<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended December 31, 1994
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period from to
Commission File Number 0-1210
GTE NORTH INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 35-1869961
(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:
<TABLE>
<S> <C> <C> <C>
$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
---------------------------------------------------------------------------------------------------
(TITLE OF CLASS)
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
---
THE COMPANY HAD 978,351 SHARES OF $1,000 STATED VALUE COMMON STOCK OUTSTANDING
AT FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
---- ----
<S> <C> <C> <C>
PART I
------
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
-------
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
--------
10. Directors and Executive Officers of the Registrant 36
11. Executive Compensation 40
12. Security Ownership of Certain Beneficial Owners
and Management 48
13. Certain Relationships and Related Transactions 49
PART IV
-------
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 50
</TABLE>
<PAGE> 3
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 Illinois, 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.
Additional information related to the above transactions can be found in Note 3
of the Company's consolidated financial statements included in Item 8. All
previously issued financial data included herein has been restated to reflect
the combined historical results of GTE North Incorporated excluding operations
transferred to GTE Midwest Incorporated and including Contel of Illinois, Inc.,
Contel of Indiana, Inc. and Contel of Pennsylvania, Inc.
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 a wide variety of communications services ranging from
local telephone service for the home and office to highly complex voice and
data services for industry. The Company provides local telephone service
within its franchise 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 AT&T Corp. The number of access
lines served has grown steadily from 3,617,577 on January 1, 1990 to 4,191,915
on December 31, 1994.
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<PAGE> 4
The number of access lines in the states in which the Company operates as of
December 31, 1994, was as follows:
<TABLE>
<CAPTION>
Access
State Lines Served
----------- ------------
<S> <C>
Illinois 824,277
Indiana 861,883
Michigan 627,412
Ohio 795,480
Pennsylvania 620,726
Wisconsin 462,137
------------
Total 4,191,915
============
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1994 1993 1992
---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Local Network Services $1,040,206 $ 980,039 $ 945,175
% of Total Revenues 38% 38% 37%
Network Access Services $1,032,752 $ 963,918 $ 973,661
% of Total Revenues 38% 37% 38%
Long Distance Services $ 395,636 $ 391,050 $ 332,150
% of Total Revenues 14% 15% 13%
Equipment Sales and Services $ 144,087 $ 106,288 $ 103,607
% of Total Revenues 5% 4% 4%
Other $ 147,224 $ 160,952 $ 205,449
% of Total Revenues 5% 6% 8%
</TABLE>
At December 31, 1994, the Company had 17,765 employees. In 1994, agreements
were reached on six contracts with the International Brotherhood of Electrical
Workers (IBEW) and two contracts with the Communication Workers of America
(CWA). During 1995, two contracts with the CWA, one contract with the IBEW,
one contract with the International Association of Machinists (IAM), and one
contract with the United Steelworkers of America (USWA) will expire.
Telephone Competition and Regulatory Developments
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the 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 12 of the
Company's consolidated financial statements included in Item 8.
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<PAGE> 5
During 1994, the Company began implementation of a three-year $375 million
re-engineering plan. In the initial year of the plan, $144 million was expended
to implement this program. These expenditures were primarily associated with
the consolidation of certain customer service centers, separation benefits
associated with employee reductions and incremental expenditures to redesign and
streamline systems and processes. The overall re-engineering plan remains on
schedule and is expected to be completed by the end of 1996. Continued
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services and to reach its stated
objective of being the easiest company to do business with in the industry.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communication
Services (PCS). PCS will compete with the Company's traditional wireline
services.
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. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Fort Wayne, Indiana, to provide advanced communications for business
customers. This program includes sophisticated high-speed, digital fiber-optic
rings, a high-capacity switching network (known as SONET), and a new
centralized operations center that monitors the entire network. These SONET
rings are an integral part of the high-speed information network that enables
GTE to provide advanced services such as high-speed data transmission and video
conferencing.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has continued. Regulatory authorities have adopted various
forms of alternative regulation, which provide economic incentives to telephone
service providers to improve productivity and provide the foundation for
implementing pricing flexibility necessary to address competitive entry into
the markets the Company serves.
Many states are currently investigating whether to authorize local and toll
competition. Several have concluded that competition is in the public interest
and five states, including Michigan, have authorized plans that would allow
customers to pre-subscribe to a specific carrier to handle intraLATA toll
calls. GTE is challenging these orders primarily based on the lack of equality
since the Company is prohibited from providing interLATA toll service.
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<PAGE> 6
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 prices that the
Company may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. The Company may,
within certain ranges, price individual services above or below the overall
cap.
Under its price cap regulatory plan, the FCC 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 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under terms and conditions as negotiated.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint and GTE Spacenet (both since divested), prohibits
GTE's domestic telephone operating subsidiaries from providing long distance
service beyond the boundaries of the LATA. This prohibition restricts the
Company's 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.
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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
-4-
<PAGE> 7
Item 2. Properties
The Company's property consists of network facilities (82%), company facilities
(14%), customer premises equipment (1%) and other (3%). From January 1, 1990
to December 31, 1994, the Company made gross property additions in the amount
of $2.9 billion and property retirements of $1.6 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.
-5-
<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's common stock, preferred stock
and no par preferred stock is the First National Bank of Boston.
GTE Corporation
C/O Bank of Boston
P.O. Box 9191
Boston, MA 02205-9191
10-K REPORT
A copy of the 1994 annual report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by writing to:
GTE Telephone Operations
External Reporting
P.O. Box 407, MC: INAAACG
Westfield, IN 46074
(317)896-6464
PARENT COMPANY ANNUAL REPORT
A copy of the 1994 annual report of our parent company may be obtained by
writing to:
GTE Corporation
Corporate Secretary's Office
One Stamford Forum
Stamford, CT 06904
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<PAGE> 9
Item 6. Selected Financial Data
GTE North Incorporated and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
--------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
-----------------------------------
Operating revenues $2,759,905 $2,602,247 $2,560,042 $2,504,987 $2,480,553
Operating expenses 1,885,956 2,334,968 1,876,066 1,961,630 1,972,648
--------------------------------------------------------------------------------
Net operating income 873,949 267,279 683,976 543,357 507,905
Interest expense 112,884 123,557 124,197 122,970 119,915
Other - net 496 3,581 3,473 (1,487) (2,461)
Income tax provision 284,293 34,925 186,764 130,037 108,230
--------------------------------------------------------------------------------
Income before
extraordinary charge 476,276 105,216 369,542 291,837 282,221
Extraordinary charge -- 14,270 -- -- --
--------------------------------------------------------------------------------
Net income $ 476,276 $ 90,946 $ 369,542 $ 291,837 $ 282,221
================================================================================
Dividends declared on common stock $ 277,729 $ 165,052 $ 364,162 $ 228,116 $ 220,008
Dividends declared on preferred
stock 2,643 2,680 2,731 2,788 2,836
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET ITEMS
----------------------------
Investment in property, plant
and equipment - net $4,780,079 $4,680,338 $4,635,444 $4,537,997 $4,460,052
Total assets 6,120,013 5,813,016 5,679,570 5,385,303 5,100,667
Long-term debt and preferred stock,
subject to mandatory redemption 1,384,397 1,486,589 1,387,072 1,434,209 1,255,781
Common stock, reinvested
earnings and other capital 2,335,624 2,139,720 2,216,427 2,163,745 2,102,727
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATISTICS
-------------------
Access lines 4,191,915 4,031,547 3,897,641 3,776,803 3,691,065
Access line gain 160,368 133,906 120,838 85,738 73,488
Net investment in property, plant
and equipment per access line $ 1,140 $ 1,161 $ 1,189 $ 1,202 $ 1,208
Number of employees 17,765 17,382 18,901 19,826 21,278
Access lines per employee 236 232 206 190 173
Capital expenditures (thousands) $ 656,377 $ 566,821 $ 552,243 $ 587,380 $ 582,086
</TABLE>
--------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Net operating income in 1993 included a $374.6 million pretax charge for
restructuring costs, which reduced net income by $230.8 million.
-7-
<PAGE> 10
Item 7. 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 (GTE), provides local exchange, network access and long distance
services to customers in six Midwestern and Great Lakes states: Illinois,
Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. The Company serves over 4
million access lines.
On April 1, 1993, the Company merged with Contel of Illinois, Inc., Contel of
Indiana, Inc. and Contel of Pennsylvania, Inc. (indirect, wholly-owned
subsidiaries of GTE). Prior to the merger, the properties of the Company
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 the Company
excluding operations transferred to GTE Midwest Incorporated 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 was $476 million in 1994 and $91 million in 1993. The 1994 results
include pension settlement gains associated with lump sum payments from the
Company's pension plans. The 1993 results included one-time charges of $288
million, net of tax, to restructure operations and complete enhanced early
retirement and voluntary separation programs and for the early retirement of
high-coupon debt.
Excluding these special items, net income increased 29% or $97 million in 1994
compared to a decrease of 8% or $30 million in 1993. The 1994 increase relates
primarily to customer growth and lower operating and interest costs. The 1993
decrease reflected higher operating expenses due to the impact of the adoption
of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective January
1, 1993, partially offset by higher operating revenues reflecting continued
customer growth.
OPERATING REVENUES
Operating revenues were $2.8 billion in 1994 and $2.6 billion in 1993.
Operating revenues increased 6% or $158 million in 1994 and 2% or $42 million
in 1993.
Local network services revenues are comprised mainly of fees charged to
customers for providing local exchange service. Local network service revenues
were $1.04 billion and $980 million in 1994 and 1993, respectively. This
represents increases of 6% or $60 million in 1994 and 4% or $35 million in
1993. The 1994 and 1993 increases are due to growth in access lines and
increases in custom calling, special operator services and E911 surcharges.
Access lines increased 4% in 1994 compared to a 3% increase in 1993.
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<PAGE> 11
Network access services revenues are fees charged to interexchange carriers
that use the local telecommunication network to provide long-distance services
to their customers. In addition, end users pay access fees to connect to the
local network to obtain long-distance service. Network access services
revenues were $1.03 billion and $964 million in 1994 and 1993, respectively.
Revenues derived from network access services increased 7% or $69 million in
1994 compared to a decrease of 1% or $10 million in 1993. The 1994 increase
reflects increased minutes of use reflecting greater network usage by
interexchange carriers and end users. The 1993 decrease reflected 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
was an Indiana toll provider order effective January 1, 1993 which is revenue
neutral but reduced 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 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 services revenues were $396
million and $391 million in 1994 and 1993, respectively. This represents
increases of 1% or $5 million in 1994 and 18% or $59 million in 1993. The 1994
increase is primarily due to an increase in toll usage reflecting customer
growth partially offset by unfavorable intrastate settlement activity and a
decrease in private network revenues. The 1993 increase was 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.
Equipment sales and services revenues were $144 million and $106 million in
1994 and 1993, respectively. This represents increases of 36% or $38 million
in 1994 and 3% or $3 million in 1993. The 1994 increase is attributable to
growth in revenue from continuation of services agreements associated with
non-strategic dispositioned properties and wiring maintenance agreements. The
1993 increase reflected higher maintenance agreement revenue and single-line
telephone product sales and rent revenue partially offset by lower single-line
peripheral sales.
Other operating revenues were $147 million and $161 million in 1994 and 1993,
respectively. This represents decreases of 9% or $14 million in 1994 and 22%
or $44 million in 1993. The 1994 decrease is primarily due to a decrease in
rental revenue from shared facilities, a decline in directory advertising
revenue and lower revenue from carrier billing and collections. These
decreases are partially offset by an increase in 800 directory services and
operator service revenues. The 1993 decrease was primarily due to lower
directory advertising revenues and lower billing and collection revenue. In
addition, the 1993 decrease reflected lower revenues as a result of the Indiana
toll provider order discussed above.
OPERATING EXPENSES
Cost of sales and services were $576 million and $602 million for 1994 and
1993, respectively. This represents a decrease of 4% or $26 million in 1994
compared to an increase of 3% or $17 million in 1993. The 1994 decrease is
primarily associated with lower charges for inventory obsolescence, decreased
installation and maintenance and network administration costs. The decrease is
also attributable to lower costs reflecting continued cost reduction
-9-
<PAGE> 12
efforts. The 1993 increase reflected higher costs associated with the adoption
of SFAS No. 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 cost
reduction efforts.
Depreciation and amortization expense was $534 million and $502 million in 1994
and 1993, respectively. This represents increases of 6% or $32 million in 1994
and 2% or $11 million in 1993. The increases in 1994 and 1993 are due to rate
adjustments and an increase in plant balances.
Expenses for marketing, selling, general and administrative were $776 million
and $857 million in 1994 and 1993, respectively. This represents a decrease of
9% or $81 million in 1994 compared to an increase of 7% or $56 million in 1993.
The 1994 decrease is primarily due to settlement gains associated with lump sum
payments from the Company's pension plans. The decrease is also due to lower
computer systems costs reflecting efficiencies gained from the re-engineering
efforts and lower labor and benefits costs associated with the reduction of
employees derived from the early enhanced retirement and voluntary separation
packages offered in 1993. The 1993 increase reflected costs of $35 million
associated with the adoption of SFAS No. 106. The increase was 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 were partially offset by lower computer
expenses due to program reductions and continuing cost reduction efforts.
OTHER DEDUCTIONS
Interest costs were $113 million and $124 million in 1994 and 1993,
respectively. Interest expense decreased 9% or $11 million in 1994 and
remained relatively unchanged in 1993. The 1994 decrease is primarily due to
the retirement of $316 million of high-coupon first mortgage bonds in late 1993
with proceeds from commercial paper. The commercial paper was refinanced on a
long-term basis at lower interest rates in early 1994.
Income tax expense was $284 million and $35 million in 1994 and 1993,
respectively. This reflects an increase of $249 million in 1994 compared to a
decrease of $153 million in 1993. The changes are primarily due to
corresponding changes in pretax income.
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 $2.8
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 1994 was cash flow from operations
of $876 million compared to $822 million for 1993. The increase in cash flow
from operations is primarily the result of improved operations and is partially
offset by an increase of tax payments.
-10-
<PAGE> 13
Capital expenditures represent a significant use of funds during 1994 and 1993
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. The
Company's capital expenditures during 1994 were $656 million compared to $567
million in 1993. In 1995, capital expenditures are expected to increase
slightly from the 1994 level.
Cash used for financing activities was $206 million in 1994 compared to $269
million in 1993. This included dividend payments of $235 million in 1994
compared to $290 million in 1993. 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%. The cost of
calling these bonds is reflected as an extraordinary after-tax charge of $14
million in the Consolidated Statements of Income. In February 1994, the
Company issued $200 million of 5.5% Debentures, due 1999 to refinance a portion
of the bonds called. In January 1994, the Company issued $250 million of 6%
Debentures, Series A, due 2004 toward the payment of short-term debt.
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, but was
subsequently withdrawn from consideration. Telecommunications legislation has
been introduced again in 1995.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has also continued. Regulatory authorities have adopted
various alternative forms of regulation, which provide economic incentives to
telephone service providers to improve productivity and provide the foundation
for implementing pricing flexibility necessary to address competitive entry
into the markets the Company serves.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under terms and conditions as negotiated.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 12 of the Company's consolidated
financial statements included in Item 8.
-11-
<PAGE> 14
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and cellular telephone
companies. Competition from IXCs, wireless and cable TV companies, as well as
more recent entry by media and computer companies, is expected to increase in
the rapidly changing telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company
has embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $375 million
re-engineering plan. During 1994, the initial year of the three-year plan,
$144 million was expended as significant progress was made in implementing this
program. These expenditures were primarily associated with the consolidation
of customer contact, network operations and operator service centers,
separation benefits associated with employee reductions and incremental
expenditures to redesign and streamline systems and processes. Continued
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services and to reach its stated
objective of being the easiest company to do business with in the industry.
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. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
-12-
<PAGE> 15
During 1994, GTE unveiled its World Class Network in eight key markets,
including Fort Wayne, Indiana, to provide advanced communications for business
customers. This program includes sophisticated high-speed, digital fiber-optic
rings, a high-capacity switching network (known as SONET), and a new
centralized operations center that monitors the entire network. These SONET
rings are an integral part of the high-speed information network that enables
GTE to provide advanced services such as high-speed data transmission and video
conferencing.
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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, SFAS No. 71 requires companies to depreciate plant and equipment over
lives approved by regulators which may extend beyond the assets' actual
economic and technological lives. SFAS No. 71 also requires deferral of
certain costs and obligations based upon approvals received from regulators to
permit recovery in the future. Consequently, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, may be
greater than that which would otherwise be recorded by unregulated enterprises.
On an ongoing basis, the Company reviews the continued applicability of SFAS
No. 71 based on the current regulatory and competitive environment. Although
recent developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result, the
Company continues to believe that accounting under SFAS No. 71 is appropriate.
If the Company were to determine that the use of SFAS No. 71 was no longer
appropriate, it would be required to write-off the deferred costs and
obligations referred to above. It may also be necessary for the Company to
reduce the carrying value of its plant and equipment to the extent that it
exceeds fair market value. At this time, it is not possible to estimate the
amount of the Company's plant and equipment, if any, that would be considered
unrecoverable in such circumstances. The financial impact of such a
determination, however, 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.
-13-
<PAGE> 16
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (NOTE 3)
GTE North Incorporated and Subsidiary
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (a):
Local network services $1,040,206 $ 980,039 $ 945,175
Network access services 1,032,752 963,918 973,661
Long distance services 395,636 391,050 332,150
Equipment sales and services 144,087 106,288 103,607
Other 147,224 160,952 205,449
---------- ---------- ----------
2,759,905 2,602,247 2,560,042
---------- ---------- ----------
OPERATING EXPENSES (b):
Cost of sales and services 576,320 602,128 585,004
Depreciation and amortization 533,907 501,733 490,624
Marketing, selling, general and
administrative 775,729 856,549 800,438
Restructuring costs -- 374,558 --
---------- ---------- ----------
1,885,956 2,334,968 1,876,066
---------- ---------- ----------
NET OPERATING INCOME 873,949 267,279 683,976
---------- ---------- ----------
OTHER DEDUCTIONS:
Interest expense 112,884 123,557 124,197
Other - net 496 3,581 3,473
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 760,569 140,141 556,306
---------- ---------- ----------
INCOME TAX PROVISION 284,293 34,925 186,764
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE 476,276 105,216 369,542
EXTRAORDINARY CHARGE - EARLY RETIREMENT OF
DEBT (NET OF INCOME TAXES OF $8,456) -- 14,270 --
---------- ---------- ----------
NET INCOME $ 476,276 $ 90,946 $ 369,542
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $92,406, $94,545 and $115,100 for the
years 1994-1992, respectively.
(b) Includes billings from affiliates of $155,446, $137,519 and $150,316 for
the years 1994-1992, respectively.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS (NOTE 3)
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $1,118,351 $1,195,137 $1,192,488
ADD -
Net income 476,276 90,946 369,542
DEDUCT -
Cash dividends declared on common stock 277,729 165,052 364,162
Cash dividends declared on
preferred stock 2,643 2,680 2,731
---------- ---------- ----------
BALANCE AT END OF YEAR $1,314,255 $1,118,351 $1,195,137
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE> 17
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
GTE North Incorporated and Subsidiary
December 31 1994 1993
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 30,373 $ 5,722
Accounts receivable
Customers (including unbilled revenues) 440,459 390,027
Affiliated companies 149,557 170,753
Other 64,447 33,123
Allowance for uncollectible accounts (23,241) (25,173)
Materials and supplies 29,201 40,949
Prepaid taxes 41,124 40,707
Deferred income tax benefits 94,535 66,984
Prepayments and other 14,384 17,236
----------- -----------
840,839 740,328
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,598,565 8,335,305
Accumulated depreciation (3,818,486) (3,654,967)
----------- -----------
4,780,079 4,680,338
----------- -----------
PREPAID PENSION COSTS 458,065 335,874
----------- -----------
OTHER ASSETS 41,030 56,476
----------- -----------
TOTAL ASSETS $ 6,120,013 $ 5,813,016
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 197,400 $ 148,075
Current maturities of long-term debt 99,498 15,675
Accounts payable 164,349 146,181
Affiliate payables and accruals 29,930 62,102
Advanced billings and customer deposits 53,553 54,359
Accrued taxes 143,889 144,788
Accrued interest 25,589 14,855
Accrued payroll and vacations 114,038 84,021
Accrued dividends 54,507 9,392
Accrued restructuring costs and other 212,714 273,814
----------- -----------
1,095,467 953,262
----------- -----------
LONG-TERM DEBT 1,365,781 1,467,045
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 895,962 826,033
Employee benefit obligations 187,707 106,699
Restructuring costs and other 191,823 271,680
----------- -----------
1,275,492 1,204,412
----------- -----------
PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION 18,616 19,544
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock 29,033 29,033
Common stock (978,351 shares outstanding) 978,351 978,351
Other capital 43,018 43,018
Reinvested earnings 1,314,255 1,118,351
----------- -----------
2,364,657 2,168,753
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,120,013 $ 5,813,016
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE> 18
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTE North Incorporated and Subsidiary
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 476,276 $ 105,216 $ 369,542
Adjustments to reconcile income
before extraordinary charge to net
cash from operating activities:
Depreciation and amortization 533,907 501,733 490,624
Restructuring costs -- 374,558 --
Deferred income taxes and investment
tax credits 30,888 (160,234) 40,215
Provision for uncollectible accounts 38,292 37,577 31,907
Change in current assets and current
liabilities (130,284) (93,102) (20,975)
Other - net (73,486) 56,381 (119,243)
---------- ---------- ----------
Net cash from operating activities 875,593 822,129 792,070
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (656,377) (566,821) (552,243)
Other - net 11,595 14,808 (12,810)
---------- ---------- ----------
Net cash used in investing activities (644,782) (552,013) (565,053)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued -- -- 50,000
Long-term debt issued 445,942 -- --
Early retirement of debt and related
call premium -- (329,288) --
Long-term debt and preferred
stock retired (16,170) (43,022) (81,594)
Dividends paid to shareholders (235,257) (290,119) (296,780)
Increase (decrease) in short-term debt (400,675) 392,956 77,133
---------- ---------- ----------
Net cash used in financing activities (206,160) (269,473) (251,241)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH 24,651 643 (24,224)
CASH:
Beginning of year 5,722 5,079 29,303
---------- ---------- ----------
End of year $ 30,373 $ 5,722 $ 5,079
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTE North Incorporated and Subsidiary
1. SUMMARY OF SIGNIFICANT 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
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $167.4 million, $185.7
million and $224.9 million for the years 1994-1992, respectively. Such
purchases are recorded in the accounts of the Company at cost which includes a
normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$155.4 million, $137.5 million and $150.3 million for the years 1994-1992,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $92.4 million, $94.5 million and $115.1 million for the
years 1994-1992, 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 on a straight-line
basis over asset lives approved by regulators. Depreciation is 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 6.4%, 6.2% and 6.4% for the years
1994-1992, 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)
-17-
<PAGE> 20
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. Accordingly, 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 to permit recovery of such amounts in future years. 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 services are rendered or products are
delivered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average 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 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 in
accounting on the Company's results of operations was immaterial.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
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.
-18-
<PAGE> 21
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.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $86 million.
The estimated fair value of long-term debt as of December 31, 1993, exceeded
the carrying value by approximately $58 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
where appropriate to conform to the 1994 presentation.
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of $374.6
million, which reduced net income by $230.8 million, primarily for incremental
costs related to implementation of the Company's three-year re-engineering
plan. The re-engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the time necessary
to introduce new products and services and further reduce costs. The
re-engineering plan included $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.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $143.5 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes.
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.
-19-
<PAGE> 22
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. 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 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 year ended December 31, 1992 for each
of these entities are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
GTE North Transfer to GTE
Inc. GTE Contel of Contel of Contel of North Inc.
(Predecessor Midwest Illinois Indiana Penn (Post-
Corp.) Inc. (a) Inc. Inc. Inc. Merger)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total operating
revenues $2,461,347 $ (183,376) $ 122,601 $ 101,179 $ 58,291 $2,560,042
Net income $ 371,557 $ (35,303) $ 13,568 $ 14,218 $ 5,502 $ 369,542
-----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents operations included in the Predecessor Corporation which were
transferred to GTE Midwest Incorporated prior to the Merger.
-20-
<PAGE> 23
4. PREFERRED STOCK
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
AUTHORIZED Shares
---------
<S> <C>
No par value 388,396
$100 par value 33,524
---------
Total 421,920
=========
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING Shares Amount*
--------- --------
<S> <C> <C>
$2.00 No par value 45,484 $ 2,215
$2.10 No par value 66,390 3,542
$2.20 No par value 34,379 1,719
$2.25 No par value 90,765 4,538
$4.50 $100 par value 7,297 730
$5.00 $100 par value 24,639 2,464
$7.60 No par value 140,000 13,825
--------- --------
Total 408,954 $ 29,033
========= ========
</TABLE>
Cumulative preferred stock, subject to mandatory redemption, exclusive of
amounts held in treasury, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
--------------------- ------------------- --------------------
AUTHORIZED Shares Shares
--------- ---------
<S> <C> <C>
No par value 462,934 462,934
$50 par value 166,721 166,721
--------- ---------
Total 629,655 629,655
========= =========
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING Shares Amount* Shares Amount*
--------- -------- --------- --------
<S> <C> <C> <C> <C>
$1.15 No par value 134,400 $ 3,360 140,800 $ 3,520
$1.25 No par value 19,814 495 21,014 525
$2.30 No par value 26,400 1,320 26,400 1,320
$2.375 No par value 33,365 1,668 35,833 1,792
$2.40 $50 par value 31,490 1,575 33,490 1,675
$2.50 No par value 41,800 2,090 43,800 2,190
$2.50 No par value 50,545 2,501 53,464 2,645
$2.50C No par value 24,437 1,222 25,637 1,282
4.60% $50 par value 63,700 3,185 66,900 3,345
5.16% $50 par value 24,000 1,200 25,000 1,250
--------- --------- --------- --------
Total 449,951 $ 18,616 472,338 $ 19,544
========= ========= ========= ========
</TABLE>
* Thousands of Dollars
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 shares at December 31, 1994 and 1993.
-21-
<PAGE> 24
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 22,387; 16,699; and 16,560 shares in
1994 through 1992, respectively. The aggregate redemption requirements of
preferred stock subject to mandatory redemption are $900,000 in each of the
years 1995 through 1999.
At December 31, 1994 and 1993, the Company held no treasury stock compared to
38 shares held at December 31, 1993, 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, 1994, $514.8 million of reinvested earnings was restricted as
to the payment of cash dividends on common stock under the terms of the Rural
Utilities Services mortgage covenants.
-22-
<PAGE> 25
6. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS:
Maturing 1996 through 2031,
weighted average rates of 8.00%
and 7.85%, respectively $ 868,277 $ 917,233
DEBENTURES:
6% Series A, due 2004 250,000 --
5.5% Series B, due 1999 200,000 --
CAPITALIZED LEASES 1,603 522
OTHER:
GTE Finance Corporation promissory notes-
Maturing 1998 through 2016,
weighted average rates of 9.02%
and 9.71%, respectively 45,000 95,000
Rural Telephone Bank First Mortgage notes-
Maturing 1999 through 2014,
weighted average rates of 7.50%
and 6.82%, respectively 9,198 9,573
Rural Utilities Service
First Mortgage notes-
Maturing 1997 through 2005,
rate of 2.00% 1,411 1,904
Short-term debt refinanced in 1994 -- 450,000
----------- -----------
Total principal amount 1,375,489 1,474,232
DISCOUNT AND PREMIUM - NET (9,708) (7,187)
----------- -----------
Total long-term debt $ 1,365,781 $ 1,467,045
=========== ===========
</TABLE>
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%. The cost of calling these bonds is reflected as
an extraordinary after-tax charge of $14.3 million in the Consolidated
Statements of Income. In February 1994, the Company issued $200 million of
5.5% Debentures, due 1999 to refinance a portion of the bonds called.
In January 1994, the Company issued $250 million of 6% Debentures, due 2004
toward the payment of short-term debt incurred for the purpose of financing the
Company's construction program in 1993.
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.
-23-
<PAGE> 26
Debt discount and premium on the Company'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, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 99,498
1996 50,555
1997 70,564
1998 35,970
1999 216,773
</TABLE>
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>
1994 1993 1992
--------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial paper -
Maximum month-end balance $281,025 $566,650 $158,800
Average monthly balance $ 58,497 $294,204 $ 52,673
Weighted average interest rate 4.26% 3.15% 3.56%
AT DECEMBER 31 -
Balance outstanding -
Note payable to GTE $ -- $ -- $ 46,319
Average interest rate -- -- 3.72%
Commercial paper $197,400 $148,075 $158,800
Average interest rate 5.90% 3.66% 3.41%
</TABLE>
Unused lines of credit available to the Company to support outstanding
commercial paper and other short-term financing needs are $9.1 million. In
addition, a $2.8 billion credit 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.
-24-
<PAGE> 27
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
CURRENT
Federal $ 221,180 $ 172,447 $ 124,442
State 32,225 22,712 22,107
------------- ------------- -------------
Total 253,405 195,159 146,549
------------- ------------- -------------
DEFERRED
Federal 42,589 (121,656) 53,103
State 4,772 (21,479) 3,718
------------- ------------- -------------
Total 47,361 (143,135) 56,821
------------- ------------- -------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (16,473) (17,099) (16,606)
------------- ------------- -------------
Total $ 284,293 $ 34,925 $ 186,764
============= ============= =============
</TABLE>
The components of deferred income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation and
amortization $ (2,524) $ (16,067) $ (1,133)
Employee benefit
obligations (45,397) (24,635) 16,494
Prepaid pension costs 53,006 40,411 31,969
Restructuring costs 52,105 (139,696) --
Other - net (9,829) (3,148) 9,491
------------- ------------- -------------
Total $ 47,361 $ (143,135) $ 56,821
============= ============= =============
</TABLE>
A reconciliation between the taxes computed by applying statutory federal income
tax rate to pretax income and income taxes provided in the Consolidated
Statements of Income is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
AMOUNTS COMPUTED AT STATUTORY
RATES $ 266,199 $ 49,049 $ 189,144
State income taxes, net
of federal income tax
benefits 24,047 801 17,045
Amortization of deferred
investment tax credits (16,473) (17,099) (16,606)
Depreciation of telephone
plant construction costs
previously deducted for
tax purposes - net 6,315 5,899 7,232
Rate differentials applied
to reversing temporary
differences (7,337) (5,446) (7,232)
Other differences - net 11,542 1,721 (2,819)
------------- ------------- -------------
TOTAL PROVISION $ 284,293 $ 34,925 $ 186,764
============= ============= =============
</TABLE>
-25-
<PAGE> 28
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, 1994 amounted
to $22.1 million and $39.5 million, respectively, and the unamortized regulatory
asset and regulatory liability balances at December 31, 1993 amounted to $19.2
million and $44.6 million, respectively, and are reflected as other assets and
other deferred credits 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:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 759,183 $ 750,585
Employee benefit obligations (93,588) (48,191)
Prepaid pension costs 168,895 115,889
Restructuring costs (87,591) (139,696)
Investment tax credits 43,980 60,288
Other - net 10,548 20,174
--------- ---------
Total $ 801,427 $ 759,049
========= =========
</TABLE>
-26-
<PAGE> 29
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
fixed income investments.
The components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year $ 46,407 $ 49,102 $ 47,052
Interest cost on projected benefit
obligations 101,768 111,938 110,201
Return on plan assets:
Actual 2,633 (327,583) (137,875)
Deferred (201,449) 133,233 (44,309)
Other - net (43,237) (42,515) (37,212)
--------- --------- ---------
Net pension credit $ (93,878) $ (75,825) $ (62,143)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for 1993 and 1992.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Plan assets at fair value $2,309,622 $2,616,531
Projected benefit obligations 1,242,056 1,426,298
---------- ----------
Excess of assets over projected
benefit obligations 1,067,566 1,190,233
Unrecognized net transition asset (158,596) (204,631)
Unrecognized net gain (450,905) (649,728)
---------- ----------
Prepaid pension costs $ 458,065 $ 335,874
========== ==========
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $950.6 million and $1.1 billion and vested
benefit obligations of $832.4 million and $934.3 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
-27-
<PAGE> 30
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. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Benefits earned during the year $ 9,499 $ 15,371
Interest cost on accumulated postretirement
benefit obligations 41,828 50,066
Actual return on plan assets 749 (1,096)
Amortization of transition obligation 21,791 30,755
Other - net (3,616) --
--------- ---------
Postretirement benefit cost $ 70,251 $ 95,096
========= =========
</TABLE>
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $15.9 million.
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands
of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations
attributable to:
Retirees $ 393,439 $ 352,762
Fully eligible active plan participants 21,187 26,759
Other active plan participants 161,123 225,235
--------- ---------
Total accumulated postretirement benefit obligations 575,749 604,756
Fair value of plan assets 19,244 16,753
--------- ---------
Excess of accumulated obligations over plan assets 556,505 588,003
Unrecognized transition obligation (379,602) (463,190)
Unrecognized net loss (21,201) (54,452)
--------- ---------
Accrued postretirement benefit obligations $ 155,702 $ 70,361
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and
13% for pre-65 participants and 9.0% 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 1994 costs by $5.5 million and the
accumulated postretirement benefit obligations at December 31, 1994 by $54.0
million.
-28-
<PAGE> 31
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes, among others, include newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service. The net
effect of these changes reduced the accumulated postretirement benefit
obligations at December 31, 1993 by $72.7 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $14.4 million, $9.7 million and $6.0 million in
1994-1992, respectively.
10. LEASE COMMITMENTS
The Company has noncancelable leases covering certain land, buildings, office
space and equipment that contain varying renewal options for terms up to 24
years. The majority of lease commitments relate 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.
Rental expense was $27.2 million, $38.1 million and $39.3 million in 1994-1992,
respectively. Minimum rental commitments under noncancelable leases through
1999 do not exceed $11.5 million annually and aggregate $12.8 million
thereafter.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 29,850 $ 29,777
Buildings 556,628 532,520
Central office equipment 3,188,290 3,050,436
Outside plant 3,974,419 3,931,612
Other 849,378 790,960
----------- -----------
Total property, plant and equipment 8,598,565 8,335,305
Accumulated depreciation (3,818,486) (3,654,967)
----------- -----------
Net property, plant and equipment $ 4,780,079 $ 4,680,338
=========== ===========
</TABLE>
-29-
<PAGE> 32
12. 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 (MPSC) 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 replaced 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 were frozen for two years (four years for customers 60 years or
older). The Company may request local rate increases in 1995 equal to the
Detroit consumer price index less 1%.
On August 18, 1994, the MPSC issued an order approving the Company's
application to increase basic exchange rates by 1.81%, which will have an
annualized revenue impact of approximately $1.2 million. The rate increase was
effective September 1, 1994, and was applied uniformly across all rate
components including business and residential customers. Michigan law exempts
residential customers 60 years of age or older from the rate increase.
On February 24, 1994, the MPSC issued an order on the rehearing matter of
intraLATA 1+ dialing parity. The order requires that intraLATA dialing parity,
using one-PIC or two-PIC technology, shall be implemented when the Company is
authorized and able to provide interLATA toll service, but no later than
January 1, 1996. The Company has appealed the MPSC's order to the Michigan
Court of Appeals.
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, 1993
the Company filed a request for reconsideration of certain aspects of the
WPSC's decision. On June 6, 1993 the WPSC denied the Company's request on all
issues. On July 2, 1993 the Company filed an appeal with the
-30-
<PAGE> 33
Circuit Court in Wisconsin. On May 10, 1994, the Circuit Court denied the
Company's appeal on the basis of a technicality. The Court did not examine any
of the issues of this case on their merits. In June 1994, the Company filed an
appeal of this ruling with the Wisconsin Court of Appeals.
On July 5, 1994, regulatory reform legislation was signed into law in
Wisconsin. Effective September 1, 1994, this legislation allows LEC's to
choose to be regulated under price cap regulation or remain under traditional
rate of return regulation. Regardless of the LEC's choice, the new legislation
opens the LEC's local exchange franchises to competition and requires
interconnection with competitors and provision of basic local services on an
unbundled basis. If a LEC chooses to operate under the price cap plan, it is
required to file a network modernization plan. On November 2, 1994, the
Company formally notified the Wisconsin Commission that it would elect price
cap regulation as of January 1, 1995. On that same date, the Company also
filed intrastate access charge reductions of $4.0 million, to be effective
January 1, 1995. This reduction is a legislative requirement of those
companies electing price cap regulation.
On October 11, 1994, the ICC issued an order in a rate restructuring case to
reduce the Company's rates by $1.2 million, effective November 1, 1994. The
rate restructuring case combined the Company's customers and former Contel
customers under a common rate structure and restructured the Company's rates to
bring them closer to underlying costs. The Company also requested and was
granted approval to implement a term discount plan for intrastate access
charges in Illinois. This plan offers discounted access to interexchange
carriers who are willing to commit to specific time periods and usage volumes.
The term discount plan will result in a further decrease in revenues of $4.0
million as compared to full price access charges.
On June 10, 1993, the ICC allowed the Company 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
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 price cap regulatory plan, the FCC 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 the prospective prices. During
1995, the FCC is scheduled to review the LEC price cap plan to determine
whether it should be continued or modified.
-31-
<PAGE> 34
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 Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994-1992 under
various arrangements and amounted to $402.8 million, $404.3 million and $423.0
million, respectively.
13. 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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $(100,784) $ (70,997) $(121,653)
Materials and supplies 11,748 10,496 13,265
Prepayments and other current assets 2,435 (5,197) 6,668
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable 18,168 (41,525) 56,863
Affiliate payables and accruals (32,172) 1,258 1,597
Advanced billings and customer deposits (806) (2,024) (128)
Accrued liabilities 39,852 34,800 10,570
Other (68,725) (19,913) 11,843
-------- --------- ---------
Total $(130,284) $ (93,102) $ (20,975)
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest $ 100,037 $ 123,416 $ 122,886
Income taxes 258,789 136,851 166,016
</TABLE>
-32-
<PAGE> 35
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, 1994 and 1993, and the related
consolidated statements of income, reinvested earnings and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, 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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This supporting schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 25, 1995.
-33-
<PAGE> 36
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.
JOHN C. APPEL
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
-34-
<PAGE> 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-35-
<PAGE> 38
PART III
Item 10. Directors and Executive Officers of the Registrant
a. Identification of Directors
The names, ages and positions of the directors of the Company as of March 24,
1995 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
------------------ --- ------- -----------------------------
<S> <C> <C> <C>
Kent B. Foster 51 1993 Vice Chairman of the Board of Directors, GTE Corporation, October 1993;
President, GTE Telephone Operations, 1989; Director, GTE Corporation, 1992;
Director, all GTE domestic telephone subsidiaries, 1993 and/or 1994; Director,
BC Telecom, Inc.; Director, Compania Anonima Nacional Telefonos de Venezuela;
Director, NationsBank of Texas; Director, Dallas Symphony Orchestra.
Richard M. Cahill 56 1993 Vice President - General Counsel, GTE Telephone Operations, 1988; Director, all
GTE domestic telephone subsidiaries, 1993 and/or 1994; former Director, GTE
Vantage Incorporated, 1991.
Gerald K. Dinsmore 45 1993 Senior Vice President - Finance and Planning, GTE Telephone Operations, 1994;
former Vice President - Finance, GTE Telephone Operations, 1993; former Vice
President - Intermediary Customer Markets, GTE Telephone Operations, 1988;
former President of all South Area companies, GTE Telephone Operations, 1992;
Director, GTE Florida Incorporated and GTE South Incorporated, 1992; Director,
all other GTE domestic telephone subsidiaries, 1993 and/or 1994.
</TABLE>
-36-
<PAGE> 39
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
---------------- --- ------- ----------------------------- --
<S> <C> <C> <C>
Michael B. Esstman 48 1993 Executive Vice President - Customer Segments, GTE Telephone Operations, 1994;
former Executive Vice President - Operations, GTE Telephone Operations, 1993;
former President and Director of all Central Area companies, GTE Telephone
Operations, 1991; former President, Contel Eastern Region, Telephone Operations
Sector, 1983; Director, AG Communications Systems; Director, all other GTE
domestic telephone subsidiaries, 1993 and/or 1994.
Thomas W. White 48 1993 Executive Vice President - Network Operations, GTE Telephone Operations, 1994;
former Executive Vice President - Telephone Operations, GTE Telephone
Operations, 1993; former Senior Vice President - General Office Staff, GTE
Telephone Operations, 1989; Director, all GTE domestic telephone subsidiaries,
1993 and/or 1994; Director, Quebec - Telephone.
</TABLE>
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which may be held on any business
day in 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.
b. Identification of Executive Officers
The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations
(Telops). Accordingly, the list below contains the names, ages and positions
of the executive officers of both the Company and GTE Telephone Operations as
of March 24, 1995.
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- -------------------
<S> <C> <C> <C> <C>
Kent B. Foster 51 1989 -- President of GTE Telephone
Operations
John C. Appel (1) 46 1994 1995 President of the Company and
Senior Vice President -
Regional Operations of GTE
Telephone Operations
Mary Beth Bardin (2) 40 1994 1995 Vice President - Public Affairs
of GTE Telephone Operations
and the Company
</TABLE>
-37-
<PAGE> 40
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- -------------------
<S> <C> <C> <C> <C>
Clarence F. Bercher 51 1994 1995 President - Consumer Markets of
GTE Telephone Operations and
Vice President - Consumer
Markets of the Company
Richard M. Cahill 56 1989 1995 Vice President - General
Counsel of GTE Telephone
Operations and the Company
Robert C. Calafell 53 1993 -- Vice President - Video Services
of GTE Telephone Operations
Gerald K. Dinsmore 45 1994 1994 Senior Vice President - Finance
and Planning of GTE Telephone
Operations and the Company
William M. Edwards, III 46 -- 1993 Controller of the Company
Michael B. Esstman 48 1994 -- Executive Vice President -
Customer Segments of GTE
Telephone Operations
William A. Griswold 42 -- 1994 Vice President - Northeast
Region of the Company
Bruce E. Haddad 41 1994 -- Senior Vice President -
International of GTE
Telephone Operations
Donald A. Hayes 57 1992 -- Vice President - Information
Technology of GTE Telephone
Operations
Gregory D. Jacobson 43 -- 1994 Treasurer of the Company
Andrew T. Jones 54 1992 -- Vice President - International
of GTE Telephone Operations
Brad M. Krall 53 1993 1995 Vice President - Centralized
Operations of GTE Telephone
Operations and the Company
Michael J. McDonough 45 1994 1995 President - Business Markets
of GTE Telephone Operations
and Vice President - Business
Markets of the Company
Paul E. Miner 50 1993 1995 Vice President - Network
Operations Support of GTE
Telephone Operations and the
Company
Richard L. Schaulin 52 1989 1995 Vice President - Human
Resources of GTE Telephone
Operations and the Company
Leland W. Schmidt 61 1989 -- Vice President - Industry
Affairs of GTE Telephone
Operations
Charles J. Somes 49 -- 1994 Secretary of the Company
Larry J. Sparrow 51 1994 1995 President - Carrier Markets of
GTE Telephone Operations and
Vice President - Carrier
Markets of the Company
</TABLE>
-38-
<PAGE> 41
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- -------------------
<S> <C> <C> <C> <C>
Alex Stadler 44 1994 1995 Vice President - Strategy &
Technology Planning of GTE
Telephone Operations and the
Company
Thomas W. White 48 1994 -- Executive Vice President -
Network Operations of GTE
Telephone Operations
William A. Zielke 48 -- 1994 Vice President - North Region
of the Company
</TABLE>
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) John C. Appel was elected President replacing Earl A. Goode who was
appointed President, GTE Information Services.
(2) Mary Beth Bardin was elected Vice President - Public Affairs of GTE
Telephone Operations replacing G. Bruce Redditt who was appointed Vice
President - Public Affairs and Communications, GTE Corporation.
During 1994, the organizational structure of GTE Telephone Operations was
restructured to include 11 regions, eliminating the previous Area management
structure.
-39-
<PAGE> 42
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 each
individual who served as Chief Executive Officer and each of the other four
most highly compensated executive officers of the Company (the named executive
officers) in 1994 for services in all capacities to the Company and its
subsidiary.
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------------------
Annual Compensation(1) Awards Payouts
--------------------------------- ----------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Compensation Stock Options/ Payouts Compensation
Position in Group Year ($) Bonus($) ($) Awards(#) SARs(#) ($)(2) ($)(3)
------------------ ---- -------- -------- ------------ ---------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earl A. Goode (4) 1994 120,723 113,954 -- -- 30,900 55,414 4,500
President 1993 252,897 162,378 -- -- 14,500 38,747 7,587
1992 238,674 224,242 -- -- -- 70,980 7,160
M. L. Keith, Jr. (5) 1994 105,619 60,312 -- -- 5,500 -- 4,351
Area Vice President - 1993 155,301 49,921 -- -- 4,000 -- 4,659
Sales 1992 149,506 67,905 -- -- -- -- 4,485
Kent B. Foster 1994 140,393 177,048 -- -- 138,100 84,055 4,500
President 1993 122,310 112,348 -- -- 58,800 24,743 1,374
GTE Telephone Operations 1992 110,628 129,242 -- -- -- 40,238 1,409
William A. Zielke 1994 150,204 66,900 -- -- 7,800 -- 4,353
Regional Vice President - 1993 137,504 41,200 -- -- 2,700 -- 4,125
General Manager-IN/MI 1992 131,306 55,100 -- -- -- -- --
James D. Blanchard (6) 1994 155,186 51,464 -- -- 4,000 -- 4,462
Regional Vice President - 1993 151,885 39,600 -- -- 2,700 -- 4,557
General Manager-IL/WI 1992 145,538 55,100 -- -- -- -- 4,366
William A. Griswold 1994 132,138 69,200 -- -- 7,800 -- 3,964
Regional Vice President - 1993 115,400 39,600 -- -- 2,700 -- 2,452
General Manager-OH/PA 1992 101,023 34,800 -- -- -- -- --
</TABLE>
(1) Annual Compensation represents the Company's pro rata share, if
applicable, of salaries, bonuses and other annual compensation. Total
annual cash compensation for Messrs. Goode, Keith, Foster, Zielke,
Blanchard and Griswold, for whom allocated amounts are shown above, is
$309,683; $316,658; $1,525,508; $217,104; $208,400 and $201,338 for 1994,
respectively.
(2) 1994 Long-Term Incentive Plan (LTIP) Payouts include transition awards
for the 1994 period, which were established by the Committee as a special
grant to allow for the smooth transitioning from a single long-term
performance measure (return on equity) to a combined measure (return on
equity and operating cash flow margin).
(3) All other compensation includes Company contributions to defined
contribution plans.
(4) Mr. Goode served as President until July 14, 1994 when he resigned from
the Company to become President of GTE Information Services.
(5) Upon the resignation of Mr. Goode on July 14, 1994, Mr. Keith, whose
official title remained as Area Vice President - Sales, assumed the
additional responsibilities of acting President. Mr. Appel was elected
President of the Company in February 1995.
(6) Mr. Blanchard served as Regional Vice President - General Manager -
Illinois/Wisconsin until February 1995. In September 1994 he was also
appointed General Manager - Customer Operations - Wisconsin Division,
GTE Telephone Operations.
-40-
<PAGE> 43
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to each of the named executive officers of the Company in 1994,
whether or not specifically allocated to the Company. The options and SARs
were granted under the LTIP. Pursuant to Securities and Exchange Commission
rules, the table also shows the value of the options granted at the end of the
option terms (ten years) if the stock price were to appreciate annually by 5%
and 10%, respectively. There is no assurance that the stock price will
appreciate at the rates shown in the table. The table also indicates that if
the stock price does not appreciate, there will be no increase in the potential
realizable value of the options granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants(1) Option Term
---------------------------------------------------- ---------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted (1) Fiscal Year ($/SH) Date 0% 5% 10%
---- ----------- ------------ -------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earl A. Goode 30,900 0.75% $ 32.44 02/16/04 $ -- $ 630,134 $1,596,759
M. L. Keith, Jr. 5,500 0.13 32.44 02/16/04 -- 112,160 284,213
Kent B. Foster 69,050 1.68 34.44 02/16/04 -- 1,270,016 3,430,063
69,050 1.68 32.44 02/16/04 -- 1,408,116 3,568,163
William A. Zielke 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
3,800 .09 31.00 09/06/04 -- 74,084 187,743
James D. Blanchard 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
William A. Griswold 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
3,800 .09 31.00 09/16/04 -- 74,084 187,743
</TABLE>
(1) Each option was granted in tandem with a SAR, which will expire upon
exercise of the option. Under the LTIP, one-third of these grants vest
annually commencing one year after the date of grant.
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1994. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) common stock on
December 30, 1994.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Earl A. Goode -- $ -- 56,733 48,467 $ 57,500 $ --
M. L. Keith, Jr. -- -- 8,566 9,634 -- --
Kent B. Foster -- -- 152,374 210,626 -- --
William A. Zielke -- -- 900 9,600 -- --
James D. Blanchard -- -- 8,300 5,800 30,250 --
William A. Griswold -- -- 900 9,600 -- --
</TABLE>
-41-
<PAGE> 44
Long-Term Incentive Plan - Awards in Last Fiscal Year
The GTE 1991 LTIP provides for awards, currently in the form of stock options
with tandem SARs and cash bonuses, to participating employees. The primary
purpose of the LTIP is to offer participants an incentive to cause GTE to
achieve superior financial performance, thereby helping to assure superior
performance for the shareholders. The stock options and tandem SARs awarded
under the LTIP to the named executive officers in 1994 are shown in the table
on page 40.
The named executive officers are eligible to receive annual grants of
performance bonuses which are earned during a 36-month performance cycle. The
performance bonuses are paid in cash. Awards for the three-year performance
cycle ending in 1994 are based on GTE's financial performance during the
relevant cycle as measured by GTE's average return on equity (ROE) against
pre-established target levels. In 1994, the Executive Compensation and
Organizational Structure Committee of the Board of Directors of GTE (the
Committee) established an additional measure of corporate performance -
operating cash flow margin (OCFM). The Committee views OCFM as an excellent
complement to ROE due to its capacity to accurately measure profitable revenue
growth, a key determinant of financial strength, especially for high growth
businesses. To transition from awards based solely on performance against ROE
targets to awards based on a combination of ROE and OCFM performance, the
Committee established two performance periods - a one-year period to run
concurrently with the final year of the three-year ROE performance cycle ending
in 1994 and a two-year period to run concurrently with the final two years of
the three-year ROE performance cycle ending in 1995. The awards for the two
award periods will be based on GTE's performance against ROE and OCFM
performance for the one- and two-year periods. Awards for the three-year
performance cycle ending in 1996 will be based on GTE's performance against the
ROE and OCFM targets established for the full three-year cycle. Seventy-five
percent of the award is determined based on ROE performance and 25% of the
award is determined based on OCFM performance.
At the time performance targets for the current LTIP cycles are established, a
Common Stock Unit account is set up for each participant in the LTIP. An
initial dollar amount for each account (target award) is determined based on
the competitive performance bonus grant practices of other major companies in
the telecommunications industry and with practices of other major corporations
not involved in the telecommunications industry that have a reputation for
excellence, are comparable to GTE in terms of such quantitative measures as
revenues, market value and total shareholder return and are viewed as direct
competitors for executive talent in the overall labor market as well as GTE's
past and projected financial performance. 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 paid on
an equivalent number of shares of GTE common stock is added on each dividend
payment date. 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, Foster, Zielke and Griswold are the only individuals of the named
executive officers eligible to receive a cash award under the LTIP. The
number of Common Stock Units initially allocated in 1994 to the
-42-
<PAGE> 45
named executive officers' accounts and estimated future payouts under the LTIP
are shown in the following table:
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans(1)
-------------------------------------
(a) (b) (c) (d) (e) (f)
Performance
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 3,800 3 Years 873 4,367
1,400 2 Years 316 1,582
1,400 1 Year 298 1,488
M. L. Keith, Jr. -- N/A -- --
Kent B. Foster 15,400 3 Years 3,701 18,507
5,400 2 Years 1,221 6,103
5,400 1 Year 1,148 5,739
William A. Zielke 935 28 Months 218 1,090
500 16 Months 110 548
James D. Blanchard -- N/A -- --
William A. Griswold 935 28 Months 218 1,090
500 16 Months 110 548
</TABLE>
(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 30, 1994. The target award is
the dollar amount derived by multiplying the Common Stock Unit balance at
the end of the award cycle by the price of GTE common stock.
(2) The Threshold is the level of the average ROE and the average OCFM during
the relevant cycle which represents the minimum acceptable performance
level for both the ROE and OCFM performance measures. If the Threshold is
attained with respect to both performance measures, the award will be
equal to 20% of the combined target award for ROE and OCFM. Because ROE
and OCFM are separate performance measures, it is possible to receive an
award if the Threshold is achieved with respect to only one of the
performance measures. If the actual results for one, but not both,
performance measures is at the Threshold level, the portion of the award
determined by the measure performing at the Threshold level will be at 20%
of the target award for that performance measure, and no award will be
made for the portion of the award determined by the measure performing at
less than the Threshold level. However, if the actual results for both
performance measures are below the minimum acceptable performance level,
no award will be earned.
(3) The Target is the level of the average ROE and the average OCFM during the
cycle which represents outstanding performance for both the ROE and OCFM
performance measures. If the Target is attained with respect to both
performance measures, the award will be equal to 100% of the target award
for ROE and OCFM. If the actual results for one, but not both,
performance measures is at the Target level, the portion of the award
determined by the measure performing at the Target level will be at 100%
of the target award for that performance measure, and the portion of the
award determined by the measure performing at less than 100% will be
determined accordingly.
(4) This column has intentionally been left blank because it is not possible
to determine the maximum award until the award cycle has been completed.
The maximum amount of the award is limited by the amount the actual ROE
-43-
<PAGE> 46
and the actual OCFM exceed the targeted ROE and the targeted OCFM. If
GTE's average ROE and OCFM during the cycle exceed their performance
targets, additional bonuses may be earned according to the following
schedule:
<TABLE>
<CAPTION>
Performance Increment Above Added Percentage
Maximum ROE and OCFM Performance Targets to Maximum Awards
-----------------------------------------------------------
<S> <C> <C>
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
</TABLE>
For example, if average ROE and OCFM performance each exceed the ROE and
OCFM target by 0.5%, respectively, the performance bonus will equal 114%
of the combined target award.
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 these individuals
separate from service and have a "good reason" for leaving or are terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes, but is not limited to, the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the 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.
-44-
<PAGE> 47
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; ten years if credited
service is more than five and not more than ten years; and, if the executive's
credited service exceeds ten years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan (SERP) and the 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. The
Agreements provide that 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.
-45-
<PAGE> 48
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
<TABLE>
<CAPTION>
Final Average Years of Service
-----------------------------------------------------------------------------
Earnings 15 20 25 30 35
------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,532 $ 42,042 $ 52,553 $ 63,063 $ 73,574
200,000 42,407 56,542 70,678 84,813 98,949
300,000 64,157 85,542 106,928 128,313 149,699
400,000 85,907 114,542 143,178 171,813 200,449
500,000 107,657 143,542 179,428 215,313 251,199
600,000 129,407 172,542 215,678 258,813 301,949
700,000 151,157 201,542 251,928 302,313 352,699
800,000 172,907 230,542 288,178 345,813 403,449
900,000 194,657 259,542 324,428 389,313 454,199
1,000,000 216,407 288,542 360,678 432,813 509,949
1,200,000 259,907 346,542 433,178 519,813 606,449
1,500,000 325,157 433,542 541,928 650,313 758,699
2,000,000 433,907 578,542 723,178 867,813 1,012,449
</TABLE>
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains the GTE
Service Corporation Plan for Employees' Pensions (the Service Corporation
Plan), a noncontributory pension plan for the benefit of GTE employees based on
years of service. Pension benefits to be paid from the Service Corporation
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 the Service Corporation Plan,
pensions are computed on a two-rate formula basis of 1.15% and 1.45% for each
year of service, with the 1.15% service credit being applied to that portion of
the average annual salary for the five highest consecutive years that does not
exceed the Social Security Integration Level (the portion of salary subject to
the Federal Security Act), and the 1.45% service credit being applied to that
portion of the average annual salary that exceeds said level. As of February
15, 1995, the credited years of service under the plan for Messrs. Goode,
Keith, Foster, Zielke, Blanchard and Griswold are 32, 28, 24, 23, 32 and 21,
respectively.
Under Federal law, an employee's benefits under a qualified pension plan such
as the Service Corporation Plan are limited to certain maximum amounts. GTE
maintains a SERP, which supplements, on an unfunded basis, the benefits of any
participant in the Service Corporation Plan in an amount by which any
participant's benefits under the Service Corporation Plan are limited by law.
In addition, the SERP includes a provision permitting the payment of additional
retirement benefits determined in a similar manner as under the Service
Corporation Plan on remuneration accrued under management incentive plans as
determined by the Committee. SERP benefits are payable in a lump sum or an
annuity.
-46-
<PAGE> 49
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Mr. Foster a
postretirement life insurance benefit of three times final base salary, Messrs.
Zielke and Griswold a postretirement life insurance benefit of two times final
base salary, Mr. Keith a postretirement life insurance benefit of one and
one-half times final base salary and Mr. Blanchard a postretirement life
insurance benefit of one times final base salary. Upon retirement, ERLIP
benefits may be paid as life insurance, or optionally, an equivalent amount
equal to the present value of the life insurance amount (based on actuarial
factors and the interest rate then in effect), as a lump sum payment, as an
annuity or as installment payments.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for services on the Board.
-47-
<PAGE> 50
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1995:
<TABLE>
<CAPTION>
Name and Shares of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership of Class
-------- ---------------- ---------- --------
<S> <C> <C> <C>
Common Stock of GTE Corporation 978,351 100%
GTE North One Stamford Forum shares of
Incorporated Stamford, Connecticut record
06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1994:
<TABLE>
<S> <C> <C> <C>
Common Stock of Name of Director or Nominee(1)(2) No director
GTE Corporation --------------------------------- or nominee or
Kent B. Foster 268,305 executive
Richard M. Cahill 36,287 officer owns
Gerald K. Dinsmore 41,529 as much as
Michael B. Esstman 67,631 1/10 of
Thomas W. White 120,994 1 percent.
---------
534,746
=========
Executive Officers(1)(2)
------------------------
Earl A. Goode 78,545
M. L. Keith, Jr. 16,541
Kent B. Foster 268,305
William A. Zielke 5,187
James D. Blanchard 22,665
William A. Griswold 8,078
---------
399,321
=========
All directors and executive
officers as a group(1)(2) 1,360,713 Represents
========= less than 1/5
of 1 percent
of outstanding
common stock.
</TABLE>
(1) Includes shares acquired through participation in GTE's Consolidated
Employee Stock Ownership Plan and/or the GTE Savings Plan.
(2) Included in the number of shares beneficially owned by Messrs.
Foster, Cahill, Dinsmore, Esstman, White, Goode, Keith, Zielke,
Blanchard and Griswold and all directors and executive officers as a
group are 214,539; 32,616; 39,499; 46,466; 109,299; 71,866; 13,199;
3,133; 10,533; 3,133 and 1,041,307 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 1994.
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.
-48-
<PAGE> 51
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required, all persons subject to these reporting requirements filed the
required reports on a timely basis. All of the Company's common stock is owned
by GTE and, to the Company's knowledge, none of such directors or executive
officers currently owns, or has ever owned, any shares of the Company's
registered preferred stock (which is the only registered class of the Company's
equity securities).
Item 13. Certain Relationships and Related Transactions
The Company's executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest. None of the Company's directors were involved
in any business relationships with the Company.
-49-
<PAGE> 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE North Incorporated's consolidated
financial statements and report of independent accountants
thereon in the Financial Statements section included elsewhere
herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended December
31, 1994-1992 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than that listed above are omitted as not
applicable, not required, or the information is included in the
consolidated 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.
4* Indenture dated as of January 1, 1994 between GTE North
Incorporated and The First National Bank of Chicago,
as Trustee (Exhibit 4.1 of the Company's Registration
Statements on Form S-3, File Nos. 33-50449 and
33-51911).
27 Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth
quarter of 1994.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
-50-
<PAGE> 53
GTE NORTH INCORPORATED AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Thousands of Dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
--------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Deductions
Balance at Charged Charged from Balance at
Beginning to to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1994 $ 25,173 $ 38,292 $ 16,974(2) $ 57,198 $ 23,241
======================================================================
December 31, 1993 $ 14,332 $ 37,577 $ 43,926(2) $ 70,662 $ 25,173
======================================================================
December 31, 1992 $ 5,370 $ 31,907 $ 19,982(2) $ 42,927 $ 14,332
======================================================================
Accrued restructuring costs
for the year ended (Note 3):
December 31, 1994 $ 374,558 $ 0 $ 0 $ 143,509 $ 231,049
======================================================================
December 31, 1993 $ 0 $ 374,558 $ 0 $ 0 $ 374,558
======================================================================
December 31, 1992 $ 0 $ 0 $ 0 $ 0 $ 0
======================================================================
</TABLE>
-------------------------------------------------
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 2 to the Consolidated Financial Statements included elsewhere
herein.
-51-
<PAGE> 54
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 24, 1995 By JOHN C. APPEL
------------------------
JOHN C. APPEL
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.
JOHN C. APPEL President March 24, 1995
------------------------
JOHN C. APPEL (Principal Executive Officer)
GERALD K. DINSMORE Senior Vice President - Finance March 24, 1995
------------------------
GERALD K. DINSMORE and Planning and Director
(Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 24, 1995
------------------------
WILLIAM M. EDWARDS, III (Principal Accounting Officer)
RICHARD M. CAHILL Director March 24, 1995
------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 24, 1995
------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 24, 1995
------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 24, 1995
------------------------
THOMAS W. WHITE
52
<PAGE> 55
EXHIBIT INDEX
-------------
3* Bylaws. Articles of Incorporation and amendments are
referenced in the 1986 and 1987 Form 10-K's,
respectively.
4* Indenture dated as of January 1, 1994 between GTE North
Incorporated and The First National Bank of Chicago,
as Trustee (Exhibit 4.1 of the Company's Registration
Statements on Form S-3, File Nos. 33-50449 and
33-51911).
27 Financial Data Schedule.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 30,373
<SECURITIES> 0
<RECEIVABLES> 654,463
<ALLOWANCES> 23,241
<INVENTORY> 29,201
<CURRENT-ASSETS> 840,839
<PP&E> 8,598,565
<DEPRECIATION> 3,818,486
<TOTAL-ASSETS> 6,120,013
<CURRENT-LIABILITIES> 1,095,467
<BONDS> 1,365,781
<COMMON> 978,351
18,616
29,033
<OTHER-SE> 1,357,273
<TOTAL-LIABILITY-AND-EQUITY> 6,120,013
<SALES> 2,759,905
<TOTAL-REVENUES> 2,759,905
<CGS> 576,320
<TOTAL-COSTS> 1,885,956
<OTHER-EXPENSES> 496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,884
<INCOME-PRETAX> 760,569
<INCOME-TAX> 284,293
<INCOME-CONTINUING> 476,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 476,276
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
