<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 1-7077
GTE SOUTHWEST INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-0573444
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 214-718-5600
Securities registered pursuant to Section 12(b) of
the act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
FIRST MORTGAGE BONDS-7 1/2%-SERIES, DUE 2002 AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of
the Act:
4.60% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
5.10% SERIES CUMULATIVE PREFERRED STOCK $20 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- ------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
-----
THE COMPANY HAD 6,500,000 SHARES OF $100 STATED VALUE COMMON STOCK OUTSTANDING
AT FEBRUARY 29, 1996. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
<S> <C> <C>
Part I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for the Registrant's Common Equity and Related 6
Shareholder Matters
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on 40
Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant 41
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners and Management 52
13. Certain Relationships and Related Transactions 53
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 54
</TABLE>
<PAGE> 3
PART I
Item 1. Business
GTE Southwest Incorporated (the Company) was incorporated in Delaware in 1926.
The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and provides
communications services in the states of Arkansas, New Mexico, Oklahoma and
Texas.
In December 1992, GTE announced a plan to pursue the sale or trade of a small
percentage of local-exchange telephone properties (representing less than 5% of
its U.S. access lines) in markets that may be of greater long-term strategic
value to other telephone service providers. As part of this program, during
1995-1993, the Company sold various local- exchange telephone properties in the
states of Texas, Arizona, Utah and Idaho, as discussed below.
On September 30, 1995, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 10,517
access lines) in the state of Texas to various parties. On November 30, 1994,
the Company sold a portion of its telephone plant-in-service, inventories and
supplies and customers (representing 8,898 access lines) in the state of
Oklahoma to Pioneer Telephone Cooperative, Inc. The Company also sold a
portion of its telephone plant-in-service, inventories and supplies and
customers (representing 26,519 access lines) in the state of Arizona to
Citizens Utilities Company. On May 1, 1994, the Company sold a portion of its
telephone plant-in-service, inventories and supplies and customers
(representing 12,798 access lines) in the state of Oklahoma to Eaglenet, Inc.
On December 31, 1993, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 17,000
access lines) in the state of Utah to Citizens Utilities Company.
In addition, on May 4, 1995, the Company sold its unconsolidated investment in
Metropolitan Houston Paging Service, Inc. (a Texas corporation), and on
February 23, 1993, the Idaho properties of the Company were sold to GTE
Northwest Incorporated.
On February 28, 1995, the Company entered into an Agreement of Merger with
Contel of Texas, Inc., a Texas corporation and Contel of the West, Inc., an
Arizona corporation (collectively, the Contel Subsidiaries). The agreement
provided that the Contel Subsidiaries would merge with and into the Company,
with the Company to be the surviving corporation (the Merger). The Contel
Subsidiaries provided communication services in the states of Texas and New
Mexico. The Merger became effective on December 31, 1995, and has been
accounted for in a manner similar to a "pooling of interests."
Additional information related to the above transactions can be found in Note 3
and Note 5 of the Company's financial statements included in Item 8.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. The Company provides local telephone
service within its franchise area and intraLATA (Local Access Transport Area)
toll service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of the states in which the Company operates is provided
through connection with interexchange (long distance) common carriers. These
common carriers are charged fees (access charges) for interconnection to the
Company's local facilities. Business and residential customers also pay access
charges to connect to the local network to obtain long distance service. The
Company earns other revenues by leasing interexchange plant facilities and
providing such services as billing and collection and operator services to
interexchange carriers.
1
<PAGE> 4
The number of access lines in the states in which the Company operates as of
December 31, 1995, was as follows:
<TABLE>
<CAPTION>
Access
State Lines Served
----------------- ---------------
<S> <C>
Texas 1,852,476
Oklahoma 104,521
New Mexico 83,295
Arkansas 80,902
----------------- ---------------
Total 2,121,194
----------------- ===============
</TABLE>
At December 31, 1995, the Company had 6,251 employees.
The Company has three written agreements with the Communications Workers of
America (CWA). In 1995, one agreement was reached with the CWA. During 1996,
two contracts with the CWA will expire.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
Texas, Oklahoma, New Mexico and Arkansas as to its intrastate business
operations and by the Federal Communications Commission (FCC) as to its
interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the
local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless and
cable TV companies, as well as more recent entry by media and computer
companies, is expected to increase in the rapidly changing telecommunications
marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a
2
<PAGE> 5
separate subsidiary, began offering long distance service to its customers in
selected markets. GTE plans to offer the service, marketed under the name GTE
Easy Savings Plan(SM), in all 28 states where it currently offers local
telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Texas. In addition, eight states, none
of which are served by the Company, have concluded that intraLATA 1+
competition is in the public interest. These states have authorized plans that
would allow customers to pre-subscribe to a specific carrier to handle their
intraLATA toll calls. Pre-subscribed customers will simply dial "1" before the
telephone number in order to complete intraLATA calls. The Telecommunications
Act requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.
For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan. The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum prices that the
local-exchange carrier (LEC) may charge are increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs have limited pricing flexibility provided they do not exceed the allowed
price cap. The FCC is considering how the price cap plan should be modified in
the future in order to adapt the system to the emergence of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 13 to the Company's financial statements included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
3
<PAGE> 6
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $199 million
re-engineering program. Since the program began in 1994, costs of $116.1
million have been charged to the restructuring reserve -- $82.4 million
related to customer service processes, $17.9 million related to administrative
processes and $15.8 million related to the consolidation of facilities and
operations and other related costs. These costs were primarily associated with
the closure and relocation of various centers, software enhancements and
separation benefits associated with workforce reductions. The continued
implementation of this program positions the Company to accelerate delivery of
a full array of voice, video and data services and to reach its stated
objective of being the easiest company to do business with in the industry.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
4
<PAGE> 7
Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of the
aforementioned properties, located in the states of Texas, Oklahoma, New Mexico
and Arkansas, are generally in good operating condition and adequate to satisfy
the needs of the business. Substantially all of the Company's property is
subject to the liens of its respective mortgages securing funded debt. From
January 1, 1991 to December 31, 1995, the Company made capital expenditures of
$1.7 billion for new plant and facilities required to meet telecommunication
service needs and to modernize plant facilities. These additions were equal to
35% of gross plant of $4.9 billion at December 31, 1995.
In response to recently enacted and pending legislation and the increasingly
competitive environment, effective January 1, 1996, the Company has adopted the
use of accounting practices appropriate for nonregulated enterprises and thus
discontinued the use of 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 to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 to the Company's financial
statements included in Item 8.
Item 3. Legal Proceedings
The state of Texas passed a telecommunications reform bill which was signed
into law on May 26, 1995, and became effective September 1, 1995. This new
legislation opens the local-exchange to competition and permits existing LECs
to elect a form of price regulation rather than rate of return regulation. On
September 20, 1995, the Company notified the TPUC of its election of price
regulation and, in doing so, resolved its 1989 rate case. See Note 13 to
the Company's financial statements included in Item 8.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock and preferred stock, should be contacted with any
questions relating to shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call 1-
617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Mail Stop 45-02-60
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1995 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE Corporation through
the following universal resource: http://www.gte.com
6
<PAGE> 9
Item 6. Selected Financial Data (See Note 3 to the Company's financial
statements included in Item 8)
GTE Southwest Incorporated
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
Selected Income Statement Items (a) 1995 1994 1993(b) 1992 1991
- ----------------------------------- --------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Revenues and sales $ 1,553,441 $ 1,482,495 $ 1,457,263 $ 1,457,369 $ 1,405,022
Operating costs and expenses 1,224,580 1,203,019 1,348,211 1,086,785 1,131,886
--------------------------------------------------------------
Operating income 328,861 279,476 109,052 370,584 273,136
Interest - net 61,218 63,568 82,722 86,133 93,640
Gain on disposition of assets (21,583) (63,688) (17,536) -- --
Other - net (5,500) -- 1,224 -- --
Income taxes (benefit) 99,437 95,068 (12,731) 93,692 38,487
--------------------------------------------------------------
Income before extraordinary charges 195,289 184,528 55,373 190,759 141,009
Extraordinary charges (c) (549,438) -- (31,250) -- --
-------------------------------------------------------------
Net income (loss) $ (354,149) $ 184,528 $ 24,123 $ 190,759 $ 141,009
==============================================================
Dividends declared on common stock $ 80,900 $ 243,033 $ 149,348 $ 179,383 $ 102,645
Dividends declared on preferred stock 1,118 1,258 1,409 1,588 1,703
- -----------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------
Selected Balance Sheet Items 1995 1994 1993 1992 1991
- ---------------------------- --------------------------------------------------------------
(Thousands of Dollars)
Property, plant and equipment - net (c) $1,966,506 $2,832,912 $2,843,398 $2,912,515 $2,865,868
Total assets 2,446,560 3,243,367 3,286,638 3,288,049 3,205,154
Long-term debt and preferred stock,
subject to mandatory redemption 835,472 755,530 798,255 833,056 908,099
Shareholders' Equity 713,719 1,149,886 1,232,177 1,358,811 1,349,023
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100% owned
by GTE Corporation.
(b) Operating income in 1993 included a $199 million pre-tax charge for
restructuring costs which reduced net income by $122.6 million.
(c) See Note 2 to the financial statements included in Item 8.
7
<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE Southwest Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services in
Arkansas, New Mexico, Oklahoma and Texas. The Company also markets
telecommunications systems and equipment. At December 31, 1995, the Company
served 2,121,194 access lines in its service territories, with 87% of these
lines in Texas.
On February 28, 1995, the Company entered into an Agreement of Merger with
Contel of Texas, Inc., a Texas corporation and Contel of the West, Inc., an
Arizona corporation (collectively, the Contel Subsidiaries). The agreement
provided that the Contel Subsidiaries would merge with and into the Company,
with the Company to be the surviving corporation (the Merger). The Merger
became effective on December 31, 1995, and has been accounted for in a manner
similar to a "pooling of interests." Accordingly, the financial statements
include the combined historical results of operations and financial position of
the Company and the Contel Subsidiaries as though the Merger had occurred at
the beginning of each period presented and reflect the elimination of all
significant intercompany transactions.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
----------- --------- --------
<S> <C> <C> <C>
Net income (loss) $ (354.1) $ 184.5 $ 24.1
</TABLE>
The net loss for 1995 includes one-time extraordinary charges (net of tax) of
$549.4 related to the discontinuance of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(FAS 71) and the early retirement of debt in the fourth quarter of 1995. In
addition, $14.3 of one-time gains (net of tax) were recorded on the sales of
non-strategic properties in the state of Texas during 1995 and a $3.8
settlement gain (net of tax) was recorded in the second quarter of 1995 which
resulted from lump-sum payments from the Company's pension plans. Net income
for 1994 includes one-time gains (net of tax) of $39.8 recorded on the sales of
non-strategic properties in the states of Arizona and Oklahoma. Net income for
1993 includes a one-time restructuring charge (net of tax) of $122.6, a
one-time extraordinary charge (net of tax) of $31.3 for the early retirement of
high-coupon debt and a one- time charge (net of tax) of $6.5 to complete
enhanced early retirement and voluntary separation programs. Net income for
1993 also includes a one-time gain (net of tax) of $12.7 recorded on the sale
of non-strategic properties in the state of Utah.
Excluding these special items, net income increased 22% or $32.5 for 1995 and
decreased 16% or $27.1 for 1994. The 1995 increase is primarily due to higher
revenues and sales resulting from continued customer growth and additional
revenues related to service bureau contracts, partially offset by an increase
in depreciation expense. The 1994 decrease is primarily the result of
voluntary network access rate reductions in an ongoing effort to price services
more competitively and an increase in costs of services and sales and
depreciation expenses, partially offset by a decrease in interest expense.
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REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Local services $ 531.8 $ 490.4 $ 461.2
Network access services 579.0 577.7 572.8
Toll services 214.3 244.9 257.6
Other services and sales 228.3 169.5 165.7
--------- --------- ----------
Total revenues and sales $ 1,553.4 $ 1,482.5 $ 1,457.3
</TABLE>
Total revenues and sales increased 5% or $70.9 and 2% or $25.2 during 1995 and
1994, respectively.
Local service revenues are comprised mainly of fees charged to customers for
providing local-exchange service within designated franchise areas. Local
service revenues increased 8% or $41.4 and 6% or $29.2 in 1995 and 1994,
respectively. The number of access lines increased 5% in 1995 which generated
additional revenues of $11.2. The 1995 increase is also due to additional
revenues of $5.7 associated with the continued expansion of local area calling
zones, $3.1 of growth in revenues related to sales of Centranet(R) and custom
calling features, such as SmartCall(R), a $5.2 growth in new local services and
$15.8 of favorable impacts on local service revenues resulting from the
discontinuance of the monthly provision related to the Company's 1989 Texas
rate case (as discussed in Note 13 to the financial statements included in Item
8). The 1994 increase is primarily due to a 5% increase in access lines and
the expansion of local area calling zones.
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local- exchange network in providing
long-distance services. In addition, residential and business customers pay
end-user access fees to connect to the local network to obtain long-distance
service. Network access service revenues increased less than 1% or $1.3 and
$4.9 in 1995 and 1994, respectively. Minutes of use increased 11% in 1995,
generating $20.7 of additional revenues. The net effect of the May and August
1995 interstate rate changes resulted in $6.9 of additional revenues associated
with the FCC Price Cap (as discussed in Note 13 to the financial statements
included in Item 8). The 1995 increase is also due to $3.8 of higher end-user
access charge revenues associated with growth in access lines, a $7.3 increase
in private line revenues and $5.3 of favorable impacts on network access
service revenues resulting from the discontinuance of the monthly provisions
related to the Company's 1989 Texas rate case. These increases are offset by a
$30.2 decline in revenues due to the Company's access charge restructuring plan
discussed below and $11.6 of lower Universal Service Fund support payments.
After exiting the toll pool, the Company began participating in the Texas
Pooling Alternative Settlement Plan (PASP) effective January 1, 1994. The PASP
is also known as an Originating Responsibility Plan. Under this plan, the toll
rates billed to end users for intraLATA toll calls originating in the Company's
service area are retained by the Company. The Company, in turn, pays access
charges to the telephone company hauling and terminating the call based on that
company's approved access charge tariff. Likewise, the Company will receive
access charges for terminating any intraLATA toll call that originates outside
of its service area based on its approved access charge tariff.
The 1994 increase in network access service revenues is primarily the result of
an increase in minutes of use and increased revenue related to the Texas PASP.
These increases are partially offset by revenue decreases resulting from the
Company's exit from old pooling arrangements and an access charge restructuring
plan which was approved by the Public Utility Commission of Texas (PUC) on
April 1, 1992. The implementation of this plan resulted in a $41 annual
reduction, effective September 1, 1992, a $29 annual reduction, effective
September 1, 1993, and a final annual reduction of $33 which became effective
September 1, 1994.
9
<PAGE> 12
Toll service revenues are based on fees charged for service beyond a customer's
local calling area but within the local access transport area (LATA). Toll
service revenues decreased 13% or $30.6 and 5% or $12.7 in 1995 and 1994,
respectively. The decrease in 1995 is due to the end of transitional support
payments received from Southwestern Bell Telephone Company of $8.9 in 1994 as a
result of the Company's exit from the Texas state intraLATA toll pool. The
decrease is also due to the expansion of local area calling zones which
resulted in $8.4 of toll service revenue reductions and a $12.8 decrease in
revenues due to a decline in toll usage resulting from competition. The 1994
decrease is mainly due to diminishing transitional support payments as a result
of the Company's exit from the Texas state intraLATA toll pool and the
beginning of its participation in the Texas PASP discussed above.
Other services and sales revenues increased 35% or $58.8 and 2% or $3.8 in 1995
and 1994, respectively. The 1995 increase is primarily due to $17.1 of
additional equipment sales and $42.6 of revenues resulting from service bureau
contracts. Through service bureau contracts, the Company provides general,
administrative and operational services (e.g. invoice and payroll processing,
billing and collection services, human resources services, etc.) on a
contractual basis to other local exchange carriers (LECs) and certain
affiliates. The 1995 increase is also due to $3.7 of growth in DataBase 800
services. The 1994 increase is due to higher equipment sales, such as
single-line telephones, large private branch equipment, voice messaging
services and maintenance agreements, partially offset by higher provisions for
uncollectible accounts and lower rental revenues.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Cost of services and sales $ 599.3 $ 621.3 $ 553.3
Selling, general and administrative 285.9 260.7 286.0
Depreciation and amortization 339.4 321.0 309.9
Restructuring -- -- 199.0
--------- --------- ----------
Total operating costs and expenses $ 1,224.6 $ 1,203.0 $ 1,348.2
</TABLE>
Total operating costs and expenses increased 2% or $21.6 in 1995 and decreased
11% or $145.2 in 1994. The 1995 increase is primarily attributable to $18.4 of
increased depreciation expenses, primarily associated with additions to gross
plant balances, $10.2 of higher contractor costs, a $5.6 increase in material
costs and $5.2 of increased rental costs associated with voice messaging
systems. These increases are partially offset by $7.9 of lower labor and
benefit costs associated with ongoing cost-reduction programs from process
re-engineering activities, a $9.6 decrease in charges related to unbillable
calling card calls and a $5.8 settlement gain recorded in the second quarter
of 1995 which resulted from lump-sum payments from the Company's pension plans.
Operating costs and expenses in 1993 include one-time pre-tax charges of $199
related to the Company's restructuring plan and $9.4 associated with the
enhanced early retirement and voluntary separation programs offered to eligible
employees. Excluding these items, operating costs and expenses increased 5% or
$63.2 in 1994. The 1994 increase is primarily the result of costs associated
with the previously mentioned Texas PASP, increased installation and
maintenance expenses and an increase in materials expense. The increase is
also due to an increase in depreciation expenses, primarily associated with
additions to gross plant balances.
10
<PAGE> 13
OTHER (INCOME) EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Interest - net $ 61.2 $ 63.6 $ 82.7
Gain on disposition of assets (21.6) (63.7) (17.5)
Other - net (5.5) -- 1.2
Income taxes (benefit) 99.4 95.1 (12.7)
</TABLE>
Interest - net decreased 4% or $2.4 and 23% or $19.1 in 1995 and 1994,
respectively. The 1994 decrease is primarily the result of lower average
interest rates obtained through the high-coupon debt refinancing in November
1993.
On September 30, 1995, the Company recorded a $16.3 pre-tax gain on the sale of
certain non-strategic properties in the state of Texas (representing 10,517
access lines). On May 4, 1995, the Company recorded a $5.3 pre-tax gain on the
sale of its unconsolidated investment in Metropolitan Houston Paging Service,
Inc. On November 30, 1994, the Company recorded pre-tax gains of $12.6 and
$41.8 on the sales of certain non-strategic properties in the states of
Oklahoma (representing 8,898 access lines) and Arizona (representing 26,519
access lines), respectively. On May 1, 1994, the Company recorded a $9.3
pre-tax gain on the sale of certain non-strategic properties in the state of
Oklahoma (representing 12,798 access lines). On December 31, 1993, the Company
recorded a $17.5 pre-tax gain on the sale of non- strategic properties in the
state of Utah (representing 17,000 access lines).
Other - net income was $5.5 in 1995 due to the reversal of expired
representation and warranty reserves related to certain 1994 property
dispositions for which the period of exposure has expired.
Income taxes increased $4.3 and $107.8 in 1995 and 1994, respectively. The
1995 and 1994 increases are primarily due to corresponding increases in pretax
income. The 1995 increase is also due to lower amortization of investment tax
credits and lower reversals of temporary differences provided in prior years at
higher tax rates. The 1994 increase is also due to favorable adjustments made
in 1994 to prior years' tax liabilities.
CAPITAL RESOURCES AND LIQUIDITY
Management believes the Company has adequate internal and external resources
available to meet ongoing operating requirements for construction of new plant,
modernization of facilities and payment of dividends. The Company generally
funds its construction program from operations, although external financing is
available. Short-term borrowings can be obtained through commercial paper
borrowings or borrowings from GTE. A $3,490 line of credit is available to the
Company through shared lines of credit with GTE and other affiliates to support
short-term financing needs. In January 1996, the Company issued $150 million
of 6% debentures to refinance commercial paper outstanding at December 31, 1995
(see Note 8 to the financial statements). Subsequent to this financing, the
Company currently has an existing shelf registration statement for an
additional $150 of debentures.
The Company's primary source of funds during 1995 was cash from operations of
$392.8 compared to $482 in 1994. The year-to-year decrease is primarily due to
higher working capital requirements and cash from operations being utilized to
fund the Company's re-engineering plan.
The Company used $288.1 and $220.8 in investing activities during 1995 and
1994, respectively. The Company's capital expenditures during 1995 and 1994
were $319.2 and $378, respectively. The declining requirements for
modernization of current facilities offset the expenditures associated with
continued growth in access lines and introduction of new products and services,
including broadband digital services. These expenditures were partially offset
by cash proceeds of $36.6 and $158.2 received from the sale of certain
non-strategic properties, discussed above, during 1995 and 1994, respectively.
The Company's anticipated construction costs for 1996 are expected to increase
slightly from the 1995 level, reflecting the continued modernization of
facilities and anticipated growth.
11
<PAGE> 14
The Company used $97.4 and $257.6 in financing activities during 1995 and 1994,
respectively. This included dividend payments of $143.2 in 1995 compared to
$201.3 in 1994. Financing included net short-term borrowings of $66.1 in 1995,
compared to $15.1 in 1994. In December 1995, the Company redeemed prior to
stated maturity, $5.6 of long-term debt with proceeds from commercial paper
borrowings. The Company retired an additional $15.4 of long-term debt and
preferred stock in 1995 compared to total retirements of $49 in 1994. During
1994, the Company returned $22.5 of capital to GTE with the cash proceeds from
certain non-strategic property sales.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
Texas, Oklahoma, New Mexico and Arkansas as to its intrastate operations and by
the Federal Communications Commission (FCC) as to its interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the
local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless and
cable TV companies, as well as more recent entry by media and computer
companies, is expected to increase in the rapidly changing telecommunications
marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Texas. In addition, eight states, none
of which are served by the Company, have concluded that intraLATA 1+
competition is in the public interest. These states have authorized plans that
would allow customers to pre-subscribe to a specific carrier to handle their
intraLATA toll calls. Pre-subscribed customers will simply dial "1" before the
telephone number in order to complete intraLATA calls. The Telecommunications
Act requires GTE to negotiate intraLATA dialing parity provisions with its
competitors. In subsequent negotiations, GTE will address implementation of 1+
in those states which have not previously ordered implementation.
12
<PAGE> 15
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets.
For the provision of interstate access services, the Company operates under
the terms of the FCC's price cap incentive plan. The "price cap" mechanism
serves to limit the rates a carrier may charge, rather than just regulating the
rate of return which may be achieved. Under this approach, the maximum prices
that the LEC may charge are increased or decreased each year by a price index
based upon inflation less a predetermined productivity target. LECs have
limited pricing flexibility provided they do not exceed the allowed price cap.
The FCC is considering how the price cap plan should be modified in the future
in order to adapt the system to the emergence of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 13 to the Company's financial statements included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $199
re-engineering program. Since the program began in 1994, costs of $116.1 have
been charged to the restructuring reserve -- $82.4 related to customer service
processes, $17.9 related to administrative processes and $15.8 related to the
consolidation of facilities and operations and other related costs. These
costs were primarily associated with the closure and relocation of various
centers, software enhancements and separation benefits associated with
workforce reductions. The continued implementation of this program positions
the Company to accelerate delivery of a full array of voice, video and data
services and to reach its stated objective of being the easiest company to do
business with in the industry.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
13
<PAGE> 16
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. In discontinuing the application of FAS 71, the
Company used a methodology similar to FAS 121 in determining the amount of
asset impairments. Accordingly, the issuance of FAS 121 will not have a
significant impact on the Company's financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
14
<PAGE> 17
Item 8. Financial Statements and Supplementary Data
GTE Southwest Incorporated
STATEMENTS OF INCOME (Note 3)
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
- ----------------------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales (a):
Local services $ 531,849 $ 490,359 $ 461,165
Network access services 579,038 577,706 572,849
Toll services 214,278 244,856 257,597
Other services and sales 228,276 169,574 165,652
----------- ----------- -----------
Total revenues and sales 1,553,441 1,482,495 1,457,263
----------- ----------- -----------
Operating costs and expenses (b):
Cost of services and sales 599,312 621,299 553,363
Selling, general and administrative 285,884 260,704 286,001
Depreciation and amortization 339,384 321,016 309,873
Restructuring -- -- 198,974
----------- ----------- -----------
Total operating costs and expenses 1,224,580 1,203,019 1,348,211
----------- ----------- -----------
Operating income 328,861 279,476 109,052
Other (income) expense:
Interest - net 61,218 63,568 82,722
Gain on disposition of assets (21,583) (63,688) (17,536)
Other - net (5,500) -- 1,224
----------- ----------- -----------
Income before income taxes 294,726 279,596 42,642
Income taxes (benefit) 99,437 95,068 (12,731)
----------- ----------- -----------
Income before extraordinary charges 195,289 184,528 55,373
Extraordinary charges (549,438) -- (31,250)
----------- ----------- -----------
Net income (loss) $ (354,149) $ 184,528 $ 24,123
=========== =========== ===========
</TABLE>
(a) Includes billings to affiliates of $45,564, $35,658 and $37,803 for the
years 1995-1993, respectively.
(b) Includes billings from affiliates of $103,877, $89,766 and $82,976 for
the years 1995-1993, respectively.
See Notes to Financial Statements.
15
<PAGE> 18
GTE Southwest Incorporated
BALANCE SHEETS (Note 3)
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 17,825 $ 10,462
Receivables, less allowances of $21,182 and $20,043 277,838 266,902
Inventories and supplies 20,452 17,983
Deferred income tax benefits 32,033 23,356
Prepaid taxes and other 45,630 21,875
----------- -----------
Total current assets 393,778 340,578
----------- -----------
Property, plant and equipment, net 1,966,506 2,832,912
Other assets 86,276 69,877
----------- -----------
Total assets $ 2,446,560 $ 3,243,367
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $49,862 $97,945
Accounts payable 101,548 113,755
Affiliate payables and accruals 43,970 38,479
Advanced billings and customer deposits 36,568 31,082
Taxes payable 36,940 51,258
Accrued interest 6,657 7,651
Accrued payroll costs 46,038 40,104
Dividends payable 198 61,374
Accrued restructuring costs 82,872 50,740
Other 84,510 71,265
----------- -----------
Total current liabilities 489,163 563,653
----------- -----------
Non-current liabilities:
Long-term debt 827,082 745,200
Deferred income taxes 178,003 407,510
Employee benefit obligations 145,799 101,779
Restructuring costs -- 105,994
Other liabilities 84,404 159,015
----------- -----------
Total non-current liabilities 1,235,288 1,519,498
----------- -----------
Preferred stock, subject to mandatory redemption 8,390 10,330
----------- -----------
Shareholders' equity:
Preferred stock 7,600 7,600
Common stock (6,500,000 shares issued) 650,000 650,000
Additional paid-in capital 48,751 48,751
Retained earnings 7,368 443,535
----------- -----------
Total shareholders' equity 713,719 1,149,886
----------- -----------
Total liabilities and shareholders' equity $ 2,446,560 $ 3,243,367
=========== ===========
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 19
GTE Southwest Incorporated
STATEMENTS OF CASH FLOWS (Note 3)
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
- ----------------------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operations:
Income before extraordinary charges $ 195,289 $ 184,528 $ 55,373
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 339,384 321,016 309,873
Deferred income taxes 16,312 (10,697) (121,142)
Restructuring costs -- -- 198,974
Gain on disposition of assets, net of tax (14,298) (39,766) (12,722)
Provision for uncollectible accounts 33,136 34,868 22,663
Change in current assets and current liabilities:
Receivables - net (59,328) (34,660) (68,081)
Other current assets (15,635) (8,905) 30,088
Accrued taxes and interest (17,924) (11,132) 3,955
Other current liabilities (65,392) 21,699 63,645
Other - net (18,731) 25,060 53,863
----------- ----------- -----------
Net cash from operations 392,813 482,011 536,489
----------- ----------- -----------
Investing:
Capital expenditures (319,162) (378,037) (339,562)
Proceeds from sale of assets 36,576 158,189 77,550
Other - net (5,478) (964) 4,232
----------- ----------- -----------
Net cash used in investing (288,064) (220,812) (257,780)
----------- ----------- -----------
Financing:
Long-term debt issued -- -- 496,666
Long-term debt and preferred stock retired (20,968) (48,980) (547,441)
Dividends paid to shareholders (143,194) (201,279) (217,377)
Increase in short-term obligations,
excluding current maturities 66,064 15,142 12,298
Return of capital to GTE -- (22,528) --
Other - net 712 -- (20,578)
----------- ----------- -----------
Net cash used in financing (97,386) (257,645) (276,432)
----------- ----------- -----------
Increase in cash and temporary investments 7,363 3,554 2,277
Cash and temporary investments:
Beginning of year 10,462 6,908 4,631
----------- ----------- -----------
End of year $ 17,825 $ 10,462 $ 6,908
=========== =========== ===========
Cash paid during the year for:
Interest $ 64,626 $ 66,410 $ 84,567
Income taxes 111,154 112,303 86,750
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 20
GTE Southwest Incorporated
STATEMENTS OF SHAREHOLDERS' EQUITY (Note 3)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
---------- ----------- ----------- ------------ -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1992 $ 7,600 $ 650,000 $ 71,279 $ 629,932 $ 1,358,811
Net income 24,123 24,123
Dividends declared (150,757) (150,757)
---------- ----------- ----------- ------------ -----------
Shareholders' equity, December 31, 1993 7,600 650,000 71,279 503,298 1,232,177
Net income 184,528 184,528
Dividends declared (244,291) (244,291)
Return of capital (a) (22,528) (22,528)
---------- ----------- ----------- ------------ -----------
Shareholders' equity, December 31, 1994 7,600 650,000 48,751 443,535 1,149,886
Net loss (354,149) (354,149)
Dividends declared (82,018) (82,018)
---------- ----------- ----------- ------------ -----------
Shareholders' equity, December 31, 1995 $ 7,600 $ 650,000 $ 48,751 $ 7,368 $ 713,719
========== =========== =========== ============ ===========
</TABLE>
(a) During 1994, the Company returned $22.5 million of capital to GTE with the
cash proceeds from certain non-strategic property sales (see Note 5 to the
financial statements).
See Notes to Financial Statements.
18
<PAGE> 21
GTE Southwest Incorporated
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE Southwest Incorporated (the Company) provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries. At
December 31, 1995, the Company served 2,121,194 access lines in the states of
Arkansas, New Mexico, Oklahoma and Texas. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its financial statements in accordance with generally
accepted accounting principles which require that management make estimates and
assumptions that affect reported amounts. Actual results could differ from
those estimates.
On February 28, 1995, the Company entered into an Agreement of Merger with
Contel of Texas, Inc., a Texas corporation and Contel of the West, Inc., an
Arizona corporation (the Merger). The Merger became effective on December 31,
1995 and has been accounted for in a manner similar to a "pooling of interests"
(see Note 3).
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2). The 1995
financial presentation reflects account classifications consistent with
unregulated enterprises operating in a competitive environment. Specifically,
uncollectible revenue accounts have been reclassified from revenues and sales
to selling, general and administrative expenses.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1995 presentation, including the reclassification of the 1989
Texas Rate Case reserve from other services and sales revenues to the revenue
categories affected by the rate case (i.e. local services revenues and network
access revenues).
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies, which are not subsidiaries of the Company, supply
construction and maintenance equipment, supplies and electronics repair
services to the Company. These purchases and services amounted to $91.2
million, $90.3 million and $118.5 million for the years 1995-1993,
respectively. Such purchases and services are recorded in the accounts of the
Company, at cost, which includes a normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$103.9 million, $89.8 million and $83 million for the years 1995-1993,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's financial statements include allocated expenses based on the
sharing of certain executive, administrative, financial, accounting, marketing,
personnel, engineering, and other support services being performed at
consolidated work centers among the domestic GTE Telephone Operating Companies.
The amounts charged for these affiliated transactions are based on a
proportional cost allocation method as filed with the Federal Communications
Commission.
19
<PAGE> 22
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $45.6 million, $35.7 million and $37.8 million for the
years 1995-1993, respectively.
TELEPHONE PLANT
The Company has historically provided for depreciation on a straight-line basis
over asset lives approved by regulators. Beginning in 1996, the Company will
provide for depreciation on a straight-line basis over the estimated economic
lives of its assets (see Note 2). Maintenance and repairs of property are
charged to income as incurred. Additions to, replacements and renewals of
property are charged to telephone plant accounts. Property retirements are
charged in total to the accumulated depreciation account. No adjustment to
depreciation is made at the time properties are retired or otherwise disposed
of, except in the case of significant sales or extraordinary retirements of
property where profit or loss is recognized.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement
gains and losses associated with employee separations are recognized in the
period in which they occur.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112), effective
January 1, 1993. FAS 112 requires employers to accrue the future cost of
benefits provided to former or inactive employees and their dependents after
employment but before retirement. Previously, the cost of these benefits was
charged to expense as paid. The impact of this change in accounting on the
Company's results of operations was immaterial.
INCOME TAXES
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and
remits tax payments to GTE based on its tax liability on a separate company
basis.
Deferred tax assets and liabilities are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely.
20
<PAGE> 23
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. In discontinuing the application of FAS 71, the
Company used a methodology similar to FAS 121 in determining the amount of
asset impairments. Accordingly, the issuance of FAS 121 will not have a
significant impact on the Company's financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
21
<PAGE> 24
2. EXTRAORDINARY CHARGES
In response to recently enacted and pending legislation (see Note 13) and the
increasingly competitive environment, the Company discontinued the use of FAS
71 in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $549.3 million (net of tax benefits
of $301.6 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. The amount of the charge was
based on an analysis of the discounted cash flows expected to be generated by
the embedded telephone plant and equipment over their remaining economic lives.
In addition to the one-time charge, the Company, beginning in 1996, will
shorten the depreciable lives of its telephone plant and equipment as follows
as a result of the discontinuance of FAS 71:
<TABLE>
<CAPTION>
Depreciable Lives
---------------------
Average
Asset Category Before After
- -------------- ------- -----
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
In addition, during 1995, the Company redeemed prior to stated maturity, $5.6
million of long-term debt. These redemptions resulted in an after-tax
extraordinary charge of $0.1 million (net of tax benefits).
During 1993, the Company redeemed prior to stated maturity, $501 million of
high-coupon first-mortgage bonds. These redemptions resulted in an after-tax
extraordinary charge of $31.3 million (net of tax benefits of $16.1 million).
22
<PAGE> 25
3. LEGAL ENTITY MERGER
On February 28, 1995, the Company entered into an Agreement of Merger with
Contel of Texas, Inc., a Texas corporation and Contel of the West, Inc., an
Arizona corporation (collectively, the Contel Subsidiaries). The agreement
provided that the Contel Subsidiaries would merge with and into the Company,
with the Company to be the surviving corporation (the Merger). The Merger
became effective on December 31, 1995, and has been accounted for in a manner
similar to a "pooling of interests." Accordingly, the financial statements
include the combined historical results of operations and financial position of
the Company and the Contel Subsidiaries as though the Merger had occurred at
the beginning of each period presented and reflect the elimination of
significant intercompany transactions.
Listed below are details of the results of operations of the previously
separate enterprises that are included in the current combined net income
(loss):
<TABLE>
<CAPTION>
GTE Southwest Contel Contel GTE Southwest
(Pre-Merger) Texas West (Post-Merger)
------------- ---------- ----------- --------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Revenues and sales $ 1,346,541 $ 162,454 $ 44,446 $ 1,553,441
Operating income 271,151 47,071 10,639 328,861
Net income (loss) (a) (324,463) (36,301) 6,615 (354,149)
Year Ended December 31, 1994
Revenues and sales $ 1,235,775 $ 169,792 $ 76,928 $ 1,482,495
Operating income 216,646 35,216 27,614 279,476
Net income (b) 123,386 19,055 42,087 184,528
Year Ended December 31, 1993
Revenues and sales $ 1,182,787 $ 181,077 $ 93,399 $ 1,457,263
Operating income (c) 54,854 34,840 19,358 109,052
Net income (loss) (d) (19,041) 20,122 23,042 24,123
</TABLE>
(a) Net income (loss) for 1995 includes $549.4 million of extraordinary
charges for the discontinuance of FAS 71 and the early retirement of
debt (see Note 2). Net income (loss) for 1995 also includes after-tax
gains of $10.8 million recorded on the sales of non-strategic properties
and $3.5 on the sale of the Company's unconsolidated investment in
Metropolitan Houston Paging, Inc (see Note 5).
(b) Net income for 1994 includes after-tax gains on the sales of
non-strategic properties of $39.8 million (see Note 5).
(c) Operating income for 1993 includes a $199 million pre-tax charge for
restructuring costs which reduced net income by $122.6 million and a
one-time pre-tax charge of $9.4 million to complete enhanced early
retirement and voluntary separation programs which reduced net income by
$6.5 million .
(d) Net income for 1993 includes a $31.3 million extraordinary charge for
the early retirement of debt. Net Income for 1993 also includes
after-tax gains on the sale of non-strategic properties of $12.7 million
(see Note 5).
23
<PAGE> 26
4. RESTRUCTURING COSTS
Results for 1993 include one-time pre-tax restructuring costs of $199 million,
which reduced net income by $122.6 million, primarily for incremental costs
related to implementation of the Company's three-year re-engineering plan. The
re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The
implementation of the plan is expected to result in costs of $134.7 million to
re-engineer customer service processes and $48.5 million to re- engineer
administrative processes. The restructuring costs also include $15.8 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 substantially completed by the end of 1996.
Costs of $116.1 million have been incurred since the plan's inception including
$82.4 million related to customer service processes, $17.9 million related to
administrative processes and $15.8 million related to the consolidation of
facilities and operations and other related costs. These expenditures were
primarily associated with the closure and relocation of various service
centers, software enhancements and separation benefits related to employee
reductions.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pre-tax charge of $9.4 million which
reduced 1993 net income by $6.5 million.
24
<PAGE> 27
5. PROPERTY REPOSITIONING
On September 30, 1995, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 10,517
access lines) in the state of Texas to various parties for $29.6 million in
cash. A pre- tax gain of $16.3 million was recorded on the sale. The proceeds
from this transaction were used primarily to reduce short-term obligations and
to pay $18.7 million of dividends to GTE in the fourth quarter of 1995.
On May 4, 1995, the Company sold its unconsolidated investment in Metropolitan
Houston Paging Service, Inc. (a Texas Corporation) for $7 million in cash. A
pre-tax gain of $5.3 million was recorded on the sale. The proceeds from this
transaction were used primarily to reduce short-term obligations.
On November 30, 1994, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 8,898
access lines) in the state of Oklahoma to Pioneer Telephone Cooperative, Inc.
for $26.8 million in cash. A pre-tax gain of $12.6 million was recorded on the
sale. The proceeds from this transaction were used primarily to reduce
short-term obligations.
On November 30, 1994, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 26,519
access lines) in the state of Arizona to Citizens Utilities Company for $90.4
million in cash. A pre-tax gain of $41.8 million was recorded on the sale.
The proceeds from this transaction were used primarily to pay down $8 million
of long-term debt and pay $54.5 million of dividends to GTE.
On May 1, 1994, the Company sold a portion of its telephone plant-in-service,
inventories and supplies and customers (representing 12,798 access lines) in
the state of Oklahoma to Eaglenet, Inc. for $41 million in cash. A pre-tax
gain of $9.3 million was recorded on the sale. The proceeds from this
transaction were used primarily to pay down $30 million of long-term debt.
On December 31, 1993, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 17,000
access lines) in the state of Utah to Citizens Utilities Company for $52.6
million in cash. A pre-tax gain of $17.5 million was recorded on the sale.
The proceeds from this transaction were primarily used to pay down $24.4
million of long-term debt and return $22.5 million of capital to GTE in early
1994.
On February 23, 1993, the Idaho properties of the Company were sold to GTE
Northwest Incorporated for their book value of $25 million.
25
<PAGE> 28
6. PREFERRED STOCK
The authorized cumulative preferred stock, not subject to mandatory redemption,
consists of 2,060,758 shares. Shares outstanding at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
Outstanding: Shares Amount
-------- ---------
(Thousands of Dollars)
<S> <C> <C>
$2.20 no par value 32,000 $ 1,600
5.10% $20 par value 300,000 6,000
-------- ---------
Total 332,000 $ 7,600
-------- ---------
</TABLE>
Cumulative preferred stock, subject to mandatory redemption, is as follows:
<TABLE>
<CAPTION>
Authorized: Shares
----------
<S> <C>
4.60% $20 par value 350,000
$8.10 no par value 300,000
----------
650,000
</TABLE> ----------
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------
1995 1994
------------------------------ ----------------------------
Shares Amount Shares Amount
---------- ------------- ----------- -----------
Outstanding: (Thousands of Dollars) (Thousands of Dollars)
<S> <C> <C> <C> <C>
4.60% $20 par value 89,500 $ 1,790 96,500 $ 1,930
$8.10 no par value 66,000 6,600 84,000 8,400
---------- ------------- ----------- -----------
Total 155,500 $ 8,390 180,500 $ 10,330
---------- ------------- ----------- -----------
</TABLE>
The 4.60% Series sinking fund provisions require the Company to redeem a
minimum of 7,000 shares at $20 per share on April 1 of each year. This
requirement was met in 1995 and 1994 with the purchase of 7,000 shares per
year.
The $8.10 Series sinking fund provisions require the redemption of a minimum of
9,000 shares at $100 per share on November 1 of each year. The Company
redeemed 18,000 shares in 1995 and 1994 to meet this requirement.
The preferred shareholders are entitled to voting rights (on an equal basis
with the common shareholder) in the event dividends in arrears equal or exceed
the annual dividends on all preferred stock. Otherwise, the preferred
shareholders have no voting rights. The Company is not in arrears in its
dividend payments at December 31, 1995.
The aggregate redemption requirements of preferred stock subject to mandatory
redemption are $1 million in each of the years 1996-2000.
No shares of preferred stock were 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.
26
<PAGE> 29
7. COMMON STOCK
The authorized common stock of the Company consists of 6,500,000 shares with a
stated value of $100 per share. All outstanding shares of common stock are
held by GTE.
Effective December 31, 1995, the Company issued 50,000 shares of its common
stock to GTE in exchange for all of the outstanding common stock of the Contel
Subsidiaries (see Note 3).
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1995, all of the Company's retained earnings were restricted as
to the payment of cash dividends on common stock under the most restrictive
terms of the Company's Certificate of Incorporation. In addition, as a result
of the discontinuance of FAS 71 discussed in Note 2, the Company is currently
restricted from making a full payment of cash dividends on common stock.
27
<PAGE> 30
8. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
5 3/8% Series, due 1996 $ 9,000 $ 9,000
6 7/8% Series, due 1998 25,000 25,000
7 1/2% Series, due 2002 40,000 40,000
8 1/2% Series, due 2031 100,000 100,000
9.70% Series S, due 2002 9,544 10,908
9.74% Series T, due 2013 12,900 13,200
9.36% Series U, due 2014 35,000 35,000
8.50% Series K, due 2003 -- 2,160
8.75% Series G, due 1999 -- 4,000
Debentures:
5.82% Series A, due 1999 250,000 250,000
6.54% Series B, due 2005 250,000 250,000
Other:
Rural Utilities Service (RUS) -- 3,154
Rural Telephone Bank (RTB) -- 4,961
Federal Financing Bank (FFB) -- 1,386
Commercial paper refinanced on a long-term basis 105,800 --
Capitalized leases 1,130 340
-------- --------
Total principal amount 838,374 749,109
Less: discount (933) (800)
-------- --------
Total 837,441 748,309
Less: current maturities of long-term debt (10,359) (3,109)
-------- --------
Total long-term debt $827,082 $745,200
======== ========
</TABLE>
Long-term debt as of December 31, 1995, includes $105.8 million of commercial
paper which was refinanced by the issuance of $150 million of 6% Debentures in
January 1996.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None
of the securities shown above were held in sinking or other special funds of
the Company or pledged by the Company. Debt discounts on the Company's
outstanding long-term debt are amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.
Estimated payments of long-term debt during the next five years are: $10.4
million in 1996; $1.7 million in 1997; $26.7 million in 1998; $251.7 million in
1999 and $4 million in 2000.
28
<PAGE> 31
Total short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rate 5.93% $ - $66,595
Notes payable to affiliate - average rates 6.10% and 3.27% 39,503 28,241
Current maturities of long-term debt 10,359 3,109
------- -------
Total $49,862 $97,945
======= =======
</TABLE>
A $3.5 billion credit line is available to the Company through shared lines of
credit with GTE and other affiliates. Most of these arrangements require
payment of annual commitment fees of .1% of the unused lines of credit.
9. FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying values. As of December 31, 1995, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, exceeded the carrying value by approximately $42 million.
The estimated fair value of long-term debt as of December 31, 1994, was lower
than the carrying value by approximately $66 million.
29
<PAGE> 32
10. INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $ 78,708 $ 92,583 $ 102,869
State 4,417 13,182 5,542
------------ ------------- ------------
83,125 105,765 108,411
------------ ------------- ------------
Deferred:
Federal 26,111 3,933 (105,961)
State (1,729) (4,348) (2,807)
------------ ------------- ------------
24,382 (415) (108,768)
------------ ------------- ------------
Amortization of deferred investment tax credits (8,070) (10,282) (12,374)
------------ ------------- ------------
Total $ 99,437 $ 95,068 $ (12,731)
============ ============= ============
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the statements
of income is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 102,763 $ 97,858 $ 14,925
State income taxes, net of federal income tax benefits 2,124 5,730 1,752
Amortization of deferred investment tax credits (8,070) (10,282) (12,374)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net 3,133 2,382 3,891
Rate differentials applied to reversing temporary
differences (1,299) (3,087) (4,646)
Other differences, including settlements of prior year
tax issues 786 2,467 (16,279)
------------ ------------- ------------
Total provision (benefit) $ 99,437 $ 95,068 $ (12,731)
============ ============= ============
</TABLE>
The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 191,074 $ 431,869
Employee benefit obligations (59,879) (39,105)
Prepaid pension costs 24,655 14,663
Restructuring costs (29,437) (57,603)
Investment tax credits 21,948 34,738
Other - net (2,391) (408)
------------- -------------
Total $ 145,970 $ 384,154
============= =============
</TABLE>
30
<PAGE> 33
11. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors, noncontributory, defined benefit pension plans covering
substantially all employees. The benefits to be paid under these plans are
generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The components of the net pension credit for 1995-1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 13,435 $ 18,955 $ 21,091
Interest cost on projected benefit obligations 37,427 38,626 44,192
Return on plan assets:
Actual (156,937) 1,834 (133,253)
Deferred 94,244 (68,923) 64,653
Other - net (14,491) (11,106) (14,266)
------------ ------------- ------------
Total - net $ (26,322) $ (20,614) $ (17,583)
============ ============= ============
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1995 and
1994 and 8.25% for 1993.
The funded status of the plans and the prepaid pension cost at December 31 were
as follows:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 349,378 $ 324,243
========== ===========
Accumulated benefit obligations $ 404,047 $ 375,427
========== ===========
Plan assets at fair value $ 861,063 $ 821,667
Less: projected benefit obligations 516,001 493,096
---------- ---------
Excess of assets over projected benefit obligations 345,062 328,571
Unrecognized net transition asset (46,505) (58,692)
Unrecognized net gain (225,922) (227,926)
---------- ---------
Total - net $ 72,635 $ 41,953
========== =========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Discount rate 7.50% 8.25%
Rate of compensation increase 5.25% 5.50%
</TABLE>
31
<PAGE> 34
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). FAS 106 requires that the expected
costs of these benefits be charged to expense during the years that the
employees render service. The Company elected to adopt this new accounting
standard on the delayed recognition method and commencing January 1, 1993,
began amortizing the estimated unrecorded accumulated postretirement benefit
obligation over twenty years. Prior to the adoption of FAS 106, the cost of
these benefits was charged to expense as paid.
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1995-93 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 6,123 $ 7,862 $ 9,473
Interest cost on accumulated postretirement benefit 26,265 26,816 28,678
obligations
Actual return on plan assets (485) -- --
Amortization of transition obligation 13,980 14,723 17,482
Other - net (242) 18 --
---------- ----------- ----------
Total - net $ 45,641 $ 49,419 $ 55,633
========== =========== ==========
</TABLE>
The following table sets forth the plans' funded status and the accrued
obligations as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $ 217,377 $ 205,104
Fully eligible active plan participants 7,458 9,630
Other active plan participants 133,013 133,314
----------- ----------
Total accumulated postretirement benefit obligations 357,848 348,048
Less: fair value of plan assets 4,736 2,609
----------- ----------
Excess of accumulated obligations over plan assets 353,112 345,439
Unrecognized transition obligation (229,973) (264,879)
Unrecognized net gain 18,653 7,182
----------- ----------
Total $ 141,792 $ 87,742
=========== ==========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1995, and 8.25% at December 31,
1994. The assumed health care cost trend rates in 1995 and 1994 were 11% and
12%, respectively, for pre-65 participants and 8.5% and 9%, respectively, for
post-65 retirees, each rate declining on a graduated basis to an ultimate rate
in the year 2004 of 6%. A one percentage point increase in the assumed health
care cost trend rate for each future year would have increased 1995 costs by
$4.7 million and the accumulated postretirement benefit obligations at December
31, 1995, by $45 million.
32
<PAGE> 35
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for nonunion employees retiring on or after January
1, 1995. These changes include, among others, newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
cost sharing schedule based on a retiree's years of service.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $4.9 million in 1995 and $5.1 million in 1994 and 1993.
12. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is summarized as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
Land $ 17,220 $ 17,202
Buildings 366,791 360,705
Plant and equipment 4,086,569 3,929,461
Other 383,632 386,801
------------ ------------
Total 4,854,212 4,694,169
Accumulated depreciation (see Note 2) (2,887,706) (1,861,257)
------------ ------------
Total property, plant and equipment - net $ 1,966,506 $ 2,832,912
============ ============
</TABLE>
Depreciation provisions in 1995-1993 were equivalent to composite average
percentages of 6.26%, 6.78% and 6.48%, respectively.
13. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the state regulatory
commissions in Arkansas, New Mexico, Oklahoma and Texas. The Company is
subject to regulation by the Federal Communications Commission (FCC) for its
interstate business operations.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company also provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
individual state regulatory orders. The Company also provides long distance
access services directly to interexchange carriers and other customers who
provide services between LATAs.
33
<PAGE> 36
The Public Utility Commission of Texas (PUC) approved a rulemaking procedure on
December 17, 1991, with an effective date of January 1, 1991, allowing the
Company and other LECs to exit the intraLATA toll pool with diminishing
transition payments from Southwestern Bell Telephone Company to be received
through 1997.
After exiting the toll pool, the Company began participating in the Texas
Pooling Alternative Settlement Plan (PASP) effective January 1, 1994. The PASP
is also known as an Originating Responsibility Plan. Under this plan, the toll
rates billed to end users for intraLATA toll calls originating in the Company's
service area are retained by the Company. The Company, in turn, pays access
charges to the telephone company hauling and terminating the call based on that
company's approved access charge tariff. Likewise, the Company will receive
access charges for terminating any intraLATA toll call that originates outside
of its service area based on its approved access charge tariff.
An access charge restructuring plan was approved by the PUC on April 1, 1992.
The implementation of this plan resulted in a $40.6 million annual rate
reduction, effective September 1, 1992. Effective September 1, 1993, the
Company implemented an additional rate reduction of $29 million representing
the second step of a three year phase-out of certain access charges under the
access charge restructuring plan. The final phase became effective September
1, 1994, with an additional rate reduction of $33 million.
On April 19, 1994, the Oklahoma Corporation Commission (OCC) approved a Joint
Stipulation and Settlement Agreement in the consolidated docket to end the Toll
Surcharge Pool in Oklahoma. This order allowed the Company to exit the toll
pool while receiving transition payments during a three year (1994-1996)
conversion period to an access charge arrangement. However, the industry,
interexchange carriers and OCC staff have since developed an agreement for an
IntraLATA Access Plan, effective March 1, 1996. The OCC approved the Access
Plan Stipulation Plan in January 1996.
On December 7, 1995, the OCC approved a Joint Stipulation in the Company's rate
case which reduced annual revenues by $5.5 million and allowed for full
recovery of $14.7 million in OCC-mandated network modernization requirements
through a modernization surcharge. Tariffs, which reflect the ordered revenue
changes, were filed with the OCC on January 8, 1996. The local service rate
changes amount to $4.7 million and the approved access tariff changes amounted
to $0.8 million. These rate changes became effective March 6, 1996.
The Company is currently involved in a New Mexico rate proceeding, filed on
September 1, 1994. The proceeding was bifurcated into two phases. On April
13, 1995, the New Mexico Service Corporation Commission (NMSCC) issued an order
in the first phase of the New Mexico rate proceeding requiring the Company to
decrease its revenues by $8.3 annually, effective immediately. Hearings were
held on the second phase of the proceeding, which considered rate design and an
order was issued on December 27, 1995, approving various rates and structures
which should be placed into service during the first quarter of 1996. Refunds
to customers back to April 13, 1995, will be issued and these refunds have been
reserved.
On June 9, 1995, the Arkansas Public Service Commission (APSC) ordered the
Company to reduce rates by $12.8 million annually. The Company filed a motion
for reconsideration on July 7, 1995, which was approved by the APSC on July 10,
1995. The APSC issued a final decision, effective December 5, 1995, which
upheld its original order for the Company to reduce rates by $12.8 million
annually.
Texas Rate Case
On June 19, 1991, the Texas Third District Court of Appeals (Court of Appeals)
affirmed in part and reversed, in part, a decision by the District Court of
Travis County (District Court) regarding the Company's 1989 rate case. The
Court of Appeals affirmed the portion of the District Court's order which
determined that the PUC had no authority to retroactively adjust the Company's
rates. That portion of the PUC's order would have resulted in customer refunds
of approximately $140.0 million. The Court of Appeals also affirmed the
District Court's determination relating to the manner in which the PUC had
calculated the Company's rate of return in setting its rates. The Court of
Appeals, however, reversed the District Court's determination that the PUC had
made appropriate findings related to payments made by the Company to two of its
affiliates. In addition, the Court of Appeals reversed the District Court's
determination related to the PUC's treatment of the Company's federal income tax
expense. The Company appealed this decision to the Supreme Court of Texas, and
in April 1995, the Supreme Court of Texas ruled on an appeal of the Company's
1989 rate case. The Court agreed with the
34
<PAGE> 37
Company's position concerning retroactive ratemaking, the ratemaking treatment
of federal income tax expense and the payment for services provided by GTE
Service Corporation, a wholly-owned subsidiary of GTE. The issue of payments
associated with telephone directories published by GTE Directories Corporation,
also a wholly-owned subsidiary of GTE, was remanded to the PUC.
Subsequent to the Supreme Court's decision, the state of Texas passed a
telecommunications reform bill which was signed into law on May 26, 1995, and
became effective September 1, 1995. This new legislation opens the
local-exchange to competition and permits existing LECs to elect a form of
price regulation rather than rate of return regulation. The incentive form of
price regulation requires LECs to cap basic service rates for four years, after
which indexed, PUC- approved rate adjustments will be permitted. The price
regulation plan contained in the reform bill also requires all calls be
digitally switched by year-end 1998 and for the provision of broadband
facilities to schools, libraries and hospitals on customer demand. On
September 20, 1995, the Company notified the PUC of its election of price
regulation and, in doing so, resolved the remaining open issues of the 1989
rate case. In conjunction with its decision to elect price regulation, the
Company must make certain investments in its network as discussed above. The
Company also elected to amortize the reserve previously established for
potential refunds related to the rate case on a straight-line basis over the
four year period for which revenues will be capped. The remaining reserve is
reflected on the balance sheets as other current liabilities and other
non-current liabilities.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. LECs have limited pricing
flexibility provided they do not exceed the allowed price cap.
In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariffed
entity. Each of the three options reflected an increase to the 3.3%
productivity factor used since 1991. The Company selected the following
productivity factors and sharing thresholds for use in the 1995-1996 tariff
year:
<TABLE>
<CAPTION> Sharing Parameters
Tariff Productivity ----------------------------------
Entity Factor 50% 100%
------ ------------ --------------- ---------------
<S> <C> <C> <C>
Arkansas, GTE Texas 4.0% 12.25-13.25%ROR Over 13.25% ROR
New Mexico, Oklahoma
and Contel Texas 5.3% None None
</TABLE>
Since the Company's access fees were priced significantly below the FCC's
maximum price, the Company was permitted to file tariffs effective May 24, 1995,
to increase rates $9.6 annually. In addition, the Company filed tariffs
effective August 1, 1995, under the interim rules to reduce rates $0.9,
annually. On September 20, 1995, the FCC released its proposed rulemaking
proceeding on price caps which proposes specific changes to reflect and
encourage emerging competition in local and access services markets and to
establish the path towards decreased regulation of LECs' services. On
September 27, 1995, the FCC solicited comments on a number of specific issues
regarding methods for establishing the price caps, such as productivity
measurements, sharing, the common line formula and exogenous costs. The Company
anticipates the FCC will issue an order prior to the July 1996 annual filing.
35
<PAGE> 38
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1995-1993 under
various arrangements and amounted to $223 million, $208.1 million and $214.6
million, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $15.2 million, $14.4 million and $18.1
million in 1995-1993, respectively. Minimum rental commitments under
noncancelable leases through 2000 do not exceed $2.3 million annually and
aggregate $2.7 million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. The Company supports greater competition in telecommunications
provided that, overall, the actions to eliminate existing legal and regulatory
barriers allow an opportunity for all service providers to participate equally
in a competitive marketplace under comparable conditions.
36
<PAGE> 39
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1995 and 1994 quarterly financial data is as follows :
<TABLE>
<CAPTION>
Revenues Operating Net Income
and Sales Income (Loss)
------------ ----------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
1995
First Quarter $ 359,404 $ 78,505 $ 40,574
Second Quarter (a) 376,644 74,403 43,503
Third Quarter (b) 391,223 103,192 68,738
Fourth Quarter (c) 426,170 72,761 (506,964)
------------ ----------- ------------
Total $ 1,553,441 $ 328,861 $ (354,149)
============ =========== ============
1994
First Quarter $ 365,059 $ 80,348 $ 42,358
Second Quarter (a) 380,578 89,940 54,602
Third Quarter 372,575 61,404 30,552
Fourth Quarter (c) 364,283 47,784 57,016
------------ ----------- ------------
Total $ 1,482,495 $ 279,476 $ 184,528
============ =========== ============
</TABLE>
(a) Second-quarter 1995 and 1994 net income includes after-tax gains on the
sale of the Company's unconsolidated investment in Metropolitan Houston
Paging, Inc. and the sale of non-strategic properties of $3.5 million
and $6.5 million, respectively (see Note 5).
(b) Third-quarter 1995 net income includes an after-tax gain on the sale of
non-strategic properties of $10.8 million (see Note 5).
(c) Fourth-quarter 1995 net income includes $549.4 million of extraordinary
charges for the discontinuance of FAS 71 and the early retirement of
debt (see Note 2). Fourth-quarter 1994 net income includes after-tax
gains on the sales of non-strategic properties of $33.2 million
(see Note 5).
37
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE Southwest Incorporated:
We have audited the accompanying balance sheets of GTE Southwest Incorporated
(a Delaware corporation and wholly-owned subsidiary of GTE Corporation) as of
December 31, 1995 and 1994, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements and the schedule and exhibit referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule and
exhibit based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Southwest Incorporated as
of December 31, 1995, and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1995 the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation".
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 24, 1996
38
<PAGE> 41
MANAGEMENT REPORT
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report on
Form 10-K, including the financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
KATHERINE J. HARLESS
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
39
<PAGE> 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
40
<PAGE> 43
Item 10. Directors and Executive Officers of the Registrant
a. Identification of Directors
The names, ages and positions of the directors of the Company as of March 1,
1996 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
- ------------------------ ------- ----------------- ------------------------------------------------------
<S> <C> <C> <C>
John C. Appel 47 1996 Executive Vice President - Network Operations, GTE
Telephone Operations, 1996; Executive Vice President -
Network Operations, all GTE domestic telephone
subsidiaries of which he is not President, 1996;
Director, all GTE domestic telephone subsidiaries,
1996; President - GTE South Incorporated and GTE North
Incorporated, 1995; Senior Vice President - Regulatory
Operations, GTE Telephone Operations, 1994; President -
GTE Southwest Incorporated, 1994; State President -
Texas / New Mexico, 1993; Vice President and General
Manager - California, GTE Telephone Operations West
Area, 1992; Assistant Vice President - Business
Services, GTE Telephone Operations, 1991.
Richard M. Cahill 57 1993 Vice President - General Counsel, GTE Telephone
Operations, 1988; Director, all GTE domestic telephone
subsidiaries, 1993 and / or 1994; Director, GTE Vantage
Incorporated, 1991; Vice President - General Counsel,
all GTE domestic telephone subsidiaries, 1995.
Gerald K. Dinsmore 46 1993 Senior Vice President - Finance and Planning, GTE
Telephone Operations, 1994; Senior Vice President -
Finance and Planning, all GTE domestic telephone
subsidiaries, 1994; Vice President - Finance, GTE
Telephone Operations, 1993; Vice President -
Intermediary Customer Markets, GTE Telephone
Operations, 1988; President of all South Area
Companies, GTE Telephone Operations, 1992; Director,
GTE Florida Incorporated and GTE South Incorporated,
1992; Director, all other GTE domestic telephone
subsidiaries, 1993 and / or 1994.
Michael B. Esstman 49 1993 Executive Vice President - Customer Segments, GTE
Telephone Operations, 1994; Executive Vice President -
Operations, GTE Telephone Operations, 1993; President,
all Central Area Companies, GTE Telephone Operations,
1991; President, Contel Eastern Region, Telephone
Operations Sector, 1983; Director, AG Communications
Systems; Director, all Central Area Companies, 1991;
Director, all other GTE domestic telephone subsidiaries,
1993 and / or 1994.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
- ------------------------ ------- ----------------- ------------------------------------------------------
<S> <C> <C> <C>
Thomas W. White 49 1993 President, GTE Telephone Operations, 1995; Executive
Vice President - Network Operations, GTE Telephone
Operations, 1994; Executive Vice President - GTE
Telephone Operations, 1993; Senior Vice President -
General Office Staff, GTE Telephone Operations, 1989;
Director, all GTE domestic telephone subsidiaries, 1993
and / or 1994; Director, Quebec-Telephone.
</TABLE>
Directors are elected annually. There are no family relationships between any
of the directors or executive officers of the Company.
42
<PAGE> 45
b. Identification of Executive Officers
The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations.
Accordingly, the list below contains the names, ages and positions of the
executive officers of both the Company and GTE Telephone Operations (Telops) as
of March 1, 1996.
<TABLE>
<CAPTION>
Year Assumed
Present Position
------------------------
the
Name Age Telops Company Position
- ------------------------ ------- ------------ ---------- -------------------------------------------------
<S> <C> <C> <C> <C>
Thomas W. White (1) 49 1995 -- President of GTE Telephone Operations
John C. Appel (2) 47 1996 1996 Executive Vice President - Network Operations of
GTE Telephone Operations and the Company
Mary Beth Bardin 41 1994 1995 Vice President - Public Affairs of GTE Telephone
Operations and the Company
C. F. Bercher 52 1994 1995 Vice President - Consumer Markets of GTE
Telephone Operations and the Company
Richard M. Cahill 57 1988 1995 Vice President - General Counsel of GTE Telephone
Operations and the Company
Gerald K. Dinsmore 46 1994 1994 Senior Vice President - Finance and Planning of
GTE Telephone Operations and the Company
William M. Edwards, III 47 -- 1993 Controller of the Company
Michael B. Esstman 49 1994 -- Executive Vice President - Customer Segments of
GTE Telephone Operations
Katherine J. Harless 45 -- 1995 President of the Company
Gregory D. Jacobson 44 -- 1994 Treasurer of the Company
Brad M. Krall 54 1993 1995 Vice President - Centralized Operations of GTE
Telephone Operations and the Company
Michael J. McDonough 46 1994 1995 Vice President - Business Markets of GTE
Telephone Operations and the Company
Barry W. Paulson 44 -- 1991 Vice President - Midwest Region of the Company
Richard L. Schaulin 53 1989 1995 Vice President - Human Resources of GTE Telephone
Operations and the Company
Charles J. Somes 49 -- 1994 Secretary of the Company
Larry J. Sparrow 52 1994 1995 Vice President - Carrier Markets of GTE Telephone
Operations and the Company
Alex Stadler 45 1994 1995 Vice President - Strategy and Technology Planning
of GTE Telephone Operations and the Company
</TABLE>
(1) Thomas W. White was appointed President of GTE Telephone Operations
replacing Kent W. Foster, who was appointed President of GTE Corporation.
(2) John C. Appel was appointed Executive Vice President - Network Operations
of GTE Telephone Operations, replacing Thomas W. White, who was appointed
President of GTE Telephone Operations.
(3) Katherine J. Harless was appointed President of the Company, replacing
John C. Appel, who was appointed Executive Vice President - Network
Operations of GTE Telephone Operations.
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years. Except for duly elected officers
and directors, no other employees had a significant role in decision making.
All officers are appointed for a term of one year.
43
<PAGE> 46
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the 1995
Principal Executive Officers of the Company and each of the other four most
highly compensated executive officers (the named executive officers) of GTE
Telephone Operations in 1995. The information in this table under the caption
"Annual Compensation" sets forth all compensation paid to the named executive
officers by GTE Telephone Operations. The caption "Long-Term Compensation" in
this table sets forth all long-term compensation paid to the named executive
officers under employee benefit plans administered by GTE Corporation or GTE
Service Corporation. Footnote 1 to this table sets forth the actual 1995
annual compensation for each of the named executive officers that was allocated
to the Company.
<TABLE>
<CAPTION>
Annual Compensation (1)
-----------------------------------------------
(a) (b) (c) (d) (e)
Other Annual
Name and Principal Salary Bonus Compensation
Position in Group Year ($) (2) ($) ($)
- ------------------------- ----- --------- ---------- --------------
<S> <C> <C> <C> <C>
Katherine J. Harless (5) 1995 $ 167,746 $ 113,800 $ --
President 1994 160,092 110,300 --
1993 147,258 88,500 --
John C. Appel (6) 1995 239,600 258,100 --
President 1994 193,023 182,400 --
1993 139,250 52,200 --
Kent B. Foster (7) 1995 381,302 476,600 --
President - 1994 687,608 837,900 --
GTE Telephone 1993 603,659 531,700 --
Operations
Thomas W. White 1995 418,884 443,800 --
President - 1994 353,508 368,200 --
GTE Telephone 1993 328,696 282,600 --
Operations
Michael B. Esstman 1995 350,731 349,400 --
Executive Vice 1994 327,546 358,200 --
President - 1993 287,830 268,400 --
Customer Segments
GTE Telephone
Operations
Gerald K. Dinsmore 1995 265,125 255,600 --
Senior Vice President - 1994 248,438 233,800 --
Finance and Planning 1993 213,061 206,900 --
GTE Telephone
Operations
</TABLE>
<TABLE>
<Caption)
Long-Term Compensation
-----------------------------------------------
Awards Payouts
--------------------------- ---------------------------
(a) (f) (g) (h) (i)
Securities
Restricted Underlying LTIP All Other
Name and Principal Stock Options/ Payouts Compensation
Position in Group Awards (#) SARs (#) ($) (3) ($) (4)
- ------------------------- ----------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Katherine J. Harless (5) $ -- 12,500 $ 75,600 $ 7,548
President -- 10,600 18,800 4,887
-- 6,000 -- 4,418
John C. Appel (6) -- 63,500 162,800 10,194
President -- 24,800 34,700 6,230
-- 7,300 -- 4,187
Kent B. Foster (7) -- 187,900 848,300 10,613
President - -- 138,100 397,800 7,075
GTE Telephone Operations -- 58,800 117,100 6,502
Thomas W. White -- 98,800 331,800 10,613
President - -- 53,700 164,100 7,075
GTE Telephone Operaions -- 22,600 52,700 7,067
Michael B. Esstman -- 63,500 305,900 7,238
Executive Vice -- 53,700 158,300 4,998
President - -- 22,600 46,200 7,056
Customer Segments
GTE Telephone Operations
Gerald K. Dinsmore -- 36,400 211,300 10,613
Senior Vice President - -- 30,900 97,800 7,075
Finance and Planning -- 14,500 14,800 6,207
GTE Telephone Operations
</TABLE>
(1) Annual Compensation represents the total annual cash compensation of
salaries, bonuses and other compensation. The Company's allocated share
for Ms. Harless and Messrs. Appel, Foster, White, Esstman and Dinsmore,
for whom total annual amounts are shown above, is $281,546; $61,874;
$102,060; $101,876; $84,303 and $62,700, respectively.
(2) The data in the table includes fees of $20,604, $22,896 and $21,944,
respectively, received by Mr. Foster when he served as a director of BC
TEL during 1995, 1994 and 1993, and fees of $289 and $2,869, respectively,
for serving as a director of CANTV during 1994 and 1993. Mr. White
received fees of $16,607 for serving as director of BC TEL during 1995.
Both BC TEL and CANTV are indirectly-owned subsidiaries of GTE
Corporation.
44
<PAGE> 47
(3) 1995 Long-Term Incentive Plan (LTIP) Payouts include transition awards for
the 1994-1995 performance period, which were established by the Committee
as a special grant to allow for the smooth transitioning from a single
measure of long-term performance (return on equity) to a combined measure
(return on equity and operating cash flow margin).
(4) All other compensation for 1995 includes company contributions to the GTE
Savings Plan of $6,750 for Ms. Harless and each of Messrs. Appel, Foster,
White and Dinsmore and $3,375 for Mr. Esstman. Also included are company
contributions to the GTE Executive Salary Deferral Plan of $798 for Ms.
Harless, $3,444 for Mr. Appel and $3,863 for each of Messrs. Foster,
White, Esstman and Dinsmore.
(5) Ms. Harless was elected President February 15, 1995, replacing Mr. Appel.
(6) Mr. Appel served as President until February 15, 1995. In May 1994, he
was also elected Senior Vice President - Regional Operations, GTE
Telephone Operations.
(7) Mr. Foster served as President of GTE Telephone Operations through June
1995 at which time he was selected President of GTE Corporation. Mr.
White replaced Mr. Foster as President of GTE Telephone Operations.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1995, whether
or not specifically allocated to the Company. The options and SARs were
granted under the Long-Term Incentive Plan (LTIP). Pursuant to Securities and
Exchange Commission (the SEC) rules, the table also shows the value of the
options granted at the end of the option terms (ten years) if the stock price
were to appreciate annually by 5% and 10%, respectively. There is no assurance
that the stock price will appreciate at the rates shown in the table. The
table also indicates that if the stock price does not appreciate, there will be
no increase in the potential realizable value of the options granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants (1) Option Term
-------------------------------------------------------- -----------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to All GTE Or Base
Options / SARs Employees in Price Expiration
Name Granted (1) Fiscal Year ($/SH) Date 0% 5% 10%
- --------------------- -------------- -------------- --------- ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Katherine J. Harless $ 12,500 0.22% $ 33.38 02/14/05 $ -- $ 262,367 $ 664,889
John C. Appel 29,300 0.51% 33.38 02/14/05 -- 614,988 1,558,501
34,200 0.60% 35.81 08/12/05 -- 769,996 1,951,166
Kent B. Foster 163,100 2.89% 33.38 02/13/05 -- 3,423,364 8,675,477
24,800 0.44% 34.44 07/02/05 -- 536,922 1,360,557
Thomas W. White 63,500 1.12% 33.38 02/13/05 -- 1,332,824 3,377,638
35,300 0.62% 35.75 07/30/05 -- 793,375 2,010,409
Michael B. Esstman 63,500 1.11% 33.38 02/14/05 -- 1,332,824 3,377,638
Gerald K. Dinsmore 36,400 0.64% 33.38 02/14/05 -- 764,013 1,936,158
</TABLE>
(1) Each option was granted in tandem with a SAR, which will expire upon
exercise of the option. Under the LTIP, one-third of these grants vest
annually commencing one year after the date of grant.
45
<PAGE> 48
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1995. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) Common Stock on
December 29, 1995.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs at FY-End at FY-End ($)
Acquired Value ---------------------------- ---------------------------
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- ---------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Katherine J. Harless -- $ -- 16,733 21,587 $ 174,621 $ 229,704
John C. Appel 15,132 55,354 -- 82,468 -- 799,764
Kent B. Foster -- -- 251,331 299,569 2,836,272 3,071,409
Thomas W. White 19,800 227,700 105,566 142,134 1,227,717 1,428,689
Michael B. Esstman -- -- 49,166 106,834 526,500 1,141,425
Gerald K. Dinsmore 29,833 142,354 12,833 61,834 117,248 660,412
</TABLE>
Long-Term Incentive Plan - Awards in Last Fiscal Year
The LTIP provides for awards, currently in the form of stock options with
tandem SARs, other stock-based awards and dollar denominated awards, to
participating employees. The stock options and tandem SARs awarded under the
LTIP to the named executive officers are shown in the table on page 47.
The named executive officers are eligible to receive annual grants of
performance bonuses which are earned during a 36-month performance cycle.
Awards for the three-year performance cycle ending in 1995 were based on GTE's
financial performance during the relevant cycle as measured by GTE's average
Return on Equity (ROE) against pre-established target levels. In 1994, the
Executive Compensation and Organizational Structure Committee of the Board of
Directors of GTE (the Committee) established an additional measure of corporate
performance - operating cash flow margin (OCFM). To transition from awards
based solely on performance against ROE targets to awards based on a
combination of ROE and OCFM performance and to bring opportunities to company
levels, the Committee established a special performance period of two-years to
run concurrently with the final two years of the three-year ROE performance
cycle ending in 1995. The awards for the additional period were based on GTE's
performance against ROE and OCFM goals for the two-year period. The Committee
authorized grants for the three-year performance cycle ending in 1997. The
payments under this cycle will be based on GTE's performance against the ROE
and OCFM targets established for the full three-year cycle. 75% of the award is
determined based on ROE performance and 25% of the award will be determined
based on OCFM performance.
The Committee established minimum and target award opportunities for each cycle
based upon competitive practices. In establishing the targeted performance
objectives for ROE and OCFM, the Committee considered past performance, the
strategic goals of the GTE and the plans for implementing those goals. The
established targets are designed to facilitate implementing strategic plans and
improving performance.
At the time performance targets for the current LTIP cycles were established, a
Common Stock Unit account was set up for each participant in the LTIP. An
initial dollar amount for each account (target award) was determined based on
the competitive performance bonus grant practices of the market comparator
group. That amount was then divided by the average market price for GTE Common
Stock for the calendar week preceding the day the account was established to
determine the number of Common Stock Units in the account. The value of the
account increased or decreased based on the market price of the GTE Common
Stock. An amount equal to the dividends paid on an equivalent number of
shares of GTE Common Stock was added on each dividend payment date. This
46
<PAGE> 49
amount was then converted into a number of Common Stock Units obtained by
dividing the amount of the dividend by the average price of the GTE Common
Stock on the composite tape of the New York Stock Exchange on the dividend
payment date and added to the Common Stock Unit account. Ms. Harless and Messrs
Appel, Foster, White, Esstman and Dinsmore are each eligible to receive a cash
award under the LTIP. The number of Common Stock Units initially allocated in
1995 to the named executive officers' accounts and estimated future payouts
under the LTIP are shown in the following table:
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans (1)
-----------------------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Or Other Period
Number of Until
Shares, Units Maturation
Name Or Other Rights Or Payout Threshold (2) Target (3) Maximum (4)
- ------------------------ ---------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Katherine J. Harless 1,500 3 Years 315 1,577
John C. Appel 2,256 29 Months 462 2,308
4,700 3 Years 988 4,942
1,322 17 Months 270 1,352
1,865 24 Months 392 1,961
225 12 Months 47 237
Kent B. Foster 15,400 3 Years 3,527 17,633
2,415 30 Months 538 2,690
1,450 18 Months 310 1,548
610 6 Months 125 624
Thomas W. White 5,900 3 Years 1,351 6,755
2,495 29 Months 556 2,779
1,465 17 Months 313 1,564
370 5 Months 76 378
Michael B. Esstman 5,900 3 Years 1,241 6,204
Gerald K. Dinsmore 3,800 3 Years 799 3,996
</TABLE>
NOTES:
(1) It is not possible to predict future dividends and, accordingly, estimated
Common Stock Unit accruals in this table are calculated for illustrative
purposes only and are based upon the dividend rate and price of GTE Common
Stock at the close of business on December 29, 1995. The target award is
the dollar amount derived by multiplying the Common Stock Unit balance at
the end of the award cycle by the price of GTE Common Stock.
(2) The Threshold is the level of the average ROE and the average OCFM during
the relevant cycle which represents the minimum acceptable performance
level for both the ROE and OCFM performance measures. If the Threshold is
attained with respect to both performance measures, the award will be
equal to 20% of the combined target award for ROE and OCFM. Because ROE
and OCFM are separate performance measures, it is possible to receive an
award if the Threshold is achieved with respect to only one of the
performance measures. If the actual results for one, but not both,
performance measures is at the Threshold level, the portion of the award
determined by the measure performing at the Threshold level will be at 20%
of the target award for that performance measure, and no award will be
made for the portion of the award determined by the measure performing at
less than the Threshold level. However, if the actual results for both
performance measures are below the minimum acceptable performance level,
no award will be earned.
(3) The Target is the level of the average ROE and the average OCFM during the
cycle which represents outstanding performance for both the ROE and OCFM
performance measures. If the Target is attained
47
<PAGE> 50
with respect to both performance measures, the award will be equal to 100%
of the target award for ROE and OCFM. If the actual results for one,
but not both, performance measures is at the Target level, the portion
of the award determined by the measure performing at the Target level will
be at 100% of the target award for that performance measure, and the
portion of the award determined by the measure performing at less than
100% will be determined accordingly.
(4) This column has intentionally been left blank because it is not possible
to determine the maximum award until the award cycle has been completed.
The maximum amount of the award is limited by the amount the actual ROE
and the actual OCFM exceed the targeted ROE and the targeted OCFM. If
GTE's average ROE and OCFM during the cycle exceed their respective
performance targets, additional bonuses may be earned according to the
following schedule:
<TABLE>
<CAPTION>
Performance Increment Above
Maximum Performance Target Added Percentage to Maximum Awards
- --------------------------------------------------------------------------------
<S> <C> <C>
First and Second .1% +2%
Third and Fourth .1% +3%
Fifth and above .1% +4%
</TABLE>
For example, if average ROE and OCFM performance each exceed the ROE and OCFM
targets by 0.5%, respectively, the performance bonus will equal 114% of the
combined target award.
48
<PAGE> 51
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Foster, White,
Esstman and Dinsmore regarding benefits to be paid in the event of a change in
control of GTE (a Change in Control).
A Change in Control is deemed to have occurred if a majority of the members of
the Board do not consist of members of the incumbent Board (as defined in the
Agreements) or if, in any 12-month period, three or more directors are elected
without the approval of the incumbent Board. An individual whose initial
assumption of office occurred pursuant to an agreement to avoid or settle a
proxy or other election contest is not considered a member of the incumbent
Board. In addition, a director who is elected pursuant to such a settlement
agreement will not be deemed a director who is elected or nominated by the
incumbent Board for purposes of determining whether a Change in Control has
occurred. A Change in Control will not occur in the following situations: (1)
certain merger transactions in which there is at least 50% GTE shareholder
continuity in the surviving corporation, at least a majority of the members of
the board of directors of the surviving corporation consists of members of the
Board of GTE and no person owns more than 20% (or under certain circumstances,
a lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event these individuals
separate from service and have a "good reason" for leaving or are terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes, but is not limited to, the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the Executive Incentive
Plan (EIP) for the previous three years. The executive will also continue to
receive medical and life insurance coverage for up to two years and will be
provided with financial and outplacement counseling.
In addition, the Agreements with Messrs. Foster, White, Esstman and Dinsmore
provide that in the event of a separation from service, they will receive
service credit in the following amounts: two times years of service otherwise
credited if the executive has five or fewer years of credited service; 10 years
if credited service is more than five and not more than 10 years; and, if the
executive's credited service exceeds 10 years, the actual number of credited
years of service. These additional years of service will apply towards
vesting, retirement eligibility, benefit accrual and all other purposes under
the Supplemental Executive Retirement Plan (SERP) and the GTE Corporation
Executive Retired Life Insurance Plan (ERLIP). In addition, each executive
covered under an Agreement will be considered to have not less than 76 points
and 15 years of accredited service for the purpose of determining his or her
eligibility for early retirement benefits. The Agreements provide that there
will be no duplication of benefits.
Each of the agreements remain in effect until July 1, 1999 unless terminated
earlier pursuant to its terms. The agreements will be automatically renewed on
each successive July 1 unless, not later than December 31 of the preceding
year, one of the parties notifies the other that he does not wish to extend his
respective Agreement. If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.
49
<PAGE> 52
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings (integrated with social security as
described below) and years of service, is illustrated in the following table:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Final Average Years of Service
- -------------------- -------------------------------------------------------------------------------
Earnings 15 20 25 30 35
- -------------------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,460 $ 41,946 $ 52,433 $ 62,919 $ 73,406
200,000 42,335 56,446 70,558 84,669 98,781
300,000 64,085 85,446 106,808 128,169 149,531
400,000 85,835 114,446 143,058 171,669 200,281
500,000 107,585 143,446 179,308 215,169 251,031
600,000 129,335 172,446 215,558 258,669 301,781
700,000 151,085 201,446 251,808 302,169 352,531
800,000 172,835 230,446 288,058 345,669 403,281
900,000 194,585 259,446 324,308 389,169 454,031
1,000,000 216,335 288,446 360,558 432,669 504,781
1,200,000 259,835 346,446 433,058 519,669 606,281
1,500,000 325,085 433,446 541,808 650,169 758,531
2,000,000 433,835 578,446 723,058 867,669 1,012,281
</TABLE>
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains the GTE
Service Corporation Plan for Employees' Pensions (the Service Corporation
Plan), a noncontributory pension plan for the benefit of all GTE employees
based on years of service. Pension benefits to be paid from the Service
Corporation Plan and contributions to the Service Corporation Plan are related
to basic salary exclusive of overtime, differentials, incentive compensation
(except as otherwise described) and other similar types of payment. Under the
Service Corporation Plan, pensions are computed on a two-rate formula basis of
1.15% and 1.45% for each year of service, with the 1.15% service credit being
applied to that portion of the average annual salary for the five highest
consecutive years that does not exceed the Social Security Integration Level
(the portion of salary subject to the Federal Security Act), and the 1.45%
service credit being applied to that portion of the average annual salary that
exceeds said level. As of December 31, 1995, the credited years of service
under the plan for Ms. Harless is 23 and for Messrs. Appel, Foster, White,
Esstman and Dinsmore are 20, 25, 28, 26 and 20, respectively.
Under Federal law, an employee's benefits under a qualified pension plan, such
as the Service Corporation Plan, are limited to certain maximum amounts. GTE
maintains a SERP, which supplements the benefits of any participant in the
Service Corporation Plan, in an amount by which any participant's benefits
under the Service Corporation Plan are limited by law. In addition, the SERP
includes a provision permitting the payment of additional retirement benefits
determined in a similar manner as under the Service Corporation Plan on
remuneration accrued under management incentive plans as determined by the
Committee. SERP benefits are payable in a lump sum or an annuity.
50
<PAGE> 53
Executive Retired Life Insurance Plan
The ERLIP provides Messrs. Appel, Foster, White, Esstman and Dinsmore a
postretirement life insurance benefit of three times final base salary and
provides Ms. Harless a postretirement life insurance benefit of two and
one-half times final base salary. Upon retirement, ERLIP benefits may be paid
as life insurance, or optionally, an equivalent amount equal to the present
value of the life insurance amount (based on actuarial factors and the
interest rate then in effect), as a lump sum payment, as an annuity or as
installment payments.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for service on the Board.
51
<PAGE> 54
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 29, 1996:
<TABLE>
<CAPTION>
Name and Address of Shares of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
- --------------------------- --------------------------- -------------------- ----------------
<S> <C> <C> <C>
Common Stock of GTE GTE Corporation 6,500,000 100%
Southwest Incorporated One Stamford Forum shares of record
Stamford, Connecticut 06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1995:
<TABLE>
<CAPTION>
Title of Class Name of Director or Nominee (1) (2) (3)
- --------------------------- ------------------------------------------------------
<S> <C> <C>
Common Stock of GTE Richard M. Cahill 54,481
Corporation Gerald K. Dinsmore 29,667
Michael B. Esstman 107,586
Thomas W. White 119,761
---------------
311,495
===============
Executive Officers (1) (2) (3)
------------------------------------------------------
Katherine J. Harless 30,560
John C. Appel 9,412
Kent B. Foster 432,173
Thomas W. White 119,761
Michael B. Esstman 107,586
Gerald K. Dinsmore 29,667
---------------
729,159
===============
All directors and executive
officers as a group (1) (2)(3) 1,479,089
===============
</TABLE>
(1) Includes shares acquired through participation in GTE's Consolidated
Employee Stock Ownership Plan and/or the GTE Savings Plan.
(2) Included in the number of shares beneficially owned by Messrs. Cahill,
Dinsmore, Esstman, White, Appel, Foster and Ms. Harless and all directors
and executive officers as a group are 49,733; 27,267; 93,066; 106,699;
6,101; 367,865; 26,432 and 1,219,883 shares, respectively, which such
persons have the right to acquire within 60 days pursuant to stock
options.
(3) No director, nominee for director or executive officer owns as much as
one-tenth of one percent of the total outstanding shares of GTE Common
Stock, and all directors and executive officers as a group own less than
one-fifth of one percent of the total outstanding shares of GTE Common
Stock.
(c) There were no changes in control of the Company during 1995.
The Federal securities laws require the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
any equity securities of the Company.
52
<PAGE> 55
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required, all persons subject to these reporting requirements filed the
required reports on a timely basis. All of the Company's common stock is owned
by GTE and, to the Company's knowledge, none of such directors or executive
officers currently owns, or has ever owned, any shares of the Company's
registered preferred stock (which is the only registered class of the
Company's equity securities).
Item 13. Certain Relationships and Related Transactions
The Company's executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest. None of the Company's directors were involved
in any business relationships with the Company.
53
<PAGE> 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE Southwest Incorporated's financial
statements and report of independent accountants thereon in the
financial statements section included elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the financial
statements for the years ended December 31, 1995-1993 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1* Agreement of Merger, dated February 28, 1995, between GTE
Southwest Incorporated, Contel of Texas, Inc. and Contel of the
West, Inc. (Exhibit 2.1 of the Company's Report on Form 8-K,
dated December 1, 1995, and filed on December 4, 1995)
3* Articles of Incorporation and Bylaws (Exhibit 3 of the 1993 Form
10-K, File No. 1-7077)
4* Indenture between GTE Southwest Incorporated and Nationsbank of
Georgia, National Association, as Trustee, dated as of November
15, 1993 (Exhibit 4.1 of the Company's Registration Statement on
Form S-3, File No. 33-50939, filed with the Securities and
Exchange Commission on November 5, 1993)
10 Material Contracts - Agreements Between GTE and Certain
Executive Officers
12 Statements re: Calculation of the Ratio of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1995, the Company filed a report on Form 8-K, dated
November 9, 1995, under Item 5 "Other Events". Financial
information was filed with this report.
On December 4, 1995, the Company filed a report on Form 8-K, dated
December 1, 1995, under Item 5 "Other Events" and Item 7 "Financial
Statements, Pro Forma Financial information (Unaudited) and
Exhibits".
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commission as designated.
54
<PAGE> 57
GTE Southwest Incorporated
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Deductions
Balance at Charged to from Balance at
Beginning Charged to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:
December 31, 1995 $ 20,043 $ 33,136 $ 33,692 (2) $ 65,689 $ 21,182
================================================================================
December 31, 1994 $ 19,542 $ 34,868 $ 14,612 (2) $ 48,979 $ 20,043
================================================================================
December 31, 1993 $ 8,392 $ 22,663 $ 22,263 (2) $ 33,776 $ 19,542
================================================================================
Accrued restructuring costs for the
years ended (Note 3):
December 31, 1995 $ 156,734 $ -- $ -- $ 73,862 $ 82,872
================================================================================
December 31, 1994 $ 198,974 $ $ $ 42,240 $ 156,734
================================================================================
December 31, 1993 $ -- $ 198,974 $ -- $ -- $ 198,974
================================================================================
</TABLE>
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 4 to the financial statements included elsewhere herein.
55
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE SOUTHWEST INCORPORATED
-------------------------------------
(Registrant)
Date March 28, 1996 By Katherine J. Harless
--------------------- -------------------------------------
Katherine J. Harless
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Katherine J. Harless President March 28, 1996
- -------------------------- (Principal Executive Officer)
Katherine J. Harless
Gerald K. Dinsmore Senior Vice President - Finance and March 28, 1996
- -------------------------- Planning and Director
Gerald K. Dinsmore (Principal Financial Officer)
William M. Edwards, III Controller March 28, 1996
- -------------------------- (Principal Accounting Officer)
William M. Edwards, III
John C. Appel Director March 28, 1996
- --------------------------
John C. Appel
Richard M. Cahill Director March 28, 1996
- --------------------------
Richard M. Cahill
Michael B. Esstman Director March 28, 1996
- --------------------------
Michael B. Esstman
Thomas W. White Director March 28, 1996
- --------------------------
Thomas W. White
</TABLE>
56
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------ ------------------------------------------------------------------------------
<S> <C>
10 Material Contracts - Agreements Between GTE and Certain Executive Officers
12 Statements re: Calculation of the Ratio of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated as of January 8, 1996, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
the "Executive".
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the Company,
but desires assurance that he will not be materially disadvantaged by a change
in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued service
to the Company and the mutual agreements herein contained, the Company and the
Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. The Company shall not be
required to provide any benefits to the Executive pursuant to this Agreement
unless a Qualifying Termination occurs before the Agreement expires in
accordance with Section 6.1 hereof. For purposes of this Agreement, a
Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good
Reason arises, and (B) the Executive terminates employment
with the Company within (I) six months after the Good Reason
arises or (II) two years after the Change in Control,
whichever occurs later;
provided, that a Qualifying Termination shall not occur if the Executive's
employment with the Company terminates by reason of the Executive's Retirement,
Disability, or death. A Qualifying Termination may occur even though the
Executive retires from employment with the Company other than by reason of
Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of securities of
GTE by any Person, immediately after which such Person,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE
representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time,
would cause the Person to constitute an "Acquiring Person" (as
such term is defined in the Rights Plan); provided that, in
determining whether a Change in Control has occurred, the
acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change
in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the
"Incumbent Board" (as defined below) then serving as members
of the Board, are elected within any single 12-month period to
serve on the Board; provided that an individual whose election
or nomination for election is approved as a result of either
an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the Securities Exchange Act of
1934, as amended from time to time) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest"),
including by
<PAGE> 2
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have
been approved by a majority of the Incumbent Board for
purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board"
shall mean individuals who, as of the close of business on
April 19, 1995, are members of the Board; provided that, if
the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at
least three-quarters of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further that no
individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other
actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving
unless
(A) the shareholders of GTE, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation,
or reorganization, at least 50 percent of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger, consolidation, or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation, or reorganization
constitute at least a majority of the board of directors of
the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary
of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any
subsidiary of GTE, or any Person who, immediately prior to
such merger, consolidation, or reorganization, had Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of
"Change in Control") or more of the Voting Power) has
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition
of "Change in Control") or more of the combined Voting Power
of the Surviving Corporation's then outstanding voting
securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of GTE to any Person (other
than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether
such right or obligation is exercisable or effective
immediately or only after the passage of time) pursuant to any
agreement, arrangement, or understanding (whether or not in
<PAGE> 3
writing) or upon the exercise of conversion rights, exchange
rights, rights (other than the rights granted pursuant to the
Rights Plan), warrants or options, or otherwise; provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," securities tendered pursuant to a tender
or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement, or understanding
(whether or not in writing); provided that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (ii) if the agreement,
arrangement, or understanding to vote such security (A) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations of the
Securities Exchange Act of 1934, as amended from time to time,
and (B) is not also then reported by such person on Schedule
13D under the Securities Exchange Act of 1934, as amended from
time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement, or understanding
(whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise
formed a group for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and State Street Bank and Trust Company (now administered by
the First National Bank of Boston), as it may be amended from time to time, or
any successor thereto.
"Voting Power" means the voting power of all securities of GTE then
outstanding generally entitled to vote for the election of directors of GTE.
Section 1.3. Termination for Cause. The Company shall have Cause
to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a notice, consisting of a copy of a resolution duly
adopted by the affirmative vote of not less than three quarters of the entire
membership of GTE's Board of Directors at a duly held meeting of the Board of
Directors (with reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board of Directors)
("Notice of Termination"), finding that the Executive has engaged in the
conduct set forth above in this Section 1.3 and specifying the particulars
thereof in detail. GTE's Board of Directors may not delegate or assign its
duties under this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment,
represents a demotion from the Executive's status or
position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment,
are inconsistent with the Executive's status or position(s) in
effect immediately before the Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the
Executive's employment for Cause or as a result of the
Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be
equal to his base salary plus the greater of (i) the most
recent award that he has earned under the GTE Corporation
Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs)). For
<PAGE> 4
purposes of this paragraph (d), the Executive's "Average
Percentage" means the average of the Executive's Annual
Percentages for the Determination Years. For purposes of this
paragraph (d), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a
percentage), the numerator of which is the EIP award earned by
the Executive for such Determination Year, and the denominator
of which is the annual value of the normal payment under the
EIP for the Executive's salary level (such annual value and
normal payment being those that were in effect under the EIP
for such Determination Year for the Executive's salary level
for such Determination Year). For purposes of this paragraph
(d), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Change in
Control occurs (or, if less, the number of those three plan
years during which the Executive was a participant in the
EIP);
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan in
which the Executive is participating at the time of the Change
in Control (or plans or arrangements providing the Executive
with substantially equivalent benefits) other than as a result
of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on
at least as favorable a basis as was the case on the date of
the Change in Control, or that would materially reduce the
Executive's benefits in the future under the Plan or deprive
him of any material benefits that he enjoyed at the time of
the Change in Control, except to the extent that such action
or inaction by the Company is required by the terms of the
Plan as in effect immediately before the Change in Control, or
is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal
Revenue Code, and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
(h) the Company's failure to provide and credit the Executive with
the number of days of paid vacation, holiday, or leave to
which he is then entitled in accordance with the Company's
normal vacation, holiday, or leave policy in effect
immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 25 miles of where his principal
office was located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company as provided by
Section 6.3 hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 1.3 hereof
or that does not afford the Executive the procedural
protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including this
Agreement) between it and the Executive.
Notwithstanding the foregoing, no action by the Company shall give rise to a
Good Reason if it results from the Executive's termination for Cause,
Retirement, or death, and no action by the Company specified in paragraphs (a)
through (d) of the preceding sentence shall give rise to a Good Reason if it
results from the Executive's Disability. A Good Reason shall not be deemed to
be waived by reason of the Executive's continued employment as long as the
termination of the Executive's employment occurs within the time prescribed by
Section 1.1(b)(ii)(B) hereof. For purposes of this Section 1.4, "Plan" means
any compensation plan, such as an incentive, stock option, or restricted stock
plan, or any employee benefit plan, such as a thrift, pension, profit-sharing,
stock bonus, long-term performance award, medical, disability, accident, or
life insurance plan, or a relocation plan or policy, or any other plan, program
or policy of the Company that is intended to benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or
injury) on a full- time basis for six consecutive months.
Section 1.7. Notice. If a Change in Control occurs, the Company
shall notify the Executive of the
<PAGE> 5
occurrence of the Change in Control within two weeks after the Change in
Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the
Base Amount. The Base Amount shall be an amount equal to the
greater of:
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the
Executive's Average Percentage of the annual value (i.e., the
dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs). For purposes of this paragraph
(A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination
Years. For purposes of this paragraph (A), the Executive's
"Annual Percentage" for each Determination Year means a
fraction (expressed as a percentage), the numerator of which
is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual
value of the normal payment under the EIP for the Executive's
salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year
for the Executive's salary level for such Determination Year).
For purposes of this paragraph (A), a "Determination Year"
means each of the last three EIP plan years ending before the
date on which the Change in Control occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II)
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP
immediately before the date on which the Qualifying
Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying
Termination occurs). For purposes of this paragraph (B), the
Executive's "Average Percentage" means the average of the
Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual
Percentage" for each Determination Year means a fraction
(expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and
the denominator of which is the annual value of the normal
payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in
effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For
purposes of this paragraph (B), a "Determination Year" means
each of the last three EIP plan years ending before the date
on which the Qualifying Termination occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant
to subsection (a) of this Section 2.1 in a lump sum within 30
days of the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs); such coverage shall end upon the earlier of
(a) the expiration of 24 months after the Qualifying Termination or (b)(i) with
respect to medical insurance coverage, the date on which the Executive first
becomes eligible for medical insurance coverage provided by a firm that employs
him following the Qualifying Termination, or (ii) with respect to life
insurance coverage, the date on which the Executive first becomes eligible for
life insurance coverage provided by such firm.
<PAGE> 6
Section 2.3. Outplacement Counseling. If the Executive incurs a
Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during 1995. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the
outplacement counseling that this Section 2.3 otherwise requires the Company to
provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility,
benefit accrual, and all other purposes, under all employee
benefit plans sponsored by the Company (including, but not
limited to, health, life insurance, pension, savings, stock,
and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he
participated immediately before the Change in Control, for 24
months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company,
including the GTE Service Corporation Supplemental Executive
Retirement Plan ("SERP"), the Executive's compensation shall
include the amount payable to the Executive pursuant to
Section 2.1 hereof, and for purposes of this subsection (b),
the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount
payable to the Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of
determining his eligibility for early retirement benefits
under the Company's defined benefit pension plans (including,
but not limited to, the SERP) and for purposes of determining
his eligibility for benefits under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this
Section 2.5 and the compensation recognized under subsection (b) of this
Section 2.5, nothing in this Section 2.5 shall prevent the Executive from
receiving any benefits to which the Executive is entitled under any defined
benefit or defined contribution pension plan maintained by the Company,
including the SERP (as such benefits are modified by this Agreement) in any
form permitted by such plans (including but not limited to a lump-sum
distribution) immediately following the Executive's Qualifying Termination. To
the extent that the Company's tax-qualified retirement plans cannot provide the
benefits specified by this Section 2.5 without jeopardizing the tax
qualification of such plans, the Company shall provide such benefits under the
SERP.
Section 2.6. Nonduplication.
(a) Nothing in this Agreement shall require the Company to make
any payment or to provide any benefit or service credit that
GTE or the Company is otherwise required to provide under any
other contract, agreement, policy, plan, or arrangement.
Section 2.7. Prior Agreement. This Agreement supersedes any prior
Executive Severance Agreement entered into between the Company and the
Executive ("Prior Agreement"). On and after the date of this Agreement, such
Prior Agreement shall have no force or effect.
<PAGE> 7
ARTICLE III
EFFECT ON HUMAN RESOURCES POLICY 104
Section 3.1. Effect on Policy 104. If the Executive becomes
entitled to receive benefits hereunder, the Executive shall not be entitled to
any benefits under GTE Human Resources Policy 104, as amended from time to
time, or any successor policy, or under any other Company severance or salary
continuation policy (including but not limited to any benefits pursuant to an
involuntary separation program or similar program maintained under a pension
plan sponsored by the Company).
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of
his continued service to the Company or severance payments in consideration of
his past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal fees
and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal
fees and expenses.
Section 5.3. Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. The amount of any payment provided for
herein shall not be reduced by any remuneration that the Executive may earn
from employment with another employer or otherwise following his Qualifying
Termination.
Section 5.4. Interest. If the Company fails to make, or cause to
be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest
rate shall be equal to 120 percent of the prime rate as reported by The Wall
Street Journal for the first business day of each month, effective for the
ensuing month. The interest rate shall be adjusted at the beginning of each
month.
Section 5.5. Authority. The execution of this Agreement has been
authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 1999, if no Change in Control has occurred before that date; (b)
the termination of the Executive's employment with the Company for any reason
prior to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good
<PAGE> 8
Reason, following a Change in Control and the Company's and the Executive's
fulfillment of all of their obligations hereunder; and (d) the expiration
following a Change in Control of two years and six months and the fulfillment
by the Company and the Executive of all of their obligations hereunder.
Notwithstanding the foregoing, commencing on July 1, 1999, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall supersede the
terms of any plan or arrangement (other than this Agreement) that is affected
by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to
setoff against any obligations or to assignment by operation of law. Any
attempt, voluntary or involuntary, to effect any action specified in the
immediately preceding sentence shall be void. However, this Section 6.6 shall
not prohibit the Executive from designating one or more persons, on a form
satisfactory to the Company, to receive amounts payable to him under this
Agreement in the event that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this Agreement
shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, One Stamford Forum, Stamford,
Connecticut 06904, Attention: Corporate Secretary. Notices to the Executive
shall be deemed given when personally delivered or sent by certified or
registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall be
effective unless in writing and signed by both the Company and the Executive.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this
Agreement or any subsequent breach. No failure on the part of either the
Company or the Executive to exercise, and no delay in exercising, any right or
remedy
<PAGE> 9
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain
in full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to cause
any agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Definitions. All upper case terms used herein shall
have the meaning set forth in this Agreement.
Section 6.13. Captions. The captions to the respective articles
and sections of this Agreement are intended for convenience of reference only
and have no substantive significance.
Section 6.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: J. Randall MacDonald
----------------------
J. Randall MacDonald
Senior VP-Human Resources
and Administration
By: Marianne Drost
----------------------
Marianne Drost
VP and Associate General
Counsel-Finance & Corporate
Secretary
<PAGE> 1
Exhibit 12
GTE Southwest Incorporated
STATEMENTS OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1995(a) 1995 1994(b) 1994 1993(c) 1993 1992 1991
--------- --------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed
charges:
Income before extraordinary charges $ 180,991 $ 195,289 $ 144,762 $ 184,528 $ 171,814 $ 55,373 $ 190,759 $ 141,009
Add - Income taxes (benefit) 92,152 99,437 71,146 95,068 61,684 (12,731) 93,692 38,487
- Fixed charges 68,925 68,925 70,761 70,761 91,107 91,107 93,355 98,968
--------- --------- --------- --------- --------- --------- --------- ---------
Adjusted earnings: $ 342,068 $ 363,651 $ 286,669 $ 350,357 $ 324,605 $ 133,749 $ 377,806 $ 278,464
========= ========= ========= ========= ========= ========= ========= =========
Fixed charges:
Interest expense $ 63,848 $ 63,848 $ 65,913 $ 65,913 $ 85,044 $ 85,044 $ 87,561 $ 93,761
Portion of rent expense
representing interest 5,077 5,077 4,848 4,848 6,063 6,063 5,794 5,207
--------- --------- --------- --------- --------- --------- --------- ---------
Adjusted fixed charges: $ 68,925 $ 68,925 $ 70,761 $ 70,761 $ 91,107 $ 91,107 $ 93,355 $ 98,968
========= ========= ========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED
CHARGES: 4.96 5.28 4.05 4.95 3.56 1.47 4.05 2.81
</TABLE>
(a) Excludes after-tax gains of approximately $14 million related to the sale
of the Company's unconsolidated investment in Metropolitan Houston Paging
Service, Inc. and non-strategic local exchanges in Texas.
(b) Results for 1994 exclude after-tax gains of approximately $40 million
related to the sale of non-strategic local exchanges in Oklahoma and
Arizona.
(c) Results for 1993 exclude an after-tax restructuring charge of
approximately $123 million for the implementation of a re-engineering
plan, a one-time after-tax charge of approximately $6 million related to
the enhanced early retirement and voluntary separation programs offered to
eligible employees in 1993, and an after-tax gain of approximately
$13 million related to Contel of the West, Inc.'s sale of non-strategic
local exchanges in Utah.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 24, 1996, on the financial statements and
supporting schedule and exhibit of GTE Southwest Incorporated included in this
Form 10-K, into the Registration Statement filed on Form S-3 (File No.
33-64795).
Dallas, Texas
March 28, 1996
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,825
<SECURITIES> 0
<RECEIVABLES> 299,020
<ALLOWANCES> 21,182
<INVENTORY> 20,452
<CURRENT-ASSETS> 393,778
<PP&E> 4,854,212
<DEPRECIATION> 2,887,706
<TOTAL-ASSETS> 2,446,560
<CURRENT-LIABILITIES> 489,163
<BONDS> 827,082
<COMMON> 650,000
8,390
7,600
<OTHER-SE> 56,119
<TOTAL-LIABILITY-AND-EQUITY> 2,446,560
<SALES> 1,553,441
<TOTAL-REVENUES> 1,553,441
<CGS> 599,312
<TOTAL-COSTS> 1,224,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,218
<INCOME-PRETAX> 294,726
<INCOME-TAX> 99,437
<INCOME-CONTINUING> 195,289
<DISCONTINUED> 0
<EXTRAORDINARY> (549,438)
<CHANGES> 0
<NET-INCOME> (354,149)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
