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, 1993
---------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 19334 [Fee Required]
For the transition period from ___________________ to _______________________
Commission File Number 0-2908
-----------------------------------------------------
GTE NORTHWEST INCORPORATED
- -----------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-0466810
- -------------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 41st Street, Everett, Washington 98201
- -------------------------------------------- ---------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 206-261-5321
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH WAS REGISTERED
- --------------------------------------- -----------------------------
NONE
- --------------------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
- -----------------------------------------------------------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. ____
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- -----
THE COMPANY HAD 17,920,000 SHARES OF NO PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1994.
DOCUMENT INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1993
(INCORPORATED IN PARTS I AND II).
<PAGE>
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial 5
Condition and Results of Operations
8. Financial Statements and Supplementary Data 5
9. Changes in and Disagreements with Accountants on 5
Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 6
11. Executive Compensation 10
12. Security Ownership of Certain Beneficial Owners and
Management 17
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
<PAGE>
PART I
Item 1. Business
GTE Northwest Incorporated (the Company) (formerly General Telephone Company of
the Northwest, Inc., formerly West Coast Telephone Company) was incorporated in
Washington on March 31, 1964. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE). Together with its wholly-owned subsidiary, GTE West Coast
Incorporated, the Company provides communications services in the states of
California, Idaho, Montana, Oregon and Washington.
On February 23, 1993, the Idaho properties of Contel of the West, Inc. were
purchased by the Company. On February 26, 1993, Contel of the Northwest, Inc.
merged into the Company. Both Contel of the West, Inc. and Contel of the
Northwest, Inc. were wholly-owned subsidiaries of Contel Corporation (a wholly-
owned subsidiary of GTE). 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."
On December 31, 1993, the Company sold its telephone plant in service,
materials and supplies and customers (representing 17,000 access lines) in the
state of Idaho to Citizens Utilities Company.
The Company provides local telephone service within its franchise area and
intraLATA (Local Access Transport Area) long distance service between the
Company's facilities and the facilities of other telephone companies within the
Company's LATAs in Idaho and Montana. 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 for access to the facilities of the long distance carrier.
The Company also earns other revenues by leasing interexchange plant
facilities and providing such services as billing and collection and
operator services to interexchange carriers, primarily the American
Telephone and Telegraph Company (AT&T). The number of access lines served
has grown steadily from 934,856 on January 1, 1989 to 1,271,916 on
December 31, 1993.
The following table denotes the access lines in the states in which the Company
operates as of December 31, 1993:
Access
State Lines Served
----- ------------
Washington 753,005
Oregon 397,799
Idaho 101,474
California 12,010
Montana 7,628
---------
Total 1,271,916
=========
The Company's principal line of business is providing telecommunication
services. These services fall into five major classes: local network, network
access, long distance, equipment sales and services and other. Revenues from
each of these classes over the last three years are as follows:
Years Ended December 31
---------------------------------------------
1993 1992 1991
---- ---- ----
(Thousands of Dollars)
Local Network Services $ 331,369 $ 321,575 $ 303,880
% of Total Revenues 38% 36% 36%
Network Access Services $ 370,980 $ 382,997 $ 379,382
% of Total Revenues 42% 43% 45%
Long Distance Services $ 14,444 $ 17,789 $ 16,994
% of Total Revenues 2% 2% 2%
Equipment Sales and Services $ 77,989 $ 78,279 $ 80,272
% of Total Revenues 9% 9% 9%
Other $ 80,513 $ 86,147 $ 67,365
% of Total Revenues 9% 10% 8%
At December 31, 1993, the Company had 4,509 employees. The Company has written
agreements with the Communications Workers of America (CWA) and the
International Brotherhood of Electrical Workers (IBEW) covering substantially
all non-management employees. In 1993, agreements were reached on two
contracts with the IBEW. During 1994, there are no contracts which will
expire.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the regulatory bodies of the states of
California, Idaho, Montana, Oregon and Washington as to its intrastate business
operations and 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 Annual Report to
Shareholders for the year ended December 31, 1993, incorporated herein and
filed as Exhibit 13.
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually
all aspects of its business. Specialized communications companies have
constructed new systems in certain markets to bypass the local exchange
network. Additional competition from interexchange carriers as well as
wireless companies continues to evolve for both intrastate and
interstate communications.
During 1994, the Company will begin implementation of a re-engineering plan
that will redesign and streamline processes. Implementation of its re-
engineering plan will allow the Company to continue to respond aggressively to
these competitive and regulatory developments through reduced costs, improved
service quality, competitive prices and new product offerings. Moreover,
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services. The re-engineering program
will be implemented over three years. During the year, the company continued
to introduce new business and consumer services utilizing advanced technology,
offering new features and pricing options while at the same time reducing costs
and prices.
During 1991, the FCC announced its decision to auction licenses during 1994 in
51 major markets and 492 basic trading areas across the united States to
encourage the development of a new generation of wireless personal
communications services (PCS). These services will both complement and compete
with the Company's traditional wireline services. The Company will be
permitted to fully participate in the license auctions in areas outside of
GTE's existing cellular service areas. Limited participation will be permitted
in areas in which GTE has an existing cellular presence.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets the Company serves.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's
domestic telephone operating subsidiaries from providing long distance service
beyond the boundaries of the LATA. This prohibition restricts their direct
provision of long distance service to relatively short distances. The degree
of competition allowed in the intraLATA market is subject to state regulation.
However, regulatory constraints on intraLATA competition are gradually being
relaxed. In fact, some form of intraLATA competition is authorized in many of
the states in which the Company provides service.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company supports these initiatives to assure greater competition in
telecommunications, provided that overall the changes allow an opportunity for
all service providers to participate equally in a competitive marketplace under
comparable conditions.
Item 2. Properties
The Company's property consists of network facilities (82%), customer premises
equipment (14%), company facilities (1%) and other (3%). From January 1, 1989
to December 31, 1993, the Company made gross property additions of $1.2 billion
and property retirements of $0.5 billion. Substantially all of the Company's
property is subject to liens securing long-term debt. In the opinion of
management, the Company's telephone plant is substantially in good repair.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholders, page 32,
for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reference is made to the Registrant's Annual Report to Shareholders, pages 27
to 31, for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Registrant's Annual Report to Shareholders, pages 5 to
25, for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The names, ages and positions of all the directors and executive officers of
the Company as of March 21, 1994 are listed below along with their business
experience during the past five years.
a. Identification of Directors
Director
Name Age Since Business Experience
---- --- -------- ----------------------------------------
Kent B. Foster 50 1993 Vice Chairman of the Board of Directors
of GTE Corporation, October 1993.
President, GTE Telephone Operations,
1989; Director, GTE Corporation, 1992;
Director, all GTE domestic telephone
subsidiaries, 1993; Director, BC
Telecom, Inc.; Director, Compania
Anonima Nacional Telefonos de
Venezuela; Director, National Bank of
Texas.
Richard M. Cahill 55 1993 Vice President - General Counsel of GTE
Telephone Operations, 1988; Director,
all GTE domestic telephone
subsidiaries, 1993; Director, GTE
Vantage Incorporated, 1991; Director,
GTE Intelligent Network Services
Incorporated, 1993.
Gerald K. Dinsmore 44 1993 Senior Vice President - Finance and
Planning for GTE Telephone Operations,
1994. Vice President - Finance, GTE
Telephone Operations, 1993; Vice
President - Intermediary Customer
Markets, GTE Telephone Operations,
1991. President, South Area, GTE
Telephone Operations, 1992; Director,
all GTE domestic telephone
subsidiaries, 1993.
Michael B. Esstman 47 1993 Executive Vice President-Operations,
GTE Telephone Operations, 1993;
President, Central Area, GTE Telephone
Operations, 1991. President, Contel
Eastern Region, Telephone Operations
Sector, 1983; Director, AG
Communications System; Director, all
GTE domestic telephone subsidiaries,
1993.
Larry J. Sparrow 50 1992 Director and President, GTE California
Incorporated and GTE Northwest
Incorporated; Director and Chairman of
the Board and Chief Executive Officer
of GTE Hawaiian Telephone Company
Incorporated, 1992; Vice President -
Regulatory and Governmental Affairs,
GTE Telephone Operations, 1989;
Director, California Chamber of
Commerce; Director, The Los Angeles
Area Chamber of Commerce; Director,
California Economic Development
Corporation.
Thomas W. White 47 1993 Executive Vice President of GTE
Telephone Operations, 1993; Senior Vice
President - General Office Staff, GTE
Telephone Operations, 1989; Director,
all GTE domestic telephone
subsidiaries, 1993; Director, Quebec-
Telephone.
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which may be held on any day during
March, as specified in the notice of the meeting.
There are no family relationships between any of the directors or executive
officers of the Company.
All of the directors, with the exception of Mr. Sparrow, were elected December
10, 1993 following the resignations from the Board of Donald M. Anderson, J.
Cleve Borth, Walter A. Dods, Jr., Elizabeth A. Edwards, Admiral Ronald J. Hays,
William N. Lampson, Dr. John N. Lein, Donald A. Lockwood, Harry F. Magnuson,
Charles T. Manatt, Esq. and James B. Thayer.
b. Identification of Executive Officers
Year
Assumed
Current
Name Age Position Position with Company
--------- --- -------- --------------------------------
Larry J. Sparrow(1) 50 1992 Area President - West
Elizabeth A. Edwards 42 1991 Regional Vice President - General
Manager-Northwest
Anthony W. Armstrong 47 1984 Regional Vice President - External
Affairs-Northwest
Clark Michael Crawford (1) 47 1992 Area Vice President - General
Manager
Jorge Jackson (1)(2) 49 1993 Area Vice President - Public
Affairs
Timothy J. McCallion (1)(3) 40 1993 Area Vice President - Regulatory
and Governmental Affairs
Robert G. McCoy (1) 49 1992 Area Vice President - Sales
Richard J. Nordman (1)(4) 44 1993 Area Vice President - Finance
Kenneth K. Okel (1) 47 1991 Area Vice President - General
Counsel and Secretary
Ronald E. Pejsa (1)(5) 50 1993 Area Vice President - Human
Resources
Year
Assumed
Current Position with
Name Age Position GTE Telephone Operations (6)
---- --- -------- ---------------------------------
Kent B. Foster 50 1989 President
Michael B. Esstman (7) 47 1993 Executive Vice President -
Operations
Thomas W. White 47 1989 Executive Vice President
Guillermo Amore 55 1990 Senior Vice President -
International
Gerald K. Dinsmore (8) 44 1993 Senior Vice President - Finance
and Planning
Robert C. Calafell (9) 52 1993 Vice President - Video Services
A. T. Jones 54 1992 Vice President - International
Brad M. Krall (10) 52 1993 Vice President - Centralized
Services
Donald A. Hayes 56 1992 Vice President - Information
Technology
Richard L. Schaulin 51 1989 Vice President - Human Resources
Clarence F. Bercher 50 1991 Vice President - Sales
Mark S. Feighner 45 1991 Vice President - Product
Management
Geoff C. Gould 41 1989 Vice President - Regulatory and
Governmental Affairs
G. Bruce Redditt 43 1991 Vice President - Public Affairs
Richard M. Cahill 55 1989 Vice President and General Counsel
Leland W. Schmidt 60 1989 Vice President - Industry Affairs
Paul E. Miner 49 1990 Vice President - Regional
Operations Support
Katherine J. Harless 43 1992 Vice President- Intermediary
Markets
William M. Edwards, III(11) 45 1993 Controller
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) Individual is an executive officer for West Area which is comprised of GTE
California Incorporated, GTE Hawaiian Telephone Company Incorporated and
GTE Northwest Incorporated.
(2) Jorge Jackson was appointed Area Vice President - Public Affairs effective
November 12, 1993, replacing Jim J. Parrish who retired.
(3) Timothy J. McCallion was appointed Area Vice President- Regulatory and
Governmental Affairs effective November 21, 1993, replacing Keith M.
Kramer who retired.
(4) Richard J. Nordman was appointed Area Vice President - Finance effective
November 7, 1993, replacing Paul R. Shuell.
(5) Ronald E. Pejsa was appointed Area Vice President - Human Resources
effective October 24, 1993, replacing James R. Poling who retired.
(6) Position is with, and duties are performed at, the GTE Telephone Operations
General Office Headquarters in Irving, Texas.
(7) Michael B. Esstman was appointed Executive Vice President - Operations
effective April 25, 1993 replacing Charles A. Crain who retired on April
1, 1993.
(8) Gerald K. Dinsmore, previously South Area President, was appointed Senior
Vice President - Finance and Planning effective November 21, 1993,
replacing John L. Hume who retired.
(9) Robert C. Calafell was appointed Vice President - Video Services effective
March 28, 1993.
(10) Brad M. Krall was appointed Vice President - Centralized Services
effective November 7, 1993.
(11) William M. Edwards, III was appointed Controller effective November 7,
1993 replacing John D. Utzinger.
<TABLE>
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company for services in all capacities to the Company and its
subsidiary.
<CAPTION>
Long-Term Compensation
------------------------------------------
Annual Compensation Awards Payments
------------------------- ---------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Annual Other
Name and Principal Compen- Options LTIP Compen-
Position in Group Year Salary($)(1) Bonus($) sation($) Awards(#) SARs(#) Payments sation($)(4)
- ------------------ ---- ------------ -------- --------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow(2) 1993 45,580 32,185 2,357 -- 14,500 7,101 1,366
President 1992 38,138 40,204 10,797 -- 9,000 8,835 1,095
Elizabeth A. 1993 141,231 37,100 1,657 -- 2,700 -- 4,237
Edwards(3)
Regional Vice 1992 139,591 55,577 19,052 -- -- -- 4,196
President-General 1991 53,538 48,100 84,585 -- 2,300 -- 3,582
Manager-Northwest
Anthony W. Armstrong 1993 124,700 21,200 2,354 -- -- -- 3,597
Regional Vice 1992 124,725 34,797 544 -- -- -- 3,749
President-External 1991 103,842 37,600 1,019 -- -- -- 3,409
Affairs-Northwest
Kent B. Foster 1993 41,156 37,804 1,337 -- 58,800 8,326 462
President-GTE 1992 34,642 40,475 678 -- -- 12,600 441
Telephone 1991 24,801 33,524 1,920 -- 133,300 13,978 362
Operations
Thomas W. White 1993 23,370 20,093 518 -- 22,600 3,747 502
Executive Vice 1992 20,514 20,302 275 -- -- 5,646 441
President-GTE 1991 15,405 16,817 211 -- 57,600 7,426 362
Telephone
Operations
<FN>
- ----------
(1) Annual Compensation represents the Company's pro rata share of salaries,
bonuses and other annual compensation. Total annual cash compensation for
Messrs. Sparrow, Foster and White, for whom allocated amounts are shown
above, is $432,159, $1,129,356 and $618,575, respectively, for 1992.
(2) Mr. Sparrow became Area President - West in March 1992.
(3) Ms. Edwards became Regional Vice President - General Manager - Northwest in
July 1991. The 1991 Other Annual Compensation amount includes relocation
costs.
(4) All Other Compensation includes Company contributions to defined
contribution plans.
</TABLE>
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the named executive officers
of the Company in 1993. Pursuant to Securities and Exchange Commission (the
SEC) rules, the table also shows the value of the options granted at the end
of the option terms (ten years) if the stock price were to appreciate
annually by 5% and 10%, respectively. There is no assurance that the stock
price will appreciate at the rates shown in the table. The table also
indicates that if the stock price does not appreciate, there will be no
increase in the potential realizable value of the options granted.
<CAPTION>
Potential Realizable Value at Assumed
at Annual Rate of Stock Price
Individual Grants(1) Appreciation for Option Term
--------------------------------------------- --------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Total
Options/
SARs Granted Exercise
to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/SH) Date 0% 5% 10%
- ---- ----------- ------------ -------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow 14,500 0.72% $35.0625 02/15/03 $0 $ 319,734 $810,269
Elizabeth A. Edwards 2,700 0.14 35.0625 02/15/03 0 59,537 150,878
Anthony W. Armstrong 0 N/A 0 00/00/00 0 0 0
Kent B. Foster 48,400 2.42 35.0625 02/15/03 0 246,087 623,632
10,400 0.52 37.6250 10/12/03 0 108,048 273,815
Thomas W.White 17,600 0.88 35.0625 02/15/03 0 388,091 983,499
5,000 0.25 35.5000 06/02/03 0 1,116,629 282,890
<FN>
- ----------
(1) Under the Long-Term Incentive Plan, options are presently granted with
tandem stock appreciation rights ("SARs"). One-third of these grants vest
annually commencing one year after the date of grant.
</TABLE>
<PAGE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and stock appreciation
rights exercised by each of the named executive officers of the Company during
1993 and the value of options and stock appreciation rights held by such
officers at year-end measured in terms of the closing price of GTE Common Stock
on December 31, 1993.
<CAPTION>
(a) (b) (c) (d) (e)
Value of Unexercised
Shares Number of Unexercised In-the-Money Options/SARs($)
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow 0 $ 0 22,700 30,600 $ 66,130 $ 55,068
Elizabeth A. Edwards 0 0 5,133 3,467 46,286 2,445
Anthony W. Armstrong 0 0 0 0 0 0
Kent B. Foster 70,517 1,447,800 99,450 125,450 341,551 212,447
Thomas W. White 20,000 390,000 63,600 51,400 393,150 91,800
</TABLE>
Long-Term Incentive Plan - Awards in Last Fiscal Year
The GTE Long-Term Incentive Plan (LTIP) provides for awards, currently in the
form of stock options with tandem stock appreciation rights and cash bonuses,
to participating employees. The stock options and stock appreciation rights
awarded under the LTIP to the five most highly compensated individuals in 1993
are shown in the table on page 10.
Under the LTIP, performance bonuses are paid in cash based on the achievement
of pre-established goals for GTE's return on equity (ROE) over a three-year
award cycle. Performance bonuses are denominated in units of GTE Common Stock
("Common Stock Units") and are maintained in a Common Stock Unit Account.
<TABLE>
At the time performance targets are established for the three-year cycle, a
Common Stock Unit Account is set up for each participant who is eligible to
receive a cash award under the LTIP. An initial dollar amount for each account
is determined based on the competitive performance bonus grant practices of
other major companies in the telecommunications industry and with other
selected corporations that are comparable to GTE in terms of revenue, market
value and other quantitative measures. That amount is then divided by the
average market price of GTE Common Stock for the calendar week preceding the
day the account is established to determine the number of Common Stock Units in
the account. The value of the account increases or decreases based on the
market price of the GTE Common Stock. An amount equal to the dividends
declared on an equivalent number of shares of GTE Common Stock is added each
time a dividend is paid. This amount is then converted into the number of
Common Stock Units obtained by dividing the amount of the dividend by the
average price of the GTE Common Stock on the composite tape of the New York
Stock Exchange on the dividend payment date and added to the Common Stock Unit
Account. Messrs. Sparrow, Foster and White are the only individuals of the
five most highly compensated individuals eligible to receive a cash award under
the LTIP. The number of Common Stock Units initially allocated in 1993 to
their accounts and estimated future payouts under the LTIP are shown in the
following table.
<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>
Larry J. Sparrow 2,000 3 years 375 1,874
Elizabeth A. Edwards 0 N/A 0 0
Anthony W. Armstrong 0 N/A 0 0
Kent B. Foster 6,100 3 years 1,428 7,139
670 2 years 149 743
326 1 year 69 343
1,620 26 months 365 1,827
854 14 months 183 913
119 2 months 24 121
Thomas W. White 2,400 3 years 562 2,809
471 32 months 109 545
292 20 months 64 320
114 8 months 24 118
<FN>
- ----------
(1) It is not possible to predict future dividends and, accordingly,
estimated Common Stock Unit accruals in this table are calculated
for illustrative purposes only and are based upon the dividend rate and
price of GTE Common Stock at the close of business on December 31, 1993.
The target award is the dollar amount derived by multiplying the Common
Stock Unit balance at the end of the award cycle by the price of GTE Common
Stock.
(2) The level of average ROE during the cycle which represents minimum
acceptable performance and which, if attained, results in payment of 20%
of the target award. Below the minimum acceptable performance level,
no award is earned.
(3) The average ROE target during the cycle which represents outstanding GTE
performance and which, if attained, results in payment of 100% of the
target award.
(4) This column has intentionally been left blank because it is not possible to
determine the maximum award until the award cycle has been completed. The
maximum amount of the award is limited by the amount the actual ROE exceeds
the targeted ROE. If GTE's average ROE during the cycle exceeds the
performance target, additional bonuses may be earned according to the
following schedule:
Performance Increment Above Added Percentage
Maximum ROE Performance Target to Maximum Awards
------------------------------ -----------------
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
For example, if average ROE performance exceeds the ROE target by 0.5%, the
performance bonus will equal 114% of the target award.
</TABLE>
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Sparrow, Foster
and White regarding benefits to be paid in the event of a change in control of
GTE (a "Change in Control").
A Change in Control is deemed to have occurred if a majority of the members of
the Board do not consist of members of the incumbent Board (as defined in the
Agreements) or if, in any 12-month period, three or more directors are elected
without the approval of the incumbent Board. An individual whose initial
assumption of office occurred pursuant to an agreement to avoid or settle a
proxy or other election contest is not considered a member of the incumbent
Board. In addition, a director who is elected pursuant to such a settlement
agreement will not be deemed a director who is elected or nominated by the
incumbent Board for purposes of determining whether a Change in Control has
occurred. A Change in Control will not occur in the following situations: (1)
certain merger transactions in which there is at least 50% GTE shareholder
continuity in the surviving corporation, at least a majority of the members of
the board of directors of the surviving corporation consists of members of the
Board of GTE and no person owns more than 20% (or under certain circumstances,
a lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event this individual
separates from service and has a "good reason" for leaving or is terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes but is not limited to the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the EIP for the previous
three years. The executive will also continue to receive medical and life
insurance coverage for up to two years and will be provided with financial and
outplacement counseling.
In addition, the Agreements with Messrs. Sparrow, Foster and White provide that
in the event of a separation from service, they will receive service credit in
the following amounts: two times years of service otherwise credited if the
executive has five or fewer years of credited service; 10 years if credited
service is more than five and not more than 10 years; and, if the executive's
credited service exceeds 10 years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan and the Executive Retired Life Insurance
Plan. In addition, each executive will be considered to have not less than 76
points and 15 years of accredited service for the purpose of determining his or
her eligibility for early retirement benefits. However, there will be no
duplication of benefits.
The Agreements remain in effect until the earlier of July 1 of each successive
year or the date on which the executive reaches age 65, unless the Agreement is
terminated earlier pursuant to its terms. The Agreements will be automatically
renewed on each successive July 1 unless, not later than December 31 of the
preceding year, one of the parties notifies the other that he does not wish to
extend the Agreement. If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings and years of employment, are illustrated
in the table below:
PENSION PLAN TABLE
Years of Service
Final Average ---------------------------------------------------------
Earnings 15 20 25 30 35
-------- --------- --------- --------- --------- ----------
$ 150,000 $ 31,604 $ 42,138 $ 52,672 $ 63,207 $ 73,742
200,000 42,479 56,638 70,797 84,957 99,117
300,000 64,229 85,638 107,048 128,457 149,867
400,000 85,979 114,638 143,298 171,957 200,617
500,000 107,729 143,638 179,548 215,457 251,367
600,000 129,479 172,638 215,798 258,957 302,117
700,000 151,229 201,638 252,048 302,457 352,867
800,000 172,979 230,638 288,298 345,957 403,617
900,000 194,729 259,638 324,548 389,457 454,367
1,000,000 216,479 288,638 360,798 432,957 505,117
1,200,000 259,979 346,638 433,298 519,957 606,617
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains a
noncontributory pension plan for the benefit of GTE employees based on years of
service. Pension benefits to be paid from this plan and contributions to this
plan are related to basic salary exclusive of overtime, differentials,
incentive compensation (except as otherwise described) and other similar types
of payment. Under this plan, pensions are computed on a two-rate formula basis
of 1.15% and 1.45% for each year of service, with the 1.15% service credit
being applied to that portion of the average annual salary for the five highest
consecutive years that does not exceed the Social Security Integration Level
(the portion of salary subject to the Federal Security Act), and the 1.45%
service credit being applied to that portion of the average annual salary that
exceeds said level. As of March 1, 1994, the credited years of service under
the plan for Mr. Sparrow, Ms. Edwards, Messrs. Armstrong, Foster and White are
26, 17, 20, 23 and 25, respectively.
Under Federal law, an employee's benefits under a qualified pension plan such
as the GTE Service Corporation plan are limited to certain maximum amounts.
GTE maintains a Supplemental Executive Retirement Plan (SERP), which
supplements the benefits of any participant in the qualified pension plan by
direct payment of a lump sum or by an annuity, on an unfunded basis, of the
amount by which any participant's benefits under the GTE Service Corporation
pension plan are limited by law. In addition, the SERP includes a provision
permitting the payment of additional retirement benefits determined in a
similar manner as under the qualified pension plan on remuneration accrued
under management incentive plans as determined by the Executive Compensation
and Organizational Structure Committee.
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Mr. Sparrow, Ms.
Edwards, Messrs. Armstrong, Foster and White a maximum postretirement life
insurance benefit of three times final base salary. Upon retirement, ERLIP
benefits may be paid as life insurance or optionally, an equivalent amount may
be paid as a lump sum payment equal to the present value of the life insurance
amount (based on actuarial factors and the interest rate then in effect), as an
annuity or as installment payments. If an optional payment method is selected,
the ERLIP benefit will be based on the actuarial equivalent of the present
value of the insurance amount.
Directors' Compensation:
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for service on the Board.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1994:
Name and Shares of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership of Class
-------- ---------------- ---------- -----------
Common Stock of GTE Corporation 17,920,000 100%
GTE Northwest One Stamford Forum shares of
Incorporated Stamford, Connecticut record
06904
(b) Security Ownership of Management as of December 31, 1993:
Name of Director or Nominee
---------------------------
Common Stock of Richard M. Cahill (1) 37,188 All less
GTE Corporation Gerald K. Dinsmore (1) 18,503 than 1%
Michael B. Esstman 54,051
Kent B. Foster 168,299
Larry J. Sparrow 33,749
Thomas W. White 83,071
-------
394,861
=======
Executive Officers(1)(2)
------------------------
Larry J. Sparrow 33,749
Elizabeth A. Edwards 11,256
Anthony W. Armstrong 1,451
Kent B. Foster 168,299
Thomas W. White 33,749
-------
248,504
=======
All directors and executive
officers as a group(1)(2) 771,063
=======
- ----------
(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 Mr. Sparrow, Ms.
Edwards, Messrs. Armstrong, Foster and White and all directors and
executive officers as a group are 27,537; 6,033; 0; 115,583; 69,466 and
522,451, shares, respectively, which such persons have the right to
acquire within 60 days pursuant to stock options.
(c) There were no changes in control of the Company during 1993.
Item 13. Certain Relationships and Related Transactions
The Company's executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest. None of the Company's directors were involved
in any business relationships with the Company.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - Reference is made to the Registrant's
Annual Report to Shareholders, pages 5 - 25 , for the year ended
December 31, 1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income for the years ended December
31, 1993-1991.
Consolidated Statements of Reinvested Earnings for the years
ended December 31, 1993-1991.
Consolidated Statements of Cash Flows for the years ended December
31, 1993-1991.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules - Included in Part IV of
this report for the years ended December 31, 1993-1991:
Page(s)
-------
Report of Independent Public Accountants 21
Schedules:
V - Property, Plant and Equipment 22-24
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 25
VIII - Valuation and Qualifying Accounts 26
X - Supplementary Income Statement Information 27
Note: Schedules other than those listed above are omitted as not
applicable, not required, or the information is included in the
financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1 Plan of Merger of Contel of the Northwest, Inc. into GTE
Northwest Incorporated dated November 18, 1992.
13 Annual Report to Shareholders for the year ended December 31,
1993, filed herein as Exhibit 13.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth
quarter of 1993.
- ----------
* Denotes exhibits incorporated herein by reference to previous
filings with the Securities and Exchange Commission as designated.<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Northwest Incorporated:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in GTE Northwest Incorporated and
subsidiary's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 28, 1994. Our
report on the consolidated financial statements includes an explanatory
paragraph with respect to the change in the method of accounting for income
taxes in 1992 as discussed in Note 1 to the consolidated financial statements.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedules listed under Item 14 are the responsibility of
the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
<TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------------- ------------ ----------- ------------- ---------- ------------
Balance at Additions Retirements Other Balance at
Beginning at Cost or Sales Debits or Close of
Classification of Year (Note 1) (Note 2) (Credits) Year
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated at original cost:
Land $ 12,329 $ 165 $ -- $ 159 $ 12,653
Buildings 216,471 12,362 5,539 2,115 225,409
Central office equipment 1,077,084 126,290 67,322 (1,197) 1,134,855
Station apparatus 37,194 2,163 893 (211) 38,253
Cable, underground conduit, etc. 1,150,722 138,317 50,163 935 1,239,811
Furniture and office equipment 104,424 10,850 43,493 26,849 98,630
Vehicles and other work equipment 65,562 7,051 8,678 6,855 70,790
Telephone plant adjustment (3) -- -- 17,663 -- (17,663)
Telephone plant under construction 48,661 (1,247) -- -- 47,414
----------- ---------- --------- --------- ----------
Total Telephone Plant 2,712,447 295,951 193,751 35,505 2,850,152
NONREGULATED PLANT 70,796 3,490 1,298 (36,830) 36,158
----------- ----------- ---------- ---------- ----------
Total Property, Plant and Equipment $2,783,243 $ 299,441 $ 195,049 $ (1,325) $2,886,310
=========== =========== ========== =========== ==========
<FN>
- ----------
NOTES:
(1) Reconciliation of capital expenditures disclosed in
Consolidated Statement of Cash Flows:
Capital expenditures per Consolidated Statements of Cash Flows $ 251,373
Acquisition of assets in Idaho 24,807
Acquired reserve 23,261
---------
Total additions per Column C above $ 299,441
=========
(2) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(3) Represents Montana plant held for sale.
</TABLE>
<PAGE>
<TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Other
Balance at Retirements Debits or Balance at
Beginning Additions or Sales (Credits) Close of
Classification of Year at Cost (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated at original cost:
Land $ 11,749 $ 677 $ -- $ (97) $ 12,329
Buildings 209,968 10,855 1,718 (2,634) 216,471
Central office equipment 997,366 135,248 67,985 12,455 1,077,084
Station apparatus 33,377 3,540 53 330 37,194
Cable, underground conduit, etc. 1,045,591 107,044 6,556 4,643 1,150,722
Furniture and office equipment 121,014 8,608 192 (25,006) 104,424
Vehicles and other work equipment 65,618 7,131 2,414 (4,773) 65,562
Telephone plant under construction 81,195 (30,216) -- (2,318) 48,661
---------- -------- ------- ------- ----------
Total Tangible Property 2,565,878 242,887 78,918 (17,400) 2,712,447
INTANGIBLES 28 -- 28 -- --
--------- -------- -------- ------- ---------
Total Telephone Plant 2,565,906 242,887 78,946 (17,400) 2,712,447
NONREGULATED PLANT 34,928 3,156 684 33,396 70,796
--------- ------- ------- ------- ----------
Total Property, Plant and Equipment $2,600,834 $ 246,043 $ 79,630 $ 15,996 $2,783,243
========== ========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 3).
(2) Represents adjustments in 1992 due to the adoption of SFAS No. 109,
prior-year adjustments to conform to the current year presentation
and transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Other
Balance at Debits or Balance at
Beginning Additions Retirements (Credits) Close of
Classification of Year at Cost or Sales (Note 1) Year
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT -
TANGIBLE PROPERTY, stated at original cost:
Land $ 11,798 $ 130 $ -- $ (179) $ 11,749
Buildings 199,585 13,614 1,454 (1,777) 209,968
Central office equipment 954,271 93,466 50,785 414 997,366
Station apparatus 31,695 1,899 217 -- 33,377
Station connections 73,387 -- 73,387 -- --
Cable, underground conduit, etc. 950,158 119,433 24,415 415 1,045,591
Furniture and office equipment 118,509 8,091 306 (5,280) 121,014
Vehicles and other work equipment 60,760 7,952 1,777 (1,317) 65,618
Telephone plant under construction 59,136 18,638 -- 3,421 81,195
Property held for future telephone use 11 -- -- (11) --
----------- ---------- ---------- ---------- ----------
Total Tangible Property 2,459,310 263,223 152,341 (4,314) 2,565,878
INTANGIBLES 25 -- -- 3 28
----------- ---------- ---------- ---------- ----------
Total Telephone Plant 2,459,335 263,223 152,341 (4,311) 2,565,906
NONREGULATED PLANT 24,875 1,388 101 8,766 34,928
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $2,484,210 $ 264,611 $ 152,442 $ 4,455 $2,600,834
========== ========== ========== ========== ==========
<FN>
- ----------
NOTE:
(1) Primarily represents prior-year adjustments to conform to the
current year presentation and transfers in accordance with
FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Additions Other
Charged to Charges -
Balance at Costs and Add Balance at
Beginning Expenses Retirements (Deduct) End of
Description of Period (Note 1) (Note 2) (Note 3) Period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated depreciation
and amortization for
the year ended:
December 31, 1993 $ 857,583 $ 166,134 $ 177,422 $ 40,740 $ 887,035
========== ========== ========== ========== ==========
December 31, 1992 $ 778,875 $ 154,707 $ 79,540 $ 3,541 $ 857,583
========== ========== ========== ========== ==========
December 31, 1991 $ 776,073 $ 155,519 $ 152,167 $ (550) $ 778,875
========== ========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) Reference is made to Note 1 of Notes to Consolidated Financial Statements
with respect to depreciation policy:
1993 1992 1991
---- ---- ----
Total as shown in Consolidated $ 167,448 $ 157,214 $ 155,769
Statements of Income
General office allocations (2,162) (1,746) (903)
Other 848 (761) 653
---------- ---------- ----------
Total as shown above $ 166,134 $ 154,707 $ 155,519
========== ========== ==========
(2) Represents: Retirements or sales
credited to property,
plant and equipment
(Schedule V) $ 195,049 $ 79,630 $ 152,442
Montana assets held for sale (17,663) -- --
Other 36 (90) (275)
---------- ---------- ----------
Total as shown above $ 177,422 $ 79,540 $ 152,167
========== ========== ==========
(3) Represents: Salvage (including $ 33,403 $ 3,780 $ 5,358
properties sold in 1993)
Removal costs (7,328) (7,946) (8,151)
Other 14,665 7,726 2,243
---------- ---------- ----------
Total as shown above $ 40,740 $ 3,560 $ (550)
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------------------------- -------- --------
Additions
--------------------------
Charged Deductions
Balance at Charged to Other from Balance at
Beginning to Accounts Reserves Close of
Description of Year Income (Note 1) (Note 2) Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1993 $ 3,654 $ 12,724 $ 13,690 $ 23,466 $ 6,602
========== ========== ========== ========== ==========
December 31, 1992 $ 2,265 $ 9,340 $ 18,471 $ 26,422 $ 3,654
========== ========== ========== ========== ==========
December 31, 1991 $ 4,741 $ 7,750 $ 8,404 $ 18,630 $ 2,265
========== ========== ========== ========== ==========
<FN>
- ----------
NOTES:
(1) Recoveries of previously written-off amounts.
(2) Charges for purpose for which reserve was created. Represents write-offs of
receivable accounts.
</TABLE>
<PAGE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
- ------------------------------------------------------------------------------
Column A Column B
--------------- -------------------------------------------
Item Charged to Operating Expenses
- ------------------------------------------------------------------------------
1993 1992 1991
---------- ---------- ----------
Maintenance and repairs $ 144,364 $ 136,018 $ 140,579
========== ========== ==========
Taxes, other than payroll and
income taxes, are as follows:
Real and personal property $ 28,742 $ 21,207 $ 26,461
State gross receipts 10,015 7,578 8,467
Other 6,926 4,728 6,728
Portion of above taxes charged
to plant and other accounts (4,333) (4,301) (4,450)
---------- ---------- ----------
Total $ 41,350 $ 29,212 $ 37,206
========== ========== ==========
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE NORTHWEST INCORPORATED
(Registrant)
Date March 21, 1994 By LARRY J. SPARROW
-------------- ---------------------------
LARRY J. SPARROW
Area President - West
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
LARRY J. SPARROW President and Director March 21, 1994
- ---------------- (Principal Executive Officer)
LARRY J. SPARROW
GERALD K. DINSMORE Senior Vice President--Finance March 21, 1994
- ------------------ and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 21, 1994
- ----------------------- (Principal Accounting Officer)
WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 21, 1994
- -----------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 21, 1994
- ------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 21, 1994
- --------------
KENT B. FOSTER
THOMAS W. WHITE Director March 21, 1994
- ---------------
THOMAS W. WHITE
EXHIBIT 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER dated this 18th day of November, 1992, is
entered into between GTE NORTHWEST INCORPORATED, a Washington corporation
("GTE Northwest") and CONTEL OF THE NORTHWEST, INC., a Washington corporation
("Contel Northwest").
I. RECITALS
1. WHEREAS, GTE Corporation, a New York corporation ("GTE"), now owns or
will own at all times pertinent hereto, including the Effective Date of the
merger, all of the common stock of GTE Northwest and Contel Northwest; and
2. WHEREAS, GTE Northwest and Contel Northwest desire that Contel
Northwest be merged into GTE Northwest and that GTE Northwest will be the
surviving corporation; and
3. WHEREAS, the laws of the state of Washington permit said merger; and
4. WHEREAS, the outstanding capital stock of Contel Northwest consists of
536 shares of common stock; and
5. WHEREAS, the outstanding capital stock of GTE Northwest consists of
15,960,000 shares of common stock.
NOW THEREFORE, the parties mutually agree as follows:
II. MERGER
1. The manner of converting the shares of each of the constituent
corporations into shares of the surviving corporation and such other
provisions as are deemed necessary or desirable to accomplish the merger are
appended hereto as Exhibit 1 as the Plan of Merger, and are incorporated
herein by this reference.
2. On the Effective Date of the merger, as defined in paragraph 3, the
assets and liabilities of GTE Northwest and Contel Northwest shall be carried
on the books of the surviving corporation at the amounts at which they are
respectively carried on such date on the books of GTE Northwest and Contel
Northwest, and the capital surplus and earned surplus of the surviving
corporation shall be the sum of the respective capital surpluses and earned
surpluses of GTE Northwest and Contel Northwest, subject in each case to such
adjustment, eliminations or transfers as may be required to give effect to the
merger. Except as from time to time restricted by contract or by statute, the
aggregate amount of the net assets of GTE Northwest and Contel Northwest which
was legally available for the payment of dividends immediately prior to
merger, and the extent that the value thereof was not transferred to the
stated capital by the issuance of shares or otherwise, shall continue to be
legally available for the payment of dividends by the surviving corporation.
3. This merger shall become effective upon the date of filing of Articles
of Merger with the Secretary of State of the State of Washington, where the
surviving corporation will be then domiciled, which date is herein called the
"Effective Date."
4. The merger may be abandoned or terminated at any time by mutual
agreement of the Boards of Directors of the merging companies.
5. This Agreement embodies the entire agreement and the understanding of
the parties relating to its subject matter and supersedes any prior agreements
and understandings relating thereto.
6. For the convenience of the parties, this Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same document.
IN WITNESS WHEREOF, this Agreement of Merger has been signed by the
President or a Vice President and the Secretary or an Assistant Secretary of
each of the corporations as of the day first above written, pursuant to the
approval and authority duly given by resolutions adopted by the respective
boards of directors.
ATTEST: GTE NORTHWEST INCORPORATED,
a Washington corporation
By: LARRY J. SPARROW
- --------------------- ---------------------------
Assistant Secretary LARRY J. SPARROW
President
ATTEST: CONTEL OF THE NORTHWEST, INC.,
a Washington corporation
By: LARRY J. SPARROW
- --------------------- --------------------------
Assistant Secretary LARRY J. SPARROW
President
<PAGE>
EXHIBIT 1
PLAN OF MERGER
OF
CONTEL OF THE NORTHWEST, INC.
INTO
GTE NORTHWEST INCORPORATED
I.
The Corporations Proposing to Merge
Contel of the Northwest, Inc. (hereinafter referred to as "Contel
Northwest"), a Washington corporation, will be merged into GTE Northwest
Incorporated (hereinafter sometimes referred to as "GTE Northwest"), a
Washington corporation, the latter being the surviving corporation, which is
qualified to transact business as a foreign corporation in the states of
Oregon, Idaho and Montana.
Contel Northwest and GTE Northwest are hereinafter sometimes referred to
collectively as the "constituent corporations."
II.
Terms and Conditions of the Merger
The terms and conditions of the merger are as follows:
(a) Contel Corporation, a wholly owned subsidiary of GTE Corporation,
will distribute the common stock of Contel of the Northwest to GTE
Corporation.
(b) On the Effective Date of the merger, as defined in the Agreement of
Merger, Contel Northwest will be merged into GTE Northwest, and GTE Northwest
will exchange 920,272 shares of its common shares, valued at $50.46 per share
as of March 31, 1992, or such additional shares as may be issued by the
Company, for a total value of $46,436,925, with GTE Corporation for all of the
outstanding shares of common stock (536 shares) of Contel Northwest.
(c) No later than the Effective Date, the following securities of Contel
Northwest shall be assumed by GTE Northwest or cancelled and exchanged for
bonds issued by GTE Northwest:
Description of the Security Outstanding Amount
- --------------------------- -------------------
6-5/8% Promissory Note due 01/01/1993 $ 520,000
5-1/8% Promissory Note due 04/01/1994 265,500
9.5 % Promissory Note due 03/01/1995 640,000
8-1/2% Promissory Note due 05/01/1996 920,000
8-1/4% Promissory Note due 04/01/1997 980,000
10.25% Promissory Note due 12/01/1997 6,000,000
8.375% Promissory Note due 05/05/1998 2,645,000
9-1/8% Promissory Note due 06/01/1999 1,470,000
8-3/4% Promissory Note due 02/01/2002 1,600,000
8.75 % Promissory Note due 01/15/2003 440,000
9.67 % Promissory Note due 09/15/2010 15,000,000
10.4 % Promissory Note due 10/01/2013 14,550,000
III.
Articles of Incorporation and Surviving Corporation
The Articles of Incorporation of the surviving corporation will not be
affected by the merger.
IV.
Bylaws of Surviving Corporation
The Bylaws of GTE Northwest will be the Bylaws of the surviving
corporation.
V.
Additional Description of Surviving Corporation
On the Effective Date, the directors of GTE Northwest shall become the
directors of the surviving corporation.
VI.
Approval of the Plan
This Plan will be submitted for consideration to the Board of Directors
of each of the constituent corporations for approval. If the Plan is duly
approved by resolution of the Board of Directors of each of the constituent
corporations, then the Plan will be submitted to the respective shareholders
for approval in the manner required by the laws of the State of Washington.
In the event the Plan is duly approved by the stockholders, the Plan, together
with the other appropriate documentation, will be filed, and the merger shall
be made effective, in accordance with the laws of the State of Washington.
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
of
GTE NORTHWEST INCORPORATED
For the year ended December 31, 1993
<PAGE>
PRESIDENT'S REPORT
- -------------------------------------------------------------------------------
"A year of challenge" was the phrase that many used to describe the business
climate in 1993. That was certainly true for GTE Northwest. But "challenge"
also meant growth, and that, too, characterized the tempo of opportunity within
our telephone operations.
Additional elements of challenge were there in abundance: the threat of
competition of our local network, continuing demands from customers for
improved technology and enhanced services, and most particularly, the pressures
on employees to meet all of these elements. Throughout the year, GTE Northwest
employees responded well to these challenges. The Company added over 57,000
total access lines throughout its serving territory.
MEETING THE COMPETITIVE CHALLENGE
To strengthen its competitive position, the Company moved to strategically
reduce prices. Although net income was down from 1992, mostly due to a one-time
charge for the Company's process re-engineering efforts, we continued our
commitment to network expansion and modernization, designating $251 million for
improvements to plant during the year. These improvements are key elements in
the evolving "information highway" of the future and reinforce our
determination and ability to meet competition. Alternative service providers
are pressing for expansion of local services over their fiber networks in
Washington and Oregon, and, in response, we continue to actively develop our
fiber rings (such as those in the Portland and Puget Sound metropolitan areas)
as effective deterrents to any erosion in our major customer base.
We expect that the utility commissions in both Washington and Oregon will
continue their efforts to open the local network to competition. These efforts
also can lead to greater flexibility in our pricing and delivery of
telecommunications services. As an example, GTE Northwest gained approval in
early 1994 from both commissions to become a primary toll carrier as a means of
offering additional savings and enhanced services to our customers.
TELECOMMUNICATIONS LEADERSHIP
Our position as a leader in telecommunications services was further enhanced by
numerous other service improvements during 1993. The Company completed 19
digital switching center projects enabling us to market advanced
telecommunications products and services to the majority of our customers. We
also laid the groundwork for several major network upgrade projects in the Tri-
Cities area of Washington and in our Seattle and Portland metropolitan service
areas.
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LARRY J. SPARROW ELIZABETH A. EDWARDS
Area President-West Regional Vice President-
General Manager--Northwest
GUARANTEEING OUR PERFORMANCE
Service performance is not only measured in technological terms. For that
reason, and to emphasize our pledge to deliver superior service in every way,
the Company introduced its "no hassle" service guarantee throughout its five-
state serving territory. Credits of $25 and $100, respectively, are granted to
residential and business customers if the Company fails to meet a service
commitment. The program is designed so that customers or employees can invoke
the service performance guarantee.
The first phase of our organizational re-engineering process was implemented
with the restructuring of our repair and service order functions. Regional
centers in Everett have replaced customer contact units in Idaho and Oregon.
These new centers enhance our ability to respond quickly to customer needs by
providing "one-stop service" for new installations or resolving service
problems. These and other changes in the way the Company does business resulted
in a downsizing of the work force. At mid-year, 513 management and hourly
employees accepted either early retirement or voluntary separation.
Express Dial Tone service also was introduced in 1993. It offers new customers
virtually instant service when they move into a location that previously had
telephone service. Customers simply plug in their telephone and gain direct
access to the Customer Contact Center. In this way, service can begin in a
matter of hours.
NETWORK OF THE FUTURE
Gains in deployment of the Company's Integrated Service Digital Network (ISDN)
also marked our efforts to meet customer demands for improved service. We
continued the trend established in 1992 by conducting negotiations with another
major medical facility on a seven-year, multi-million dollar contract for both
ISDN and CentraNet R lines. In addition, we began a major installation that
will provide ISDN directly to the homes of one large customer's technical work
force. This is one of the first such installations in the nation.
Local organizations throughout our serving territory benefited from both dollar
and equipment donations totaling over $850,000. The Company's shareholders also
provided more than $100,000 in economic development grants to the communities
we service. These were made directly to help 11 organizations in Washington,
Oregon and Idaho to bolster their economies through a variety of projects. GTE
Northwest also responded to community needs through continued sponsorship of
the GTE Northwest Classic golf tournament. This event has gained prestige and
recognition over the years providing significant dollar contributions to social
service agencies dealing with children at risk.
LOOKING AHEAD
Such support is vital as we continue to meet the challenges of the future. The
downturn in production at the Boeing Company certainly had its impact in the
Puget Sound area. However, this was offset somewhat by expansion in high
technology industries. The brightest spots in the GTE Northwest region were in
the north Idaho communities and in the Tri-Cities area in central Washington.
The clean-up effort at Hanford nuclear reservation will inject $50 billion into
the Tri-Cities area over the next 30 years and is already fueling a robust
economy. Northern Idaho also is rapidly becoming a mecca for small companies
seeking a stable community environment with an available work force.
As part of GTE's strategic access line repositioning effort, the Company
concluded the transfer of 17,000 access lines in southern Idaho to Citizens
Utilities Company. The sale was part of a previously announced strategy to
trade or sell a small percentage of local exchange properties in markets that
may be of greater long-term strategic value to other telephone service
providers. This enables GTE to strengthen its presence in its key markets.
During the year, the Company completed very successful contract negotiations
with the Communications Workers of America and International Brotherhood of
Electrical Workers locals that represent most of the Company's hourly
employees. The use of a "win-win" negotiations process during bargaining has
received national recognition from the Federal Mediation and Conciliation
Service.
Today, GTE Northwest's more than 4,500 employees look ahead to 1994 with
anticipation and excitement. They will carry the Company forward as we build on
our strengths in the coming year and work together to keep GTE Northwest at the
forefront of the telecommunications industry.
LARRY J. SPARROW ELIZABETH A. EDWARDS
Area President-West Regional Vice President-
General Manager-Northwest
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EXECUTIVE OFFICES
1800 41st Street
Everett, Washington 98201
TRANSFER AGENT AND REGISTRAR
GTE Corporation
c/o Bank of Boston
P.O. Box 9191
Boston, Massachusetts 02205-9191
FOR A COPY OF THE 1993 ANNUAL REPORT OF
OUR PARENT COMPANY, PLEASE WRITE TO:
GTE Corporation
One Stamford Forum
Stamford, Connecticut 06904
FOR A COPY OF THE 1993 ANNUAL FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, PLEASE WRITE TO:
GTE Telephone Operations
Financial Reporting
P.O. Box 407, MC INAAACG
Westfield, IN 46074
(317) 896-6464
LEADERSHIP
- ------------------------------------------------------------------------------
Officers
LARRY J. SPARROW
Area President-West
ELIZABETH A. EDWARDS
Regional Vice President-General
Manager-Northwest
ANTHONY W. ARMSTRONG
Regional Vice President-
External Affairs-Northwest
CLARK MICHAEL CRAWFORD
Area Vice President-General Manager
GERALD K. DINSMORE
Senior Vice President-Finance
and Planning
JORGE JACKSON
Area Vice President-Public Affairs
TIMOTHY J. MCCALLION
Area Vice President-Regulatory and
Governmental Affairs
ROBERT G. MCCOY
Area Vice President-Sales
RICHARD J. NORDMAN
Area Vice President-Finance
KENNETH K. OKEL
Area Vice President-General Counsel
and Secretary
RONALD E. PEJSA
Area Vice President-Human Resources
WILLIAM M. EDWARDS, III
Controller
- ------------------------------------------------------------------------------
Board of Directors
RICHARD M. CAHILL
Vice President-General Counsel
GTE Telephone Operations
GERALD K. DINSMORE
Senior Vice President-Finance
and Planning
GTE Telephone Operations
MICHAEL B. ESSTMAN
Executive Vice President-
Operations
GTE Telephone Operations
KENT B. FOSTER
President
GTE Telephone Operations
LARRY J. SPARROW
Area President-West
GTE California Incorporated
GTE Northwest Incorporated
Chairman of the Board and
Chief Executive Officer
GTE Hawaiian Telephone Company
Incorporated
THOMAS W. WHITE
Executive Vice President
GTE Telephone Operations
FINANCIAL REPORT
- ------------------------------------------------------------------------------
Consolidated Statements of Income (Note 4)
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
OPERATING REVENUES (a):
Local network services $ 331,369 $ 321,575 $ 303,880
Network access services 370,980 382,997 379,382
Long distance services 14,444 17,789 16,994
Equipment sales and services 77,989 78,279 80,272
Other 80,513 86,147 67,365
- ------------------------------------------------------------------------------
875,295 886,787 847,893
- ------------------------------------------------------------------------------
OPERATING EXPENSES (b):
Cost of sales and services 212,682 203,210 199,077
Depreciation and amortization 167,448 157,214 155,769
Marketing, selling, general and 313,427 277,733 283,472
administrative
Restructuring costs 125,003 _ _
- ------------------------------------------------------------------------------
818,560 638,157 638,318
- ------------------------------------------------------------------------------
NET OPERATING INCOME 56,735 248,630 209,575
- ------------------------------------------------------------------------------
OTHER (INCOME) DEDUCTIONS:
Interest expense 58,185 54,352 59,867
Gain on disposition of assets (19,578) _ _
Other - net (1,783) 912 (3,569)
- ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 19,911 193,366 153,277
- ------------------------------------------------------------------------------
INCOME TAXES 5,581 66,586 44,106
- ------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE 14,330 126,780 109,171
- ------------------------------------------------------------------------------
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF DEBT (NET OF
INCOME TAXES OF $2,522) 4,501 _ _
- ------------------------------------------------------------------------------
NET INCOME $ 9,829 $ 126,780 $ 109,171
- ------------------------------------------------------------------------------
(a) Includes billings to affiliates of $49,500, $50,400 and $33,900 for the
years 1993-1991, respectively.
(b) Includes billings from affiliates of $115,700, $107,700 and $97,700 for
the years 1993-1991, respectively.
Consolidated Statements of Reinvested Earnings (Note 4)
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
BALANCE AT BEGINNING OF YEAR $434,434 $396,835 $358,707
ADD-
Local network services 9,829 126,780 109,171
DEDUCT-
Cash dividends declared on common stock 52,177 88,713 70,445
Cash dividends declared on preferred stock 337 468 598
- ------------------------------------------------------------------------------
BALANCE AT END OF YEAR $391,749 $434,434 $396,835
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets (Note 4)
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash $ 2,535 $ 1,641
Accounts receivable
Customers (including unbilled revenues) 166,224 155,793
Affiliated companies 1,924 4,409
Other 38,223 23,810
Allowance for uncollectible accounts (6,602) (3,654)
Materials and supplies, at average cost 12,375 21,560
Deferred income tax benefits 16,598 70
Net assets held for sale 10,013 _
Prepayments and other 6,487 6,636
- ------------------------------------------------------------------------------
247,777 210,265
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 2,886,310 2,783,243
Accumulated depreciation (887,035) (857,583)
- ------------------------------------------------------------------------------
1,999,275 1,925,660
- ------------------------------------------------------------------------------
OTHER ASSETS 56,517 47,815
- ------------------------------------------------------------------------------
TOTAL ASSETS $2,303,569 $2,183,740
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 188,550 $ 40,505
Current maturities of long-term debt 3,773 7,802
Accounts payable 87,695 77,522
Affiliate payables and accruals 41,457 26,361
Advanced billings and customer deposits 18,491 20,373
Accrued taxes 54,776 43,775
Accrued payroll and vacations 15,994 13,721
Accrued interest 11,304 10,479
Accrued dividends 54 29,667
Accrued restructuring costs and other 78,904 15,410
- ------------------------------------------------------------------------------
500,998 285,615
- ------------------------------------------------------------------------------
LONG-TERM DEBT 473,241 650,393
- ------------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 303,566 305,573
Deferred investment tax credits 17,879 22,612
Restructuring costs and other 106,449 11,826
- ------------------------------------------------------------------------------
427,894 340,011
- ------------------------------------------------------------------------------
PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION 4,000 5,600
- ------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock (17,920,000 and 17,230,272
shares outstanding, respectively) 448,000 430,757
Other capital 57,687 36,930
Reinvested earnings 391,749 434,434
- ------------------------------------------------------------------------------
897,436 902,121
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,303,569 $2,183,740
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows (Note 4)
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 14,330 $ 126,780 $ 109,171
Adjustments to reconcile net income
before extraordinary charge to net
cash from operating activities:
Depreciation and amortization 167,448 157,214 155,769
Restructuring costs 125,003 _ _
Deferred income taxes and investment
tax credits (28,838) 27,204 11,215
Provision for uncollectible accounts 12,724 9,340 7,750
Gain on disposition of assets,
net of tax (11,159) _ _
Change in current assets and current
liabilities 20,588 (22,096) (13,545)
Other--net 8,177 (20,623) (29,853)
- ------------------------------------------------------------------------------
Net cash from operating activities 308,273 277,819 240,507
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (251,373) (246,043) (264,611)
Acquisition of assets (25,039) _ _
Proceeds from sale of assets 53,972 _ _
Other--net 2,323 (2,626) 612
- ------------------------------------------------------------------------------
Net cash used in investing activities (220,117) (248,669) (263,999)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 123,730 _ _
Common stock issued and additional
paid-in capital 38,000 20,000 25,000
Early retirement of debt and related
call premium (130,003) _ _
Long-term debt and preferred stock
retired (59,907) (22,856) (4,407)
Dividends paid to shareholders (82,127) (74,809) (78,982)
Increase in short-term debt 23,045 33,476 90,129
- ------------------------------------------------------------------------------
Net cash from (used in) financing
activities (87,262) (44,189) 31,740
- ------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 894 (15,039) 8,248
CASH:
Beginning of year 1,641 16,680 8,432
- ------------------------------------------------------------------------------
End of year $ 2,535 $ 1,641 $ 16,680
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
Notes To Consolidated Financial Statements
1. Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE Northwest
Incorporated (the Company) and its wholly-owned subsidiary. All significant
intercompany transactions have been eliminated. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to $61.5
million, $72.0 million and $76.0 million for the years 1993-1991, respectively.
Such purchases are recorded in the accounts of the Company at cost including a
normal return realized by the affiliates.
The Company is billed for printing and other costs for the production of
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$115.7 million, $107.7 million and $97.7 million for the years 1993-1991,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method which reflects management's best
estimate
REVENUES
The Company has an agreement with GTE Directories Corporation (100% owned by
GTE), whereby the Company provides its subscriber lists, billing and collection
and other services. Revenues from these services amounted to $49.5 million,
$50.4 million and $33.9 million for the years 1993-1991, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant over the estimated
useful lives of the assets using the straight-line method, based upon rates
prescribed by the Federal Communications Commission (FCC) and the state
regulatory commissions. The provisions for depreciation and amortization were
equivalent to composite annual rates of 6.0%, 6.0% and 6.3% for the years 1993-
1991, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the regulatory commissions in each of the Company's operating
jurisdictions and Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. The Company annually reviews the continued
applicability of SFAS No. 71 based upon the current regulatory and competitive
environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company elected
to adopt this new accounting standard on the delayed recognition method and
commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before retirement.
Previously, the cost of these benefits was charged to expense as paid. The
impact of this change in accounting on the Company's results of operations was
immaterial.
INCOME TAXES
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
As further explained in Note 9, during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1,
1992. SFAS No. 109 changed the method by which companies account for income
taxes. Among other things, the Statement requires that deferred tax balances be
adjusted to reflect new tax rates when they are enacted into law. The impact of
this change in accounting on the Company's results of operations was
immaterial.
FINANCIAL INSTRUMENTS
The fair values of financial instruments other than long-term debt, closely
approximate their carrying value. The estimated fair value of long-term debt at
December 31, 1993 and 1992, based on either reference to quoted market prices
or an option pricing model, exceeded the carrying value by approximately $28
million and $27 million, respectively.
2. Restructuring and Merger Costs
Results for 1993 include a one-time pretax restructuring charge of $125.0
million related to the Company's re-engineering plan over the next three years.
The re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The re-
engineering plan includes $49.7 million to upgrade or replace existing customer
service and administrative systems and enhance network software, $56.2 million
for employee separation benefits associated with workforce reductions and $15.2
million primarily for the consolidation of facilities and operations and other
related costs.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pretax charge of $7.8 million which
reduced net income by $5.1 million.
In March 1991, the merger of the Company's parent, GTE, and Contel Corporation
(Contel) was consummated. GTE Telephone Operations is in the process of
integrating and restructuring the merged operations.
3. Property Repositioning
On February 23, 1993, the Idaho properties of Contel of the West, Inc. were
purchased by the Company for their book value of $25 million.
On December 31, 1993, the Company sold a portion of its telephone plant in
service, materials and supplies and customers (representing 17,000 access
lines) in the state of Idaho to Citizens Utilities Company for $54 million in
cash. This transaction was accounted for as a sale. The net sales proceeds
exceeded the book value and therefore, a pretax gain of $20 million was
recognized on the transaction. The proceeds from this transaction were used to
pay down $50 million of debt.
On May 18, 1993, GTE Corporation and GTE Northwest Incorporated (the
Company) entered into a purchase agreement whereby the Company will sell all of
its local exchange properties in Montana to Citizens Utilities Company. The
parties intend to close on the properties in 1994. The net assets held for sale
of $10 million represent primarily property, plant and equipment.
4. Legal Entity Merger
On February 26, 1993, Contel of the Northwest, Inc. merged into the Company.
Contel of the Northwest, Inc. was a wholly-owned subsidiary of Contel
Corporation (a wholly-owned subsidiary of GTE Corporation) prior to the merger.
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 Company and Contel of the Northwest,
Inc. for all periods. Operating revenues and net income for the years ended
December 31, 1992 and 1992 are as follows:
- ------------------------------------------------------------------------------
GTE Contel
Northwest Northwest
Inc. Inc.
- ------------------------------------------------------------------------------
Year Ended December 31, 1992
Total operating revenues $ 801,116 $ 85,671
Net income $ 111,504 $ 15,276
Year Ended December 31, 1991
Total operating revenues $ 767,363 $ 80,530
Net income $ 100,519 $ 8,652
- ------------------------------------------------------------------------------
5. Preferred Stock
Cumulative preferred stock (without par value), subject to mandatory
redemption, is as follows:
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
SHARES AMOUNT* Shares Amount*
- ------------------------------------------------------------------------------
AUTHORIZED 5,000,000 5,000,000
- ------------------------------------------------------------------------------
OUTSTANDING
8.16% Series 40,000 $ 4,000 56,000 $ 5,600
- ------------------------------------------------------------------------------
*Thousands of Dollars
The stock is redeemable, in whole or in part, at the option of the Company.
A sinking fund provision requires the Company to retire 8,000 shares on each
February 1. In each of the years 1991 through 1993, the Company redeemed 16,000
shares at its $100 stated value.
The aggregate redemption requirements of preferred stock subject to mandatory
redemption are $800,000 for each of the years 1994-1998.
In the event of default in the payment of accrued dividends in an amount equal
to four full quarterly-yearly dividends, the preferred shareholders, voting as
a class, will be entitled to elect two directors in addition to the directors
elected by GTE. Otherwise, the preferred shareholders have no voting rights.
The Company is not in arrears in its dividend payments at December 31, 1993.
No shares of preferred stock were 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.
6. Common Stock
The authorized common stock of the Company consists of 20,000,000 shares
without par value. The Company received proceeds of $38 million and $20 million
from the issuance of common stock to GTE in 1993 and 1992, respectively. All
outstanding shares of common stock are held by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1993, $127.7 million of reinvested earnings were restricted as
to the payment of cash dividends or the repurchase of common stock under the
most restrictive terms of the Company's indentures.
7. Long-Term Debt
Long-term debt outstanding, exclusive of current maturities, is as follows:
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
FIRST MORTGAGE BONDS:
4-5/8% Series, due 1995 $ 10,000 $ 10,000
6% Series P, due 1996 9,000 9,000
6-1/4% Series Q, due 1998 13,600 13,600
7-1/8% Series R, due 1999 18,000 18,000
9-1/4% Series S, due 2000 _ 25,000
7-7/8% Series U, due 2002 20,000 20,000
8-1/4% Series W, due 2007 48,000 48,000
9-3/8% Series X, due 2008 _ 50,000
8-3/4% Series BB, due 2016 75,000 125,000
7-3/4% Series CC, due 1998 50,000 50,000
9-3/4% Series DD, due 2017 _ 50,000
9-3/4% Series EE, due 2030 75,000 75,000
6-1/8% Series FF, due 1999 (a) 125,000 _
10-1/4% Series GG, due 1997 2,999 4,000
9.67% Series HH, due 2010 14,118 15,000
10.40% Series II, due 2013 14,100 14,250
- ------------------------------------------------------------------------------
474,817 526,850
- ------------------------------------------------------------------------------
OTHER:
Commercial paper refinanced in 1993 (a) _ 125,000
CAPITALIZED LEASES 2,613 4,331
- ------------------------------------------------------------------------------
Total principal amount 477,430 656,181
- ------------------------------------------------------------------------------
DISCOUNT (4,189) (5,788)
- ------------------------------------------------------------------------------
Total long-term debt $ 473,241 $ 650,393
- ------------------------------------------------------------------------------
(a) In 1993, the Company issued $125 million of 6-1/8% First Mortgage
Bonds, due 1999 to refinance commercial paper.
In November 1993, the Company called $125 million of high-coupon first mortgage
bonds with proceeds from commercial paper borrowings. These bonds had coupons
ranging from 9-1/4% to 9-3/4%. The Company plans to refinance these bonds in
early 1994 at lower current interest rates. The cost of calling these bonds is
reflected as an extraordinary after-tax charge of $4.5 million in the
Consolidated Statements of Income.
In December 1993, the Company called $50 million of 8-3/4% Series BB First
Mortgage Bonds with proceeds from the sale of property in Idaho.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures.
None of the securities shown above were held in sinking or other special funds
of the Company or pledged by the Company.
Debt discount on the Company's outstanding long-term debt is amortized over the
lives of the respective issues.
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1994 are summarized below (in thousands of dollars):
---------------------------------
1994 $ 3,773
1995 13,491
1996 12,187
1997 2,031
1998 64,632
--------------------------------
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
8. Short-Term Debt
The Company finances part of its construction program through the use of
interim short-term loans, primarily commercial paper, 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:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
DURING THE YEAR -
Commercial paper -
Maximum month-end balance $ 188,550 $144,000 $ 124,345
Average monthly balance $ 111,023 $130,547(a) $ 84,238
Weighted average interest rate (b) 3.19% 3.72% 5.61%
AT DECEMBER 31 -
Balance outstanding -
Notes payable to affiliate $ _ $ 26,805 $ 9,274
Average interest rate _ 3.72% 4.70%
Commercial paper $ 188,550 $ 13,700(c) $ 122,755
Average interest rate 3.32% 3.50% 4.86%
- ------------------------------------------------------------------------------
(a) Includes $125 million of commercial paper refinanced in 1993 with 6-1/8%
First Mortgage Bonds.
(b) Calculated by dividing the annualized interest expense by the average of
the balances of the debt outstanding at the end of each month.
(c) Excludes $125 million of commercial paper refinanced in 1993 with 6-1/8%
First Mortgage Bonds, which has been included in long-term debt.
Unused lines of credit of $2.3 billion are available to the Company to support
outstanding commercial paper and other short-term financing needs 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.
9. Income Taxes
The provision for income taxes is as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
CURRENT
Federal $ 28,929 $ 36,347 $ 30,338
State and local 5,490 3,035 2,553
- ------------------------------------------------------------------------------
Total 34,419 39,382 32,891
- ------------------------------------------------------------------------------
DEFERRED
Federal (17,776) 30,743 10,272
State and local (5,762) 2,277 1,445
- ------------------------------------------------------------------------------
Total (23,538) 33,020 11,717
- ------------------------------------------------------------------------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (5,300) (5,816) (502)(a)
- ------------------------------------------------------------------------------
Total $ 5,581 $ 66,586 $ 44,106
- ------------------------------------------------------------------------------
(a) Includes a cumulative charge of $6.6 million related to the cumulative
adjustment of the amortization of deferred investment tax credits of
$2.9 million, $2.9 million and $1.2 million for the years 1990 through
1988, respectively.
The components of deferred income tax expense are as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ 26,643 $ 17,631 $ 14,396
Employee benefit obligations (9,933) 139 (386)
Prepaid pension cost 3,525 2,224 1,560
Revenues _ 6,387 (982)
Restructuring cost (46,506) _ _
Other - net 2,733 6,639 (2,871)
- ------------------------------------------------------------------------------
Total $ (23,538) $ 33,020 $ 11,717
- ------------------------------------------------------------------------------
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate is as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
STATUTORY FEDERAL INCOME TAX RATE 35.0% 34.0% 34.0%
State and local income taxes,
net of Federal income tax
benefits (0.9) 1.8 1.7
Amortization of deferred
investment tax credits (26.9) (3.0) (0.6)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - 16.8 1.8 3.0
net
Rate differentials applied to
reversing temporary (7.5) (1.1) (4.0)
differences
Reversal of excess tax reserves _ _ (5.0)
Other differences - net 11.5 0.9 (0.3)
- ------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 28.0% 34.4% 28.8%
- ------------------------------------------------------------------------------
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established rate-
making practices. Since the manner in which income taxes are treated for rate-
making has not changed, pursuant to SFAS No. 71 a corresponding regulatory
asset was also established. In addition, deferred income taxes were adjusted
and a regulatory liability established to give effect to the current statutory
Federal income tax rate and for unamortized investment tax credits. The
unamortized regulatory asset and regulatory liability balances at December 31,
1993 amounted to $16.7 million and $2.0 million, respectively, and the
unamortized regulatory asset and liability balances at December 31, 1992
amounted to $15.2 million and $2.0 million, respectively, and are reflected as
other assets and other deferred credits, respectively, in the accompanying
Consolidated Balance Sheets. These amounts are being amortized over the lives
of the related depreciable assets concurrent with recovery in rates and in
conformance with the provisions of the Internal Revenue Code. The assets and
liabilities established in accordance with SFAS No. 71 have been increased for
the tax effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
- ------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ 325,746 $ 294,002
Employee benefit obligations (14,504) (4,571)
Prepaid pension cost 2,911 (614)
Restructuring cost (46,506) _
Other - net 19,321 16,686
- ------------------------------------------------------------------------------
Total $ 286,968 $ 305,503
- ------------------------------------------------------------------------------
10. Employee Benefit Plans
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings.
The Company's funding policy, subject to the minimum funding requirements of
U.S. employee benefit and tax laws, is to contribute such amounts as are
determined on an actuarial basis to provide the plans with assets sufficient to
meet the benefit obligations of the plans. The assets of the plans consist
primarily of corporate equities, government securities and corporate debt
securities.
The net pension credits for 1993-1991 include the following components:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned during
the period $ 13,590 $ 12,399 $ 12,829
Interest cost on projected benefit
obligations 26,445 24,573 22,344
Actual return on plan assets (80,052) (27,356) (89,861)
Other - net 29,924 (16,270) 51,854
- ------------------------------------------------------------------------------
Net pension credit $ (10,093) $ (6,654) $ (2,834)
- ------------------------------------------------------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1993 and
1992 and 8.0% in 1991.
The funded status of the plans at December 31, 1993 and 1992 was as follows:
- ------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Plan assets at fair value $506,227 $ 501,663
Projected benefit obligation 302,825 319,329
- ------------------------------------------------------------------------------
Excess of assets over projected
obligation 203,402 182,334
Unrecognized net transition asset (35,226) (46,508)
Unrecognized net gain (146,415) (125,010)
- ------------------------------------------------------------------------------
Prepaid pension cost $ 21,761 $ 10,816
- ------------------------------------------------------------------------------
The projected benefit obligations at December 31, 1993 and 1992 include
accumulated benefit obligations of $238.7 million and $220.6 million and vested
benefit obligations of $208.3 million and $188.9 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1993 and 1992 were as follows:
------------------------------------------
1993 1992
------------------------------------------
Discount rate 7.5 % 8.0%
Rate of compensation
increase 5.25% 6.0%
------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds accounts
for postretirement benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1993 includes the following components (in
thousands of dollars):
- ----------------------------------------------------------------
1993
- ----------------------------------------------------------------
Service cost-benefits earned during the period $ 3,501
Interest cost on accumulated postretirement
benefit obligation 9,079
Amortization of transition oblication and prior
service cost 6,251
Curtailment and enhancement accounting 7,322
- ----------------------------------------------------------------
Postretirement benefit cost $26,153
- ----------------------------------------------------------------
During 1992 and 1991, the cost of postretirement health care and life insurance
benefits on a pay-as-you-go basis was $4.6 million and $3.3 million,
respectively.
The following table sets forth the plans' funded status and the accrued
obligation as of December 31, 1993 (in thousands of dollars):
- ------------------------------------------------------------------------------
1993
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation attributable to:
Retirees $ 70,881
Fully eligible active plan participants 1,201
Other active plan articipants 47,453
- ------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 119,535
Fair value of plan assets 2,474
- ------------------------------------------------------------------------------
Excess of accumulated obligation over plan assets 117,061
Unrecognized transition obligation (83,333)
Unrecognized net loss (13,141)
- ------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 20,587
- ------------------------------------------------------------------------------
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.5% at December 31, 1993. The expected long-term rate
of return on plan assets was 8.25% for 1993. The assumed health care cost trend
rate in 1993 was 13% for pre-65 participants and 9.5% for post-65 retirees,
each rate declining on a graduated basis to an ultimate rate in the year 2004
of 6%. A one percentage point increase in the assumed health care cost trend
rate for each future year would have increased 1993 costs by $2.1 million and
the accumulated postretirement benefit obligation at December 31, 1993 by $14.1
million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees that are effective January
1, 1995. These changes include newly established limits to the Company's annual
contribution to postretirement medical costs and a revised sharing schedule
based on a retiree's years of service. The effect of these changes decreased
the accumulated benefit obligation at December 31, 1993 by $26.0 million.
SAVINGS PLANS
The Company sponsors savings plans under section 401(k) of the Internal Revenue
Code. The plans cover substantially all full-time employees. Under the plans,
the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$3.1 million, $3.1 million and $3.0 million in the years 1993-1991,
respectively.
11. Commitments and Contingencies
The Company's anticipated construction costs for 1994 are approximately $250
million, for which the Company had substantial purchase commitments as of
December 31, 1993.
The Company has noncancelable lease contracts covering certain buildings,
office space and equipment. The lease contracts contain varying renewal options
for terms up to 18 years.
Minimum rental commitments for noncancelable leases for periods subsequent to
December 31, 1993 are as follows (in thousands of dollars):
----------------------------------------------------
1994 $ 3,856
1995 3,008
1996 2,842
1997 1,382
1998 5,302
Thereafter 4,206
----------------------------------------------------
Total minimum rental commitments $ 20,596
----------------------------------------------------
The total amount of rents charged to expense was $11.3 million, $11.9 million
and $12.6 million for the years 1993-1991, respectively.
12. Regulatory Matters
The Company is subject to regulation by the FCC for its interstate business
operations. The state regulatory commissions governing the states of
California, Idaho, Montana, Oregon and Washington regulate the Company's
intrastate operations.
INTRASTATE SERVICES
The Washington Utility and Transportation Commission (WUTC) concluded a review
of the Company's intrastate results culminating with approval of new tariffs,
effective August 1, 1991. Access rates were reduced $6.3 million annually while
local service rates were reduced $3.5 million on an annualized basis. In
addition, local revenues were reduced an additional $2.0 million on an
annualized basis as the Company's one-party conversion progressed through 1992.
A filing was made on July 9, 1992 with the WUTC for approval of the legal
entity merger in Washington (see Note 4). A settlement agreement was approved
by the WUTC on September 24, 1992. Pursuant to the stipulation order, rates
were reduced by $8.0 million annually and access rates were reduced by $2.0
million, effective January 1, 1993. On January 25, 1993, the WUTC filed a
complaint alleging that the $2.0 million access reduction was not in accordance
with the settlement agreement. The Company disagrees with the allegations. On
January 28, 1994, the WUTC ordered the Company to reduce its access rates by an
additional $6.7 million effective February 11, 1994.
The Company began a major Extended Area Service (EAS) offering in the Portland
metropolitan area in November 1991. This non-optional EAS offering provides
expanded local calling to customers in Portland's metropolitan EAS region
allowing customers to choose between flat rate, measured, or a combination of
flat rate and measured EAS calling plans.
A filing was made on July 10, 1992 with the Oregon Public Utility Commission
(OPUC) for approval of the legal entity merger in Oregon (see Note 4). A
settlement agreement was filed on October 9, 1992 and approved by the OPUC on
November 5, 1992. The Company's rates were reduced by $1.3 million effective
January 1, 1993.
In 1992, the Company filed tariffs in both Washington and Oregon that would
allow it to operate as a Primary Toll Carrier (PTC) in its service areas. In
Oregon, the Company agreed that as part of the PTC proceeding, it would file
earnings data to enable the OPUC staff to review its authorized return and rate
levels. On January 28, 1993, the WUTC authorized the Company to operate as a
PTC in its service areas, effective July 1, 1994. On February 22, 1994, the
OPUC approved the Company's request to operate as a PTC and ordered $5.1
million of local and access rate reductions as part of the OPUC's earnings
review of the Company. The OPUC's PTC authorization and earnings review
reductions were ordered to be effective May 1, 1994. The Company has requested
clarification of various aspects of these orders and is planning to implement
by the above effective dates.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
local exchange carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCC has also
adopted a productivity sharing feature. Because of this feature, under the
minimum productivity-gain option, the Company must share equally with its
ratepayers any realized interstate returns above 12.25% up to 16.25%, and all
returns higher than 16.25%, by temporarily lowering prospective prices. During
1994, the FCC is scheduled to review the LCC price cap plan to determine
whether it should be continued or modified.
In 1992, the Company's rates were voluntarily reduced by $4.3 million effective
July 1, 1992, $1.9 million effective July 17, 1992, $7.2 million effective
October 2, 1992 and $4.0 million effective December 15, 1992.
SIGNIFICANT CUSTOMERS
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities during the years 1993-1991 under various
arrangements and amounted to $129.3 million, $131.7 million and $136.2 million,
respectively. Revenues received from USWEST were $82.6 million, $96.9 million,
and $107.8 million for the years 1993-1991, 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:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
(INCREASE) DECREASE IN CURRENT
ASSETS:
Accounts receivable - net $(14,705) $(25,173) $(30,527)
Materials and supplies 8,989 3,776 (3,773)
Other current assets 1,703 (3,596) (547)
INCREASE (DECREASE) IN CURRENT
LIABILITIES:
Accounts payable 3,015 18,942 3,151
Affiliate payables and accruals 14,514 (1,691) 3,652
Advanced billings and customer
deposits (1,882) (163) (39)
Accrued liabilities 4,214 (1,391) (6,324)
Other 4,740 (12,800) 20,862
- ------------------------------------------------------------------------------
Total $20,588 $(22,096) $(13,545)
- ------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $55,102 $ 54,028 $ 61,586
Income taxes 21,079 34,511 13,929
- ------------------------------------------------------------------------------
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
GTE Northwest Incorporated:
We have audited the accompanying consolidated balance sheets of GTE Northwest
Incorporated (a Washington corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1993 and 1992, and the related
consolidated statements of income, reinvested earnings and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Northwest Incorporated and
subsidiary as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions. Also as discussed in Note 1,
effective January 1, 1992, the Company changed its method of accounting for
income taxes.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
Management Report
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
LARRY J. SPARROW
Area President - West
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OPERATIONS
GTE Northwest Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation, provides local exchange, network access and long distance
telecommunications services for over 1.2 million access lines throughout its
five-state service area.
In February 1993, the Company merged with Contel of the Northwest, Inc., a
wholly-owned subsidiary of Contel Corporation (which is a wholly-owned
subsidiary of GTE Corporation). The merger was accounted for similar to a
"pooling of interests" and, accordingly, the previously issued financial
results have been restated to reflect the combined historical results of
operations, financial position, and cash flows of the Company and Contel of the
Northwest, Inc. All comparative data presented in this discussion reflects such
restatement.
RESULTS OF OPERATIONS
Net income decreased $117 million for the year ended December 31, 1993. The
1993 results include a one-time restructuring charge of $77 million, net of
tax, related primarily to a re-engineering plan. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services and further reduce costs. The results also reflect an extraordinary
charge of $5 million, net of tax, related to the early extinguishment of debt.
In November 1993, the Company called several issues of high-coupon first
mortgage bonds. These bonds will be refinanced in early 1994 on a long-term
basis at lower current interest rates. Also included in the 1993 results is a
one-time charge of $5 million, net of tax, associated with the enhanced early
retirement and voluntary separation programs completed during the second
quarter.
Excluding the above charges, net income decreased 24% or $30 million for 1993.
Net income increased 16% or $18 million for 1992. The 1993 decrease is
primarily due to the impact of the adoption of SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" effective January
1, 1993 and lower operating revenues due to voluntary rate reductions in an
ongoing effort to price services more competitively. Partially offsetting these
decreases is a $20 million gain from the sale of Contel Idaho properties to
Citizens in December 1993. The improvement in 1992 was primarily attributable
to revenue growth, partially offset by an increase in income taxes. Also
contributing to the increase was a reduction in interest expense reflecting
lower short-term interest rates. In addition, the 1991 results reflect a $7
million pretax cumulative adjustment which increased income taxes (see Note 9).
Local network service revenues, which are comprised mainly of fees charged to
customers for providing local exchange service, increased 3% or $10 million in
1993 and increased 6% or $18 million in 1992. The 1993 increase is primarily
the result of continued customer growth reflected by a 5% increase in access
lines and increases from CentraNet R revenues, partially offset by an $8
million annual rate reduction in Washington and a $1 million annual rate
reduction in Oregon effective January 1, 1993 as a result of the legal entity
merger filing. The 1992 increase was primarily the result of continued customer
growth in access lines of 6% coupled with increased revenues from custom
calling and other enhanced features.
Network access service revenues represent the local telephone companies' charge
to end users for access to the facilities of long distance carriers and the
charge to long distance carriers for interconnection to local facilities.
Revenues derived from network access services decreased 3% or $12 million in
1993 and increased 1% or $4 million during 1992. The decrease in 1993 is due to
voluntary rate reductions and an additional $2 million reduction which was
effective January 1, 1993 as a result of the merger filing in Washington. In
1992, the Company's interstate rates were voluntarily reduced by $4 million
effective July 1, 1992, $2 million effective July 17, 1992, $7 million
effective October 2, 1992 and $4 million effective December 15, 1992. Although
minutes of use increased in 1992 compared to 1991, this was substantially
offset by a reduction of Washington intrastate access rates of $6 million
effective August 1, 1991 and voluntary rate reductions in 1992.
The Company's revenues for long distance services from designated geographical
areas are provided under revenue sharing arrangements with various telephone
companies. Long distance service revenues decreased 19% or $3 million in 1993
compared to an increase of 5% or $1 million in 1992. The 1993 decrease is due
to an unfavorable calling card settlement and a revenue reserve charge. The
1992 increase was due to revenues from new calling card settlement agreements.
Equipment sales and services revenues consist primarily of the sale, lease,
installation and maintenance of customer premises equipment. These revenues
were relatively unchanged in 1993 and decreased 2% or $2 million in 1992. The
1992 decrease was due to lower contract rates with AT&T for billing and
collection offset by an increase in single-line telephone and customer inside
wiring sales and higher revenue from maintenance agreements.
Other revenues decreased 7% or $6 million in 1993 compared to an increase of
28% or $19 million in 1992. The 1993 decrease is due to reductions in revenues
from leased facilities and higher provisions for uncollectible accounts
partially offset by an increase in operator service revenue. The 1992 increase
was due to the reduction of a revenue reserve and higher rental income from
facilities shared with other GTE telephone operating companies offset by
increased provisioning for uncollectible accounts.
Cost of sales and services increased 5% or $9 million in 1993 and 2% or $4
million in 1992. The 1993 increase reflects 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 $10 million. The 1992
increase was due to higher expenses associated with increased sales of
maintenance agreements and increased directory revenue. The increase was also
due to the implementation of a new customer service system in 1992.
Depreciation and amortization expense increased 7% or $10 million in 1993 and
was relatively unchanged in 1992. The 1993 increase is due to a higher plant
base and increased depreciation rates.
Marketing, selling, general and administrative expenses increased 13% or $36
million in 1993 compared to a decrease of 2% or $6 million in 1992. The 1993
increase reflects costs of $5 million associated with the adoption of SFAS No.
106. The increase is also due to a one-time charge of $8 million associated
with the enhanced early retirement and voluntary separation programs offered to
eligible employees during the second quarter of 1993 in addition to higher data
processing costs due to system conversions and higher property and gross
receipt taxes. The 1992 decrease was due to a prior year property tax refund,
lower land and building expenses from renegotiated contracts and consolidation
of work locations offset by an increase in employee severance payments.
Restructuring costs reflect a one-time charge related to the Company's re-
engineering plan over the next three years. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services, resulting in cumulative savings in excess of the one-time charge. The
re-engineering plan includes $50 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $56
million for employee separation benefits associated with workforce reductions
and $15 million primarily for the consolidation of facilities and operations
and other related costs. The charge for employee separation benefits includes
$28 million related to the recognition of previously deferred postretirement
health and life insurance costs for separating employees.
Interest expense increased 7% or $4 million in 1993 compared to a decrease of
9% or $6 million in 1992. The 1993 increase reflects higher average long-term
debt levels, due to the issuance of first mortgage bonds in February 1993,
partially offset by a decrease in the average short-term debt level and rate.
The 1992 decrease was primarily the result of lower average short-term debt
rates.
The $20 million gain on disposition of assets represents the excess of cash
proceeds over book value of assets and liabilities sold to Citizens Utilities
Company in December 1993 (see Note 3).
Income tax expense decreased $61 million in 1993 and increased $22 million in
1992. The decrease in 1993 is primarily due to decreases in pretax income. The
increase in 1992 was primarily due to higher pretax income, lower reversal of
tax rate differentials on deferred tax balances, and adjustments made in 1991
for prior years' tax provisions partially offset by higher amortization of
deferred investment tax credits.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. In addition, a $2.3 billion
line of credit is available to the Company through shared lines of credit with
GTE and other affiliates to support short-term financing needs.
The Company's primary source of funds during 1993 was cash flow from operations
of $308 million compared to $278 million for 1992.
Capital expenditures represent the largest use of funds during 1993 and 1992,
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. Cash
requirements to implement the re-engineering plan are expected to be largely
offset by cost savings. The Company's capital expenditures during 1993 were
$251 million compared to $246 million during 1992. The Company's anticipated
construction costs for 1994 are approximately $250 million.
In February 1993, the Company acquired, for book value ($25 million), the Idaho
properties of Contel of the West, Inc., an affiliate. In December 1993, the
Company sold a portion of its telephone plant in service, materials and
supplies and customers in the state of Idaho to Citizens Utilities Company for
$54 million. The proceeds were used to pay down $50 million of long-term debt.
Cash used for financing activities was $87 million in 1993 compared to $44
million in 1992. This included dividend payments of $82 million in 1993
compared to $75 million in 1992. The Company issued $125 million of 6-1/8% First
Mortgage Bonds in February 1993 to refinance short-term borrowings. In
addition, the Company received $38 million of cash from the issuance of common
stock to the parent, GTE, in September 1993.
In November 1993, the Company called $125 million of high-coupon first mortgage
bonds with proceeds from commercial paper borrowings. These bonds have coupons
ranging from 9.25% to 9.75%. The Company plans to refinance these bonds on a
long-term basis at lower current interest rates. The cost of calling these
bonds is reflected as an extraordinary after-tax charge of $4.5 million in the
Consolidated Statements of Income.
COMPETITION AND REGULATORY TRENDS
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually all
aspects of its business. Specialized communications companies have constructed
new systems in certain markets to bypass the local-exchange network. Additional
competition from interexchange carriers as well as wireless companies continues
to evolve for both intrastate and interstate communications.
Implementation of its re-engineering plan will allow the Company to continue to
respond aggressively to these competitive and regulatory developments through
reduced costs, improved service quality, competitive prices and new product
offerings. Moreover, implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services.
During the year, the Company continued to introduce new business and consumer
services utilizing advanced technology, offering new features and pricing
options while at the same time reducing costs and prices.
During 1993, the Federal Communications Commission (FCC) announced its decision
to auction licenses during 1994 in 51 major markets and 492 basic trading areas
across the United States to encourage the development of a new generation of
wireless personal communications services (PCS). These services will both
complement and compete with the Company's traditional wireline services. The
Company will be permitted to fully participate in the license auctions in areas
outside of GTE is existing cellular service areas. Limited participation will
be permitted in areas in which GTE has an existing cellular presence.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets we serve.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company supports these initiatives to assure greater competition in
telecommunications, provided that overall the changes allow an opportunity for
all service providers to participate equally in a competitive marketplace under
comparable conditions.
The Company follows the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators. In the event that recoverability of these costs
becomes unlikely or uncertain, whether resulting from actual or anticipated
competition or specific regulatory, legislative or judicial actions, continued
application of SFAS No. 71 would no longer be appropriate. If the Company no
longer qualifies for the provision of SFAS No. 71, the financial effects of the
required accounting change (which would be non-cash) could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
<TABLE>
Selected Financial Data
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
Total operating revenues $ 875,295 $ 886,787 $ 847,893 $ 831,988 $ 808,694
Total operating expenses 818,560 638,157 638,318 622,641 600,082
- -----------------------------------------------------------------------------------------------------------
Net operating income 56,735 248,630 209,575 209,347 208,612
Interest expense 58,185 54,352 59,867 48,140 44,433
Gain on disposition of assets (19,578) _ _ _ _
Other - net (1,783) 912 (3,569) (3,847) (3,382)
Income taxes 5,581 66,586 44,106(b) 42,738 51,805
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary charge 14,330 126,780 109,171 122,316 115,756
- -----------------------------------------------------------------------------------------------------------
Extraordinary charge 4,501 _ _ _ _
- -----------------------------------------------------------------------------------------------------------
Net income $ 9,829 $ 126,780 $109,171(b) $ 122,316 $115,756
- -----------------------------------------------------------------------------------------------------------
Dividends declared on
common stock $ 52,177 $ 88,713 $ 70,445 $ 85,772 $ 80,720
Dividends declared on
preferred stock 337 468 598 677 1,815
- -----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
SELECTED BALANCE SHEET ITEMS
Investment in property, plant and
equipment - net $1,999,275 $1,925,660 $1,821,922 $1,712,608 $1,615,091
Total assets 2,303,569 2,183,740 2,063,346 1,909,844 1,771,293
Long-term debt and preferred stock,
subject to mandatory redemption 477,241 655,993 553,666 558,442 460,382
Common stock, reinvested earnings
and other capital 897,436 902,121 844,522 781,394 745,526
- -----------------------------------------------------------------------------------------------------------
SELECTED STATISTICS
Access lines 1,271,916 1,214,717 1,147,813 1,094,576 996,382
Access line gain 57,199 66,904 53,237 98,194 61,526
Net investment in property, plant
and equipment per access line $ 1,572 $ 1,585 $ 1,587 $ 1,565 $ 1,621
Number of employees 4,509 5,166 5,464 5,807 5,807
Access lines per employee 282 235 210 188 172
Gross plant additions (thousands) $ 274,634 $ 246,043 $ 264,611 $ 247,132 $ 213,687
- -----------------------------------------------------------------------------------------------------------
<FN>
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Includes a cumulative charge of $6.6 million related to the cumulative
adjustment of the amortization of deferred investment tax credits of
$2.9 million for the years 1990 and 1989.
</TABLE>
