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PACIFIC TELESIS
NOTICE OF PROXY 1995 CONSOLIDATED
ANNUAL MEETING STATEMENT FINANCIAL STATEMENTS
To the Shareowners of Pacific Telesis Group:
The 1996 Annual Meeting of Shareowners of Pacific Telesis Group will be
held at the San Jose Scottish Rite Center, 2455 Masonic Drive, San Jose,
California, on Thursday, May 2, 1996 at 10:00 a.m., for the following
purposes:
o 1. To elect the three directors constituting Class III of the Corpora-
tion's Board of Directors to serve a three-year term.
o 2. To ratify the appointment of Coopers & Lybrand L.L.P. as the
Corporation's independent auditors for the year 1996.
o 3. To act upon other matters that properly come before the meeting or
any adjournment thereof, such as voting on the shareowner proposals
which begin on page 24 of the proxy statement. (The directors
oppose these proposals.)
Shareowners of record at the close of business on March 3, 1996 will be
entitled to vote at the meeting or any adjournment of the meeting.
March 15, 1996 Richard W. Odgers
Secretary
PACIFIC*TELESIS
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TABLE OF CONTENTS
Page
----
Proxy Statement
Voting of Shares.............................................. 2
Board of Directors............................................ 3
Election of Directors
(Item A on Proxy Card)................................... 4
Director Compensation and Related Transactions................ 7
Stock Ownership............................................... 9
Section 16 Reporting.......................................... 10
Report of the Compensation and Personnel Committee............ 11
Compensation and Personnel Committee Interlocks
and Insider Participation................................ 13
Executive Compensation........................................ 14
Ratification of Appointment of Auditors
(Item B on Proxy Card)................................... 24
Shareowners' Proposals:
Regarding Directory Paper Procurement Practices
(Item C on Proxy Card)................................... 24
Regarding Director Compensation
(Item D on Proxy Card)................................... 27
Other Matters to Come Before the Meeting...................... 29
Solicitation of Proxies....................................... 29
Proposals for the 1997 Annual Meeting......................... 29
Multiple Copies of Summary Annual Report to Shareowners....... 30
Financial Review
Stock Trading Activity and Dividends Paid................ F-1
Management's Discussion and Analysis..................... F-3
Selected Financial and Operating Data.................... F-34
Report of Management..................................... F-36
Report of Independent Accountants........................ F-38
Consolidated Financial Statements........................ F-39
Notes to Consolidated Financial Statements............... F-46
Quarterly Financial Data................................. F-76
Copyright * 1996 Pacific Telesis Group
All rights reserved.
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Pacific Telesis Group
130 Kearny Street
San Francisco, California 94108
PROXY STATEMENT
This proxy statement and the accompanying proxy card are being mailed
beginning March 15, 1996 to shareowners of Pacific Telesis Group (the
"Corporation") in connection with the solicitation of proxies by the Board of
Directors (the "Board") for the Annual Meeting of Shareowners ("Annual
Meeting") to be held on May 2, 1996.
Proxies are solicited to give all shareowners of record on March 3, 1996 an
opportunity to vote on matters scheduled for the meeting and described in the
proxy materials. Shares can only be voted if the shareowner is present in
person or is represented by proxy. Any person giving a proxy may revoke it at
any time before the meeting by sending in a written revocation or a proxy
bearing a later date. Shareowners may also revoke their proxies by attending
the meeting in person and casting a ballot. If proxy cards are signed and
returned without specifying choices, the shares represented by the proxy card
will be voted as recommended by the Board.
The Corporation has adopted a policy that provides all shareowners (with some
modifications in policy for shareowners who are employee benefit plan
participants) the option to request that any proxy, ballot or voting
instruction be kept confidential, except as required by law, in the event of a
contested proxy solicitation, or to the extent confidentiality is expressly
waived in writing by the shareowner. The policy also provides for the
tabulation of the vote by employees of the Corporation's transfer agent or by
some other independent third party and for the certification of the vote by an
independent inspector of election. The Corporation may, however, be informed
if a particular shareowner has voted and may receive periodic status reports
on the aggregate vote. If you desire to keep your vote confidential, please
mark the designated box on your proxy card. Your written comments on proxies
or ballots may also be made available to the Corporation, but your name and
address will not be disclosed if you request confidentiality.
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VOTING OF SHARES
Your vote is important. We urge you to return your marked proxy card
promptly. The holders of a majority of the shares of common stock issued and
outstanding and entitled to vote, whether present in person or represented by
proxy, constitutes a quorum. Abstentions will be counted towards the
tabulation of votes cast on matters presented to the shareowners and will have
the same effect as negative votes. Broker nonvotes occur when nominee
recordholders do not vote on specific issues because they did not receive
specific instructions on such matters from the beneficial owners of such
shares. Broker nonvotes are counted towards a quorum, but are not counted for
any purpose in determining whether a matter has been approved.
An affirmative vote of the holders of a plurality of the votes cast at the
meeting is required for the election of directors. An affirmative vote of the
holders of a majority of the shares present or represented at the meeting is
required for the approval of each of the other matters to be voted upon.
Highlights of the meeting will be included in the Second Quarter Report to
Shareowners which will be mailed in July.
If a shareowner is a participant in the Pacific Telesis Group Shareowner
Dividend Reinvestment and Stock Purchase Plan, the proxy card represents the
number of full shares in the dividend reinvestment plan account on the record
date as well as shares registered in the participant's name. If a shareowner
is a participant in the Pacific Telesis Group Supplemental Retirement and
Savings Plan for Salaried Employees, the Pacific Telesis Group Supplemental
Retirement and Savings Plan for Nonsalaried Employees (collectively, the
"Savings Plans"), the Pacific Telesis Group Leveraged Employee Stock Ownership
Plan (the "LESOP"), or the Pacific Telesis Group Employee Stock Ownership Plan
(the "ESOP"), the proxy card will also serve as a voting instruction for the
trustees of those plans where all accounts are registered in the same name.
Shares in the ESOP cannot be voted unless the card is signed and returned. If
cards representing shares held in the Savings Plans and LESOP are not re-
turned, those shares will be voted by the trustees in the same proportion as
the shares for which signed cards are returned by other participants.
Shareowners of record at the close of business on March 3, 1996 will be
entitled to vote at the meeting or any adjournment of the meeting. On
March 3, 1996, there were 428,434,672 shares of common stock ("Common Stock")
outstanding, each share being entitled to one vote.
IF YOU ARE A REGISTERED OWNER AND PLAN TO ATTEND THE MEETING IN PERSON, PLEASE
DETACH AND RETAIN THE ADMISSION TICKET WHICH IS ATTACHED TO YOUR PROXY CARD
AND MARK THE APPROPRIATE BOX ON THE PROXY CARD. BENEFICIAL OWNERS WHO PLAN TO
ATTEND THE MEETING IN PERSON MAY OBTAIN ADMISSION TICKETS IN ADVANCE BY
SENDING WRITTEN REQUESTS, ALONG WITH PROOF OF OWNERSHIP, SUCH AS A BANK OR
BROKERAGE FIRM ACCOUNT STATEMENT TO: MANAGER - SHAREOWNER RELATIONS, PACIFIC
TELESIS GROUP, 130 KEARNY STREET, SUITE 2907, SAN FRANCISCO, CALIFORNIA 94108.
SHAREOWNERS WHO DO NOT PRESENT ADMISSION TICKETS AT THE MEETING WILL BE
ADMITTED UPON VERIFICATION OF OWNERSHIP AT THE SHAREOWNER SERVICES COUNTER.
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BOARD OF DIRECTORS
Regular meetings of the Board of Directors are held ten times a year and
special meetings are scheduled when required. The Board held ten meetings in
1995. No director attended fewer than 75 percent of the total aggregate
number of board and committee meetings on which he or she served. Directors
meet their responsibilities not only by attending board and committee meet-
ings, but also through communication with the Chairman of the Board and other
members of management on matters affecting the Corporation.
The Board has established a number of standing committees. Standing Board
committees include the Audit, Compensation and Personnel ("C&P"), Nominating
and Corporate Governance ("Corporate Governance"), Corporate Public Policy,
Executive, Finance, and Pension and Savings Plans Committees. All committees,
except the Executive Committee, have nonemployee directors as chairpersons.
The Audit Committee, which consisted of five nonemployee directors in 1995,
meets with management to consider the adequacy of the internal controls of the
Corporation and the objectivity of its financial reporting. This Committee
also meets about these issues with the independent auditors, with financial
personnel of the Corporation and with internal auditors. The Audit Committee
recommends to the Board the appointment of the independent auditors, which
appointment may be ratified by the shareowners at the Annual Meeting. Both
the internal auditors and the independent auditors periodically meet alone
with the Audit Committee and always have unrestricted access to the Committee.
The Audit Committee also oversees the Corporation's Compliance Program, which
is designed to ensure that the Corporation and its employees comply with all
state and federal laws and regulations. The Corporation's compliance officer,
who is responsible for developing and implementing the Compliance Program,
reports to this Committee. The Audit Committee met five times in 1995.
The C&P Committee had five members during 1995, all of whom were nonemployee
directors. Other than the Chairman of the Board and Chief Executive Officer,
whose compensation is approved by the full Board, the C&P Committee approves
the compensation of officers within the authority delegated by the Board,
administers all executive benefit plans and provides oversight with respect to
employee benefit plans. The C&P Committee met eight times in 1995.
The Corporate Governance Committee advises the Board on matters concerning the
governance of the Corporation. The Committee also advises and makes
recommendations to the Board on the selection of candidates as nominees for
election as directors. In recommending Board candidates, this Committee seeks
individuals of proven judgment and competence who are outstanding in their
chosen fields. It also considers factors such as education, geographic
location, anticipated participation in Board activities and special talents or
personal attributes. In 1995, four nonemployee directors were members of the
Corporate Governance Committee. The Corporate Governance Committee met four
times in 1995. Shareowners who wish to suggest qualified candidates to the
Corporate Governance Committee should write to Richard W. Odgers, Secretary of
the Corporation, at 130 Kearny Street, Suite 3713, San Francisco, California
94108, stating in detail the candidate's qualifications for consideration by
the Committee.
If a shareowner wishes to nominate a director other than a director nominated
by the Corporate Governance Committee for that year, he or she must comply
with certain procedures set out in the Corporation's By-Laws. (See page 29,
"Other Matters to Come Before the Meeting.")
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Directors will hold office until the end of their terms and until their
successors have been elected and qualified or until the retirement date
specified by the Board, whichever date shall first occur. Directors who are
also employees (other than retired Chief Executive Officers) will retire from
the Board when they retire from the Corporation. It is the Corporation's
policy that directors will retire not later than the end of the calendar year
in which they reach 70 years of age.
ELECTION OF DIRECTORS (ITEM A ON PROXY CARD - DIRECTORS RECOMMEND A VOTE
"FOR")
The Corporation's Articles of Incorporation divide the Board into three
approximately equal classes of directors serving staggered three-year terms,
with one class of directors to be elected at each Annual Meeting. The three
nominees in Class III, as described below, are nominated for election at this
year's Annual Meeting.
The proxy holders named on the proxy card, unless otherwise instructed on
proxy cards that have been signed and returned, will vote for the election of
the three nominees listed below. These nominees have been selected by the
Board on the recommendation of the Corporate Governance Committee. If you do
not wish your shares to be voted for particular nominees, please identify the
exceptions on the proxy card.
If one or more of the nominees should become unavailable to serve at the time
of the meeting, the shares represented by proxy will be voted for the
remaining nominees and for any substitute nominees recommended by the
Corporate Governance Committee. If there are no substitute nominees, the size
of the Board will be reduced. The Corporate Governance Committee knows of no
reason why any of the nominees will be unavailable or unable to serve. The
following is a brief description of the principal occupation for at least the
past five years, other major affiliations and the age of each director.
CLASS III - NOMINEES FOR ELECTION TO TERM EXPIRING IN 1999
GILBERT F. AMELIO, 53, Chairman of the Board and Chief Executive Officer,
Apple Computer, Inc. (personal computer hardware and software company) since
February 1996. Former Chairman of the Board, Chief Executive Officer and
President, National Semiconductor Corporation (electronics company) 1991-1996.
Dr. Amelio is a director of Apple Computer, Inc. He has been a director of
the Corporation since 1995; member of the C&P, Corporate Governance and
Corporate Public Policy Committees.
FRANK C. HERRINGER, 53, Chairman of the Board since January 1996, President
and Chief Executive Officer since 1991, Transamerica Corporation
("Transamerica") (insurance and financial services company).
Mr. Herringer is a director of Transamerica and Unocal Corporation. He has
been a director of the Corporation since 1994 and is Chairman of the Finance
Committee; member of the C&P and Executive Committees.
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LEWIS E. PLATT, 54, Chairman of the Board, President and Chief Executive
Officer, Hewlett-Packard Company ("H-P") (manufacturer of electronic
equipment) since 1993, President and Chief Executive Officer since 1992.
Mr. Platt was an Executive Vice President of H-P from 1987 through 1992. He
is a director of H-P and Molex Inc. He has been a director of the Corporation
since 1994; member of the C&P and Finance Committees.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE IN CLASS III
ABOVE.
CLASS I - TERM EXPIRES AT 1997 ANNUAL MEETING OF SHAREOWNERS:
HERMAN E. GALLEGOS, 65, Independent Management Consultant since 1982.
Mr. Gallegos was a director of Gallegos Institutional Investors Corporation
(investment brokerage firm) from 1990 through 1994. He is a director of
Transmetrics, Inc. and Union Bank. From 1994 to 1995, Mr. Gallegos served as
alternate U.S. Public Delegate to the 49th United Nations General Assembly.
He has been a director of the Corporation since 1983 and is Chairman of the
Corporate Public Policy Committee; member of the Audit and Pension and Savings
Plans Committees.
PHILIP J. QUIGLEY, 53, Chairman of the Board, President and Chief Executive
Officer, Pacific Telesis Group since 1994.
Mr. Quigley served as Group President of the Corporation from 1988 through
March 1994 and President and Chief Executive Officer of Pacific Bell from 1987
through March 1994. He is a director of Varian Associates, Wells Fargo & Co.
and Wells Fargo Bank, N.A. Mr. Quigley has been a director of the Corporation
since 1988 and is Chairman of the Executive Committee; member of the Finance
Committee.
TONI REMBE, 59, Partner, Pillsbury Madison & Sutro LLP (law firm) since 1971.
Ms. Rembe is a trustee of the American Conservatory Theater, President of the
Van Loben Sels Foundation and a member of the Board of Governors of the
Commonwealth Club of California. She is a director of American President
Companies, Ltd., Potlatch Corporation and Transamerica. Ms. Rembe has been a
director of the Corporation since 1991 and is Chairwoman of the Audit
Committee; member of the Corporate Governance Committee.
S. DONLEY RITCHEY, 62, Managing Partner, Alpine Partners (family investment
partnership). Retired Chairman of the Board and Chief Executive Officer,
Lucky Stores, Inc.
Mr. Ritchey is a trustee of the Rosenberg Foundation. He is a director of
De La Salle Institute, Hughes Markets, Inc., McClatchy Newspapers, Inc. and
Spreckels Industries. Mr. Ritchey has been a director of the Corporation
since 1984 and is Chairman of the C&P Committee; member of the Audit,
Executive and Finance Committees.
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CLASS II - TERM EXPIRES AT 1998 ANNUAL MEETING OF SHAREOWNERS
WILLIAM P. CLARK, 64, Chief Executive Officer of the Clark Companies (family-
held corporations) since 1958.
Mr. Clark is a lawyer, rancher, retired California Supreme Court Justice and
former Secretary of the United States Department of Interior. He is a
director of Dulles Access Rapid Transit Corporation, The Irish Investment Fund
and Lawter International Inc. Mr. Clark has been a director of the
Corporation since 1985 and is Chairman of the Corporate Governance Committee;
member of the Audit, Corporate Public Policy and Pension and Savings Plans
Committees.
MARY S. METZ, 58, Dean of University Extension, University of California at
Berkeley since 1991.
Dr. Metz is President Emerita of Mills College. She is a trustee of the
American Conservatory Theater. Dr. Metz is a director of the
Cowell Foundation, Longs Drug Stores Corporation, Pacific Gas and
Electric Company and Union Bank. She has been a director of the Corporation
since 1986 and is Chairwoman of the Pension and Savings Plans Committee;
member of the Corporate Public Policy and Finance Committees.
RICHARD M. ROSENBERG, 65, Chairman of the Board, BankAmerica Corporation
(banking) since 1990.
Mr. Rosenberg is a trustee of the University of Southern California and the
California Institute of Technology. He is a director of Airborne Freight
Corporation, BankAmerica Corporation, Northrop Grumman Corporation, Pacific
Mutual Life Insurance Company and Potlatch Corporation. Mr. Rosenberg has
been a director of the Corporation since 1994; member of the C&P, Corporate
Governance and Finance Committees.
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DIRECTOR COMPENSATION AND RELATED TRANSACTIONS
For service on the Board during 1995, directors who are not employees received
an annual retainer of $25,000, a fee of $1,200 for each board meeting attended
and $600 for participating in board teleconferences, a fee of $1,000 for each
committee meeting attended and $500 for participation in committee
teleconferences. Chairmen of the Audit, C&P and Finance Committees each
received an additional retainer of $5,000. Other nonemployee directors who
chair committees received additional annual retainers of $4,000. Nonemployee
directors may elect to defer the receipt of all or a part of their fees and
retainers. These deferred amounts earn interest, compounded annually, at a
rate determined by the Board. The rate for 1995 was equal to 10 percent. A
trust has been established and assets have been contributed by the
Corporation, consisting primarily of cash and other investments, from which
benefits consisting of the deferrals and earnings on such deferrals described
above may be paid. Directors who are also employees of the Corporation
receive no additional remuneration for serving as directors or as members of
committees of the Board. Directors are entitled to reimbursement for
out-of-pocket expenses in connection with attendance at board and committee
meetings.
Nonemployee directors are reimbursed for certain telecommunications services
and equipment. The average cost per nonemployee director for
telecommunications services and equipment provided during 1995 was $4,559.
Employee directors receive similar services and equipment as part of their
compensation as officers.
The Corporation also provided nonemployee directors a travel accident
insurance policy while on Corporation business at an aggregate cost of $283 in
1995 and a personal excess liability insurance policy at an aggregate cost of
$4,450 in 1995.
Under the 1994 Stock Incentive Plan (the "Stock Plan"), which was approved by
the shareowners of the Corporation at the 1994 Annual Meeting, incumbent
nonemployee directors received a grant of 2,000 non-statutory options ("NSOs")
on April 29, 1994, and will continue to receive an annual grant of 2,000 NSOs,
subject to anti-dilution adjustments, at the conclusion of each subsequent
regular Annual Meeting so long as they continue to serve on the Board. The
exercise price for this annual stock option grant is equal to the fair market
value of Common Stock on the date of grant. The NSOs become exercisable one
year after the grant, or earlier, in the event of the director's death or
total and permanent disability or in the event of a change in control of the
Corporation. The NSOs expire the earlier of (1) ten years after the date of
grant, (2) 60 months after the termination of the director's service due to
retirement after serving at least three years, (3) 36 months after the
termination of the director's service due to total and permanent disability,
(4) 12 months after the director's death, and (5) three months after the
termination of the director's service for any other reason.
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The Stock Plan also provides for three annual grants of 400 shares of Common
Stock, subject to anti-dilution adjustments, to nonemployee directors
appointed on or after January 1, 1994. The first such grant occurred on the
conclusion of the 1994 Annual Meeting. For nonemployee directors appointed
after the 1994 Annual Meeting, the first grant occurred or will occur upon
such director's first appointment or election to the Board. The second and
third such grants will occur at the conclusion of the Annual Meeting of
Shareowners in each of the two calendar years next following the calendar year
of the first such grant. Incumbent nonemployee directors appointed on or
after February 1, 1991, but before January 1, 1994, received one grant of
400 shares of Common Stock on the conclusion of the 1994 Annual Meeting. All
of such shares granted to nonemployee directors under the Stock Plan are
100 percent vested on the date of grant.
Finally, the Corporation's Board may implement provisions of the Stock Plan
that permit a nonemployee director to elect to receive all or a portion of his
or her annual retainer and meeting fees in the form of NSOs or stock units to
be issued under the Stock Plan, provided the election is made at least six
months before such fees are payable.
Nonemployee directors serving as of the date of the 1990 reduction in
directors' mandatory retirement age will receive, at retirement, a one-time
payment equal to $20,000 (which was the amount of the 1990 annual retainer).
On January 26, 1996, the Corporation's Board approved revisions to the
Pacific Telesis Group Outside Directors' Retirement Plan (the "Retirement
Plan"). These revisions limit participation in the Retirement Plan to
nonemployee directors who commenced service prior to January 26, 1996 and
limit the credit for service under the Retirement Plan for purposes of
calculating pension benefits to years of service as of May 1, 1996. Upon the
latest to occur of (1) retirement, (2) attaining age 65 or (3) disability,
nonemployee directors who commenced service prior to January 26, 1996 and
elect to continue participation in the Retirement Plan receive pensions for
life equal to a percentage of the annual retainer in effect at the time of
retirement. This percentage is equal to 15 percent multiplied by the
director's years of service as of May 1, 1996 (not to exceed 100 percent).
Effective January 26, 1996, the Corporation's Board also adopted a new plan
which will provide benefits for nonemployee directors at retirement in a form
more strongly linked to shareowners' interests. Under the Pacific Telesis
Group Outside Directors' Deferred Stock Unit Plan (the "DSU Plan"),
nonemployee directors who begin service on or after January 26, 1996 will be
granted 400 deferred stock units on the date of the Annual Meeting of
Shareowners in each year after completing three years' service. Each unit
represents the cash value of one share of Common Stock. Current nonemployee
directors who have accrued a pension equal to 100 percent of the retainer
under the Retirement Plan may elect prior to May 2, 1996 to either retain
their accrued pension under the Retirement Plan or convert the present value
of their accrued pension to deferred stock units under the new DSU Plan.
Existing nonemployee directors with a partial accrued pension may elect prior
to May 2, 1996 to no longer participate in the Retirement Plan and convert to
the DSU Plan. In that case, the nonemployee directors will be granted
deferred stock units equivalent to the present value of their accrued pension
and future pension accruals as of May 1, 1996. The units attributable to the
accrued pension are fully vested, while the units attributable to future
accruals will vest pro rata in annual increments over the periods from May 2,
1996, to the date when the director completes seven years of service.
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Existing directors with a partial accrued pension under the Retirement Plan
who do not elect to waive participation in the Retirement Plan as described in
the preceding paragraph receive a prorated annuity under the Retirement Plan,
reflecting years of service as of May 1, 1996. The nonemployee directors also
receive deferred stock units equivalent to future pension accruals as of
May 1, 1996. Between May 2, 1996 and the year such a director reaches seven
years' service, equal annual installments of deferred stock units will vest.
Dividend equivalents will accrue on all deferred stock units granted under the
DSU Plan.
Deferred stock units will normally be settled as soon as reasonably
practicable after a director's service terminates. The deferred stock units
will be settled by paying the director a lump sum in cash, unless the director
has made a prior election to receive five or ten equal annual installments.
The amount of the cash settlement will be equal to the number of vested
deferred stock units held by the director, including dividend equivalents
converted into stock units, times the closing price of the Corporation's
Common Stock for the trading day coinciding with or next preceding the
director's last day of service.
Members of Messrs. Gallegos' and Quigley's immediate families were employed by
Pacific Bell, a subsidiary of the Corporation, and were paid a total of
$167,233 in 1995. Amounts paid to these employees are comparable to
compensation paid to other employees performing similar job functions.
STOCK OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock as of
February 29, 1996 by the directors, the Corporation's Chairman of the Board,
President and Chief Executive Officer, and four other most highly paid
executive officers (the "Named Executive Officers") and all directors and
executive officers as a group (including shares acquired under the
Pacific Telesis Group Supplemental Retirement and Savings Plan for Salaried
Employees and the ESOP as of November 30, 1995). The total number of shares
of Common Stock beneficially owned by the group is less than one percent of
the class outstanding.
Amount and Nature of Exercisable
Name of Beneficial Owner Beneficial Ownership Options*
- ----------------------------------------------------------------------------
G. F. Amelio 892 0
W. P. Clark 3,056 (1) 8,000
D. W. Dorman 83 100,000
M. J. Fitzpatrick 162 85,000
H. E. Gallegos 2,587 8,000
F. C. Herringer 2,804 (1)(2) 4,000
M. S. Metz 2,511 (1) 8,000
J. R. Moberg 388 70,000
R. W. Odgers 2,182 70,000
L. E. Platt 800 4,000
P. J. Quigley 7,476 (1) 267,000
T. Rembe 2,265 7,000
S. D. Ritchey 3,586 (1) 8,000
R. M. Rosenberg 1,800 2,000
All directors and executive officers
as a group (16 persons) 32,603 (3) 751,000
- -----------------------------------------------------------------------------
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(1) Includes the following shares of the Corporation's Common Stock in which
the named persons share voting and investment power: Mr. Clark,
600 shares; Mr. Herringer, 2,800 shares; Dr. Metz, 348 shares;
Mr. Quigley, 3,520 shares and Mr. Ritchey, 3,586 shares.
(2) Includes four shares beneficially owned by spouse, for which beneficial
ownership is disclaimed.
(3) Includes 549 shares beneficially owned by a spouse and acquired under the
Pacific Telesis Group Supplemental Retirement and Savings Plan for
Salaried Employees and the ESOP (as of November 30, 1995), for which
beneficial ownership is disclaimed. See Notes (1) and (2) above.
* Includes options which are exercisable within 60 days after February 29,
1996.
The following table sets forth the beneficial ownership of Common Stock as of
December 29, 1995 of persons known to the Corporation to be beneficial owners
of more than five percent of the Corporation's Common Stock.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
============================================================================
The Capital Group Companies, Inc. and 29,182,020 6.8%
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071 (1)
- ----------------------------------------------------------------------------
(1) Based on information contained in a report on Schedule 13G filed with
the Securities and Exchange Commission (the "SEC"). The Capital Group
Companies, Inc. ("Capital") is the parent company of various investment
management companies, including Capital Research and Management Company.
All of the shares reported above are owned by various institutional
clients of Capital and its subsidiaries. Capital and its subsidiaries
disclaim any beneficial ownership of any of these shares.
SECTION 16 REPORTING
As required by SEC rules under Section 16 of the Securities Exchange Act of
1934 (the "Exchange Act"), the Company notes that Vice President
Robert L. Barada filed a Form 4 five days late due to an inadvertent error by
his broker in recording the date of the transaction.
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REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE
The Board has established the following ongoing principles and objectives for
the Corporation's executive compensation program.
o Provide compensation opportunities that will help attract, motivate
and retain highly qualified managers and executives.
o Link executives' total compensation to company performance and
individual job performance.
o Provide an appropriate balance between incentives focused on
achievement of annual business plans and longer term results linked to
increases in shareowner value.
The Corporation's executive compensation programs are approved and
administered by the C&P Committee. The programs are designed to provide
competitive compensation opportunities for all corporate officers and
managers.
The Corporation retains the services of an outside executive compensation
consulting firm to advise the C&P Committee on executive compensation matters.
The consultant reviews the appropriateness of the design of the Corporation's
various plans in meeting the objectives set forth above.
In addition, the consultant provides the C&P Committee with aggregate data on
compensation paid to executives in comparable positions in other companies
that are representative of the labor markets in which the Corporation competes
for executive talent. These are companies that are comparable in complexity
to the Corporation and are of similar size which, in 1995, was approximately
$9 billion in revenues. The Corporation sets total compensation targets for
good performance, including salary, Short Term Incentive Plan ("STIP"), Senior
Management Long Term Incentive Plan ("LTIP") and stock options, in the middle
of the range of rates paid by these companies.
Competitive data is derived from survey data bases maintained by various
consulting firms. These data bases may, but do not necessarily, include data
from the firms used in the peer group performance comparison shown at the end
of this section. The C&P Committee periodically reviews this competitive data
to ensure the Corporation's pay levels are in line with its competitive
targets.
Cash compensation of the Corporation's executive officers is highly related to
company performance. In 1995, the Corporation's STIP provided annual cash
awards contingent upon the degree to which the Corporation met or exceeded
annual goals for Cash Value Added ("CVA") and Revenue determined during the
annual financial planning process and approved by the C&P Committee. These
criteria were used in determining awards for substantially all other employees
as well. Depending upon performance, actual awards may range from 0 to
200 percent of the annual target award amount approved by the C&P Committee.
In addition, the C&P Committee has the authority to grant, from time to time,
special awards to recognize outstanding contributions. The Corporation has
adopted an amended and restated STIP effective January 1, 1995, which includes
provisions that permit the C&P Committee to adjust awards based on additional
performance criteria, including individual merit, and which were intended to
ensure that compensation paid to the Named Executive Officers under the STIP
will be exempt from the limits on deductible compensation imposed under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
11
<PAGE>
The Corporation's LTIP provides awards contingent upon the achievement of
performance objectives over a three-year period that correlate strongly to
shareowner returns. Awards are denominated in shares of Common Stock and
dividend equivalents are paid during the performance period. At the end of
the period, awards are paid either in shares of Common Stock or in cash valued
at the average price of the Common Stock for a ten-day period in January.
The measures of performance under the LTIP for the performance period that
ended in 1995 are:
o Cash Flow Return on Investment in the third year of the performance
period.
o Cumulative Net Cash Flow over the three-year period.
o Total Investor Return relative to the Total Investor Return of four
comparator groups. These comparator groups are the Regional Holding
Companies ("RHCs"), Independent Telecommunications Companies,
California Utilities and the Dow Jones Industrial Average.
The performance targets were set by the C&P Committee in consideration of the
performance levels projected in the Corporation's business plan and the levels
of return required to meet investor return expectations. Investor return
expectations are based on an analysis of stock market data by an independent
third party. The Corporation has adopted an amended and restated LTIP
effective January 1, 1995, which includes provisions that permit the C&P
Committee to adjust awards based on additional performance criteria, including
individual merit, and which are intended to ensure that compensation paid to
the Named Executive Officers under the LTIP will be exempt from the limits on
deductible compensation imposed under Code Section 162(m).
Compensation of the Chairman of the Board, President and Chief Executive
Officer ("CEO") is administered by the C&P Committee with concurrence of the
Board. The Corporation has adopted a philosophy of tying a large fraction of
the CEO's total compensation to performance. Annually, the C&P Committee and
the CEO establish criteria for evaluation of CEO performance. These criteria
and results are reviewed with the Board. Mr. Quigley is Chairman of the
Board, President and CEO of the Corporation. Mr. Quigley's compensation
package (including salary, STIP, LTIP and stock options) is established by the
Board at a level commensurate with the range of competitive rates for
companies comparable in size to the Corporation. The C&P Committee has
established a strategy to bring Mr. Quigley's total compensation package
commensurate with the market median for comparable positions by 1998. In
order to accomplish this, and, as warranted by future performance, Mr.
Quigley's compensation will increase at rates faster than general movement in
the labor market.
Mr. Quigley's actual total compensation increased in 1995 as compared with
1994 primarily as a result of the increases granted to him in base salary and
the payment of 1995 incentive awards. However, for the 1993-1995 performance
period under the LTIP, Mr. Quigley's payout was significantly less than 1994
(28 percent). Although financial performance was close to expectations,
relative total investor return was less than the Corporation's peer group.
12
<PAGE>
In 1993, Congress adopted federal tax legislation limiting the deduction
available for compensation in excess of $1 million paid to the Corporation's
Named Executive Officers in any year under Code Section 162(m). The Stock
Plan, which was approved by shareowners at the 1994 Annual Meeting, contains
provisions that were intended to permit option grants under such plan to meet
the performance-based exception from the provision of Code Section 162(m) that
would otherwise apply. The Corporation also amended its STIP and LTIP
effective January 1, 1995, in consideration of proposed regulations then in
effect under Code Section 162(m), and the amended STIP and LTIP were approved
by shareowners in connection with the 1995 Annual Meeting. The Internal
Revenue Service (the "IRS") issued final regulations under Code Section 162(m)
on December 20, 1995. The Committee will continue to examine the effects of
the Code Section 162(m) provisions under the final IRS regulations and will
monitor the levels of compensation in order to determine if further action may
be appropriate. However, given the current levels of compensation of the
Named Executive Officers, any potential tax liability from the loss of
deductibility of STIP and LTIP awards would be nominal, in any event.
THE COMPENSATION AND PERSONNEL COMMITTEE
S. Donley Ritchey, Chairman
Gilbert F. Amelio Frank C. Herringer
Lewis E. Platt Richard M. Rosenberg
COMPENSATION AND PERSONNEL COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the C&P Committee during 1995 were: Frank C. Herringer,
Lewis E. Platt, Toni Rembe, S. Donley Ritchey and Richard Rosenberg. No
current officer of the Corporation serves on the C&P Committee and there were
no "interlocks" as defined by the SEC in 1995.
The Corporation is a party to certain agreements with subsidiaries of
Transamerica whereby the Corporation or its subsidiaries have the option or
the obligation to purchase under specified conditions the equity interests
that the Transamerica subsidiaries have acquired in certain Chicago cable
television properties, at a price sufficient to cover the costs Transamerica
has incurred in connection with the acquisition. Two subsidiaries of
Transamerica borrowed $60 million from banks to cover the acquisition costs,
and the Corporation guaranteed the borrowings. Interest accruing on the
loans, which will be added to the loan amounts, may accrue to a maximum of
$136 million. The Transamerica subsidiaries will be paid a total of $400,000
per year for the option, plus certain transaction costs such as legal fees.
The Transamerica subsidiaries were paid $405,000 in 1995 in connection with
the transaction. Ms. Rembe is a director of Transamerica. Mr. Herringer is
Chairman of the Board, President and CEO of Transamerica.
Transactions between the Corporation and H-P for equipment development, repair
and maintenance, and training and support amounted to $10.1 million in 1995.
Such amount includes payments to H-P for the development of large video
servers pursuant to an agreement between H-P and Pacific Telesis Video
Services, a wholly-owned subsidiary of the Corporation. Mr. Platt is Chairman
of the Board, President and CEO of H-P.
In 1995, the Corporation and its subsidiaries obtained legal services from the
law firm of Pillsbury Madison & Sutro LLP, of which Ms. Rembe is a member, on
terms which the Corporation believes were as favorable as would have been
obtained from unaffiliated parties.
13
<PAGE>
<TABLE>
EXECUTIVE COMPENSATION
The following table discloses compensation received by the Named Executive Officers for the three fiscal years
ended December 31, 1995.
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ----------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I) (C+D+H)
OTHER RESTRICTED LTIP ALL TOTAL
NAME & ANNUAL STOCK AWARDS OPTIONS/ PAYOUTS OTHER COMP CASH COMP
POSITION YEAR SALARY($) BONUS($)* COMP($) ($)** SARs(#) ($) ($)*** ($)****
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
P. J. QUIGLEY 1995 645,833 662,080 110,481 0 0 304,011 47,984 1,611,924
Chairman of the Board 1994 541,458 372,313 77,546 0 210,000 424,008 74,925 1,337,779
President & CEO 1993 458,417 291,200 46,499 0 0 320,432 50,101 1,070,049
D. W. DORMAN 1995 475,625 562,238(1) 50,136 1,387,500 0 0 46,864 1,037,863
President & CEO - 1994 206,250 587,500(1) 14,033 0 100,000 0 22,500 793,750
Pacific Bell
M. J. FITZPATRICK 1995 403,333 377,050(2) 35,823 0 0 0 43,382 780,383
President & CEO - 1994 366,875 230,500 13,425 0 70,000 0 61,647 597,375
Pacific Telesis 1993 105,000 50,000 0 0 15,000 0 0 155,000
Enterprises
R. W. ODGERS 1995 347,083 399,350 41,409 0 0 176,450 36,287 922,883
Executive Vice President,1994 331,875 178,250 39,166 0 70,000 239,616 59,153 749,741
General Counsel, 1993 324,458 268,000 28,764 0 0 188,209 43,688 780,667
External Affairs & Secretary
J. R. MOBERG 1995 347,083 349,350 43,578 0 0 176,450 51,654 872,883
Executive Vice President,1994 331,875 178,250 40,845 0 70,000 239,616 92,001 749,741
Human Resources 1993 324,375 238,000 29,129 0 0 188,209 70,340 750,584
=================================================================================================================================
14
<PAGE>
(1) In 1994 and 1995, the Corporation advanced $300,000 to Mr. Dorman at interest rates of 5.63 and 6.69 percent
per annum, respectively. In January 1995 and 1996, the principal amounts of the loans were forgiven in payment
of special compensation payments earned by Mr. Dorman in 1994 and 1995.
(2) Includes a special compensation payment of $50,000 which was earned by Mr. Fitzpatrick in 1995 and was paid
in 1996.
* Includes special awards ($230,000, $0, $15,000, $127,500 and $127,500, respectively) paid in April 1995
to recognize significant shareowner value created between 1989-1994.
** Represents the dollar value of shares awarded, calculated by multiplying the market value on the date of
grant ($27.75) by the number of shares awarded. The value of the grant as of December 31, 1995 was
$1,675,000 (based on the closing price on the New York Stock Exchange - Composite Transactions on
December 29, 1995 of $33.50). Dividends will be paid on these shares of restricted stock.
Mr. Dorman's grant vests in one installment on July 23, 2000.
*** Includes "above-market" interest on deferred compensation (1995 = $21,984, $30, $782, $22,387 and $37,754,
respectively) and company contributions under the Pacific Telesis Group Supplemental Retirement and Savings
Plan for Salaried Employees, including a "make-up" match under the Executive Deferral Plan for amounts that
were deferred and therefore not eligible for matching contributions under the Pacific Telesis Group
Supplemental Retirement and Savings Plan for Salaried Employees (1995 = $26,000, $6,334, $16,200, $13,900
and $13,900, respectively). Also includes executive relocation payments to Messrs. Dorman and Fitzpatrick
(1995 = $40,500 and $26,400, respectively).
**** Includes Salary + Bonus + LTIP Payouts and does not include Dividend Equivalents which are included
under Column E.
15
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES*
(A) (B) (C) (D) (E)
Value of Unexercised
Number of Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name On exercise (#) Value Realized ($) Unexercisable** Unexercisable***
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
P. J. Quigley No Exercises N/A 162,000/105,000 611,950/157,500
D. W. Dorman No Exercises N/A 50,000/ 50,000 137,500/137,500
M. J. Fitzpatrick No Exercises N/A 50,000/ 35,000 79,704/ 52,500
R. W. Odgers No Exercises N/A 35,000/ 35,000 52,500/ 52,500
J. R. Moberg No Exercises N/A 35,000/ 35,000 52,500/ 52,500
- -------------------------------------------------------------------------------------------------------------------------------
* To reflect the spin-off of AirTouch Communications, Inc. ("AirTouch") on April 1, 1994, the exercise price of
all outstanding options on the Corporation's Common Stock was adjusted and the outstanding options were
supplemented with AirTouch options so that the intrinsic value of the sum of both resulting options
remained the same.
In 1995, Messrs. Quigley and Moberg exercised options to purchase 75,000 and 6,000 shares of AirTouch common stock,
respectively. Based on the market value of AirTouch common stock on the date of exercise minus the exercise price,
Messrs. Quigley and Moberg realized value of $690,687 and $67,663, respectively, on such exercises.
As of December 31, 1995, the number of AirTouch options held by Messrs. Quigley, Dorman, Fitzpatrick, Odgers
and Moberg was 34,400, 0, 15,000, 39,600 and 33,600, respectively. All of such AirTouch options were exercisable.
The value of such options (based on the closing price on the New York Stock Exchange - Composite Transactions
on December 29, 1995 of $28.125 minus the exercise price) was $459,124, $0, $96,546, $415,153 and $351,240,
respectively. As of February 29, 1996, Messrs. Quigley, Fitzpatrick, Odgers and Moberg exercised all AirTouch
options held by them and no longer hold any AirTouch options.
16
<PAGE>
** All unexercisable options as of December 31, 1995 (except Mr. Dorman's) reflect options granted on April 1, 1994;
50 percent became exercisable on April 1, 1995, and the remaining 50 percent become exercisable on April 1, 1996.
Mr. Dorman's options were granted on July 1, 1994. 50 percent became exercisable on April 2, 1995, and the
remaining 50 percent become exercisable on April 2, 1996.
*** Based on the closing price on the New York Stock Exchange - Composite Transactions of the Corporation's Common Stock
on December 29, 1995 of $33.50 minus the exercise price.
17
<PAGE>
LONG TERM INCENTIVE PLANS* - AWARDS IN LAST FISCAL YEAR
Estimated Future Payouts
Under Nonstock Price-Based Plans
-------------------------------------------
(A) (B) (C) (D) (E) (F)
Performance or
Number of Other Period Until Threshold Target Maximum
Name Units (#)** Maturation or Payout (# of Units) (# of Units) (# of Units)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
P. J. Quigley 21,800 Three Years 5,450 21,800 43,600
D. W. Dorman 14,500 Three Years 3,625 14,500 29,000
M. J. Fitzpatrick 8,300 Three Years 2,075 8,300 16,600
R. W. Odgers 6,050 Three Years 1,513 6,050 12,100
J. R. Moberg 6,050 Three Years 1,513 6,050 12,100
- ------------------------------------------------------------------------------------------------------------------
* The Long Term Incentive Plan provides awards contingent upon the achievement of performance objectives set by the C&P
Committee over a three-year period. The above grants (Column B) are for the three-year performance period which will
end December 31, 1997. The measures of performance under this Plan are: (1) CVA averaged over the three years of the
performance period; (2) Cumulative Revenue over the three-year period and (3) Total Investor Return relative to the
Total Investor Return of four comparator groups. These comparator groups are the RHCs, Independent Telecommunications
Companies, California Utilities and the Standard & Poor's 500 Index (the "S&P 500 Index"). The performance targets
are set by the C&P Committee based on the performance levels projected in the Corporation's business plan.
Awards are denominated in shares of Common Stock and dividend equivalents are paid during the performance period.
At the end of the period, awards are paid either in shares of Common Stock or in cash (valued at the average price
of the Common Stock for a ten-day period in January).
** A unit is based on one share of Common Stock.
</TABLE>
18
<PAGE>
PERFORMANCE GRAPH
The stock performance graph shown below is not necessarily indicative of
future price performance. (See Appendix for narrative description.)
Comparison of Five Year Cumulative
Total Return for Pacific Telesis Group, the
Six Other RHCs and the S&P 500 Index
G R A P H
- ---------------------------------------------------------------------------
PENSION PLANS
The Corporation has noncontributory pension plans (both qualified and
nonqualified) for salaried employees. These plans provide a monthly pension
for salaried employees including officers equal to 1.45 percent of
"Compensation" averaged over the last five years of service multiplied by
years of service. Compensation for purposes of determining officer pension
benefits includes base salary and the target award under the STIP.
Effective January 1995, the years of service for this purpose will not be
more than the greater of 30 or the actual years of service accrued as of
December 31, 1994. An employee is eligible for a pension at age 65 after
completing five years of service. Pensions may begin earlier with or
without an early payment discount depending upon age and length of service
at retirement. Retirement is mandatory at age 65 for officers and other
senior managers, provided the individuals fall within the provisions of
Section 12(c)(1) of the Age Discrimination in Employment Act of 1967, as
amended from time to time.
The pension plans covering officers also provide that officers designated as
eligible to participate prior to January 25, 1992, will be eligible for a
minimum pension of 45 percent of average Compensation for the officer's last
five years of employment if the officer serves as an officer for ten years
and leaves the Corporation in good standing at age 55 or thereafter. This
minimum pension is increased by an additional 1.0 percent per year, up to a
maximum total pension of 50 percent, at 15 years or more of service as an
officer. The minimum pension benefit will be offset by benefits payable to
the officer under any other qualified or nonqualified pension plans of the
Corporation.
19
<PAGE>
Officers and senior managers who are hired at age 35 or over into a
specified level of management ("mid-career hires") and terminate after
completing five or more years of service at a specified level, receive
additional pension credits equal to the difference between 35 and their
maximum possible years of service attainable at age 65, not to exceed actual
net credited service, at a rate of 1.0 percent per year, with a higher rate
of 1.45 percent per year for those years served as an officer. Effective
July 1, 1995, the Board adopted amendments to these mid-career hire
provisions to coordinate these provisions with the 30-year limit on service
for pensions described above. These amendments limit the maximum mid-career
pension to 43.5 percent of average Compensation for a mid-career hire's last
five years of employment (offset by all other pension benefits).
Pensions under the qualified plan may be paid as life annuities or joint and
survivor annuities or a lump sum payment at retirement. Pensions under the
qualified plan are not subject to offset or forfeiture. Pensions under the
nonqualified plans may be paid as life annuities or joint and survivor
annuities, subject to the C&P Committee's discretion to determine another
form of payment. Pensions under the nonqualified plan are subject to
forfeiture or reduction in certain circumstances.
The 1995 Compensation of Messrs. Quigley, Dorman, Fitzpatrick, Odgers and
Moberg, covered by the qualified and nonqualified pension plans is
$1,066,250, $750,000, $595,000, $518,750 and $518,750 respectively. The
approximate estimated credited years of service that will be used in
calculating a pension benefit of Messrs. Quigley, Dorman, Fitzpatrick,
Odgers and Moberg, upon retirement at age 65 is 30, 25, 20, 14 and 34,
respectively. Messrs. Quigley and Moberg will have 15 or more years of
service as an officer at age 65, assuming they continue as officers during
the intervening period, and thus would be entitled to the greater of the
amount determined under the table below or a minimum pension benefit of
50 percent of the average annual Compensation during their final five years
of service. Mr. Odgers will have 14 years of service as an officer at age
65 assuming he continues as an officer during the intervening period, and
thus should be entitled to the greater of the amount determined under the
table below or a minimum pension benefit equal to 49 percent of the average
annual Compensation during his final five years of service.
The following table shows the total annual straight life annuity pension
benefits that would be received by an executive officer of the Corporation
retiring today at age 65 under the qualified and nonqualified plans. It
assumes various specified levels of total years of service and of average
annual Compensation during the final five years of service. The benefits
shown in the table generally are not subject to offsets for Social Security
benefits or other payments.
20
<PAGE>
Average Annual
Compensation
During Final Years of Service Prior to Retirement
Five Years -----------------------------------------------------------
of Service 15 20 25 30 35
- ----------------------------------------------------------------------------
$ 450,000 $ 97,875 $130,500 $163,125 $195,750 $228,375
500,000 108,750 145,000 181,250 217,500 253,750
650,000 141,375 188,500 235,625 282,750 329,875
700,000 152,250 203,000 253,750 304,500 355,250
800,000 174,000 232,000 290,000 348,000 406,000
900,000 195,750 261,000 326,250 391,500 456,750
1,000,000 217,500 290,000 362,500 435,000 507,500
1,150,000 250,125 333,500 416,875 500,250 583,625
1,300,000 282,750 377,000 471,250 565,500 659,750
- ----------------------------------------------------------------------------
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL
ARRANGEMENTS
The Corporation has entered into employment agreements with certain
officers, including Messrs. Quigley, Dorman, Fitzpatrick, Odgers and Moberg
which provide for payments in the event of an involuntary termination of
employment. Such agreements do not have a fixed term and may be terminated
upon three years notice. The agreements will automatically terminate upon
the voluntary resignation of the officer. The amount of the payments
depends on whether the involuntary termination occurs within three years
after a "change in control." If an officer's employment is involuntarily
terminated for some reason other than cause, death or disability, whether or
not there has been a change in control, the Corporation will make a cash
payment of three times the officer's base compensation then in effect, plus
100 percent of the target award under the STIP applicable for that calendar
year and, if all LTIP awards are forfeited, an amount equal to the value of
a share of Common Stock on the date of employment termination multiplied by
the number of LTIP units granted for the performance period that ends in
that calendar year. In such event, the Corporation will also compensate the
officer for the termination of NSOs and Stock Appreciation Rights ("SARs"),
based on the difference between fair market value of the Corporation's
Common Stock at the effective date of termination and the option price (in
the case of SARs, the difference between such fair market value and the
option price at which the stock option related to the SAR was granted). If
an officer's employment is involuntarily terminated by reason of death,
disability or cause, no compensation is payable under the employment
agreement.
21
<PAGE>
Upon an involuntary termination (including a "constructive termination,"
which is defined as a material reduction in responsibilities, a material
reduction in salary or benefits or a requirement to relocate) within three
years after a "change in control," the officer shall receive a severance
payment, in addition to the payments described in the preceding paragraph,
when applicable, equal to approximately 200 percent of the officer's STIP
and LTIP awards for one year. "Change in control" is defined generally as a
party's acquisition, direct or indirect, of 20 percent or more of the
Corporation's securities, a greater than one-third change in composition of
the Corporation's Board of Directors in 24 months that was not approved by
the majority of existing directors, or certain mergers, consolidations,
sales or liquidations of substantially all of the Corporation's assets.
Without regard to any other provision of the employment agreements, in the
event that the Corporation's auditors determine that any portion of the
payment to be made under the agreement is nondeductible by the Corporation
because of Code Section 280G, payments under the agreements will be reduced
to the extent of the nondeductible amount.
In addition to the provisions of the employment agreements described above,
the Corporation has also entered into a supplemental benefit agreement with
Mr. Odgers under which, if he voluntarily terminates his employment, he
would receive a pension (payable in any of the forms available under the
nonqualified pension plans) equal to a percentage (increasing ratably for
each month of employment, beginning with 35 percent and ending with
45 percent in the event of termination in or after October 1997) of his
average annual compensation (including base salary and the target award
under the STIP) during the final five years of employment. The agreement
further provides that if Mr. Odgers is involuntarily terminated, or if his
position or compensation is materially reduced, he would receive a pension
equal to 45 percent of his average annual compensation during his final five
years of employment. Any payments to Mr. Odgers under this agreement would
be offset by benefits payable to him under the qualified and nonqualified
pension plans of the Corporation described under "Pension Plans" in the
above discussion. In addition to the provisions of the employment
agreements described above, the Corporation has agreed to provide certain
supplemental pension benefits to Mr. Dorman if he terminates employment
after completing five years of service. The Corporation has agreed that Mr.
Dorman would receive a supplemental pension benefit of 1.0 percent per year
of service (in addition to the 1.45 percent credited to all salaried
employees) of his average annual compensation (including base salary and the
target award under the STIP) during the final five years of employment
multiplied by his years of service. Mr. Dorman's total pension would be
limited to a maximum of 50 percent, would be payable in any of the forms
available under the nonqualified pension plans and would not be discounted
for early payment. Any payments to Mr. Dorman under this agreement would be
offset by benefits payable to him under the qualified and nonqualified
pension plans of the Corporation described under "Pension Plans" in the
above discussion.
22
<PAGE>
The Corporation also has an Executive Deferral Plan pursuant to which
officers may elect to defer the receipt of all or a part of certain
specified compensation payments (including base salary, STIP, LTIP and bonus
payments). These deferred amounts earn interest compounded annually at a
rate determined by the C&P Committee. The rate for 1995 was equal to 10
percent. A trust has been established and assets have been contributed by
the Corporation, consisting of cash and other investments, from which
benefits for officers under the Executive Deferral Plan may be paid. A
similar trust (with the contribution of assets in a similar manner) has also
been established from which various nonqualified executive retirement or
pension benefits may be paid. These trusts generally provide that the C&P
Committee may issue instructions to the trustee as to payment of benefits
and that the Corporation will contribute sufficient assets to the trust to
fully fund benefit payments upon a change in control.
23
<PAGE>
RATIFICATION OF APPOINTMENT OF AUDITORS (ITEM B ON PROXY CARD - DIRECTORS
RECOMMEND A VOTE "FOR")
Subject to shareowner ratification, the Board, upon recommendation of the
Audit Committee, has reappointed the firm of Coopers & Lybrand L.L.P.,
Certified Public Accountants, as independent accountants to audit the
financial statements of the Corporation for the year 1996. Coopers &
Lybrand L.L.P. has audited the Corporation's financial statements for many
years. The Board recommends that the shareowners vote "FOR" such
ratification. If the shareowners do not ratify this appointment, other
certified public accountants will be considered by the Board upon
recommendation of the Audit Committee.
For the year 1995, Coopers & Lybrand L.L.P. audited the financial statements
of the Corporation and some of its subsidiaries, and provided other audit
services to the Corporation in connection with SEC filings, the review of
interim financial statements and audits of pension and other employee
benefit plans.
One or more members of the firm are expected to be present at the Annual
Meeting and will have the opportunity to make a statement if they desire to
do so and to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
SHAREOWNER PROPOSALS
Shareowner proponents have stated their intention to present the following
proposals at the 1996 Annual Meeting. In accordance with applicable proxy
regulations of the SEC, the name, address and shareownership of any
proponent will be furnished by the Corporation to any person, orally or in
writing as requested, promptly upon the receipt of any oral or written
request therefor addressed to Shareowner Relations, 130 Kearny Street, Suite
2907, San Francisco, California 94108. The proposals and supporting
statements, for which the Board and the Corporation accept no
responsibility, are set forth on the following pages. The Board opposes
these proposals for the reasons stated after each proposal.
SHAREOWNER PROPOSAL REGARDING DIRECTORY PAPER PROCUREMENT PRACTICES
(ITEM C ON PROXY CARD - DIRECTORS RECOMMEND A VOTE "AGAINST")
"WHEREAS: The world's forests contain the vast majority of the terrestrial
floral and faunal species;
"WHEREAS: The coastal temperate rainforests have been identified as one of
the rarest and most threatened forest types in the world, occurring on just
0.2 percent of earth's land base. British Columbia contains one-half of
North America's and one-quarter of the world's remaining coastal temperate
rainforests. The British Columbia Provincial Government has permanently
protected less than 7 percent of its coastal temperate rainforest, as
compared to 40 percent protected in Alaska. For example, an acre of British
Columbia's forest is clear-cut every 66 seconds, mainly for export to the
United States (this amount exceeds the total number of trees felled on all
U.S. national forests combined);
24
<PAGE>
"WHEREAS: A recent blue-ribbon panel of scientists found that even under
British Columbia's new Forest Practice Code, current timber planning
procedures are inadequate for sustainable ecosystem management and that
approximately 90 percent of the logging in B.C. is done by clearcutting.
The B.C. Government permits the cutting of an exorbitant volume of wood
products equaling 75 million cubic meters of timber - equivalent to a year's
worth of logging trucks, that if lined up nose-to-end, would circle the
Earth 1.25 times!
"WHEREAS: Due to the current fiber supply shortage, paper products are a
major cause of deforestation, with 50 percent of the mass of all the trees
cut in British Columbia ending up as paper or paperboard products;
WHEREAS: Pacific Bell purchases approximately 29,000 tons of paper from
MacMillan Bloedel, most of which is derived from the clearcutting of British
Columbia's coastal temperate rainforests;
"WHEREAS: MacMillan Bloedel has been convicted and fined 86 times for
violations of forestry, fishery and waste management practices by the B.C.
provincial and federal governments:
"RESOLVED: That shareholders request that Pacific Bell Directory, a
subsidiary of Pacific Telesis Corporation, stop its use of paper products
derived from clear-cut ancient rainforests and prepare a report to
shareholders on its plans to adopt ecologically sound procurement policies.
The report should be available to all shareholders within six months of the
1996 annual meeting."
In support of this proposal the proponents have submitted the following
statement:
"We believe it is vital for the company to review its procurement policies
to ensure that it is taking all steps to avoid use of old growth forests as
a source of paper for its phone directories. To that end, the report to
shareholders should consider the following three options:
o "Use of certified well-managed secondary forest (previously logged)
sources for their forest products. The Forest Stewardship Council
(FSC) is a non-partisan international body formed to accredit good
forest management certification programs. Pacific Telesis should
purchase forest products from vendors certified according to council
guidelines.
o "Maximize recycled fiber input. The company should also seek and
invest in fiber from ecologically responsible non-tree sources such
as the kenaf plant and agricultural wastes such as cereal grains
(wheat, rice, etc.).
o "Reduce overall paper consumption."
25
<PAGE>
The Board of Directors recommends a vote "AGAINST" this proposal for the
following reasons:
Pacific Bell Directory ("Directory") agrees with the principles that
underlie this proposal, however, we cannot support this proposal.
o The proposal would make it IMPOSSIBLE for Directory to produce our
telephone directories. The grade of paper that is used for
directories is in short supply around the world. If we halt or cut
back on purchases from any supplier, no suitable replacement is
available.
o The proposal focuses on trees harvested in British Columbia ("BC")
by MacMillan Bloedel (MacMillan"), but fails to mention that
MacMillan's harvests are strictly regulated and conducted in an
ecologically sound manner. All logging in BC must be approved by
multiple government agencies which solicit community input and
scientific review, and aim for a sustainable yield that protects the
forests, jobs and the environment. The BC government owns most of
the land in BC and has been aggressive in protecting the environment
-- including the creation of 100 new parks since 1991. Of the total
26 million acres of coastal temperate rain forest, two million acres
are formally protected and 20 million acres remain unlogged after
decades of forestry. Harvested areas are promptly reforested to
maintain biodiversity.
o The proposal will not save trees. BC's log and paper sales reports
do not support the contention that increased paper demand causes
more trees to be cut. Trees from BC are primarily harvested to
produce solid wood products (such as lumber for homes and
furniture), not for paper. Directory paper is made from inferior
trees, sawmill waste and recycled paper. Also, Directory's
purchases represent less than one percent of MacMillan's business.
o Directory already employs all practical means to reduce its
environmental impact, including many steps advocated by the
proponents.
The proponents ask Directory to: (1) use "certified" secondary forest
sources, (2) maximize recycled fiber input, and (3) reduce overall paper
consumption.
o Certified forests -- We cannot comply because no "certified forests"
are currently used to produce directory paper. However, we continue
to monitor standards for certification that are being developed.
o Recycling -- Directory is the industry leader in the use of recycled
directory paper. At our request, MacMillan invested heavily in
equipment to produce directory paper with 40 percent recycled
content- the current practical technical maximum. Directory's phone
books, which are 100 percent recyclable, are collected throughout
California and recycled into new directory paper and phone bill
remittance envelopes. We are also evaluating wheat straw as a
potential alternative fiber in our paper, and plan to test this
paper on our presses this year.
26
<PAGE>
o Reduce paper consumption -- Directory practices this every day, both
for environmental reasons and to lower costs. We use a printing
process and a redesigned directory format which reduces paper
consumption. We have greatly lowered the number of excess directory
copies.
In sum, the shareowners' proposal does not present a balanced solution
to the complex issues surrounding Canadian forestry and environmentally
sound directory publishing practices. In fact, this proposal would not
accomplish the goals of the proponents, would inappropriately interfere in
BC public policy and would deny Directory the ability to produce phone
books. Directory has prudently pursued environmentally responsible actions
and will evaluate additional opportunities as they arise.
THE BOARD OF DIRECTORS RECOMMEND A VOTE "AGAINST" THIS PROPOSAL.
SHAREOWNER PROPOSAL REGARDING DIRECTOR COMPENSATION (ITEM D ON PROXY CARD -
DIRECTORS RECOMMEND A VOTE "AGAINST")
"The shareholders of Pacific Telesis request the Board of Directors take
the necessary steps to amend the company's governing instruments to adopt
the following: Beginning on the 1997 Pacific Telesis fiscal year all
members of the Board of Director's total compensation will be paid in shares
of Pacific Telesis common stock each year. No other compensation of any
kind will be paid. These shares to be held until they leave the Board."
In support of this proposal, the proponent has submitted the following
statement:
"This proposal makes each board member wholly tied to the fortunes of the
company, as it should be. These are the people responsible for making sure
the company is on the right track. It is their responsibility to reward
good performance by the managers and to replace them if incompetent. Human
nature being what it is, the directors will only make the hard choices if
they have a substantial stake in the company and have to hold those shares
for the long term. A board member can always borrow money against their
shares using the shares as collateral, but they will still be tied to the
companies fortunes and that's how it should be. We hear from management we
have to pay in cash because some directors might need the money urgently and
we could not get successful people, if paid in stock. If they do not have
enough money or could not borrow the money for their every day living, they
must not be very successful and we do not need them. These people all have
other sources of income. This is a business not a charity."
The Board of Directors recommends a vote "AGAINST" this proposal for the
following reasons:
The success of the Corporation is dependent upon not only its employees, but
also its directors and their talent and experience. To attract and retain
the best group of directors, our compensation package must be fully
competitive.
27
<PAGE>
Directors' compensation is made up of four basic components: board and
committee chair retainers, board and committee fees, stock grants and/or
options and pension. The Corporation regularly surveys compensation
provided to directors by other regional holding companies and other large
California corporations. The data from these studies indicate that these
components are very common in these other companies. Moreover, the
aggregate value of the compensation received by the Corporation's
nonemployee directors is within the range of compensation provided by the
surveyed companies.
Nonetheless, the Corporation has taken action to place more emphasis on
stock ownership in compensating its directors. As reported in more detail
elsewhere in this proxy statement, on January 26, 1996, the Board of
Directors approved revisions to the Pacific Telesis Group Outside Directors'
Retirement Plan. These revisions limit directors' service for purposes of
determining their pension to years of service at May 1, 1996 and eliminate
all future credit for service after that date. New directors elected after
January 25, 1996, are not eligible to participate in the Retirement Plan.
Also on January 26, 1996, the Pacific Telesis Group Outside Director's
Deferred Stock Unit Plan was adopted. This plan allows existing directors
to convert the present value of their accrued pensions to Pacific Telesis
Group stock units of equal value. It also provides for the grants of stock
units equivalent to the value of the future pension accruals that were
eliminated. New directors elected after January 25, 1996 will receive
deferred stock units in lieu of any pension accruals.
By converting a portion of the current compensation program to Pacific
Telesis Group stock units, these actions significantly strengthen the link
between directors' and shareowners' interests.
The Corporation seeks to have diverse representation on its Board of
Directors. Many highly qualified and successful individuals come from walks
of life that do not provide high levels of cash income. Compensating
directors entirely in stock may preclude some of these individuals from
serving on the Board. The Corporation believes its current mix of cash and
noncash elements in its compensation package is appropriate and necessary to
attract the caliber of directors it needs.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THIS PROPOSAL.
28
<PAGE>
OTHER MATTERS TO COME BEFORE THE MEETING
The proxy card, in addition to voting choices specifically marked, and
unless otherwise indicated by the shareowner, confers discretionary
authority on the named proxy holders to vote on any matter that properly
comes before the 1996 Annual Meeting which is not described in these proxy
materials. At the time this proxy statement went to press, the Corporation
knew of no other matters which might be presented for shareowner action at
the Annual Meeting.
The federal proxy rules specify what constitutes timely submission for a
shareowner proposal to be included in the proxy statement. If a shareowner
desires to bring business before the meeting which is not the subject of a
proposal timely submitted for inclusion in the proxy statement, the
shareowner must follow procedures outlined in the Corporation's By-Laws. A
copy of these procedures is available upon request from the Secretary of the
Corporation, 130 Kearny Street, Suite 3713, San Francisco, California 94108.
One of the procedural requirements in the By-Laws is timely notice in
writing of the business the shareowner proposes to bring before the meeting.
Notice must be received not less than 25 days nor more than 60 days prior to
the meeting. It should be noted that these By-Law procedures govern proper
submission of business to be put before a shareowner vote and do not
preclude discussion by any shareowner of any business properly brought
before the Annual Meeting.
If a shareowner wants to nominate a person for election to the Board other
than a director nominated by the Corporate Governance Committee, notice of
the proposed nomination must be delivered to or mailed and received by the
Secretary of the Corporation not less than 25 days prior to the meeting. A
copy of the By-Law provisions governing the requirements for notice is
available upon request from the Secretary of the Corporation.
SOLICITATION OF PROXIES
The Corporation will pay all costs of distribution and solicitation of
proxies. Brokers, nominees, fiduciaries and other custodians will be
reimbursed their reasonable fees and expenses incurred in forwarding proxy
materials to beneficial owners. Corporate Investor Communications, Inc. has
been retained at an estimated cost of $16,000, plus reasonable out-of-pocket
expenses, to assist in the solicitation of proxies. This solicitation will
be by mail, telephone and other means.
PROPOSALS FOR THE 1997 ANNUAL MEETING
Shareowner proposals intended for presentation at the Corporation's
1997 Annual Meeting must be received at the Corporation's principal
executive offices no later than November 15, 1996. Proposals must comply
with Rule 14a-8 promulgated by the SEC pursuant to the Exchange Act.
29
<PAGE>
MULTIPLE COPIES OF SUMMARY ANNUAL REPORT TO SHAREOWNERS
The Corporation's 1995 Summary Annual Report to Shareowners has been mailed
to shareowners. If more than one copy of the Summary Annual Report is sent
to your address, we will discontinue the mailing of reports on the accounts
you select if you mark the designated box on the appropriate proxy card(s).
Mailing of dividends, dividend reinvestment statements, proxy materials and
special notices will not be affected by your election to discontinue
duplicate mailings of the Summary Annual Report to Shareowners.
By Order of the Board of Directors,
Richard W. Odgers
Executive Vice President, General Counsel, External Affairs and Secretary
Dated: March 15, 1996
30
<PAGE>
- ----------------------------------------------------------------------------
In accordance with Rule 14a-3(c) under the Securities Exchange Act of 1934
(the "Exchange Act"), as adapted to the "Summary Annual Report" procedure,
the information contained below and in the following appendix (consisting of
the section entitled "Annual Financial Review") is provided solely for the
information of shareowners and the Securities and Exchange Commission
("SEC"). Such information shall not be deemed to be "soliciting material"
or to be "filed" with the SEC or subject to Regulation 14A under the
Exchange Act (except as provided in Rule 14a-3) or to the liabilities of
Section 18 of the Exchange Act, unless, and only to the extent that, it is
expressly incorporated by reference into the Form 10-K of Pacific Telesis
Group for its fiscal year ending December 31, 1995.
- ----------------------------------------------------------------------------
Except for historical information contained below and in the following
appendix (consisting of the section entitled "Annual Financial Review"),
such discussion contains forward-looking statements that involve potential
risks and uncertainties. Pacific Telesis Group's (the "Corporation") actual
results could differ materially from those discussed therein. Factors that
could cause or contribute to such differences include, but are not limited
to, those discussed therein and those discussed in the Corporation's Forms
10-K for the years ended December 31, 1995 and 1994, and Forms 10-Q for
first, second, and third quarters of 1995. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as
of the date hereof. The Corporation undertakes no obligation to revise or
update these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
- ----------------------------------------------------------------------------
STOCK TRADING ACTIVITY AND DIVIDENDS PAID
Payment
1995 High Low Dividends Date
- ----------------------------------------------------------------------------
First Quarter.................... $31.250 $28.000 $0.545 5/1/95
Second Quarter................... $31.250 $25.625 $0.545 8/1/95
Third Quarter.................... $30.875 $25.625 $0.545 11/1/95
Fourth Quarter................... $34.375 $29.125 $0.545 2/1/96
- ----------------------------------------------------------------------------
Payment
1994 High Low Dividends Date
- ----------------------------------------------------------------------------
First Quarter*.................. $58.000 $51.000 $0.545 5/2/94
Second Quarter.................. $32.375 $29.875 $0.545 8/1/94
Third Quarter................... $33.500 $30.125 $0.545 11/1/94
Fourth Quarter.................. $32.125 $28.250 $0.545 2/1/95
- ----------------------------------------------------------------------------
(Stock trading activity: based on New York Stock Exchange - Composite
Transactions)
* Reflects market prices per share prior to the April 1, 1994 spin-off of
spun-off operations.
F-1
<PAGE>
Dividends
The record date is set by the Pacific Telesis Group Board of Directors at
the time it declares a dividend. Based on the current schedule, record
dates are expected in April, July, October, and December, and dividends are
expected to be paid in May, August, November, and February. Quarterly
reports are mailed with dividend checks.
Stock Listing
New York, Pacific, Chicago exchanges PAC
London, Swiss exchanges Pacific Telesis
Newspaper stock tables Pac Telesis
Copies of the Pacific Telesis Group 1995 Form 10-K filed with the Securities
and Exchange Commission may be obtained without charge by writing to:
Shareowner Relations
Pacific Telesis Group
130 Kearny Street, Suite 2907
San Francisco, California 94108
F-2
<PAGE>
ANNUAL FINANCIAL REVIEW
-------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
The Corporation includes a holding company, Pacific Telesis, and its
telephone subsidiaries: Nevada Bell and Pacific Bell (which when used herein
includes its subsidiaries, Pacific Bell Directory, Pacific Bell Information
Services, Pacific Bell Mobile Services, Pacific Bell Internet Services,
Pacific Bell Network Integration, and others) hereinafter referred to as the
Telephone Companies. Other Pacific Telesis subsidiaries include Pacific
Telesis Enterprises, Pacific Bell Communications, and several other
subsidiaries that provide video, communications, and other services. The
Telephone Companies provide local exchange services, network access, toll
services, directory advertising, Internet access, and selected information
services in California and Nevada.
The Corporation's vision is to enrich people's lives through communications
and access to information, education, and entertainment services. Its
mission is to build customer loyalty and be the customer's first choice for
telecommunications and information services; to foster a culture that
ensures employee commitment; and to build value for its shareowners. To be
successful, the Corporation must continue to balance the needs of its three
major stakeholders: customers, employees, and shareowners.
KEY STRATEGIES
With increasing competition for existing services and the introduction of
local services competition in California effective January 1, 1996, the
Telephone Companies, which consist of Pacific Bell and Nevada Bell, face an
increasingly competitive marketplace. In response to the competitive
challenge, management has developed three key strategies intended to provide
a consistent, integrated focus for management's decisions and actions.
These overarching strategies are to strengthen the Corporation's core
telecommunications business, develop new markets, and promote public policy
reform.
Strengthen Core Business
- ------------------------
A strong core business provides the essential foundation to pursue future-
oriented opportunities. To strengthen the core telecommunications business,
management will continue to improve customer service and reduce costs,
upgrade network and systems capability, and retain and expand existing
markets through product and channel innovation.
F-3
<PAGE>
Improve Customer Service and Reduce Costs
To ensure a high degree of customer satisfaction, the Telephone Companies
interview more than 18,000 customers each month to monitor performance. The
majority of the interviews are event driven and designed to measure customer
satisfaction with recent transactions. Also, a portion of employee pay is
based on meeting customer satisfaction targets. The cumulative percentage
of Pacific Bell's business and residence market customers responding "good"
or "excellent" in 1995 interviews is displayed below. Nevada Bell achieved
even higher results.
Service Service Account
Provisioning Maintenance Servicing
- ----------------------------------------------------------------------------
Business Market (%) 90.8 84.7 89.6
Residence Market (%) 92.0 81.7 90.4
- ----------------------------------------------------------------------------
The Corporation continues its commitment to total quality management
practices as a proven way to improve processes and increase customer
satisfaction. In this area Pacific Bell has been recognized as a quality
leader. In December 1995, Governor Wilson of California awarded Pacific
Bell the Golden State Quality Award. The award, modeled after the Malcolm
Baldrige National Quality Award, is designed to recognize California
companies that continually strive for the achievement of organizational
excellence. The award recognizes companies whose employees, at all levels,
understand their company's vision and mission, and can relate their own
roles to the business strategy. In addition, several of Pacific Bell's
special access ordering, provisioning, and maintenance centers were
registered under ISO 9000, an international quality standard.
To prosper in a competitive environment, the Telephone Companies must
continue to provide outstanding customer service while lowering costs. To
improve operational efficiencies and reduce cost, the Corporation is
implementing core process reengineering ("CPR"), primarily at Pacific Bell.
CPR is a method for achieving significant increases in performance by
fundamentally rethinking basic business processes and systems. CPR projects
have resulted in better, faster customer service, and reduced costs. For
example, a major focus of 1995 was the creation of customer service centers
to improve the response to service activation and repair calls. With many
functions consolidated in the centers, significant time savings and service
improvements have been achieved by reducing hand-offs between functional
work groups. Similarly, Pacific Bell has reduced the number of network
operations centers from 25 to two. Each center acts as a fully functional
backup center for the other. Both new centers were operational by early
1996. The new consolidated centers require approximately 250 fewer
employees to operate than the old centers.
Another effort is Pacific Bell's plan to reduce real estate occupancy costs
by as much as 25 percent over five years by encouraging employees to pursue
alternative working arrangements such as telecommuting, virtual offices, and
shared offices. Expense savings will result from consolidating operations,
terminating leases, and eventually selling surplus properties. In 1995,
Pacific Bell reduced its annual real estate occupancy costs by over
$9 million.
F-4
<PAGE>
To provide faster customer service, Pacific Bell has implemented a new
process called "quick dialtone." Quick dialtone allows the customer to
access certain repair, 911, and business office numbers, even after service
is disconnected. It requires less processing to initiate telephone service
and allows Pacific Bell to activate service within about two hours. Eighty
percent of California residences were equipped for quick dialtone in 1995.
Quick dialtone makes it easy for customers to choose Pacific Bell.
As a result of reengineering processes and other efforts, the Corporation
reduced its workforce 5.2 percent during 1995.
Upgrade Network and Systems Capabilities
In order to offer the products and services customers want, now and in the
future, the Telephone Companies continue to invest heavily in improvements
to the core telecommunications networks. The Telephone Companies spent a
total of $1.9 billion on the telecommunications networks during 1995. The
focus of these investments has been in the advanced digital technologies
discussed below. These technologies enable the Telephone Companies to
provide new products and services, increase network quality and reliability,
increase transmission speed, and reduce costs.
December 31
------------
Technology Deployment 1995 1994
- ----------------------------------------------------------------------------
Access lines served by digital switches...................... 73% 66%
Access lines with SS-7 capability............................ 98% 95%
Access lines with ISDN accessibility......................... 85% 79%
Miles of installed optical fiber (thousands)................. 482 425
- ----------------------------------------------------------------------------
Signaling System 7 ("SS-7") permits faster call setup and custom calling
services. Integrated Services Digital Network ("ISDN") allows simultaneous
transmission of voice, data, and video over a single telephone line.
Digital switches and optical fiber, a technology using thin filaments of
glass or other transparent materials to transmit coded light pulses,
increase the capacity and reliability of transmitted data while reducing
maintenance costs. In addition, the Telephone Companies are deploying
Synchronous Optical Network ("SONET") interfaces within the fiber
infrastructure. SONET is an international standard for high-speed fiber
optics transmission.
Pacific Bell is working with AT&T Corp. to develop and field test an
Advanced Communications Network ("ACN") in California. In addition to
providing advanced telecommunications services, the new network should serve
as a platform for other information providers and will offer customers
alternatives to existing cable television providers. The ACN technology
that management has selected is a hybrid fiber/coaxial cable architecture.
This technology should be cost effective to deploy and operate, and allow
Pacific Bell to achieve significant operational savings. In 1995,
management decided to concentrate development and deployment of the ACN in
San Diego and the San Francisco Bay Area, two of Pacific Bell's most
competitive markets. Construction will be slower than originally planned.
F-5
<PAGE>
Management is continuing to reevaluate its capital program for 1996 but
currently anticipates capital spending in 1996 to be slightly lower than
1995 levels. The capital program includes the cost of upgrading and
maintaining the core telecommunications network and systems capabilities,
meeting customer demand for new access lines, building the Personal
Communications Services ("PCS") network, and constructing the wireless
digital television network, but excludes most of the costs of the ACN. The
Corporation's capital expenditures related to a contract with AT&T Corp. for
construction of the ACN are expected to be deferred until 1998. Pacific
Bell is committed to purchase these facilities in 1998 if they meet certain
quality and performance criteria. Management now expects the purchase
amount to be less than $1 billion in 1998, which is lower than the previous
forecast. Pacific Bell will lease certain operational portions of the
facilities prior to 1998 during the construction period.
Retain and Expand Existing Markets
Stimulating usage of the Telephone Companies' existing networks is the most
cost effective way to increase revenues. The Telephone Companies are
increasing their use of alternative sales channels and targeted advertising
to stimulate usage. Focus areas include high-growth data markets, voice
mail, additional residential lines, and custom calling services.
The market for high-speed data transmission is growing rapidly. The
Telephone Companies' ISDN sales more than doubled in 1995. The Telephone
Companies also offer several other high-speed data transmission products
tailored to a customer's specific needs. Frame Relay technology allows a
customer to transmit 126 pages of data per second and enables the customer
to move data quickly between widely dispersed local area networks. Switched
Multimegabit Data Service ("SMDS") allows users to buy whatever bandwidth
they need, and to upgrade it later if desired. Asynchronous Transfer Mode
("ATM") is a high bandwidth technology that allows a customer to transmit
50,000 pages of data per second, or to transmit broadcast-quality video.
The success of the Corporation's voice mail products continued in 1995.
Customers value such features as the ability of the service to answer the
phone even when they are on the line. They also like remote message
retrieval features and the reliability of the network. Voice mailbox
equivalents in service increased 27 percent in 1995 to about 1.5 million.
Changes in technology and telecommuting are fueling increased demand for
additional telephone lines in the home. Pacific Bell began a promotion in
December 1995 designed to increase the number of second residential access
lines. The Corporation provides approximately 1.7 million residential
access lines that are in addition to the customer's primary line. Customers
want extra lines for data transmission, Internet access, fax machines, and
convenience. Similarly, demand for Custom Calling Services, such as call
waiting, grew more than eight percent in 1995 as customers asked for greater
convenience and more control over their telephone communications.
F-6
<PAGE>
In May 1995, the Federal Communications Commission ("FCC") established
national rules affecting how carriers, including the Telephone Companies,
may offer calling party identification services ("Caller ID"). Caller ID
displays the telephone number of the calling party on a device that attaches
to, or is part of, a customer's telephone. The FCC ruling preempts certain
of the California Public Utilities Commission's ("CPUC") restrictions that
made providing Caller ID in California uneconomic. In June 1995, the CPUC
appealed the FCC's ruling to the U.S. Court of Appeals for the Ninth
Circuit, which subsequently upheld the FCC's ruling in January 1996. The
ruling is subject to further appeal.
The FCC rules require that a customer notification plan be approved by state
regulators before Caller ID services can be offered. In December 1995, the
CPUC ordered Pacific Bell to revise its customer notification plan and
allowed recovery of the plan's cost. Pacific Bell intends to offer Caller
ID services beginning in June 1996 at the same time it begins passing the
calling party's number on interstate calls in compliance with the FCC rules.
To protect customer privacy, Pacific Bell will automatically provide the
capability for per call blocking, which is accomplished by the customer
dialing *67 before dialing the telephone number. Pacific Bell will also
provide per line blocking at the customer's request.
Develop New Markets
- -------------------
As competition becomes more fierce in its core telecommunications business,
the Corporation will rely increasingly on developing new markets to create
new revenue sources. Toward that end, the Corporation is actively pursuing
opportunities in long-distance, video dialtone, PCS, wireless digital
television, Internet access, home entertainment, and other information
services.
In February 1996, the President signed into law the Telecommunications Act
of 1996 that establishes new procedures under which the Corporation can
apply to the FCC for authority to offer long-distance telephone service. To
compete effectively in this market, the Corporation has formed a new
subsidiary, Pacific Bell Communications. Although the Corporation must meet
certain requirements before it can offer long-distance service, management
expects to fulfill those requirements by the first part of 1997. Management
intends to offer price, service, and value packages that will provide the
incentive for Californians to choose Pacific Bell Communications as their
long-distance carrier. It is estimated that California's long-distance
market will grow to approximately $7.3 billion by the end of 1997.
In July 1995, the FCC approved Pacific Bell's applications for authority to
offer video dialtone services in specific locations in California. The
approval allows Pacific Bell to begin installing the video-specific
components of its ACN. Subject to regulatory approvals, the Corporation
plans to begin offering video services in San Diego and the San Francisco
Bay Area in 1996. The Telecommunications Act of 1996 terminates the FCC's
video dialtone rules and regulations but allows the continued construction
and operation of previously approved video dialtone systems. The FCC has
until July 1996 to issue regulations for an open video system. Management
continues to analyze the impact of the new legislation on its ACN plans.
F-7
<PAGE>
In 1995, the Corporation obtained licenses from the FCC to offer PCS to over
30 million potential customers in California and Nevada. PCS is a digital
wireless service offering mobility for both voice and data communications.
Pacific Bell Mobile Services has begun to deploy its network to provide PCS
throughout California and Nevada. The network will incorporate the Global
System for Mobile Communications ("GSM") standard which is widely used in
Europe. Management is working with the industry to resolve issues relating
to hearing aid interference and compatibility common to all digital systems.
Management expects a widespread offering of PCS service by early 1997.
Although management anticipates significant competition, particularly from
established cellular companies, it believes that digital technology and
Pacific Bell's reputation for superior service will be competitive
advantages.
In July 1995, the Corporation acquired Cross Country Wireless Inc. ("CCW").
CCW has existing wireless television operations with over 40,000 video
customers in Riverside, California and holds licenses and rights to provide
wireless television in Los Angeles, Orange County, and San Diego.
Additionally, the Corporation has negotiated an agreement to acquire two
companies with rights to provide wireless television in the San Francisco
Bay Area, San Diego, and Victorville, as well as in several communities
outside California. The two companies hold rights to reach about two
million households in California and another two million in other parts of
the country. The planned acquisition is subject to a number of conditions,
including regulatory and shareholder approvals of the selling companies.
When the planned acquisition is completed and the networks are built, the
Corporation's wireless television systems will be able to reach seven
million households in California. The ultimate number of actual subscribers
cannot be predicted at this time. The Corporation plans to provide digital
services that will bring consumers 100-plus channels and deliver picture and
sound quality superior to today's analog cable systems. Unlike direct
broadcast satellite programming, the service will include local broadcast
stations. The Corporation is also participating in the FCC's auction of
wireless spectrum.
In 1995, Pacific Bell formed a subsidiary and announced an aggressive
campaign to provide Internet access services to a broad range of customers
in California. One-third of all Internet traffic originates or terminates
in California. One-quarter of the commercial domains on the Internet are
California based. Pacific Bell began providing Internet access to large
businesses in the third quarter of 1995 and will provide residential service
in 1996.
The Corporation is also developing new markets for home entertainment,
information, and interactive services. To help facilitate entering these
new markets, TELE-TV, a joint venture with Bell Atlantic and NYNEX, was
formed to develop a portfolio of branded programming and services. TELE-TV
is moving aggressively to secure programming for the Corporation's wireless
digital television offerings. Upon FCC approval, TELE-TV also anticipates
delivering video services through retail affiliates over Pacific Bell's ACN
as well as over the Corporation's wireless digital television systems.
Management expects the Corporation to incur substantial start-up costs in
the development of these new markets, but continues to see these new markets
as attractive investment opportunities.
F-8
<PAGE>
Promote Public Policy Reform
- ----------------------------
Telecommunications policy reform has been, and will continue to be, the
subject of much debate in Congress, the California Legislature, the courts,
the FCC, the CPUC, and the Public Service Commission of Nevada ("PSCN").
Management supports public policy reform that promotes fair competition and
ensures that the responsibility for universal service is shared by all who
seek to provide telecommunications services. Competition will bring great
benefits to customers by giving them the opportunity to choose among service
providers, for everything from dialtone to long-distance to home
entertainment.
Telecommunications Legislation
In February 1996, the President signed into law a comprehensive
telecommunications bill that eases certain restrictions imposed by the
Communications Act of 1934 and the 1984 Cable Act, and which replaces the
1982 Consent Decree. Among the provisions, the new law allows telephone
companies and cable television companies to compete in each others' markets,
and permits the former Bell Operating Companies to apply to the FCC for
authority to offer long-distance service, subject to certain conditions.
Once the new law is fully implemented, consumers will have many new options
for their local telephone, long-distance, and cable television services.
(See "Develop New Markets" on page F-7.)
FCC Regulatory Framework Review
In March 1995, the FCC adopted new interim price cap rules that govern the
prices that the larger local exchange carriers ("LECs"), including the
Telephone Companies, charge interexchange carriers ("IECs") for access to
local telephone networks. The interim rules require LECs to adjust their
maximum prices for changes in inflation, productivity, and certain costs
beyond the control of the LEC. Under the interim plan, LECs may choose from
three productivity factors: 4.0, 4.7, or 5.3 percent. Election of the
5.3 percent productivity factor permits the LEC to retain all of its
earnings, whereas election of the lower productivity factors require
earnings above certain thresholds to be shared with customers. The
Telephone Companies have chosen the 5.3 percent productivity factor, which
enables them to retain all of their earnings after July 1, 1995.
In adopting the interim plan, the FCC required LECs to prospectively reduce
their earnings by 0.7 percent for each year the LEC elected the lower
3.3 percent productivity factor during 1991-94. For Pacific Bell this
resulted in a 2.1 percent reduction. Nevada Bell will have a 1.4 percent
reduction. The Telephone Companies have formally contested these reductions
as well as other adjustments associated with the interim plan in the U.S.
Court of Appeals for the District of Columbia ("the Court"). In August
1995, the Court agreed to expedite review of these adjustments.
The FCC plans to adopt permanent rules in 1996 to replace the interim price
cap plan following a rulemaking proceeding. Management continues to believe
that the FCC should adopt pure price cap regulation and eliminate the
productivity factor, sharing, and earnings caps.
F-9
<PAGE>
CPUC Revenue Rebalancing Shortfall
In September 1995, Pacific Bell filed with the CPUC for $214 million of
revenue increases. The request was to compensate Pacific Bell for the
revenue shortfall that resulted from the CPUC's price rebalancing plan that
accompanied the official introduction of toll services competition on
January 1, 1995. Revenue reductions due to lower prices were intended to be
offset by other price increases and by increased network usage generated by
the lower prices. Demand growth as a result of local toll price reductions
fell far short of the level anticipated by the CPUC. As a result, the
revenue neutrality intended by the CPUC was not achieved. Management cannot
predict the outcome of this matter.
CPUC Regulatory Framework Review
In December 1995, the CPUC issued an order in Phase I of its review of the
regulatory framework in California. The order suspended use of the
"inflation minus productivity" component of the price cap formula for 1996
through 1998. This action freezes the price caps on most of Pacific Bell's
regulated services for three years except for adjustments due to exogenous
costs or price changes approved through the CPUC's application process. In
January 1996, the CPUC began Phase II of its review which will examine the
continued applicability of earnings caps, sharing, procedures for modifying
rules after full competition, and other items. Management continues to
believe that the CPUC should adopt pure price cap regulation and permanently
eliminate sharing, earnings caps, and all other vestiges of rate-of-return
regulation.
PSCN Regulatory Review
On April 24, 1995, the PSCN issued a rule redesigning telecommunications
regulation in the state of Nevada. This rule includes many reforms
initiated by an industry coalition which includes Nevada Bell, Nevada IECs,
and other Nevada LECs. The rule includes compromises reached with other
parties, including the cable industry and the state Office of Consumer
Advocate. The new rule will remove barriers to toll and local competition
in Nevada but will also allow Nevada Bell to keep any productivity gains by
eliminating the current customer sharing provision. The new plan is
optional and will require a rate case to determine initial pricing. After
adoption, pricing flexibility is based on the nature and competitive
environment of the service. Prices for basic service are capped during a
three- or five-year period at Nevada Bell's election. The plan does not
prohibit or require presubscription and allows interconnection where
technologically feasible. Management anticipates a complete rate redesign
as part of a rate case which it will file in first quarter of 1996, for
rates effective in the latter part of 1996 when the current plan expires.
Management cannot predict the outcome of the proceeding but believes that
competition and increased productivity will result in price reductions for
customers.
F-10
<PAGE>
Local Services Competition
In December 1995, the CPUC issued rules concerning local exchange market
competition. The CPUC authorized 30 other facilities-based competitive
local carriers ("CLCs") to begin providing local phone service in California
beginning January 1, 1996. The new rules provide for interconnection of the
CLCs' networks to Pacific Bell's networks. All CLCs must provide access to
emergency services. For the first time, Pacific Bell and GTE California are
able to compete in each other's territory.
The CPUC has also announced that competitors who lease lines from LECs for
resale will be able to offer local telephone service beginning in March
1996. In February 1996, a CPUC Administrative Law Judge issued a proposed
decision specifying terms and conditions for resale competition. The
proposed decision sets wholesale prices for certain services about 17
percent below retail prices. Wholesale basic residential service would be
priced 10 percent below retail prices, both of which are below Pacific
Bell's costs since basic residential service is subsidized.
In November 1995, Pacific Bell and MFS Communications Company, Inc. reached
agreement on terms and conditions for the interconnection of their
respective networks and for the use of Pacific Bell's local lines. In
January 1996, Pacific Bell reached an interconnection agreement under the
CPUC's December 20, 1995, preferred framework with Teleport Communications
Group.
The CPUC expects to resolve remaining issues and issue final rules for
implementing competition in all California telecommunications markets by
January 1, 1997. Issues to be finalized include LEC pricing flexibility,
LEC provisioning and pricing of essential network functions to competitors,
presubscription, the price of interim number portability, universal service,
and final resale terms and conditions.
Management supports the expansion of local telephone competition and
believes that all markets should be open to all competitors under the same
rules at the same time. Management is also concerned that the final local
competition rules may not provide Pacific Bell with an opportunity to earn a
fair rate-of-return. Pacific Bell has filed testimony showing that the
effect of the CPUC's proposed final local competition rules, taken together
with possible unfavorable decisions on other pending regulatory issues,
would deprive Pacific Bell of the opportunity to earn a fair rate-of-return.
The filing shows that the proposed final local competition rules alone could
substantially reduce the rate-of-return on Pacific Bell's regulated
California operations in 1996, depending on the outcome of the unresolved
issues discussed above.
F-11
<PAGE>
Universal Service
In a December 1995 report to the California Legislature, the CPUC outlined
its proposal to continue universal telephone service as competition begins
in the local telephone market. The CPUC proposed to define basic service as
including the ability to place and receive calls; access to long-distance
carriers and directory assistance; free access to emergency and customer
services; and other services. The CPUC also proposed establishing a High
Cost Voucher Fund to subsidize companies serving high cost areas. All
carriers providing local phone service must offer adaptive telephone
equipment for the deaf and disabled and reduced "lifeline" rates for
qualified low-income customers.
If the California Legislature authorizes it to proceed, the CPUC intends to
finalize the definition of basic service, establish a revenue source for the
High Cost Voucher Fund, and identify high cost areas eligible for subsidy in
June 1996. Management believes that universal service issues should be
resolved before resale competition is authorized; however, resale
competition is currently scheduled to begin in March 1996, and the final
decision establishing universal service funding is scheduled for July 1996.
On the federal level, the Telecommunications Act of 1996 requires the
establishment of a Federal State Joint Board to make recommendations on the
definition, preservation, and advancement of universal service no later than
October 1996. The FCC must implement these recommendations no later than
March 1997. The Telecommunications Act of 1996 permits periodic
redefinition of universal service. It also states that all service
providers should contribute to the preservation and advancement of universal
service on an equitable and nondiscriminatory basis. The Telecommunications
Act of 1996 also states that there should be specific, predictable, and
sufficient federal and state mechanisms to preserve and advance universal
service. The states may establish their own universal service policies and
regulations provided that they do no conflict with the federal regulations
implemented by the FCC.
COMPETITIVE RISK
Regulatory, legislative and judicial actions, as well as advances in
technology, have expanded the types of available communications products and
services and the number of companies offering such services. Various forms
of competition are growing steadily and are already having an effect on
Pacific Bell's earnings. An increasing amount of this competition is from
large companies with substantial capital, technological, and marketing
resources. Currently, competitors primarily consist of interexchange
carriers, competitive access providers, and wireless companies. Pacific
Bell also faces competition from cable television companies and others.
F-12
<PAGE>
Effective January 1, 1995, the CPUC authorized toll services competition.
In May 1995, the CPUC required Pacific Bell to permit Centrex customers who
purchase certain optional routing features to route local toll calls to the
carrier of their choice. Management estimates that Pacific Bell lost about
five to six percent of the total local toll services market to competitors
in 1995. Management further estimates that, as a result of official
competition and unofficial competitive losses in prior years, Pacific Bell
currently serves less than 60 percent of the business toll market. The CPUC
also ordered Pacific Bell to offer expanded interconnection to competitive
access providers. These competitors are allowed to carry the intrastate
portion of long-distance and local toll calls between Pacific Bell's central
offices and long-distance carriers. As a result of the CPUC order,
competitors may choose to locate their transmission facilities within or
near Pacific Bell's central offices.
Effective January 1, 1996, the CPUC authorized local exchange competition.
The CPUC approved 30 companies, including large and well-capitalized long-
distance carriers, competitive access providers, and cable television
companies to begin providing local phone service in California. These
companies are prepared to compete in major local exchange markets and many
have already deployed switches or other facilities. In addition, cable
television companies currently have wires which pass more than 90 percent of
Pacific Bell's residential customers and have already announced plans for
major build-outs to compete in the local exchange market. All of Pacific
Bell's customers have already chosen a long-distance company, and these
companies have established widespread customer awareness through extensive
advertising campaigns over several years.
Local exchange competition may affect toll and access revenues, as well as
local service revenues, since customers may select a competitor for all
their telecommunications services. Local exchange competition may also
affect other service revenues as Pacific Bell Directory will have to acquire
listings from other providers for its products, and competing directory
publishers may ally themselves with other telecommunications providers.
Management estimates the CPUC's proposed final local competition rules alone
could substantially reduce the rate-of-return on Pacific Bell's regulated
California operations in 1996, depending on the outcome of certain
unresolved issues in the local competition rules proceeding.
The unique characteristics of the California market make Pacific Bell
vulnerable to competition. Pacific Bell's business and residence revenues
and profitability are highly concentrated among a small portion of its
customer base and geographic areas. Competitors need only serve selected
portions of Pacific Bell's service area to compete for the majority of its
business and residence usage revenues. High-margin customers are clustered
in high-density areas such as Los Angeles and Orange County, the San
Francisco Bay Area, San Diego, and Sacramento. Competitors are expected to
target the high-usage, high-profit customers.
F-13
<PAGE>
In Nevada, the PSCN issued a rule opening the local exchange market to
competition. It includes requirements that the LECs allow interconnection,
unbundling, interim number portability and resale, although open issues
remain as to resale terms and conditions, LEC wholesale pricing, terms and
conditions of unbundled services, and presubscription. Although there are
no open dockets on these issues at present, such dockets are expected in the
1996 to 1997 time frame. At least one long-distance provider has requested
resale of certain custom calling services and two competitive access
providers have entered the Northern Nevada market, with the express intent
of providing an alternative basic business service to high-margin customers.
Further, long-distance carriers can now transport toll calls both within and
between service areas, and there is evidence that such transport is
increasing at a rapid rate. As in California, Nevada Bell's market is also
vulnerable to competition and competitors are expected to target the high-
usage, high-profit customers. These customers are geographically
concentrated in the Reno/Sparks metropolitan area and business parks.
Management believes that all markets should be open to all competitors under
the same rules at the same time, and that a truly open competitive market,
in which the Corporation can compete without restrictions, offers long-term
opportunity to build the business.
F-14
<PAGE>
RESULTS OF OPERATIONS
The following discussions and data summarize the results of operations of
the Corporation for the periods 1995 compared to 1994, and 1994 compared to
1993. The Corporation's previous interests in the operating results of
wireless operations that were spun off to shareowners on April 1, 1994, are
classified separately as "spun-off operations" in the accompanying financial
statements. (See Note B - "Spun-off Operations" on page F-49.) The spun-off
operations are excluded from the Corporation's results from continuing
operations.
% %
Operating Statistics** 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Capital expenditures ($ millions). 2,961 75.8 1,684 -10.7 1,886
Total employees at December 31.... 48,889 -5.2 51,590 -6.8 55,355
Telephone Companies' employees
at December 31*................. 45,413 -6.2 48,404 -7.8 52,525
Telephone Companies' employees per
ten thousand access lines*...... 28.8 -8.9 31.6 -10.5 35.3
- ----------------------------------------------------------------------------
* Excludes Pacific Bell Directory and Pacific Bell Mobile Services
employees.
** Continuing operations.
The Corporation reported a loss of $2,312 million for 1995, or loss per
share of $5.43. The reported loss is due primarily to a non-cash,
extraordinary charge to net income during third quarter 1995 of
$3.4 billion, after taxes, or $7.89 per share. The charge resulted from the
discontinued application by the Corporation's Pacific Bell subsidiary of
special accounting rules for entities subject to traditional regulation and
its change to the general accounting rules used by competitive enterprises.
Revenue shortfalls also contributed to the decline in earnings. Demand
growth as a result of the January 1995 local toll price reductions fell far
short of the level anticipated by the CPUC. As a result, the revenue
neutrality intended by the CPUC's price rebalancing order was not achieved.
Price cap revenue reductions ordered by the CPUC and the FCC further reduced
earnings. Additional pressure on earnings resulted from incremental labor
expense associated with the severe storms in 1995. Pressure on earnings was
mitigated by the Corporation's continuing cost containment initiatives.
The Corporation's 1994 earnings and earnings per share, excluding income
from spun-off operations, increased $2.7 billion and $6.38, respectively.
1993 results were reduced by after-tax charges of about $2.7 billion for
adopting new accounting rules, restructuring charges, and other one-time
items. Results for 1994 included an after-tax charge of about $29 million
due to a CPUC refund order related to Pacific Bell's payment processing
system.
F-15
<PAGE>
Management expects that earnings may increase slightly in 1996 compared to
1995 earnings excluding the extraordinary item. Any increase, however, will
be significantly dependent on pending regulatory decisions regarding the
terms and conditions for local competition, and the amount of market share
loss as competition continues to grow. Management anticipates earnings
dilution from the development of new markets and increased local
competition, but believes that the California economy will continue to
improve and that cost controls will continue to succeed. (See "Develop New
Markets" on page F-7 and "Local Services Competition" on page F-11.) In the
long-term, stimulated usage of the core telephone networks, development of
new markets, and the continued expansion of the California economy should
provide opportunity for stronger earnings.
Volume Indicators
- -----------------
% %
1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Switched access lines at Dec. 31
(thousands)....................... 15,782 3.0 *15,315 3.0 14,873
Residence....................... 9,876 2.1 *9,677 2.2 9,467
Business........................ 5,692 4.9 *5,426 4.3 5,201
Other........................... 214 0.9 *212 3.4 205
ISDN access lines at Dec. 31
(thousands, included in above) 53 130.4 23 91.7 12
Interexchange carrier access
minutes-of-use (millions)........ 59,193 10.7 53,486 7.7 49,674
Interstate...................... 32,774 3.7 31,604 8.0 29,265
Intrastate...................... 26,419 20.7 21,882 7.2 20,409
Toll messages (millions).......... 4,819 8.0 *4,460 4.9 *4,251
Toll minutes-of-use (millions).... 14,547 4.1 13,980 1.3 13,795
Voice mailbox equivalents at Dec. 31
(thousands)...................... 1,453 27.0 1,144 31.0 873
Custom calling services at Dec. 31
(thousands)...................... 7,321 8.4 6,752 9.0 6,195
- ----------------------------------------------------------------------------
* Restated.
The total number of access lines in service at December 31, 1995, grew to
15,782 thousand, an increase of 3.0 percent for the year, the same growth
rate as 1994. The growth rate in business access lines was 4.9 percent in
1995, up from 4.3 percent in 1994. The growth in business access lines
reflects increased employment levels in California. The number of ISDN
lines in service grew to 53 thousand, an increase of 130.4 percent for the
year, as customers increased telecommuting and demanded faster data
transmission and Internet access. The residential access line growth rate
declined to 2.1 percent for 1995, from 2.2 percent in 1994. The lower
residential growth rate compared to the business growth rate reflects weak
residential construction in California.
F-16
<PAGE>
Access minutes-of-use represent the volume of traffic carried by
interexchange carriers over the Telephone Companies' local networks. Total
access minutes-of-use for 1995 increased by 10.7 percent over 1994. The
increase in access minutes-of-use was primarily attributable to economic
growth and the effect of toll services competition. In California, the
official introduction of toll services competition in January 1995 had the
effect of increasing intrastate access minutes-of-use. This phenomenon
occurs because Pacific Bell provides access service to competitors who
complete local toll calls over Pacific Bell's network.
Toll messages and minutes-of-use are comprised of Message Telecommunications
Service and Optional Calling Plans ("local toll") as well as WATS and
terminating 800 services. In 1995, toll minutes-of-use increased by
4.1 percent compared to an increase of 1.3 percent for 1994. The increase
was driven primarily by economic growth as well as lower prices. In
California on January 1, 1995, Pacific Bell lowered the price of its local
toll services by an average of 40 percent. Pacific Bell also began offering
new discount calling plans. Residential customers receive an automatic 15
percent off toll charges above five dollars per month while businesses
receive an automatic 20 percent off toll charges over $15 per month. High-
volume customers can receive even larger discounts. Price decreases
stimulated demand slightly but the increase fell far short of levels
predicted in the CPUC's order.
For a discussion of voice mail products and custom calling services, see
page F-6 under "Retain and Expand Existing Markets."
A growing California economy should allow current volume growth trends to
continue into 1996. However, this may be completely or partially offset by
competitive losses due to the CPUC's authorization of local competition
beginning January 1, 1996.
Operating Revenues
- ------------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Total operating revenues...... $9,042 -$193 $9,235 -$9 $9,244
-2.1% -
- ----------------------------------------------------------------------------
Revenues were reduced from 1994 primarily because demand growth as a result
of lower prices was less than assumed in the CPUC-ordered price rebalancing.
Revenues were also reduced because of price cap revenue reductions ordered
by the CPUC and FCC under incentive-based regulation as well as the effects
of toll services competition.
F-17
<PAGE>
Effective January 1, 1995, the CPUC allowed long-distance companies and
others to officially compete with Pacific Bell in providing local toll
services in California. That decision also rebalanced prices for most of
Pacific Bell's regulated services so that Pacific Bell could remain
competitive in the new environment. The CPUC intended this decision to be
initially revenue neutral. Revenue reductions due to lower prices were
intended to be offset by other price increases and by increased network
usage generated by the lower prices. Although Pacific Bell observed some
increased usage during 1995, calling volumes were far below levels
forecasted by the CPUC and far below levels necessary to achieve revenue
neutrality.
The decreases in total operating revenues from price rebalancing and price
cap orders were partially offset by a net increase in customer demand of
$324 million. Comparative revenues were also increased by a CPUC-ordered
refund of $27 million in the second quarter of 1994 related to Pacific
Bell's payment processing system.
Primary factors affecting revenue changes are summarized below:
Total
Price Change
Price Cap Customer from
($ millions) Rebalancing Orders Misc. Demand 1994
- ----------------------------------------------------------------------------
Local service....................... $379 -$125 $79 $ 27 $360
Network access:
Interstate......................... 20 -46 75 75 124
Intrastate......................... -213 -17 3 204 -23
Toll service........................ -616 -48 -53 -57 -774
Other service revenues.............. 15 -1 31 75 120
----- ----- ----- ----- -----
Total operating revenues............ -$415 -$237 $135 $324 -$193
============================================================================
Local service revenues include basic monthly service fees and usage charges.
Fees and charges for custom calling services, coin phones, installation, and
service connections are also included in this category. The $27 million
increase in customer demand for local service is the result of the 3.0
percent growth in access lines and the 8.4 percent growth in custom calling
services, such as call waiting, generated by the improved economy in
California.
Network access revenues reflect charges to interexchange carriers and to
business and residential customers for access to the Telephone Companies'
local networks. The $75 million increase in interstate network access
revenues due to customer demand reflects increased interexchange carrier
access minutes-of-use, as well as increased access lines. The $204 million
demand-related increase in intrastate network access revenues also resulted
from growth in access minutes-of-use. At Pacific Bell, the official
introduction of competition in the local toll market in January 1995 had the
effect of increasing access usage revenues.
F-18
<PAGE>
Toll service revenues include charges for local toll as well as WATS and
800 services within service area boundaries. The decreases in customer
demand-related toll service revenues primarily result from competition. The
Telephone Companies have lost and continue to lose WATS and 800 service
business to interexchange carriers who have the competitive advantage of
being able to offer these services both within and between service areas.
Management estimates that Pacific Bell lost an additional five to six
percent of the local toll services market to competitors in 1995. Partially
offsetting these reductions were increased usage revenues resulting from
general economic growth and lower prices.
Other service revenues are generated from a variety of services including
directory advertising, information services, and billing and collection
services provided by the Telephone Companies. Other service revenues for
1995 include an increase in information service revenues of $35 million at
Pacific Bell, chiefly due to the success of its business and residential
voice mail products. Voice mailbox equivalents at the Telephone Companies
increased 27 percent in 1995.
In 1994, total operating revenues decreased $9 million from 1993 reflecting
$119 million of revenue reductions ordered by the CPUC and the FCC under
price cap regulation. In addition, revenues were reduced by $56 million
because of accruals at the Telephone Companies for sharing interstate
earnings with customers. Revenues also were reduced due to a $27 million
CPUC refund order related to Pacific Bell's payment processing system, and a
July 1994 CPUC decision which increased the productivity factor of the price
cap formula from 4.5 percent to 5.0 percent. The higher productivity factor
reduced revenues $19 million. These and other miscellaneous reductions were
partially offset by $265 million of revenue increases due to customer
demand.
Looking ahead, in addition to the effects of local services competition on
Pacific Bell's revenues in 1996, the FCC's annual access charge order that
took effect August 1, 1995, required the Telephone Companies to reduce
revenues about $126 million annually.
Operating Expenses
- ------------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Total operating expenses...... $7,031 -$10 $7,041 -$1,541 $8,582
-0.1% -18.0%
- ----------------------------------------------------------------------------
F-19
<PAGE>
The decrease in total operating expenses for 1995 reflects the Corporation's
continuing cost reduction efforts and reduced settlements expense. These
decreases were largely offset by increased depreciation expense, costs
resulting from severe storm damage in early 1995, and increased software
expenses. Primary factors affecting expense changes are summarized below.
Pacific Bell Expenses Total
(excluding subsidiaries) PTG
---------------------------------------- Other Change
Salaries Employee Settle- PTG from
($ millions) & Wages Benefits ments Misc. Entities 1994
- ---------------------------------------------------------------------------
Cost of products and
services............. -$21 -$38 -$79 $ 50 $ 7 -$81
Customer operations and
selling expenses..... -23 -17 - -2 23 -19
General, administrative,
and other expenses... -41 4 - - 49 12
Property & other taxes. - - - 1 - 1
Depreciation and
amortization......... - - - 69 8 77
------ ------ ------ ------ ------ ------
Total operating
expenses............. -$85 -$51 -$79 $118 $87 -$10
===========================================================================
At Pacific Bell, excluding subsidiaries, salary and wage expense decreased
$85 million in 1995, primarily as a result of a net workforce reduction of
3,114 employees. The effect of Pacific Bell's declining workforce was
partially offset in 1995 by increased overtime for storm and flood repairs
and by a $29 million increase related to higher compensation rates. The
Corporation's salary and wage expense was $2,215 million for 1995, a
decrease of $56 million from 1994. Management expects salary and wage
expense to decline further in 1996 due to continued force reduction programs
(see "Status of Reserves" on page F-24).
At Pacific Bell, excluding subsidiaries, employee benefits expense decreased
$51 million primarily due to the Corporation's ongoing health care cost-
reduction efforts and Pacific Bell's continued force reduction programs.
The Corporation's employee benefits expense was $660 million for 1995, a
decrease of $36 million from 1994. Management expects employee benefits
expense to decline further in 1996 due to the continued force reduction
programs and changes in actuarial assumptions.
Decreases in salaries and wages and employee benefits expense forecast for
1996 will be partially offset by increases associated with new labor
agreements at the Telephone Companies. The new agreements were effective
August 1995 and feature a 10.5 percent wage increase, a 14 percent pension
increase, and other increased benefits over three years. Management
estimates that the agreements will result in increased costs of
approximately $550 million over three years. This estimate does not include
savings that may result from the continued force reduction programs.
F-20
<PAGE>
Pacific Bell's settlements expense for 1995 decreased primarily due to the
CPUC-ordered price rebalancing, which eliminated reimbursements to certain
other local exchange carriers for calls terminating in their territories.
Pacific Bell's miscellaneous cost of products and services increased
primarily due to increased software purchases in 1995.
At Pacific Bell, excluding subsidiaries, depreciation expense increased
$69 million in 1995 primarily due to higher depreciation rates ordered by
the CPUC effective January 1, 1995, and higher telecommunications plant
balances. The Corporation's depreciation expense was $1,864 million for
1995, an increase of $77 million from 1994. Depreciation expense is
expected to increase in 1996 due to the continuing upgrade of the
Corporation's core telecommunications networks. (See "Upgrade Network and
Systems Capabilities" on page F-5.)
The Corporation's other entities' general and administrative expense
increased in 1995 primarily due to non-recurring software expenses.
The decrease in total operating expenses for 1994 reflects pre-tax
restructuring charges recorded in 1993 by the Corporation totaling
$1,431 million. The largest of the restructuring charges was to recognize
the incremental cost of force reductions associated with the restructuring
of Pacific Bell's internal business processes through 1997. (See "Status of
Reserves" on page F-24.)
In 1994, the Corporation's salary and wage expense of $2,271 million
decreased $110 million from 1993 reflecting a net workforce reduction at
Pacific Bell of about 3,800 employees and decreased overtime primarily
because of extensive storm repairs necessary in 1993. The Corporation's
employee benefits expense for 1994 of $696 million decreased $97 million
from 1993 primarily due to Pacific Bell's workforce reduction program.
Depreciation expense in 1994 was $1,787 million, an increase of $51 million
from 1993 due to higher telecommunications plant balances, a change in the
composition of the Corporation's plant, and increased depreciation rates
prescribed by regulators.
Interest Expense
- ----------------
% %
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Interest expense:
Long-term debt....................... $382 -9.7 $423 -6.0 $450
Short-term debt...................... 21 320.0 5 -72.2 18
LESOP trust.......................... 23 21.1 19 -5.0 20
Other obligations.................... 16 100.0 8 -61.9 21
---- ---- ----
Total.................................. $442 -2.9 $455 -10.6 $509
============================================================================
F-21
<PAGE>
Interest expense decreased in 1995 primarily due to a decrease in the
balance of long-term debt from 1994 and interest expense associated with a
CPUC refund order in 1994. These decreases were partially offset by
interest expense associated with increased short-term borrowings,
adjustments on capital leases and the completion of amortization of gains on
certain investments. Interest expense in 1996 is expected to decrease due
to the reclassification of interest during construction from an item of
miscellaneous income to a reduction in interest expense associated with the
discontinuance of Statement of Financial Accounting Standards No. ("SFAS")
71, "Accounting for the Effects of Certain Types of Regulation." (See Note
C - "Discontinuance of Regulatory Accounting - SFAS 71" on page F-51.)
The decrease in interest expense for 1994 reflected reduced borrowings
primarily because long-term debt levels were temporarily higher in 1993 due
to time-lags between new debt issuances and the retirements of refinanced
amounts. In addition, interest expense decreased in 1994 due to lower
interest rates resulting from refinancings in 1993. Interest expense also
decreased on short-term borrowings and other obligations due to reduced
short-term borrowings in 1994 and interest from a CPUC-ordered refund in
1993, respectively. Interest expense on other obligations was offset by
interest expense related to a CPUC late payment charges decision in 1994.
Miscellaneous Income
- --------------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Miscellaneous income.......... $42 -$13 $55 $7 $48
-23.6% 14.6%
- ----------------------------------------------------------------------------
Miscellaneous income decreased in 1995 primarily due to equity losses,
mainly at TELE-TV, and bond redemption costs associated with Pacific Bell's
redemption of debentures (see "Liquidity and Financial Condition" on page
F-26). These decreases were partially offset by interest income of
approximately $30 million from tax refunds received in 1995 related to prior
years and unrealized gains on trust assets under an executive compensation
deferral plan. These unrealized gains will fluctuate over time and may be
offset by unrealized losses depending on market conditions. Miscellaneous
income is expected to decrease in 1996 primarily due to dividends associated
with Trust Originated Preferred Securities (see Note N - "Subsequent Events"
on page F-70) and an increase of equity losses at TELE-TV associated with
start-up costs. In addition, miscellaneous income will decrease due to the
reclassification of interest during construction from an item of
miscellaneous income to a reduction in interest expense associated with the
discontinuance of SFAS 71.
Net miscellaneous income in 1994 increased in comparison to the 1993 amount,
which had included increased debt refinancing costs at Pacific Bell. The
increase in miscellaneous income was partially offset by reduced interest
income earned on intercompany advances to the spun-off operations which were
repaid in 1993. (See Note K - "Related Party Transactions" on page F-67.)
F-22
<PAGE>
Income Taxes
- ------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Income taxes........................... $563 -$95 $658 $648 $10
-14.4% -
Effective tax rate (%)................. 34.9 36.7 5.0
- ----------------------------------------------------------------------------
The decrease in income tax expense for 1995 was primarily due to lower pre-
tax income and tax refunds received in 1995.
The increase in income taxes for 1994 reflects the Corporation's higher
pre-tax income. The amount of investment tax credit amortization and
reversals of fixed asset related items in relation to the lower pre-tax
income for 1993 contributed to the reduced 1993 effective tax rate.
Extraordinary Item
- ------------------
The Telephone Companies historically have accounted for the economic effects
of regulation in accordance with the provisions of SFAS 71. Under SFAS 71,
the Telephone Companies have depreciated telephone plant using lives
prescribed by regulators and, as a result of other actions of regulators,
have deferred recognizing certain costs or have recognized certain
liabilities (referred to as "regulatory assets" and "regulatory
liabilities").
Effective third quarter 1995, management determined that, for external
financial reporting purposes, it is no longer appropriate for Pacific Bell
to continue to use the special SFAS 71 accounting rules for entities subject
to traditional regulation. Management's decision to change to the general
accounting rules used by competitive enterprises was based upon an
assessment of the emerging competitive environment in California. Pacific
Bell's prices for its products and services are being driven increasingly by
market forces instead of regulation.
The discontinued application of SFAS 71 required Pacific Bell, for external
financial reporting purposes, to write down the carrying amount of its
telephone plant and to eliminate its regulatory assets and liabilities. As
a result, the Corporation recorded in 1995 a non-cash, extraordinary charge
of $3.4 billion, or $7.89 per share, which is net of a deferred income tax
benefit of $2.4 billion. The telephone plant write-down portion of the
charge reflects a pre-tax increase in Pacific Bell's accumulated
depreciation of approximately $4.8 billion to recognize shorter estimated
lives in a competitive market. The extraordinary charge also includes a
pre-tax adjustment of $962 million to eliminate Pacific Bell's regulatory
assets and liabilities. The discontinuance of SFAS 71 for Pacific Bell was
made in accordance with SFAS 101, "Accounting for the Discontinuance of
Application of FASB Statement No. 71." The Corporation's Nevada Bell
subsidiary continues to apply SFAS 71 accounting. If Nevada Bell were to
discontinue SFAS 71, the financial impact would not have a material effect
on the Corporation's earnings. (See also Note C - "Discontinuance of
Regulatory Accounting - SFAS 71" on page F-51.)
F-23
<PAGE>
In future years, the discontinuance of SFAS 71 by Pacific Bell is not
expected to materially affect the Corporation's depreciation expense, net
income, or cash flow. This action will not affect Pacific Bell's planned
network investments. The discontinuance of SFAS 71 by Pacific Bell is a
change for external financial reporting only and has no effect on its
customers.
Cumulative Effect of Prior Year Accounting Changes
- --------------------------------------------------
Effective January 1, 1993, the Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," and SFAS 112,
"Employers' Accounting for Postemployment Benefits." These rules required a
change from the cash to the accrual method of accounting for these costs.
The cumulative effects of applying the new rules to prior years were
recognized during 1993 by one-time non-cash charges applicable to continuing
operations totaling $1.724 billion. The charges are net of deferred income
tax benefits of $1.155 billion. Pacific Bell's higher annual costs under
SFAS 106 have been partially recovered through increased revenues granted by
regulators of approximately $100 million for each of the years 1993-1996.
The Corporation's higher SFAS 106 costs have not materially affected
reported earnings for the years 1993-1995. However, a CPUC order held that
related revenues collected after October 12, 1994, are subject to refund.
(See "Revenues Subject to Refund" on page F-32.) The annual periodic expense
under SFAS 112 does not differ materially from expense under the prior
method.
Adoption of New Accounting Standards
- ------------------------------------
Under SFAS 123, "Accounting for Stock-Based Compensation," companies are
required to provide new disclosures about stock options based on their fair
value at the date of the grant. This new rule is required in financial
statements for fiscal years beginning after December 15, 1995. SFAS 123
provides for an option to disclose pro-forma effects of stock compensation
on net income and earnings per share or charge stock compensation to
earnings. The Corporation intends to adopt the disclosure-only alternative
in its December 31, 1996 consolidated financial statements.
Status of Reserves
- ------------------
In prior years, the Corporation has established a number of reserves to
record the effects of discontinuing and restructuring certain parts of its
business.
In 1991, a $203 million reserve was established for the cost of management
force reduction programs through 1994. A balance of $77 million remained at
the end of 1993. An additional $1,020 million reserve was established in
December 1993 to record the incremental cost of force reductions associated
with restructuring Pacific Bell's business processes through 1997. This
restructuring was expected to allow Pacific Bell to eliminate more than
14,000 employee positions from 1994 through 1997. After considering new
positions expected to be created, a net reduction of approximately
10,000 positions was anticipated. Pacific Bell also expects to relocate
approximately 10,000 employees as it consolidates business offices, network
F-24
<PAGE>
facilities, installation and collection centers, and other operations.
Pacific Bell's gross force reductions under the restructuring plan,
excluding subsidiaries, totaled 4,187 employees in 1995. Total gross force
reductions for the first two years of the plan, 1994 and 1995, totaled
10,039. Net force reductions were 3,114 for 1995 and 7,242 for the two-year
period 1994 and 1995. Management now believes both total gross and net
force reductions through 1997 are likely to exceed its original forecasts.
Annual cash savings are expected to reach approximately $1 billion when the
restructuring is completed. In 1995, expense savings due to the
restructuring totaled approximately $500 million primarily from savings in
labor costs due to cumulative force reductions since restructuring began.
Charges to the restructuring reserve in 1995 totaled $591 million including
$219 million for the cost through 1997 of enhanced retirement benefits
negotiated in the 1995 union contracts. These costs will be paid from
pension fund assets and do not require current outlays of the Corporation's
funds. Because the cost of enhanced retirement benefits was recognized in
full in 1995, charges to the restructuring reserve in 1996 and 1997 are
expected to be approximately $100 million less in each of the respective
years than the original forecast.
Other reserves were recorded in 1993, 1992, and 1990 related to the spun-off
operations and the Corporation's withdrawal from, or restructuring of, its
real estate, cable, and customer premises equipment businesses. Management
believes the $98 million balance in these reserves remaining at the end of
1995 is adequate. (See Note D - "Restructuring Charges" on page F-53.)
The table below sets forth the status and activity of these reserves.
($ millions) 1995 1994 1993
- ---------------------------------------------------------------------------
Reserve for force reductions and restructuring:
Balance - beginning of year.................. $ 819 $1,097 $ 101
Additions.................................... - - 1,020
Charges: cash outlays ....................... -372 -216 -24
noncash ............................ -219 -62 -
----------------------
Balance - end of year........................ $ 228 $ 819 $1,097
======================
Other reserves:
Balance - beginning of year.................. $ 119 $ 428 $ 60
Additions.................................... - - 454
Charges: cash outlays........................ -6 -61 -86
noncash............................. -15 -248 -
----------------------
Balance - end of year........................ $ 98 $ 119 $ 428
===========================================================================
F-25
<PAGE>
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 expects to continue to meet
the majority of its liquidity needs from internally generated funds, but can
also obtain external financing through the issuance of common stock,
preferred stock and short- and long-term debt, if needed.
With increasing competition in the coming years, the Corporation's internal
sources of cash could be reduced from historical levels. Any decision to
seek debt and equity in the capital markets would have to be balanced by the
Corporation's desire to maintain strong credit ratings as well as the
objective of minimizing dilution of the interests of existing shareowners.
Short-term borrowings are available under a commercial paper program and
through uncommitted unused lines of credit. These lines of credit are
subject to continued review by the lending banks. At December 31, 1995, the
unused lines of credit available totaled approximately $2.7 billion.
For longer-term borrowings at December 31, 1995, Pacific Bell had remaining
authority from the CPUC to issue up to $1.25 billion of long- and
intermediate-term debt. The proceeds may be used only to redeem maturing
debt and to refinance other debt issues. Pacific Bell had remaining
authority from the SEC to issue up to $650 million of long- and
intermediate-term debt through a shelf registration filed in April 1993. In
addition, the Corporation's PacTel Capital Resources subsidiary may issue up
to $192 million of medium-term notes through a shelf registration on file
with the SEC.
In February 1996, Pacific Bell issued $250 million of 5.875 percent
debentures due February 15, 2006. The debentures may not be redeemed prior
to maturity. The proceeds from the sale of the debentures were used to
reduce short-term debt incurred to retire Pacific Bell's debentures totaling
approximately $500 million in December 1995. The remaining debentures
retired in December 1995 were financed by commercial paper and may be
refinanced under the current remaining authorities of $1 billion and $400
million from the CPUC and SEC, respectively, described above.
In November 1995, the Corporation announced plans to acquire 100 percent of
the stock of Wireless Holdings, Inc. and Videotron Bay Area, Inc., which
hold licenses and rights to provide wireless video services. Both are joint
ventures between Transworld Telecommunications, Inc. ("TTI") and Le Groupe
Videotron Ltee. The transaction involves the exchange of approximately
$120 million of the Corporation's stock for the outstanding stock of the
acquired companies, and the Corporation's assumption of approximately
$55 million of debt. Closing is expected in second quarter 1996 and is
subject to a number of conditions, including regulatory and TTI shareholder
approval. The planned acquisition complements the purchase of CCW that
occurred in July 1995. The Corporation acquired 100 percent of the stock of
CCW to provide wireless television service in Southern California. The
transaction involved the exchange of approximately $120 million of
Pacific Telesis Group treasury stock, or about 4.4 million shares, for the
outstanding stock of CCW. The Corporation also assumed approximately
$55 million of CCW debt, which was retired during the third quarter of 1995.
(See "Develop New Markets" on page F-7.)
F-26
<PAGE>
In October 1995, the Corporation and Pacific Telesis Financing I, II, and
III filed a shelf registration with the SEC to sell up to $1 billion of
Trust Originated Preferred Securities ("TOPrS") to the public. The TOPrS
are subject to a guarantee from the Corporation. (See Note N - "Subsequent
Events" on page F-70.) An offering of $500 million in TOPrS priced at
7.56 percent was sold in January 1996. The proceeds were used to pay down
commercial paper. Proposed changes in income tax regulations may limit the
attractiveness of future issuances.
In October 1995, the Corporation and the Los Angeles Times announced that
the two companies will discontinue their equally owned joint venture, ESS
Ventures. The joint venture was created to explore and offer electronic
shopping services. The Corporation and the Los Angeles Times have decided
to independently develop their own services. The discontinuance of ESS
Ventures will not have a material effect on the Corporation's earnings.
In 1995, management decided to concentrate deployment of the ACN in San
Diego and the San Francisco Bay Area, two of Pacific Bell's most competitive
markets. Construction will be slower than originally planned, which will
reduce capital needs over the next five years by about $1 billion. (See
"Upgrade Network and Systems Capabilities" on page F-5.)
In September 1995, TELE-TV, of which the Corporation is a one-third owner,
announced it had selected Thomson Consumer Electronics as its wireless set-
top box supplier. The contract will include building three million set-top
boxes, valued at more than $1 billion over the course of three years.
In June 1995, the Corporation paid the remaining $557 million balance for
the two licenses it had acquired to offer PCS in California and Nevada. The
cost of the licenses totaled $696 million of which 20 percent had been paid
by March 1995 including a $56 million deposit made in 1994. These payments
were made from a combination of internally generated funds and external
financing. The Corporation anticipates financing the build-out of the PCS
network, including a five-year $300 million agreement with Ericsson for
network equipment, from a combination of internally generated funds and
external financing.
In December 1994, Pacific Bell contracted for the purchase of ACN facilities
that incorporate emerging technologies. Pacific Bell is committed to
purchase these facilities in 1998 if they meet certain quality and
performance criteria. Under this arrangement, the Corporation's capital
expenditures for ACN and related long-term financing requirements are
expected to be deferred until 1998. Management expects the purchase amount
to be less than $1 billion in 1998, which is lower than the previous
forecast. The Corporation intends to lease certain operational portions of
the facilities prior to 1998 during the construction period.
F-27
<PAGE>
In May 1995, Duff and Phelps, Inc. lowered the rating of Pacific Bell's
bonds from Double-A (AA) to Double-A-Minus (AA-). The rating action
reflected price cap revenue reductions, toll services competition, and
proposed rules on local services competition. The rating action also
reflected the expected financing requirements of the Corporation's broadband
and PCS networks. In addition, Moody's Investors Services, Inc. ("Moody's")
has changed its outlook on the long-term debt of Pacific Bell to "negative"
from "stable," citing concerns about risks associated with deployment of the
broadband network and potential pressure on the financial profile and
performance of Pacific Bell. Moody's also expressed concerns about the
timetable for the introduction of competition for all telecommunications
services in California and the risk that the rules governing the competitive
environment will be unbalanced.
In August 1995, Standard & Poor's Corporation ("S&P") removed bond and
commercial paper ratings of the Corporation, PacTel Capital Resources, and
Pacific Bell from "CreditWatch," where they were placed in May 1995
following the release by the CPUC of its proposed interim rules on local
services competition. S&P stated that the long-term rating outlook for the
above entities is negative.
The following are commercial paper, bond, and TOPrS ratings for the
Corporation and its subsidiaries:
Moody's Investors Standard & Duff and
Services, Inc. Poor's Corp. Phelps, Inc.
----------------- ------------ ------------
Commercial Paper:
- --------------------------------------
Pacific Telesis Group................. Prime-1 A-1 -
Pacific Bell.......................... Prime-1 A-1+ Duff 1+
PacTel Capital Resources.............. Prime-1 A-1 -
Long- and Intermediate-Term Debt:
- --------------------------------------
Pacific Bell.......................... Aa3 AA- AA-
PacTel Capital Resources.............. A1 A+ -
TOPrS:
- --------------------------------------
Pacific Telesis Financing I, II & II.. (P) "a1" A -
The above ratings reflect the views of the rating agencies and are subject
to change. The ratings should be evaluated independently and are not
recommendations to buy, sell, or hold the securities of the Corporation.
F-28
<PAGE>
The Corporation holds an equity swap contract to hedge its exposure to the
risk of market changes related to its recorded liability for outstanding
employee stock options of the spun-off operations' common stock and
associated stock appreciation rights. (See Note H - "Stock Options and
Stock Appreciation Rights" on page F-62.) Off-balance-sheet risk exists to
the extent the market price of the spun-off operations' stock rises above
the market price reflected in the liability's current carrying value. The
equity swap was entered into to hedge this exposure and minimize the impact
of market fluctuations. The equity swap itself involves certain off-
balance-sheet risks. (See Note J - "Financial Instruments" on page F-65.)
Significant changes in certain balance sheet items occurred primarily due to
the discontinuance of SFAS 71. (See Note C - "Discontinuance of Regulatory
Accounting - SFAS 71" on page F-51.) Accumulated depreciation on telephone
plant increased due to the discontinuance of SFAS 71. A portion of the
deferred income tax benefit associated with the SFAS 71 charge increased
deferred charges and other noncurrent assets along with the reclassification
of certain other deferred taxes. Deferred charges and other noncurrent
assets also increased due to the Corporation's investment in PCS licenses
(see Note A under "Intangible Assets and Capitalized Interest" on page F-
48). Offsetting these increases was the elimination of regulatory assets
due to SFAS 71. Long-term obligations increased primarily due to the
elimination of unamortized debt redemption costs associated with the
discontinuance of SFAS 71. Shareowners' equity and the Corporation's
deferred income taxes liability decreased due to the extraordinary charge
associated with SFAS 71 net of related tax benefit.
Cash From Operating Activities
- ------------------------------
($ millions) 1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------
Cash from operating activities
of continuing operations.... $2,769 -$178 $2,947 $220 $2,727
-6.0% 8.1%
- ---------------------------------------------------------------------------
The decrease in 1995 cash from operating activities of continuing operations
is primarily due to timing differences in the payment of liabilities and
lower revenues. The decrease in cash flow was partially offset by tax
refunds and associated interest income of approximately $165 million
received in 1995.
Management is unable to predict the impact that competition will have on
cash from operating activities of continuing operations in 1996.
The increase in 1994 cash from operating activities of continuing operations
is primarily due to timing differences in the payment of accounts payable
and other liabilities. A $72 million reduction in the amount of interest
paid in 1994 also contributed to the increase.
F-29
<PAGE>
Cash Used For Investing Activities
- ----------------------------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Cash used by continuing operations
for investing activities........... $2,674 $1,172 $1,502 -$637 $2,139
78.0% -29.8%
- ----------------------------------------------------------------------------
Cash used by continuing operations for investing activities increased
primarily due to payments of $656 million for PCS licenses and associated
capitalized interest in 1995. In addition, the increase also reflects
investments to upgrade the core telecommunications network and the
Corporation's 1995 investments in the TELE-TV joint venture with Bell
Atlantic and NYNEX and the recently disbanded LA Times joint venture.
In 1995, the Corporation made capital expenditures of about $3.0 billion.
The Corporation is continuing to reevaluate its capital program for 1996 but
currently anticipates capital spending in 1996 to be slightly lower than
1995 levels. (See "Upgrade Network and Systems Capabilities" on page F-5.)
Pacific Bell has purchase commitments of about $274 million remaining in
connection with its previously announced program for deploying an all-
digital switching platform with ISDN and SS-7 capabilities.
The decrease in cash used by continuing operations for investing activities
during 1994 reflects the Corporation's net cash investment in spun-off
operations during 1993 of $356 million which raised the comparative 1993
amount in relation to 1994. (See Note K - "Related Party Transactions" on
page F-67.) The decrease was also due partially to delays in capital
expenditures and the receipt of $112 million in cash in connection with the
Corporation selling the assets of its real estate subsidiary during December
1994. These decreases were partially offset during 1994 by the payment of a
$56 million refundable deposit for bidding on PCS licenses.
During 1994, the Corporation sold its remaining cable franchises in the
United Kingdom after selling four others in 1993. Sales proceeds of $30 and
$49 million, respectively, in 1994 and 1993 are reflected in cash provided
from other investing activities.
F-30
<PAGE>
Cash Used For Financing Activities
- ----------------------------------
($ millions) 1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------
Cash used by continuing operations
for financing activities......... $154 -$1,225 $1,379 $786 $593
-88.8% 132.5%
- ----------------------------------------------------------------------------
Cash used by continuing operations for financing activities decreased
primarily due to proceeds from short-term borrowings of approximately
$1.5 billion in 1995. In 1994, the Corporation substantially repaid its
short-term borrowings during the first half of the year. These decreases
were partially offset by the retirement of approximately $800 million of
long-term debt, which included $500 million of debentures that Pacific Bell
called for redemption in December 1995.
The net increase in cash used by continuing operations for financing
activities during 1994 reflects reduced proceeds from issuances of treasury
stock from 1993. In 1993, treasury stock issuances of $728 million at cost
primarily included additional equity raised from discounted stock purchases
offered under the Corporation's dividend reinvestment and stock purchase
plan. The additional dividends reinvested under this offer also reduced the
cash requirements for dividend payments in 1993 in comparison to 1994. In
addition, the 1994 increase in cash used by continuing operations for
financing activities reflects greater repayments of short-term borrowings.
During 1994 and 1993, respectively, $588 and $473 million was used to pay
down short-term borrowing levels.
Long-term borrowing activity, excluding spun-off operations, included the
following issuances and redemptions:
Interest Maturity Principal
($ millions) Rate Date Amount
- ----------------------------------------------------------------------------
Issuances:
1995..................... - - -
1994..................... 6.96% 2006 $ 10
1993..................... 6.25% to 7.50% 2005 to 2043 $2,650
Retirements:
1995*.................... 7.625% to 9.320% 1995 to 2030 $ 814
1994..................... 9.250% 2008 $ 12
1993..................... 6.125% to 9.625% 1993 to 2030 $2,624
- ----------------------------------------------------------------------------
* Amount includes approximately $55 million of debt assumed in the CCW
acquisition, which was subsequently retired, and approximately $12
million of recall premium.
The Corporation's debt ratio changed to 74.1 percent as of December 31,
1995, from 49.6 percent as of December 31, 1994, primarily due to the
extraordinary charge in 1995 which decreased shareowners' equity, and
increases in net borrowings of approximately $695 million. Pre-tax interest
coverage was negative for 1995, due to the extraordinary charge, compared to
4.9 times for 1994.
F-31
<PAGE>
For 1995, the Board of Directors ("the Board") maintained the Corporation's
annual dividend at $2.18 per share, the same level as in 1994 and 1993. The
Board continues to monitor the effect that increased competition, the
Corporation's investment strategy, and public policy and regulatory
decisions have on its ability to maintain the dividend.
PENDING REGULATORY ISSUES
Uniform Systems of Account ("USOA") Turnaround Adjustment
- ---------------------------------------------------------
In May 1995, Pacific Bell filed an application with the CPUC to eliminate
the USOA Turnaround Adjustment effective January 1, 1995. This Turnaround
Adjustment is a vestige of traditional rate-of-return regulation and has
been in effect since 1988. Because of the adjustment, Pacific Bell's
revenues have been reduced by over $23 million each year since 1988. These
adjustments were intended to reflect annual revenue requirement reductions
resulting from the CPUC's adoption of a capital-to-expense accounting change
in 1988. The CPUC held evidentiary hearings in October 1995 addressing
whether the USOA Turnaround Adjustment should be eliminated. Pacific Bell
has strongly recommended that this adjustment be discontinued effective
January 1, 1995, which would result in a one-time revenue increase to
Pacific Bell of $23 million for 1995. The CPUC's Division of Ratepayer
Advocates has proposed that Pacific Bell be ordered to permanently reduce
its revenues by $106 million effective January 1, 1996. Another intervenor
has proposed that Pacific Bell should be ordered to reduce its revenues
permanently by $112 million over the next ten years and reduce its revenues
by an additional $43 million on January 1, 1996. It is possible that the
CPUC could decide this issue in the near term, and that the decision could
have a material adverse effect on Pacific Bell.
Revenues Subject to Refund
- --------------------------
In 1992, the CPUC issued a decision adopting, with modification, SFAS 106
for regulatory accounting purposes. Annual price cap decisions by the CPUC
granted Pacific Bell approximately $100 million in each of the years 1993-
1996 for partial recovery of higher costs under SFAS 106. However, the CPUC
in October 1994 reopened the proceeding to determine the criteria for
exogenous cost treatment and whether 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 plus interest. These related
revenues totaled about $122 million at December 31, 1995. Management
believes postretirement benefits costs are appropriately recoverable in
Pacific Bell's price cap filings. It is possible that the CPUC could decide
this issue in the near term, and that the decision could have a material
adverse effect on Pacific Bell.
F-32
<PAGE>
Property Tax Investigation
- --------------------------
In 1992, a settlement agreement was reached between the State Board of
Equalization, all California counties, the State Attorney General, and
28 utilities, including Pacific Bell, on a specific methodology for valuing
utility property for property tax purposes. The CPUC opened an
investigation to determine if any resulting property tax savings should be
returned to customers. Intervenors have asserted that as much as $20
million of annual property tax savings should be treated as an exogenous
cost reduction in Pacific Bell's annual price cap filings. These
intervenors have also asserted that past property tax savings totaling as
much as $60 million plus interest should be returned to customers.
Management believes that under the CPUC's regulatory framework, any property
tax savings should only be treated as a component of the calculation of
shareable earnings. In an Interim Opinion issued in June 1995, the CPUC
decided to defer a final decision on this matter pending resolution of the
criteria for exogenous cost treatment under its regulatory framework. The
criteria are being considered in a separate proceeding initiated for
rehearing of the CPUC's postretirement benefits other than pensions
decision. It is possible that the CPUC could decide this issue in the near
term, and that the decision could have a material adverse effect on Pacific
Bell.
SALE OF BELLCORE
In April 1995, Bellcore announced a decision by its owners to pursue the
sale of Bellcore. Bellcore is a leading provider of communications software
and consulting services. It is owned by Pacific Bell and six of the
telephone regional holding companies formed at the divestiture of AT&T Corp.
in 1984. The owners have retained two investment banking firms in connection
with the proposed sale. A final decision regarding the disposition of
interests and the structure of such a transaction has yet to be determined.
Any transaction will be subject to necessary approvals. (See Note Q -
"Additional Financial Information" on page F-73.)
F-33
<PAGE>
Pacific Telesis Group and Subsidiaries
Selected Financial and Operating Data
(Dollars in millions,
except per share amounts) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Operating revenues.............. $ 9,042 $ 9,235 $ 9,244 $ 9,108 $ 9,168
Operating expenses.............. 7,031 7,041 8,582 7,025 7,217
Operating income................ 2,011 2,194 662 2,083 1,951
Income from continuing
operations.................... 1,048 1,136 191 1,173 931
Income (loss) from spun-off
operations.................... - 23 29 (31) 84
Cumulative effect of accounting
changes, net of tax........... - - (1,724) - -
Extraordinary item, net of tax (3,360) - - - -
Net income (loss)............... $(2,312) $ 1,159 $(1,504) $ 1,142 $ 1,015
- ----------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Income from continuing
operations.................... $ 2.46 $ 2.68 $ 0.46 $ 2.91 $ 2.37
Income (loss) from spun-off
operations.................... - 0.05 0.07 (0.08) 0.21
Cumulative effect of
accounting changes............ - - (4.16) - -
Extraordinary item.............. (7.89) - - - -
Net income (loss)............... $ (5.43) $ 2.73 $ (3.63) $ 2.83 $ 2.58
- ----------------------------------------------------------------------------
OTHER FINANCIAL AND OPERATING DATA
Dividends per share............. $ 2.18 $ 2.18 $ 2.18 $ 2.18 $ 2.14
Total assets*................... $15,841 $20,139 $23,437 $21,849 $21,226
Net assets of spun-off
operations.................... - - $ 2,874 $ 745 $ 663
Shareowners' equity............. $ 2,190 $ 5,233 $ 7,786 $ 8,251 $ 7,729
Continuing Operations**:
Book value per share............ $ 5.11 $ 12.34 $ 11.61 $ 18.53 $ 17.62
Return on equity (%)............ -51.3 22.0 -26.3 16.1 13.4
Return on capital (%)........... -18.0 14.3 -8.6 12.0 10.6
Debt maturing within one year... $ 1,530 $ 246 $ 595 $ 1,158 $ 951
Long-term obligations........... $ 4,737 $ 4,897 $ 5,129 $ 5,207 $ 5,395
Debt ratio (%).................. 74.1 49.6 53.8 45.9 47.3
Capital expenditures............ $ 2,961 $ 1,684 $ 1,886 $ 1,852 $ 1,737
Cash from operating activities.. $ 2,769 $ 2,947 $ 2,727 $ 2,807 $ 2,439
Total employees at December 31.. 48,889 51,590 55,355 57,023 59,037
Volume Indicators:
Toll messages (millions)***..... 4,819 4,460 4,251 4,145 4,081
Carrier access minutes- of-use
(millions).................... 59,193 53,486 49,674 46,800 43,872
Customer switched access lines
in service at December 31
(thousands; 1994***).......... 15,782 15,315 14,873 14,551 14,262
- ----------------------------------------------------------------------------
(Continued next page)
F-34
<PAGE>
Pacific Telesis Group and Subsidiaries
Selected Financial and Operating Data
(Continued)
Effective third quarter 1995, management discontinued, for external
financial reporting purposes, the application of SFAS 71, "Accounting for
the Effects of Certain Types of Regulation," an accounting standard for
entities subject to traditional regulation. As a result, during 1995 the
Corporation recorded a non-cash, extraordinary charge of $3.4 billion, or
$7.89 per share, which is net of a deferred income tax benefit of $2.4
billion. As a result of the extraordinary charge, the Corporation's
shareowners' equity was reduced by $3.4 billion. (See Note C -
"Discontinuance of Regulatory Accounting - SFAS 71" on page F-51.)
Effective April 1, 1994, the Corporation spun off to its shareowners its
domestic and international cellular, paging, and other wireless operations
in a one-for-one stock distribution of its 86 percent interest in these
operations. As a result, the Corporation's total assets and shareowners'
equity were each reduced by $2.9 billion during 1994. The Corporation's
previous interests in the operating results and net assets of spun-off
operations are classified separately and excluded from the Corporation's
revenues, expenses, and other amounts presented for continuing operations.
(See "Spun-off Operations" under Note A on page F-47.)
Results for 1993 and 1991 reflect restructuring charges which reduced income
from continuing operations by $861 and $122 million for each respective
year, and related per share amounts by $2.08 and $.30 for each respective
year. Results for 1993 also reflect the cumulative after-tax effects of
applying new accounting rules for postretirement and postemployment benefits
to prior years.
* Includes net assets of spun-off operations for the years 1991-1993.
** Excludes spun-off operations.
*** Restated.
F-35
<PAGE>
REPORT OF MANAGEMENT
To the Shareowners of Pacific Telesis Group:
The management of Pacific Telesis Group is responsible for preparing the
accompanying financial statements and for their integrity and objectivity.
The statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis and are not misstated
due to material fraud or error. In instances where exact measurement is not
possible, the financial statements include amounts based on management's
best estimates and judgments. Management also prepared the other
information in this annual financial review and is responsible for its
accuracy and consistency with the financial statements.
The Corporation's financial statements have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose appointment has been ratified
by the shareowners. Management has made available to Coopers & Lybrand
L.L.P. all the Corporation's financial records and related data, as well as
the minutes of shareowners' and directors' meetings. Furthermore, management
believes that all of its representations made to Coopers & Lybrand L.L.P.
during their audit are valid and appropriate.
Management has established and maintains a system of internal control that
provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial
reporting. The system of internal control provides for appropriate division
of responsibility and is documented by written policies and procedures that
are communicated to employees with significant roles in the financial
reporting process and are updated as necessary. Management continually
monitors the system of internal control for compliance, and maintains a
strong internal auditing program that independently assesses the
effectiveness of the internal controls and recommends improvements when
necessary. In addition, as part of their audit of the Corporation's
financial statements, Coopers & Lybrand L.L.P. have obtained a sufficient
understanding of the internal control structure to determine the nature,
timing, and extent of audit tests to be performed. Management has
considered the internal auditors' and Coopers & Lybrand L.L.P.'s
recommendations concerning the Corporation's system of internal control and
has taken actions that it believes are cost-effective under the circum-
stances to respond appropriately to these recommendations. Management
believes that the Corporation's system of internal control is adequate to
accomplish the objectives discussed.
Management also recognizes its responsibility to foster a strong ethical
climate that enables the Corporation to conduct its affairs according to the
highest standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Corporation's code of corporate conduct,
which is publicized throughout the Corporation. The code of conduct
addresses, among other things: potential conflicts of interest; compliance
with domestic laws, including those relating to foreign transactions and
financial disclosure; and the confidentiality of proprietary information.
The Corporation maintains a systematic program to assess compliance with
these policies.
F-36
<PAGE>
The Audit Committee of the Board of Directors is responsible for overseeing
the Corporation's financial reporting process on behalf of the Board. In
fulfilling its responsibility, the Committee recommends to the Board,
subject to shareowner ratification, the selection of the Corporation's
independent accountants. During 1995, the Committee consisted of five
members of the Board who were neither officers nor employees of the
Corporation. It meets regularly with representatives of management,
internal audit, and the independent accountants to review internal
accounting controls and accounting, auditing, and financial reporting
matters. During 1995, the Committee held five meetings. The Corporation's
internal auditors and independent accountants periodically meet alone with
the Committee to discuss the matters previously noted and have direct access
to it for private communication at any time.
Philip J. Quigley
Chairman, President, and Chief Executive Officer
William E. Downing
Executive Vice President,Chief Financial Officer, and Treasurer
February 23, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners
of Pacific Telesis Group:
We have audited the accompanying consolidated balance sheets of
Pacific Telesis Group and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareowners' equity, and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and sig-
nificant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Telesis Group and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note A to the Consolidated Financial Statements, the
Corporation's Pacific Bell subsidiary discontinued its application of
Statement of Financial Accounting Standards No. 71 during 1995, and the
Corporation adopted new accounting rules for postretirement and
postemployment benefits in 1993.
Coopers & Lybrand L.L.P.
San Francisco, California
February 22, 1996
F-38
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Income
For the Year Ended December 31
-------------------------------
(Dollars in millions, except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------
OPERATING REVENUES
Local service..................................... $ 3,815 $3,455 $ 3,477
Network access - interstate....................... 1,736 1,612 1,622
Network access - intrastate....................... 711 734 683
Toll service...................................... 1,232 2,006 2,058
Other service revenues............................ 1,548 1,428 1,404
-------------------------
TOTAL OPERATING REVENUES.......................... 9,042 9,235 9,244
- ----------------------------------------------------------------------------
OPERATING EXPENSES
Cost of products and services..................... 1,822 1,903 1,932
Customer operations and selling expenses.......... 1,829 1,848 1,788
General, administrative, and other expenses....... 1,325 1,313 1,507
Property and other taxes.......................... 191 190 188
Restructuring charges............................. - - 1,431
Depreciation and amortization..................... 1,864 1,787 1,736
-------------------------
TOTAL OPERATING EXPENSES.......................... 7,031 7,041 8,582
- ----------------------------------------------------------------------------
OPERATING INCOME.................................. 2,011 2,194 662
Interest expense.................................. 442 455 509
Miscellaneous income.............................. 42 55 48
- ----------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............................. 1,611 1,794 201
Income taxes...................................... 563 658 10
- ----------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS................. 1,048 1,136 191
Income from spun-off operations, net of income taxes
of $29 and $61, respectively (Notes A and B).... - 23 29
-------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES AND EXTRAORDINARY ITEM....... 1,048 1,159 220
Cumulative effect of accounting changes, net
of tax (Note A)................................. - - (1,724)
Extraordinary item, net of tax (Note C)........... (3,360) - -
-------------------------
NET INCOME (LOSS)................................. $(2,312) $1,159 $(1,504)
============================================================================
(Continued next page)
F-39
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Income
(Continued)
For the Year Ended December 31
-------------------------------
(Dollars in millions, except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Income from continuing operations............... $ 2.46 $2.68 $ 0.46
Income from spun-off operations................. - 0.05 0.07
------------------------
Income before cumulative effect of
accounting changes and extraordinary item..... 2.46 2.73 0.53
Cumulative effect of accounting changes......... - - (4.16)
Extraordinary item.............................. (7.89) - -
------------------------
Net income (loss)............................... $(5.43) $2.73 $(3.63)
============================================================================
Dividends per share............................... $ 2.18 $2.18 $ 2.18
Average shares outstanding (thousands)............ 425,996 423,969 414,171
============================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-40
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Balance Sheets
December 31
------------------
(Dollars in millions, except per share amounts) 1995 1994
- ----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents.............................. $ 76 $ 135
Accounts receivable - net of allowances
for uncollectibles of $132 and $134.................. 1,505 1,557
Prepaid expenses and other current assets.............. 1,002 1,206
------------------
Total current assets................................... 2,583 2,898
------------------
Property, plant, and equipment......................... 27,222 26,565
Less: accumulated depreciation........................ (15,837) (10,451)
------------------
Property, plant, and equipment - net................... 11,385 16,114
------------------
Deferred charges and other noncurrent assets........... 1,873 1,127
------------------
TOTAL ASSETS........................................... $15,841 $20,139
============================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Accounts payable and accrued liabilities............... $ 2,203 $ 1,907
Debt maturing within one year.......................... 1,530 246
Other current liabilities.............................. 908 1,330
------------------
Total current liabilities.............................. 4,641 3,483
------------------
Long-term obligations.................................. 4,737 4,897
------------------
Deferred income taxes.................................. - 1,673
------------------
Other noncurrent liabilities and deferred credits...... 4,273 4,853
------------------
Commitments and contingencies (Notes J and O)
Common stock ($0.10 par value; 432,827,595 shares
issued; 428,434,672 and 424,065,165 shares
outstanding)........................................ 43 43
Additional paid-in capital............................ 3,498 3,493
Reinvested earnings (deficit)......................... (982) 2,257
Less: treasury stock, at cost (4,392,923 and
8,762,430 shares)............................ (127) (254)
deferred compensation - leveraged employee
stock ownership trust........................ (242) (306)
------------------
Total shareowners' equity............................. 2,190 5,233
------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY............. $15,841 $20,139
============================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-41
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Shareowners' Equity
For the Year Ended December 31
-------------------------------
(Dollars in millions, except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year..................... $ 43 $ 43 $ 43
------------------------
Balance at end of year........................... 43 43 43
- ----------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year..................... 3,493 6,372 5,220
Spin-off stock distribution (Note B)............. - (2,901) -
Issuance of common stock of
spun-off operations (Note B)................... - - 1,027
Issuance of shares............................... - 22 104
Acquisition of wireless cable company (Note M)... (9) - -
Other changes.................................... 14 - 21
-----------------------
Balance at end of year........................... 3,498 3,493 6,372
- ----------------------------------------------------------------------------
REINVESTED EARNINGS (DEFICIT)
Balance at beginning of year..................... 2,257 2,040 4,459
Net income (loss)................................ (2,312) 1,159 (1,504)
Dividends declared ($2.18 per share each year)... (929) (924) (910)
Other changes.................................... 2 (18) (5)
------------------------
Balance at end of year........................... (982) 2,257 2,040
- ----------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at beginning of year..................... (254) (283) (1,011)
Issuance of shares............................... - 29 728
Acquisition of wireless cable company (Note M)... 127 - -
------------------------
Balance at end of year........................... (127) (254) (283)
- ----------------------------------------------------------------------------
DEFERRED COMPENSATION
Balance at beginning of year..................... (306) (386) (460)
Cost of LESOP trust shares allocated to
employee accounts (Note L)..................... 64 80 74
------------------------
Balance at end of year........................... (242) (306) (386)
- ----------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY........................ $2,190 $5,233 $7,786
============================================================================
(Continued next page)
F-42
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Shareowners' Equity
(Continued)
For the Year Ended December 31
-------------------------------
(Amounts in millions) 1995 1994 1993
============================================================================
COMMON SHARES AUTHORIZED AT DECEMBER 31........ 1,100 1,100 1,100
============================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year................... 424 423 405
Treasury shares reissued....................... 4 1 18
----------------------------
Balance at end of year......................... 428 424 423
============================================================================
PREFERRED SHARES AUTHORIZED AT DECEMBER 31..... 50 50 50
============================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-43
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31
-------------------------------
(Dollars in millions) 1995 1994 1993
- ----------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES
Net income (loss)................................ $(2,312) $1,159 $(1,504)
Adjustments to reconcile net income (loss)
to cash from operating activities:
(Income) from spun-off operations............. - (23) (29)
Cumulative effect of accounting changes....... - - 1,724
Restructuring charges......................... - - 1,431
Extraordinary item............................ 3,360 - -
Depreciation and amortization................. 1,864 1,787 1,736
Deferred income taxes......................... 94 44 (314)
Unamortized investment tax credits............ (53) (63) (49)
Changes in operating assets and liabilities:
Accounts receivable........................... 55 (17) (74)
Prepaid expenses and other current assets..... (60) (17) 1
Deferred charges and other noncurrent assets.. (34) (4) 112
Accounts payable and accrued liabilities...... 297 195 85
Other current liabilities..................... (33) 1 17
Noncurrent liabilities and deferred credits... (481) (85) (394)
Other adjustments, net........................ 72 (30) (15)
--------------------------
Cash from continuing operations.................. 2,769 2,947 2,727
Cash from spun-off operations.................... - 18 440
--------------------------
Cash from operating activities................... 2,769 2,965 3,167
- ----------------------------------------------------------------------------
CASH FROM (USED FOR) INVESTING ACTIVITIES
Additions to property, plant, and equipment...... (2,002) (1,631) (1,800)
Investment in PCS licenses....................... (674) - -
Proceeds from disposals of assets of real estate
subsidiary..................................... 13 129 7
Net investment in spun-off operations (Note K)... - 33 (356)
Other investing activities, net.................. (11) (33) 10
--------------------------
Cash used by continuing operations............... (2,674) (1,502) (2,139)
Cash used by spun-off operations................. - (332) (1,441)
--------------------------
Cash used for investing activities............... (2,674) (1,834) (3,580)
- ----------------------------------------------------------------------------
(Continued next page)
F-44
<PAGE>
Pacific Telesis Group and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
For the Year Ended December 31
-------------------------------
(Dollars in millions) 1995 1994 1993
- ----------------------------------------------------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of common and
treasury shares.................................... 74 140 800
Proceeds from issuance of long-term debt............. - 10 2,590
Retirements of long-term debt........................ (814) (12) (2,624)
Dividends paid....................................... (927) (907) (756)
Increase (decrease) in short-term borrowings, net.... 1,509 (588) (473)
Other financing activities, net...................... 4 (22) (130)
-----------------------
Cash used by continuing operations................... (154) (1,379) (593)
Cash from spun-off operations........................ - 39 1,631
-----------------------
Cash from (used for) financing activities............ (154) (1,340) 1,038
- ----------------------------------------------------------------------------
Net cash from (used for) all activities.............. (59) (209) 625
Less spun-off operations............................. - (275) 630
-----------------------
Increase (decrease) in cash and cash equivalents..... (59) 66 (5)
Cash and cash equivalents at January 1............... 135 69 74
-----------------------
Cash and cash equivalents at December 31.............$ 76 $ 135 $ 69
============================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-45
<PAGE>
PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 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, and its telephone subsidiaries: Nevada Bell and
Pacific Bell (which when used herein includes its subsidiaries,
Pacific Bell Directory, Pacific Bell Information Services, Pacific Bell
Mobile Services, Pacific Bell Internet Services, Pacific Bell Network
Integration, and others) hereinafter referred to as the Telephone
Companies. Other Pacific Telesis subsidiaries include Pacific Telesis
Enterprises, Pacific Bell Communications, and several other
subsidiaries that provide video, communications, and other services.
All significant intercompany balances and transactions have been
eliminated. Investments in partnerships, joint ventures, and less than
majority-owned subsidiaries are principally accounted for under the
equity method.
The Corporation's principal business, communications and information
services, accounts for substantially all of its revenues. The
Telephone Companies, which consist of Pacific Bell and Nevada Bell,
provide local exchange services, network access, local toll services,
directory advertising, Internet access, and selected information
services in California and Nevada.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Regulatory Accounting
Effective third quarter 1995, the Corporation's Pacific Bell subsidiary
discontinued accounting under Statement of Financial Accounting
Standards No. ("SFAS") 71, "Accounting for the Effects of Certain Types
of Regulation." (See Note C - "Discontinuance of Regulatory Accounting
- SFAS 71" on page F-51.) The Corporation's Nevada Bell subsidiary
continues to apply SFAS 71 accounting.
F-46
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Spun-off Operations
The Corporation's previous interests in the operating results and net
assets of wireless operations that were spun off effective April 1,
1994 are reported separately as spun-off operations. (See Note B -
"Spun-off Operations" on page F-49.) These operations are excluded
from amounts reported for the Corporation's revenues, expenses, assets,
and liabilities that reflect "continuing operations." Amounts
presented for spun-off operations have been prepared solely for the
purpose of reporting Pacific Telesis Group results.
Property, Plant, and Equipment
Property, plant, and equipment (which consists primarily of
telecommunications plant dedicated to providing telecommunications
services) is carried at cost. The cost of self-constructed plant
includes employee wages and benefits, materials, capitalized interest
during the construction period, and other costs. 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.
No gain or loss is recognized on the disposition of depreciable
telecommunications plant. At the time of retirement of
telecommunication property, plant, and equipment, the original cost of
the plant retired plus cost of removal is charged to accumulated
depreciation. Accumulated depreciation is credited with salvage value
or insurance recovery, if any.
Depreciation expense is computed using the straight-line method based
on management's estimate of economic lives for various categories of
property, plant, and equipment.
The Telephone Companies continue to invest heavily in improvements to
their core telecommunications networks. The Corporation is also making
significant investments in Personal Communications Services ("PCS") and
wireless digital television. These technologies are subject to
technological risks and rapid market changes due to new products and
services and changing customer demand. These changes may result in
changes to the estimated economic lives of these assets.
The Corporation carries catastrophic insurance coverage with large
deductibles on its telecommunications switching and building assets,
and is self-insured for its outside plant telecommunications assets.
F-47
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Intangible Assets and Capitalized Interest
Included in deferred charges and other noncurrent assets is $696
million representing the amounts paid for two PCS licenses recorded at
cost. In addition, interest related to these licenses will be
capitalized. These costs will be amortized over 40 years once the PCS
system is in service. Management anticipates a widespread offering of
PCS services in early 1997.
Cash and Cash Equivalents
Cash equivalents include all highly liquid monetary instruments with
maturities of ninety days or less from the date of purchase. In its
cash management practices, the Corporation maintains zero-balance
disbursement accounts for which funds are made available as checks are
presented for clearance. Checks outstanding are included in accounts
payable.
Income Taxes
Deferred income taxes are provided to reflect the tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
tax purposes.
Investment tax credits earned prior to their repeal by the Tax Reform
Act of 1986 are amortized as reductions in tax expense over the lives
of the assets which gave rise to the credits.
Advertising Costs
Costs for advertising products and services or corporate image are
expensed as incurred.
Earnings Per Share
Earnings (loss) per share calculations are based on the weighted
average number of common shares outstanding, including those shares
held by a leveraged employee stock ownership trust.
Computer Software Costs
The costs of computer software purchased or developed for internal use
are expensed as incurred. However, initial operating system software
costs are capitalized and amortized over the lives of the associated
hardware. Costs for subsequent additions or modifications to operating
system software are expensed as incurred.
F-48
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Change in Accounting for Postretirement and Postemployment Costs
Effective January 1, 1993, the Corporation adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions," and SFAS 112, "Employers' Accounting for Postemployment
Benefits." (See also Note G - "Other Postretirement and Postemployment
Benefits" on page F-60.) The cumulative after-tax effects of applying
the new rules to prior years were recognized by one-time charges
applicable to continuing operations totaling $1.724 billion. The
charges are net of deferred income tax benefits of $1.155 billion and
reduced earnings applicable to continuing operations for 1993 by $4.16
per share. The annual periodic expense under SFAS 112 does not differ
materially from expense under the prior method. (See "Revenues Subject
to Refund" in Note O on page F-71.)
B. SPUN-OFF OPERATIONS
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 Communications, Inc. ("spun-off operations"). The
stock distribution was recorded as a stock dividend from paid-in
capital at the carrying amount of the net assets of spun-off
operations. As a result, the Corporation's total assets and
shareowners' equity were each reduced by $2.9 billion in 1994. The
stock distribution itself is a non-cash 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 the spun-off operations. In addition, the
Corporation's responsibilities have been terminated in connection with
any future obligations under the spun-off operations' 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.
F-49
<PAGE>
B. SPUN-OFF OPERATIONS (Cont'd)
The Corporation's previous interests in the net revenues and expenses
of the spun-off operations prior to April 1, 1994, are classified
separately as income from spun-off operations in the income statements.
The components of income are summarized below:
(Dollars in millions) 1994 1993
-----------------------------------------------------------------------
Operating revenues...................................... $259 $1,061
Operating expenses...................................... 225 930
-------------
Operating income........................................ 34 131
Other income/(expense).................................. 22 (35)
-------------
Income before income taxes.............................. 56 96
Income taxes............................................ 29 61
-------------
Income before minority interest and cumulative effect
of accounting changes................................. 27 35
Minority interest of other shareowners.................. (4) -
Cumulative effect of accounting changes................. - (6)
-------------
Income from spun-off operations*........................ $ 23 $ 29
=======================================================================
* See "Spun-off Operations" in Note A - on page F-47. The amounts
for 1994 reflect operations through March 31, 1994.
The Corporation's cash flow statements include separately the cash
flows of spun-off operations. Cash proceeds of approximately $1.5
billion received by the spun-off operations from an initial public
offering of its stock in December 1993 are reflected in cash from spun-
off operations in the Corporation's financing cash flows for 1993. The
proceeds from the initial public offering above the book value of the
Corporation's transferred ownership interest were credited to
additional paid-in capital in 1993 within the Corporation's
shareowners' equity accounts.
F-50
<PAGE>
C. DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71
Effective third quarter 1995, the Corporation's Pacific Bell subsidiary
discontinued its application of SFAS 71 in accordance with the
provisions of SFAS 101, "Accounting for the Discontinuance of
Application of FASB Statement No. 71." As a result, the Corporation
recorded a non-cash, extraordinary charge of $3.4 billion, or $7.89 per
share, during 1995 which is net of a deferred income tax benefit of
$2.4 billion. The charge includes a write-down of net telephone
plant and the elimination of net regulatory assets as summarized in the
following table.
(Dollars in millions) Pre-Tax After-Tax
-----------------------------------------------------------------------
Increase in telephone plant and equipment
accumulated depreciation..................... $4,819 $2,842
Elimination of net regulatory assets........... 962 518
-------------------
Total.......................................... $5,781 $3,360
=======================================================================
Pacific Bell historically accounted for the economic effects of
regulation in accordance with the provisions of SFAS 71. Under SFAS
71, Pacific Bell depreciated telephone plant using lives prescribed by
regulators and, as a result of actions of regulators, deferred
recognizing certain costs, or recognized certain liabilities (referred
to as "regulatory assets" and "regulatory liabilities").
Effective third quarter 1995, management determined that, for external
financial reporting purposes, it is no longer appropriate for Pacific
Bell to use the special SFAS 71 accounting rules for entities subject
to traditional regulation. Management's decision to change to the
general accounting rules used by competitive enterprises was based
upon an assessment of the emerging competitive environment in
California. Pacific Bell's prices for its products and services are
being driven increasingly by market forces instead of regulation.
The $4.8 billion increase in Pacific Bell's accumulated depreciation
for its telephone plant reflects the adoption of new, shorter
depreciation lives. The estimated useful lives historically prescribed
by regulators did not keep up with the rapid pace of technology.
Pacific Bell's previous and new asset lives are compared in the
following table.
Asset Lives (in years) Old New
-----------------------------------------------------------------------
Copper cable...................................... 19-26 14
Digital switches.................................. 16.5 10
Digital circuits.................................. 9.6-11.5 8
Fiber optic cable................................. 28-30 20
Conduit........................................... 59 50
-----------------------------------------------------------------------
F-51
<PAGE>
C. DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71 (Cont'd)
The discontinuance of SFAS 71 for external financial reporting purposes
by Pacific Bell also required the elimination of net regulatory assets
totaling $962 million. Regulators sometimes include costs in
allowable costs for ratemaking purposes in a period other than the
period in which those costs would be charged to expense under general
accounting rules. The accounting for these timing differences created
regulatory assets and regulatory liabilities on Pacific Bell's balance
sheet.
Significant changes have occurred in the Corporation's balance sheets
as a result of the discontinuance of SFAS 71. Details of Pacific
Bell's net regulatory assets that have been eliminated are displayed
in the following table.
(Dollars in millions)
-----------------------------------------------------------------------
Regulatory assets/(liabilities) due to:
Deferred pension costs*...................................... $460
Unamortized debt redemption costs**.......................... 337
Deferred compensated absence costs*.......................... 206
Unamortized purchases of property, plant, and
equipment under $500....................................... 82
Deferred income taxes***..................................... (159)
Other........................................................ 36
----
Total.......................................................... $962
=======================================================================
* Previously included primarily in "deferred charges and other
noncurrent assets" in the Corporation's balance sheets.
** Previously included in "long-term obligations."
*** Previously included in "other current liabilities" and "other
noncurrent liabilities and deferred credits."
Due to the discontinued application of SFAS 71, pension costs for both
intrastate and interstate operations are now determined under SFAS 87,
"Employers' Accounting for Pensions," and SFAS 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits." Capitalized interest cost is
reported as a cost of telephone plant and equipment and as a reduction
in interest expense, as required by SFAS 34, "Capitalization of
Interest Cost." Prior to the discontinuance of SFAS 71, Pacific Bell
recorded an allowance for funds used during construction, which
included both interest and equity return components, as a cost of plant
and as an item in miscellaneous income. Pacific Bell's accounting and
reporting for regulatory purposes are not affected by the discontinued
application of SFAS 71 for external financial reporting purposes.
F-52
<PAGE>
D. RESTRUCTURING CHARGES
During 1993, the Corporation recorded pre-tax restructuring charges
totaling $1.431 billion which reduced earnings for 1993 by $861
million, or $2.08 per share. These charges include a $977 million pre-
tax charge by Pacific Bell to recognize the incremental cost of force
reductions associated with restructuring its internal business
processes through 1997. This charge is to cover the incremental
severance costs associated with terminating more than 14,000 employees
from 1994 through 1997. It is also to cover the incremental costs of
consolidating and streamlining operations and facilities to support
this downsizing initiative. The remaining reserve balance as of
December 31, 1995 and 1994, was $228 and $819 million, respectively.
During 1993, management completed a reevaluation of investment
alternatives relating to its 1990 decision to dispose of its real
estate subsidiary's assets. Based on this reevaluation, the
Corporation recorded an additional pre-tax restructuring reserve of
$347 million to cover future losses on sales and estimated operating
losses. In December 1994, the Corporation's real estate subsidiary
sold substantially all of its assets for approximately $160 million.
Charges to the reserve in 1994 totaled $287 million, $248 million for
losses on sale of its assets and $39 million for operating losses. Net
1995 charges totaled $19 million. Management believes the reserve
balance of $32 million as of December 31, 1995, is adequate to cover
the cost to dispose of the remaining assets.
The remaining $107 million of 1993 pre-tax charges provided for
anticipated costs associated with spun-off operations and the
withdrawal from, or restructuring of, the Corporation's cable and
customer premises equipment businesses. Management believes the
remaining reserve balance of $66 million as of December 31, 1995, is
adequate.
F-53
<PAGE>
E. INCOME TAXES
The components of income tax expense applicable to continuing
operations each year are as follows:
(Dollars in millions) 1995 1994 1993
-----------------------------------------------------------------------
Current:
Federal........................................ $408 $480 $526
State and local income taxes................... 115 142 148
-------------------
Total current.................................... 523 622 674
Deferred:
Federal........................................ 64 77 (472)
Change in federal enacted tax rate............. - - (23)
State and local income taxes................... 29 22 (117)
-------------------
Total deferred .................................. 93 99 (612)
Amortization of investment tax credits - net..... (53) (63) (52)
-------------------
Total income taxes............................... $563 $658 $ 10
=======================================================================
Significant components of the Corporation's deferred tax assets and
liabilities are as follows:
December 31
----------------
(Dollars in millions) 1995 1994
-----------------------------------------------------------------------
Deferred tax (assets)/liabilities - due to:
Depreciation and amortization.................... $1,013 $3,003
Postretirement and postemployment benefits..... (1,042) (1,072)
Restructuring reserves........................... (116) (413)
Customer rate reductions......................... (133) (150)
Other, net....................................... (666) (170)
----------------
Net deferred tax (assets)/liabilities ............. $ (944) $1,198
================
Amounts recorded in the consolidated balance sheets:
Deferred tax assets*............................. $ 944 $ 483
================
Deferred tax liabilities*........................ $ - $1,681
=======================================================================
* Reflects reclassification of certain current and noncurrent amounts
by federal and state tax jurisdiction to a net presentation. Amounts
include both current and noncurrent portions. (See Note Q -
"Additional Financial Information" on page F-73 for current portion
of deferred tax assets.)
F-54
<PAGE>
E. INCOME TAXES (Cont'd)
An income tax benefit related to the extraordinary charge in 1995 for
the discontinued application of SFAS 71 for depreciated telephone plant
is $2.0 billion and for regulatory assets and liabilities is
$0.4 billion. (See Note C - "Discontinuance of Regulatory Accounting -
SFAS 71" on page F-51.)
The reasons for differences each year between the Corporation's
effective income tax rate and applying the statutory federal income tax
rate to income from continuing operations before income taxes are
provided in the following reconciliation:
1995 1994 1993
-----------------------------------------------------------------------
Statutory federal income tax rate (%)....... 35.0 35.0 35.0
Increase/(decrease) in taxes resulting from:
Amortization of investment tax credits... (3.3) (3.5) (26.0)
Plant basis differences - net of
applicable depreciation.................. - 0.3 17.4
Interest during construction............. (1.1) (0.6) (6.1)
State income taxes - net of federal
income tax benefit....................... 5.8 5.9 9.7
Deferred tax impact due to rate change... - - (26.9)
Other.................................... (1.5) (0.4) 1.9
-------------------
Effective income tax rate (%)............... 34.9 36.7 5.0
=======================================================================
F. EMPLOYEE RETIREMENT PLANS
Defined Benefit Plans
The Corporation provides pension, death, and survivor benefits under
defined benefit pension plans that cover substantially all employees.
Benefits of the Pacific Telesis Group Pension Plan (for non-salaried
employees) are based on a flat dollar amount and vary according to job
classification, age, and years of service. Benefits of the
Pacific Telesis Group Pension Plan for Salaried Employees are based on
a percentage of final five-year average pay and vary according to age
and years of service.
The Corporation is responsible for contributing enough to the pension
plans, while the employee is still working, to ensure that adequate
funds are available to provide the benefit payments upon the employee's
retirement. These contributions are made to an irrevocable trust fund
in amounts determined using the aggregate cost actuarial method, one of
the actuarial methods specified by the Employee Retirement Income
Security Act of 1974 ("ERISA"), subject to ERISA and Internal Revenue
Code limitations.
F-55
<PAGE>
F. EMPLOYEE RETIREMENT PLANS (Cont'd)
The Corporation reports pension costs and related obligations under the
provisions of SFAS 87 and SFAS 88. However, prior to discontinuing
application of SFAS 71 during 1995, Pacific Bell recognized pension
costs consistent with the methods adopted for ratemaking. Nevada Bell
continues to follow the accounting methods prescribed by the Public
Service Commission of Nevada. Pension costs recognized by Pacific Bell
under SFAS 71 reflected a CPUC order requiring the continued use of the
aggregate cost method for intrastate operations and an FCC requirement
to use SFAS 87 and SFAS 88 for interstate operations. (See Note C -
"Discontinuance of Regulatory Accounting - SFAS 71" on page F-51.)
During 1995 and 1994, special pension benefits and cash incentives were
offered in connection with Pacific Bell's restructuring and related
force reduction program. Effective October 1, 1995, pension benefit
increases are being offered to various groups of non-salaried employees
under 1995 plan amendments which increase benefits for specified groups
who elect early retirement under incentive programs. On March 28,
1994, Pacific Bell offered a special pension benefit that removed any
age discount from pensions for management employees who were eligible
to retire with a service pension on that date. Also during 1994,
pension benefit increases were offered to various groups of non-
salaried employees under 1992 plan amendments that increase benefits
for specified groups who elect early retirement under incentive
programs. Approximately 1,900 and 3,400 employees left Pacific Bell
during 1995 and 1994, respectively, under early retirement or voluntary
and involuntary severance programs. In 1993, Nevada Bell offered an
early retirement program under which approximately 70 management
employees elected early retirement. Annual pension cost in the
following table excludes $219 and $62 million of additional pension
costs charged to Pacific Bell's restructuring reserve in 1995 and 1994,
respectively, and excludes $7 million of additional pension expense for
incentive programs in 1993.
F-56
<PAGE>
F. EMPLOYEE RETIREMENT PLANS (Cont'd)
Annual pension cost each year consisted of the following components:
(Dollars in millions) 1995 1994 1993
-----------------------------------------------------------------------
Service cost - benefits earned during year...... $ 149 $ 198 $ 140
Interest cost on projected benefit obligations.. 678 681 679
Actual return on assets......................... (2,215) (173) (1,402)
Net amortization and deferral of items subject
to delayed recognition*....................... 1,477 (601) 640
---------------------
Net periodic pension cost under SFAS 87......... 89 105 57
Adjustment to reflect differing regulatory
treatment**................................... - (79) (53)
Less spun-off operations........................ - - 3
---------------------
Pension cost recognized......................... $ 89 $ 26 $ 7
=======================================================================
* Under SFAS 87, differences between actual returns and losses on
assets and assumed returns, which are based on an expected long-
term rate-of-return, are deferred and included with "unrecognized
net gain" (see table below). During 1994, actual returns were less
than assumed returns by $551 million. During 1995 and 1993, actual
returns exceeded assumed returns by $1,524 and $691 million,
respectively.
** See Note C - "Discontinuance of Regulatory Accounting - SFAS 71" on
page F-51. Regulatory assets due to deferred pension costs were
$407 and $340 million as of December 31, 1994 and 1993,
respectively.
The amounts shown above for annual pension cost recognized in 1995,
1994, and 1993 reflect the effects of strong fund asset performance in
prior years and Internal Revenue Service ("IRS") funding limitations.
F-57
<PAGE>
F. EMPLOYEE RETIREMENT PLANS (Cont'd)
The following table sets forth the status of the plans' assets and
obligations and the amounts recognized in the Corporation's
consolidated balance sheets:
December 31
------------------
(Dollars in millions) 1995 1994
----------------------------------------------------------------------
Plan assets at estimated fair value............ $11,490 $10,372
Actuarial present value of projected benefit
obligations*................................. 10,111 8,736
----------------
Plan assets in excess of projected benefit
obligations.................................. 1,379 1,636
Less items subject to delayed recognition:
Unrecognized net gain**...................... (2,179) (2,012)
Unrecognized transition amount***............ (412) (551)
Unrecognized prior service cost.............. 42 48
----------------
Accrued pension cost liability recognized in
the consolidated balance sheets.............. $ 1,170 $ 879
======================================================================
* The projected benefit obligation at December 31, 1995, was
increased $407 million for the cost of force reductions anticipated
to take place in 1996 and 1997 and recognized in the Corporation's
financial statements under SFAS 88.
** Gains or losses from actual returns on assets different than
assumed returns, as well as from demographic experience different
than assumed and the effects of changes in other assumptions, are
recognized through amortization, over time, when the cumulative
gains or losses exceed certain limits.
*** A $1,078 million excess of the fair value of plan assets over
projected benefit obligations as of the January 1, 1987, adoption
of SFAS 87 is being recognized through amortization over
approximately 18 years.
The assets of the plans are primarily composed of common stocks, U.S.
Government and corporate obligations, index funds, and real estate
investments. The plans' projected benefit obligations for employee
service to date reflect the Management's expectations of the effects of
future salary progression and benefit increases. As of December 31,
1995 and 1994, the actuarial present values of the plans' accumulated
benefit obligations, which do not anticipate future salary increases,
were $9,122 and $8,256 million, respectively. Of these amounts, $7,997
and $7,396 million, respectively, were vested.
F-58
<PAGE>
F. EMPLOYEE RETIREMENT PLANS (Cont'd)
Liabilities and expenses for employee benefits are based on actuarial
assumptions. The assumptions used in computing the present values of
benefit obligations include a discount rate of 7.25 percent for 1995,
8.0 percent for 1994, and 7.5 percent for 1993. An 8.0 percent long-
term rate-of-return on assets is assumed in calculating pension costs.
Based on the plans' historical return on assets, the assumed long-term
rate-of-return will be increased to 9.0 percent in 1996. These
actuarial assumptions are subject to change over time, which could have
a material impact on the Corporation's financial statements.
Effective December 31, 1993, the salaried pension plan was amended to
permanently remove the age discount from pension benefits for employees
with 30 or more years of net credited service. Effective January 1,
1995, the salaried pension plan was also amended to cap net credited
service for pension benefits at 30 years or, if greater, the amount of
the employee's service on January 1, 1995. Upon adoption, these
amendments affected approximately 400 and 800 employees, respectively.
The Corporation has entered into labor negotiations with union-
represented employees in the past and expects to do so in the future.
Pension benefits have been included in these negotiations, and
improvements in benefits have been made periodically. Additionally,
the Corporation has increased benefits to pensioners on an ad hoc
basis. While no assurance can be offered with respect to future
increases, the Management's expectations for future benefit increases
have been reflected in determining pension costs.
Defined Contribution Plans
The Corporation sponsors defined contribution retirement plans covering
substantially all employees. These plans include the Pacific Telesis
Group Supplemental Retirement and Savings Plan for Salaried Employees,
and the Pacific Telesis Group Supplemental Retirement and Savings Plan
for Nonsalaried Employees (collectively, the "Savings Plans").
The Corporation's contributions to the Savings Plans are based on
matching a portion of employee contributions. All matching employer
contributions to the Savings Plans are made through a leveraged
employee stock ownership plan ("LESOP") trust (see "Employee Stock
Ownership Trust" in Note L on page F-68). Total contributions to these
plans, including contributions allocated to participant accounts
through the LESOP trust, were $66, $66, and $65 million in 1995, 1994,
and 1993, respectively. These amounts exclude costs applicable to
spun-off operations.
F-59
<PAGE>
G. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Substantially all retirees and their dependents are covered under the
Corporation's plans for medical, dental, and life insurance benefits.
Approximately 42,000 retirees were eligible to receive benefits as of
January 1, 1995. Currently, the Corporation pays the full cost of
retiree health benefits. However, by 1999, all employees retiring
after 1990 will pay a share of the costs of medical coverage that
exceeds a defined dollar medical cap. Such future cost sharing
provisions have been reflected in determining the Corporation's
postretirement benefit costs. The Corporation retains the right,
subject to applicable legal requirements, to amend or terminate these
benefits.
Effective January 1, 1993, the Corporation adopted SFAS 106 on an
immediate-recognition basis. The standard requires that the cost of
retiree benefits be recognized in the financial statements from an
employee's date of hire until the employee becomes eligible for these
benefits. Previously, the Corporation expensed retiree benefits as
they were paid. Immediate recognition of the value of prior benefits
earned, the transition obligation, resulted in a one-time, non-cash
charge applicable to continuing operations of $1.573 billion, or $3.80
per share. The charge is net of a deferred income tax benefit of
$1.054 billion, which will be recognized over the remaining lives of
the workforce.
The Corporation's periodic expense under SFAS 106 in 1995 and 1994, as
displayed in the table below, increased from a level of $106 million in
costs in 1992 under the prior method. Because the Telephone Companies'
higher costs are being partially recovered in revenues, the increased
costs have not materially affected reported earnings. (See "Change in
Accounting for Postretirement and Postemployment Costs" in Note A on
page F-49.) However, a CPUC order held that related revenues collected
after October 12, 1994, are subject to refund. (See "Revenues Subject
to Refund" in Note O on page F-71.)
The components of net periodic postretirement benefit cost are as
follows:
(Dollars in millions) 1995 1994
-----------------------------------------------------------------------
Service cost........................................... $ 50 $ 58
Interest cost on accumulated postretirement
benefit obligation................................... 262 258
Actual return on plan assets........................... (250) (3)
Net amortization and deferral.......................... 176 (66)
------------
Net periodic postretirement benefit cost............... $238 $247
=======================================================================
Both Pacific Bell and Nevada Bell partially fund their obligations by
contributing to Voluntary Employee Benefit Association trusts. Plan
assets are invested primarily in domestic and international stocks and
domestic investment-grade bonds.
F-60
<PAGE>
G. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (Cont'd)
The funded status of the plans follows:
December 31
----------------
(Dollars in millions) 1995 1994
----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees............................................ $2,311 $2,308
Eligible active employees........................... 222 270
Other active employees.............................. 788 802
---------------
Total accumulated postretirement benefit obligations.. 3,321 3,380
Less:
Fair value of plan assets........................... (1,246) (880)
Unrecognized net gain/(loss)*....................... 167 (178)
Unrecognized prior service cost..................... 39 -
---------------
Accrued postretirement benefit obligation recognized
in the consolidated balance sheets.................. $2,281 $2,322
======================================================================
* The unrecognized net gain/(loss) is amortized over the expected
future service lives of approximately 16 years and reflects
differences between actuarial assumptions and actual experience. It
also includes the impact of changes in actuarial assumptions.
Liabilities and expenses for employee benefits are based on actuarial
assumptions. The assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7.25 percent and 8.0 percent for
1995 and 1994, respectively. The 1995 accrued postretirement benefit
obligation and the 1996 expense are based on an assumed annual increase
in health care costs of 6.0 percent. Increasing the assumed health
care cost trend rates by one percent each year would increase the
December 31, 1995, accumulated postretirement benefit obligation by
$426 million and would increase the combined service and interest cost
components of net periodic postretirement benefit cost for 1995 by $40
million. An 8.75 percent long-term rate-of-return on assets is assumed
in calculating postretirement benefit costs. Based on the plans'
historical return on assets, the assumed long-term rate-of-return will
be increased to 9.0 percent in 1996. These actuarial assumptions are
subject to change over time, which could have a material impact on the
Corporation's financial statements.
Effective January 1, 1993, the Corporation adopted SFAS 112 for
accounting for postemployment benefits, which required a change from
cash to accrual accounting. Postemployment benefits offered by the
Corporation include workers compensation, disability benefits, medical
benefit continuation, and severance pay. These benefits are paid to
former or inactive employees who terminate without retiring. A one-
time, non-cash charge representing prior benefits earned was recorded
in 1993, which reduced earnings applicable to continuing operations by
$151 million, or $0.36 per share. The charge was net of a deferred
income tax benefit of $101 million. The annual periodic expense under
SFAS 112 does not differ materially from expense under the prior
method.
F-61
<PAGE>
H. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Key employees of the Corporation have outstanding options and stock
appreciation rights ("SARs") that were granted under the Pacific
Telesis Group 1994 Stock Incentive Plan (the "Stock Plan") and a
previous plan (collectively, the "Plans"). The Stock Plan was approved
by shareowners effective January 1, 1994. The previous plan expired
December 31, 1993. A total of 21,000,000 shares of the Corporation's
common stock was authorized by the Board of Directors (the "Board") for
grants of options, SARs, restricted stock, and stock units under the
Stock Plan. As of December 31, 1995, the remaining shares authorized
were 14,139,300, including 136,000 remaining shares separately
authorized for grant to nonemployee directors of the Board. The
remaining shares authorized for future grants as of December 31, 1994,
were 13,963,200.
Options granted under the Plans were granted as nonqualified options or
as incentive stock options, and portions were granted in conjunction
with SARs. The original exercise price of each outstanding option and
SAR was equal to the fair market value of the Corporation's common
stock on the date of grant. The exercise prices of options and SARs
outstanding at the time of the spin-off (see Note B - "Spun-off
Operations" on page F-49) were adjusted as described below. The
exercise price of each option may be paid in cash or by surrendering
shares of common stock already owned by the holder, or with a
combination of cash and such shares. Options and associated SARs
ordinarily become exercisable at stated times beginning at least one
year after the date of grant. The term of any option or SAR cannot
exceed ten years. As of December 31, 1995, 5,773,723 options and SARs
were exercisable at prices ranging from $12.4297 to $32.1250, after
exercise price adjustments arising from the spin-off.
F-62
<PAGE>
H. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (Cont'd)
The following table summarizes option and SAR activity during 1995 and
1994:
Price Range Price Range
1995 Per Share* 1994 Per Share*
-----------------------------------------------------------------------
Shares issuable under
outstanding options
and SARs at $12.4297 - $ 8.7008 -
January 1 10,742,408 32.1250 6,185,201 27.6050
Options and $26.6250 - $30.7500 -
SARs granted 363,700 30.2500 7,215,800 32.1250
Options and SARs $12.4297 - $ 8.7008 -
exercised (1,057,347) 32.0000 (1,255,080) 27.6050
Options and SARs
canceled or $15.6577 - $ 8.7008 -
forfeited (535,913) 32.0000 (9,520) 27.6050
Options and SARs
replaced for
employees of
spun-off $12.4297 -
operations - - (1,393,993) 27.6050
---------- -----------
Shares issuable
under outstanding
options and
SARs at $12.4297 - $12.4297 -
December 31 9,512,848 32.1250 10,742,408 32.1250
=======================================================================
* Exercise prices per share were adjusted to reflect the spin-off of
wireless operations on April 1, 1994.
In 1993, 2,199,709 options and SARs were exercised at adjusted prices
ranging from $8.7008 to $27.6050.
Options and SARs held by the continuing employees of the Corporation at
the time of the spin-off were supplemented with an equal number of
options and SARs for common shares of spun-off operations. The
exercise prices for the Corporation's outstanding options and SARs were
adjusted downward to reflect the value of the supplemental spun-off
operations options and SARs. The Corporation's balance sheet reflects
a related liability equal to the difference between the current market
price of spun-off operations stock and the exercise prices of the
supplemental options outstanding. (See "Off-Balance-Sheet Risk" in
Note J on page F-66.) As of December 31, 1995, 3,140,472 supplemental
spun-off operations options and SARs were outstanding. Expiration
dates for the supplemental options and SARs range from 1996 to 2003.
F-63
<PAGE>
H. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (Cont'd)
Outstanding options and SARs of the Corporation that were held by
employees of the wireless operations at the spin-off date were replaced
by options and SARs for common shares of spun-off operations. The
spun-off operations assumed liability for these replacement options and
SARs.
Certain information presented in this note is based on estimates, which
are not expected to differ materially from actual amounts.
I. DEBT AND LEASE OBLIGATIONS
Long-term obligations as of December 31, 1995 and 1994, consist of
debentures of $3,545 and $4,047 million, respectively, and corporate
notes of $1,279 and $1,295 million, respectively. Maturities and
interest rates of long-term obligations follow:
December 31
--------------------
Maturities and Interest Rates 1995 1994
---------------------------------------------------------------------
(Dollars in millions)
1996 8.650% $ - $ 15
1997 8.990% to 12.560% 69 71
1999 4.625% 100 100
2000 4.625% 125 125
2001-2043 6.000% to 9.500% 4,530 5,031
----------------
4,824 5,342
Long-term capital lease obligations 18 16
Unamortized discount - net of premium (105) (461)
----------------
Total long-term obligations $4,737 $4,897
=====================================================================
At December 31, 1995, Pacific Bell had remaining authority from the
CPUC to issue up to $1.25 billion of long- and intermediate-term debt.
The proceeds may be used only to redeem maturing debt and to refinance
other debt issues. Pacific Bell had remaining authority from the
Securities and Exchange Commission to issue up to $650 million of long-
and intermediate-term debt through a shelf registration. In February
1996, Pacific Bell issued $250 million of intermediate-term debt under
these authorities. (See Note N - "Subsequent Events" on page F-70.)
In addition, PacTel Capital Resources, a wholly owned subsidiary of the
Corporation, may issue up to $192 million of medium-term notes through
a shelf registration on file with the SEC.
F-64
<PAGE>
I. DEBT AND LEASE OBLIGATIONS (Cont'd)
As of December 31, 1995 and 1994, the weighted-average interest rate on
total short-term borrowings was 5.91 percent and 7.0 percent,
respectively. Debt maturing within one year in the balance sheets
consists of short-term borrowings and the portion of long-term
obligations that matures within one year as follows:
December 31
-------------
(Dollars in millions) 1995 1994
-----------------------------------------------------------------------
Commercial paper................................... $1,416 $ -
Notes payable to banks............................. 95 2
---------------
Total short-term borrowings........................ 1,511 2
Current maturities of long-term obligations........ 19 244
---------------
Total debt maturing within one year................ $1,530 $246
=======================================================================
Lines of Credit
The Corporation has various uncommitted lines of credit with certain
banks. These arrangements do not require compensating balances or
commitment fees and, accordingly, are subject to continued review by
the lending institutions. As of December 31, 1995 and 1994, the total
unused lines of credit available were approximately $2.7 and
$2.2 billion, respectively.
J. FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of the
Corporation's financial instruments:
December 31, 1995 December 31, 1994
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
----------------------------------------------------------------------
Cash and cash equivalents......... $ 76 $ 76 $ 135 $ 135
Debt maturing within one year..... 1,530 1,530 246 246
Deposit liabilities............... 358 358 305 305
Long-term debt.................... $4,719 $5,021 $4,881 $4,729
======================================================================
The following methods and assumptions were used to estimate the fair
values of each category of financial instrument:
The fair values of cash and cash equivalents, debt maturing within one
year, and deposit liabilities approximate their carrying amounts
because of the short-term maturities of these instruments.
F-65
<PAGE>
J. FINANCIAL INSTRUMENTS (Cont'd)
The fair value of long-term debt issues was estimated based on the net
present value of future expected cash flows, which were discounted
using current interest rates. The carrying amounts include the
unamortized net discount.
Off-Balance-Sheet Risk
The Corporation holds an equity swap contract to hedge exposure to risk
of market changes related to its recorded liability for outstanding
employee stock options for common stock of spun-off operations and
associated SARs. (See Note H - "Stock Options and Stock Appreciation
Rights" on page F-62.) The Corporation plans to make open market
purchases of the stock of spun-off operations to satisfy its obligation
for options that are exercised. Off-balance-sheet risk exists to the
extent the market price of the stock of spun-off operations rises above
the market price reflected in the liability's current carrying value.
The equity swap was entered into to hedge this exposure and minimize
the impact of market fluctuations. The contract entitles the
Corporation to receive settlement payments to the extent the price of
the common stock of spun-off operations rises above the notional value
of $23.74 per share, but imposes an obligation to make payments to the
extent the price declines below this level. The swap also obligates
the Corporation to make a monthly payment of a fee based on LIBOR. The
total notional amount of the contract, $77 million as of December 31,
1995, covers the approximate number of the options and SARs outstanding
of spun-off operations on that date. The Corporation plans to
periodically adjust downward the outstanding notional amount as the
options and SARs are exercised. The equity swap contract expires April
1999.
Both the equity swap and the Corporation's liability for the stock
options and SARs of spun-off operations are carried in the balance
sheet at their market values, which were immaterial as of December 31,
1995. Gains and losses from quarterly market adjustments of the
carrying amounts substantially offset in results of operations. As of
December 31, 1995, the accounting loss that would be incurred from
nonperformance by the counterparty to the equity swap was $14 million.
However, the Corporation does not expect to realize any loss from
counterparty nonperformance.
F-66
<PAGE>
K. RELATED PARTY TRANSACTIONS
During 1993, the Corporation made net cash investments in spun-off
operations of $356 million. These investments included capital
contributions to spun-off operations of $1,180 and are reported net of
intercompany borrowings and repayments. The net investments also
reflect dividends received from spun-off operations of $114 million in
1993. During 1993, spun-off operations substantially repaid previous
intercompany borrowings from the Corporation, which reduced a net
balance receivable from spun-off operations by $715 million. The 1993
repayment by spun-off operations was made primarily using proceeds of
the Corporation's capital contributions. A remaining net receivable
balance of $33 million was repaid in 1994.
Miscellaneous income of the Corporation for 1993 reflects interest
income of $20 million from intercompany borrowings by spun-off
operations. The borrowings from PacTel Capital Resources were
primarily in the form of promissory notes bearing interest at variable
rates, which averaged 6.1 percent during 1993. In addition, Pacific
Telesis provided certain administrative services to spun-off operations
and charged for these services through 90 days following the April 1,
1994, spin-off date.
A separation agreement for the spin-off provided for complete
separation of all properties of the spun-off operations from the
Corporation. The Corporation's consolidated federal income tax return
for 1994 included spun-off operations through the spin-off date.
L. CAPITAL STOCK
Shareowners
As of January 31, 1995, the number of shareowners was 771,961.
Preferred Stock
The Corporation's Articles of Incorporation include a provision for the
issuance of up to 50,000,000 preferred shares (par value $0.10 per
share) in one or more series with full or limited voting powers or
without voting powers, and with such designations, preferences, and
rights as the Board may determine.
Treasury Stock
From time to time, the Corporation purchases shares of its common stock
and holds these shares as treasury stock. Treasury stock that is held
may be reissued later in connection with acquisitions, the
Corporation's shareowner dividend reinvestment and stock purchase plan
("DRISPP"), and employee benefit plans.
F-67
<PAGE>
L. CAPITAL STOCK (Cont'd)
During 1995, the Corporation reissued 4,369,507 treasury shares,
primarily in connection with the acquisition of Cross Country Wireless
Inc. ("CCW"). (See Note M - "Acquisition" on page F-70.) During 1994
and 1993, respectively, the Corporation reissued 1,006,122 and
17,966,717 treasury shares in connection with the DRISPP and employee
benefit plans. The greater amount of reissuances in 1993, $728 million
(at cost), primarily reflects additional equity raised that year from a
discounted stock purchase offering under the DRISPP. As of December
31, 1995, 4,392,923 shares remained held as treasury stock pending
their ultimate disposition.
Employee Stock Ownership Trust
All matching employer contributions to the Savings Plans are made
through a LESOP trust. (See "Defined Contribution Plans" in Note F on
page F-59.) During 1989, Bankers Trust Company, as trustee of the
Pacific Telesis Group Employee Stock Ownership Plan Trust, purchased
13,900,000 of the Corporation's treasury shares at a price of
$691,052,400 in exchange for a promissory note from the trust to the
Corporation. The note payable by the trust is not reflected as a
liability of the Corporation and the remaining cost of unallocated
trust shares is carried as a reduction of shareowners' equity (as
"deferred compensation"). Principal and interest on the note is paid
from employer contributions and dividends received by the trust.
The following table summarizes the Corporation's expense each year from
the allocation of shares held by the LESOP trust to the accounts of
employees participating in the Savings Plans:
(Dollars in millions) 1995 1994 1993
-----------------------------------------------------------------------
Total compensation and interest expense recognized*... $66 $60 $65
Interest expense portion**............................ 23 19 20
Other information:
Employer contributions to trust..................... 60 77 76
Dividends received by trust......................... $44 $35 $30
=======================================================================
* Determined using the shares-allocated accounting method and after
being reduced by dividends paid on shares held by the trust.
** The Corporation's LESOP interest expense is matched by an equal
amount of interest income earned on the promissory note from the
trust and reflected in miscellaneous income.
F-68
<PAGE>
L. CAPITAL STOCK (Cont'd)
Shares held by the LESOP trust are released for allocation to the
accounts of employees as employer matching contributions are earned.
The following table summarizes the Corporation's shares held by the
trust:
December 31
---------------------
1995 1994
-----------------------------------------------------------------------
Shares allocated to employee accounts........... 8,238,685 9,142,067
Shares committed to be allocated*............... 340,519 167,641
Shares unallocated.............................. 11,228,756 11,420,334
----------------------
Total shares held by trust...................... 19,807,960 20,730,042
=======================================================================
* Represents employer matching contributions earned by employees, but
not yet allocated to employee accounts.
Effective with the April 1, 1994, spin-off, the LESOP trust received
one share of stock of spun-off operations for each Pacific Telesis
Group share held. During 1994, the trust sold the shares of the spun-
off operations it received on unallocated shares using the proceeds to
purchase Pacific Telesis Group shares. In addition, shares of the
spun-off operations received for allocated trust shares were used to
purchase Pacific Telesis Group shares except for employees who elected
to retain and transfer their shares of the spun-off operations from
their savings match account to another investment fund. The number of
trust shares increased by 7,887,851 shares as a result of these
transactions.
Statement of Position 93-6 ("SOP 93-6"), "Employers' Accounting for
Employee Stock Ownership Plans," issued by the American Institute of
Certified Public Accountants, established new accounting rules for new
LESOP shares. As allowed by specific provisions of SOP 93-6, the
Corporation continues to follow the prior rules in accounting for the
LESOP trust.
Shareowner Rights Plan
During 1989, the Board adopted a shareowner rights plan to enhance its
ability to protect the shareowners' interests if the Corporation is
faced with a hostile acquisition proposal. Under the terms of the plan,
shareowners of record as of October 10, 1989, received one right for
each share of the Corporation's common stock held on that date.
Initially, the rights are not exercisable and trade automatically with
the Corporation's common stock. If a takeover attempt occurred that
satisfied the tests described in the plan, each right (except for
rights held by the person or group making that takeover attempt) would
become the right to purchase common stock at one-half its then market
value (or, at the Board's discretion, could be exchanged for an
additional share of common stock). The rights do not have any voting
rights, may be redeemed under certain circumstances at $0.01 per right,
and expire on October 10, 1999.
F-69
<PAGE>
M. ACQUISITION
In July 1995, the Corporation acquired 100 percent of the stock of CCW
to provide wireless television service in Southern California. The
acquisition was accounted for by the purchase method of accounting.
The Corporation now has existing wireless cable operations with over
40,000 video customers in Riverside, California and holds licenses and
rights to provide wireless video services in Los Angeles, Orange
County, and San Diego. The transaction involved the exchange of
approximately $120 million of Pacific Telesis Group treasury stock, or
about 4.4 million shares, for the outstanding stock of CCW. The
Corporation also assumed approximately $55 million of CCW debt, which
was retired during the third quarter of 1995. (See Note O -
"Commitments and Contingencies" below, under "Purchase Commitments",
for a discussion of plans to acquire other companies that provide
wireless video services.)
N. SUBSEQUENT EVENTS
Trust Originated Preferred Securities ("TOPrS")
On October 17, 1995, Pacific Telesis Financing I, II, and III (the
"Trusts") were established as Delaware statutory business trusts. All
of the common securities of the Trusts will be directly or indirectly
owned by the Corporation. In October 1995, the Corporation and the
Trusts filed a shelf registration with the SEC to sell up to $1 billion
of TOPrS to the public. In January 1996, the Corporation sold $500
million of 7.56 percent TOPrS through Pacific Telesis Financing I. The
20 million shares of TOPrS are priced at $25 per share, have a 30-year
maturity, an extension option, and are callable in five years at par.
The proceeds were used to reduce the Corporation's commercial paper
outstanding.
TOPrS are subject to a guarantee from the Corporation. Each Trust was
formed for the exclusive purpose of issuing preferred and common
securities representing undivided beneficial interests in the Trusts
and investing the proceeds from the sale of TOPrS in unsecured
subordinated debt securities of the Corporation. As of January 31,
1996, the sole asset of Pacific Telesis Financing I consisted of $515.5
million in principal amount of the Subordinated Debenture of the
Corporation.
Debt Issuance
In February 1996, Pacific Bell issued $250 million of 5.875 percent
debentures due February 15, 2006. The debentures may not be redeemed
prior to maturity. The proceeds from the sale of the debentures were
used to reduce short-term debt incurred to retire Pacific Bell's
debentures totaling approximately $500 million in December 1995.
F-70
<PAGE>
O. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
In November 1995, the Corporation reached an agreement to acquire
Wireless Holdings, Inc. and Videotron Bay Area, Inc. for approximately
$120 million of the Corporation's common stock and the assumption of
approximately $55 million of debt. The transaction is not expected to
close until the second quarter of 1996 and is subject to approvals by
regulators and the owners of the companies to be acquired.
In December 1994, Pacific Bell contracted for the purchase of up to
$2 billion of Advanced Communications Network facilities, which will
incorporate emerging technologies. Pacific Bell is committed to
purchase these facilities in 1998 if they meet certain quality and
performance criteria. Management expects the purchase amount to be
less than $1 billion in 1998.
Pacific Bell has purchase commitments of about $274 million remaining
in connection with its previously announced program for deploying an
all digital switching platform with ISDN and SS-7 capabilities.
Purchase Options
In June 1990, Prime Cable of Chicago, Inc. ("Prime Cable") acquired
certain Chicago cable television properties from Group W. The
Corporation, through its PTCB subsidiary, holds options to purchase 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 management's opinion, the likelihood
that the Corporation will be required to pay principal or interest on
this debt under these guarantees is remote.
Revenues Subject to Refund
In 1992, the CPUC issued a decision adopting, with modification, SFAS
106 for regulatory accounting purposes. Annual price cap decisions by
the CPUC granted Pacific Bell approximately $100 million in each of
the years 1993-1996 for partial recovery of higher costs under SFAS
106. However, the CPUC in October 1994 reopened the proceeding to
determine the criteria for exogenous cost treatment and whether 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 plus interest. Related revenues totaled about $122 million at
December 31, 1995. Management believes postretirement benefits costs
are appropriately recoverable in Pacific Bell's price cap filings. It
is possible that the CPUC could decide this issue in the near term, and
that the decision could have a material adverse effect on Pacific Bell.
F-71
<PAGE>
O. COMMITMENTS AND CONTINGENCIES (Cont'd)
Property Tax Investigation
In 1992, a settlement agreement was reached between the State Board of
Equalization, all California counties, the State Attorney General, and
28 utilities, including Pacific Bell, on a specific methodology for
valuing utility property for property tax purposes. The CPUC opened an
investigation to determine if any resulting property tax savings should
be returned to customers. Intervenors have asserted that as much as
$20 million of annual property tax savings should be treated as an
exogenous cost reduction in Pacific Bell's annual price cap filings.
These intervenors have also asserted that past property tax savings
totaling as much as $60 million plus interest should be returned to
customers. Management believes that, under the CPUC's regulatory
framework, any property tax savings should be treated only as a
component of the calculation of shareable earnings. In an Interim
Opinion issued in June 1995, the CPUC decided to defer a final decision
on this matter pending resolution of the criteria for exogenous cost
treatment under its regulatory framework. The criteria are being
considered in a separate proceeding initiated for rehearing of the
CPUC's postretirement benefits other than pensions decision discussed
above. It is possible that the CPUC could decide this issue in the
near term, and that the decision could have a material adverse effect
on Pacific Bell.
P. COMPETITIVE RISK
The Telephone Companies are facing increasing competition for existing
and new services. Currently, competitors primarily consist of
interexchange carriers, competitive access providers, and wireless
companies. Pacific Bell also faces competition from cable television
companies and others.
In 1995, the CPUC authorized toll services competition and also ordered
Pacific Bell to offer expanded interconnection to competitive access
providers. Effective January 1, 1996, the CPUC authorized local
exchange competition. Local exchange competition may also affect toll
and access revenues, as well as local service revenues, since customers
may select a competitor for all their telecommunications services.
Local exchange competition may also affect other service revenues as
Pacific Bell Directory will have to acquire listings from other
providers for its products, and competing directory publishers may ally
themselves with other telecommunications providers.
The unique characteristics of the California market make Pacific Bell
vulnerable to competition. Pacific Bell's business and residence
revenues and profitability are highly concentrated among a small
portion of its customer base and geographic areas. Competitors need
only serve selected portions of Pacific Bell's service area to compete
for the majority of its business and residence usage revenues. High-
margin customers are clustered in high density areas such as Los
Angeles and Orange County, the San Francisco Bay Area, San Diego, and
Sacramento. Competitors are expected to target the high-usage, high-
profit customers.
F-72
<PAGE>
P. COMPETITIVE RISK (Cont'd)
As in California, Nevada Bell's market is also vulnerable to
competition and competitors are expected to target the high-usage,
high-profit customers. These customers are geographically concentrated
in the Reno/Sparks metropolitan area and business parks.
Q. ADDITIONAL FINANCIAL INFORMATION
December 31
---------------------
(Dollars in millions) 1995 1994
-----------------------------------------------------------------------
Prepaid expenses and other current assets:
Prepaid directory expenses.................. $ 320 $ 328
Miscellaneous prepaid expenses............... 38 33
Notes and other receivables.................. 101 115
Inventory and supplies....................... 58 60
Current deferred tax benefits................ 300 458
PCS auction deposit.......................... - 56
Deferred compensation trusts................. 152 124
Other........................................ 33 32
---------------------
Total.......................................... $ 1,002 $ 1,206
=======================================================================
Property, plant, and equipment - net:
Land and buildings........................... $ 2,758 $ 2,625
Cable and conduit............................ 11,175 10,818
Central office equipment..................... 9,562 9,598
Furniture, equipment, and other.............. 2,917 2,948
Construction in progress..................... 810 576
---------------------
27,222 26,565
Less accumulated depreciation................ (15,837) (10,451)
---------------------
Total.......................................... $ 11,385 $16,114
=======================================================================
Deferred charges and other noncurrent assets:
PCS licenses and costs....................... $ 730 $ -
Investment in Bellcore....................... 27 28
Other........................................ 1,116 1,099
---------------------
Total.......................................... $ 1,873 $ 1,127
=======================================================================
F-73
<PAGE>
Q. ADDITIONAL FINANCIAL INFORMATION (Cont'd)
December 31
----------------
(Dollars in millions) 1995 1994
---------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable:
Trade..................................... $ 753 $ 720
Payroll................................... 56 47
Checks outstanding........................ 302 336
Other:
Incentive awards payable................ 200 237
Other................................... 429 139
Interest accrued............................ 124 136
Advance billing and customers' deposits..... 339 292
------------------
Total......................................... $ 2,203 $ 1,907
=====================================================================
Other current liabilities:
Accrued compensated absences................ $ 278 $ 287
Dividends payable........................... 234 231
Restructuring reserves...................... 311 554
Other....................................... 85 258
------------------
Total......................................... $ 908 $ 1,330
=====================================================================
Other noncurrent liabilities and deferred credits:
Unamortized investment tax credits.......... $ 292 $ 473
Accrued pension cost liability.............. 1,170 879
Restructuring reserves........................ 15 386
Accrued postretirement benefit obligation... 2,281 2,322
Other....................................... 515 793
-----------------
Total......................................... $ 4,273 $ 4,853
=====================================================================
F-74
<PAGE>
Q. ADDITIONAL FINANCIAL INFORMATION (Cont'd)
For the Year Ended
December 31
----------------------
(Dollars in millions) 1995 1994 1993
-----------------------------------------------------------------------
Other service revenues:
Directory Advertising...................... $1,031 $1,003 $1,007
Other...................................... 517 425 397
------------------------
Total........................................ $1,548 $1,428 $1,404
=======================================================================
Interest expense:
Gross interest expense..................... $ 480 $ 455 $ 509
Less capitalized interest.................. (38) - -
------------------------
Net interest expense......................... $ 442 $ 455 $ 509
=======================================================================
Miscellaneous income/(expense):
Interest income............................ $ 62 $ 29 $ 27
Other...................................... (20) 26 21
------------------------
Total........................................ $ 42 $ 55 $ 48
=======================================================================
Advertising expense*......................... $ 97 $ 99 $ 63
=======================================================================
CASH PAYMENTS FOR:
Interest..................................... $ 492 $ 442 $ 514
Income taxes................................. $ 530 $ 737 $ 771
=======================================================================
NON-CASH TRANSACTIONS:
Treasury shares issued in lieu of cash
dividends under shareowner dividend
reinvestment plan.......................... $ - $ 17 $ 143
Spin-off stock distribution.................. $ - $2,901 $ -
Acquisition of CCW (See Note M - "Acquisition"
on page F-70)..............................
Treasury shares issued....................... $ 117 $ - $ -
Debt assumed................................. $ 55 $ - $ -
=======================================================================
* Restated.
F-75
<PAGE>
Q. ADDITIONAL FINANCIAL INFORMATION (Cont'd)
Major Customer
Substantially all of the Corporation's operating revenues were from
telecommunications and information services. Approximately 9 percent,
11 percent, and 11 percent of these revenues were earned in 1995, 1994,
and 1993, respectively, for services provided to AT&T Corp. No other
customer accounted for more than 10 percent of revenues.
-----------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
(Unaudited)
(Dollars in millions, except per share amounts)
-----------------------------------------------
1995 First Second Third Fourth
-----------------------------------------------------------------------
Operating revenues.................. $2,254 $2,231 $ 2,275 $2,282
Operating income.................... 490 518 530 473
Earnings (loss):
Income before extraordinary item.. 282 260 275 231
Extraordinary item................ - - (3,360) -
Net income (loss)................... $ 282 $ 260 $(3,085) $ 231
Earnings (loss) per share:
Income before extraordinary item.. $ 0.67 $ 0.61 $ 0.64 $ 0.54
Extraordinary item................ - - (7.86) -
Net income (loss)................... $ 0.67 $ 0.61 $ (7.22) $ 0.54
-----------------------------------------------------------------------
1994 First Second Third Fourth
-----------------------------------------------------------------------
Operating revenues.................. $2,294 $2,256 $ 2,329 $2,356
Operating income.................... 548 547 603 496
Earnings:
Income from continuing operations. 282 278 314 262
Income from spun-off operations... 23 - - -
Net income.......................... $ 305 $ 278 $ 314 $ 262
Earnings per share:
Income from continuing operations. $ 0.67 $ 0.65 $ 0.74 $ 0.62
Income from spun-off operations... 0.05 - - -
Net income.......................... $ 0.72 $ 0.65 $ 0.74 $ 0.62
=======================================================================
Third quarter 1995 results reflect an after-tax extraordinary charge as
a result of Pacific Bell's discontinuance of regulatory accounting.
(See Note C - "Discontinuance of Regulatory Accounting - SFAS 71" on
page F-51.)
Second quarter 1994 results reflect an after-tax charge of $29 million,
or $0.07 per share, resulting from a CPUC refund order.
First quarter 1994 operating revenues, operating income, and certain
other data exclude spun-off operations from continuing operations.
(See Note B - "Spun-off Operations" on page F-49.)
F-76
<PAGE>
APPENDIX
--------
GRAPHIC AND IMAGE MATERIAL
Following is a description of the stock performance chart under the heading
"Performance Graph" on page 19, entitled "Comparison of Five-Year Cumulative
Total Return for Pacific Telesis Group, the Six Other RHCs* and the S&P 500
Index." This information is depicted in a line graph, and the left vertical
axis indicates the dollar range. The lowest value for this range is
$100.00, and it increases in $50 increments to the top listed value of
$250.00. The horizontal axis shows the time period beginning with the year
1990, followed by five consecutive year intervals ending in 1995. Pacific
Telesis Group, represented by a solid bold line, reflects the following
values: 1990 - $100; 1991 - $104; 1992 - $108; 1993 - $138; 1994 - $132;
and 1995 - $167. The Six RHCs, represented by a short bold dash, reflects
the following values: 1990 - $100, 1991 - $106; 1992 - $119; 1993 - $138;
1994 - $134; and 1995 - $207. The S&P 500 Index, represented by a long thin
dash, reflects the following values: 1990 - $100; 1991 - $130; 1992 - $140;
1993 - $154; 1994 - $156; and 1995 - $215.
--------------------------------------------------------------------------
* The six RHC's include Ameritech Corporation, Bell Atlantic Corporation,
BellSouth Corporation, NYNEX Corporation, SBC Communications Inc. and
the combined U.S. West Communications Group and U.S. West Media Group.
<PAGE>
A D M I S S I O N T I C K E T
Annual Meeting of Shareowners
May 2, 1996
San Jose Scottish Rite Center M A P H E R E
2455 Masonic Drive
San Jose, California
Doors Open at 9:30 A.M.
Meeting Begins at 10:00 A.M.
DIRECTIONS
FROM NORTH BAY, SAN FRANCISCO OR PENINSULA:
From I-280 South, exit at 87 Guadalupe Pkwy
South (far right lane). Continue on Guadalupe
Pkwy South and exit at Curtner Ave. Turn right
on Curtner and get immediately in the left lane.
Turn left on Canoas Garden Ave. Go one block to
Masonic Dr. and turn right.
From Hwy 101 South, exit at 87 Guadalupe Pkwy
South. Continue South on Guadalupe Pkwy through
Downtown San Jose and exit at Curtner Ave.
Turn right on Curtner and get immediately in
the left lane. Turn left on Canoas Garden Ave.
Go one block to Masonic Dr. and turn right.
FROM EAST BAY:
Take I-680 South, exit at 87 Guadalupe Pkwy South.
Continue on Guadalupe Pkwy South and exit at
Curtner Ave. Turn right on Curtner and get
immediately in the left lane. Turn left on Canoas
Garden Ave. Go one block to Masonic Dr. and turn right.
From I-880 South, take Hwy 101 South. Take I-280
North, exit at 87 Guadalupe Pkwy South.
Continue on Guadalupe Pkwy South and exit at
Curtner Ave. Turn right on Curtner and get
immediately in left lane. Turn left on Canoas
Garden Ave. Go one block to Masonic Dr. and turn right.
Please present this ticket
for admittance of shareowner(s)
named on reverse and a guest.
DETACH PROXY CARD HERE
............................................................................
<PAGE>
PACIFIC*TELESIS
Group
PROXY/VOTING INSTRUCTION CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 2, 1996.
The undersigned hereby appoints Philip J. Quigley, William E. Downing and
Richard W. Odgers, and each of them, as proxies, each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote
as designated herein all the shares of Common Stock of Pacific Telesis Group
represented hereby and held of record by the undersigned on March 3, 1996 at
the Annual Meeting of Shareowners to be held at the San Jose Scottish Rite
Center, 2455 Masonic Drive, San Jose, California, on May 2, 1996, at
10:00 a.m., or any adjournments thereof, upon all subjects that may properly
come before the meeting, including the matters described in the proxy
statement furnished herewith. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREOWNER AND IN
ACCORDANCE WITH THE DETERMINATION OF THE NAMED PROXIES, AND ANY OF THEM, ON
ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. This proxy
also provides voting instructions for shares held in the Shareowner Dividend
Reinvestment and Stock Purchase Plan and, if registrations are identical,
shares held in the various employee savings and benefit plans described in
the proxy statement. IF THIS PROXY IS SIGNED AND RETURNED AND NO
DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED "FOR" ITEMS A AND B, AND
"AGAINST" ITEMS C AND D SHOWN ON THE REVERSE OF THIS CARD, AND IN ACCORDANCE
WITH THE DETERMINATION OF THE NAMED PROXIES, AND ANY OF THEM, ON ANY OTHER
MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. (If you have made any
comments on this side of the card, please mark the comments box on the
reverse of this card.)
Your vote is important. Please sign and date on the reverse and promptly
return c/o Boston Equiserve, P.O. Box 9018, Boston, MA 02205-8650.
<PAGE>
PACIFIC*TELESIS
Group
March 15, 1996
Dear Shareowner:
It is a pleasure to invite you to Pacific Telesis Group's 1996 Annual
Meeting of Shareowners, our twelfth Annual Meeting. The meeting will be
held on May 2, 1996, at the San Jose Scottish Rite Center, 2455 Masonic
Drive, San Jose, California.
I hope you will be able to join us to review the year and take a look at
what the future holds for the Corporation. An Assistive Listening System
will be available and an American Sign Language interpreter will be present
at the meeting to assist shareowners with impaired hearing. The meeting
location is also accessible to wheelchairs. IF YOU DO ATTEND, PLEASE BE
SURE TO BRING THE ADMISSION TICKET THAT APPEARS ON THE REVERSE SIDE OF THIS
LETTER.
Whether or not you plan to be at the meeting, it is important that you
exercise your right to vote as a shareowner of Pacific Telesis Group.
PLEASE VOTE YOUR PREFERENCES ON THE PROXY CARD BELOW, DETACH IT FROM THIS
LETTER AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
I look forward to seeing you at the meeting, and on behalf of the management
and directors of Pacific Telesis Group, I want to thank you for your
continued support and confidence in 1996.
Sincerely,
Philip J. Quigley
Chairman of the Board
Admission Ticket on Reverse
Detach Proxy Card Here
............................................................................
<PAGE>
X Please mark votes as in this example.
-------
----------------------------------------------------
Directors Recommend a Vote "FOR"
----------------------------------------------------
Director Nominees are:
G. F. Amelio, F. C. Herringer and L. E. Platt
FOR WITHHOLD
A. Election of
All Directors
------- ---------
FOR ALL
EXCEPT: -----------------------------
FOR AGAINST ABSTAIN
B. Ratification
of Auditors
------- -------- ----------
---------------------------------------------------
Directors Recommend a Vote "AGAINST"
---------------------------------------------------
FOR AGAINST ABSTAIN
C. Proposal
Regarding
Directory Paper
Procurement
Practices ------- -------- ---------
D. Proposal
Regarding
Director
Compensation ------- -------- ---------
Please see comments --------
Please keep my
vote confidential --------
Will attend meeting --------
Discontinue duplicative
Summary Annual Report --------
Comments:
-------------------------------------
<PAGE>
PLEASE SIGN THIS PROXY AND RETURN IT PROMPTLY WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING. If signing for a
corporation or partnership, or as agent, attorney or
fiduciary, indicate the capacity in which you are signing.
If you do attend the meeting and decide to vote by ballot,
such vote will supersede this proxy. Sign here as name(s)
appears at left.
SIGNATURE________ DATE_____ SIGNATURE_________ DATE_____
<PAGE>
PACIFIC*TELESIS
Group
PROXY/VOTING INSTRUCTION CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 2, 1996.
The undersigned hereby appoints Philip J. Quigley, William E. Downing and
Richard W. Odgers, and each of them, as proxies, each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote
as designated herein all the shares of Common Stock of Pacific Telesis Group
held of record by the undersigned on March 3, 1996, at the Annual Meeting of
Shareowners to be held at the San Jose Scottish Rite Center, 2455 Masonic
Drive, San Jose, California, on May 2, 1996, at 10:00 a.m., or any
adjournments thereof, upon all subjects that may properly come before the
meeting, including the matters described in the proxy statement furnished
herewith. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREOWNER AND IN ACCORDANCE WITH THE
DETERMINATION OF THE NAMED PROXIES, AND ANY OF THEM, ON ANY OTHER MATTERS
THAT MAY PROPERLY COME BEFORE THE MEETING. IF THIS PROXY IS SIGNED AND
RETURNED AND NO DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED "FOR" ITEMS A
and B AND "AGAINST" ITEMS C AND D SHOWN ON THE REVERSE OF THIS CARD, AND IN
ACCORDANCE WITH THE DETERMINATION OF THE NAMED PROXIES, AND ANY OF THEM, ON
ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
<PAGE>
X Please mark votes as in example.
-------
-----------------------------------------------------
Directors Recommend a Vote "FOR"
-----------------------------------------------------
Director Nominees are:
G. F. Amelio, F. C. Herringer and L. E. Platt
FOR WITHHOLD
A. Election of
All Directors
------- --------
FOR ALL
EXCEPT: -----------------------------
FOR AGAINST ABSTAIN
B. Ratification
of Auditors
------- -------- ----------
----------------------------------------------------
Directors Recommend a Vote "AGAINST"
----------------------------------------------------
C. Proposal
Regarding
Directory Paper
Procurement
Practices ------- -------- ---------
D. Proposal
Regarding
Director
Compensation ------- -------- ---------
----------------------------------------------------
PLEASE SIGN THIS PROXY AND RETURN IT PROMPTLY WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING. If signing for a corporation
or partnership, or as an agent, attorney or fiduciary,
indicate the capacity in which you are signing.
Signature ________________________ Date________
Signature ________________________ Date________
