement
(including exhibits thereto) and Prospectus and to supplement the Prospectus in
such manner as shall not be unsatisfactory to Messrs. Milbank, Tweed, Hadley &
McCloy. The Company will make copies of any such amendments or supplements
available for examination at the above offices in Irving and Stamford.
<PAGE> 2
-2-
2. Information Regarding the Bidders to be Furnished to the Company.
In the case of a bid by a group of bidders, the Representative shall
be designated and authorized as the representative of the several bidders in
such group in the questionnaires filed by the members of the group.
In the case of a bid by a group of bidders, the Representative shall
provide to the Company in writing a list of the names of any potential bidder
in its group no later than 10:00 A.M. on the business day immediately preceding
the date scheduled for the submission of bids. No bid by a group of bidders
will be accepted by the Company if such group contains a member to which the
Company has objected prior to 5:00 P.M. on the business day immediately
preceding the date scheduled for the submission of bids. Additional members may
be added to a group of bidders after 10:00 A.M. on the business day immediately
preceding the date scheduled for the submission of bids only with the consent
of the Company.
No bid will be considered unless the Sole Bidder, or in the case of a
group of bidders, each member of the group through the Representative, shall
have furnished to the Company, and the Company shall have received, two signed
copies of the form of questionnaire referred to above, properly filled out by
the Sole Bidder or by each member of the group of bidders (the Company
reserving, however, the right to waive the form of the questionnaire or any
irregularity which it deems to be immaterial in any such questionnaire and to
extend either generally or in specific instances the time for furnishing
questionnaires, and specifically reserving the right to obtain all required
bidder information by telegraph or other means of communication). Such copies
shall be furnished to the Company at the office of GTE Service Corporation,
10th Floor, One Stamford Forum, Stamford, CT 06904, Attention: David S.
Kauffman, Esq., before 5:00 P.M., New York City time on the business day
immediately preceding the date scheduled for the submission of bids (or on such
later date as may be determined pursuant to Section 5 hereof). Notwithstanding
the furnishing of such questionnaires to the Company, any Sole Bidder, or the
Representative on behalf of a group of bidders, thereafter may determine,
without liability to the Company, not to bid, or any of the several members of
a group (other than the Representative) may withdraw therefrom at or before the
time of submission of the bid of such group.
3. Obligations of a Representative to a Group of Bidders
In the case of a group of bidders, the Representative shall (i)
distribute to the members of the group any due diligence materials received by
it from the Company and (ii) upon the request of any member of such group,
request from the Company and deliver to such member of the group copies of the
documents listed in Section 1 hereof.
4. Form and Contents of Bids.
Each bid shall be for the purchase of all of the Debentures.
In case the bid of a group of bidders is accepted, the obligations of
the members of the group to purchase the respective principal amounts of
Debentures indicated in the bid shall be several and not joint. Such bidders
shall act through the Representative, who shall be empowered to bind the
bidders in the group. No bidder may submit or participate in more than one
bid.
5. Submission of Bids and Delivery of Confirmation of Bids.
All bids must be submitted by telephone and confirmed in writing in
the manner set forth in Exhibit A, Confirmation of Bid, attached, signed by the
<PAGE> 3
-3-
Sole Bidder or the Representative on behalf of the members of a group of
bidders. Each bid must specify: (a) the interest rate, which shall be a
multiple of 1/8 of 1%; and (b) the price to be paid to the Company for the
Debentures, which shall be expressed as a percentage of the principal amount of
the Debentures and shall not be less than 98% thereof nor more than 101%
thereof. The Confirmation of Bid shall specify the same interest rate and
price specified in the telephonic bid.
The Company reserves the right in its discretion from time to time to
postpone the time and the date for submission of bids for an aggregate period
of not exceeding thirty days, and will give notice of any such postponement to
each Invited Bidder, specifying in such notice the changes in the times and
dates set forth in the Purchase Agreement occasioned by such postponement. In
the event that any such postponement should be for a period of more than three
full business days after the date of sending or delivering such notice, the
time for filing of questionnaires by prospective bidders under Section 2 hereof
shall by such notice be postponed to 5:00 P.M., New York City time, at the
place of delivery specified in Section 2 hereof, on the business day
immediately preceding the newly scheduled date for the submission of bids.
6. Acceptance or Rejection of Bids.
The Company may reject all bids, but if any bid for the Debentures is
accepted the Company will accept that bid which shall result in the lowest
"annual cost of money" to the Company for the Debentures, and any bid not so
accepted by the Company shall, unless such bid shall be involved in rebidding
as hereinafter provided, be deemed to have been rejected. The lowest annual
cost of money to the Company for the Debentures shall be determined by the
Company and such determination shall be final. In case the lowest annual cost
of money to the Company is provided by two or more such bids, the Company
(unless it shall reject all bids) will give the makers of such identical bids
an opportunity (the duration of which the Company may in its sole discretion
determine) to improve their bids. The Company will accept, unless it shall
reject all bids, the improved bid providing the Company with the lowest annual
cost of money for the Debentures. If upon such rebidding the lowest annual
cost of money to the Company is again provided by two or more improved bids,
the Company may without liability to the maker of any other bid accept any one
of such improved bids in its sole discretion, or may reject all bids. If no
improved bid is made within the time fixed by the Company, the Company may
without liability to the maker of any other bid accept any one of the initially
submitted bids providing the lowest annual cost of money to the Company, or may
reject all bids.
The Company further reserves the right to reject the bid of any Sole
Bidder or group of bidders if the Company, in the opinion of its counsel, may
not lawfully sell the Debentures to such bidder or to any member of such group,
unless, in the case of a group of bidders, prior to 1:00 P.M., New York City
time, on the date on which the bids are submitted, the member or members to
which, in the opinion of the Company's counsel, the Debentures may not be
lawfully sold have withdrawn from the group and the remaining members have
agreed to purchase the Debentures which such withdrawing member or members had
offered to purchase.
7. Purchase Agreement and Completion of Registration Statement.
The Company will signify its acceptance of a bid by signing the
Purchase Agreement. The Company shall, upon request, execute the acceptance on
additional number of copies of the Purchase Agreement as shall be reasonably
requested by the Representative of the successful bidders. Upon the
<PAGE> 4
-4-
acceptance of a bid, the successful Sole Bidder, or, in the case of a bid by a
group of bidders, the Representative on behalf of the successful bidders, shall
furnish to the Company, in writing, all information regarding the bidder or
bidders and the public offering, if any, of the Debentures required in
connection with the prospectus supplement to the Registration Statement, any
further information regarding the bidders and the public offering, if any, to
be made by them, which may be required to complete the applications filed by
the Company with public authorities having jurisdiction over the Company, and
other information required by law in respect of the purchase or sale of the
Debentures as herein contemplated.
8. Delivery of the Debentures.
The Debentures will be delivered in temporary or definitive form, at
the election of the Company, to the purchasers of the Debentures at the place,
at the time and in the manner indicated in the Purchase Agreement, against
payment of the purchase price therefor as provided in the Purchase Agreement.
9. Opinion of Counsel for the Purchasers.
Messrs. Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New
York, N.Y. 10005, have been requested by the Company to act as counsel for the
successful bidder or bidders of the Debentures and to give to the purchasers an
opinion as outlined in the Purchase Agreement. Such counsel has reviewed or
will review, from the standpoint of possible purchasers of the Debentures, the
form of the Registration Statement and the Prospectus and competitive bidding
papers, including the Purchase Agreement, and has reviewed or will review the
corporate proceedings with respect to the issue and sale of the Debentures.
Invited Bidders may confer with Messrs. Milbank, Tweed, Hadley & McCloy with
respect to any of the foregoing matters at the offices of said firm, 1 Chase
Manhattan Plaza, New York, N.Y. 10005, Attn.: Robert W. Mullen, Jr., Esq. The
successful bidders are to pay the compensation and disbursements of such
counsel, except as otherwise provided in the Purchase Agreement. Such counsel
will, on request, advise any Sole Bidder who has, or the Representative of any
group of bidders who have, furnished questionnaires as provided in Section 2
hereof, of the amount of such compensation and of the estimated amount of such
disbursements.
GTE CALIFORNIA INCORPORATED
______, 199_
<PAGE> 5
EXHIBIT A
GTE CALIFORNIA INCORPORATED
(the "Company")
CONFIRMATION OF BID FOR
$___,000,000 ____% Debentures, Series _, Due ____
(the "Debentures")
TERMS
Maturity: ________________.
Interest Payable: Semi-annually on _____ and _____, commencing ______, ____.
Redemption Provisions:
[The Debentures will not be redeemable prior to maturity.]
OR
[The New Debentures will not be redeemable prior to ______.
Thereafter, the New Debentures will be redeemable on not less than 30 nor more
than 60 days' notice given as provided in the Indenture, as a whole or in part,
at the option of the Company at the redemption price set forth below. The
"initial regular redemption price" will be the initial public offering price as
defined below plus the rate of interest on the Debentures. The redemption price
during the twelve month period beginning _______ and during the twelve month
periods beginning on each ___________ thereafter through the twelve month
period ended __________ will be determined by reducing the initial regular
redemption price by an amount determined by multiplying (a) 1/_ of the amount
by which such initial regular redemption price exceeds 100% by (b) the number
of such full twelve month periods which shall have elapsed between _________
and the date fixed for redemption; and thereafter the redemption prices during
the twelve month periods beginning _________ shall be 100%; provided, however,
that all such prices will be specified to the nearest 0.01% or if there is no
nearest 0.01%, then to the next higher 0.01%.
For the purpose of determining the redemption prices of the
Debentures, the initial public offering price of the Debentures shall be the
price, expressed in percentage of principal amount (exclusive of accrued
interest), at which the Debentures are to be initially offered for sale to the
public; if there is not a public offering of the Debentures, the initial public
offering price of the Debentures shall be deemed to be the price, expressed in
percentage of principal amount (exclusive of accrued interest), to be paid to
the Company by the Purchasers.]
NAME OF BIDDER: _________________________________________________________
TELEPHONE NUMBER TO BE USED TO CALL IN BID: _____________________________
<PAGE> 6
-2-
TIME AND DATE BID RECEIVED: _____________________________________________
(to be completed by GTE Service Corporation on behalf of the Company)
By submitting this bid, the bidder named above agrees to the following terms
and conditions:
o Each bid shall be for the purchase of all of the Debentures.
o Each bid may be made by a single bidder or by a group of bidders.
o The bidder acknowledges that it (and all members of the bidding group it
represents) has received a copy of the Prospectus dated _________________.
o If the bid is made by a group of bidders, the undersigned represents and
warrants that it is fully authorized by all bidders in the group to act on
their behalf and to bind them to the terms of the Purchase Agreement relating
to the Debentures.
o Each bid shall specify:
- the annual interest rate on the Debentures, which rate shall be a
multiple of 1/8%;
- the price (exclusive of accrued interest) to be paid to the
Company for the Debentures, which price shall not be less than 98% and not more
than 101% of the principal amount of the Debentures, and that accrued interest
on the Debentures from _______________, to the date of payment of the
Debentures and the delivery thereof will be paid to the Company by the
purchaser or purchasers; and
- in the case of a bid by a group of bidders, the name of, and
amount to be purchased by each bidder;
o Bids must be received by 10:00 A.M., New York City time, on ____________,
____, or such later time and/or date as the Company may specify (the "Bid
Time").
o Bids shall be irrevocable for one (1) hour after the Bid Time.
o The winning bid shall be selected on the basis of the lowest "annual cost of
money" to the Company.
o Whether or not this bid is accepted by the Company, an executed copy of this
Confirmation of Bid must be sent promptly by facsimile to GTE Service
Corporation on behalf of the Company at 203-965-3746 or 203-965-2830.
o If this bid is accepted, upon acceptance the undersigned agrees to promptly
furnish to the Company a signed copy of the Purchase Agreement relating to the
Debentures and a copy of all information required to be included in the
Prospectus relating to the Debentures.
o Closing Date: __________________ at 10:00 A.M., New York City time.
<PAGE> 7
-3-
BID:
Interest Rate ________________ %
Price to be paid to the Company
________________ %
___________________________________
(Name of Bidder)
__________________________________
(Authorized Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 31,126
<SECURITIES> 0
<RECEIVABLES> 611,081
<ALLOWANCES> 56,810
<INVENTORY> 31,022
<CURRENT-ASSETS> 711,506
<PP&E> 8,597,000
<DEPRECIATION> 4,882,561
<TOTAL-ASSETS> 4,906,098
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<BONDS> 1,285,771
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 262,903
<TOTAL-LIABILITY-AND-EQUITY> 4,906,098
<SALES> 2,801,333
<TOTAL-REVENUES> 2,801,333
<CGS> 1,076,787
<TOTAL-COSTS> 2,207,598
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 100,910
<INCOME-PRETAX> 492,825
<INCOME-TAX> 199,703
<INCOME-CONTINUING> 293,122
<DISCONTINUED> 0
<EXTRAORDINARY> (583,428)
<CHANGES> 0
<NET-INCOME> (290,306)
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