<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8609
PACIFIC TELESIS GROUP
I.R.S. Employer No. 94-2919931
A Nevada Corporation
130 Kearny Street, San Francisco, California 94108
Telephone - Area Code (415) 394-3000
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 .
--- ---
At October 31, 1994, 424,065,165 common shares were outstanding.
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Review Report of Independent Accountants .............. 3
Condensed Consolidated Statements of Income ........... 4
Condensed Consolidated Balance Sheets ................. 6
Condensed Consolidated Statements of
Shareowners' Equity ............................... 7
Condensed Consolidated Statements of Cash Flows ....... 8
Notes to Condensed Consolidated Financial Statements .. 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .................... 16
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K ........................ 30
SIGNATURE ........................................................ 31
- ---------
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners
of Pacific Telesis Group:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Telesis Group and Subsidiaries as of September 30, 1994, and the
related condensed consolidated statements of income for the three- and nine-
month periods ended September 30, 1994 and 1993, and the condensed
consolidated statements of shareowners' equity and cash flows for the nine-
month periods ended September 30, 1994 and 1993. These financial statements
are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Telesis Group and
Subsidiaries as of December 31, 1993, and the related consolidated statements
of income, shareowners' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 3, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Coopers & Lybrand L.L.P.
San Francisco, California
November 14, 1994
3
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
OPERATING REVENUES ---------- ---------- ---------- ----------
Local service ................ $ 875 $ 880 $ 2,576 $ 2,610
Network access
Interstate ................. 400 416 1,209 1,224
Intrastate ................. 192 174 534 507
Toll service ................. 498 520 1,502 1,553
Other service revenues........ 364 354 1,058 1,053
---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES ..... 2,329 2,344 6,879 6,947
---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of products and services 464 475 1,415 1,459
Customer operations and
selling expenses ........... 452 453 1,336 1,317
General, administrative, and
other expenses ............. 360 415 1,096 1,211
Restructuring charges ........ - - - 413
Depreciation and amortization 450 430 1,334 1,302
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES ..... 1,726 1,773 5,181 5,702
---------- ---------- ---------- ----------
OPERATING INCOME ............. 603 571 1,698 1,245
Interest expense ............. 107 114 336 361
Miscellaneous income ......... 12 11 36 43
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES................ 508 468 1,398 927
Income taxes ................. 194 161 524 331
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS.................. 314 307 874 596
Income from spin-off
operations, net of tax
(Notes A and B)............. - 16 23 15
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES .................... 314 323 897 611
Cumulative effect of
accounting changes ......... - - - (1,724)
---------- ---------- ---------- ----------
NET INCOME (LOSS) ............ $ 314 $ 323 $ 897 $(1,113)
========== ========== ========== ==========
(Continued)
4
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in millions, except per share amounts)
(Unaudited)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE:
Income from continuing
operations .............. $ 0.74 $ 0.73 $ 2.06 $ 1.45
Income from spin-off
operations .............. - 0.04 0.06 0.03
---------- ---------- ---------- ----------
Income before cumulative
effect of accounting
changes ................. 0.74 0.77 2.12 1.48
Cumulative effect of
accounting changes ...... - - - (4.19)
---------- ---------- ---------- ----------
Net income (loss) ......... $ 0.74 $ 0.77 $ 2.12 $ (2.71)
========== ========== ========== ==========
Dividends per share ......... $ 0.545 $ 0.545 $ 1.635 $ 1.635
Average shares outstanding
(thousands) ............... 424,065 417,215 423,937 411,481
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
5
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
September 30, December 31,
1994 1993
------------- ------------
ASSETS: (Unaudited)
Cash and cash equivalents ................... $ 51 $ 69
Accounts receivable -(net of allowances for
uncollectibles of $145 and $138 in 1994 and
1993, respectively) ....................... 1,559 1,548
Prepaid expenses and other current assets.... 982 1,029
----------- -----------
Total current assets ........................ 2,592 2,646
----------- -----------
Property, plant, and equipment - at cost .... 26,810 26,607
Less: accumulated depreciation ........... (10,435) (9,961)
----------- -----------
Property, plant, and equipment - net ........ 16,375 16,646
----------- -----------
Net assets of spin-off operations
(Notes A and B) ........................... - 2,874
----------- -----------
Deferred charges and other noncurrent assets. 1,326 1,271
----------- -----------
TOTAL ASSETS ................................ $ 20,293 $ 23,437
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY:
Accounts payable and accrued liabilities .... $ 1,771 $ 1,645
Debt maturing within one year ............... 218 595
Other current liabilities ................... 1,164 1,168
----------- -----------
Total current liabilities.................... 3,153 3,408
----------- -----------
Long-term obligations ....................... 4,934 5,129
----------- -----------
Deferred income taxes ....................... 1,627 1,598
----------- -----------
Other noncurrent liabilities and
deferred credits .......................... 5,399 5,516
----------- -----------
Commitments and contingencies (Notes C and D)
Total shareowners' equity.................... 5,180 7,786
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY ... $ 20,293 $ 23,437
=========== ===========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(Dollars in millions)
(Unaudited)
For the 9 Months Ended
September 30,
----------------------
1994 1993
-------- --------
COMMON STOCK
Balance at beginning of period ............... $ 43 $ 43
-------- --------
Balance at end of period ..................... 43 43
-------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period ............... 6,372 5,220
Spin-off stock distribution (Note B).......... (2,901) -
Issuance of shares ........................... 22 67
Other changes ................................ (4) 11
-------- --------
Balance at end of period ..................... 3,489 5,298
-------- --------
REINVESTED EARNINGS
Balance at beginning of period ............... 2,040 4,459
Net income (loss) ............................ 897 (1,113)
Dividends declared ........................... (693) (679)
Other changes................................. (12) (9)
-------- --------
Balance at end of period ..................... 2,232 2,658
-------- --------
TREASURY STOCK
Balance at beginning of period ............... (283) (1,011)
Issuance of shares ........................... 29 679
-------- --------
Balance at end of period ..................... (254) (332)
-------- --------
DEFERRED COMPENSATION - LESOP TRUST
Balance at beginning of period ............... (386) (460)
Cost of trust shares allocated
to employee accounts ....................... 56 57
-------- --------
Balance at end of period ..................... (330) (403)
-------- --------
TOTAL SHAREOWNERS' EQUITY ...................... $ 5,180 $ 7,264
======== ========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
7
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited) For the 9 Months Ended
September 30,
----------------------
1994 1993
CASH FROM (USED FOR) OPERATING ACTIVITIES: --------- ---------
Net income (loss)................................... $ 897 $(1,113)
Adjustments to net income (loss):
(Income) from spin-off operations (Note A)........ (23) (15)
Cumulative effect of accounting changes .......... - 1,724
Restructuring charges ............................ - 413
Depreciation and amortization .................... 1,334 1,302
Deferred income taxes ............................ (3) (34)
Changes in operating assets and liabilities:
Accounts receivable ............................ (12) (78)
Prepaid expenses and other current assets ...... 17 (51)
Deferred charges and other noncurrent assets ... 2 81
Accounts payable and accrued liabilities ....... 104 33
Other current liabilities....................... (4) (78)
Noncurrent liabilities and deferred credits .... (66) (227)
Other adjustments, net ........................... (84) (70)
--------- ---------
Cash from operating activities of continuing
operations........................................ 2,162 1,887
--------- ---------
CASH FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant, and equipment ........ (1,060) (1,226)
Net investment in spin-off operations............... - (972)
Decrease in net receivable from
spin-off operations .............................. 33 796
Other investing activities, net .................... (6) 61
--------- ---------
Cash used for investing activities ................. (1,033) (1,341)
--------- ---------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common and
treasury shares .................................. 124 721
Proceeds from issuance of long-term debt ........... 10 2,059
Retirements of long-term debt ...................... (1) (2,188)
Dividends paid ..................................... (676) (547)
Decrease in short-term borrowings, net ............. (588) (498)
Other financing activities, net .................... (16) (101)
--------- ---------
Cash used for financing activities .................
(1,147) (554)
--------- ---------
Decrease in cash and cash equivalents .............. (18) (8)
Cash and cash equivalents at January 1 ............. 69 74
--------- ---------
Cash and cash equivalents at September 30 .......... $ 51 $ 66
========= =========
(Continued)
8
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in millions)
(Unaudited)
For the 9 Months Ended
September 30,
----------------------
1994 1993
- ----------------------------------------------------------------------------
Cash payments for:
Interest ......................................... $ 371 $ 394
Income taxes ..................................... $ 527 $ 517
- ----------------------------------------------------------------------------
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
9
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Telesis Group (the "Corporation") and its wholly and majority-
owned subsidiaries. The Corporation includes a holding company, Pacific
Telesis; its telephone subsidiaries: Pacific Bell and its subsidiaries,
Pacific Bell Directory, Pacific Bell Information Services and Pacific Bell
Mobile Services, and Nevada Bell (the "Telephone Companies"); and several
other units. All significant intercompany balances and transactions have
been eliminated in consolidation.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC") applicable to interim financial information.
Certain information and footnote disclosures included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in these interim statements
pursuant to such SEC rules and regulations. Management recommends that
these interim financial statements be read in conjunction with both the
Corporation's 1993 annual report on Form 10-K and its 1994 Proxy Statement
that includes the audited 1993 financial statements.
In management's opinion, the Condensed Consolidated Financial Statements
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for each interim period shown. The Condensed Consolidated
Financial Statements have been reviewed by Coopers & Lybrand L.L.P.,
independent accountants. Their report is on page 3.
The Condensed Consolidated Financial Statements have been reclassified to
conform to the current presentation. The Corporation's previous interests
in the operating results and net assets of AirTouch Communications
("AirTouch") are classified separately as "spin-off operations." (See
Note B - "Spin-off" following.) These operations are excluded from
amounts reported for the Corporation's revenues, expenses, assets,
liabilities, and cash flows. Prior intercompany transactions with these
operations which were previously eliminated in consolidation are now
reflected in the Corporation's financial statements. Financial
information presented for spin-off operations in the Condensed
Consolidated Financial Statements has been prepared solely for the purpose
of reporting Pacific Telesis Group results.
10
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accounting Under Regulation
The Telephone Companies account for the economic effects of regulation
under Statement of Financial Accounting Standards No. 71 ("SFAS 71"),
"Accounting for the Effects of Certain Types of Regulation." SFAS 71
requires the Telephone Companies to reflect the rate actions of regulators
in their financial statements when appropriate. Regulators sometimes
include costs in allowable costs for ratemaking in a period other than the
period in which those costs would be charged to expense by an unregulated
enterprise. These timing differences can create "regulatory assets" or
"regulatory liabilities" recorded by the Telephone Companies. The
regulatory assets and liabilities included in the Corporation's
consolidated balance sheets are listed and discussed below:
September 30, December 31,
1994 1993
-----------------------------------------------------------------------
(Dollars in millions)
Regulatory assets (liabilities) due to:
Deferred pension costs* .................. $ 387 $ 340
Unamortized debt redemption costs** ...... 348 357
Deferred compensated absence costs* ...... 221 227
Unamortized purchases of property, plant,
and equipment under $500 ............... 116 141
Deferred income taxes*** ................. (199) (238)
Other .................................... 56 71
-------- --------
Total .................................... $ 929 $ 898
-----------------------------------------------------------------------
* Included primarily in "deferred charges and other noncurrent assets"
on the Corporation's balance sheet.
** Reflected as a reduction of "long-term obligations."
*** Included in "other current liabilities" and "other noncurrent
liabilities and deferred credits."
Deferred pension costs above reflect an order by the California Public
Utilities Commission (the "CPUC") requiring Pacific Bell to use the
"aggregate cost method" for its intrastate operations. These deferred
costs represent differences between Pacific Bell's intrastate pension
costs calculated using this actuarial method, subject to Internal Revenue
Service and other limitations, and costs determined under the provisions
of Statement of Financial Accounting Standards No. 87 ("SFAS 87"),
"Employers' Accounting for Pensions," and ("SFAS 88"), "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits."
11
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
When debt is refinanced before maturity, Pacific Bell amortizes to expense
any difference between net book value and redemption price evenly over the
term of the replacing issue for its intrastate operations, in accordance
with the ratemaking treatment of such costs by the CPUC. These costs are
expensed as incurred for interstate operations.
In prior years, the CPUC and the Federal Communications Commission (the
"FCC") changed the required accounting for the costs of compensated
absences, such as vacation days, from a cash basis to an accrual basis. A
transition liability for earned, but unused, compensated absence days is
being amortized to expense over periods prescribed by each regulator.
However, the CPUC continues to require Pacific Bell to recognize certain
compensated absence costs on a cash basis for ratemaking. The above
regulatory asset for compensated absences reflects those costs which have
been deferred in accordance with ratemaking treatment.
In 1989 and 1990, the FCC and the CPUC, respectively, increased the
threshold for directly expensing purchases of property, plant, and
equipment from $200 to $500. Purchases of less than $500 which were
previously capitalized are being amortized to expense over periods
prescribed by regulators.
Specific provisions of Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," require regulated companies
to record a regulatory asset or a regulatory liability when recognizing
deferred income taxes if it is probable that these deferred taxes will be
reflected in future rates.
In addition to the regulatory assets and liabilities described above, the
carrying amount of property, plant, and equipment is also affected by the
actions of regulators. Property, plant, and equipment is carried at cost.
The cost of self-constructed plant includes employee wages and benefits,
materials, and other costs. Regulators allow the Telephone Companies to
accrue an allowance for funds used during construction, which includes
both debt and equity components, as a cost of constructing certain plant
and as an item of miscellaneous income. This income is not realized in
cash currently, but is expected to be realized over the service lives of
the related plant.
Expenditures in excess of $500 that increase the capacity, operating
efficiency or useful life of an individual asset are capitalized.
Expenditures for maintenance and repairs are charged to expense. When
retired, the original cost of depreciable telephone plant is charged to
accumulated depreciation.
12
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Depreciation of telephone plant is computed primarily using the remaining-
life method, essentially a form of straight-line depreciation, using
depreciation rates prescribed by state and federal regulatory agencies.
Depreciation decisions are made by regulators after deliberation and
consideration of numerous factors. Regulators have prescribed the
following depreciable lives for each category of property, plant, and
equipment:
Depreciable Lives*
--------------------------------------------------------------------
(in years)
Buildings ....................................... 30 to 57
Cable and conduit ................................ 10 to 30
Central office equipment ......................... 9 to 16.5
Furniture, equipment, and other .................. 5.5 to 20
--------------------------------------------------------------------
* excludes Nevada Bell
Unregulated enterprises may have selected shorter depreciable lives for
similar assets. At this time, the Corporation has not determined what
depreciable lives it might otherwise have selected or what the cumulative
effect on its financial statements would have been had shorter lives been
used. Two other telephone regional holding companies ("RHCs") have
discontinued the application of SFAS 71 regulatory accounting and have
recorded the cumulative effect of using shorter depreciable lives for
their telephone plant. If Pacific Bell were to discontinue the
application of SFAS 71 and adopt similar depreciable lives and use similar
methodologies as these other two RHCs to calculate the cumulative effect,
the reduction in the carrying amount of the Corporation's property, plant,
and equipment would be between $3 and $5 billion.
13
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
B. SPIN-OFF
Effective April 1, 1994, the Corporation spun off to shareowners its
domestic and international cellular, paging, and other wireless operations
in a one-for-one stock distribution of its 86 percent interest in
AirTouch. The stock distribution was recorded at the carrying amount of
the net assets of spin-off operations. As a result, the Corporation's
total assets and shareowners' equity were each reduced by $2.9 billion
during the nine-month period ended September 30, 1994. The stock
distribution itself is a noncash transaction which did not affect the
Corporation's cash flow statement.
Under a separation agreement, any unrecorded non-tax contingent
liabilities that become certain after the spin-off date will be allocated
based on origin of the claim, and acts by, or benefits to, the Corporation
or AirTouch. In addition, the Corporation's responsibilities terminate in
connection with any future obligations under AirTouch's joint venture
agreement with Cellular Communications, Inc., and under various financial
instrument contracts. As of December 31, 1993, these financial
instruments included foreign currency swap and forward contracts with face
amounts totaling $291 million.
C. PRIOR YEAR ACCOUNTING CHANGES AND RESTRUCTURING CHARGES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other than Pensions," and Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for
Postemployment Benefits." These new rules require a change from the cash
to the accrual method of accounting for these costs. The cumulative
after-tax effects of applying the new rules to prior years were recognized
in first quarter 1993 by one-time charges of $1.724 billion. The charges
are net of deferred income tax benefits of $1.155 billion and reduced
earnings applicable to continuing operations by $4.19 per share for the
nine-month period ended September 30, 1993. Under decisions by the CPUC,
Pacific Bell was granted $100 million in 1994 for partial recovery of its
higher costs under SFAS 106. Two customer advocacy groups challenged the
recovery ordered. In October 1994, the CPUC ordered a rehearing to
determine if Pacific Bell should continue to recover these costs. The
CPUC's order held that related revenues collected after October 12, 1994
are subject to refund.
As previously reported, the Corporation recorded pre-tax restructuring
charges during first quarter 1993 relating to its planned disposal of real
estate assets, the spin-off of wireless operations, and other
restructuring activities. Overall, these charges reduced income from
continuing operations for the nine-month period ended September 30, 1993
by $258 million, or $.63 per share.
14
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
D. LOAN GUARANTEE CONTINGENCY
In June 1990, Prime Cable of Chicago, Inc. ("Prime Cable") acquired
certain Chicago cable television properties from Group W. The
Corporation, through its PacTel Cable subsidiary, holds options to
purchase up to a 75 percent interest in Prime Cable. TC Cable, Inc.
("TC Cable") now holds this interest. PacTel Capital Funding, a wholly
owned subsidiary of the Corporation, has guaranteed bank financing used by
TC Cable and its parent corporation to acquire this interest. The
guarantees cover initial loan amounts of $60 million as well as interest
accruing on the loans which will be added to the outstanding loan balances
up to an aggregate of $136 million. In the Corporation's opinion, the
likelihood that it will be required to pay principal or interest on this
debt under these guarantees is remote.
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussions and data compare the results of operations of
Pacific Telesis Group (the "Corporation") for the three- and nine-month
periods ended September 30, 1994 to the same periods in 1993. The
Corporation's previous interests in the operating results of wireless
operations which were spun off to shareowners on April 1, 1994 are classified
separately as "spin-off operations" in the accompanying financial statements.
(See Note B - "Spin-off" on page 14.) These operations are excluded from the
reported amounts of the Corporation's revenues and expenses. The
Corporation's "continuing operations" include Pacific Bell and Nevada Bell
(the "Telephone Companies"), along with several other units. Results for the
first nine months of 1994 for continuing operations may not be indicative of
results for the full year. (See discussions of "Pending Regulatory Issues"
beginning on page 25.)
A summary of supplemental financial and operating data is shown below:
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
% %
Selected Operating Data* 1994 1993 Change 1994 1993 Change
- ----------------------------------------------------------------------------
Return on shareowners'
equity (%)................ 24.1 22.4 7.6 22.7 -25.4 -
Operating ratio (%)......... 74.1 75.6 -2.0 75.3 82.1 -8.3
Revenues per employee
($ in thousands).......... 44 42 4.8 128 123 4.1
Total employees at
September 30.............. 53,162 55,938 -5.0 - - -
Telephone Companies'
employees per ten thousand
thousand access lines**... 32.8 35.9 -8.6 - - -
- ----------------------------------------------------------------------------
* continuing operations
** excludes Pacific Bell Directory employees
Earnings
- --------
Earnings reflect a modest but consistent improvement in the California economy
and the Corporation's continuing cost reduction programs. For third quarter
1994, the Corporation reported net income of $314 million, or $0.74 per share,
compared to earnings of $307 million, or $0.73 per share, from continuing
operations for a year ago.
16
<PAGE>
For the first nine months of 1994, earnings without one-time effects also
improved. Last year's results reflected after-tax charges in first quarter of
$1.7 billion for adopting new accounting rules and $258 million for
restructuring reserves. As previously reported, this year's results include
an after-tax charge of about $29 million in second quarter for a California
Public Utilities Commission ("CPUC") refund order. In April 1994, the CPUC
let stand its previous order requiring Pacific Bell to refund about
$35 million in late payment and reconnection charges which resulted from past
problems with its payment processing system. Without last year's charges and
this year's one-time effects, earnings from continuing operations for the
nine-month period would have increased about six percent. On a per share
basis, earnings would have increased about three percent.
Management expects the current good performance to continue this year.
However, the effects of regulatory rulings, increased competition and
strategic initiatives will make it difficult to achieve earnings growth next
year. (See discussions of "Pending Regulatory Issues" beginning on page 25.)
Volume Indicators
- -----------------
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
% %
1994 1993 Change 1994 1993 Change
- ----------------------------------------------------------------------------
Customer switched access
lines in service at
September 30 (thousands). 15,223 14,811 2.8 - - -
Carrier access minutes-
of-use (millions)........ 13,554 12,691 6.8 39,968 37,009 8.0
Interstate............... 7,982 7,501 6.4 23,693 21,743 9.0
Intrastate............... 5,572 5,190 7.4 16,275 15,266 6.6
Toll messages (millions)*.. 1,137 1,088 4.5 3,355 3,206 4.6
- ----------------------------------------------------------------------------
* Toll messages for 1993 have been restated to conform to the current
presentation.
The Corporation is seeing continued improvement in volume indicators due to
economic recovery in California. The number of access lines in service grew
to 15,223 thousand, an increase of 2.8 percent for the twelve months ended
September 30, 1994. This represents an improvement over a 2.0 percent
increase for the same period last year. This year's increase was primarily
attributable to the economic recovery and Pacific Bell's promotional efforts
to increase the number of households with two lines. The Telephone Companies'
residential access line growth rate increased to 2.0 percent for the twelve
months ended September 30, 1994, from 1.2 percent last year. The growth rate
in business access lines climbed to 4.1 percent this year, from 3.2 percent
last year.
Access minutes-of-use represent the volume of traffic carried by interexchange
carriers over the Telephone Companies' local networks. Total access minutes-
of-use increased by 8.0 percent for the nine-month period ended September 30,
1994, an improvement over the 5.5 percent increase for the same period last
year. The increase in access minutes-of-use was attributable primarily to
economic growth which increased network usage.
17
<PAGE>
Toll messages are comprised of Message Telecommunications Service, Optional
Calling Plans, WATS and terminating 800 messages. For the nine-month period
ended September 30, 1994, toll messages increased by 4.6 percent compared to
an increase of 2.1 percent for the corresponding period in 1993. Unauthorized
competition, particularly in WATS and 800 services, continues to constrain
growth in toll messages.
The CPUC has formally authorized competition in the intra-service area toll
market beginning in January 1995. As a result, Pacific Bell will lower
average prices for intra-service area toll services approximately 40 percent.
Toll messages are expected to increase due to lower prices. However, the
increase may be at least partially offset by the loss of some toll business
to competition. Although competition may reduce toll messages, it also has
the effect of increasing access minutes-of-use. (See "Toll Service
Competition" on page 25.)
Operating Revenues
- ------------------
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in millions) 1994 1993 Change 1994 1993 Change
- ----------------------------------------------------------------------------
Total operating revenues .. $2,329 $2,344 -$15 $6,879 $6,947 -$68
-0.6% -1.0%
- ----------------------------------------------------------------------------
Decreases for the three- and nine-month periods reflect revenue reductions
ordered by the CPUC and the Federal Communications Commission (the "FCC")
under incentive-based regulation. In addition, revenues were reduced by
accruals at the Telephone Companies for sharing interstate earnings with
customers. The FCC and state regulators require sharing earnings above a
threshold rate of return. In addition, Pacific Bell revenues for the nine-
month period were reduced due to a second quarter CPUC refund order related to
customer late payment charges. These and other reductions were partially
offset by increases due to customer demand.
18
<PAGE>
The factors affecting revenues are summarized in the following tables:
Third Quarter 1994 vs. Third Quarter 1993
----------------------------------------------
Price
Cap Sharing Customer Total
(Dollars in millions) Orders Accruals Misc. Demand Change
- ---------------------------------------------------------------------------
Local service ............... -$19 $ 1 $13 -$ 5
Network access
Interstate ................ -$23 7 -16
Intrastate ................ -6 1 23 18
Toll service ................ -16 -6 -22
Other service
revenues .................. -3 13 10
------- ------- ------- ------- -------
Total operating
revenues .................. -$41 -$23 -$ 1 $50 -$15
- ---------------------------------------------------------------------------
First 9 Months 1994 vs. First 9 Months 1993
----------------------------------------------------
Late Price
Payment Cap Sharing Customer Total
(Dollars in millions) Refund Orders Accruals Misc. Demand Change
- ---------------------------------------------------------------------------
Local service ...... -$ 46 -$34 $ 46 -$34
Network access
Interstate ....... -10 -$54 -8 57 -15
Intrastate ....... -14 -15 56 27
Toll service ....... -37 -13 -1 -51
Other service
revenues ......... -$27 -3 35 5
------- ------- ------- ------- ------- -------
Total operating
revenues ......... -$27 -$107 -$54 -$73 $193 -$68
- ---------------------------------------------------------------------------
The increases in revenues due to customer demand in the above tables are the
result of growth in key volume indicators. Local service revenues from
increased customer demand reflect a 2.8 percent increase from a year ago in
the Telephone Companies' customer access lines. Interstate network access
revenues reflect a 9.0 percent increase in minutes-of-use for the nine-month
period, as well as increased access lines. Intrastate network access revenues
from increased customer demand reflect 6.6 percent growth in minutes-of-use
for the nine-month period. Competition continues to constrain demand for
Pacific Bell's toll services.
The increases in other service revenues due to customer demand reflect the
success of the Telephone Companies' business and residential voice mail
products. Voice processing units in service at Pacific Bell increased
37 percent for the twelve months ended September 30, 1994.
19
<PAGE>
Operating Expenses
- ------------------
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- -----------------------
(Dollars in millions) 1994 1993 Change 1994 1993 Change
- --------------------------------------------------- -----------------------
Total operating expenses .. $1,726 $1,773 -$47 $5,181 $5,702* -$521
-2.7% -9.1%
- ----------------------------------------------------------------------------
* Includes restructuring charges of $413 million recorded in first quarter
1993.
The above decreases in total operating expenses reflect the Corporation's
continuing cost reduction efforts and resulting expense savings, primarily at
Pacific Bell. Without last year's first quarter restructuring charges,
recorded expenses for the nine-month period ended September 30, 1994 would
have decreased 2.0 percent from a year ago. Those pre-tax charges relate to
the Corporation's planned disposal of real estate assets, the spin-off of its
wireless operations, and other restructuring activities.
As displayed in the tables below, Pacific Bell's cost reduction efforts
resulted primarily in savings in salaries and wages, employee benefits, and
contract services expenses.
Pacific Bell Expenses
Third Quarter 1994 vs. Third Quarter 1993
-------------------------------------------------
Salaries Employee Contract Total
(Dollars in millions) & Wages Benefits Services Misc. Change
- --------------------------------------------------------------------------
Cost of products
& services ........ -$ 2 -$ 8 -$ 4 $ 6 -$ 8
Customer operations
& selling expense.. 2 -4 6 -8 -4
General, admin. &
other expense ..... -10 -11 -30 -5 -56
Depreciation
& amortization..... 22 22
-------- -------- -------- -------- --------
Total operating
expenses .......... -$10 -$23 -$28 $15 -$46
- -------------------------------------------------------------------------
20
<PAGE>
Pacific Bell Expenses
First 9 Months 1994 vs. First 9 Months 1993
-------------------------------------------------
Salaries Employee Contract Total
(Dollars in millions) & Wages Benefits Services Misc. Change
- --------------------------------------------------------------------------
Cost of products
& services .......... -$45 -$24 -$15 $31 -$ 53
Customer operations
& selling expense.... -5 5 15 -4 11
General, admin. &
other expense ....... -15 -51 -25 -29 -120
Depreciation
& amortization....... 35 35
-------- -------- -------- -------- --------
Total operating
expenses ............ -$65 -$70 -$25 $33 -$127
- --------------------------------------------------------------------------
The decrease in Pacific Bell's salary and wage expense for the nine-month
period reflects savings of $63 million due to a reduction in its workforce,
and a $44 million reduction in overtime primarily due to storm repairs last
year. These decreases were partially offset by a $33 million increase due to
higher wage rates. The decrease in employee benefits expense is primarily due
to certain nonrecurring adjustments and a decrease in postretirement benefit
costs related to force reduction plans.
Pacific Bell's contract services expense decreased primarily due to a
reduction in contract programmers which resulted from last year's completion
of billing system enhancements. These expenses also decreased because Pacific
Bell hired fewer contract laborers this year due to more favorable weather
conditions. These decreases were partially offset by higher contract costs
related to intensified telemarketing efforts.
Pacific Bell's depreciation expense increased primarily due to higher average
plant balances and higher interstate depreciation rates authorized by the FCC.
(See "Depreciation Rate Changes" on page 27.)
21
<PAGE>
Interest Expense
- ----------------
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in millions) 1994 1993 Change 1994 1993 Change
- ----------------------------------------------------------------------------
Interest expense ......... $107 $114 -$7 $336 $361 -$25
-6.1% -6.9%
- ----------------------------------------------------------------------------
Pacific Bell's interest on long-term debt decreased $27 million for the nine-
month period, including a $16 million reduction related to higher borrowing
levels last year and $11 million in savings due to lower interest rates.
Long-term debt levels were temporarily higher in 1993 due to time-lags between
new debt issuances and the retirements of refinanced amounts. The
Corporation's interest on its short-term borrowings also decreased, reflecting
reduced borrowings for the first nine months of 1994. However, these
decreases were partially offset by miscellaneous increases in interest expense
relating to the CPUC's late payment charges decision, financing charges
associated with Pacific Bell's project to build an all digital switching
platform and interest on certain regulatory refunds.
Income Taxes
- ------------
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in millions) 1994 1993 Change 1994 1993 Change
- ----------------------------------------------------------------------------
Income taxes ............ $194 $161 $33 $524 $331 $193
20.5% 58.3%
- ----------------------------------------------------------------------------
The increase in income tax expense for third quarter 1994 reflects higher pre-
tax income. In addition, last year's income tax expense had been reduced by a
third quarter adjustment of prior years' deferred taxes to reflect the
cumulative effect of new tax legislation. For the nine-month period, the
increase in income tax expense also reflects higher pre-tax income. The
effective tax rate on pre-tax income of 37.5 percent for the nine-month period
of 1994 compares to 35.7 percent for the same period last year.
Cumulative Effect of Accounting Changes
- ---------------------------------------
Effective January 1, 1993, the Corporation adopted two new accounting rules
for postretirement benefits and postemployment benefits and recorded related
one-time charges. These noncash charges in 1993 represent the cumulative
after-tax effects of applying the new rules to prior years. The new rules
increase annual benefit costs in comparison to prior methods. These higher
costs are being partially recovered in revenues and, therefore, have not
materially affected reported earnings. However, two customer advocacy groups
challenged the revenue recovery ordered. (See "Postretirement Benefits Other
Than Pensions" on page 26.)
22
<PAGE>
Status of Restructuring Reserves
- --------------------------------
As previously reported, Pacific Bell established a restructuring reserve at
the end of 1993 to provide for the incremental cost of force reductions and
other exit costs related to restructuring its internal business processes
through 1997. A total of $106 million was charged to the reserve in the first
nine months of 1994, primarily for severance benefits. As of September 30,
1994, a balance of $991 million remained in the restructuring reserve.
Pacific Bell is reducing force throughout its traditional telephone business.
Excluding its subsidiaries, force reductions totaled 3,783 employees for the
first nine months of 1994. The reduction in force net of new hires was
2,621 employees. During this same period, Pacific Bell estimates it has saved
$111 million in labor costs and other expenses from what it would have spent
without restructuring. Management expects savings for the year to meet or
exceed its original estimate of approximately $170 million.
Pacific Bell continues to refine its reengineering and force reduction plans
in order to maximize cost savings. Management expects fourth quarter 1994
charges to the reserve to exceed the $54 million charged in the third quarter.
However, certain costs originally estimated to be incurred in 1994 may be
delayed to 1995. As a result, management expects total charges to the reserve
in 1994 to be less than the original estimate of $226 million.
During the first nine months of 1994, the Corporation charged $29 million of
realized losses to its reserve for its existing real estate business. As of
September 30, 1994, the remaining balance of the reserve was $309 million.
The Corporation has entered into an agreement to sell its real estate business
properties. The sale is subject to considerable due diligence efforts by the
prospective buyer and, thus, the Corporation cannot predict whether the sale
will be consummated. The sale is not expected to have a material impact on
net income.
LIQUIDITY AND FINANCIAL CONDITION
The Corporation defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, pay its current
obligations, and pay dividends. The Corporation has met most of its financing
needs from internally generated funds, but also can obtain external financing
through the issuance of common stock and short- and long-term debt, if needed.
The Corporation expects to continue to meet most of its long-term financing
needs for its capital program from internally generated funds. In addition,
the Corporation is considering an agreement to defer purchase of broadband
network facilities and operating support systems, now being constructed by
AT&T Corp., until 1997. Pursuant to the proposed agreement, the cost for
these facilities is expected to total $1.0 to $1.5 billion. Purchase by the
Corporation in 1997 would be conditioned upon the network meeting certain
quality and performance specifications. In the event such agreement is
reached, the Corporation's capital expenditures for broadband deployment and
related long-term financing needs will be deferred. The Corporation intends
to lease certain operational portions of the facilities during the initial
construction period prior to 1997. If the agreement is not consummated, the
Corporation has the ability to obtain funds from external debt or equity
financing to fund construction.
23
<PAGE>
Short-term borrowings are available under a commercial paper program and
through unused formal and informal lines of credit. These lines of credit are
subject to continued review by the lending banks. At September 30, 1994, the
unused lines of credit available totaled approximately $2.0 billion. The
Corporation intends initially to use cash and short-term borrowings to fund
personal communications services ("PCS") licenses if it is a successful bidder
at the upcoming FCC auctions. The Corporation cannot predict if it will be a
successful bidder, and, if so, what the costs of these licenses will be. (See
"Personal Communications Services" on page 28.)
The Corporation is an equal partner with Bell Atlantic and NYNEX in two new
companies formed to deliver the next generation of nationally branded home
entertainment, information and interactive services. To fund these ventures,
the Corporation will be required to contribute approximately $100 million in
cash over the next three years. (See "Video Services" beginning on page 27.)
For longer term borrowings, Pacific Bell has remaining authority from the CPUC
to issue up to $1.25 billion of long- and intermediate-term debt. The
proceeds may only be used to redeem maturing debt and to refinance other debt
issues. Pacific Bell has remaining authority from the Securities and Exchange
Commission (the "SEC") to issue up to $650 million of long- and intermediate-
term debt through an April 1993 shelf registration. The Corporation's PacTel
Capital Resources subsidiary may also issue up to $192 million of medium-term
notes through an SEC shelf registration.
Cash flow from operating activities of continuing operations increased
$275 million for the nine months ended September 30, 1994, compared to the
same period in 1993. The increase is primarily due to timing differences in
the payment of accounts payable and other liabilities.
For the first nine months of 1994, cash used for investing activities
decreased $308 million due partially to delays in capital expenditures. Cash
used for investing activities also decreased because last year's investments
in spin-off operations raised the comparative 1993 amount. The investments in
these operations in the nine-month period of 1993, less cash received from
their repayment of intercompany balances, raised last year's comparative
amount by $176 million. The Telephone Companies invested about $1.1 billion
in their networks during the first nine months of 1994 and now expect to
invest about $1.7 billion for the year. Pacific Bell expects to invest about
$16 billion in its network over the next seven years.
During January 1994, the Corporation sold its remaining cable franchises in
the United Kingdom after selling four others in March 1993. Sales proceeds of
$30 and $49 million, respectively, in 1994 and 1993 are reflected in cash
provided from other investing activities for each year's nine-month period.
Cash used for financing activities during the first nine months of 1994
reflects a reduction of $588 million in the level of the Corporation's short-
term borrowings. The Corporation's debt ratio improved to 49.9 percent at
September 30, 1994 from 53.8 percent at December 31, 1993, reflecting the
lower level of overall debt. Pre-tax interest coverage was 5.2 times for the
first nine months of 1994. Last year, calculations of this indicator were
negative due to the Corporation's 1993 reported loss.
24
<PAGE>
Proceeds from issuances of treasury stock have declined this year from their
level in the first nine months of 1993. Last year's proceeds included
additional equity raised from a discounted stock purchase offer under the
Corporation's dividend reinvestment and stock purchase plan. The additional
dividends reinvested under this offer also reduced the cash requirement for
1993 dividend payments.
For third quarter 1994, the Pacific Telesis Group Board of Directors
maintained the Corporation's dividend at $0.545 per share. This represents
the same annual dividend level of $2.18 per share as for 1993 and 1992.
PENDING REGULATORY ISSUES
CPUC Annual Price Cap Filing
- ----------------------------
In October 1994, Pacific Bell submitted its annual price cap filing for 1995
in which it proposed a $196 million revenue reduction. The proposed reduction
includes a decrease of $161 million due to the 5.0 percent productivity factor
of the price cap formula exceeding the growth in the Gross Domestic Product
Price Index by 2.4 percent. The filing also included several additional
factors which, if adopted, will decrease revenue by an additional $35 million.
Of the total proposed reduction, $45 million will have been accrued by the end
of 1994. The CPUC is expected to issue a decision before the end of 1994.
Toll Service Competition
- -------------------------
In September 1994, the CPUC issued its final decision in Phase III of its
investigation into alternative regulatory frameworks. Effective January 1,
1995, the decision provides that long-distance and other telecommunications
companies will be officially allowed to compete with Pacific Bell and other
local telephone companies in providing intra-service area toll call services
in California. To allow Pacific Bell to be a more effective competitor, the
decision also rebalances prices for services. Rebalancing brings prices for
certain services closer to the costs of providing those services. The
decision lowers intra-service area toll prices an average of about 40 percent
and increases Pacific Bell's residential flat rate service from $8.35 to
$11.25 per month. Pacific Bell's business basic prices will increase from
$8.35 to $10.32 per month. Other prices will also change.
The CPUC intends the decision to be revenue neutral; that is, the effect of
price decreases would be offset by the effect of price increases. However,
the Corporation believes the decision is based on an estimate of demand growth
due to lower toll prices that may be too optimistic. If actual demand falls
short of estimates, toll service revenues would be adversely affected.
More importantly, as competition intensifies for intra-service area toll
calling, there is a risk that Pacific Bell will realize materially reduced
toll revenues. The CPUC has stated that in the near future it will consider
whether customers should be allowed to presubscribe to a specific carrier to
handle their intra-service area toll calls.
25
<PAGE>
CPUC Regulatory Framework Review
- --------------------------------
In June 1994, the CPUC issued a decision in its review of the New Regulatory
Framework ("NRF") ordered in 1989. Among other issues, this review has
examined elements of the price cap formula, including the rate of return on
investment and the productivity factor.
Effective July 1994, the decision reduced Pacific Bell's benchmark rate of
return from 13.0 percent to 11.5 percent. Earnings from 11.5 percent to
15.0 percent will be shared equally with Pacific Bell's customers. Earnings
above 15.0 percent will be shared 30.0 percent with customers. Also effective
July 1994, the decision increased the productivity factor from 4.5 percent to
5.0 percent, a change which each year will reduce annual revenues by
$32.5 million through 1996. Changes in the price cap formula will decrease
total revenues from previous levels by about $19, $72, and $104 million,
respectively, for 1994, 1995, and 1996. The CPUC is scheduled to review the
NRF again in 1995.
PSCN Regulatory Review
- ----------------------
In Nevada, the Public Service Commission of Nevada (the "PSCN") has opened a
proceeding to consider revising existing regulations for telecommunications
providers. In April 1994, Nevada Bell joined an industry group of
interexchange carriers and local exchange carriers in proposing to the PSCN
fundamental changes in the nature of telecommunications regulation. The
proposal would permit competition where it is in the public interest and would
establish guidelines by which all competitors would be regulated. If adopted
by the PSCN, the proposal would allow local exchange carriers to elect a form
of price regulation.
Postretirement Benefits Other Than Pensions
- -------------------------------------------
In December 1992, the CPUC issued a decision adopting, with modification,
Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers'
Accounting for Postretirement Benefits Other than Pensions," for regulatory
accounting purposes. The CPUC decision also granted Pacific Bell revenue
increases for recovery of contributions to tax-advantaged funding vehicles for
SFAS 106 costs. Pacific Bell was granted $100 million in 1994 for partial
recovery of higher costs under SFAS 106. Two customer advocacy groups
challenged the recovery ordered. In October 1994, the CPUC ordered a
rehearing to determine if Pacific Bell should continue to recover these costs.
The CPUC's order held that related revenues collected after October 12, 1994
are subject to refund.
Offering of Telephone Enhanced Services
- ----------------------------------------
In October 1994, the U.S. Court of Appeals for the Ninth Circuit overturned
the FCC's removal of its structural separations requirement for the offering
of enhanced services by the former Bell Operating Companies, including the
Telephone Companies.
26
<PAGE>
The Corporation anticipates seeking a waiver from the FCC to continue current
enhanced service offerings pending new FCC proceedings in which the FCC may
reestablish relief from such requirements. The reimposition of structural
separations requirements could result in increased costs and reduced revenues.
Depreciation Rate Changes
- -------------------------
In June 1994, Pacific Bell filed an application to change its depreciation
rates with the CPUC. The application reflects a preliminary agreement between
Pacific Bell and the CPUC's Division of Ratepayer Advocates. If adopted, the
new depreciation rates will increase depreciation expense about $30 million
effective January 1, 1995. In July 1994, the FCC authorized new depreciation
rates for the Telephone Companies which will increase depreciation expense
about $10 million annually retroactive to January 1, 1994. Under incentive-
based regulation, increases in depreciation expense are not recovered in
revenues.
FCC Annual Access Tariff Filing
- -------------------------------
In June 1994, the FCC accepted the Telephone Companies' annual access tariff
filings under price cap regulation. As a result, Pacific Bell's interstate
network access revenues will be reduced about $30 million annually effective
July 1, 1994. Pacific Bell's decrease reflects the application of the price
cap formula and an $8 million price reduction to help it remain competitive
with other access providers. Nevada Bell's revenues will decrease $2 million
annually under the new tariffs.
Video Services
- --------------
In October 1994, the FCC reaffirmed its rule that permits local exchange
carriers ("LECs"), including the Telephone Companies, to provide a tariffed
basic platform that will deliver video programming developed by others ("video
dialtone") and to provide certain other services to customers of this basic
platform. In December 1993, Pacific Bell filed an application with the FCC
seeking authority to offer video dialtone services in specific locations in
four of its service areas: the San Francisco Bay Area; Los Angeles; San Diego;
and Orange County. The advanced integrated broadband telecommunications
network which Pacific Bell plans to build will be capable of delivering an
array of services including voice, data and video services. Once FCC approval
is obtained, Pacific Bell will deploy the video-exclusive components of the
advanced network.
In addition to providing advanced telecommunications services, Pacific Bell's
new network will also serve as a platform for other information providers, and
will offer customers an alternative to existing cable television providers.
The integrated network is also expected to spur the development of new
interactive consumer services in education, entertainment, government, and
health care.
27
<PAGE>
In October 1994, the Corporation, Bell Atlantic, and NYNEX formed two new
companies to deliver the next generation of nationally branded home
entertainment, information and interactive services. The partners have formed
a strategic relationship with Creative Artists Agency, Inc. which will serve
as a consultant to a new media company to develop a portfolio of branded
programming and services. A new technology and integration company will
provide the systems needed to drive the delivery of this programming over the
partners' video dialtone networks.
Under the 1984 Cable Act, the Corporation is currently prohibited from
providing video programming in its service areas. In November 1993, the
Corporation filed suit in the U.S. District Court in San Jose challenging the
constitutionality of the Cable Act's prohibition. The case is currently
stayed pending the U.S. Court of Appeals for the Ninth Circuit's resolution of
the federal government's appeal in a comparable U.S. West case. In this case,
the Cable Act's prohibition was held to be unconstitutional. In addition, the
Corporation's appeal of the lower court's denial of our request for
preliminary relief has been consolidated with the appeal in the U.S. West
case. Oral argument before the Ninth Circuit is scheduled to begin
November 15, 1994.
Personal Communications Services
- --------------------------------
The Corporation plans to aggressively pursue licenses for PCS at FCC auctions
scheduled to begin on December 5, 1994. Winning bids in major PCS markets are
expected to require large capital expenditures. In December 1993, the FCC
awarded "pioneer preferences" to three companies without charge. One company
received one of the broad spectrum licenses covering the Los Angeles, San
Diego, and Las Vegas market area. In August 1994, the FCC reconsidered its
previous decision to award pioneer preferences without charge and amended its
rule to require the recipients to pay approximately 90 percent of the value of
similar licenses. In September 1994, legislation was introduced in Congress
which would require recipients of pioneer preferences to pay 85 percent of the
average amount paid for licenses in the 20 largest cities (exclusive of
pioneer preference cities), but not less than $400 million. The Corporation
vigorously opposes this legislation because it would result in pioneer
preference recipients receiving licenses at only a fraction of their value.
This legislation would also prevent the continuation of the Corporation's
pending court appeal of the FCC's order that originally granted pioneer
preferences. In addition, this legislation may prevent the FCC from reviewing
certain licensing issues regarding the pioneer preference awards.
Interstate Access
- -----------------
The FCC ordered large LECs, including the Telephone Companies, to offer
expanded network interconnection for interstate special access services
effective June 1993, and for the transport portion of interstate switched
access services effective February 1994. The Telephone Companies and other
LECs appealed a provision of the decision which requires the LECs to permit
competitive access providers ("CAPs") and other customers to locate their
transmission facilities in the LECs' central offices. In June 1994, the U.S.
Court of Appeals for the D.C. Circuit overruled the mandatory physical
collocation requirement. The Court also remanded to the FCC the issue of
whether the LECs should offer "virtual collocation" instead of physical
28
<PAGE>
collocation. With virtual collocation, the LECs install and maintain the
equipment dedicated for use by the CAPs and charge the CAPs for services. In
July 1994, the FCC directed the LECs to provide virtual collocation, but
exempted LECs from this requirement at central offices where they offer
physical collocation. The Telephone Companies plan to continue to offer
physical collocation but has appealed certain requirements of the FCC's order.
Interstate access revenues subject to increased competition represent less
than five percent of the Telephone Companies' total revenues.
Telecommunications Legislation
- ------------------------------
In June 1994, the U.S. House of Representatives approved two
telecommunications bills which would ease certain restrictions imposed by the
1982 Consent Decree and the 1984 Cable Act. Similar legislation with less
favorable provisions was introduced in the U.S. Senate. However, the Senate
bill was withdrawn before it could be submitted for a vote. The Corporation
expects that similar legislation will be reintroduced in 1995.
In September 1994, Governor Wilson signed legislation directing the CPUC to
authorize fully open competition for intrastate long-distance services if
federal legislation or court action amends the 1982 Consent Decree. If not
amended, the CPUC by October 1995 must order Pacific Bell to offer intrastate
long-distance services and to seek a waiver of the 1982 Consent Decree. The
CPUC's order would be subject to specific safeguards which would ensure that
competitors have fair, nondiscriminatory and mutually open access to Pacific
Bell's exchanges and to interexchange facilities.
APPLICABILITY OF REGULATORY ACCOUNTING
The Telephone Companies currently account for the economic effects of
regulation under Statement of Financial Accounting Standards No. 71
("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation." If
it becomes no longer reasonable to assume the Telephone Companies will recover
their costs through rates charged to customers, whether resulting from the
effects of increased competition or specific regulatory actions, SFAS 71 would
no longer apply. The Corporation monitors the effects of competition and
changes in regulation to assess the likelihood the Telephone Companies will
continue to recover their costs. The discontinued application of SFAS 71
would require the Telephone Companies to eliminate their regulatory assets and
liabilities and may require a reduction of the carrying amount of their
telephone plant. Two other telephone regional holding companies ("RHCs") have
discontinued the application of SFAS 71 regulatory accounting and have
recorded the cumulative effect of using shorter depreciable lives for their
telephone plant. If Pacific Bell were to discontinue the application of
SFAS 71 and adopt similar depreciable lives and use similar methodologies as
these other two RHCs to calculate the cumulative effect, the reduction in
carrying amount of the Corporation's property, plant, and equipment would be
between $3 and $5 billion. (See "Accounting Under Regulation" in Note A on
page 11 for a discussion of regulatory assets and liabilities included in the
balance sheet.)
29
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number Description
- ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between Pacific
Telesis Group and The First National Bank of Boston, as successor
Rights Agent, which includes as Exhibit B thereto the form of
Rights Certificate (Exhibits 1 and 2 to Form SE filed September
25, 1989 as part of Form 8-A, File No. 1-8609).
4b No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Telesis Group or its subsidiaries
is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, Pacific
Telesis Group hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
10.pp(iii) Employment contract for a senior officer of Pacific Telesis Group.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Financial Data Schedule for Pacific Telesis Group third quarter
1994 Form 10-Q.
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
30
<PAGE>
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Telesis Group
BY W. E. Downing
--------------------------
W. E. Downing
Executive Vice President,
Chief Financial Officer and
Treasurer
November 14, 1994
31
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All other exhibits are
provided as part of the electronic transmission.
Exhibit
Number Description
- ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between Pacific
Telesis Group and The First National Bank of Boston, as successor
Rights Agent, which includes as Exhibit B thereto the form of
Rights Certificate (Exhibits 1 and 2 to Form SE filed September
25, 1989 as part of Form 8-A, File No. 1-8609).
4b No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Telesis Group or its subsidiaries
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, Pacific Telesis
Group hereby agrees to furnish a copy of any such instrument to the
SEC upon request.
10.pp(iii) Employment contract for a senior officer of Pacific Telesis Group.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Financial Data Schedule for Pacific Telesis Group third quarter
1994 Form 10-Q.
32
<PAGE>
June 16, 1994
David W. Dorman
5501 High Drive
Mission Hills, Kansas 66208
Dear Dave:
This letter is intended to confirm an offer of employment as President and
Chief Executive Officer of Pacific Bell under the terms and conditions
outlined in this letter, subject to confirmation by the Compensation and
Personnel Committee of, and election by, the Board of Directors of Pacific
Telesis Group ("Telesis"). As a condition of employment, you will be required
to execute an employment agreement in the form attached, which is a standard
contract approved by the Pacific Telesis Group Board of Directors to apply to
all executive officers in Telesis companies. In applying the terms of the
employment agreement, we have discussed the following items with respect to
your employment:
Employment Effective Date
- -------------------------
We understand that you would begin employment effective July 1, 1994.
Base Salary
- -----------
Your base salary for 1994 would be $450,000 per annum. The level of your base
salary for 1995 would be subject to review as a part of the normal review
process by the Compensation and Personnel Committee.
Short Term Incentive Plan Awards
- --------------------------------
Provided you commence employment on or before July 1, 1994, you would be
eligible for a full award for 1994 under the Pacific Telesis Group Short Term
Incentive Plan ("STIP"). The 1994 target award for your position is $250,000.
Target awards are established by the Compensation and Personnel Committee
during the end of year review process.
Stock Option Grant
- ------------------
We would recommend to the Compensation and Personnel Committee that a grant of
100,000 non qualified stock options be made to you effective as of your
employment date under the Pacific Telesis Group 1994 Stock Incentive Plan.
The exercise price of the options will be the closing price of Telesis stock
on the day prior to the option grant. One half or 50,000 of the options would
become exercisable on April 2, 1995 and 50,000 would become exercisable on
April 2, 1996.
<PAGE>
Special Compensation Payments
- -----------------------------
If you continue to be employed by Pacific Telesis Group or any of its
subsidiaries on January 1, 1995, you would be eligible to receive a special
compensation payment of $300,000, less applicable tax withholding, to be paid
as soon as practicable during January 1995. If you continue to be employed by
Pacific Telesis Group or any of its subsidiaries on January 1, 1996, you would
be eligible to receive an additional special compensation payment of $300,000,
less applicable tax withholding, to be paid as soon as practicable during
January 1996. At your option at any time following execution of this
agreement by both parties and confirmation of the provisions of this agreement
by the Compensation and Personnel Committee and your election as an officer by
the Board of Directors of Telesis, you may execute a full recourse promissory
note with Pacific Telesis Group for an amount equal to the expected payments
and receive such payment in advance of its scheduled payout. Said note will
bear interest at a rate to be agreed upon by you and Pacific Telesis Group,
but in no event less than the Applicable Federal Rate published by the IRS
which applies to employee loans of this type. The principal amount of the
debt evidenced by the promissory note will be forgiven in accordance with the
payment schedule for the scheduled compensation payments described above
(i.e., $300,000 forgiven if you are still employed on January 1, 1995 and
$300,000 if you are still employed on January 1, 1996). All outstanding
principal and accrued unpaid interest on the note would be due if you notify
Telesis that you will not begin employment or if you terminate employment with
Telesis before the applicable forgiveness dates. You understand that you will
be responsible for any withholding and tax consequences that may arise at the
time the debt is extinguished.
Pension Benefits
- ----------------
You will be eligible to participate in the Pacific Telesis Group Pension Plan
for Salaried Employees and in the supplemental nonqualified plans applicable
to Pacific Telesis Group Officers. Under these plans, your pension benefit is
based on your annual cash compensation (base salary plus standard Short Term
Incentive Plan Award) for your final sixty months of service and is calculated
at a basic rate of 1.45% of the average monthly compensation per year of
service. In addition, you will receive a supplemental pension credit of 1.0%
per year of service so that your pension accrual rate is effectively 2.45% per
year of service. Under the terms of the plans, the pension amounts would be
discounted based on age if you began receiving your pension prior to age 60.
However, under this special agreement you would be able to receive your vested
pension without the applicable age discount were you to terminate prior to
attaining age 60. This pension calculation is illustrated in the enclosed
exhibit.
Relocation Expenses
- -------------------
The specific terms of the relocation expenses that would be provided to you
are described in the attached document entitled "Addendum to Employment
Agreement-Relocation Benefits".
<PAGE>
Automobile Allowance
- --------------------
You will be eligible to receive an automobile allowance of one thousand one
hundred dollars ($1,100) per month for up to thirty-six months following your
employment. This allowance is in lieu of your being provided a company
vehicle under the Pacific Telesis Group Automobile Policy. At the end of
thirty-six months or, at your earlier discretion, the automobile allowance
will be discontinued and you will be eligible to participate in the Automobile
Policy.
Other Employment Benefits
- -------------------------
You will be eligible to participate in the other executive compensation and
benefit programs of Telesis, including the Pacific Telesis Group Senior
Management Long Term Incentive Plan, under the standard terms and conditions
of these plans. A summary of the provisions of these plans has been provided
to you previously.
This offer of employment is conditioned upon the outcome of a substance abuse
test which will be scheduled for you.
We hope this information will be helpful to you. If you have further
questions, please let me know. If you agree that the above accurately
describes your understanding of our agreement regarding your employment and
you are willing to accept these terms, please so indicate by signing in the
space provided below.
Sincerely,
J. R. MOBERG
- ------------
J. R. MOBERG
Executive Vice President - Human Resources
By signing below, I also represent and warrant that there is no contractual or
other commitment that would prevent me from accepting employment on the terms
outlined above, and as discussed with Telesis representatives, or that would
prevent me from carrying out the duties and responsibilities of the position
of President and Chief Executive Officer of Pacific Bell, including the
fulfillment of obligations involving entry into and operation of any existing
or future business related to the inter-LATA transmission of voice, video or
data services by wireline or wireless means, provided that, during the first
18 months of employment, my time and efforts are not dedicated principally to
the provision of interlata communications services.
Acceptance: David W. Dorman Date: 6/22/94
----------------------
David W. Dorman
Enclosures: Pension Calculation Illustration
Relocation Benefits - Addendum to Employment Agreement
<PAGE>
PENSION CALCULATION ILLUSTRATION
(1) (2) (3) (4)
FINAL
5 YEARS UNDISCOUNTED
TOTAL BASIC PROJECTED AVERAGE PENSION
AGE SERVICE & PROPOSED PAY (5%) PAY AMOUNT
- ----------------------------------------------------------------------------
40 0 00.0% $700,000 $700,000 $ 0
41 1 00.0% $735,000 $717,500 $ 0
42 2 00.0% $771,750 $735,583 $ 0
43 3 00.0% $810,337 $754,272 $ 0
44 4 00.0% $850,854 $773,588 $ 0
45 5 12.3% $893,397 $812,268 $ 99,909
46 6 14.7% $938,067 $852,881 $125,374
47 7 17.2% $984,970 $895,525 $154,030
48 8 19.6% $1,034,219 $940,302 $184,299
49 9 22.1% $1,085,930 $987,317 $218,197
50 10 24.5% $1,140,226 $1,036,682 $253,987
51 11 27.0% $1,197,238 $1,088,517 $293,899
52 12 29.4% $1,257,099 $1,142,942 $336,025
53 13 31.9% $1,319,954 $1,200,089 $382,829
54 14 34.3% $1,385,952 $1,260,094 $432,212
55 15 36.8% $1,455,250 $1,323,099 $486,900
56 16 39.2% $1,528,012 $1,389,254 $544,587
57 17 41.7% $1,604,413 $1,458,716 $608,285
58 18 44.1% $1,684,633 $1,531,652 $675,459
59 19 46.6% $1,768,865 $1,608,235 $749,437
60 20 49.0% $1,857,308 $1,688,646 $827,437
61 21 50.0% $1,950,174 $1,773,079 $886,539
Pension based on base salary plus target STIP award.
Basic formula of 1.45% per year of service.
Supplemental accrual of 1.0% per year of service.
<PAGE>
ADDENDUM TO EMPLOYMENT AGREEMENT
RELOCATION BENEFITS
This is an addendum to the offer of employment made by Pacific
Telesis Group ("PTG") to David W. Dorman ("Dorman") on June 16, 1994 and the
accompanying Employment Agreement between PTG and Dorman. This addendum sets
forth the understanding and agreement between PTG and Dorman regarding the
relocation benefits Dorman will be entitled to receive upon his acceptance of
PTG's offer of employment. This addendum is supplemental to the Employment
Agreement between PTG and Dorman and shall be considered as part of that
Employment Agreement. This addendum shall have no force or effect unless and
until the Employment Agreement is fully executed by the parties, at which time
this addendum shall become fully effective as part of that Employment
Agreement without separate execution. This addendum shall be governed and
construed in accordance with the terms of the Employment Agreement. To the
extent any term or provision of this addendum is contradictory of or in
conflict with any term or provision of the Employment Agreement, the
Employment Agreement shall control and the contradictory or conflicting term
or provision of this addendum shall be void to the extent, but only to the
extent, of such contradiction or conflict.
As used in this addendum "relocation benefits" refers to 1) the
assistance PTG will provide Dorman in the sale of his current residence in
Mission Hills, Kansas, 2) the assistance PTG will provide Dorman in the
purchase of a residence in or around San Francisco, California ("the Bay
Area"), and 3) the expenses and allowance PTG will pay Dorman associated with
the cost of his move from Mission Hills to the Bay Area.
1. Assistance in Sale of Mission Hills Residence.
(a) Appraisal of value of Mission Hills residence. In
preparation for the sale of Dorman's Mission Hills residence, PTG will arrange
for two appraisals of the value of the residence by appraisers mutually agreed
to by Dorman and PTG. The parties agree that the average of those two
appraised values shall be used as the basis of the value of the residence for
purposes of this addendum (the "full appraised value"). If, however, the
difference between the two appraisals is greater than five percent (5%), the
parties agree that PTG shall arrange for a third appraisal by an appraiser
mutually agreed to by the parties and that the "full appraised value" for
purposes of this addendum shall be the average of all three appraisals.
Dorman agrees to allow all appraisers full access to the Mission Hills
residence for the purpose of conducting the appraisals referenced in this
paragraph on or after June 16, 1994.
(b) Home Purchase. Immediately following the determination
of the full appraised value of the Mission Hills residence in accordance with
(a) above, and provided that Dorman has vacated such residence, PTG agrees
that it will buy the Mission Hills residence from Dorman at the greater of the
full appraised value or $1,100,000.00.
2. Assistance in Purchase of Bay Area Residence.
(a) Residence purchase. PTG will reimburse Dorman for
certain non-recurring fees associated with the purchase of the new residence,
i.e., the origination loan fee not to exceed two percent (2%) of the loan, the
title insurance fees, the fees for two (2) home inspections, reasonable and
customary legal fees directly associated with the purchase of the new
<PAGE>
residence and other such non-recurring fees.
(b) Residence purchase search trips. PTG will provide
Dorman with up to five (5) trips to and from the Bay Area for a period of up
to five (5) days each for the purpose of locating a new residence in the Bay
Area in accordance with its existing relocation program at pages 9-13, copies
of which pages are attached to this addendum and incorporated herein by
reference.
(c) Executive Relocation Allowance. Dorman will be eligible
to receive an Executive Relocation Allowance. The allowance is calculated as
a percentage of starting base salary and is equal to ten percent (10%) of such
salary during the first year of employment, eight percent (8%) the second year
and six percent (6%) the third year. The initial payment will be made upon
close of escrow on a home in the Bay Area and will be equal to the accumulated
monthly installments to date. Subsequent payments will be made on a monthly
basis. At the end of thirty-six months, or earlier if Dorman terminates
employment with PTG or its subsidiaries, the allowance will be discontinued.
3. Moving Expenses.
(a) Moving Service. PTG will pay for moving services for
Dorman's household and personal property from his Mission Hills residence to
his new Bay Area residence in accordance with the provisions of its existing
relocation program at pages 49-54, copies of which pages are attached to this
addendum and incorporated herein by reference.
(b) Temporary living expenses. For the lesser of 6 months,
or until the Mission Hills residence is sold or otherwise disposed of, PTG
will provide Dorman with temporary living expenses following his relocation to
the Bay Area in accordance with the provisions of its existing relocation
program at pages 9-13, copies of which pages are attached to this addendum and
incorporated herein by reference, except that the maximum reimbursable
allowance for lodging shall be $200 per night including family members.
(c) Miscellaneous allowance. PTG will further provide
Dorman with an allowance of up to Two Thousand, Five Hundred Dollars ($2,500)
to assist in any additional expenses associated with moving his household and
personal property from Mission Hills to the Bay Area.
The parties agree and understand that the foregoing
constitutes their complete and final agreement with regard to the relocation
benefits Dorman will be entitled to receive, and that despite the
incorporation by reference of selected and limited portions of PTG's existing
relocation program, Dorman is not entitled to any other benefits under that
program.
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, effective the 1st day of July, 1994, by and between
DAVID W. DORMAN (the "Employee") and PACIFIC TELESIS GROUP, a Nevada
corporation (the "Corporation").
W I T N E S S E T H:
WHEREAS the Corporation or an affiliate wishes to continue employing
the Employee in a position no lower than Group President; and
WHEREAS the Employee is willing to continue such employment upon the
terms and conditions set forth below:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and in consideration of the continuing employment of Employee by
the Corporation or an affiliate, the parties agree as follows:
1. TERM OF EMPLOYMENT.
(a) Basic Rule. The Corporation agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the
Corporation, from the effective date of this Agreement until the date when the
Employee's employment terminates pursuant to the provisions of this Agreement.
(b) Early Termination. Subject to sections 6 and 7, the
Corporation may terminate the Employee's employment by giving the Employee 30
days' advance notice in writing. If the Corporation terminates the Employee's
employment within three years after a Change in Control, as defined herein,
the provisions of section 6 shall apply. If the Corporation terminates the
Employee's employment for any reason other than Cause or Disability, both as
defined herein, the provisions of section 7 shall apply. The Employee may
terminate his employment by giving the Corporation 30 days' advance notice in
writing. If the Employee terminates his employment under the preceding
sentence, other than a Constructive Termination, as defined herein, occurring
within three years after a Change in Control, the Corporation shall have no
obligation to pay or provide any compensation or benefits on account of the
Employee's termination of employment, or for periods following such
termination. The Employee's rights under any applicable benefit plans shall
be determined under the provisions of those plans. A termination of
employment effective on or after the Employee's Normal Retirement Date shall
be deemed a voluntary termination. Any waiver of notice shall be valid only
if it is made in writing and expressly refers to the applicable notice
requirement of this section 1.
(c) Death. The Employee's employment shall terminate in the event
of his death. The Corporation shall have no obligation to pay or provide any
compensation or benefits on account of the Employee's death, or for periods
following the Employee's death. The Employee's rights under the benefit plans
of the Corporation shall be determined under the provisions of those plans.
(d) Cause. Subject to section 6, the Corporation may terminate the
Employee's employment for Cause by giving the Employee 30 days' advance notice
in writing. For all purposes under this Agreement, "Cause" shall mean (i) a
willful failure by the Employee to substantially perform his duties hereunder,
1
<PAGE>
other than a failure resulting from the Employee's complete or partial
incapacity due to physical or mental illness or impairment, (ii) a willful act
by the Employee which constitutes gross misconduct and which is injurious to
the Corporation, (iii) a willful breach by the Employee of a material
provision of this Agreement, or (iv) a material and willful violation of a
federal or state law or regulation applicable to the business of the
Corporation. No act, or failure to act, by the Employee shall be considered
"willful" unless committed without good faith and without a reasonable belief
that the act or omission was in the Corporation's best interest. Unless the
termination of employment for Cause occurs within three years after a Change
in Control, no compensation or benefits will be paid or provided to the
Employee on account of a termination for Cause, or for periods following the
date when such a termination of employment is effective. The Employee's
rights under the benefit plans of the Corporation shall be determined under
the provisions of those plans.
(e) Disability. Subject to section 6, the Corporation may
terminate the Employee's employment for Disability by giving the Employee six
months' advance notice in writing. If the Corporation terminates the
Employee's employment for Disability within three years after a Change in
Control, the provisions of section 6 shall apply. For all purposes under this
Agreement, "Disability" shall mean that the Employee, at the time notice is
given, has been unable to perform his duties under this Agreement for a period
of not less than six consecutive months as the result of his incapacity due to
physical or mental illness. In the event that the Employee resumes the
performance of substantially all of his duties hereunder before the
termination of his employment under this subsection (e) becomes effective, the
notice of termination shall automatically be deemed to have been revoked.
Unless the termination of employment for Disability occurs within three years
after a Change in Control, no compensation or benefits will be paid or
provided to the Employee on account of termination for Disability, or for
periods following the date when such a termination of employment is effective.
The Employee's rights under the benefit plans of the Corporation shall be
determined under the provisions of those plans.
(f) Termination of Agreement. Except as otherwise provided in this
subsection (f), this Agreement shall terminate when all obligations of the
parties hereunder have been satisfied. In addition, either the Corporation or
the Employee can terminate this Agreement for any reason, and without
affecting the Employee's status as an employee, by giving the other party
three years' advance notice in writing. A termination of this Agreement
pursuant to the preceding sentence shall be effective for all purposes, except
that such termination shall not affect the payment or provision of
compensation or benefits on account of a termination of employment occurring
prior to the termination of this Agreement. Finally, this Agreement shall
terminate in any event on the Employee's Normal Retirement Date, as defined
herein.
2. DUTIES AND SCOPE OF EMPLOYMENT.
(a) Position. The Corporation agrees to employ the Employee for
the term of his employment under this Agreement in a position no lower than
Group President, as such positions were defined in terms of responsibilities
and compensation as of the effective date of this Agreement. If the employing
corporation is not Pacific Telesis Group, the Employee's position shall be no
lower than that of a Group President of Pacific Telesis Group, as such
2
<PAGE>
positions were defined in terms of responsibilities and compensation as of the
effective date of this Agreement.
(b) Obligations. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Corporation and its subsidiaries. The foregoing, however, shall not preclude
the Employee from engaging in appropriate civic, charitable or religious
activities or from devoting a reasonable amount of time to private investments
or from serving on the boards of directors of other entities, as long as such
activities and service do not interfere or conflict with his responsibilities
to the Corporation.
3. BASE COMPENSATION.
During the term of his employment under this Agreement, the
Corporation agrees to pay the Employee as compensation for his services a base
salary at the annual rate of $450,000, or at such higher rate as the
Corporation's Board of Directors may determine from time to time. Such salary
shall be payable in approximately equal bi-weekly installments. Once the
Corporation's Board of Directors has increased such salary, it thereafter
shall not be reduced, provided that, if a Change in Control has not occurred,
such salary, including any increases, may be reduced by the Corporation if (i)
the Employee commits an act or omission that meets the definition of Cause, as
defined in section 1(d), or (ii) the Employee and all other officers of
Pacific Telesis Group and its subsidiaries who are parties to written
employment agreements containing a provision substantially in the form of this
provision have their salaries, including any increases, reduced by the same
percentage amount for the same time period. (The annual compensation specified
in this section 3, together with any increases in such compensation that the
Board of Directors may grant from time to time, and together with any
reductions made in accordance with this section, is referred to in this
Agreement as "Base Compensation.")
4. EMPLOYEE BENEFITS.
During the term of his employment under this Agreement, the Employee
shall be eligible to participate in the employee benefit plans and executive
compensation programs maintained by the Corporation, including (without
limitation) pension plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs,
subject in each case to the generally applicable terms and conditions of the
plan or program in question and to the determination of any committee
administering such plan or program.
5. BUSINESS EXPENSES AND TRAVEL.
During the term of his employment under this Agreement, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment
and other business expenses in connection with his duties hereunder. The
Corporation shall reimburse the Employee for such expenses upon presentation
of an itemized account and appropriate supporting documentation, all in
accordance with the Corporation's generally applicable policies.
6. CHANGE IN CONTROL.
3
<PAGE>
(a) Definition. For all purposes under this Agreement, "Change in
Control" shall mean the occurrence of any of the following events:
(i) Any "person" (as such term is used in sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), other than a
trustee or other fiduciary holding securities under an employee benefit plan
of Pacific Telesis Group or a corporation owned directly or indirectly by the
shareowners of Pacific Telesis Group in substantially the same proportions as
their ownership of stock of Pacific Telesis Group, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of Pacific Telesis Group representing 20 percent or
more of the total voting power represented by Pacific Telesis Group's then
outstanding voting securities; or
(ii) A change in the composition of the Board of Directors of
Pacific Telesis Group, as a result of which fewer than two-thirds of the
incumbent directors are directors who either (A) had been directors of Pacific
Telesis Group 24 months prior to such change or (B) were elected, or nominated
for election, to the Board of Directors of Pacific Telesis Group with the
affirmative votes of at least a majority of the directors who had been
directors of Pacific Telesis Group 24 months prior to such change and who were
still in office at the time of the election or nomination; or
(iii) The shareowners of Pacific Telesis Group approve a
merger or consolidation of Pacific Telesis Group with any other corporation,
other than a merger or consolidation which would result in the voting
securities of Pacific Telesis Group outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 80 percent of the
total voting power represented by the voting securities of Pacific Telesis
Group or such surviving entity outstanding immediately after such merger or
consolidation, or the shareowners of Pacific Telesis Group approve a plan of
complete liquidation of Pacific Telesis Group or an agreement for the sale or
disposition by Pacific Telesis Group of all or substantially all Pacific
Telesis Group's assets.
Any other provision of this section notwithstanding, the term "Change in
Control" shall not include either of the following events undertaken at the
election of Pacific Telesis Group:
(1) Any transaction, the sole purpose of which is to change
the state of Pacific Telesis Group's incorporation;
(2) A transaction, the result of which is to sell all or
substantially all of the assets of Pacific Telesis Group to another
corporation (the "surviving corporation"); provided that the surviving
corporation is owned directly or indirectly by the shareholders of Pacific
Telesis Group immediately following such transaction in substantially the same
proportions as their ownership of Pacific Telesis Group's common stock
immediately preceding such transaction; and provided, further, that the
surviving corporation expressly assumes this Agreement.
(b) Severance Payment. If, during the term of this Agreement and
within three years after the occurrence of a Change in Control, the Employee's
employment is involuntarily terminated for any reason by the Corporation,
including a Constructive Termination, as defined herein, the Employee shall be
4
<PAGE>
entitled to receive a severance payment from the Corporation (the "Severance
Payment"). The Severance Payment shall be made in a lump sum not less than 31
days nor more than 120 days following the date of the employment termination
and shall be in an amount determined under subsection (c) below. The
Severance Payment shall be in lieu of any further payments to the Employee
under section 3 and any further accrual of benefits under section 4 with
respect to periods subsequent to the date of the employment termination. The
Severance Payment shall not reduce or offset any benefits the Employee may be
entitled to under section 7.
(c) Amount. The Amount of the Severance Payment shall be equal to
the following:
(i) an amount equal to 200 percent of the Standard Award
within the meaning of the Pacific Telesis Group Short Term Incentive Plan for
the Employee's Position Rate as of the date of employment termination (the
"Standard Award"); plus
(ii) an amount equal to the fair market value of a share of
Pacific Telesis Group common stock on the date of employment termination
multiplied by the number of Units within the meaning of the Pacific Telesis
Group Senior Management Long Term Incentive Plan ("LTIP Units") granted to the
Employee for the two performance periods ending with the two calendar years
following the year in which the employment termination occurs.
Notwithstanding any other provision of this Agreement or any provision in
the two above-referenced Incentive Plans, after the amounts in this subsection
(c) are paid to the Employee, the Employee shall have no further interest in
the Pacific Telesis Group Short Term Incentive Plan, or in the LTIP Units
granted for the two performance periods ending with the two calendar years
following the year in which the employment termination occurs.
(d) Life Insurance, Health Plan Coverage and Financial Counseling.
If, during the term of this Agreement and within three years after the
occurrence of a Change in Control, the Employee's employment is involuntarily
terminated for any reason by the Corporation, including a Constructive
Termination, in addition to the Severance Payment, the Employee (and, where
applicable, his dependents) shall be entitled to continue participation for a
period of three years following the date of employment termination, or until
the Employee's Normal Retirement Date, if earlier, in the basic and
supplemental group term life insurance plan and in the health care plan for
management employees maintained by the Corporation, as if he were still an
employee of the Corporation. Where applicable, the employee's salary for
purposes of such plans shall be deemed to be equal to his salary immediately
prior to employment termination. To the extent that the Corporation finds it
undesirable to cover the Employee under its group life insurance and health
plans, the Corporation (at its own expense) shall provide the Employee with
the same level of coverage under individual policies. The Corporation shall
also provide to the Employee for one year after employment termination
professional financial counseling services comparable in scope and value to
the financial counseling services made available to the Employee immediately
prior to the Change in Control.
(e) Additional Payment. If, during the term of this Agreement and
within three years after the occurrence of a Change in Control, the Employee's
employment is involuntarily terminated for any reason by the Corporation,
5
<PAGE>
including a Constructive Termination, and if the Corporation refuses or fails
to timely pay or provide the compensation and benefits specified in this
Agreement upon demand as provided in section 12(c), and if such refusal or
failure is not corrected within ten business days after written notice thereof
by the Employee to the Corporation, the Corporation shall pay immediately to
the Employee an additional amount equal to fifty percent (50%) of the
Employee's Base Compensation. This provision shall apply only once.
(f) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this section 6 (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
7. Involuntary Termination Without Cause, as Defined in Section 1(d), or
Disability, as Defined in Section 1(e).
(a) Continuation Period. In the event that, during the term of
this Agreement, the Corporation terminates the Employee's employment for any
reason other than Cause or Disability, the Employee shall be entitled to
receive all of the payments and benefit coverage described in the succeeding
subsections of this section 7. Except as otherwise provided herein, the
benefit coverage described in subsection (c) of this section 7 shall continue
for the period commencing on the date when the employment termination is
effective and ending on the earlier of (A) the first anniversary of the date
when the employment termination is effective, (B) the date of the Employee's
death, or (C) the Employee's Normal Retirement Date (the "Continuation
Period").
(b) Cash Payment. The Corporation shall pay to the Employee, in a
lump sum not less than 31 days nor more than 120 days following the date of
the employment termination whichever of the following amounts is applicable:
(i) if three or more years remain between the date of
employment termination and the Normal Retirement Date, an amount equal to
three times the Employee's Base Compensation in effect on the date of
employment termination; or
(ii) if less than three years remain between the date of
employment termination and the Normal Retirement Date, an amount equal to one-
twelfth of the Employee's Base Compensation in effect on the date of
employment termination, multiplied by the number of months (rounded to the
next higher whole number) remaining between the date of employment termination
and the Normal Retirement Date.
(c) Life Insurance and Health Plan Coverage. During the
Continuation Period, the Employee (and, where applicable, his dependents)
shall be entitled to continue participation in the basic and supplemental
group term life insurance plan and in the health care plan for management
employees maintained by the Corporation, as if he were still an employee of
the Corporation. Where applicable, the Employee's salary for purposes of such
plans shall be deemed to be equal to his Base Compensation in effect on the
date of employment termination. To the extent that the Corporation finds it
undesirable to cover the Employee under its group life insurance and health
plans, the Corporation (at its own expense) shall provide the Employee with
the same level of coverage under individual policies.
6
<PAGE>
(d) Incentive Awards. Within sixty days after the date the
employment termination is effective, the Corporation shall pay to the Employee
100% of the Standard Award applicable to the Employee for the calendar year
containing the date of employment termination. Except as otherwise provided
in this Agreement, the Employee's rights and interests under the Pacific
Telesis Group Senior Management Long Term Incentive Plan will be determined
under the provisions of that Plan; provided that the Employee may petition the
Corporation to distribute, in the Corporation's sole discretion, to the
Employee any non-forfeited LTIP Units remaining to his credit at a time
earlier than that specified in the Long Term Incentive Plan; and provided
further that if all LTIP Units granted to the Employee are forfeited and
cancelled under the terms of the Long Term Incentive Plan, the Corporation
shall pay to the Employee, within sixty days after the date the employment
termination is effective, an amount equal to the fair market value of a share
of Pacific Telesis Group common stock on the date of employment termination
multiplied by the number of LTIP Units granted to the Employee for the
performance period ending with the calendar year containing the date of
employment termination.
(e) Stock Options. The Employee's rights in stock options and
stock appreciation rights ("SARs") heretofore or hereafter granted to him
under the Pacific Telesis Group Stock Option and Stock Appreciation Rights
Plan (the "Stock Option Plan") shall be determined by the provisions of the
Stock Option Plan and the option and SAR agreements; provided that, the
Employee shall be entitled to be compensated within 60 days after employment
termination for any of the Employee's vested and nonvested stock options
(other than Incentive Stock Options) and vested and nonvested SARs that
terminate at the Employee's termination of employment. For each terminated
stock option (other than Incentive Stock Options), the amount of compensation
shall be the difference between the fair market value of a share of Pacific
Telesis Group common stock on the date the employment termination is effective
and the option price. For each terminated SAR, the amount of compensation
shall be the difference between the fair market value of a share of Pacific
Telesis Group common stock on the date the termination of employment is
effective and the option price at which the stock option related to the SAR
was granted. SARs that are cancelled under their own terms when the related
stock option is exercised shall not be compensated by the Corporation.
(f) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment or benefit contemplated by this section 7, nor shall
any such payment or benefit be reduced by any earnings or benefits that the
Employee may receive from any other source.
8. LIMITATION ON PAYMENTS.
(a) Basic Rule. Any provision of this Agreement to the contrary
notwithstanding, in the event that Coopers & Lybrand (the "Auditors")
determines that any payment or transfer by the Corporation to or for the
benefit of the Employee, whether paid or payable (or transferred or
transferable) pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be nondeductible by the Corporation for federal income tax
purposes because of section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), then the aggregate present value of all Payments shall
be reduced (but not below zero) to the Reduced Amount. For purposes of this
section 8, the "Reduced Amount" shall be the amount, expressed as a present
value, which maximizes the aggregate present value of the Payments without
7
<PAGE>
causing any Payment to be nondeductible by the Corporation because of section
280G of the Code.
(b) Reduction of Payments. If the Auditors determine that any
Payment would be nondeductible by the Corporation because of section 280G of
the Code, then the Corporation, within five business days after being notified
by the Auditors, shall give the Employee notice to that effect and a copy of
the detailed calculation thereof and of the Reduced Amount. The Employee may
then elect, in his sole discretion, which and how much of the Payments shall
be eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall advise the
Corporation in writing of his election within 30 days of his receipt of
notice. If no such election is made by the Employee within such 30-day period,
then the Corporation may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the Employee
promptly of such election. For purposes of this section 8, present value
shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this section 8 shall be binding upon
the Corporation and the Employee and shall be made within 60 days of the date
of the employment termination.
(c) Overpayments and Underpayments. As a result of uncertainty in
the application of section 280G of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that Payments will
have been made by the Corporation which should not have been made (an
"Overpayment") or that additional Payments which will not have been made by
the Corporation could have been made (an "Underpayment"), consistent in each
case with the calculation of the Reduced Amount hereunder. In the event that
the Auditors, based upon the assertion of a deficiency by the Internal Revenue
Service against the Corporation or the Employee which the Auditors believe has
a high probability of success, determine that an Overpayment has been made,
such Overpayment shall be treated for all purposes as a loan to the Employee
which he shall repay to the Corporation, together with interest at the
applicable federal rate provided for in section 7872(f)(2)(A) of the Code;
provided, however, that no amount shall be payable by the Employee to the
Corporation if and to the extent that such payment would not reduce the amount
which is subject to taxation under section 4999 of the Code. In the event
that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Corporation to or
for the benefit of the Employee, together with interest at the applicable
federal rate provided for in section 7872(f)(2)(A) of the Code.
9. SUCCESSORS.
(a) Corporation's Successors. The Corporation shall require any
successor (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Corporation's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree expressly
to perform this Agreement in the same manner and to the same extent as the
Corporation would be required to perform it in the absence of a succession.
The Corporation's failure to obtain such agreement prior to the effectiveness
of a succession shall be a breach of this Agreement and shall entitle the
Employee to all of the compensation and benefits to which he would have been
entitled hereunder if the Corporation had involuntarily terminated his
8
<PAGE>
employment without Cause or Disability, on the date when such succession
becomes effective. For all purposes under this Agreement, the term
"Corporation" shall include any successor to the Corporation's business and/or
assets which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by this Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
10. NOTICE.
Notices and all other communications contemplated by this Agreement
shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Corporation in writing. In the case of the
Corporation, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
11. INFORMATION.
(a) Employee agrees not to disclose to others, or take or use for
Employee's own purposes or the purposes of others, during or after Employee's
employment, any Information owned or controlled by Corporation. Employee
agrees that these restrictions shall also apply to all (i) Information in
Corporation's possession belonging to third parties, and (ii) Information
conceived, originated, discovered or developed, in whole or in part, by
Employee. As used herein, "Information" includes trade secrets, confidential
or proprietary business, technical or financial information, knowledge, data
or know-how, whether or not Employee's work product, in written, graphic, oral
or other tangible or intangible forms, including but not limited to
specifications, samples, records, data, computer programs, drawings, diagrams,
models, customer names, business or marketing plans and reports, and software
systems and processes. Any Information which is not readily available to the
public shall be considered to be a trade secret, even if it is not
specifically marked as such, unless Corporation advises Employee otherwise in
writing.
(b) Employee agrees that on termination of employment, Employee
will return to Corporation all property belonging to Corporation, including
all documents or other media in Employee's possession or control which in any
way incorporate or reflect any Information.
12. MISCELLANEOUS PROVISIONS.
(a) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Corporation (other than the Employee). No waiver by either party of any
breach of, or of compliance with, any condition or provision of this Agreement
by the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
9
<PAGE>
(b) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof.
(c) Presumption. Subject to the provisions of section 8, the
Corporation shall make a payment described in this Agreement upon receiving
written notice from the Employee describing such payment, referring to the
provision of this Agreement under which such payment is claimed and certifying
that all conditions for such payment, as set forth in this Agreement, have
been satisfied. The information so furnished to the Corporation by the
Employee shall be presumed to be correct, subject to rebuttal by the
Corporation after making payment. After making the payment claimed by the
Employee, the Corporation may seek a refund of such payment in accordance with
subsection (g) below. This subsection shall not be used to cause a payment to
be made at a time earlier than provided in this Agreement.
(d) No Setoff. There shall be no right of setoff or counterclaim,
with respect to any claim, debt or obligation, against payments to the
Employee under this Agreement.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(g) Arbitration. Except as otherwise provided in section 8, any
dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in San Francisco, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Punitive damages shall not be awarded. Notwithstanding the
foregoing, a dispute or controversy over whether Cause exists for the
termination of an Employee, when such termination occurred within three years
after a Change in Control, or a dispute or controversy over whether a
Constructive Termination has occurred, shall be arbitrated by a three-member
panel of the outside directors of Pacific Telesis Group, with the selection of
the panel to be made by the Chairman, as of one year prior to the Change in
Control, of the Pacific Telesis Group Board of Directors. If three such
individuals are unwilling to serve as arbitrators, the preceding sentence
shall be inapplicable, and all disputes and controversies shall be subject to
arbitration in accordance with the rules of the American Arbitration
Association, as provided above in this subsection. For purposes of this
subsection, "outside directors" shall mean members of the Board of Directors
of Pacific Telesis Group, as such Board of Directors was constituted one year
prior to the Change in Control, and who were not employees of Pacific Telesis
Group or a subsidiary one year prior to the Change in Control.
(h) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
10
<PAGE>
other creditor's process, and any action in violation of this subsection (h)
shall be void.
(i) Constructive Termination. As used herein, "Constructive
Termination" shall mean a material reduction in salary or benefits, a material
change in responsibilities, or a requirement to relocate, except for office
relocations that would not increase the Employee's one-way commute distance by
more than 40 miles.
(j) Fair Market Value. As used herein, "fair market value" of a
share of Pacific Telesis Group common stock shall mean the closing price of
such stock, as reported on the New York Stock Exchange composite transactions
tape for the day preceding the day in question, or if there are no sales on
such day, on the most recent prior date for which sales of such stock have
been reported on such composite transactions tape.
(k) Employment At Will; Limitation of Remedies. The Corporation
and the Employee acknowledge that the Employee's employment is at will, as
defined under applicable law. If the Employee's employment terminates for any
reason, the Employee shall not be entitled to any payments, benefits, damages,
awards or compensation other than as provided by this Agreement.
(l) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable taxes.
(m) Benefit Coverage Non-Additive. In the event that the Employee
is entitled to life insurance and health plan coverage under more than one
provision hereunder, only one provision shall apply, and neither the periods
of coverage nor the amounts of benefits shall be additive.
(n) Normal Retirement Date. As used herein, the Normal Retirement
Date shall mean the date the Employee attains age 65.
(o) Assignment of Agreement by Corporation. Pacific Telesis Group
may assign its rights under this Agreement to an affiliate, and an affiliate
may assign its rights under this Agreement to another affiliate of Pacific
Telesis Group or to Pacific Telesis Group. In the case of any such
assignment, the term "Corporation" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Corporation by its duly authorized officer, as of the day
and year first above written.
PACIFIC TELESIS GROUP
By:________________________________
Title: ________________________________
_____________________________________
DAVID W. DORMAN
11
<PAGE>
Exhibit 11
----------
PACIFIC TELESIS GROUP AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Dollars in millions, except per share amounts; shares in thousands)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------------------- ----------------------
Net income (loss) ....... $ 314 $ 323 $ 897 $ (1,113)
========= ========= ========= =========
Weighted average number
of common shares
outstanding ........... 424,065 417,215 423,937 411,481
Common stock equivalent
shares applicable to
stock options ......... 1,268 1,402 1,277 0
--------- --------- --------- ----------
Total number of shares
for computing primary
earnings (loss)
per share ............. 425,333 418,617 425,214 411,481
Incremental shares for
computing fully diluted
earnings (loss)
per share ............. 0 248 0 0
--------- --------- --------- ---------
Total number of shares
for computing fully
diluted earnings (loss)
per share ............. 425,333 418,865 425,214 411,481
========= ========= ========= =========
Earnings (loss) per common
share (as reported) ... $ 0.74 $ 0.77 $ 2.12 $ (2.71)
Primary earnings (loss)
per share ............. $ 0.74 $ 0.77 $ 2.11 $ (2.71)
Fully diluted earnings
(loss) per share ...... $ 0.74 $ 0.77 $ 2.11 $ (2.71)
Earnings (loss) per share amounts for the three- and nine-month periods ended
September 30, 1994 and September 30, 1993, as reported in the Condensed
Consolidated Statements of Income, were based on the weighted average number
of common shares outstanding for the respective periods. Primary and fully
diluted earnings (loss) per share amounts were not shown in the Condensed
Consolidated Statements of Income, as they differ from the reported earnings
per share amounts by less than three percent. Common stock equivalents were
excluded from the nine-month 1993 primary and fully diluted loss per share
calculations because their inclusion would have diluted the reported loss per
share.
<PAGE>
Exhibit 15
----------
COOPERS & LYBRAND L.L.P.
November 14, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Pacific Telesis Group
Registrations on Forms S-3, Form S-4, and Forms S-8
---------------------------------------------------
We are aware that our report dated November 14, 1994 on our review of the
interim financial information of Pacific Telesis Group and Subsidiaries for
the three- and nine-month periods ended September 30, 1994 and included in
this Form 10-Q is incorporated by reference in the Corporation's registration
statements as follows:
Form S-3: PacTel Capital Resources $500,000,000 Debt Securities and
Guarantee thereof by Pacific Telesis Group
Form S-3: Secondary Offering of 137,504 shares of Pacific Telesis Group
Common Stock
Form S-3: Shareowner Dividend Reinvestment and Stock Purchase Plan
Form S-4: ABI American Businessphones, Inc. Merger
Form S-8: Nonemployee Director Stock Option Plan
Form S-8: Supplemental Retirement and Savings Plan for Salaried Employees
Form S-8: Supplemental Retirement and Savings Plan for Nonsalaried
Employees
Form S-8: Stock Option and Stock Appreciation Rights Plan
Form S-8: PacTel Corporation Retirement Plan
Form S-8: Stock Incentive Plan
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
Coopers & Lybrand L.L.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<PERIOD-TYPE> 9-MOS
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 1,704
<ALLOWANCES> 145
<INVENTORY> 54
<CURRENT-ASSETS> 2,592
<PP&E> 26,810
<DEPRECIATION> 10,435
<TOTAL-ASSETS> 20,293
<CURRENT-LIABILITIES> 3,153
<BONDS> 0
<COMMON> 43
0
0
<OTHER-SE> 5,137
<TOTAL-LIABILITY-AND-EQUITY> 20,293
<SALES> 0
<TOTAL-REVENUES> 6,879
<CGS> 0
<TOTAL-COSTS> 5,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> 1,398
<INCOME-TAX> 524
<INCOME-CONTINUING> 874
<DISCONTINUED> 23
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 897
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.12
</TABLE>
