Item 1. Business
GTE California Incorporated (the Company), was incorporated in California in 1929. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and provides communications services in Southern and Central California.
The Company has a wholly-owned subsidiary, GTEL. GTEL comprises the majority of the Company's nonregulated operations including marketing telecommunications equipment and other deregulated products and services.
The Company provides local telephone service within its franchise area and intraLATA (Local Access Transport Area) long distance service between the Company's facilities and the facilities of other telephone companies within the Company's LATAs. InterLATA service to other points in and out of California is provided through connection with interexchange (long distance) common carriers. These common carriers are charged fees (access charges) for interconnection to the Company's local facilities. End user business and residential customers are also charged access charges for access to the facilities of the long distance carriers. The Company also earns other revenues by leasing interexchange plant facilities and providing such services as billing and collection and operator services to interexchange carriers, primarily the American Telephone and Telegraph Company (AT&T). The number of access lines served has grown steadily from 3,213,645 on January 1, 1989 to 3,714,570 on December 31, 1993.
The Company's principal line of business is providing telecommunication services. These services fall into five major classes: local network, network access, long distance, equipment sales and services and other. Revenues from each of these classes over the last three years are as follows:
Years Ended December 31 ----------------------------------------- 1993 1992 1991 ---------- ---------- ---------- (Thousands of Dollars)
Local Network Services $ 975,780 $ 937,797 $ 960,224 % of Total Revenues 34% 32% 32%
Network Access Services $ 616,122 $ 663,154 $ 667,525 % of Total Revenues 21% 23% 23%
Long Distance Services $1,003,154 $1,022,330 $1,010,236 % of Total Revenues 35% 35% 34%
Equipment Sales and Services $ 163,546 $ 180,281 $ 177,891 % of Total Revenues 6% 6% 6%
Other $ 116,176 $ 117,456 $ 148,167 % of Total Revenues 4% 4% 5%
At December 31, 1993, the Company had 14,379 employees. The Company has written agreements with the Communications Workers of America (CWA) covering substantially all hourly employees. The current agreements with the CWA expire in March 1996.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of its business in the territories which it serves.
The Company is subject to regulation by the California Public Utilities Commission (CPUC) as to its intrastate business operations and by the Federal Communications Commission (FCC) as to its interstate business operations. Information regarding the Company's activities with the various regulatory agencies and revenue arrangements with other telephone companies can be found in Note 10 of the Company's Annual Report to Shareholders for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.
The year was marked by important changes in the U.S. telecommunications industry. Rapid advances in technology, together with government and industry initiatives to eliminate certain legal and regulatory barriers are accelerating and expanding the level of competition and opportunities available to the Company. As a result, the Company faces increasing competition in virtually all aspects of its business. Specialized communications companies have constructed new systems in certain markets to bypass the local-exchange network. Additional competition from interexchange carriers as well as wireless companies continues to evolve for both intrastate and interstate communications.
During 1994, the Company began implementation of a re-engineering plan that will redesign and streamline processes. Implementation of its re-engineering plan will allow the Company to continue to respond aggressively to these competitive and regulatory developments through reduced costs, improved service quality, competitive prices and new product offerings. Moreover, implementation of this program will position the Company to accelerate delivery of a full array of voice, video and data services. The re-engineering program will be implemented over three years. During the year, the Company continued to introduce new business and consumer services utilizing advanced technology, offering new features and pricing options while at the same time reducing costs and prices.
During 1993, the FCC announced its decision to auction licenses during 1994 in 51 major markets and 492 basic trading areas across the United States to encourage the development of a new generation of wireless personal communications services (PCS). These services will both complement and compete with the Company's traditional wireline services. The Company will be permitted to fully participate in the license auctions in areas outside of GTE's existing cellular service areas. Limited participation will be permitted in areas in which GTE has an existing cellular presence.
In Cerritos, California, GTE is testing and comparing the capabilities of copper wire, coaxial cable, and fiber optics. The Cerritos test has enhanced GTE's expertise in the areas of pay-per-view video service, video-on-demand and local video conferencing, and led to a new interactive video service, GTE Main Street, TM which allows customers to shop, bank and access various other information services from their homes. In 1992, the FCC issued a "video dialtone" ruling that allows telephone companies to transmit video signals over their networks. The FCC also recommended that Congress amend the Cable Act of 1984 to permit telephone companies to supply video programming in their service areas.
During 1993, the CPUC approved a settlement agreement allowing the Company, beginning in 1994, to retain 100% of any earnings up to a 15.5% rate of return on investment while refunding 100% of any earnings above 15.5%. Under its prior plan, the Company was required to share 50% of any earnings over a 13% rate of return and refund 100% of any earnings over 16.5%. As part of this agreement and its normal annual price cap filing, the Company will reduce its rates by about $100 million in 1994. Additionally, the CPUC is expected to issue a final decision in early 1994 generally authorizing intralata toll competition and ordering significant rate restructuring in California. Although intended to be revenue neutral, the ultimate effect on revenue will depend, in part, on the extent to which toll and access rate reductions result in increased calling volumes.
The GTE Consent Decree, which was issued in connection with the 1983 acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's domestic telephone operating subsidiaries from providing long distance service beyond the boundaries of the LATA. This prohibition restricts their direct provision of long distance service to relatively short distances. The degree of competition allowed in the intraLATA market is subject to state regulation. However, regulatory constraints on intraLATA competition will gradually be relaxed.
In September 1993, the FCC released an order allowing competing carriers to interconnect to the local-exchange network for the purpose of providing switched access transport services. This ruling complements similar interconnect arrangements for private line services ordered during 1992. The order encourages competition for the transport of telecommunications traffic between local exchange carriers' (LECs) switching offices and interexchange carrier locations. In addition, the order allows LECs flexibility in pricing competitive services.
These and other actions to eliminate existing legal and regulatory barriers, together with rapid advances in technology, are facilitating a convergence of the computer, media and telecommunications industries. In addition to allowing new forms of competition, these developments are also creating new opportunities to develop interactive communications networks. The Company supports these initiatives to assure greater competition in telecommunications, provided that overall the changes allow an opportunity for all service providers to participate equally in a competitive marketplace under comparable conditions.
Item 2.
Item 2. Properties
The Company's property consists of network facilities (82%), company facilities (14%), customer premises equipment (1%) and other (3%). From January 1, 1989 to December 31, 1993, the Company made gross property additions of $2.8 billion and property retirements of $1.8 billion. Substantially all of the Company's property is subject to liens securing long-term debt. In the opinion of management, the Company's telephone plant is substantially in good repair.
Item 3.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company, which would have a material impact on the Company's financial statements.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
Market information is omitted since the Company's common stock is wholly-owned by GTE Corporation.
Item 6.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholders, page 32, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to the Registrant's Annual Report to Shareholders, pages 27 to 31, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Registrant's Annual Report to Shareholders, pages 5 to 25, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994, pages 3 to 4, incorporated herein and filed as Exhibit 13A. A complete list of Executive Officers of the Registrant as of March 1, 1994 is provided below.
Identification of Executive Officers
Year Assumed Current Name Age Position Position with Company - --------------------------- ---- -------- ---------------------- Larry J. Sparrow (1) 50 1992 Area President - West Susan L. Clay (2) 48 1993 Acting Regional Vice President - General Manager - California Clark M. Crawford (1) 47 1990 Area Vice President - General Manager Jorge Jackson (1)(3) 49 1993 Area Vice President - Public Affairs Timothy J. McCallion (1)(4) 40 1993 Area Vice President - Regulatory and Governmental Affairs Robert G. McCoy (1) 49 1992 Area Vice President - Sales Richard J. Nordman (1)(5) 44 1993 Area Vice President - Finance Kenneth K. Okel (1) 47 1991 Area Vice President - General Counsel and Secretary Ronald E. Pejsa (1)(6) 49 1993 Area Vice President - Human Resources
Position with GTE Telephone Operations (7) ---------------------------- Kent B. Foster 50 1989 President Michael B. Esstman (8) 47 1993 Executive Vice President - Operations Thomas W. White 47 1989 Executive Vice President Guillermo Amore 55 1990 Senior Vice President - International Gerald K. Dinsmore (9) 44 1993 Senior Vice President - Finance and Planning Robert C. Calafell (10) 52 1993 Vice President - Video Services A. T. Jones 54 1992 Vice President - International Brad M. Krall (11) 52 1993 Vice President - Centralized Services Donald A. Hayes 56 1992 Vice President - Information Technology Richard L. Schaulin 51 1989 Vice President - Human Resources Clarence F. Bercher 50 1991 Vice President - Sales Mark S. Feighner 45 1991 Vice President - Product Management Geoff C. Gould 41 1989 Vice President - Regulatory and Governmental Affairs G. Bruce Redditt 43 1991 Vice President - Public Affairs Richard M. Cahill 55 1989 Vice President and General Counsel Leland W. Schmidt 60 1989 Vice President - Industry Affairs Paul E. Miner 49 1990 Vice President - Regional Operations Support Katherine J. Harless 43 1992 Vice President - Intermediary Markets William M. Edwards, III(12) 45 1993 Controller
Each of these executive officers has been an employee of the Company or an affiliated company for the last five years.
Except for duly elected officers and directors, no other employee had a significant role in decision making.
All officers are appointed for a term of one year.
NOTES:
(1) Individual is an executive officer for West Area which is comprised of GTE California Incorporated, GTE Hawaiian Telephone Company Incorporated and GTE Northwest Incorporated.
(2) Susan L. Clay is Acting Regional Vice President - General Manager - California replacing John C. Appel who was appointed President of GTE Southwest Incorporated.
(3) Jorge Jackson was appointed Area Vice President - Public Affairs effective November 21, 1993 to replace Jim J. Parrish who retired.
(4) Timothy J. McCallion was appointed Area Vice President - Regulatory and Governmental Affairs effective November 21, 1993 replacing Keith M. Kramer who retired.
(5) Richard J. Nordman was appointed Area Vice President - Finance effective November 7, 1993 replacing Paul R. Shuell.
(6) Ronald E. Pejsa was appointed Area Vice President - Human Resources effective October 24, 1993 replacing James R. Poling who retired.
(7) Position is with, and duties are performed at, the GTE Telephone Operations Headquarters in Irving, Texas.
(8) Michael B. Esstman was appointed Executive Vice President - Operations effective April 25, 1993 replacing Charles A. Crain who retired on April 1, 1993.
(9) Gerald K. Dinsmore, previously South Area President, was appointed Senior Vice President - Finance and Planning replacing John L. Hume who retired.
(10) Robert C. Calafell was appointed Vice President - Video Services effective March 28, 1993.
(11) Brad M. Krall was appointed Vice President - Centralized Services effective November 7, 1993.
(12) William M. Edwards, III was appointed Controller effective November 7, 1993 replacing John D. Utzinger.
William E. Starkey retired November 21, 1993, George N. King retired May 21, 1993 and Clark W. Barlow retired August 21, 1993.
William D. Wilson resigned effective November 1, 1993 to accept a new position in GTE South Incorporated and GTE North Incorporated as Area Vice President - General Manager - East.
Jerry L. Austin retired November 21, 1993.
Item 11.
Item 11. Executive Compensation
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994, pages 5 to 13, incorporated herein and filed as Exhibit 13A.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994, page 14, incorporated herein and filed as Exhibit 13A.
Item 13.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's Proxy Statement, dated March 22, 1994, pages 3 to 5 and 13, incorporated herein and filed as Exhibit 13A.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - Reference is made to the Registrant's Annual Report to Shareholders, pages 5 - 25, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income for the years ended December 31, 1993-1991.
Consolidated Statements of Reinvested Earnings for the years ended December 31, 1993-1991.
Consolidated Statements of Cash Flows for the years ended December 31, 1993-1991.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules - Included in Part IV of this report for the years ended December 31, 1993-1991:
Page(s) ------- Report of Independent Public Accountants 11
Schedules:
V - Property, Plant and Equipment 12-14
VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment 15
VIII - Valuation and Qualifying Accounts 16
X - Supplementary Income Statement Information 17
Note: Schedules other than those listed above are omitted as not applicable, not required, or the information is included in the financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2-1* Agreement of Merger, dated September 10, 1992, between GTE California Incorporated and Contel of California, Inc.
3* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988 Form 10-K, File No. 1-6417).
4-1* Indenture dated December 1, 1939, between the Company and Security-First National Bank of Los Angeles, now named Security Pacific National Bank, Trustee, (Exhibit 7-A, File No. 2-4262), as supplemented by fifty-one supplemental indentures or deeds of conveyance (Filed as exhibits to the Form 10-K's for the years 1970, 1971, 1981, 1985 and 1986) and File No. 33-54788 in 1992.
12 Statement of the ratio of earnings to fixed charges.
13 Annual Report to Shareholders for the year ended December 31, 1993, filed herein as Exhibit 13.
13A Proxy Statement for the election of directors dated March 22, 1994, filed herein as Exhibit 13A.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth quarter of 1993.
* Denotes exhibits incorporated herein by reference to previous filings with the Securities and Exchange Commission as designated.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE California Incorporated:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in GTE California Incorporated and subsidiary's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the change in the method of accounting for income taxes in 1992 as discussed in Note 1 to the consolidated financial statements. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed under Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
						ARTHUR ANDERSEN & CO.
Dallas, Texas January 28, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GTE CALIFORNIA INCORPORATED -------------------------------------- (Registrant)
Date March 21, 1994 By LARRY J. SPARROW ------------------------- --------------------------------------- LARRY J. SPARROW Area President - West
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
LARRY J. SPARROW President and Director March 21, 1994 - ------------------------- (Principal Executive Officer) LARRY J. SPARROW
GERALD K. DINSMORE Senior Vice President - Finance March 21, 1994 - ------------------------- and Planning and Director GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 21, 1994 - ------------------------- (Principal Accounting Officer) WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 21, 1994 - ------------------------- RICHARD M. CAHILL
CLARK MICHAEL CRAWFORD Director March 21, 1994 - ------------------------- CLARK MICHAEL CRAWFORD
MICHAEL B. ESSTMAN Director March 21, 1994 - ------------------------- MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 21, 1994 - ------------------------- KENT B. FOSTER
THOMAS W. WHITE Director March 21, 1994 - ------------------------- THOMAS W. WHITE