UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the period ended December 31, 1993
----------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------- -------------------------
Commission File Number: 0-1210
-------------------------------------------------------
GTE NORTH INCORPORATED
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 35-1869961
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19845 N. U.S. 31, P.O. Box 407, Westfield, Indiana 46074
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 317-896-6464
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ---------------------------------- ----------------------------------------
NONE
- ---------------------------------- ----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
$1.15 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$1.25 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$2.00 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$2.10 SERIES CUMULATIVE PREFERRED STOCK-PA NO PAR VALUE
$2.20 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$2.25 SERIES CUMULATIVE PREFERRED STOCK-PA NO PAR VALUE
$2.30 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.375 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.40 SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
$2.50 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.50 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$2.50 SERIES C CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$4.50 SERIES CUMULATIVE PREFERRED STOCK-WI $100 PAR VALUE
$5.00 SERIES CUMULATIVE PREFERRED STOCK-WI $100 PAR VALUE
$7.60 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
4.60% SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
5.16% SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
- ------------------------------------------------------------------------------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREEMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
The Company had 978,351 shares of $1,000 stated value common stock outstanding
at February 28, 1994.
Document incorporated by reference:
Annual Report to Shareholders for the year ended December 31, 1993
(incorporated in Parts I and II).
<PAGE>
TABLE OF CONTENTS
Item Page
- ----- ----
PART I
1. Business 1 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and
Related Shareholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
8. Financial Statements and Supplementary Data 5
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
10. Directors and Executive Officers of the Registrant 6
11. Executive Compensation 11
12. Security Ownership of Certain Beneficial Owners
and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
<PAGE>
PART I
Item 1. Business
GTE North Incorporated (the Company) was incorporated in Wisconsin on January
27, 1987 and was the successor to the merger of eight telephone companies into
the Company on March 31, 1987. All of the Common Stock of the Company was
owned by GTE Corporation (GTE). Prior to March 31, 1993, the Company provided
communication services in the states of Ilinois, Indiana, Iowa, Michigan,
Minnesota, Missouri, Nebraska, Ohio, Pennsylvania and Wisconsin. On March 31,
1993, the Company transferred its assets and operations in Iowa, Minnesota,
Missouri and Nebraska to GTE Midwest Incorporated, which is a wholly-owned
subsidiary of GTE (the Midwest Transfer).
Contel North Incorporated was incorporated in Wisconsin on June 22, 1992.
Prior to April 1, 1993, Contel North Incorporated had no business operations
and no material assets. On April 1, 1993, the Company, along with Contel of
Illinois, Inc., Contel of Indiana, Inc. and Contel of Pennsylvania, Inc. (the
Contel Subsidiaries), merged with and into Contel North Incorporated. On April
2, 1993, Contel North Incorporated changed its name to GTE North Incorporated.
The Contel Subsidiaries were wholly-owned subsidiaries of GTE. They
provided communication services in the states of Illinois, Indiana and
Pennsylvania. The Contel Subsidiaries were, individually and in the aggregate,
significantly smaller in terms of operating revenues, net income and total
assets than the Company prior to the Midwest Transfer.
There is no public trading market for the Common Stock of the Company because
all of the Common Stock is owned by GTE, a New York corporation. The Company
has one wholly-owned subsidiary, GTW Telephone Systems Incorporated, which
markets and services telecommunications customer premises equipment.
The Company provides local telephone service within its franchise areas 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 the states in
which the Company operates is provided through connection with interexchange
(long distance) common carriers. These common carriers are charged fees
(access charges) for interconnection to the Company's local facilities. 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 3,537,907 on January 1,
1989 to 4,031,547 on December 31, 1993.
The following table denotes the access lines in the states in which the Company
operates as of December 31, 1993:
Access
State Lines Served
------------ -------------
Ohio 763,545
Indiana 838,220
Illinois 787,016
Michigan 605,126
Pennsylvania 598,781
Wisconsin 438,859
------------
Total 4,031,547
============
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 $ 980,039 $ 945,175 $ 916,302
% of Total Revenues 38% 37% 36%
Network Access Services $ 963,918 $ 973,661 $ 966,500
% of Total Revenues 37% 38% 39%
Long Distance Services $ 391,050 $ 332,150 $ 319,674
% of Total Revenues 15% 13% 13%
Equipment Sales and Services $ 106,288 $ 103,607 $ 127,485
% of Total Revenues 4% 4% 5%
Other $ 160,952 $ 205,449 $ 175,026
% of Total Revenues 6% 8% 7%
Telephone Competition
At December 31, 1993, the Company had 17,382 employees. In 1993, agreements
were reached on six contracts with the International Brotherhood of Electrical
Workers (IBEW), two contracts with the Communication Workers of America (CWA)
and one contract with the Bakers, Confectioners and Chocolate Workers (BCT).
During 1994, five contracts with the IBEW and one contract with the CWA will
expire.
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territory which it serves.
The Company is subject to regulation by the regulatory bodies of the states of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin 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 11 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 will begin 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 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.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets the Company serves.
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.
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 are gradually being
relaxed. In fact, some form of intraLATA competition is authorized in many of
the states in which the Company provides service.
These and other actions to eliminate the 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. Properties
The Company's property consists of network facilities (81%), company facilities
(13%), customer premises equipment (3%) and other (3%). From January 1, 1989
to December 31, 1993, the Company made gross property additions in the amount
of $2.8 billion and property retirements of $1.7 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. 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. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
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. 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. 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. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The names, ages and positions of all the directors and executive officers of
the Company as of March 21, 1994, are listed below along with their business
experience during the past five years.
a. Identification of Directors
Director
Name Age Since Business Experience
- --------------- ---- -------- ------------------------------------------
Kent B. Foster 50 1993 Vice Chairman of the Board of Directors of
GTE Corporation, October 1993. President,
GTE Telephone Operations, 1989; Director,
GTE Corporation, 1992; Director, all GTE
domestic telephone subsidiaries, 1993;
Director, BC Telecom, Inc.; Director,
Compania Anonima Nacional Telefonos de
Venezuela; Director, National Bank of
Texas.
Richard M. Cahill 55 1993 Vice President - General Counsel of GTE
Telephone Operations, 1988; Director, all
GTE domestic telephone subsidiaries, 1993;
Director, GTE Vantage Incorporated, 1991;
Director, GTE Intelligent Network Services
Incorporated, 1993.
Gerald K. Dinsmore 44 1993 Senior Vice President - Finance and
Planning for GTE Telephone Operations,
1994. Vice President - Finance, GTE
Telephone Operations, 1993; Vice President
- Intermediary Customer Markets, GTE
Telephone Operations, 1991. President,
South Area, GTE Telephone Operations,
1992; Director, all GTE domestic telephone
subsidiaries, 1993.
Michael B. Esstman 47 1993 Executive Vice President-Operations, GTE
Telephone Operations, 1993; President,
Central Area, GTE Telephone Operations,
1991. President, Contel Eastern Region,
Telephone Operations Sector, 1983;
Director, AG Communications System;
Director, all GTE domestic telephone
subsidiaries, 1993.
Earl A. Goode 53 1991 President, GTE North Incorporated; Various
positions with GTE including President -
GTE Southwest and Vice President - General
Manager/Wisconsin; Director, Legacy Fund,
COMMIT, NBD Financial Corporation, Indiana
State Symphony Society, United Way of
Central Indiana, Goodwill Industries of
Central Indiana, Indianapolis Chamber of
Commerce, Indianapolis Community Hospital
Foundation, Indiana Fiscal Policy
Institute, National Art Museum of Sport,
Corporate Community Council and the
Georgetown College Foundation Board;
Executive Committee, GTE North Classic;
President's Advisory Council, Purdue
University; Dean's Advisory Council,
Purdue University Krannert School of
Management and the State of Indiana
Commission for Higher Education.
Thomas W. White 47 1993 Executive Vice President of GTE Telephone
Operations, 1993; Senior Vice President -
General Office Staff, GTE Telephone
Operations, 1989; Director, all GTE
domestic telephone subsidiaries, 1993;
Director, Quebec-Telephone.
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which may be held on any day during
March, as specified in the notice of the meeting.
There are no family relationships between any of the directors or executive
officers of the Company.
All of the directors, with the exception of Mr. Goode, were elected December
16, 1993 following the resignations from the Board of Raymond C. Burroughs,
Gilbert L. Homstad, James C. McGill, Don W. Montgomery, James D. Reigle, Ian M.
Rolland, Donald E. Smith and Jane Theuerkauf.
<TABLE>
b. Identification of Executive Officers
<CAPTION>
Year
Assumed
Current
Name Age Position Position with Company
- ------------------------ ---- -------- -------------------------------------
<S> <C> <C> <C>
Earl A. Goode (1) 53 1991 President
Clare D. Coxey (1) 55 1986 Area Vice President - Public Affairs
James T. Jeske (1) 48 1991 Area Vice President - Human Resources
M. L. Keith, Jr. (1) 51 1986 Area Vice President - Sales
Jeffrey L. Schmitt (1) 48 1987 Area Vice President - Regulatory and
Government Affairs
Dale E. Sporleder (1) 53 1989 Area Vice President - General Counsel
Roger L. Utzinger (1) 47 1989 Area Vice President - Finance
William D. Wilson (1)(2) 46 1993 Area Vice President - General
Manager - East
James D. Blanchard (1) 53 1982 Regional Vice President - General
Manager - Illinois/Wisconsin
William J. Crowley 54 1991 Regional Vice President - General
Manager - Northeast
William A. Griswold (3) 41 1993 Regional Vice President - General
Manager - Ohio/Pennsylvania
William A. Zielke 47 1991 Regional Vice President - General
Manager - Indiana/Michigan
Larry E. Atwell (4) 46 1994 State Vice President - General
Manager - Michigan
Dennis Blair 37 1991 State Vice President - General
Manager - Wisconsin
Charles V. Monaghan, 56 1994 State Vice President - General
Jr.(4) Manager - Pennsylvania
Charles J. Somes (5) 48 1994 Secretary
</TABLE>
<TABLE>
Date
Assumed
Current Position with
Name Age Position GTE Telephone Operations (6)
- -------------------------- ---- ------- --------------------------------
<S> <C> <C> <C>
Kent B. Foster 50 1989 President
Michael B. Esstman (7) 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 (8) 44 1993 Senior Vice President - Finance and
Planning
Robert C. Calafell (9) 52 1993 Vice President - Video Services
A. T. Jones 54 1992 Vice President - International
Brad M. Krall (10) 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(11) 45 1993 Controller
<FN>
- ----------
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years.
Except for duly elected officers and directors, no other employees had a
significant role in decision making.
All officers are appointed for a term of one year.
NOTES:
(1) Effective March 7, 1994 these individuals became executive officers
for both GTE South Incorporated and GTE North Incorporated. M.
Michael Foster was appointed State Vice President - Operations for
GTE Florida Incorporated.
(2) William D. Wilson, previously Vice President - Business Planning for
GTE Telephone Operations, was appointed Area Vice President -
General Manager - East effective September 27, 1993, replacing
Ronald K. Poidevin who retired.
(3) William A. Griswold was appointed Regional Vice President - General
Manager - Ohio/Pennsylvania effective March 18, 1993, replacing
Robert R. Randall who retired.
(4) Larry E. Atwell and Charles V. Monaghan, Jr. were appointed State
Vice President - General Manager - Michigan and State Vice President
- General Manager - Pennsylvania, respectively, effective March 7,
1994.
(5) Charles J. Somes was appointed Secretary to replace Jerry Austin who
retired.
(6) Position is with, and duties are performed at, the GTE Telephone
Operations General Office Headquarters in Irving, Texas.
(7) Michael B. Esstman was appointed Executive Vice President -
Operations effective April 25, 1993 replacing Charles A. Crain who
retired on April 1, 1993.
(8) Gerald K. Dinsmore, previously South Area President, was appointed
Senior Vice President - Finance and Planning effective November 21,
1993, replacing John L. Hume who retired.
(9) Robert C. Calafell was appointed Vice President - Video Services
effective March 28, 1993.
(10) Brad M. Krall was appointed Vice President - Centralized Serices
effective November 7, 1993.
(11) William M. Edwards, III was appointed Controller effective November
7, 1993 replacing John D. Utzinger.
</TABLE>
<TABLE>
The Federal securities laws require the Company's directors and executive
officers,and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership
of any equity securities of the Company.
To the Company's knowledge, none of the persons subject to these reporting
requirements filed the required initial statement of beneficial ownership
of securities on a timely basis, but the Company has determined that each
of its current directors and executive officers is in the process of
completing this filing. All of the Company's common stock is owned by GTE
and, to the Company's knowledge, none of such directors or executive
officers currently owns, or has ever owned, any shares of the Company's
registered preferred stock (which is the only registered class of the
Company's equity securities).
<PAGE>
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the Chief Executive Officer and each of the
other four most highly compensated executive officers of the Company for services in all capacities to the Company
and its subsidiary.
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------------------
Annual Compensation(1) Awards Payments
------------------------------------------- -------------------- --------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
All
Reserved Other
Name and Principal Other Annual Stock Options LTIP Compensa-
Position in Group Year Salary($)(1) Bonus($) Compensation($) Awards(#) SARs(#) Payments($) tions($)(4)
- ----------------------- ------ ----------- -------- --------------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earl A. Goode 1993 252,897 162,378 6,950 -- 14,500 38,747 7,587
President (2) 1992 238,674 224,242 23,523 -- -- 70,980 7,160
1991 191,512 186,754 32,187 -- 31,600 53,913 5,278
Kent B. Foster 1993 122,310 112,348 3,975 -- 58,800 24,743 1,374
President - GTE 1992 110,628 129,242 2,166 -- -- 40,238 1,409
Telephone Operations 1991 88,666 119,853 6,865 -- 133,300 50,010 1,295
M. L. Keith, Jr. 1993 155,301 49,921 1,921 -- 4,000 -- 4,659
Area Vice President- 1992 149,506 67,905 958 -- -- -- 4,485
Sales 1991 155,429 73,200 980 -- 4,300 -- 4,917
James D. Blanchard 1993 151,885 39,600 1,196 -- 2,700 -- 4,557
Regional Vice 1992 145,538 55,100 1,958 -- -- -- 4,366
President-General 1991 133,983 54,900 1,426 -- 3,000 -- 4,274
Manager-IL/WI
William A. Zeilke 1993 137,504 41,200 981 -- 2,700 -- 4,125
Regional Vice 1992 131,306 55,100 12,303 -- -- -- --
President-General 1991 60,418 30,200 23,406 -- -- -- 1,626
Manager-IN/MI (3)
<FN>
- ----------
(1) Annual Compensation represents the Company's pro rata share of salaries,
bonuses and other annual compensation. Total annual cash compensation for
Messrs. Goode, Foster and Keith, for whom allocated amounts are shown
above, is $468,567, $1,129,356 and $229,878, respectively, for 1993.
(2) Mr. Goode was appointed President effective March 1991.
(3) Mr. Zeilke was appointed Region Vice President - General Manager - Indiana
in June 1991.
(4) All Other Compensation includes Company contributions to defined
contribution plans.
</TABLE>
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the named executive officers
of the Company in 1993. Pursuant to Securities and Exchange Commission (the
SEC) rules, the table also shows the value of the options granted at the end
of the option terms (ten years) if the stock price were to appreciate
annually by 5% and 10%, respectively. There is no assurance that the stock
price will appreciate at the rates shown in the table. The table also
indicates that if the stock price does not appreciate, there will be no
increase in the potential realizable value of the options granted.
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants(1) Option Term
----------------------------------------------- ---------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Total Options/
SARs Granted Exercise
to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/SH) Date 0% 5% 10%
- ------------------ ------------ ------------- --------- ---------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earl A. Goode 14,500 0.73% $35.0825 02/15/03 $0 $ 319,734 $ 810,269
Kent B. Foster 48,400 2.42 35.0625 02/15/03 0 1,067,249 2,704,621
10,400 0.52 37.6250 10/12/03 0 246,087 623,632
M. L. Keith, Jr. 4,000 0.20 35.0625 02/15/03 0 88,202 223,522
James D. Blanchard 2,700 0.14 35.0625 02/15/03 0 59,537 150,878
William A. Zeilke 2,700 0.14 35.0625 02/15/03 0 59,537 150,878
<FN>
- ----------
(1) Under the Long-Term Incentive Plan, options are presently granted with tandem stock appreciation rights
("SARs"). One-third of these grants vest annually commencing one year after the date of grant.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and stock appreciation
rights exercised by each of the named executive officers of the Company during
1993 and the value of options and stock appreciation rights held by such
officers at year-end measured in terms of the closing price of GTE Common Stock
on December 31, 1993.
<CAPTION>
(a) (b) (c) (d) (e)
Value of Unexercised
Shares Number of Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- -------------- ------------ ------------ --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Earl A. Goode -- -- 44,000 30,300 $ 233,713 $ 50,383
Kent B. Foster 70,517 $1,447,800 99,450 125,450 341,551 212,447
M. L. Keith, Jr. -- -- 4,332 8,368 13,442 13,190
James D. Blanchard -- -- 6,400 3,700 56,975 3,188
William A. Zeilke -- -- 11,896 4,182 177,414 11,100
</TABLE>
Long-Term Incentive Plan - Awards in Last Fiscal Year
The GTE Long-Term Incentive Plan (LTIP) provides for awards, currently in the
form of stock options with tandem stock appreciation rights and cash bonuses,
to participating employees. The stock options and stock appreciation rights
awarded under the LTIP to the five most highly compensated individuals in 1993
are shown in the table on page 10.
Under the LTIP, performance bonuses are paid in cash based on the achievement
of pre-established goals for GTE's return on equity (ROE) over a three-year
award cycle. Performance bonuses are denominated in units of GTE Common Stock
("Common Stock Units") and are maintained in a Common Stock Unit Account.
At the time performance targets are established for the three-year cycle, a
Common Stock Unit Account is set up for each participant who is eligible to
receive a cash award under the LTIP. An initial dollar amount for each account
is determined based on the competitive performance bonus grant practices of
other major companies in the telecommunications industry and with other
selected corporations that are comparable to GTE in terms of revenue, market
value and other quantitative measures. That amount is then divided by the
average market price of GTE Common Stock for the calendar week preceding the
day the account is established to determine the number of Common Stock Units in
the account. The value of the account increases or decreases based on the
market price of the GTE Common Stock. An amount equal to the dividends
declared on an equivalent number of shares of GTE Common Stock is added each
time a dividend is paid. This amount is then converted into the number of
Common Stock Units obtained by dividing the amount of the dividend by the
average price of the GTE Common Stock on the composite tape of the New York
Stock Exchange on the dividend payment date and added to the Common Stock Unit
Account. Messrs. Goode and Foster are the only individuals of the five most
highly compensated individuals eligible to receive a cash award under the LTIP.
The number of Common Stock Units initially allocated in 1993 to their accounts
and estimated future payouts under the LTIP are shown in the following table.
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans(1)
-----------------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of Or Other
Shares, Units Period Until
Or Other Maturation
Name Rights Or Payout Threshold(2) Target(3) (Maximum(4)
- ------------------ ------------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earl A. Goode 2,000 3 years 468 2,941
Kent B. Foster (5) 6,100 3 years 1,428 7,139
670 2 years 149 743
326 1 year 69 343
1,620 26 months 365 1,827
854 14 months 183 913
119 2 months 24 121
M. L. Keith, Jr. 0 N/A 0 0
James D. Blanchard 0 N/A 0 0
William A. Zielke 0 N/A 0 0
<FN>
- ----------
(1) It is not possible to predict future dividends and, accordingly,
estimated Common Stock Unit accruals in this table are calculated
for illustrative purposes only and are based upon the dividend rate
and price of GTE Common Stock at the close of business on December
31, 1993. The target award is the dollar amount derived by
multiplying the Common Stock Unit balance at the end of the award
cycle by the price of GTE Common Stock.
(2) The level of average ROE during the cycle which represents minimum
acceptable performance and which, if attained, results in payment of
20% of the target award. Below the minimum acceptable performance
level, no award is earned.
(3) The average ROE target during the cycle which represents outstanding
GTE performance and which, if attained, results in payment of 100%
of the target award.
(4) This column has intentionally been left blank because it is not
possible to determine the maximum award until the award cycle has
been completed. The maximum amount of the award is limited by the
amount the actual ROE exceeds the targeted ROE. If GTE's average
ROE during the cycle exceeds the performance target, additional
bonuses may be earned according to the following schedule:
Performance Increment Above Added Percentage
Maximum ROE Performance Target to Maximum Awards
------------------------------- ------------------
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
For example, if average ROE performance exceeds the ROE target by 0.5%, the
performance bonus will equal 114% of the target award.
</TABLE>
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Goode and Foster
regarding benefits to be paid in the event of a change in control of GTE (a
"Change in Control").
A Change in Control is deemed to have occurred if a majority of the members of
the Board do not consist of members of the incumbent Board (as defined in the
Agreements) or if, in any 12-month period, three or more directors are elected
without the approval of the incumbent Board. An individual whose initial
assumption of office occurred pursuant to an agreement to avoid or settle a
proxy or other election contest is not considered a member of the incumbent
Board. In addition, a director who is elected pursuant to such a settlement
agreement will not be deemed a director who is elected or nominated by the
incumbent Board for purposes of determining whether a Change in Control has
occurred. A Change in Control will not occur in the following situations: (1)
certain merger transactions in which there is at least 50% GTE shareholder
continuity in the surviving corporation, at least a majority of the members of
the board of directors of the surviving corporation consists of members of the
Board of GTE and no person owns more than 20% (or under certain circumstances,
a lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event this individual
separates from service and has a "good reason" for leaving or is terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes but is not limited to the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the EIP for the previous
three years. The executive will also continue to receive medical and life
insurance coverage for up to two years and will be provided with financial and
outplacement counseling.
In addition, the Agreements with Messrs. Goode and Foster provide that in the
event of a separation from service, they will receive service credit in the
following amounts: two times years of service otherwise credited if the
executive has five or fewer years of credited service; 10 years if credited
service is more than five and not more than 10 years; and, if the executive's
credited service exceeds 10 years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan and the Executive Retired Life Insurance
Plan. In addition, each executive will be considered to have not less than 76
points and 15 years of accredited service for the purpose of determining his or
her eligibility for early retirement benefits. However, there will be no
duplication of benefits.
The Agreements remain in effect until the earlier of July 1 of each successive
year or the date on which the executive reaches age 65, unless the Agreement is
terminated earlier pursuant to its terms. The Agreements will be automatically
renewed on each successive July 1 unless, not later than December 31 of the
preceding year, one of the parties notifies the other that he does not wish to
extend the Agreement. If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings and years of employment, are illustrated
in the table below:
PENSION PLAN TABLE
Years of Service
Final Average --------------------------------------------------------------
Earnings 15 20 25 30 35
- ------------------------------------------------------------------------------
$ 150,000 $ 31,604 $ 42,138 $ 52,672 $ 63,207 $ 73,742
200,000 42,479 56,638 70,797 84,957 99,117
300,000 64,229 85,638 107,048 128,457 149,867
400,000 85,979 114,638 143,298 171,957 200,617
500,000 107,729 143,638 179,548 215,457 251,367
600,000 129,479 172,638 215,798 258,957 302,117
700,000 151,229 201,638 252,048 302,457 352,867
800,000 172,979 230,638 288,298 345,957 403,617
900,000 194,729 259,638 324,548 389,457 454,367
1,000,000 216,479 288,638 360,798 432,957 505,117
1,200,000 259,979 346,638 433,298 519,957 606,617
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains a
noncontributory pension plan for the benefit of GTE employees based on years of
service. Pension benefits to be paid from this plan and contributions to this
plan are related to basic salary exclusive of overtime, differentials,
incentive compensation (except as otherwise described) and other similar types
of payment. Under this plan, pensions are computed on a two-rate formula basis
of 1.15% and 1.45% for each year of service, with the 1.15% service credit
being applied to that portion of the average annual salary for the five highest
consecutive years that does not exceed the Social Security Integration Level
(the portion of salary subject to the Federal Security Act), and the 1.45%
service credit being applied to that portion of the average annual salary that
exceeds said level. As of March 21, 1994, the credited years of service under
the plan for Messrs. Goode, Foster, Keith, Blanchard and Zeilke are 31, 23, 27,
31 and 22, respectively.
Under Federal law, an employee's benefits under a qualified pension plan such
as the GTE Service Corporation plan are limited to certain maximum amounts.
GTE maintains a Supplemental Executive Retirement Plan (SERP), which
supplements the benefits of any participant in the qualified pension plan by
direct payment of a lump sum or by an annuity, on an unfunded basis, of the
amount by which any participant's benefits under the GTE Service Corporation
pension plan are limited by law. In addition, the SERP includes a provision
permitting the payment of additional retirement benefits determined in a
similar manner as under the qualified pension plan on remuneration accrued
under management incentive plans as determined by the Executive Compensation
and Organizational Structure Committee.
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Goode,
Foster, Keith, Blanchard and Zeilke a maximum postretirement life insurance
benefit of three times final base salary. Upon retirement, ERLIP benefits may
be paid as life insurance or optionally, an equivalent amount may be paid as a
lump sum payment equal to the present value of the life insurance amount (based
on actuarial factors and the interest rate then in effect), as an annuity or as
installment payments. If an optional payment method is selected, the ERLIP
benefit will be based on the actuarial equivalent of the present value of the
insurance amount.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for service on the Board.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1994:
Name and Shares of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership of Class
--------------- ---------------------- ------------ -------------
Common Stock of GTE Corporation 978,351 100%
GTE North One Stamford Forum shares of
Incorporated Stamford, Connecticut record
06904
(b) Security Ownership of Management as of December 31, 1993:
Common Stock of Name of Director or Nominee All less
GTE Corporation ---------------------------- than 1%
Richard M. Cahill 37,188
Gerald K. Dinsmore 18,503
Michael B. Esstman 54,051
Thomas W. White 83,071
Earl A. Goode 56,634
Kent B. Foster 168,299
-------
417,746
=======
Executive Officers(1)(2)
---------------------------
Earl A. Goode 56,634
Kent B. Foster 168,299
M. L. Keith, Jr. 9,904
James D. Blanchard 17,933
William A. Zielke 15,283
-------
268,053
=======
All directors and
executive
officers as a group(1)(2) 824,013
=======
(1) Includes shares acquired through participation in GTE's
Consolidated Employee Stock Ownership Plan and/or the GTE Savings
Plan.
(2) Included in the number of shares beneficially owned by Messrs.
Goode, Foster, Keith, Blanchard and Zeilke and all directors and
executive officers as a group are 48,833; 115,583; 7,132; 7,300;
14,278 and 559,603 shares, respectively, which such persons have
the right to acquire within 60 days pursuant to stock options.
(c) There were no changes in control of the Company during 1993.
Item 13. Certain Relationships and Related Transactions
The Company`s executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest. None of the Company's directors were involved
in any business relationships with the Company.
<PAGE>
PART IV
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 21
Schedules:
V - Property, Plant and Equipment 22-24
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 25
VIII - Valuation and Qualifying Accounts 26
X - Supplementary Income Statement Information 27
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.
3* Bylaws. Articles of Incorporation and amendments are
referenced in the 1986 and 1987 Form 10-K's, respectively.
13 Annual Report to Shareholders for the year ended December
31, 1993, filed herein as Exhibit 13.
(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.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE North Incorporated:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in GTE North 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.
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------------- ----------- -------------- ------------- ----------- -----------
Balance at Retirements Other Balance at
Beginning Additions or Sales Debits or Close of
Classification of Year at Cost (Note 1) (Credits) Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated
at original cost:
Land $ 30,173 $ 218 $ (82) $ (696) $ 29,777
Buildings 546,333 28,397 16,276 (547) 557,907
Central office equipment 2,982,576 239,975 136,090 (6,500) 3,079,961
Station apparatus 134,652 6,143 2,337 (7,436) 131,022
Station connections 128,906 -- -- -- 128,906
Cable, underground conduit, etc. 3,499,642 217,669 47,115 1,488 3,671,684
Furniture and office equipment 323,200 48,583 76,512 1,937 297,208
Vehicles and other work equipment 227,651 21,198 18,086 8,430 239,193
Telephone plant under 103,863 (6,191) -- -- 97,672
construction
---------- --------- ---------- ---------- ----------
Total Telephone Plant 7,976,996 555,992 296,334 (3,324) 8,233,330
NONREGULATED PLANT 120,147 10,829 18,631 (10,370) 101,975
---------- --------- ---------- ---------- ----------
Total Property, Plant and $8,097,143 $ 566,821 $ 314,965 $(13,694) $8,335,305
Equipment
<FN>
- ----------
NOTE:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
</TABLE>
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
---------------- ------------ ----------- ------------ ---------- ----------
Other
Balance at Retirements Debits or Balance at
Beginning Additions or Sales (Credits) Close of
Classification of Year at Cost (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated at
original cost:
Land $ 30,667 $ (305) $ -- $ (189) $ 30,173
Buildings 536,357 19,473 5,907 (3,590) 546,333
Central office equipment 2,781,594 277,584 114,163 37,561 2,982,576
Station apparatus 127,977 6,392 2,190 2,473 134,652
Station connections 134,292 (2) 5,384 -- 128,906
Cable, underground conduit, etc. 3,285,038 229,914 39,382 24,072 3,499,642
Furniture and office equipment 296,489 32,628 3,706 (2,211) 323,200
Vehicles and other work equipment 224,767 18,523 9,876 (5,763) 227,651
Telephone plant under construction 148,206 (44,338) -- (5) 103,863
Property held for future
telephone use 65 (68) -- 3 --
----------- ----------- ---------- ---------- ----------
Total Tangible Property 7,565,452 539,801 180,608 52,351 7,976,996
INTANGIBLES 208 1 216 7 --
----------- ----------- ---------- ---------- ----------
Total Telephone Plant 7,565,660 539,802 180,824 52,358 7,976,996
NONREGULATED PLANT 115,765 12,441 22,875 14,816 120,147
----------- ----------- ---------- ---------- ----------
Total Property, Plant and
Equipment $7,681,425 $ 552,243 $ 203,699 $ 67,174 $8,097,143
========== =========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 3).
(2) Represents adjustments in 1992 due to the adoption of SFAS No. 109,
prior-year adjustments to conform to the current year presentation
and transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------------- -------------- ------------ ------------- -------------- -----------
Balance at Retirements Debits or Balance at
Beginning Additions or Sales (Credits) Close of
Classification of Year at Cost (Note 1) (Note 2) Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated at
original cost:
Land $ 29,759 $ 865 $ (22) $ 21 $ 30,667
Buildings 516,000 24,027 5,321 1,651 536,357
Central office equipment 2,720,471 220,599 156,691 (2,785) 2,781,594
Station apparatus 122,755 6,270 1,048 -- 127,977
Station connections 311,040 -- 176,748 -- 134,292
Private branch exchanges (246) 224 (22) -- --
Cable, underground conduit, etc. 3,104,748 235,273 51,417 (3,566) 3,285,038
Furniture and office equipment 244,506 73,621 19,027 (2,611) 296,489
Vehicles and other work equipment 222,896 22,970 12,520 (8,579) 224,767
Telephone plant under construction 150,579 (2,746) -- 373 148,206
Property held for future
telephone use 9 58 15 13 65
----------- ----------- ---------- ---------- ----------
Total Tangible Property 7,422,517 581,161 422,743 (15,483) 7,565,452
INTANGIBLES 207 -- -- 1 208
----------- ----------- ---------- ---------- ----------
Total Telephone Plant 7,422,724 581,161 422,743 (15,482) 7,565,660
NONREGULATED PLANT 107,943 6,219 7,584 9,187 115,765
----------- ----------- ---------- ---------- ----------
Total Property, Plant and
Equipment $7,530,667 $ 587,380 $ 430,327 $ (6,295) $7,681,425
=========== =========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 3).
(2) Primarily represents prior-year adjustments to conform to the
current year presentation and transfers in accordance with
FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
-------- -------- --------- -------- --------- --------
Additions Other
Charged to Charges -
Balance Costs and Add Balance at
Beginning Expenses Retirements (Deduct) End of
Description of Period (Note 1) (Note 2) (Note 3) Period
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated
depreciation
and amortization
for the year
ended:
December 31, 1993 $3,461,699 $ 510,553 $ 315,047 $ (2,238) $3,654,967
========== ========== ========== ========== ==========
December 31, 1992 $3,143,428 $ 498,011 $ 203,660 $ 23,920 $3,461,699
========== ========== ========== ========== ==========
December 31, 1991 $3,070,615 $ 497,761 $ 425,491 $ 543 $3,143,428
========== ========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) Reference is made to Note 1
of Notes to Consolidated Financial
Statements with respect to
depreciation policy: 1993 1992 1991
---- ---- ----
Total as shown in
Consolidated Statements
of Income $ 501,733 $ 490,624 $ 488,417
General office allocations 8,590 11,106 6,678
Other 230 (3,719) 2,666
---------- ---------- ----------
Total as shown above $ 510,553 $ 498,011 $ 497,761
========== ========== ==========
(2) Represents: Retirements or sales
credited to property,
plant and equipment
(Schedule V) $ 314,966 $ 203,699 $ 430,327
Other 81 (39) (4,836)
---------- ---------- ----------
Total as shown above $ 315,047 $ 203,660 $ 425,491
========== ========== ==========
(3) Represents: Salvage including
properties sold in 1993 $ 22,527 $ 12,070 $ 23,390
Removal costs (22,110) (26,781) (22,706)
Other (2,655) 38,631 (141)
---------- ---------- ----------
Total as shown above $ (2,238) $ 23,920 $ 543
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- --------------------- -------- --------
Additions
---------------------
Charged Deductions
Balance at Charged to Other from Balance at
Beginning to Accounts Reserves Close of
Description of Year Income (Notes 1 & 2) (Notes 1 & 2) Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible accounts
for the year ended:
December 31, 1993 $14,332 $37,577 $43,926 $70,662 $25,173
======= ======= ======= ======= =======
December 31, 1992 $ 5,370 $31,907 $19,982 $42,927 $14,332
======= ======= ======= ======= =======
December 31, 1991 $ 1,217 $21,535 $18,301 $35,683 $ 5,370
======= ======= ======= ======= =======
<FN>
- ----------
NOTES:
(1) Prior year data was restated to conform to the 1992 presentation.
(2) Recoveries of previously written-off amounts.
(3) Charges for purpose for which reserve was created. Represents write-offs of
receivable accounts.
</TABLE>
<PAGE>
<TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- -------------------------------------------------------------------------------
Column A Column B
------------------- -----------------------------------------
Item Charged to Operating Expenses
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Maintenance and repairs $ 477,224 $459,736 $474,975
=========== ======== ========
Taxes, other than payroll
and income taxes,
are as follows:
Real and personal property $ 70,999 $ 67,718 $ 64,667
State gross receipts 44,496 48,061 40,359
Other 17,803 12,904 16,515
Portion of above taxes charged
to plant and other accounts (9,429) (9,128) (9,819)
----------- -------- --------
Total $ 123,869 $119,555 $111,722
=========== ======== ========
</TABLE>
<PAGE>
<PAGE>
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 NORTH INCORPORATED
----------------------
(Registrant)
Date March 21, 1994 By EARL A. GOODE
--------------------- -----------------------------
EARL A. GOODE
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
EARL A. GOODE President and Director March 21, 1994
- ----------------------- (Principal Executive Officer)
EARL A. GOODE
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
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
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
of
GTE NORTH INCORPORATED
For the year ended December 31, 1993
<PAGE>
PRESIDENT'S REPORT
Meeting the needs of our customers and surpassing the performance of the
competition were at the forefront of GTE North's activities in 1993.
The Company took several important steps to continue as a key player in the
telecommunications arena and ensure an optimistic outlook for the Company's
long-term profitability.
Actions included a significant commitment to "re-engineering"the Company's
business processes over the next three years, including consolidating and
automating various business processes and introducing new technology to become
more competitive. These efforts will dramatically reduce costs, enhance
customer service, and accelerate the rollout of new products and services.
GTE NORTH'S BOND RATING REMAINS HIGH, FAVORABLE REVENUE GROWTH
Bond rating agencies in June reviewed GTE North's financial information to
determine its rating for the next two years. Duff and Phelps upgraded GTE
North's bond rating to AA+ while Moody's and Standard & Poor's issued solid AA
ratings.
Despite sluggish economic conditions, our revenues rose from $2.56 billion in
1992 to $2.60 billion in 1993. Net income for 1993 was $91 million which
included the net of tax impact from adopting SFAS No. 106 of $46 million, a one-
time restructuring charge of $231 million, and an extraordinary charge for
early retirement of debt of $14 million.
WILLIAM D. WILSON WAS NAMED VICE PRESIDENT-GENERAL MANAGER FOR GTE NORTH
OPERATIONS
William D. (Rick) Wilson was named GTE North's vice president-general manager
in September, following the retirement of Ron Poidevin. Wilson previously
served as vice president-business planning at GTE Telephone Operations. He has
held a variety of senior management positions, including controller for GTE's
California operations as well as director of results and analysis at
GTE Headquarters in Stamford, Connecticut, and assistant vice president-planning
and business policies at GTE Service Corporation in Irving,Texas.
---------------------------
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EARL A. GOODE
President
<PAGE>
EDUCATIONAL PARTNERSHIPS STRENGTHEN OUR EXPANSION OF TECHNOLOGY
Stimulating excitement and learning through the application and understanding
of telecommunications technology drive GTE North in its formation of
educational partnerships and financial-support programs. We seek to increase
the general population's understanding of technology, to train tomorrow's
leaders in engineering, math and the sciences, and at the same time to expand
the potential for future revenue growth.
Pioneering Partners(TM) for Educational Technology spreads the use of technology
in education by investing in risk-taking educators who use their experience to
show others how to make technology a transforming tool for students and
teachers. Sponsored in a partnership between the Council of Great Lakes
Governors and GTE North, the program also has strong legislative and business
support. Winning teacher teams receive a scholarship to attend a five-day summit
to collaborate with other teachers, cash awards and connection to an electronic
communications network that links teachers throughout the region for
information-sharing.
An expansion of video technology was initiated in Michigan in the fall
providing an interactive video link between Central Michigan University, Lake
Superior State University, Cedarville High School in the Upper Peninsula, and
three Lower Peninsula high schools in the Gratiot-Isabella School District,
near Mount Pleasant. This innovative test-bed transcends traditional school-
district boundaries and facilitates the effective sharing of educational
resources via Distance Learning video technology.
REGULATORY CHANGES IMPROVE GTE NORTH'S ABILITY TO COMPETE IN THE NEW BUSINESS
ENVIRONMENT
Pennsylvania re-wrote its telecommunications act to reduce existing regulatory
burdens and allow pricing flexibility. This legislative change along with
changes made in Illinois and Michigan in 1992, and actions being considered
in Congress will allow GTE North to better address competition within its
franchise areas, competition which many times does not operate with the same
regulatory restrictions.
SALES AND SERVICE PURSUES DATA AND BROADBAND MARKETS
Our Sales and Service organization placed a top priority on data competency
since the transfer of data makes up a large part of customers' needs. An
extensive training program was held for employees. GTE North continues to
aggressively pursue the broadband video market by promoting solutions in
education, health care and business.
Significant success in major sales and win-backs of former customers occurred
during the year. The $2.1 million sale of a new communications system to Hamot
Medical at Erie, Pennsylvania, is representative of successful, new-sales
efforts during the year.
GTE North began offering Express Dialtone(SM), a service that leaves restricted
dialtone on vacant residential and one-party business lines and allows
customers to call from their new residence or business to order new service or
check on previously ordered service. And, to underscore our firm commitment to
quality customer service, we also began offering our customers a Service
Performance Guarantee in 1993.
NETWORK ENHANCEMENTS ALLOW GTE NORTH TO MEET CUSTOMER NEEDS
During 1993, we invested $567 million to upgrade our technology platforms and
enhance the quality of the products and services we deliver to our customers.
Two of our significant network improvements were the installation of 13,600
miles of fiber-optic cable and our continued deployment of the latest digital
technology.Eighty percent of our access lines are now served by digital
switching.
Dealing with the ravages of the Mississippi flooding posed an additional
challenge for the dedicated people of GTE North during 1993. Many long hours
were spent by our employees protecting our offices along the flooding
Mississippi and its tributaries. And when several of our central offices
succumbed to the flooding, our employees worked to provide alternative service
to those communities.
In Illinois, flood damage to GTE North facilities amounted to $3.3 million. It
is estimated that another $3 million in additional repairs will be spent in
1994.
We realized many significant achievements in 1993 through the dedication of our
employees. And it is because of that employee commitment that I'm confident we
will further enhance GTE North's market leadership in 1994.
EARL A. GOOD
President
<PAGE>
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EXECUTIVE OFFICES
19845 North U.S. 31
Westfield, Indiana 46074
TRANSFER AGENT AND REGISTRAR
GTE Corporation
c/o Bank of Boston
P.O. Box 9191
Boston, Massachusetts 02205-9191
FOR A COPY OF THE 1993 ANNUAL REPORT OF
OUR PARENT COMPANY, PLEASE WRITE TO:
GTE Corporation
One Stamford Forum
Stamford,Connecticut 06904
FOR A COPY OF THE 1993 ANNUAL FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, PLEASE WRITE TO:
GTE Telephone Operations
Financial Reporting
P.O.Box 407, MCINAAACG
Westfield, IN 46074
(317) 896-6464
<PAGE>
LEADERSHIP
- ---------------
Officers
EARL A. GOODE
President
CLARE D. COXEY
Area Vice President-Public Affairs
GERALD K. DINSMORE
Senior Vice President-Finance and
Planning
JAMES T. JESKE
Area Vice President-Human Resources
M. L. KEITH, JR.
Area Vice President-Sales
JEFFREY L. SCHMITT
Area Vice President-Regulatory and
Government Affairs
DALE E. SPORLEDER
Area Vice President-General Counsel
ROGER L. UTZINGER
Area Vice President-Finance
WILLIAM D. WILSON
Area Vice President-General Manager-
East
JAMES D. BLANCHARD
Regional Vice President-General Manager-
Illinois/Wisconsin
WILLIAM J. CROWLEY
Regional Vice President-General Manager-
Northeast
WILLIAM A. GRISWOLD
Regional Vice President-General Manager-
Ohio/Pennsylvania
WILLIAM A. ZIELKE
Regional Vice President-General Manager-
Indiana/Michigan
LARRY E. ATWELL
State Vice President-General Manager-
Michigan
DENNIS BLAIR
State Vice President-General Manager-
Wisconsin
CHARLES V. MONAGHAN, JR.
State Vice President-General Manager-
Pennsylvania
WILLIAM M. EDWARDS,III
Controller
CHARLES J. SOMES
Secretary
Board of Directors
- ----------------------
RICHARD M. CAHILL
Vice President-General Counsel
GTE Telephone Operations
GERALD K. DINSMORE
Senior Vice President-Finance
and Planning
GTE Telephone Operations
MICHAEL B. ESSTMAN
Executive Vice President-
Operations
GTE Telephone Operations
KENT B.FOSTER
President
GTE Telephone Operations
EARL A. GOODE
President
GTE North Incorporated
THOMAS W. WHITE
Executive Vice President
GTE Telephone Operations
FINANCIAL REPORT
Consolidated Statements of Income (Note 3)
- --------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- --------------------------------------------------------------------------
(Thousands of Dollars)
OPERATING REVENUES (A):
Local network services $ 980,039 $ 945,175 $ 916,302
Network access services 963,918 973,661 966,500
Long distance services 391,050 332,150 319,674
Equipment sales and services 106,288 103,607 127,485
Other 160,952 205,449 175,026
- --------------------------------------------------------------------------
2,602,247 2,560,042 2,504,987
- --------------------------------------------------------------------------
OPERATING EXPENSES (B):
Cost of sales and services 602,128 585,004 596,234
Depreciation and amortization 501,733 490,624 488,417
Marketing, selling, general 856,549 800,438 876,979
and administrative
Restructuring costs 374,558 _ _
- --------------------------------------------------------------------------
2,334,968 1,876,066 1,961,630
- --------------------------------------------------------------------------
NET OPERATING INCOME 267,279 683,976 543,357
- --------------------------------------------------------------------------
OTHER (INCOME) DEDUCTIONS:
Interest expense 123,557 124,197 122,970
Other - net 3,581 3,473 (1,487)
- --------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 140,141 556,306 421,874
- --------------------------------------------------------------------------
INCOME TAXES 34,925 186,764 130,037
- --------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY 105,216 369,542 291,837
CHARGE
- --------------------------------------------------------------------------
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF
DEBT (NET OF INCOME TAXES 14,270 _ _
OF $8,456)
- --------------------------------------------------------------------------
NET INCOME $ 90,946 $ 369,542 $ 291,837
- --------------------------------------------------------------------------
(a) Includes billings to affiliates of $94,500, $115,100 and $79,300 for the
years 1993-1991, respectively.
(b) Includes billings from affiliates of $211,600, $222,900 and $298,300 for
the years 1993-1991, respectively.
Consolidated Statements of Reinvested Earnings (Note 3)
- --------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- --------------------------------------------------------------------------
(Thousands of Dollars)
BALANCE AT BEGINNING OF YEAR $1,195,137 $1,192,488 $1,131,555
ADD -
Net income 90,946 369,542 291,837
DEDUCT -
Cash dividends declared on 165,052 364,162 228,116
common stock
Cash dividends declared on 2,680 2,731 2,788
preferred stock
- --------------------------------------------------------------------------
BALANCE AT END OF YEAR $1,118,351 $1,195,137 $1,192,488
- --------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets (Note 3)
- --------------------------------------------------------------------------
December 31 1993 1992
- -------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash $ 5,722 $ 5,079
Accounts receivable
Customers (including unbilled revenues) 390,027 357,306
Affiliated companies 170,753 165,126
Other 33,123 27,210
Allowance for uncollectible accounts (25,173) (14,332)
Materials and supplies, at average cost 40,949 51,445
Prepaid taxes 40,707 41,069
Deferred income tax benefits 66,984 21,149
Prepayments and other 17,236 11,509
- -------------------------------------------------------------------------
740,328 665,561
- -------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,335,305 8,097,143
Accumulated depreciation (3,654,967) (3,461,699)
- -------------------------------------------------------------------------
4,680,338 4,635,444
- -------------------------------------------------------------------------
PREPAID PENSION COST 335,874 262,285
- -------------------------------------------------------------------------
OTHER ASSETS 124,299 116,280
- -------------------------------------------------------------------------
TOTAL ASSETS $5,880,839 $5,679,570
- -------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 148,075 $ 205,119
Current maturities of long-term debt 15,675 21,394
Accounts payable 146,181 187,706
Affiliate payables and accruals 62,102 60,844
Advanced billings and customer deposits 54,359 56,383
Accrued taxes 144,788 117,849
Accrued interest 14,855 17,090
Accrued payroll and vacations 84,021 81,755
Accrued dividends 9,392 131,779
Accrued restructuring costs and other 273,814 132,946
- -------------------------------------------------------------------------
953,262 1,012,865
- -------------------------------------------------------------------------
LONG-TERM DEBT 1,467,045 1,366,748
- -------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 770,637 876,295
Deferred investment tax credits 60,288 77,386
Restructuring costs and other 441,313 80,233
- -------------------------------------------------------------------------
1,272,238 1,033,914
- -------------------------------------------------------------------------
PREFERRED STOCK, SUBJECT TO MANDATORY
REDEMPTION 19,544 20,324
- -------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 29,030 29,292
Common stock (978,351 shares outstanding) 978,351 978,351
Other capital 43,018 42,939
Reinvested earnings 1,118,351 1,195,137
- -------------------------------------------------------------------------
2,168,750 2,245,719
- -------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,880,839 $5,679,570
- -------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<TABLE>
Consolidated Statements of Cash Flows (Note 3)
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- -----------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 105,216 $ 369,542 $ 291,837
Adjustments to reconcile income before
extraordinary charge to net cash from
operating activities:
Depreciation and amortization 501,733 490,624 488,417
Restructuring costs 374,558 _ _
Deferred income taxes and investment
tax credits (160,234) 40,215 (24,487)
Provision for uncollectible accounts 37,577 31,907 21,535
Change in current assets and current
liabilities (93,102) (20,975) (32,997)
Other - net 56,381 (119,243) (46,419)
- -----------------------------------------------------------------------------------
Net cash from operating activities 822,129 792,070 697,886
- -----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (566,821) (552,243) (587,380)
Other - net 14,808 (12,810) 4,704
- -----------------------------------------------------------------------------------
Net cash used in investing (552,013) (565,053) (582,676)
activities
- -----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued _ 50,000 _
Long-term debt issued _ _ 246,245
Early retirement of debt and related
call premium (329,288) _ _
Long-term debt and preferred stock (43,022) (81,594) (45,870)
retired
Dividends paid to shareholders (290,119) (296,780) (231,869)
Increase (decrease) in short-term debt 392,956 77,133 (60,814)
- -----------------------------------------------------------------------------------
Net cash used in financing (269,473) (251,241) (92,308)
activities
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 643 (24,224) 22,902
CASH:
Beginning of year 5,079 29,303 6,401
- -----------------------------------------------------------------------------------
End of year $ 5,722 $ 5,079 $ 29,303
- -----------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE North
Incorporated (the Company) and its wholly-owned subsidiary. All significant
intercompany transactions have been eliminated. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to $185.7
million, $224.9 million and $197.7 million for the years 1993-1991,
respectively. Such purchases are recorded in the accounts of the Company at
cost including a normal return realized by the affiliates.
The Company is billed for printing and other costs for the production of
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$211.6 million, $222.9 million and $298.3 million for the years 1993-1991,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method which reflects management's best
estimate.
REVENUES
The Company has an agreement with GTE Directories Corporation (100% owned by
GTE), whereby the Company provides its subscriber lists, billing and collection
and other services. Revenues from these services amounted to $94.5 million,
$115.1 million and $79.3 million for the years 1993-1991, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant
accounts. Property retirements are charged in total to the accumulated
depreciation account. No adjustment to depreciation is made at the time
properties are retired or otherwise disposed of, except in the case of
significant sales of property where profit or loss is recognized.
The Company provides for depreciation on telephone plant over the estimated
useful lives of the assets using the straight-line method, based upon rates
prescribed by the Federal Communications Commission (FCC) and the state
regulatory commissions. The provisions for depreciation and amortization were
equivalent to composite annual rates of 6.2%, 6.4% and 6.6% for the years 1993-
1991, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the regulatory commissions in each of the Company's operating
jurisdictions and Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. The Company annually reviews the continued
applicability of SFAS No. 71 based upon the current regulatory and competitive
environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company elected
to adopt this new accounting standard on the delayed recognition method and
commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before
retirement. Previously, the cost of these benefits was charged to expense as
paid. The impact of this change on the Company's results of operations was
immaterial.
INCOME TAXES
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
As further explained in Note 8., during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1,
1992. SFAS No. 109 changed the method by which companies account for income
taxes. Among other things, the Statement requires that deferred tax balances be
adjusted to reflect new tax rates when they are enacted into law. The impact of
this change in accounting on the Company's results of operations was
immaterial.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. The estimated fair value of long-term debt at
December 31, 1993 and 1992, based on either reference to quoted market prices
or an option pricing model, exceeded the carrying value by approximately $58
million and $52 million, respectively.
2. Restructuring and Merger Costs
Results for 1993 include a one-time pretax restructuring charge of $374.6
million related to the Company's re-engineering plan over the next three years.
The re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The re-
engineering plan includes $148.8 million to upgrade or replace existing
customer service and administrative systems and enhance network software,
$169.4 million for employee separation benefits associated with workforce
reductions and $45.6 million primarily for the consolidation of facilities and
operations and other related costs.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pretax charge of $6.9 million which
reduced net income by $4.3 million.
In March 1991, the merger of the Company's parent, GTE, and Contel Corporation
(Contel) was consummated. GTE Telephone Operations is in the process of
integrating and restructuring the merged operations.
3. Legal Entity Merger
On April 1, 1993, GTE North Incorporated (the Predecessor Corporation), as well
as Contel of Illinois, Inc., Contel of Indiana, Inc. and Contel of
Pennsylvania, Inc. (collectively, the Contel Companies), merged with and into
Contel North Incorporated (the Registrant). The common stock of the Predecessor
Corporation was owned by GTE Corporation (GTE). The Registrant, whose common
stock is also owned by GTE, had no business operations or material assets prior
to this merger (the Merger).The Contel Companies were indirect, wholly-owned
subsidiaries of GTE and were, individually and in the aggregate, significantly
smaller in terms of operating revenues, net income and total assets than the
Predecessor Corporation immediately prior to the Merger.
Prior to the Merger, the properties of the Predecessor Corporation located in
Iowa, Minnesota, Missouri and Nebraska were transferred to a newly created
entity, GTE Midwest Incorporated (the Midwest Transfer), which is a wholly-owned
subsidiary of GTE. On April 2, 1993, the name of the Registrant was changed to
GTE North Incorporated, the name of the Predecessor Corporation.
The Merger was accounted for in a manner consistent with a transfer of entities
under common control which is similar to that of a "pooling of
interests."Accordingly, the financial statements and the notes include the
results of operations and financial position of GTE North Incorporated (the
Predecessor Corporation) excluding operations transferred to GTE Midwest and
including Contel of Illinois, Inc., Contel of Indiana, Inc. and Contel of
Pennsylvania, Inc. for all periods.Operating revenues and net income for the
years ended December 31, 1992 and 1991 for each of these entities are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
GTE North
Inc. Transfer to Contel of Contel of Contel of
(Predecessor GTE Midwest Illinois Inc. Indiana Inc. Penn. Inc.
Corp.) Inc. (a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1992
Total operating
revenues $ 2,461,347 $ (183,376) $ 122,601 $ 101,179 $ 58,291
Net income $ 371,557 $ (35,303) $ 13,568 $ 14,218 $ 5,502
Year Ended December 31, 1991
Total operating
revenues $ 2,390,016 $ (171,544) $ 130,969 $ 100,623 $ 54,923
Net income $ 282,994 $ (21,580) $ 13,525 $ 12,849 $ 4,049
- ---------------------------------------------------------------------------------------------------------
<FN>
(a) Represents operations included in the Predecessor Corporation which were
transferred to GTE Midwest Incorporated prior to the Merger.
</TABLE>
<TABLE>
4. Preferred Stock
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, is as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------
December 31 1993 1992
- ----------------------------------------------------------------------------------------
SHARES AMOUNT* Shares Amount*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTHORIZED
No par value 388,396 388,396
$100 par value 33,524 33,524
- ----------------------------------------------------------------------------------------
Total 421,920 421,920
- ----------------------------------------------------------------------------------------
OUTSTANDING
$2.00 no par value 45,484 $ 2,213 46,865 $ 2,280
$2.10 no par value 66,390 3,541 67,141 3,582
$2.20 no par value 34,379 1,719 34,619 1,731
$2.25 no par value 90,765 4,538 91,204 4,563
$4.50 $100 par value 7,297 730 7,384 738
$5.00 $100 par value 24,639 2,464 25,726 2,573
$7.60 no par value 140,000 13,825 140,000 13,825
- ----------------------------------------------------------------------------------------
Total 408,954 $ 29,030 412,939 $ 29,292
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Cumulative preferred stock, subject to mandatory redemption, exclusive of
amounts held in treasury, is as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------
December 31 1993 1992
- ----------------------------------------------------------------------------------------
SHARES AMOUNT* Shares Amount*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTHORIZED
No par value 462,934 462,934
$50 par value 166,721 166,721
- ----------------------------------------------------------------------------------------
Total 629,655 629,655
- ----------------------------------------------------------------------------------------
OUTSTANDING
$1.15 no par value 140,800 $ 3,520 141,600 $ 3,540
$1.25 no par value 21,014 525 22,201 555
$2.30 no par value 26,400 1,320 26,400 1,320
$2.375 no par value 35,833 1,792 38,253 1,912
$2.40 $50 par value 33,490 1,675 35,420 1,771
$2.50 no par value 43,800 2,190 45,800 2,290
$2.50 no par value 53,464 2,645 56,426 2,790
$2.50C no par value 25,637 1,282 26,837 1,341
4.60% $50 par value 66,900 3,345 70,100 3,505
5.16% $50 par value 25,000 1,250 26,000 1,300
- ----------------------------------------------------------------------------------------
Total 472,338 $ 19,544 489,037 $ 20,324
- ----------------------------------------------------------------------------------------
<FN>
*Thousands of Dollars
</TABLE>
Certain outstanding preferred stock is redeemable at any time, in whole or in
part, upon notice at a premium and certain issues may be redeemed without
premiums through sinking funds. The Company purchased for treasury 3,985 and 46
shares of cumulative preferred stock, not subject to mandatory redemption, in
1993 and 1992, respectively, and redeemed 8,045 shares in 1993. Cumulative
preferred stock, not subject to mandatory redemption, held as treasury shares
by the Company were 46 and 4,106 shares at December 31, 1993 and 1992,
respectively.
The Company is required to redeem up to 23,626 shares of preferred stock,
subject to mandatory redemption, each year. The Company met this requirement
through treasury stock and the purchase of 16,699; 16,560; and 34,104 shares in
1993 through 1991, respectively. The aggregate redemption requirements of
preferred stock subject to mandatory redemption are $900,000 in each of the
years 1994 through 1998.
At December 31, 1993 and 1992, the Company held as treasury stock 38 and 6,679
shares, respectively, to cover future redemption requirements. No shares were
reserved for officers or employees or for options, warrants, conversions or
other rights. The preferred shareholders have no voting rights.
5. Common Stock
The authorized common stock of the Company consists of 2,200,000 shares with a
par value of $1,000 per share. All outstanding shares of common stock are held
by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1993, $459.7 million of reinvested earnings were restricted as
to the payment of cash dividends on common stock under the terms of the Rural
Electrification Administration mortgage covenants.
6. Long-Term Debt
Long-term debt outstanding, exclusive of current maturities, is as follows:
- ----------------------------------------------------------------------------
December 31 1993 1992
- ----------------------------------------------------------------------------
(Thousands of Dollars)
FIRST MORTGAGE BONDS:
Maturing 1994 through 2031,
weighted average rates of 7.85%
and 8.16%, respectively $ 917,233 $1,251,802
SINKING FUND DEBENTURES:
Weighted average rate of 7.87% _ 16,639
CAPITALIZED LEASES 522 691
OTHER:
GTE Finance Corporation promissory notes -
Maturing 1995 through 2016,
weighted average rate of 9.71% 95,000 95,000
Rural Telephone Bank First Mortgage notes -
Maturing 1999 through 2014,
weighted average rate of 6.82% 9,573 9,918
Rural Electrification Administration
First Mortgage notes -
Maturing 1997 through 2012,
rate of 2.00% 1,904 2,838
Commercial paper refinanced in 1994 (a) 450,000 _
- ----------------------------------------------------------------------------
Total principal amount 1,474,232 1,376,888
- ----------------------------------------------------------------------------
DISCOUNT AND PREMIUM - NET (7,187) (10,140)
- ----------------------------------------------------------------------------
Total long-term debt $1,467,045 $1,366,748
- ----------------------------------------------------------------------------
(a) In 1994, the Company issued $250 million of 6% Debentures, due 2004 and
$200 million of 5.5% Debentures, due 1999 to refinance commercial paper.
In November 1993, the Company called $316 million of high-coupon first mortgage
bonds with proceeds from commercial paper borrowings.These bonds had coupons
ranging from 9.00% to 9.375%. In February 1994, the Company issued $200 million
of 5.5% Debentures, due 1999 to refinance a portion of the bonds called. The
cost of calling these bonds is reflected as an extraordinary after-tax charge
of $14.3 million in the Consolidated Statements of Income.
All outstanding Sinking Fund Debentures were retired in 1993 with proceeds from
borrowings of commercial paper.
The aggregate principal amount of bonds and debentures available for new bonds
issuance is subject to the restrictions and provisions of the Company's
indentures.
None of the securities shown above were held in sinking or other special funds
of the Company, pledged by the Company or held by affiliates, except for the
promissory notes held by GTE Finance Corporation.
Debt discount and premium on theCompany's outstanding long-term debt are
amortized over the lives of the respective issues.
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1994 are summarized below (in thousands of dollars):
- ----------------------
1994 $ 15,675
1995 49,252
1996 49.764
1997 70,363
1998 20,970
- ----------------------
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
7. Short-Term Debt
The Company finances part of its construction program through the use of interim
short-term loans, primarily commercial paper or notes payable to affiliates,
which are generally refinanced at a later date by issues of long-term debt or
equity. Information relating to short-term borrowings is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1993 1992 1991
- -----------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial paper -
Maximum month-end balance $ 566,650(a) $ 158,800 $ 308,500
Average monthly balance $ 294,204 $ 52,673 $ 243,323
Weighted average interest rate (b) 3.15% 3.56% 5.92%
AT DECEMBER 31 -
Balance outstanding -
Note payable to GTE $ _ $ 46,319 $ 34,286
Average interest rate _ 3.72% 4.70%
Commercial paper $ 148,075 $ 158,800 $ 93,700
Average interest rate 3.66% 3.41% 4.76%
- -----------------------------------------------------------------------------------------
<FN>
(a) Includes commercial paper borrowings used to call $316 million of long-term
debt in November 1993.
(b) Calculated by dividing the annualized interest expense by the average of
the balances of the debt outstanding at the end of each month.
</TABLE>
Unused lines of credit available to the Company to support outstanding
commercial paper and other short-term financing needs are $25.5 million. In
addition, a $2.3 billion line is available through shared lines of credit with
GTE and other affiliates. Most of these arrangements require payment of annual
commitment fees of .1% of the unused lines of credit.
8. Income Taxes
The provision for income taxes is as follows:
- ----------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------------------
(Thousands of Dollars)
CURRENT
Federal $ 172,447 $ 124,442 $ 135,446
State and local 22,712 22,107 19,078
- ----------------------------------------------------------------------------
Total 195,159 146,549 154,524
- ----------------------------------------------------------------------------
DEFERRED
Federal (121,656) 53,103 (3,454)
State and local (21,479) 3,718 2,095
- ----------------------------------------------------------------------------
Total (143,135) 56,821 (1,359)
- ----------------------------------------------------------------------------
AMORTIZATION of deferred
investment tax credits (17,099) (16,606) (23,128)
- ----------------------------------------------------------------------------
Total $ 34,925 $ 186,764 $ 130,037
- ----------------------------------------------------------------------------
The components of deferred income tax expense (benefit) are as follows:
- ----------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ (16,067) $ (1,133) $ (125)
Employee benefit obligations (24,635) 16,494 4,392
Prepaid pension cost 40,411 31,969 (6,715)
State, local and other taxes 9,072 (1,122) 4,798
Restructuring cost (139,696) _ _
Other - net (12,220) 10,613 (3,709)
- ----------------------------------------------------------------------------
Total $ (143,135) $ 56,821 $ (1,359)
- ----------------------------------------------------------------------------
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate is as follows:
- ----------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------------------
STATUTORY FEDERAL INCOME TAX RATE 35.0% 34.0% 34.0%
State and local income taxes, net
of Federal income tax benefits 0.6 3.0 3.4
Amortization of deferred investment
tax credits (12.2) (2.9) (5.5)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - net 4.2 1.3 3.0
Rate differentials applied to
reversing temporary differences (3.9) (1.3) (3.2)
Other differences - net 1.2 (0.5) (0.9)
- ----------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 24.9% 33.6% 30.8%
- ----------------------------------------------------------------------------
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences which
had not previously been recognized in accordance with established rate-making
practices. Since the manner in which income taxes are treated for rate-making
has not changed, pursuant to SFAS No. 71 a corresponding regulatory asset was
also established. In addition, deferred income taxes were adjusted and a
regulatory liability established to give effect to the current statutory Federal
income tax rate and for unamortized investment tax credits. The unamortized
regulatory asset and regulatory liability balances at December 31, 1993 amounted
to $19.2 million and $44.6 million, respectively, and the unamortized regulatory
asset and regulatory liability balances at December 31, 1992 amounted to $48.2
million and $37.1 million, respectively, and are reflected as other assets and
other deferred credits, respectively, in the accompanying Consolidated Balance
Sheets. These amounts are being amortized over the lives of the related
depreciable assets concurrent with recovery in rates and in conformance with the
provisions of the Internal Revenue Code. The assets and liabilities established
in accordance with SFAS No. 71 have been increased for the tax effect of future
revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as
follows:
- -------------------------------------------------------------
1993 1992
- -------------------------------------------------------------
(Thousands of Dollars)
Depreciation and
amortization $ 760,369 $ 786,922
Employee benefit
obligations (48,191) (23,556)
Prepaid pension cost 95,448 55,037
Restructuring cost (139,696) _
Other - net 35,723 36,743
- -------------------------------------------------------------
Total $ 703,653 $ 855,146
- -------------------------------------------------------------
9. Employee Benefit Plans
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The net pension credits for 1993-1991 include the following components:
- -------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned during
the period $ 51,256 $ 44,914 $ 46,353
Interest cost on projected benefit
obligations 115,931 104,791 95,811
Actual return on plan assets (355,703) (132,869) (426,535)
Other - net 111,043 (80,459) 239,024
- -------------------------------------------------------------------------------
Net pension credit $ (77,473) $ (63,623) $ (45,347)
- -------------------------------------------------------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1993 and 1992
and 8.0% for 1991.
The funded status of the plans at December 31, 1993 and 1992 was as follows:
- ------------------------------------------------------------
1993 1992
- ------------------------------------------------------------
(Thousands of Dollars)
Plan assets at fair value $2,661,999 $2,434,378
Projected benefit obligation 1,445,589 1,377,689
- ------------------------------------------------------------
Excess of assets over projected
obligation 1,216,410 1,056,689
Unrecognized net transition asset (216,089) (259,630)
Unrecognized net gain (664,447) (534,774)
- ------------------------------------------------------------
Prepaid pension cost $ 335,874 $ 262,285
- ------------------------------------------------------------
The projected benefit obligations at December 31, 1993 and 1992 include
accumulated benefit obligations of $1.1 billion and $984.5 million and vested
benefit obligations of $984.9 million and $861.7 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1993 and 1992 were as follows:
- ------------------------------------------------
1993 1992
- ------------------------------------------------
Discount rate 7.5% 8.0%
Rate of compensation
increase 5.25% 6.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds amounts
for postretirement benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1993 includes the following components (in
thousands of dollars):
- ------------------------------------------------
1993
- ------------------------------------------------
Service cost-benefits earned
during the period $ 15,371
Interest cost on accumulated
postretirement benefit
obligation 50,066
Actual return on plan assets (1,096)
Amortization of transition
obligation and prior
service cost 30,755
- ------------------------------------------------
Postretirement benefit
cost $ 95,096
- ------------------------------------------------
During 1992 and 1991, the cost of postretirement health care and life insurance
benefits on a pay-as-you-go basis was $15.9 million and $15.6 million,
respectively.
The following table sets forth the plans' funded status and the accrued
obligation as of December 31, 1993 (in thousands of dollars):
- ------------------------------------------------------
1993
- ------------------------------------------------------
Accumulated postretirement
benefit obligation attributable to:
Retirees $ 352,762
Fully eligible active
plan participants 26,759
Other active plan
participants 225,235
- ------------------------------------------------------
Total accumulated
postretirement benefit
obligation 604,756
Fair value of plan assets 16,753
- ------------------------------------------------------
Excess of accumulated
obligation over plan assets 588,003
Unrecognized transition
obligation (463,190)
Unrecognized net loss (54,452)
- ------------------------------------------------------
Accrued postretirement
benefit obligation $ 70,361
- ------------------------------------------------------
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.5% at December 31, 1993. The expected long-term rate
of return on plan assets was 8.25% for 1993. The assumed health care cost trend
rate in 1993 was 13% for pre-65 participants and 9.5% for post-65 retirees,
each rate declining on a graduated basis to an ultimate rate in the year 2004
of 6%. A one percentage point increase in the assumed health care cost trend
rate for each future year would have increased 1993 costs by $10.8 million and
the accumulated postretirement benefit obligation at December 31, 1993 by $72.7
million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees that are effective January
1, 1995. These changes, among others, include newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
sharing schedule based on a retiree's years of service. The net effect of these
changes reduced the accumulated benefit obligation at December 31, 1993 by
$139.0 million.
SAVINGS PLANS
The Company sponsors savings plans under section 401(k) of the Internal Revenue
Code.The plans cover substantially all full-time employees. Under the plans,
the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$9.7 million, $6.0 million and $6.0 million in the years 1993-1991,
respectively.
10. Commitments and Contingencies
The Company's anticipated construction costs for 1994 are approximately $640
million, for which the Company had substantial purchase commitments as of
December 31, 1993.
The Company has noncancelable lease contracts covering certain land and
buildings, office space and equipment. The lease contracts contain varying
renewal options for terms up to 29 years. The majority of the amount remaining
after 1997 is related to the lease for the centralized GTE Telephone Operations
general facilities entered into in 1991. The lease agreement requires rental
payments over 30 years (beginning in 1992) sufficient to pay scheduled
principal and interest payments for $210 million of Telephone Facility Lease
Bonds issued by the lessor.The lease expense is shared by all GTE Telephone
operating companies.
Minimum rental commitments for noncancelable leases for periods subsequent to
December 31, 1993 are as follows (in thousands of dollars):
1994 $ 32,607
1995 30,325
1996 28,980
1997 28,699
1998 28,664
Thereafter 650,412
- ----------------------------------------------
Total minimum rental
commitments $ 799,687
- ----------------------------------------------
The total amount of rents charged to expense was $38.1 million, $39.3 million
and $39.5 million for the years 1993-1991, respectively.
11. Regulatory Matters
The Company's interstate operations are subject to regulation by the FCC.
Intrastate business is regulated by the state regulatory commissions in
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.
INTRASTATE SERVICES
The Company provides long distance services within designated geographic areas
called Local Access and Transport Areas (LATAs) directly to the customers in
their exchanges in conformity with state commission orders. Provisioning of
intrastate long distance services by the Company is accomplished by either bill
and keep arrangements or by participation with other exchange carriers in
settlement arrangements. A portion of intrastate long distance compensation is
earned through access rates which are billed to other exchange carriers for
completing long distance calls.
On March 13, 1990, the Michigan Public Service Commission authorized an
incentive regulation plan for the Company for a four-year trial period.On
December 23, 1991, the Governor signed Senate Bill 124 enacting the Michigan
Telecommunications Act (MTA). MTA is a four year plan effective January 1,
1992, that replaces the provisions of the existing incentive regulation plan by
eliminating rate of return regulation for local exchange carriers (LECs) and
providing increased pricing flexibility for all services. However, local
service rates are frozen for two years (four years for customers 60 years or
older). LECs may request local rate increases in 1994 and 1995 equal to the
Detroit consumer price index less 1%.
Effective August 10, 1992, the Pennsylvania Public Utility Commission approved
rate reductions totaling $8.2 million.
On July 22, 1992, the Illinois Commerce Commission (ICC) issued an order to
reduce the Company's rates $12.3 million effective August 14, 1992. This
reduction was a result of the legal entity merger filing on July 1, 1992 (see
Note 3).
On April 16, 1993 the Wisconsin Public Service Commission (WPSC) reached a
decision in the 1992 rate case proceeding and ordered the Company to reduce its
intrastate revenues by $4.4 million, effective April 17, 1993. On May 6, the
Company filed a request for reconsideration of certain aspects of the WPSC's
decision. On June 6, the WPSCdenied the Company's request on all issues.On July
2, the Company filed an appeal with the Circuit Court in Wisconsin. A decision
is expected sometime in 1994.
On August 2, 1993, the Company filed revised tariffs with the ICC to combine
the Company's customers and the former Contel customers under a common rate
structure. This filing, which was one of the conditions of approval of the legal
entity merger, proposes to restructure the Company's rates to bring them closer
to their underlying costs. The Company's proposal is designed to be overall
revenue neutral. The ICC has subsequently suspended the tariff filing and
established a procedural schedule to investigate various aspects of
the Company's filing. A decision by the ICCis expected by October 1994.
On June 10, 1993, the ICCallowed theCompany to consolidate depreciation rates
of the Company and the former Contel legal entity resulting in a $5 million
increase in prescribed depreciation rates effective July 1, 1994. On September
3, 1993, the Indiana Utility Regulatory Commission prescribed new depreciation
rates to be effective January 1, 1994 resulting in a $1.7 million decrease in
depreciation expense.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
local exchange carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCChas also adopted
a productivity sharing feature. Because of this feature, under the minimum
productivity-gain option, the Company must share equally with its ratepayers
any realized interstate return above 12.25% up to 16.25%, and all returns
higher than 16.25%, by temporarily lowering prospective prices. During 1994,
the FCC is scheduled to review the LEC price cap plan to determine whether it
should be continued or modified.
In 1992, the Company's rates were voluntarily reduced by $11.1 million
effective July 1, 1992 and $19.0 million effective October 2, 1992.
SIGNIFICANT CUSTOMER
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities during the years 1993-1991 under various
arrangements and amounted to $404.3 million, $423.0 million and $515.2 million,
respectively.
12. Supplemental Cash Flow Disclosures
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
- ----------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------------------
(Thousands of Dollars)
(INCREASE) DECREASE IN CURRENT
ASSETS:
Accounts receivable - net $ (70,997) $ (121,653) $ (124,983)
Materials and supplies 10,496 13,265 12,585
Other current assets (5,197) 6,668 4,440
INCREASE (DECREASE) IN CURRENT
LIABILITIES:
Accounts payable (41,525) 56,863 (33,424)
Affiliate payables and accruals 1,258 1,597 29,770
Advanced billings and customer
deposits (2,024) (128) (9,250)
Accrued liabilities 34,800 10,570 5,783
Other (19,913) 11,843 82,082
- ----------------------------------------------------------------------------
Total $ (93,102) $ (20,975) $ (32,997)
- ----------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 123,416 $ 122,886 $ 124,109
Income taxes 136,851 166,016 147,834
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE North Incorporated:
We have audited the accompanying consolidated balance sheets of GTE North
Incorporated (a Wisconsin corporation and wholly-owned subsidiary of
GTE Corporation) and subsidiary as of December 31, 1993 and 1992, and the
related consolidated statements of income, reinvested earnings and cash flows
for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE North Incorporated and
subsidiary as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions. Also as discussed in Note 1,
effective January 1, 1992, the Company changed its method of accounting for
income taxes.
ARTHUR ANDERSEN &CO.
Dallas, Texas
January 28, 1994.
<PAGE>
MANAGEMENT REPORT
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
EARL A. GOODE
President
GERALD K. DINSMORE
Senior Vice President-Finance and
Planning
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
GTE North Incorporated (the Company), a wholly-owned subsidiary of
GTE Corporation, provides local exchange, network access and long distance
services to customers in six Midwestern and Great Lakes states, consisting of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. The Company
serves over 4 million access lines.
On April 1, 1993, GTE North Incorporated merged with Contel of Illinois, Inc.,
Contel of Indiana, Inc. and Contel of Pennsylvania, Inc. (indirect, wholly-
owned subsidiaries of GTE Corporation). Prior to the merger, the properties of
GTE North Incorporated located in Iowa, Minnesota, Missouri and Nebraska were
transferred to a newly created entity, GTE Midwest Incorporated.The merger was
accounted for in a manner consistent with a transfer of entities under common
control which is similar to that of a "pooling of interests." Accordingly, all
previously issued financial statements have been restated to reflect the
combined historical results of operation, financial position, and cash flows of
GTE North Incorporated excluding operations transferred to GTE Midwest and
including Contel of Illinois, Inc., Contel of Indiana, Inc. and Contel of
Pennsylvania, Inc. All comparative data presented in this discussion reflects
such restatement.
RESULTS OF OPERATIONS
Net income decreased $279 million for the year ended December 31, 1993. The
1993 results include a one-time restructuring charge of $231 million, net of
tax, related primarily to a re-engineering plan. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services and reduce costs. The results also reflect an extraordinary charge of
$14 million, net of tax, related to the early extinguishment of debt. In
November 1993, the Company called several issues of high-coupon first mortgage
bonds. These bonds were refinanced in February 1994 on a long-term basis at
lower current interest rates. Also included in the 1993 results is a one-time
charge of $4 million, net of tax, associated with the enhanced early retirement
and voluntary separation programs completed during the second quarter.
Excluding the above charges, net income decreased 8% or $30 million in 1993.
Net income increased 27% or $78 million for 1992. The 1993 decrease reflects
higher operating expenses due to the impact of the adoption of SFASNo. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective January 1, 1993 partially offset by higher operating revenues
reflecting continued customer growth. The 1992 increase was due to increased
revenue from customer growth and higher network usage and lower costs for the
GTE and Contel merger, offset by an increase in the income tax expense due to
lower amortization of deferred investment tax credits.
Local network service revenues, which are comprised mainly of fees charged to
customers for providing local exchange service, increased 4% or $35 million in
1993 and increased 3% or $29 million in 1992. The 1993 and 1992 increases are
due to growth in access lines and increases in custom calling and other
enhanced features.
Network access service revenues represent the local telephone companies' charge
to end users for access to the facilities of long distance carriers and the
charge to long distance carriers for interconnection to local facilities. These
revenues decreased 1% or $10 million in 1993 compared to an increase of 1% or
$7 million in 1992. The 1993 decrease reflects rate reductions in Wisconsin
effective April 17, 1993 and lower interstate rates. The Company's interstate
rates were lowered $11 million effective July 1, 1992 and $19 million effective
October 2, 1992. Also contributing to the decrease is an Indiana toll provider
order effective January 1, 1993 which is revenue neutral but reduces access
revenue by $18 million annually with an offset in long distance revenues and
expense. These reductions were partially offset by increased network usage. The
1992 increase reflected increased network minutes of use and the favorable
settlement of revenue issues offset by an annual intrastate rate reduction of
$8 million effective August 10, 1992 and a $12 million rate reduction effective
August 14, 1992 in Illinois due to the legal entity merger filing. In addition,
lower interstate rates partially offset the increase.
The Company's revenues for long distance services from designated geographical
areas are provided under bill and keep arrangements or settlement arrangements
with various telephone companies. Long distance service revenues increased 18%
or $59 million and 4% or $12 million in 1993 and 1992, respectively. The 1993
increase is primarily due to the Indiana toll provider order discussed above
which resulted in increased toll revenues of $44 million annually plus growth
in toll usage. The 1992 increase was due to increased toll usage reflecting
customer growth and increased activity from calling plans partially offset by a
$3 million annual rate reduction in Illinois effective August 14, 1992.
Revenues derived from equipment sales and services increased 3% or $3 million
in 1993 compared to a decrease of 19% or $24 million in 1992. The 1993 increase
reflects higher maintenance agreement revenue and single-line telephone product
sales and rent revenue partially offset by lower single-line peripheral sales.
The 1992 decrease was due to lower revenue from a reduction in contract rates
with AT&T for nonregulated billing and collection services and a decrease in
single-line telephone product sales.
Other operating revenues decreased 22% or $44 million in 1993 compared to an
increase of 17% or $30 million in 1992. The 1993 decrease is primarily due to
lower directory advertising revenues and lower billing and collection revenue.In
addition, the decrease reflects lower revenues as a result of the Indiana toll
provider order discussed above. The 1992 increase was due to higher rental
revenues from facilities shared with other GTE telephone operating companies and
income from the calling card validation service partially offset by lower
revenue from billing and collection services due to lower contract rates with
AT&T and increased provisions for uncollectible accounts. Additionally, the
increase reflected an adjustment for directory advertising revenues associated
with a change in recognition adopted in 1991.
Cost of sales and services increased 3% or $17 million in 1993 compared to a
decrease of 2% or $11 million in 1992. The 1993 increase reflects higher costs
associated with the adoption of SFASNo. 106 effective January 1, 1993. As a
result of the adoption of the new standard, cost of sales and services
increased $39 million. This increase was partially offset by lower right-to-use
fees and lower costs reflecting continued cost reduction efforts. The 1992
decrease was due to a reduction in costs associated with the decline in
equipment sales and services and continued cost reduction efforts and employee
downsizing, partially offset by an increase in digital switch software costs.
Depreciation and amortization expense increased 2% or $11 million in 1993 and
was relatively unchanged in 1992. The increase in 1993 is due to rate
adjustments and an increase in plant balances.
Expenses for marketing, selling, general and administrative costs increased 7%
or $56 million in 1993 compared to a decrease of 9% or $77 million in 1992. The
1993 increase reflects costs of $35 million associated with the adoption of
SFASNo. 106. The increase is also due to a one-time charge of $7 million
associated with the enhanced early retirement and voluntary separation programs
offered to eligible employees during the second quarter of 1993. These
increases are partially offset by lower computer expenses due to program
reductions and continuing cost reduction efforts. The 1992 decrease was the
result of lower processing costs reflecting cost efficiencies, lower product
advertising costs and cost savings associated with employee downsizing and
lower costs related to the merger of GTE and Contel.
Restructuring costs reflect a one-time charge related to the Company's re-
engineering plan over the next three years. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services, resulting in cumulative savings in excess of the one-time charge. The
re-engineering plan includes $149 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $169
million for employee separation benefits associated with workforce reductions
and $46 million primarily for the consolidation of facilities and operations
and other related costs. The charge for employee separation benefits includes
$85 million related to the recognition of previously deferred postretirement
health and life insurance costs for separating employees.
Income taxes decreased $152 million in 1993 and increased $57 million in 1992.
The decrease in 1993 is primarily due to decreases in pretax income. The
increase in 1992 was primarily due to higher pretax income and the declining
effects of amortization of deferred investment tax credits.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations, although external
financing is available. Short-term borrowings can be obtained through commercial
paper borrowings or borrowings from GTE. In addition, a $2.3 billion line of
credit is available to the Company through shared lines of credit with GTE and
other affiliates to support short-term financing needs.
The Company's primary source of funds during 1993 was cash flow from operations
of $822 million compared to $792 million for 1992.
Capital expenditures represent a significant use of funds during 1993 and 1992,
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. Cash
requirements to implement the re-engineering plan are expected to be largely
offset by cost savings. The Company's capital expenditures during 1993 were
$567 million compared to $552 million during 1992. The Company's anticipated
construction costs for 1994 are approximately $640 million.
Cash used for financing activities was $269 million in 1993 compared to $251
million in 1992. This included dividend payments of $290 million in 1993
compared to $297 million in 1992. In November 1993, the Company called $316
million of high-coupon first mortgage bonds with proceeds from commercial paper
borrowings. These bonds have coupons ranging from 9.00% to 9.375%. In February
1994, the Company issued $200 million of 5.5% Debentures, due 1999 to refinance
a portion of the bonds called.The cost of calling these bonds is reflected as
an extraordinary after-tax charge of $14 million in theConsolidated Statements
of Income. The Company retired an additional $43 million of long-term debt in
1993 compared to $82 million in 1992 due to lower scheduled debt maturities.
COMPETITION AND REGULATORY TRENDS
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.
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.
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 Federal Communications Commission (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 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.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets we serve.
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.
The Company follows the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators. In the event that recoverability of these costs
becomes unlikely or uncertain, whether resulting from actual or anticipated
competition or specific regulatory, legislative or judicial actions, continued
application of SFAS No. 71 would no longer be appropriate. If the Company no
longer qualifies for the provisions of SFAS No. 71, the financial effects of the
required accounting change (which would be non-cash) could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
Total operating revenues $2,602,247 $2,560,042 $2,504,987 $2,480,553 $2,461,450
Total operating expenses 2,334,968 1,876,066 1,961,630 1,972,648 1,936,767
- -----------------------------------------------------------------------------------------------------------------
Net operating income 267,279 683,976 543,357 507,905 524,683
Interest expense 123,557 124,197 122,970 119,915 116,518
Other - net 3,581 3,473 (1,487) (2,461) 2,352
Income taxes 34,925 186,764 130,037 108,230 112,522
- -----------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 105,216 369,542 291,837 282,221 293,291
Extraordinary charge 14,270 _ _ _ _
- -----------------------------------------------------------------------------------------------------------------
Net income $ 90,946 $ 369,542 $ 291,837 $ 282,221 $ 293,291
- -----------------------------------------------------------------------------------------------------------------
Dividends declared on common stock $ 165,052 $ 364,162 $ 228,116 $ 220,008 $ 199,383
Dividends declared on preferred stock 2,860 2,731 2,788 2,836 2,870
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET ITEMS
Investment in property, plant and
equipment - net $4,680,338 $4,635,444 $4,537,997 $4,460,052 $4,397,148
Total assets 5,880,839 5,679,570 5,385,303 5,100,667 4,991,767
Long-term debt and preferred stock,
subject to mandatory redemption 1,486,589 1,387,072 1,434,209 1,255,781 1,266,109
Common stock, reinvested earnings
and other capital 2,139,720 2,216,427 2,163,745 2,102,727 2,043,287
- -----------------------------------------------------------------------------------------------------------------
SELECTED STATISTICS
Access lines 4,031,547 3,897,641 3,776,803 3,691,065 3,617,577
Access line gain 133,906 120,838 85,738 73,488 79,670
Net investment in property, plant
and equipment per access line $ 1,161 $ 1,189 $ 1,202 $ 1,208 $ 1,215
Number of employees 17,382 18,901 19,826 21,278 19,720
Access lines per employee 232 206 190 173 183
Gross plant additions (thousands) $ 566,821 $ 552,243 $ 587,380 $ 582,086 $ 612,804
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
</TABLE>
