<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 1, 1995
GTE SOUTHWEST INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-7077 75-0573444
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
(Former name or former address, if changed since last report)
<PAGE> 2
GTE SOUTHWEST INCORPORATED
FORM 8-K
ITEM OF INFORMATION
Item 5. Other Event
On February 28, 1995, GTE Southwest Incorporated, a Delaware corporation (the
Company) entered into an Agreement of Merger with Contel of Texas, Inc., a
Texas corporation (Contel Texas) and Contel of the West, Inc., an Arizona
corporation (Contel West). The agreement provides that the aforementioned
companies (collectively, the Contel Subsidiaries) would merge with and into the
Company, with the Company to be the surviving corporation in the merger (the
Merger). Each of the Contel Subsidiaries is a wholly-owned subsidiary of
Contel Corporation, which is itself a wholly-owned subsidiary of GTE
Corporation. The Contel Subsidiaries provide communications services in the
states of Texas and New Mexico.
The Merger, which is currently anticipated to occur on December 31, 1995, will
be accounted for in a manner consistent with a transfer of entities under
common control which is similar to a "pooling of interests." A copy of the
Agreement of Merger is attached as Exhibit 2.1.
Included under Item 7 of this report are copies of the audited financial
statements of Contel of Texas, Inc. and Contel of the West, Inc. for the years
ended December 31, 1994 and 1993 and unaudited condensed interim financial
statements as of September 30, 1995 and for the nine months ended September 30,
1995 and 1994. In addition, included are copies of the unaudited pro forma
condensed consolidating balance sheet as of September 30, 1995, and the
unaudited pro forma condensed consolidating statements of income for the nine
months ended September 30, 1995 and 1994 and for the years ended December 31,
1994-1992.
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Information (Unaudited) and
Exhibits
<TABLE>
<CAPTION>
(a) Financial Statements Page
----
<S> <C>
CONTEL OF TEXAS, INC.
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income and Reinvested Earnings for Each of the Two Years in
the Period Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for Each of the Two Years in the Period Ended December 31, 1994 . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Condensed Balance Sheet as of September 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . 18
Condensed Statements of Income for the Nine Months Ended September 30, 1995 and 1994 (Unaudited) . . . . 20
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1995
and 1994 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Notes to Condensed Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONTEL OF THE WEST, INC.
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Statements of Income and Shareholder's Equity for Each of the Two Years in
the Period Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Statements of Cash Flows for Each of the Two Years in the Period Ended December 31, 1994 . . . . . . . . 27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Condensed Balance Sheet as of September 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . 39
Condensed Statements of Income for the Nine Months Ended September 30, 1995 and 1994 (Unaudited) . . . . 41
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1995
and 1994 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Notes to Condensed Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(b) Pro Forma Financial Information (Unaudited)
Pro Forma Condensed Consolidating Balance Sheet as of September 30, 1995 . . . . . . . . . . . . . . . . 45
Pro Forma Condensed Consolidating Statement of Income for the Nine Months Ended September 30, 1995 . . . 46
Pro Forma Condensed Consolidating Statement of Income for the Nine Months Ended September 30, 1994 . . . 47
Pro Forma Condensed Consolidating Statement of Income for the Year Ended December 31, 1994 . . . . . . . 48
Pro Forma Condensed Consolidating Statement of Income for the Year Ended December 31, 1993 . . . . . . . 49
Pro Forma Condensed Consolidating Statement of Income for the Year Ended December 31, 1992 . . . . . . . 50
Notes to Unaudited Pro Forma Condensed Consolidating Financial Statements . . . . . . . . . . . . . . . . 51
</TABLE>
(c) Exhibits
2.1 Agreement of Merger, dated February 28, 1995, between GTE Southwest
Incorporated, Contel of Texas, Inc. and Contel of the West, Inc.
3.1 Amendment to Restated Certificate of Incorporation and Amended By-Laws
23.1 Consent of Arthur Andersen LLP
1
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Contel of Texas, Inc.:
We have audited the accompanying balance sheets of Contel of Texas, Inc. (a
Texas corporation), d/b/a GTE Texas (the Company), as of December 31, 1994 and
1993, and the related statements of income, reinvested earnings and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Contel of Texas, Inc. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, effective January 1, 1993,
the Company changed its method of accounting for postretirement benefits other
than pensions.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1995.
2
<PAGE> 5
CONTEL OF TEXAS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 177 $ 2,417
Accounts receivable:
Customers (including unbilled revenues) 29,355 37,032
Affiliated companies 1,152 468
Other 4,677 13,230
Allowance for uncollectible accounts (2,304) (885)
Deferred income tax benefits 2,020 3,132
Materials and supplies, prepayments and other 4,218 312
--------------- ---------------
Total current assets 39,295 55,706
--------------- ---------------
Property, plant and equipment:
Original cost 572,159 546,747
Accumulated depreciation (278,397) (253,515)
--------------- ---------------
Net property, plant and equipment 293,762 293,232
--------------- ---------------
Other assets 1,946 5,944
--------------- ---------------
Total assets $ 335,003 $ 354,882
=============== ===============
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 6
CONTEL OF TEXAS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Notes payable to affiliates $ 28,241 $ 31,894
Current maturities of long-term debt 2,993 2,970
Accounts payable 8,192 7,645
Due to affiliated companies 6,920 9,103
Advance billings and customer deposits 2,306 2,437
Accrued dividends -- 11,000
Accrued taxes 4,189 5,100
Accrued interest 2,182 2,123
Accrued payroll and vacations 1,970 1,804
Accrued restructuring costs and other 16,652 10,115
--------------- ---------------
Total current liabilities 73,645 84,191
--------------- ---------------
Long-term debt 71,780 74,770
--------------- ---------------
Deferred credits:
Deferred income taxes 35,437 34,969
Restructuring costs and other 29,244 30,181
--------------- ---------------
Total deferred credits 64,681 65,150
--------------- ---------------
Shareholder's equity:
Common stock (796,412 shares outstanding) 7,964 7,964
Other capital 40,276 40,276
Reinvested earnings 76,657 82,531
--------------- ---------------
Total shareholder's equity 124,897 130,771
--------------- ---------------
Total liabilities and shareholder's equity $ 335,003 $ 354,882
=============== ===============
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 7
CONTEL OF TEXAS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Operating revenues:
Local network services $ 33,247 $ 30,614
Network access services 88,057 84,933
Long distance services 37,967 55,042
Equipment sales and services and other 2,570 9,462
--------------- ---------------
161,841 180,051
--------------- ---------------
Operating expenses:
Cost of sales and services 59,641 56,644
Depreciation and amortization 34,692 35,820
Selling, general and administrative 32,292 30,147
Restructuring costs -- 22,600
--------------- ---------------
126,625 145,211
--------------- ---------------
Net operating income 35,216 34,840
Interest expense - net 8,349 7,955
--------------- ---------------
Income before income taxes 26,867 26,885
Income taxes 7,812 6,763
--------------- ---------------
Net income $ 19,055 $ 20,122
=============== ===============
</TABLE>
STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Balance at beginning of year $ 82,531 $ 102,809
Add -
Net income 19,055 20,122
Deduct -
Cash dividends declared on common stock 24,929 40,400
--------------- ---------------
Balance at end of year $ 76,657 $ 82,531
=============== ===============
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 8
CONTEL OF TEXAS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,055 $ 20,122
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 34,692 35,820
Restructuring costs -- 22,600
Deferred income taxes and investment tax credits 1,714 (12,233)
Provision for uncollectible accounts 8,043 1,196
Changes in current assets and current liabilities 8,611 (29,728)
Other - net 3,251 6,745
--------------- ---------------
Net cash from operating activities 75,366 44,522
--------------- ---------------
Cash flows used in investing activities:
Capital expenditures (35,644) (27,902)
Other - net 587 164
--------------- ---------------
Net cash used in investing activities (35,057) (27,738)
--------------- ---------------
Cash flows used in financing activities:
Increase (decrease) in notes payable to affiliates (3,653) 27,215
Long-term debt retired (2,967) (7,736)
Dividends paid to shareholder (35,929) (33,900)
--------------- ---------------
Net cash used in financing activities (42,549) (14,421)
--------------- ---------------
Increase (decrease) in cash (2,240) 2,363
Cash:
Beginning of year 2,417 54
--------------- ---------------
End of year $ 177 $ 2,417
=============== ===============
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 9
CONTEL OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Contel of Texas, Inc., d/b/a GTE Texas (the Company), is a wholly-owned
subsidiary of Contel Corporation (the Parent Company). The Parent Company is a
wholly-owned subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES - PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to $8.3
million and $8.4 million for the years 1994 and 1993, respectively. Such
purchases are recorded in the accounts of the Company at cost, including a
normal return realized by the affiliates.
The Company is also billed for data processing services and equipment rentals,
and receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$7.8 million for each of the years 1994 and 1993. The amounts charged for
these affiliated transactions are based on a proportional cost allocation
method.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant on a straight-line
basis over asset lives approved by regulators. Depreciation is based upon rates
prescribed by the Federal Communications Commission (FCC) and the Public
Utility Commission of Texas (PUCT). The provisions for depreciation and
amortization were equivalent to composite annual rates of 6.3% and 6.8% for
1994 and 1993, respectively.
Plant acquisition adjustments represent the cost of telephone plant acquired in
excess of the original cost of such plant when first devoted to public use.
These costs are being amortized over the life of the asset in accordance with
regulatory commission procedures. The amount of amortization was $205,000 for
1994 and 1993, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the TPUC and Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation". This
accounting recognizes the economic effects of rate regulation by recording
costs and a return on investment as such amounts are recovered through rates
authorized by regulatory authorities. Accordingly, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators to permit recovery of such amounts in future years.
The Company annually reviews the continued applicability of SFAS No. 71 based
upon the current regulatory and competitive environment.
7
<PAGE> 10
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average cost) or market
value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company
elected to adopt this new accounting standard on the delayed recognition method
and commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before retirement.
Previously, the cost of these benefits was charged to expense as paid. The
impact of this change in accounting on the Company's results of operations was
immaterial.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
FINANCIAL INSTRUMENTS
The fair values of financial instruments other than long-term debt, closely
approximate their carrying values. The estimated fair value of long-term debt
at December 31, 1994 and 1993, based on either reference to quoted market
prices or an option pricing model, exceeded the carrying value by approximately
$1.2 million and $12.1 million, respectively.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEAR'S FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1994 presentation.
8
<PAGE> 11
2. RESTRUCTURING COSTS
Results for 1993 include a one-time pretax restructuring charge of $22.6
million related to the Company's re-engineering plan over the next three years.
The re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The
re-engineering plan includes $9.3 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $10.5
million for employee separation benefits associated with workforce reductions
and $2.8 million primarily for the consolidation of facilities and operations
and other related costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $4.0 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
3. COMMON STOCK
The authorized common stock of the Company consists of 5,002,500 shares with a
par value of $10 per share. All outstanding shares of common stock are held by
the Parent Company.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1994, $55.9 million of reinvested earnings was restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Company's indentures.
4. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
RURAL UTILITIES SERVICE
2.0%, through 2018 $ 2,558 $ 3,155
RURAL TELEPHONE BANK
6.5%, due 2014 4,830 4,961
FEDERAL FINANCING BANK
9.366%, due 2015 1,328 1,386
FIRST MORTGAGE BONDS
8.5% to 9.74%, through 2015 63,064 65,268
--------------- ---------------
Total long-term debt $ 71,780 $ 74,770
=============== ===============
</TABLE>
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures.
None of the securities shown above were held in sinking or other special funds
of the Company or pledged by the Company.
9
<PAGE> 12
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 2,993
1996 2,886
1997 2,800
1998 2,790
1999 5,092
</TABLE>
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
5. NOTES PAYABLE TO AFFILIATES
The Company finances part of its construction program through the use of
interim short-term notes payable to affiliates, which are generally refinanced
at a later date by the issuance of long-term debt or equity. During 1994 and
1993, the Company supplemented its internal generation of cash with funds
borrowed from GTE. These arrangements require payment of interest based on
GTE's daily intercompany interest rate (which is based primarily on the costs
associated with the issuance of commercial paper). In addition, a $2.8 billion
line is available to the Company through shared lines of credit with GTE and
other affiliates.
10
<PAGE> 13
6. INCOME TAXES
The provision for Federal income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current $ 6,098 $ 18,996
Deferred 3,306 (10,499)
Amortization of deferred
investment tax credits (1,592) (1,734)
--------------- ---------------
Total $ 7,812 $ 6,763
=============== ===============
</TABLE>
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
STATUTORY FEDERAL INCOME TAX RATE 35.0% 35.0%
Amortization of deferred investment tax credits (5.9) (6.5)
Depreciation of telephone plant construction
costs previously deducted for tax purposes - net 0.1 0.6
Rate differentials on the turnaround of
deferred tax balances (0.4) (1.2)
Change in tax reserve 0.3 (2.8)
Other -- 0.1
--------------- ---------------
EFFECTIVE INCOME TAX RATE 29.1% 25.2%
=============== ===============
</TABLE>
11
<PAGE> 14
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established
rate-making practices. Since the manner in which income taxes are treated for
rate-making has not changed, pursuant to SFAS No. 71, a corresponding
regulatory asset was also established. In addition, deferred income taxes were
adjusted and a regulatory liability established to give effect to the current
statutory Federal income tax rate and for unamortized investment tax credits.
The net unamortized regulatory liability balances at December 31, 1994 and 1993
amounted to $4.8 million and $4.6 million, respectively, and are reflected as
other deferred credits in the accompanying Balance Sheets. These amounts are
being amortized over the lives of the related depreciable assets concurrent
with recovery in rates and in conformance with the provisions of the Internal
Revenue Code. The assets and liabilities established in accordance with SFAS
No. 71 have been increased for the tax effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 38,713 $ 37,236
Employee benefit obligations 290 (3,332)
Pension costs (1,314) (545)
Restructuring costs (8,433) (8,678)
Investment tax credits 5,406 6,998
Other - net (1,245) 158
--------------- ---------------
Total $ 33,417 $ 31,837
=============== ===============
</TABLE>
12
<PAGE> 15
7. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these
plans are generally based on years of credited service and average final
earnings. The Company's funding policy, subject to the minimum funding
requirements of U. S. employee benefit and tax laws, is to contribute such
amounts as are determined on an actuarial basis to provide the plans with
assets sufficient to meet the benefit obligations of the plans. The assets of
the plans consist primarily of corporate equities, government securities and
corporate debt securities.
The components of the net pension credit for 1994-1993 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Benefits earned during the year $ 763 $ 923
Interest cost on projected benefit obligations 1,990 2,440
Return on plan assets:
Actual 95 (7,090)
Deferred (3,567) 3,249
Other - net (596) (944)
--------------- ---------------
Net pension credit $ (1,315) $ (1,422)
=============== ===============
</TABLE>
The expected long-term rate of return on plan assets was 8.50% for 1994 and
8.25% for 1993.
The funded status of the plans and the accrued pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Plan assets at fair value $ 41,450 $ 49,538
Projected benefit obligations (24,932) (31,067)
--------------- ---------------
Excess of assets over projected benefit
obligations 16,518 18,471
Unrecognized net transition asset (2,437) (2,794)
Unrecognized net gain (14,553) (17,274)
--------------- ---------------
Accrued pension costs $ (472) $ (1,597)
=============== ===============
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $20.6 million and $25.3 million and vested
benefit obligations of $18.8 million and $23.3 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
13
<PAGE> 16
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Benefits earned during the year $ 212 $ 483
Interest cost on accumulated post-
retirement benefit obligations 2,145 2,377
Amortization of transition obligation 1,069 1,279
Other-net -- --
--------------- ---------------
Postretirement benefit cost $ 3,426 $ 4,139
=============== ===============
</TABLE>
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Accumulated postretirement benefit
obligations attributable to:
Retirees $ 23,473 $ 24,276
Fully eligible active plan participants 720 790
Other active plan participants 4,013 3,286
--------------- ---------------
Total accumulated postretirement benefit obligations 28,206 28,352
Fair value of plan assets -- --
--------------- ---------------
Excess of accumulated obligations
over plan assets 28,206 28,352
Unrecognized transition obligation (18,782) (18,127)
Unrecognized net loss (526) (3,041)
--------------- ---------------
Accrued postretirement benefit
obligations $ 8,898 $ 7,184
=============== ===============
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12.0% and
13.0% for pre-65 participants and 9.0% and 9.5% for post-65 retirees, each rate
declining on a graduated basis to an ultimate rate in the year 2004 of 6.0%. A
one percentage point increase in the assumed health care cost trend rate for
each future year would have increased 1994 costs by $147,000 and the
accumulated postretirement benefit obligations at December 31, 1994 by $1.9
million.
14
<PAGE> 17
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes, among others, include newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service. The net
effect of these changes reduced the accumulated postretirement benefit
obligations at December 31, 1993 by $8.2 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $130,000 and $214,000 in 1994 and 1993, respectively.
8. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment that contain varying renewal options for terms up to 42 years.
Rental expense was $1.2 million and $4.3 million in 1994 and 1993,
respectively. Minimum rental commitments under noncancelable leases through
1999 do not exceed $11,000 annually.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Land and buildings $ 23,379 $ 23,164
Plant in service 537,204 510,215
Plant under construction 1,441 2,394
Other 10,135 10,974
--------------- ---------------
Total telephone plant 572,159 546,747
Accumulated depreciation (278,397) (253,515)
--------------- ---------------
Net telephone plant $ 293,762 $ 293,232
=============== ===============
</TABLE>
15
<PAGE> 18
10. REGULATORY MATTERS
The Company is subject to regulation by the FCC for interstate business and the
TPUC for intrastate operations.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
Local Exchange Carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCC has also
adopted a productivity sharing feature. Because of this feature, under the
minimum productivity-gain option, the Company must share equally with its
ratepayers any realized interstate returns above 12.25% up to 16.25%, and all
returns higher than 16.25%, by temporarily lowering prospective prices.
INTRASTATE SERVICES
The Company provides long distance services within designated geographic areas
called Local Access and Transport Areas (LATAs) in conformity with state
commission orders, or as a provider of long distance services directly to the
customers in their exchanges.
On September 1, 1993, access rates were reduced by $6.1 million as part of the
two year transition ordered in TPUC's April 1, 1992 access charge rule.
LOCAL SERVICE RATE MATTERS
On May 29, 1993, rates were reduced by $2.3 million as the last of two rate
reductions included in a unanimous stipulation which settled a 1991 show cause
proceeding.
On December 4, 1994, the Office of Public Utility Counsel (OPC) filed a
petition to initiate a show cause proceeding. TPUC issued an order dated March
22, 1995 which requires Contel of Texas, Inc. to submit a rate filing package
no later than August 31, 1995.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994 and 1993
under various arrangements and amounted to $24.0 million and $24.3 million,
respectively.
16
<PAGE> 19
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $ 8,922 $ (28,551)
Materials and supplies,
prepayments and other (3,906) 820
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable 547 5,364
Due to affiliated companies (2,183) 134
Advanced billings and customer deposits (131) 169
Accrued liabilities (686) (7,176)
Other 6,048 (488)
--------------- ---------------
Total $ 8,611 $ (29,728)
=============== ===============
CASH PAID DURING THE YEAR FOR:
Interest $ 8,510 $ 8,075
Income taxes 10,250 23,070
</TABLE>
17
<PAGE> 20
CONTEL OF TEXAS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30,
1995
---------------
(Thousands of Dollars)
<S> <C>
Current assets:
Cash $ 486
Receivables, less allowance of $3,628 24,715
Deferred income tax benefits 1,216
Prepayments and other 1,862
---------------
Total current assets 28,279
---------------
Property, plant and equipment:
Original cost 586,135
Accumulated depreciation (299,893)
---------------
Net property, plant and equipment 286,242
---------------
Other assets 552
---------------
Total assets $ 315,073
===============
</TABLE>
See Notes to Condensed Financial Statements.
18
<PAGE> 21
CONTEL OF TEXAS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30,
1995
---------------
(Thousands of Dollars)
<S> <C>
Current liabilities:
Notes payable to affiliates $ 18,878
Current maturities of long-term debt 2,204
Accounts payable 13,270
Accrued taxes 5,139
Accrued interest 1,053
Accrued payroll and vacations 1,797
Accrued restructuring costs and other 15,490
---------------
Total current liabilities 57,831
---------------
Long-term debt 60,860
---------------
Deferred credits:
Deferred income taxes 34,704
Restructuring costs and other 25,295
---------------
Total deferred credits 59,999
---------------
Shareholder's equity:
Common stock 7,964
Other capital 40,276
Reinvested earnings 88,143
---------------
Total shareholder's equity 136,383
---------------
Total liabilities and shareholder's equity $ 315,073
===============
</TABLE>
See Notes to Condensed Financial Statements.
19
<PAGE> 22
CONTEL OF TEXAS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1995 1994
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Operating revenues:
Local network services $ 26,725 $ 24,711
Network access services 57,338 66,666
Long distance services 29,027 34,786
Equipment sales and services and other 3,375 3,873
--------------- ---------------
116,465 130,036
--------------- ---------------
Operating expenses:
Cost of sales and services 33,725 42,480
Depreciation and amortization 28,656 25,111
Selling, general and administrative 20,436 25,781
--------------- ---------------
82,817 93,372
--------------- ---------------
Net operating income 33,648 36,664
Interest expense - net 6,141 6,146
--------------- ---------------
Income before income taxes 27,507 30,518
Income taxes 12,021 10,309
--------------- ---------------
Net income $ 15,486 $ 20,209
=============== ===============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by
Contel Corporation (a wholly-owned subsidiary of GTE Corporation, GTE).
See Notes to Condensed Financial Statements.
20
<PAGE> 23
CONTEL OF TEXAS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1995 1994
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,486 $ 20,209
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 28,656 25,111
Deferred income taxes (264) 3,791
Provision for uncollectible accounts 4,726 4,197
Changes in current assets and current liabilities (3,567) 2,189
Other - net 3,950 (7,723)
--------------- ---------------
Net cash from operating activities 48,987 47,774
--------------- ---------------
Cash flows used in investing activities:
Capital expenditures (23,607) (21,967)
--------------- ---------------
Cash used in investing activities (23,607) (21,967)
--------------- ---------------
Cash flows used in financing activities:
Increase (decrease) in notes payable to affiliates (9,363) 1,982
Long-term debt retired (11,708) (2,452)
Dividends paid to shareholder (4,000) (27,580)
--------------- ---------------
Net cash used in financing activities (25,071) (28,050)
--------------- ---------------
Increase (decrease) in cash 309 (2,243)
Cash:
Beginning of period 177 2,417
--------------- ---------------
End of period $ 486 $ 174
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
21
<PAGE> 24
CONTEL OF TEXAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. The unaudited condensed financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
of the Company, the condensed financial statements include all adjustments,
which consist only of normal recurring accruals, necessary to present fairly
the financial information for such periods. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's 1994 Financial Statements included in
this Form 8-K filing.
2. All federal and state regulatory approvals have been obtained for the
merger of the Company into GTE Southwest Incorporated which is currently
anticipated to be effective on December 31, 1995. The merger of the Company
into GTE Southwest Incorporated will simplify the corporate structure and will
provide greater efficiency of operations through consolidation of record
keeping and control of expenses. The new Company will have enhanced market
presence both in the providing of competitive telecommunications services and
the procurement of capital.
3. Reclassifications of prior year data have been made in the condensed
financial statements where appropriate to conform to the 1995 presentation.
22
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Contel of the West, Inc.:
We have audited the accompanying balance sheets of Contel of the West, Inc.
(an Arizona corporation), d/b/a GTE West (the Company), as of December 31, 1994
and 1993, and the related statements of income, shareholder's equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Contel of the West, Inc. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, effective January 1, 1993,
the Company changed its method of accounting for postretirement benefits other
than pensions.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1995.
23
<PAGE> 26
CONTEL OF THE WEST, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 952 $ 1,603
Special cash deposit -- 2,950
Accounts receivable:
Customers (including unbilled revenues) 11,253 15,347
Affiliated companies 746 1,560
Other 2,119 9,398
Allowance for uncollectible accounts (524) (513)
Notes receivable from affiliate 18,597 24,572
Net assets held for sale -- 39,242
Materials and supplies, prepayments and other 283 2,416
--------------- ---------------
Total current assets 33,426 96,575
--------------- ---------------
Property, plant and equipment:
Original cost 104,297 98,818
Accumulated depreciation (61,427) (55,877)
--------------- ---------------
Net property, plant and equipment 42,870 42,941
--------------- ---------------
Other assets 4,599 3,120
--------------- ---------------
Total assets $ 80,895 $ 142,636
=============== ===============
</TABLE>
See Notes to Financial Statements.
24
<PAGE> 27
CONTEL OF THE WEST, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 8 $ 6
Accounts payable 2,780 9,449
Due to affiliated companies 1,190 4,890
Advance billings and customer deposits 982 1,314
Accrued dividends 10,000 7,100
Accrued taxes 19,708 16,590
Accrued interest 21 123
Accrued payroll and vacations 1,066 952
Deferred income taxes and investment tax
credits associated with sale of assets -- 2,430
Accrued restructuring costs and other 21,073 12,489
--------------- ---------------
Total current liabilities 56,828 55,343
--------------- ---------------
Long-term debt 74 8,078
--------------- ---------------
Deferred credits:
Deferred investment tax credits 751 350
Restructuring costs and other 13,044 12,926
--------------- ---------------
Total deferred credits 13,795 13,276
--------------- ---------------
Shareholder's equity:
Common stock (6,806 shares outstanding) 681 681
Other capital 4,830 27,358
Reinvested earnings 4,687 37,900
--------------- ---------------
Total shareholder's equity 10,198 65,939
--------------- ---------------
Total liabilities and shareholder's equity $ 80,895 $ 142,636
=============== ===============
</TABLE>
See Notes to Financial Statements.
25
<PAGE> 28
CONTEL OF THE WEST, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Operating revenues:
Local network services $ 17,934 $ 21,775
Network access services 46,250 53,950
Long distance services 8,662 12,601
Equipment sales and services and other 2,811 5,100
--------------- ---------------
75,657 93,426
--------------- ---------------
Operating expenses:
Cost of sales and services 22,899 30,107
Depreciation and amortization 14,030 19,596
Selling, general and administrative 11,114 19,945
Restructuring costs -- 4,420
--------------- ---------------
48,043 74,068
--------------- ---------------
Net operating income 27,614 19,358
Other (income) deductions:
Interest expense - net 392 2,685
Gain on disposition of assets (41,767) (17,536)
--------------- ---------------
Income before income taxes 68,989 34,209
Income taxes 26,902 11,167
--------------- ---------------
Net income $ 42,087 $ 23,042
=============== ===============
</TABLE>
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON OTHER REINVESTED
STOCK CAPITAL EARNINGS
--------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Balance, December 31, 1992 $ 681 $ 27,358 $ 46,258
Add -
Net income 23,042
Deduct -
Cash dividends declared on common stock 31,400
--------- --------- ---------
Balance, December 31, 1993 681 27,358 37,900
Add -
Net income 42,087
Deduct -
Cash dividends declared on common stock 75,300
Return of capital 22,528
--------- --------- ---------
Balance, December 31, 1994 $ 681 $ 4,830 $ 4,687
========= ========= =========
</TABLE>
See Notes to Financial Statements.
26
<PAGE> 29
CONTEL OF THE WEST, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 42,087 $ 23,042
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 14,030 19,596
Restructuring costs -- 4,420
Deferred income taxes and investment tax credits (6,785) (14,825)
Provision for uncollectible accounts 1,258 43
Gain on disposition of assets, net of tax (25,102) (12,722)
Changes in current assets and current liabilities 22,497 (1,720)
Other - net 9,715 5,530
--------------- ---------------
Net cash from operating activities 57,700 23,364
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (45,900) (11,044)
Proceeds from the sale of assets 90,439 77,550
Other - net 41 (720)
--------------- ---------------
Net cash from investing activities 44,580 65,786
--------------- ---------------
Cash flows used in financing activities:
Long-term debt retired (8,003) (26,140)
Dividends paid to shareholder (72,400) (26,300)
Return of capital (22,528) --
Decrease in notes payable to affiliates -- (36,717)
--------------- ---------------
Cash used in financing activities (102,931) (89,157)
--------------- ---------------
Decrease in cash (651) (7)
Cash:
Beginning of year 1,603 1,610
--------------- ---------------
End of year $ 952 $ 1,603
=============== ===============
</TABLE>
See Notes to Financial Statements.
27
<PAGE> 30
CONTEL OF THE WEST, INC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Contel of the West, Inc., d/b/a GTE West (the Company), is a wholly-owned
subsidiary of Contel Corporation (the Parent Company). The Parent Company is a
wholly-owned subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES - PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to
approximately $1.7 million and $2.1 million for the years 1994 and 1993,
respectively. Such purchases are recorded in the accounts of the Company at
cost, including a normal return realized by the affiliates.
The Company is also billed for data processing services and equipment rentals,
and receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$3.6 million and $4.0 million for the years 1994 and 1993, respectively. The
amounts charged for these affiliated transactions are based on a proportional
cost allocation method.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant on a straight-line
basis over asset lives approved by regulators. Depreciation is based upon rates
prescribed by the Federal Communications Commission (FCC) and the state
regulatory commissions. The provisions for depreciation and amortization were
equivalent to composite annual rates of 9.6% and 8.2% for the years 1994 and
1993, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the regulatory commissions in each of the Company's operating
jurisdictions and Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation". This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, SFAS No. 71 requires companies to
depreciate plant and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon approvals
received from regulators to permit recovery of such amounts in future years.
The Company annually reviews the continued applicability of SFAS No. 71 based
on the current regulatory and competitive environment.
28
<PAGE> 31
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average cost) or market
value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company
elected to adopt this new accounting standard on the delayed recognition method
and commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before retirement.
Previously, the cost of these benefits was charged to expense as paid. The
impact of this change in accounting on the Company's results of operations was
immaterial.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
FINANCIAL INSTRUMENTS
The fair values of financial instruments closely approximate their carrying
values.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system
software is capitalized and amortized over the life of the related hardware.
PRIOR YEAR'S FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1994 presentation.
29
<PAGE> 32
2. PROPERTY REPOSITIONING
On May 18, 1993, GTE and the Company entered into a purchase agreement whereby
the Company would sell all its local exchange properties in Arizona to Citizens
Utilities Company. The net assets held for sale as of December 31, 1993 of $39
million represent property, plant and equipment. Deferred income taxes and
unamoritized investment tax credits were reclassified to current liabilities
pending execution of the definitive agreement with Citizens Utilities Company.
On November 30, 1994, the definitive agreement was executed and the Company
sold a portion of its telephone plant in service, materials and supplies, and
customers (representing 26,519 access lines) in the state of Arizona to
Citizens Utilities Company. This transaction was accounted for as a sale. The
proceeds exceeded the book value and therefore, a pretax gain was recognized on
the transaction.
On December 31, 1993, the Company sold a portion of its telephone plant in
service, materials and supplies, and customers (representing 17,000 access
lines) in the state of Utah to Citizens Utilities Company. This transaction
was accounted for as a sale. The net sales proceeds exceeded the book value
and therefore, a pretax gain was recognized on the transaction.
On February 23, 1993, the Idaho properties of the Company were sold to GTE
Northwest Incorporated for their book value of $25 million.
3. RESTRUCTURING COSTS
Results for 1993 include a one-time pretax restructuring charge of $4.4 million
related to the Company's re-engineering plan over the next three years. The
re-engineering plan will redesign and streamline processes to improve customer-
responsiveness and product quality, reduce the time necessary to introduce new
products and services and further reduce costs. The re-engineering plan
includes $1.8 million to upgrade or replace existing customer service and
administrative systems and enhance network software, $2.1 million for employee
separation benefits associated with workforce reductions and $0.5 million
primarily for the consolidation of facilities and operations and other related
costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $0.8 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
4. COMMON STOCK
The authorized common stock of the Company consists of 200,000 shares with a
par value of $100 per share. All outstanding shares of common stock are held
by the Parent Company.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
30
<PAGE> 33
5. DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS
9.53% Series CC, due 2014 $ -- $ 8,000
CAPITALIZED LEASES 74 78
--------------- ---------------
Total long-term debt $ 74 $ 8,078
=============== ===============
</TABLE>
In November 1994, the Company called $8 million of first mortage bonds with
proceeds from the sale of assets in Arizona.
In December 1993, the Company called $24.4 million of first mortgage bonds with
proceeds from the sale of assets in Utah. These bonds had coupons ranging from
2.0% to 11.361%.
Installment requirements for the five-year period from January 1, 1995 are
summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 8
1996 10
1997 11
1998 13
1999 16
</TABLE>
A $2.8 billion line of credit is available to the Company through shared lines
with GTE and other affiliates.
31
<PAGE> 34
6. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Current
Federal $ 26,059 $ 22,052
State and local 7,628 3,940
--------------- ---------------
Total 33,687 25,992
Deferred
Federal (5,365) (11,052)
State and local (189) (1,729)
--------------- ---------------
Total (5,554) (12,781)
Amortization of deferred investment
tax credits (1,231) (2,044)
--------------- ---------------
Total $ 26,902 $ 11,167
=============== ===============
</TABLE>
32
<PAGE> 35
A reconciliation between taxes computed by applying the statutory Federal
income tax rate to pretax income and income taxes provided in the Statements of
Income is as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- --------------
<S> <C> <C>
STATUTORY FEDERAL INCOME TAX RATE 35.0% 35.0%
State and local income taxes, net of
Federal income tax benefits 7.0 4.2
Amortization of deferred investment tax credits (1.8) (6.0)
Depreciation of telephone plant construction
costs previously deducted for tax purposes - 0.2 1.8
net
Rate differentials applied to reversing
temporary differences (0.1) (0.3)
Other (1.3) (2.1)
--------------- --------------
EFFECTIVE INCOME TAX RATE 39.0% 32.6%
=============== ==============
</TABLE>
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established
rate-making practices. Since the manner in which income taxes are treated for
rate-making has not changed, pursuant to SFAS No. 71, a corresponding
regulatory asset was also established. In addition, deferred income taxes were
adjusted and a regulatory liability established to give effect to the current
statutory Federal income tax rate and for unamortized investment tax credits.
The net unamortized regulatory liability balances at December 31, 1994 and 1993
amounted to $1.2 million and $2.2 million, respectively, and are reflected as
other deferred credits in the accompanying Balance Sheets. This amount is
being amortized over the lives of the related depreciable assets concurrent
with recovery in rates and in conformance with the provisions of the Internal
Revenue Code. The assets and liabilities established in accordance with SFAS
No. 71 have been increased for the tax effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 2,196 $ 5,590
Employee benefit obligations (4,532) (3,286)
Restructuring costs (1,404) (1,735)
Other - net (218) (152)
--------------- ---------------
Total $ (3,958) $ 417
=============== ===============
</TABLE>
33
<PAGE> 36
7. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these
plans are generally based on years of credited service and average final
earnings. The Company's funding policy, subject to the minimum funding
requirements of U. S. employee benefit and tax laws, is to contribute such
amounts as are determined on an actuarial basis to provide the plans with
assets sufficient to meet the benefit obligations of the plans. The assets of
the plans consist primarily of corporate equities, government securities and
corporate debt securities.
The components of the net pension credit for 1994-1993 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Benefits earned during the year $ 177 $ 400
Interest cost on projected benefit obligations 500 1,090
Return on plan assets:
Actual 23 (3,133)
Deferred (868) 1,432
Other - net (403) (366)
--------------- ---------------
Net pension credit $ (571) $ (577)
=============== ===============
</TABLE>
The expected long-term rate of return on plan assets was 8.50% for 1994 and
8.25% for 1993.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Plan assets at fair value $ 10,003 $ 21,789
Projected benefit obligations (6,213) (13,852)
--------------- ---------------
Excess of assets over projected benefit
obligations 3,790 7,937
Unrecognized net transition asset (507) (1,141)
Unrecognized net gain (2,728) (6,138)
--------------- ---------------
Prepaid pension costs $ 555 $ 658
=============== ===============
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $5.2 million and $11.4 million and vested
benefit obligations of $4.8 million and $10.5 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
34
<PAGE> 37
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds amounts
for postretirement benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 includes the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Benefits earned during the year $ 112 $ 266
Interest cost on accumulated postretirement
benefit obligations 1,126 1,284
Amortization of transition obligation 334 723
--------------- ---------------
Postretirement benefit cost $ 1,572 $ 2,273
=============== ===============
</TABLE>
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Accumulated postretirement benefit
obligations attributable to:
Retirees $ 12,545 $ 12,425
Fully eligible active plan participants 201 536
Other active plan participants 1,144 2,900
--------------- ---------------
Total accumulated postretirement benefit obligations 13,890 15,861
Fair value of plan assets -- 13
--------------- ---------------
Excess of accumulated obligations
over plan assets 13,890 15,848
Unrecognized transition obligation (6,021) (9,751)
Unrecognized net gain (loss) (5,457) (566)
--------------- ---------------
Accrued postretirement benefit obligations $ 2,412 $ 5,531
=============== ===============
</TABLE>
The assumed discount rate used to measure the accumulated postretirement benefit
obligations were 8.25% at December 31, 1994 and 7.5% at December 31, 1993. The
assumed health care cost trend rates in 1994 and 1993 were 12.0% and 13.0% for
pre-65 participants and 9.0% and 9.5% for post-65 retirees, each rate declining
on a graduated basis to an ultimate rate in the year 2004 of 6.0%. A one
percentage point increase in the assumed health care cost trend rate for each
future year would have increased 1994 costs by $86,000 and the accumulated
postretirement benefit obligations at December 31, 1994 by $1.1 million.
35
<PAGE> 38
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes include, among others, newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service. The net
effect of these changes reduced the accumulated postretirement benefit
obligations at December 31, 1993 by $1.9 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $46,000 and $109,000 in 1994 and 1993, respectively.
8. LEASE COMMITMENTS
The Company has noncancelable lease contracts covering certain land and
buildings, office space and equipment. The lease contracts contain varying
renewal options for terms up to 18 years. Rental expense was $250,000 and
$810,000 in 1994 and 1993, respectively. Minimum rental commitments under
noncancelable leases through 1999 do not exceed $44,000 annually.
9. PROPERTY, PLANT AND EQUIPMENT
Telephone plant, including amounts for leases which have been capitalized,
consists of the following:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Land and buildings $ 6,590 $ 6,341
Plant in service 97,067 92,003
Plant under construction and other 640 474
--------------- ---------------
Total telephone plant 104,297 98,818
Accumulated depreciation (61,427) (55,877)
--------------- ---------------
Net telephone plant $ 42,870 $ 42,941
=============== ===============
</TABLE>
36
<PAGE> 39
10. REGULATORY MATTERS
The Company is subject to regulation by the FCC for interstate business
operations. The state regulatory commission governing the state of New Mexico
regulates the Company's intrastate operations. Prior to the sale of properties
described in Note 2, the state regulatory commissions of Idaho, Arizona and Utah
also regulated the Company's intrastate operations.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
Local Exchange Carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCC has also
adopted a productivity sharing feature. Because of this feature, under the
minimum productivity-gain option, the Company must share equally with its
ratepayers any realized interstate returns above 12.25% up to 16.25%, and all
returns higher than 16.25%, by temporarily lowering prospective prices.
INTRASTATE SERVICES
The Company provides long distance services within designated geographic areas
called Local Access and Transport Areas (LATAs) in conformity with state
commission orders, or as a provider of long distance services directly to the
customers in its exchanges.
SIGNIFICANT CUSTOMER
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities during the years 1994 and 1993 under
various arrangements and amounted to $12.5 million and $17.4 million,
respectively.
37
<PAGE> 40
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Special cash deposit $ 2,950 $ 20,004
Accounts receivable - net 10,941 (23,284)
Notes receivable from affiliate 5,975 (24,572)
Materials and supplies, prepayments and other (162) 1,372
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (6,097) 12,469
Due to affiliated companies (4,255) (1,696)
Advanced billings and customer deposits (80) 155
Accrued liabilities 3,153 7,930
Other 10,072 5,902
--------------- ---------------
Total $ 22,497 $ (1,720)
=============== ===============
CASH PAID DURING THE YEAR FOR:
Interest $ 893 $ 3,635
Income taxes 28,802 17,518
</TABLE>
38
<PAGE> 41
CONTEL OF THE WEST, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30,
1995
----------------------
(Thousands of Dollars)
<S> <C>
Current assets:
Cash $ 167
Receivables, less allowance of $540 15,939
Deferred income tax benefits 7,716
Prepayments and other 16,180
---------------
Total current assets 40,002
---------------
Property, plant and equipment:
Original cost 106,016
Accumulated depreciation (66,061)
---------------
Net property, plant and equipment 39,955
---------------
Other assets 717
---------------
Total assets $ 80,674
===============
</TABLE>
See Notes to Condensed Financial Statements.
39
<PAGE> 42
CONTEL OF THE WEST, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30,
1995
---------------
(Thousands of Dollars)
<S> <C>
Current liabilities:
Notes payable to affiliates $ 20,521
Current maturities of long-term debt 9
Accounts payable 6,486
Accrued payroll and vacations 225
Accrued restructuring costs and other 28,508
---------------
Total current liabilities 55,749
---------------
Long-term debt 69
---------------
Deferred credits:
Deferred income taxes 2,930
Restructuring costs and other 14,094
---------------
Total deferred credits 17,024
---------------
Shareholder's equity:
Common stock 681
Other capital 4,830
Reinvested earnings 2,321
---------------
Total shareholder's equity 7,832
---------------
Total liabilities and shareholder's equity $ 80,674
===============
</TABLE>
See Notes to Condensed Financial Statements.
40
<PAGE> 43
CONTEL OF THE WEST, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1995 1994
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Operating revenues:
Local network services $ 7,779 $ 13,906
Network access services 18,034 33,987
Long distance services 5,958 6,759
Equipment sales and services and other 825 2,617
--------------- ---------------
32,596 57,269
--------------- ---------------
Operating expenses:
Cost of sales and services 8,717 17,933
Depreciation and amortization 5,060 10,826
Selling, general and administrative 6,530 3,618
--------------- ---------------
20,307 32,377
--------------- ---------------
Net operating income 12,289 24,892
Interest expense - net 770 436
--------------- ---------------
Income before income taxes 11,519 24,456
Income taxes 3,885 8,262
--------------- ---------------
Net income $ 7,634 $ 16,194
=============== ===============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by
Contel Corporation (a wholly-owned subsidiary of GTE Corporation, GTE).
See Notes to Condensed Financial Statements.
41
<PAGE> 44
CONTEL OF THE WEST, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1995 1994
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,634 $ 16,194
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 5,060 10,826
Deferred income taxes (1,697) (4,475)
Provision for uncollectible accounts 1,048 505
Changes in current assets and current liabilities (9,504) 11,583
Other - net (1,855) 2,897
--------------- ---------------
Net cash from operating activities 686 37,530
--------------- ---------------
Cash flows used in investing activities:
Capital expenditures (1,988) (7,529)
--------------- ---------------
Cash used in investing activities (1,988) (7,529)
--------------- ---------------
Cash flows from financing activities:
Increase in notes payable to affiliates 20,521 --
Long-term debt retired (4) (4)
Dividends paid to shareholder (20,000) (8,600)
Return of capital -- (22,528)
--------------- ---------------
Net cash from (used in) financing activities 517 (31,132)
--------------- ---------------
Decrease in cash (785) (1,131)
Cash:
Beginning of period 952 1,603
--------------- ---------------
End of period $ 167 $ 472
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
42
<PAGE> 45
CONTEL OF THE WEST, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. The unaudited condensed financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
of the Company, the condensed financial statements include all adjustments,
which consist only of normal recurring accruals, necessary to present fairly
the financial information for such periods. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's 1994 Financial Statements included in
this Form 8-K filing.
2. All federal and state regulatory approvals have been obtained for the
merger of the Company into GTE Southwest Incorporated which is currently
anticipated to be effective on December 31, 1995. The merger of the Company
into GTE Southwest Incorporated will simplify the corporate structure and will
provide greater efficiency of operations through consolidation of record
keeping and control of expenses. The new Company will have enhanced market
presence both in the providing of competitive telecommunications services and
the procurement of capital. On April 13, 1995, in the first phase of the New
Mexico rate proceeding, which will ultimately merge the rates and tariffs of
the Company and GTE Southwest Incorporated, the New Mexico Service Corporation
Commission ordered an $8.3 million annual reduction in the combined revenues of
the Company and GTE Southwest Incorporated. The Company and GTE Southwest
Incorporated expect a final rate design order from the commission in the first
quarter of 1996, with the rate impact to be retroactive to April 1995.
3. Reclassifications of prior year data have been made in the condensed
financial statements where appropriate to conform to the 1995 presentation.
43
<PAGE> 46
GTE SOUTHWEST INCORPORATED AND CONTEL SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidating Balance Sheet as of
September 30, 1995, gives effect to the proposed Merger as if it had occurred
as of the balance sheet date. The following Unaudited Pro Forma Condensed
Consolidating Statements of Income for the nine month periods ended September
30, 1995 and 1994 and for the years ended December 31, 1994-1992 give effect to
the proposed Merger as if it had occurred at the beginning of each of the
respective periods presented. The pro forma condensed consolidating financial
statements give effect to the Merger as a "pooling of interests" for accounting
purposes and should be read in conjunction with the historical financial
statements and the related notes thereto contained in the GTE Southwest
Incorporated Annual Report on Form 10-K for the year ended December 31, 1994
and subsequent filings with the SEC. All material intercompany transactions
have been eliminated in the pro forma statements.
The pro forma data are presented for informational purposes only and are not
necessarily indicative of the operating results or financial position that
would have occurred had the Merger been consummated at the dates indicated, nor
are they necessarily indicative of future operating results or financial
position. Organizational and other costs to be incurred in connection with the
Merger are not expected to be material.
Regulatory Accounting
On November 9, 1995, GTE Southwest Incorporated (the Company), Contel of Texas,
Inc. (Contel Texas) and Contel of the West, Inc.(Contel West) (the Contel
Subsidiaries) announced through their parent, GTE Corporation, that in response
to recently enacted and pending legislation and the increasingly competitive
environment in which the Company and the Contel Subsidiaries expect to operate,
effective January 1, 1996, the Company and the Contel Subsidiaries are
discontinuing the use of accounting practices appropriate to regulated
enterprises. As a result of this decision, the Company and the Contel
Subsidiaries will record a non-cash, extraordinary charge of approximately
$549.4 million after taxes during the fourth quarter of 1995. This charge,
which is based on the results of a comprehensive study of the economic lives of
the Company's and the Contel Subsidiaries' telephone plant and equipment, will
have no effect on their customers or their liquidity and capital resources.
The Company and the Contel Subsidiaries have traditionally followed the
accounting for regulated enterprises prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71). In general, FAS 71 required the Company and the Contel
Subsidiaries to depreciate their plant and equipment over regulator approved
lives which may extend beyond the assets' actual 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, was higher than that which would
otherwise have been recorded.
The charge will primarily represent an adjustment to the net book value of the
fixed assets of the Company and the Contel Subsidiaries, through an increase in
accumulated depreciation, and is not expected to have a significant effect on
depreciation expense of existing plant and equipment or earnings over the next
several years. The income statement effect of this change in accounting will
be reflected in the statements of income as an extraordinary charge, net of
tax, under the provisions of Statement of Financial Accounting Standards No.
101, "Regulated Enterprises-Accounting for the Discontinuation of Application
of FASB Statement No. 71."
The accompanying pro forma statements of income for the nine months ended
September 30, 1995 and for the year ended December 31, 1994 and the pro forma
balance sheet as of September 30, 1995 are based on historical condensed
financial statements, adjusted to give effect to the discontinuance of FAS 71
as though it had occurred at the beginning of each period presented. The pro
forma financial information should be read in conjunction with the historical
financial statements and related notes thereto. The pro forma financial
information is not necessarily indicative of the results that would have been
attained had the discontinuance of FAS 71 occurred in an earlier period.
In addition, Contel Texas plans to refinance, on a long-term basis,
approximately $15.2 million of its long term debt. The positive impact of
these redemptions is not expected to have a signigicant effect on earnings over
the next several years.
44
<PAGE> 47
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel
Southwest Texas West Eliminations Sub-total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Accounts receivable - net $ 213,079 $ 24,715 $ 15,939 $ (4,925) (1) $ 248,808
Other current assets 89,120 3,564 24,063 116,747
Property, plant and equipment 4,148,384 586,135 106,016 4,840,535
Less: accumulated depreciation and
amortization (1,668,288) (299,893) (66,061) (2,034,242)
Other assets 86,105 552 717 87,374
------------ ------------ ------------ ------------ ------------
Total assets $ 2,868,400 $ 315,073 $ 80,674 $ (4,925) $ 3,259,222
============ ============ ============ ============ ============
Accounts payable $ 114,108 $ 13,270 $ 6,486 $ (4,925) (1) $ 128,939
Other current liabilities 402,149 44,561 49,263 495,973
Long-term debt 664,505 60,860 69 725,434
Deferred income taxes 365,174 34,704 2,930 402,808
Restructuring costs and other 219,579 25,295 14,094 258,968
Preferred stock subject to mandatory
redemption 10,190 -- -- 10,190
Shareholders' equity:
Common shareholder's equity 1,085,095 136,383 7,832 1,229,310
Preferred stock 7,600 -- -- 7,600
------------ ------------ ------------ ------------ ------------
Total shareholders' equity 1,092,695 136,383 7,832 1,236,910
------------ ------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity $ 2,868,400 $ 315,073 $ 80,674 $ (4,925) $ 3,259,222
============ ============ ============ ============ ============
<CAPTION>
FAS 71 Surviving
Adjustments Corporation
------------ ------------
<S> <C> <C>
Accounts receivable - net $ 248,808
Other current assets 116,747
Property, plant and equipment 4,840,535
Less: accumulated depreciation and
amortization $ (866,457) (4) (2,900,699)
Other assets 87,374
------------ ------------
Total assets $ (866,457) $ 2,392,765
============ ============
Accounts payable $ 128,939
Other current liabilities 495,973
Long-term debt $ 775 (6) 726,209
Deferred income taxes (301,627) (7) 101,181
Restructuring costs and other (16,167) (5) 242,801
Preferred stock subject to mandatory
redemption 10,190
Shareholders' equity:
Common shareholder's equity (549,438) (3) 679,872
Preferred stock 7,600
------------ ------------
Total shareholders' equity (549,438) 687,472
------------ ------------
Total liabilities and shareholders'
equity $ (866,457) $ 2,392,765
============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
45
<PAGE> 48
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel FAS 71 Surviving
Southwest Texas West Adjustments Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Local network services $ 352,821 $ 26,725 $ 7,779 $ 387,325
Network access services 348,464 57,338 18,034 423,836
Long distance services 127,337 29,027 5,958 162,322
Equipment sales and services
and other 125,778 3,375 825 $ 23,810 (2) 153,788
------------ ------------ ------------ ------------ ------------
954,400 116,465 32,596 23,810 1,127,271
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 389,458 33,725 8,717 431,900
Depreciation and amortization 216,739 28,656 5,060 250,455
Selling, general and
administrative 142,643 20,436 6,530 23,810 (2) 193,419
------------ ------------ ------------ ------------ ------------
748,840 82,817 20,307 23,810 875,774
------------ ------------ ------------ ------------ ------------
Net operating income 205,560 33,648 12,289 -- 251,497
Other (income) deductions:
Interest expense - net 40,689 6,141 770 47,600
Gain on disposition of (21,763) -- -- (21,763)
assets
Other - net (4,501) -- -- (4,501)
------------ ------------ ------------ ------------ ------------
Income before income taxes 191,135 27,507 11,519 -- 230,161
Income taxes 64,180 12,021 3,885 80,086
------------ ------------ ------------ ------------ ------------
Income before extraordinary
charge 126,955 15,486 7,634 -- 150,075
Extraordinary charge -- -- -- (549,438)(3) (549,438)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 126,955 $ 15,486 $ 7,634 $ (549,438) $ (399,363)
============ ============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
46
<PAGE> 49
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 1994
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel Surviving
Southwest Texas West Corporation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 327,934 $ 24,711 $ 13,906 $ 366,551
Network access services 338,795 66,666 33,987 439,448
Long distance services 148,217 34,786 6,759 189,762
Equipment sales and services
and other 93,943 3,873 2,617 100,433
------------ ------------ ------------ ------------
908,889 130,036 57,269 1,096,194
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 415,901 42,480 17,933 476,314
Depreciation and amortization 193,430 25,111 10,826 229,367
Selling, general and administrative 129,422 25,781 3,618 158,821
------------ ------------ ------------ ------------
738,753 93,372 32,377 864,502
------------ ------------ ------------ ------------
Net operating income 170,136 36,664 24,892 231,692
Other (income) deductions:
Interest expense - net 41,338 6,146 436 47,920
Gain on disposition of assets (9,297) -- -- (9,297)
------------ ------------ ------------ ------------
Income before income taxes 138,095 30,518 24,456 193,069
Income taxes 46,984 10,309 8,262 65,555
------------ ------------ ------------ ------------
Net income $ 91,111 $ 20,209 $ 16,194 $ 127,514
============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
47
<PAGE> 50
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1994
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel FAS 71 Surviving
Southwest Texas West Adjustments Corporation
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Local network services $ 451,406 $ 33,247 $ 17,934 $ 502,587
Network access services 447,481 88,057 46,250 581,788
Long distance services 198,227 37,967 8,662 244,856
Equipment sales and services
and other 113,506 2,570 2,811 $ 34,377 (2) 153,264
------------ ------------ ------------ ------------ ------------
1,210,620 161,841 75,657 34,377 1,482,495
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 538,876 59,641 22,899 621,416
Depreciation and amortization 272,294 34,692 14,030 321,016
Selling, general and administrative 182,804 32,292 11,114 34,377 (2) 260,587
------------ ------------ ------------ ------------ ------------
993,974 126,625 48,043 34,377 1,203,019
------------ ------------ ------------ ------------ ------------
Net operating income 216,646 35,216 27,614 -- 279,476
Other (income) deductions:
Interest expense - net 54,827 8,349 392 63,568
Gain on disposition of assets (21,921) -- (41,767) (63,688)
------------ ------------ ------------ ------------ ------------
Income before income taxes 183,740 26,867 68,989 -- 279,596
Income taxes 60,354 7,812 26,902 95,068
------------ ------------ ------------ ------------ ------------
Income before extraordinary
charge 123,386 19,055 42,087 -- 184,528
Extraordinary charge -- -- -- (549,438) (3) (549,438)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 123,386 $ 19,055 $ 42,087 $ (549,438) $ (364,910)
============ ============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
48
<PAGE> 51
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel Surviving
Southwest Texas West Corporation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 421,004 $ 30,614 $ 21,775 $ 473,393
Network access services 438,046 84,933 53,950 576,929
Long distance services 189,954 55,042 12,601 257,597
Equipment sales and services
and other 113,361 9,462 5,100 127,923
------------ ------------ ------------ ------------
1,162,365 180,051 93,426 1,435,842
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 466,612 56,644 30,107 553,363
Depreciation and amortization 254,457 35,820 19,596 309,873
Selling, general and administrative 214,488 30,147 19,945 264,580
Restructuring costs 171,954 22,600 4,420 198,974
------------ ------------ ------------ ------------
1,107,511 145,211 74,068 1,326,790
------------ ------------ ------------ ------------
Net operating income 54,854 34,840 19,358 109,052
Other (income) deductions:
Interest expense - net 72,082 7,955 2,685 82,722
Gain on disposition of assets -- -- (17,536) (17,536)
Other - net 1,224 -- -- 1,224
------------ ------------ ------------ ------------
Income (loss) before income taxes (18,452) 26,885 34,209 42,642
Income tax provision (benefit) (30,661) 6,763 11,167 (12,731)
------------ ------------ ------------ ------------
Income before extraordinary charge 12,209 20,122 23,042 55,373
Extraordinary charge 31,250 -- -- 31,250
------------ ------------ ------------ ------------
Net income (loss) $ (19,041) $ 20,122 $ 23,042 $ 24,123
============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
49
<PAGE> 52
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1992
(Thousands of Dollars)
<TABLE>
<CAPTION>
GTE Contel Contel Surviving
Southwest Texas West Corporation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 391,601 $ 29,760 $ 25,231 $ 446,592
Network access services 482,636 83,144 60,453 626,233
Long distance services 204,708 50,539 12,371 267,618
Equipment sales and services
and other 102,840 8,673 5,413 116,926
------------ ------------ ------------ ------------
1,181,785 172,116 103,468 1,457,369
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 438,859 54,659 35,383 528,901
Depreciation and amortization 250,799 34,210 22,803 307,812
Selling, general and administrative 197,140 36,252 16,680 250,072
------------ ------------ ------------ ------------
886,798 125,121 74,866 1,086,785
------------ ------------ ------------ ------------
Net operating income 294,987 46,995 28,602 370,584
Other deductions:
Interest expense - net 74,888 8,256 2,989 86,133
------------ ------------ ------------ ------------
Income before income taxes 220,099 38,739 25,613 284,451
Income taxes 72,720 12,071 8,901 93,692
------------ ------------ ------------ ------------
Net income $ 147,379 $ 26,668 $ 16,712 $ 190,759
============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Condensed Consolidating Financial Statements.
50
<PAGE> 53
GTE SOUTHWEST INCORPORATED AND CONTEL SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
1. Represents the elimination of intercompany receivables and payables.
2. Represents the reclassification of the provision for uncollectible
accounts to selling, general and administrative expenses, consistent with
non-regulated accounting practices.
3. Represents the after-tax effect of the adjustments described in notes
4 - 6 below.
4. Represents the write-down of property, plant and equipment, net due to an
impairment of such assets resulting from depreciation lives set by regulators
that are longer than the assets' economic lives.
5. Represents the write-off of net regulatory liabilities and the write-off
of the original debt issuance costs associated with $15.2 million of long-term
debt that is planned to be refinanced.
6. Represents the costs associated with the planned refinancing of $15.2
million of long-term debt.
7. Represents the tax effect of the adjustments described in notes 4 - 6
above.
8. Reclassifications of prior year data have been made in the condensed
consolidating financial statements where appropriate to conform to the 1995
presentation.
51
<PAGE> 54
SIGNATURE
Pursuant to the requirements 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 SOUTHWEST INCORPORATED
--------------------------
(Registrant)
Date: December 1, 1995 William M. Edwards, III
---------------- -----------------------
William M. Edwards, III
Controller
(Chief Accounting Officer)
52
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1 Agreement of Merger, dated February 28, 1995, between GTE Southwest
Incorporated, Contel of Texas, Inc. and Contel of the West, Inc.
3.1 Amendment to Restated Certificate of Incorporation and Amended By-Laws
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 1
Exhibit 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER dated as of this 28th day of February, 1995,
is entered into between GTE SOUTHWEST INCORPORATED, a Delaware corporation
("Southwest"), CONTEL OF THE WEST, INC., an Arizona corporation ("West"), and
CONTEL OF TEXAS, INC., a Texas corporation ("Texas").
I. RECITALS
A. GTE Corporation, a New York corporation ("GTE"), now owns or
will own at all times pertinent hereto, including the Effective Date of the
merger, all of the common stock of Southwest, West and Texas.
B. Southwest, West and Texas desire that West and Texas be
merged into Southwest and that Southwest be the surviving corporation. The
laws of the states of Arizona, Texas and Delaware permit this merger.
C. The outstanding capital stock of Southwest consists of
6,450,000 shares of common stock.
D. The outstanding capital stock of West consists of 6,806
shares of common stock.
E. The outstanding capital stock of Texas consists of 796,412
shares of common stock.
II. MERGER
A. The manner of converting the shares of each of the
constituent corporations into shares of the surviving corporation and such
other provisions as are deemed necessary or desirable to
<PAGE> 2
accomplish the merger are contained in the Plan of Merger appended hereto as
Exhibit 1.
B. On the Effective Date of the merger, as defined hereafter in
paragraph C., the assets and liabilities of Southwest, West and Texas shall be
carried on the books of the surviving corporation at the amounts at which they
respectively were carried on such date on the books of Southwest, West and
Texas. The capital surplus and earned surplus of the surviving corporation
shall be the sum of the respective capital surpluses and earned surpluses of
Southwest, West and Texas subject in each case to such adjustment,
eliminations or transfers as may be required to give effect to the merger.
Except as from time to time restricted by contract or by statute, the aggregate
amount of the net assets of Southwest, West and Texas which was legally
available for the payment of dividends immediately prior to the merger shall
continue to be legally available for the payment of dividends by the
surviving corporation.
C. This merger shall become effective upon the date of filing of
a Certificate of Merger with the Secretary of State of the State of
Delaware, where the surviving corporation is domiciled, which date is herein
called the "Effective Date."
D. The merger may be abandoned and terminated at any time by
mutual agreement of the Boards of Directors of the merging companies.
E. This Agreement embodies the entire agreement and
understanding of the parties relating to its subject matter and supersedes any
prior agreements and understandings relating thereto.
F. For the convenience of the parties, this Agreement may be
executed in one or more counterparts, each of which shall be deemed
<PAGE> 3
an original, but all of which together shall constitute one and the same
document.
IN WITNESS WHEREOF, this Agreement of Merger has been signed by the
President or a Vice President and the Secretary or an Assistant Secretary of
each of the corporations and each of the corporations has caused the corporate
seal to be hereunto affixed, all as of the day first above written, pursuant to
the approval and authority duly given by resolutions adopted by their
respective boards of directors.
GTE SOUTHWEST INCORPORATED
ATTEST:
J. Wilma Aly By: Katherine J. Harless
- ------------------------ ---------------------------
J. Wilma Aly Katherine J. Harless
Assistant Secretary President
CONTEL OF THE WEST, INC.
ATTEST:
Mary W. Clark By: Katherine J. Harless
- ------------------------ ---------------------------
Mary W. Clark Katherine J. Harless
Assistant Secretary President
CONTEL OF TEXAS, INC.
ATTEST:
Mary W. Clark By: Katherine J. Harless
- ------------------------ ---------------------------
Mary W. Clark Katherine J. Harless
Assistant Secretary President
<PAGE> 4
EXHIBIT 1
PLAN OF MERGER
OF
CONTEL OF THE WEST, INC.
AND
CONTEL OF TEXAS, INC.
INTO
GTE SOUTHWEST INCORPORATED
I.
The Corporations Proposing to Merge
Contel of the West, Inc. (hereinafter referred to as "West"), an
Arizona corporation, and Contel of Texas, Inc. (hereinafter referred to as
"Texas"), a Texas corporation, will be merged into GTE Southwest Incorporated
(hereinafter referred to as "Southwest"), a Delaware corporation, the latter
being the surviving corporation which is already qualified to transact business
as a foreign corporation in the States of Arkansas, New Mexico, Oklahoma, and
Texas.
The foregoing corporations are hereinafter sometimes referred to
collectively as the "constituent corporations."
II.
Terms and Conditions of the Merger
The terms and conditions of the merger are as follows:
(a) Prior to the effective date, Contel Corporation will
distribute one hundred percent (100%) of the shares of West and Texas to GTE
Corporation pursuant to the plan of liquidation of Contel Corporation adopted
on January 7, 1993.
<PAGE> 5
(b) On the effective date, West and Texas will be merged into
Southwest, and Southwest will exchange 50,000 shares of its common stock with
GTE Corporation for all of the outstanding shares of common stock of West
(6,806 shares) and Texas (796,412 shares).
(c) No later than the effective date, the following securities of
Texas will be assumed by Southwest:
<TABLE>
<CAPTION>
Description of the Security Outstanding Amount
--------------------------- as of 2-28-95
------------------
<S> <C>
GTE Texas (Contel)
- ------------------
8.750% Series G First Mortgage Bonds Due 04/01/1999 4,000,000
8.500% Series K First Mortgage Bonds Due 01/15/2003 2,160,000
9.700% Series S First Mortgage Bonds Due 07/01/2002 10,908,000
9.740% Series T First Mortgage Bonds Due 05/15/2013 13,200,000
9.360% Series U First Mortgage Bonds Due 09/15/2014 35,000,000
</TABLE>
(d) There are no outstanding securities of West to be assumed by
Southwest.
(e) The merger is intended to qualify as tax-free under Section
368(a)(1)(A) of the Internal Revenue Code of 1986 as amended.
III.
Restated Articles of Incorporation and Surviving Corporation
The Restated Articles of Incorporation of the surviving corporation
will not be affected by the merger.
IV.
Bylaws of Surviving Corporation
The Bylaws of the surviving corporation will not be affected by this
merger.
<PAGE> 6
V.
Additional Description of Surviving Corporation
On the Effective Date, the directors of Southwest shall become the
directors of the surviving corporation.
VI.
Approval of the Plan
This Plan will be submitted for consideration to the Board of
Directors of each of the constituent corporations. If the Plan is duly
approved by resolution of the Board of Directors of each of the constituent
corporations, then the Plan will be submitted for approval by the respective
stockholders in the manner required by the laws of the respective states of
incorporation. In the event the Plan is duly approved by the stockholders, the
Plan, together with other appropriate documentation, will be filed, and the
merger will become effective, in accordance with the laws of the state of
Delaware.
<PAGE> 7
THE STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BE IT REMEMBERED that on this 28th day of February, 1995, personally
came before me, a Notary Public in and for the State of Texas, Katherine J.
Harless and J. Wilma Aly, President and Assistant Secretary, respectively, of
GTE SOUTHWEST INCORPORATED, a corporation of the State of Delaware, the
corporation described in and which executed the foregoing Agreement of Merger
and Plan of Merger, known to me to personally be such, and they, and each of
them, duly executed said Agreement of Merger and Plan of Merger before me and
acknowledged the said Agreement of Merger and Plan of Merger to be their act
and deed and the act and deed of the corporation; that the signatures of the
said President and Assistant Secretary of the corporation to the foregoing
Agreement of Merger and Plan of Merger are in the handwriting of the said
President and Assistant Secretary of said corporation, respectively, and that
the seal affixed to said Agreement of Merger and Plan of Merger is the
corporate seal of the corporation, and that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year aforesaid.
Mary Kay Skinner
------------------------------
Mary Kay Skinner
Notary Public, State of Texas
<PAGE> 8
THE STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BE IT REMEMBERED that on this 28th day of February, 1995, personally
came before me, a Notary Public in and for the State of Texas, Katherine J.
Harless and Mary W. Clark, President and Assistant Secretary, respectively, of
CONTEL OF THE WEST, INC., a corporation of the State of Arizona, the
corporation described in and which executed the foregoing Agreement of Merger
and Plan of Merger, known to me to personally be such, and they, and each of
them, duly executed said Agreement of Merger and Plan of Merger before me and
acknowledged the said Agreement of Merger and Plan of Merger to be their act
and deed and the act and deed of the corporation; that the signatures of the
said President and Assistant Secretary of the corporation to the foregoing
Agreement of Merger and Plan of Merger are in the handwriting of the said
President and Assistant Secretary of said corporation, respectively, and that
the seal affixed to said Agreement of Merger and Plan of Merger is the
corporate seal of the corporation, and that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year aforesaid.
Mary Kay Skinner
------------------------------
Mary Kay Skinner
Notary Public, State of Texas
<PAGE> 9
THE STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BE IT REMEMBERED that on this 28th day of February, 1995, personally
came before me, a Notary Public in and for the State of Texas, Katherine J.
Harless and Mary W. Clark, President and Assistant Secretary, respectively, of
CONTEL OF TEXAS, INC., a corporation of the State of Texas, the corporation
described in and which executed the foregoing Agreement of Merger and Plan of
Merger, known to me to personally be such, and they, and each of them, duly
executed said Agreement of Merger and Plan of Merger before me and acknowledged
the said Agreement of Merger and Plan of Merger to be their act and deed and
the act and deed of the corporation; that the signatures of the said President
and Assistant Secretary of the corporation to the foregoing Agreement of Merger
and Plan of Merger are in the handwriting of the said President and Assistant
Secretary of said corporation, respectively, and that the seal affixed to said
Agreement of Merger and Plan of Merger is the corporate seal of the
corporation, and that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year aforesaid.
Mary Kay Skinner
------------------------------
Mary Kay Skinner
Notary Public, State of Texas
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
OF
GTE SOUTHWEST INCORPORATED
Under Section 242 of the General Corporation Law of the State of
Delaware.
The undersigned, being a Vice President and an Assistant Secretary,
respectively, of GTE SOUTHWEST INCORPORATED, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DO HEREBY CERTIFY as follows:
1. The name of the Corporation is GTE Southwest Incorporated
(hereinafter referred to as the "Corporation").
2. The Restated Certificate of Incorporation of the Corporation
was filed in the Office of the Secretary of State of the State of Delaware on
July 31, 1981, and Certificates of Amendment to the Restated Certificate of
Incorporation of the Corporation were filed in the Office of the Secretary of
the State of Delaware on January 8, 1982, April 2, 1982, August 16, 1982,
January 17, 1983, April 30, 1984, April 3, 1986, August 22, 1986, October 17,
1986, and December 29, 1987.
3. The Restated Certificate of Incorporation of the Corporation,
as heretofore amended, is hereby amended further by amending the first
paragraph of Article FOURTH thereof to read as follows:
"FOURTH: The total authorized capital stock of the Corporation is
Nine Million Two Hundred Ten Thousand Seven Hundred Fifty-Eight
(9,210,758) Shares, consisting of One Million One Hundred Seventy-
Eight Thousand Seven Hundred Fifty-Eight (1,178,758) Shares of
Cumulative Preferred Stock of the par value of Twenty Dollars ($20)
each and of the aggregate par value of Twenty-Three
<PAGE> 2
Million Five Hundred Seventy-Five Thousand One Hundred Sixty Dollars
($23,575,160) and Eight Million Thirty-Two Thousand (8,032,000) Shares
of stock without par value, consisting of One Million Five Hundred
Thirty-Two Thousand (1,532,000) Shares of Cumulative Preferred Stock
without par value and Six Million Five Hundred Thousand (6,500,000)
Shares of Common Stock without par value."
4. The foregoing amendment of the Restated Certificate of
Incorporation, as heretofore amended, of the Corporation was authorized by
resolution of the Board of Directors of the Corporation duly adopted on
November 16, 1995, acting pursuant to Section 242 of the General Corporation
Law of the State of Delaware and was subsequently adopted by a unanimous vote
of the outstanding stock entitled to vote thereon on November 17, 1995, in lieu
of meeting pursuant to Section 228, as amended, of the General Corporation Law
of the State of Delaware.
5. The capital of the Corporation will not be reduced under or by
reason of said Amendment.
IN WITNESS WHEREOF, the undersigned have signed this Certificate this
28th day of November, 1995.
/s/ PETER K. PLAUT
---------------------------------
Peter K. Plaut, Vice President
ATTEST:
/s/ J. WILMA ALY
- ---------------------------------
J. Wilma Aly, Assistant Secretary
-2-
<PAGE> 3
BYLAWS
OF
GTE SOUTHWEST INCORPORATED
INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE
(1926)
Adopted: March 29, 1939
Amended: January 25, 1950
June 4, 1953
May 24, 1965
August 20, 1971
February 20, 1976
March 25, 1981
January 27, 1982
May 26, 1982
May 27, 1987
November 13, 1993
November 15, 1995
<PAGE> 4
GTE SOUTHWEST INCORPORATED
TABLES OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I.
DEFINITIONS, ETC.
Section 1. Definitions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 7. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 9. List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 10. Consent of Stockholders in Lieu of Meeting . . . . . . . . . . . . . . . . . . . 4
ARTICLE III.
BOARD OF DIRECTORS
Section 11. General Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 12. Number, Election and Term of Office . . . . . . . . . . . . . . . . . . . . . . . 4
Section 13. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 14. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 15. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 16. Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 17. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 18. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 19. Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 20. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 21. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 22. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV.
OFFICERS
Section 23. Election, Term of Office and Qualifications . . . . . . . . . . . . . . . . . . . 7
Section 24. Other Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 25. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 26. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 27. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
ii
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 28. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 29. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 30. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 31. Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 32. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 33. Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 34. Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 35. Assistant Controllers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 36. Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V.
EXECUTION OF INSTRUMENTS, ETC.
Section 37. Contracts, etc., How Executed . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 38. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 39. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 40. Checks, Drafts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 41. Sale or Transfer of Property . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI.
SHARES AND THEIR TRANSFER: BOOKS
Section 42. Certificates of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 43. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 44. Closing of Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 45. Lost and Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 46. Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 47. Place of Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII.
NOTICE
Section 48. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VIII.
MISCELLANEOUS
Section 49. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 50. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 51. Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 52. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE IX.
Section 53. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
iii
<PAGE> 6
GTE SOUTHWEST INCORPORATED
__________________________
BYLAWS
ARTICLE I.
DEFINITIONS, ETC.
Section 1. Definitions. In these Bylaws, and for all purposes
hereof, unless there is something in the subject or context inconsistent
therewith:
(a) "Charter" shall mean the Certificate of Incorporation
of the Corporation as from time to time amended.
(b) "Board" shall mean the Board of Directors of the
Corporation.
(c) Whenever reference is made to a stockholder or
stockholders attending or being present at a meeting, such reference
shall be deemed to include a stockholder or stockholders present or
attending in person or by proxy appointed by instrument in writing and
subscribed by such stockholder or stockholders or by his or their
attorney or attorneys thereunto authorized; and, whenever reference is
made to voting or other action by any stockholder at or in connection
with any such meeting, such reference shall be deemed to include
voting or taking such action in person or by such proxy. No proxy
shall be voted on after three years from its date, unless the proxy
provides for a longer period.
(d) All references herein to Articles and Sections are to
the corresponding Articles and Sections of these Bylaws; and the words
"herein," "hereof," "hereby" and "hereunder" and other equivalent
words, refer to these Bylaws and not to any particular subdivision
hereof.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2. Annual Meeting. The annual meeting of stockholders for
the election of directors and for the transaction of such other business as may
properly come before said meeting shall be held on the fourth Wednesday in
April in each year, at 9 a.m., Local Time, but if such Wednesday is a legal
holiday under the laws of the state where such meeting is held, then at the
same hour on the next succeeding day not a holiday under the laws of said
state. If the election of directors shall not be held on the day designated
herein therefor, the Board shall cause the election to be held as soon
thereafter as is convenient.
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Section 3. Special Meetings. A special meeting of stockholders may
be called at any time by the President or by resolution of the Board or by any
two directors or a stockholder or stockholders holding of record at least 10
percent of the total number of shares of capital stock of the Corporation at
the time outstanding and entitled to vote at such meeting.
Section 4. Place of Meetings. All meetings of the stockholders shall
be held at the principal office of the Corporation in the State of Delaware, or
at such other place within or without the State of Delaware as may from time to
time be fixed by the Board or as may be designated in the respective notices
thereof or in the respective waivers of notice thereof and consents thereto
signed by all of the stockholders; provided, however, that the place of meeting
for the election of directors shall not be changed within 60 days prior to the
day on which the election is to be held and, at least 20 days before the
election is held, a notice of any change of such place of meeting shall be
given to each stockholder in person or by letter mailed to his last known post
office address.
Section 5. Notice of Meetings. Notice of each meeting of
stockholders shall be given to each stockholder entitled to vote at such
meeting, in the manner provided by law, or may be given by mailing a written or
printed notice of such meeting to each such stockholder, or by delivering such
notice to him personally, at least 15 days before the day on which the meeting
is to be held, unless some other period shall be required by statute, and if
mailed, such notice shall be enclosed in a postage prepaid envelope, addressed
to each such stockholder at his post office address as it appears on the stock
books of the Corporation, unless he shall have filed with the Secretary a
written request that notices intended for him be mailed to some other address,
in which event it shall be directed to the address so designated in such
request. Failure to give notice of any annual meeting or any irregularity in
any notice thereof shall not affect the validity of such annual meeting or of
any proceedings at such meeting. Except as otherwise expressly required by
statute, no publication of any notice of a meeting of stockholders shall be
required. Every notice of a special meeting of stockholders, besides stating
the time and place of the meeting, shall state briefly the purposes thereof.
No notice of any adjourned meeting of stockholders need be given, unless
expressly required by statute.
Section 6. Quorum. Except as otherwise provided by statute or by the
Charter, at each meeting of stockholders, the holders of a majority in number
of the issued and outstanding shares of the Corporation having voting power,
shall be present to constitute a quorum for the transaction of business.
Whether or not there is a quorum at any meeting, the stockholders present and
entitled to cast a majority of the votes thereat may adjourn the meeting from
time to time. At any such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally called.
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Shares of its own capital stock belonging to the Corporation shall not
be deemed issued and outstanding shares for the purpose of determining the
presence of a quorum at any meeting of stockholders.
Section 7. Organization. At every meeting of the stockholders, a
Chairman chosen by the stockholders present and entitled to cast a majority of
the votes thereat, shall act as Chairman. The Secretary of the Corporation
shall act as secretary of each meeting of the stockholders. In the absence at
any such meeting of the Secretary, the chairman of such meeting shall appoint
an Assistant Secretary, or, if none is present, some other person to act as
secretary of the meeting.
Section 8. Voting. Subject to the provisions of the Charter, at
every meeting of stockholders, each holder of record of stock present shall, in
respect of all questions upon which such stock shall have voting power, be
entitled to one vote for each share of stock of the Corporation held by him and
registered in his name on the books of the Corporation
(a) at the close of business on the record date fixed as provided
in Section 44, or
(b) if no such record date shall have been fixed, then at the date
and time of the meeting as fixed in the notice or waiver of notice
pursuant to which such meeting is held.
Except where the transfer books of the Corporation shall have been
closed or a date shall have been fixed as a record date for the determination
of the stockholders entitled to vote, as hereinafter in Section 44 provided, no
share of stock shall be voted at any election for directors, which shall have
been transferred on the books of the Corporation within 20 days prior to such
election of directors.
Voting shall be by ballot whenever expressly required by statute and
whenever any qualified voter shall demand that any vote be by ballot. Each
ballot shall be signed by the stockholder voting, and shall state the number of
shares voted thereby.
Shares of its own capital stock belonging to the Corporation shall not
be voted directly or indirectly.
Except as otherwise provided by law or by the Charter or by Sections
12, 19 and 20, all matters which shall properly come before any meeting of
stockholders shall be decided by the affirmative vote of stockholders present
and entitled to cast a majority of the votes thereat, a quorum being present.
Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held, and persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he shall have expressly
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empowered the pledgee to vote thereon, in which case only the pledgee and his
proxy may represent said stock and vote thereon.
Section 9. List of Stockholders. It shall be the duty of the
Secretary or other officer who shall have charge of the stock ledger to prepare
and make, at least ten days before every election of directors, a complete list
of stockholders entitled to vote at said election, arranged in alphabetical
order. Such list shall be open for said ten days at the place where said
election is to be held, to the examination of any stockholder, and shall be
produced and kept at the time and place of the election during the whole time
thereof, and subject to the inspection of any stockholder who may be present.
Upon the willful neglect or refusal of the directors to produce such list at
any election they shall be ineligible to any office at such election. The
original or duplicate stock ledger shall be the only evidence as to who are
stockholders entitled to examine such list or the books of the Corporation or
to vote at such election.
Section 10. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Charter, any action required by Article II to be
taken at any annual or special meeting of stockholders, or any action which may
be taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded.
ARTICLE III.
BOARD OF DIRECTORS
Section 11. General Powers. The business of the Corporation, except
as otherwise expressly provided by law or by the Charter, shall be managed by
the Board.
Section 12. Number, Election and Term of Office. A Board of not less
than three directors shall be elected by a plurality of the votes at the annual
meeting of stockholders and each director shall hold office until the next
annual meeting of stockholders and until his successor shall have been elected
and qualified or until his death, earlier resignation, disqualification or
removal. The number of directors shall be fixed at each annual meeting of
stockholders at which a Board is elected, but the number so fixed may be
increased within the limit, if any, prescribed by the Charter, or may be
diminished to not less than three at any special meeting of stockholders called
for the purpose. Directors need not be stockholders.
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Any officer of the Corporation or of any subsidiary or affiliate who
may be elected as a director of the Corporation shall automatically cease to be
a director of the Corporation upon his retirement or termination of his
employment for any reason as an officer of the Corporation or such subsidiary
or affiliate.
Section 13. Meetings. The first regular meeting of each Board after
the meeting of the stockholders at which such Board shall have been elected,
may be held at such time and place as may be designated by the President or by
the Secretary or by an Assistant Secretary of the Corporation, for the purpose
of organization and the election of officers, and for the transaction of such
other business as may be required by law or by these Bylaws or designated by
the Board. In case the President or the Secretary or an Assistant Secretary
shall fail to call such meeting, it may be called by any director and shall be
held at the principal office of the Corporation or such place as directed by
the President or the Secretary or an Assistant Secretary.
The Board by resolution may provide for the holding of other regular
meetings and may fix the time and place of holding such meetings.
Special meetings shall be held whenever called by the President, a
Vice President or the Secretary or any Assistant Secretary or by any two
directors.
As provided by the Delaware Corporation laws, any action required or
permitted to be taken at any meeting of the Board of Directors or any Committee
thereof may be taken without a meeting if all members of the Board or
Committees, as the case may be, consent thereto in writing, and the writings
are filed with the minutes of the proceedings of the Board or Committee.
Members of the Board of Directors of this Corporation or any Committee
designated by this Board may participate in a meeting of the Board or Committee
by means of conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other and
participation in a meeting pursuant to this provision shall constitute presence
in person at such meeting.
Section 14. Place of Meetings. The Board may hold its meetings at
such place or places, within or without the State of Delaware, as the Board
from time to time may determine, or as may be designated in waivers of notice
thereof signed by all the directors; except that the first meeting of each
Board shall be held as provided in Section 13.
Section 15. Notice of Meetings. Notice need not be given of any
regular meeting of the Board, except the first regular meeting if the time and
place of holding such regular meeting is specified in a resolution of the Board
adopted and incorporated in the minutes of a meeting of the Board at least 20
days prior to the
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holding of such regular meeting and if notice of the adoption of such
resolution is given, in the manner herein provided for giving notice of
meetings of the Board, to each director who was absent from the meeting at
which such resolution was adopted. Except as otherwise required by law, notice
of the time and place of each other meeting of the Board, including the first
regular meeting, shall be mailed to each director, postage prepaid addressed to
him at his residence or usual place of business, or at such other address as he
may have designated in a written request filed with the Secretary, at least two
days before the day on which the meeting is to be held, or shall be sent to him
at such address by telegram or cablegram or given personally or by telephone,
at least 24 hours before the time at which such meeting is to be held. Notice
of a meeting of the Board need not state the purposes thereof, except as
otherwise required by law or by Section 53 expressly provided.
Section 16. Quorum and Manner of Acting. One-third of the total
number of directors shall be present in person at any meeting of the Board in
order to constitute a quorum for the transaction of business thereat, and
(except as otherwise provided by statute or in the Charter or in Sections 20,
25 and 53) the act of a majority of the directors present at any such meeting
at which a quorum is present shall be the act of the Board. Whether or not
there is a quorum at any meeting, a majority of the directors who are present
may adjourn the meeting from time to time to a day certain. No notice of an
adjourned meeting need be given. The directors shall act only as a Board, and
the individual directors shall have no power as such.
Section 17. Organization. At every meeting of the Board, a Chairman
chosen by a majority of the directors present, shall preside. The Secretary of
the Corporation shall act as Secretary of the meetings of the Board. In the
absence of the Secretary at any meeting of the Board, the Chairman of such
meeting shall appoint an Assistant Secretary, or, if none is present, some
other person to act as Secretary of the meeting.
Section 18. Resignations. Any director may resign at any time by
giving written notice to the President or to the Secretary of the Corporation
or to the Board. Such resignation shall take effect at the time specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 19. Removal of Directors. Any director may be removed,
either with or without cause, at any time, by the affirmative vote of the
holders of a majority in interest of the outstanding stock of the Corporation
having voting power for the election of directors, at a special meeting of the
stockholders called for that purpose.
Section 20. Vacancies. Except as otherwise provided by statute or by
the Charter, any vacancy in the Board arising at any
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time from any cause, including the failure of the stockholders to elect a full
Board or an increase in the number of directors, may be filled by the vote of a
majority of the directors remaining in office; or any such vacancy may be
filled by the stockholders entitled to vote for the election of directors at
the next annual meeting held or at the special meeting of stockholders at which
such vacancy was created, or at a special meeting of stockholders called for
the purpose of filling such vacancy. The directors so appointed or elected
shall hold office until the next annual election and until their successors
have been duly elected and qualified.
Section 21. Fees. Unless otherwise provided in the Charter, the
Board shall have the authority to fix the compensation of directors for
services in any capacity. Directors may also be entitled by resolution of the
Board to be reimbursed for expenses incurred in attending meetings of the
Board. Nothing herein contained shall be construed to preclude any director
from serving in any other capacity or receiving compensation for such service.
Section 22. Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, whose quorum is one-third of the membership of the committee, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The Bylaws may provide that in the absence or disqualification
of a member of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or disqualified member. Any
such committee, to the extent provided in the resolution of the Board of
Directors, or in the Bylaws of the Corporation, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it.
ARTICLE IV.
OFFICERS
Section 23. Election, Term of Office and Qualifications. The Board
shall choose annually (who need not be members of the Board of Directors) the
President of the Corporation, a Secretary, a Treasurer and a Controller and may
also elect one or more Vice Presidents and any other officers. Each of such
officers shall hold office until the next annual election and until his
successor is chosen and qualified. Any two of said offices except those of
President and Vice President may be held, and the duties thereof may be
performed, by one person, except that no person holding the office of President
shall hold the office of Treasurer. No person
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may hold more than two of said offices. No instrument required to be signed by
more than one officer shall be signed by the same individual in more than one
capacity.
Section 24. Other Officers. The Board may elect such officers or
agents as the Board may deem necessary or advisable, including one or more
Assistant Secretaries and one or more Assistant Treasurers, and one or more
Assistant Controllers, each of whom shall hold office for such period, having
such powers and perform such duties as are provided in these Bylaws or as the
Board may from time to time determine. Any such officer, if required to do so
by the Board, shall give bond for the faithful discharge of his duty, in such
sum and with such surety and sureties as the Board shall require.
Section 25. Removal. Any officer may be removed, either with or
without cause, at any time, by resolution adopted by a majority of the whole
Board, at any meeting of the Board, or by any officer upon whom such power of
removal has been conferred by resolution adopted by a majority of the whole
Board.
Section 26. Resignations. Any officer may resign at any time by
giving written notice to the President or to the Secretary or to the Board.
Any such resignation shall take effect at the time specified therein and,
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 27. Vacancies. A vacancy in any office arising from any
cause shall be filled for the unexpired portion of the term in the manner
prescribed in these Bylaws for regular election to such office.
Section 28. President. The President shall be the chief executive
officer of the Corporation and shall have general supervision of the business
of the Corporation, and over its several officers, subject, however, to the
control of the Board. The President, when present, shall preside at all
meetings of the stockholders. He may sign and execute, in the name of the
Corporation, deeds, mortgages, bonds, contracts or other instruments authorized
by the Board, except in cases where the signing and execution thereof shall be
expressly delegated by the Board to some other officer or agent of the
Corporation; and, in general shall perform all duties incident to the office of
President, and such other duties as from time to time may be assigned to him by
the Board.
He may, unless otherwise directed by the Board, attend in person or by
substitute or proxy appointed by him and act and vote in behalf of the
Corporation at all meetings of the stockholders of any corporation in which
this Corporation holds stock.
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He shall, whenever it may in his opinion be necessary, prescribe the
duties of officers and employees of the Corporation whose duties are not
otherwise defined.
Section 29. Vice Presidents. At the request of the President, or in
his absence or disability, any Vice President available to act, shall perform
all the duties of the President, and, when so acting, shall have all the powers
of the President. Any Vice President may sign and execute, in the name of the
Corporation, deeds, mortgages, bonds or other instruments authorized by the
Board, except in cases where the signing and execution thereof shall be
expressly delegated by the Board to some other officer or agent of the
Corporation; may, in the absence of the President or in case of the failure of
the President to appoint a substitute or proxy as provided in Section 28 unless
otherwise directed by the Board, attend in person or by substitute or proxy
appointed by him and act and vote in behalf of the Corporation at all meetings
of the stockholders of any corporation in which this Corporation holds stock;
and shall perform such other duties as from time to time may be assigned to him
by the Board or by the President.
If at any time there is more than one Vice President, the order of
rank of such Vice Presidents shall be as determined by the Board, or, in the
absence of such determination, shall be the order in which such Vice Presidents
were elected as such.
Section 30. Secretary. The Secretary shall
(a) keep the minutes of all meetings of the stockholders
and of the Board, in books to be kept for the purpose;
(b) see that all notices are duly given in accordance
with these Bylaws or as required by law;
(c) be custodian of the records (other than financial)
and have charge of the seal of the Corporation and see that it is used
upon all papers and documents whose execution in behalf of the
Corporation under its seal is required by law or duly authorized in
accordance with these Bylaws;
(d) have charge of and keep or cause to be properly kept
and filed the stock books of the Corporation as provided in Section 43
and all other books, reports, statements, certificates and all other
documents and records required by law;
(e) perform the duties defined in Section 9;
(f) in general, perform all duties incident to the office
of Secretary and such other duties as from time to time may be
assigned to him by the President or by the Board.
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Section 31. Assistant Secretaries. At the request of the Secretary,
or in his absence or disability, an Assistant Secretary designated by the
Secretary or by the President or by the Board shall perform all the duties of
the Secretary and, when so acting, shall have all the powers of the Secretary.
Each Assistant Secretary shall perform such other duties as from time to time
may be assigned to him by the Secretary or by the President or by the Board.
Section 32. Treasurer. The Treasurer, if required by the Board,
shall give a bond for the faithful discharge of his duty, in such sum and with
such surety or sureties as the Board shall require. The Treasurer shall
(a) have charge of and be responsible for, the
collection, receipt, custody and disbursement of the funds of the
Company, and shall deposit its funds in the name of the Company, in
such banks, trust companies, or safe deposit vaults as the Board may
direct;
(b) have the custody of such books, receipted vouchers,
and other books and papers as in the practical business operations of
the Company shall naturally belong in the office or custody of the
Treasurer, or as shall be placed in his custody by the Board;
(c) have charge of the safe keeping of all stocks, bonds,
mortgages, and other securities belonging to the Company, but such
stocks, bonds, mortgages, and other securities shall be deposited for
safe keeping in a safe deposit vault to be approved by the Board, in a
box or boxes, access to which shall be had as may be provided by the
resolution of the Board;
(d) sign checks, drafts, and other papers providing for
the payment of money by the Company for approved purposes in the usual
course of business, and shall have such other powers and duties as are
commonly incidental to the office of Treasurer, or as may be
prescribed for him by the President or by the Board.
Section 33. Assistant Treasurers. Each Assistant Treasurer, if
required so to do by the Board, shall give bond for the faithful discharge of
his duty, in such sum and with such surety or sureties as the Board shall
require. At the request of the Treasurer, or in his absence or disability, an
Assistant Treasurer designated by the Treasurer or by the President or by the
Board shall perform all the duties of the Treasurer, and, when so acting, shall
have all the powers of the Treasurer. Each Assistant Treasurer shall perform
such other duties as from time to time may be assigned to him by the Treasurer
or by the President or by the Board.
Section 34. Controller. The Controller shall be the principal
accounting officer of the Corporation. The Controller,
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if required by the Board, shall give bond for the faithful discharge of his
duty, in such form and with such surety or sureties as the Board shall require.
The Controller shall
(a) keep or cause to be kept full and complete books of
accounts of all operations of the Corporation and of its assets and
liabilities;
(b) exhibit at all reasonable times his books of account
and records to any of the directors of the Corporation upon
application during business hours at the office of the Corporation
where such books and records are kept;
(c) render reports of the operations and business and of
the conditions of the finances of the Corporation at all regular
meetings of the Board, if called upon to do so, and at such other
times as may be requested by the Board or by any director, and render
a full financial report at the annual meeting of the stockholders, if
called upon to do so;
(d) have general supervision over all books and accounts
of the Company relating to receipts and disbursements, except those
records provided to be kept by the Secretary; shall arrange the form
of all vouchers, accounts, reports and returns required by the various
departments, shall examine the accounts of all officers and employees
from time to time and as often as practicable, and shall see that
proper returns are made of all receipts from all sources, and that
correct vouchers are turned over to him for all disbursements for any
purpose. At such times in each month as may be found practicable all
bills for the previous month, properly made in detail and certified,
shall be submitted to him, and he shall audit and approve the same, if
found satisfactory and correct, but he shall not approve any voucher
unless it has been previously certified to by the head of the
Department in which the expenditure originated, nor unless satisfied
of its propriety and correctness;
(e) have full access to all contracts, correspondence,
and all other papers and records of the company relating to its
business matters, shall have the custody of its account books and
other papers relating to the accounts of the company, except such as
in the practicable business operations of the company shall naturally
belong in the custody of the Secretary or shall be placed in the
custody of the Secretary by the President or by the Board;
(f) in general, perform all the duties incident to the
office of Controller, and such other duties as from time to time may
be assigned to him by the President or by the Board.
Section 35. Assistant Controller. Each Assistant Controller, if
required the Board, shall give bond for the faithful discharge of his duty, in
such sum and with such surety or sureties as the
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Board shall require. At the request of the Controller, or in his absence or
disability, any Assistant Controller designated by the Controller or by the
President or by the Board shall perform all the duties of the Controller, and,
when so acting shall have all the powers of the Controller. Each Assistant
Controller shall perform such other duties as from time to time may be assigned
to him by the Controller or by the President or by the Board.
Section 36. Salaries. The salaries of the officers shall be fixed
from time to time by the Board, and no officer shall be precluded from
receiving such salary by reason of the fact that he is also a director of the
Corporation.
ARTICLE V.
EXECUTION OF INSTRUMENTS, ETC.
Section 37. Contracts, etc., How Executed. The Board, subject to the
provisions of Section 23 and 42, may authorize any officer or officers, agent
or agents to enter into any contract or to execute and deliver any instrument
in the name of and in behalf of the Corporation, and such authority may be
general or confined to specific instances.
Section 38. Loans. No loans shall be contracted in behalf of the
Corporation unless authorized by the Board, subject in every case to the
restrictions in the Charter. When such authorization has been given by the
Board, any officer or agent of the Corporation thereunto authorized may effect
loans and advances at any time for the Corporation from any institution, firm
or individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds, or other evidences of indebtedness of the Corporation
and, as security for the payment of any and all loans, advances, indebtedness
and liabilities of the Corporation, may (subject to such authorization) pledge,
hypothecate or transfer any and all stocks, securities and other property at
any time owned by the Corporation and to that end endorse, assign and deliver
the same. Such authority may be general or confined to specific instances.
Section 39. Deposits. Funds of the Corporation may be deposited from
time to time to the credit of the Corporation with such depositaries as may be
selected by the Board or by any officer or officers, agent or agents of the
Corporation to whom such power may be delegated from time to time by the Board.
Section 40. Checks, Drafts, etc. All checks, drafts or other orders
for the payment of money, notes acceptances, or other evidences of indebtedness
issued in the name of the Corporation, shall be signed by such officer or
officers, agent or agents of the Corporation, and in such manner, as shall be
determined from time to time by resolution of the Board. Unless otherwise
provided by resolution of the Board, endorsements for deposit to the credit of
the Corporation in any of its duly authorized depositaries may be
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made, without countersignature, by the President or any Vice President or the
Treasurer, or by any other officer or agent of the Corporation to whom such
power shall have been delegated by the Board, or may be made by hand-stamped
impression in the name of the Corporation.
Section 41. Sale or Transfer of Property. Stock certificates, bonds
or other securities held or owned by the Corporation may, subject in every case
to the restrictions in the Charter, be sold, transferred or otherwise disposed
of pursuant to authorization by the Board, and in any such event, the stock
certificates, registered bonds or other securities, deeds and transfers of real
estate and other personal property so authorized to be sold, transferred or
otherwise disposed of may be assigned or transferred from the name of the
Corporation by the signature of the President or any Vice President.
ARTICLE VI.
SHARES AND THEIR TRANSFER: BOOKS
Section 42. Certificates of Stock. Certificates for shares of stock
of the Corporation of whatever class shall be in such form, not inconsistent
with law or with the Charter, as shall be approved by the Board. They shall be
signed by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary; provided,
however, that where such Certificate is countersigned by a transfer agent or by
a transfer clerk acting on behalf of the Corporation and by a registrar, the
signatures of the President, Vice President, Treasurer, Assistant Treasurer,
Secretary or Assistant Secretary may be facsimiles.
Section 43. Transfer of Shares. Transfer of shares of the stock of
the Corporation shall be made on the stock books of the Corporation by the
holder of record of such shares or by his attorney thereunto duly authorized,
and on surrender of the certificate or certificates for such shares, but no
shares shall be transferred until all previous calls thereon shall have been
fully paid in. A person in whose name shares of stock stand on the books of
the Corporation shall be deemed the owner thereof as regards the Corporation;
provided however, that whenever any transfer of shares shall be made for
collateral security, and not absolutely, and written notice thereof shall be
given to the Secretary of the Corporation or to its transfer agent, if any,
such fact shall be stated in the entry of the transfer.
Section 44. Closing of Transfer Books. The Board shall have power to
close the stock transfer books for a period not more than 40 days before the
date of any stockholders' meeting or the date for the payment of any dividend
or for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or for a period of not more
than 30 days in connection with obtaining the consent of stockholders for any
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purpose; or the Board may in its discretion fix in advance a date, not more
than 40 days before the date of any stockholders' meeting or the date for the
payment of any dividend or for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of and to vote at any such
meeting and any adjournment thereof, or entitled to receive such dividend or
rights, or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
stockholders and only such stockholders as shall be stockholders of record at
the close of business on the date so fixed shall be entitled to notice of and
to receive such dividend or rights, or to exercise such rights, or to give such
consent, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid.
Section 45. Lost and Destroyed Certificates. The holder of record of
any certificate of stock who shall claim that such certificate is lost or
destroyed may make an affidavit or affirmation of that fact and advertise the
same, if required to do so by the Board, in such manner as the Board may
require and furnish a bond, if required to do so by the Board, in form and with
one or more sureties satisfactory to the Board and to the Transfer Agent and/or
Registrar, if any, in such sum as the Board may direct, sufficient to indemnify
the Corporation and the Transfer Agent and/or Registrar, if any, against any
claim that may be made against them, or any of them, on account of such
certificate, whereupon one or more new certificates may be issued of the same
tenor and for the same aggregate number of shares as the one alleged to be lost
or destroyed. The Board may delegate to any officer authority to administer
the provisions of this section.
Section 46. Regulations. The Board may make such rules and
regulations as it may deem expedient concerning the issuance, transfer and
registration of certificates of stock. It may appoint one or more transfer
agents or registrars of transfer or both, and may require all certificates of
stock to bear the signature of either or both.
Section 47. Place of Keeping Books and Records. Insofar as permitted
by law, the stock ledgers, books and other records of the Corporation may, at
the option of the officer or officers in charge of the same, be kept at any
office of the Corporation within or without the State of Delaware, unless
otherwise directed by the Board.
ARTICLE VII.
NOTICE
Section 48. Waiver of Notice. No notice of the time, place or
purpose of any meeting of stockholders or directors, or any
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publication thereof, whether prescribed by law, by the Charter, or by these
Bylaws, need be given to any person who attends such meetings, or who, in
writing, executed either before or after the holding thereof, waives such
notice, and such attendance or waiver shall be deemed equivalent to notice.
ARTICLE VIII.
MISCELLANEOUS
Section 49. Fiscal Year. The fiscal year of the Corporation shall be
the calendar year.
Section 50. Seal. The corporate seal shall be a device containing
the name of the Corporation, and the word "Delaware." The corporate seal may
be used by printing, engraving, lithographing, stamping or otherwise making,
placing or affixing, or causing to be printed, engraved, lithographed, stamped
or otherwise made, placed or affixed, upon any paper or document, by any
process whatsoever, an impression, facsimile, or other reproduction of said
corporate seal.
Section 51. Offices. The Corporation shall have an office at such
place in the State of Delaware, and may have one or more other offices at such
place or places within or without the State of Delaware as the Board shall from
time to time determine.
Section 52. Indemnification. The Corporation shall indemnify its
officers, directors, employees and agents, and shall advance expenses
(including attorneys' fees) incurred by any such person in defending any
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such person to repay such advancements if it shall ultimately be determined
that such person is not entitled to indemnification, to the extent permitted by
the General Corporation Law of the State of Delaware, as amended from time to
time.
ARTICLE IX.
AMENDMENTS
Section 53. Amendments. The power to make and alter the Bylaws of
the Corporation having been conferred upon the directors by the Charter, these
Bylaws may be altered or repealed by the directors or stockholders as provided
by law. Such alteration or repeal by the stockholders may be effected at any
annual meeting, or at any special meeting if notice of the proposed alteration
or repeal is included in the notice of such special meeting; and such
alteration or repeal by the Board may be effected by the affirmative vote of a
majority of the whole Board given at any meeting, the notice whereof mentions
such alteration or repeal as one of the purposes of such meeting, or by
unanimous written consent. The time and place for the election of directors
shall not be changed within 60 days prior to the day on which the
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election is to be held and notice of any change of such time or place shall be
given each stockholder at least 20 days before the election is held, in person
or by letter mailed to his last known post office address.
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this Form
8-K of our reports dated January 25, 1995, related to the December 31, 1993 and
1994 financial statements of Contel of Texas, Inc. and Contel of the West,
Inc. It should be noted that we have not audited any financial statements of
these companies subsequent to December 31, 1994 or performed any audit
procedures subsequent to the date of our reports.
ARTHUR ANDERSEN LLP
Dallas, Texas
December 1, 1995
