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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1994
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 0-2908
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GTE NORTHWEST INCORPORATED
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-0466810
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 41st Street, Everett, Washington 98201
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 206-261-5321
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(TITLE OF CLASS)
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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
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THE COMPANY HAD 17,920,000 SHARES OF NO PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C> <C> <C>
PART I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
10. Directors and Executive Officers of the Registrant 36
11. Executive Compensation 40
12. Security Ownership of Certain Beneficial Owners
and Management 47
13. Certain Relationships and Related Transactions 48
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 49
</TABLE>
<PAGE> 3
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, Oregon and Washington. Prior to the sale of properties
described below, the Company also provided communications services in the state
of Montana.
On November 30, 1994, the Company sold all of its local exchange properties
(representing 7,000 access lines) in the state of Montana to Citizens Utilities
Company.
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.
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."
Additional information related to the above transactions can be found in Note 3
and Note 4 of the Company's consolidated financial statements included in Item
8.
The Company provides a wide variety of communications services ranging from
local telephone service for the home and office to highly complex voice and
data services for industry. The Company provides local telephone service
within its franchise area and intraLATA (Local Access Transport Area) long
distance service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of 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 AT&T Corp. The number of access lines served
has grown steadily from 996,382 on January 1, 1990 to 1,373,845 on December 31,
1994.
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The number of access lines in the states in which the Company operates as of
December 31, 1994, was as follows:
<TABLE>
<CAPTION>
Access
State Lines Served
------------- ------------
<S> <C>
Washington 825,664
Oregon 422,335
Idaho 113,142
California 12,704
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Total 1,373,845
=========
</TABLE>
The Company's principal line of business is providing telecommunication
services. These services fall into five major classes: local network, network
access, long distance, equipment sales and services and other. Revenues from
each of these classes over the last three years are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Local Network Services $ 347,387 $ 331,369 $ 321,575
% of Total Revenues 38% 38% 36%
Network Access Services $ 359,307 $ 370,980 $ 382,997
% of Total Revenues 40% 42% 43%
Long Distance Services $ 72,317 $ 14,444 $ 17,789
% of Total Revenues 8% 2% 2%
Equipment Sales and Services $ 67,525 $ 77,989 $ 78,279
% of Total Revenues 7% 9% 9%
Other $ 60,329 $ 80,513 $ 86,147
% of Total Revenues 7% 9% 10%
</TABLE>
At December 31, 1994, the Company had 4,336 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 1994, there were no contracts expiring or
agreements reached. During 1995, the contract with the CWA will expire.
Telephone Competition and Regulatory Developments
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the regulatory bodies of the states of
California, Idaho, 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 13 of the Company's consolidated financial
statements included in Item 8.
During 1994, the Company began implementation of a three-year $125 million
re-engineering plan. In the initial year of the plan, $26 million was
expended
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to implement this program. These expenditures were primarily associated with
the consolidation of certain customer service centers, separation benefits
associated with employee reductions and incremental expenditures to redesign
and streamline systems and processes. During 1995, the level of re-engineering
activities and related expenditures are expected to accelerate as pilot
programs are rolled out and other major initiatives are completed. The overall
re-engineering plan remains on schedule and is expected to be completed by the
end of 1996. Continued implementation of this program will position the
Company to accelerate delivery of a full array of voice, video and data
services and to reach its stated objective of being the easiest company to do
business with in the industry.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communication
Services (PCS). PCS will compete with the Company's traditional wireline
services.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Seattle, Washington and Portland, Oregon, to provide advanced
communications for business customers. This program includes sophisticated
high-speed, digital fiber-optic rings, a high-capacity switching network (known
as SONET), and a new centralized operations center that monitors the entire
network. These SONET rings are an integral part of the high-speed information
network that enables GTE to provide advanced services such as high-speed data
transmission and video conferencing.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has continued. Regulatory authorities have adopted various
forms of alternative regulation, which provide economic incentives to telephone
service providers to improve productivity and provide the foundation for
implementing pricing flexibility necessary to address competitive entry into
the markets the Company serves.
Many states are currently investigating whether to authorize local and toll
competition. Several have concluded that competition is in the public interest
and five states, none within the Company's operating jurisdictions, have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle intraLATA toll calls. GTE is challenging these orders
primarily based on the lack of equality since the Company is prohibited from
providing interLATA toll service.
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<PAGE> 6
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum prices that the
Company may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. The Company may,
within certain ranges, price individual services above or below the overall
cap.
Under its price cap regulatory plan, the FCC adopted a productivity sharing
feature. Because of this feature, under the minimum productivity-gain option,
the Company must share equally with its ratepayers any realized interstate
return above 12.25% up to 16.25%, and all returns higher than 16.25%, by
temporarily lowering prospective prices.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under negotiated terms and conditions.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint and GTE Spacenet (both since divested), prohibits
GTE's domestic telephone operating subsidiaries from providing long distance
service beyond the boundaries of the LATA. This prohibition restricts the
Company's direct provision of long distance service to relatively short
distances. The degree of competition allowed in the intraLATA market is
subject to state regulation. However, regulatory constraints on intraLATA
competition are gradually being relaxed.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
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<PAGE> 7
Item 2. Properties
The Company's property consists of network facilities (82%), customer premises
equipment (1%), company facilities (13%) and other (4%). From January 1, 1990
to December 31, 1994, the Company made gross property additions of $1.3 billion
and property retirements of $0.7 billion. Substantially all of the Company's
property is subject to liens securing long-term debt. In the opinion of
management, the Company's telephone plant is substantially in good repair.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for GTE Northwest's common stock and no par
preferred stock is the First National Bank of Boston.
GTE Corporation
C/O Bank of Boston
P.O. Box 9191
Boston, MA 02205-9191
10-K REPORT
A copy of the 1994 annual report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by writing to:
GTE Telephone Operations
External Reporting
P.O. Box 407, MC: INAAACG
Westfield, IN 46074
(317)896-6464
PARENT COMPANY ANNUAL REPORT
A copy of the 1994 annual report of our parent company may be obtained by
writing to:
GTE Corporation
Corporate Secretary's Office
One Stamford Forum
Stamford, CT 06904
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<PAGE> 9
Item 6. Selected Financial Data
GTE Northwest Incorporated and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
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(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
Operating revenues $ 906,865 $ 875,295 $ 886,787 $ 847,893 $ 831,988
Operating expenses 691,820 818,560 638,157 638,318 622,641
------------------------------------------------------------------
Net operating income 215,045 56,735 248,630 209,575 209,347
Interest expense 52,086 58,185 54,352 59,867 48,140
Gain on disposition of assets (11,940) (19,578) -- -- --
Other - net (1,909) (1,783) 912 (3,569) (3,847)
Income tax provision 58,159 5,581 66,586 44,106 42,738
------------------------------------------------------------------
Income before extraordinary charge 118,649 14,330 126,780 109,171 122,316
Extraordinary charge -- 4,501 -- -- --
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Net income $ 118,649 $ 9,829 $ 126,780 $ 109,171 $ 122,316
==================================================================
Dividends declared on common
stock $ 50,982 $ 52,177 $ 88,713 $ 70,445 $ 85,772
Dividends declared on preferred
stock 207 337 468 598 677
</TABLE>
<TABLE>
<CAPTION>
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As of December 31,
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1994 1993 1992 1991 1990
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(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET ITEMS
Investment in property, plant
and equipment - net $2,079,218 $1,999,275 $1,925,660 $1,821,922 $1,712,608
Total assets 2,406,033 2,303,569 2,183,740 2,063,346 1,909,844
Long-term debt and preferred stock,
subject to mandatory redemption 660,440 477,241 655,993 553,666 558,442
Common stock, reinvested
earnings and other capital 964,896 897,436 902,121 844,522 781,394
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATISTICS
Access lines 1,373,845 1,271,916 1,214,717 1,147,813 1,094,576
Access line gain 101,929 57,199 66,904 53,237 98,194
Net investment in property, plant
and equipment per access line $ 1,513 $ 1,572 $ 1,585 $ 1,587 $ 1,565
Number of employees 4,336 4,509 5,166 5,464 5,807
Access lines per employee 317 282 235 210 188
Capital expenditures (thousands) $ 263,123 $ 251,373 $ 246,043 $ 264,611 $ 247,132
--------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Net operating income in 1993 included a $125.0 million pretax charge for
restructuring costs which reduced net income by $77.0 million.
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<PAGE> 10
Item 7. 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 (GTE), provides local exchange, network access and long distance
telecommunications services for over 1.3 million access lines in California,
Idaho, Oregon, and Washington.
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). 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 was $119 million for the year ended December 31, 1994 including an
$8 million gain, net of tax, associated with the sale of certain non-strategic
properties in Montana. Net income was $10 million for the year ended December
31, 1993 including one-time after-tax charges of $87 million to restructure
operations and complete enhanced early retirement and voluntary separation
programs and for the early retirement of high-coupon debt. The 1993 results
also included an after-tax gain of $11 million due to the sale of certain
non-strategic properties in Idaho.
Excluding these special items, net income increased 29% or $25 million in 1994
and decreased 32% or $41 million in 1993. The 1994 increase is primarily due
to customer growth reflected in an 8% increase in access lines and lower
interest costs. The increase is partially offset by an increase in
depreciation and amortization. The 1993 decrease was primarily due to the
impact of the adoption of Statement of Financial Accounting Standards (SFAS)
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" effective January 1, 1993 and lower operating revenues due to
voluntary rate reductions in an ongoing effort to price services more
competitively.
OPERATING REVENUES
Operating revenues were $907 million and $875 million in 1994 and 1993,
respectively. This represents an increase of 4% or $32 million in 1994
compared to a decrease of 1% or $11 million in 1993.
Local network service revenues are comprised mainly of fees charged to
customers for providing local exchange service. In 1994 local network service
revenues were $347 million compared to $331 million in 1993. This represents
increases of 5% or $16 million in 1994 and 3% or $10 million in 1993. The 1994
increase is due to the growth of Extended Area Services revenue from
residential customers and the continued customer growth reflected by an 8%
increase in access lines. The 1993 increase was primarily due to continued
customer growth in access lines of 5%, offset by an $8 million annual rate
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<PAGE> 11
reduction in Washington and a $1 million annual rate reduction in Oregon as a
result of the legal entity merger filing.
Network access service revenues are fees charged to interexchange carriers and
intraLATA (Local Access Transport Area) toll providers that use the local
telecommunication network to provide long-distance services to their customers.
In addition, end users pay access fees to connect to the local network to
obtain long-distance service. Revenues derived from network access services
were $359 million in 1994 and $371 million in 1993. This represents a decrease
of 3% or $12 million in both 1994 and 1993. The 1994 decrease is primarily due
to the transition by Oregon and Washington in May 1994 and July 1994,
respectively, to a Primary Toll Carrier (PTC) plan. Before transitioning to
the PTC plan, all intraLATA toll was remitted to US WEST, Inc. In turn, US
WEST, Inc. paid the Company access charges for intraLATA toll that was
originated or terminated by the Company. Under the PTC plan, the Company keeps
the revenues from originating toll calls, records them as long distance service
revenues and remits access charges to the local exchange carriers (LECs).
Therefore, under the PTC plan, the Company only receives access revenues for
intraLATA toll calls that are terminated by the Company. The PTC plan is
income neutral to the Company since decreases in access revenues are offset by
increases in toll revenues and increases in access charge expenses. This
decrease is partially offset by a decrease in transitional support payments to
the National Exchange Carrier Association. The 1993 decrease was due to
voluntary rate reductions and additional reductions associated with the merger
filing in Washington.
The Company's long distance services are provided under PTC arrangements. In
1994, the long distance revenues were $72 million compared to $14 million in
1993. This represents an increase of $58 million in 1994 compared to a $3
million decrease in 1993. The 1994 increase is primarily due to the transition
to the PTC plan discussed above. The 1993 decrease was due to an unfavorable
calling card settlement and a revenue reserve charge.
Equipment sales and services revenues consist primarily of the sale, lease,
installation and maintenance of customer premises equipment. In 1994,
equipment sales and services revenues were $68 million compared to $78 million
for 1993. These revenues decreased 13% or $10 million in 1994 and were
relatively unchanged in 1993. The 1994 decrease is primarily due to a decrease
in telephone system sales and rental and installation revenues.
Other revenues were $60 million in 1994 and $81 million in 1993. This
represents decreases of 25% or $21 million in 1994 and 7% or $6 million in
1993. The 1994 decrease is due primarily to decreases in both directory
service and billing and collection service revenues partially offset by a
decrease in end user uncollectible provisions. The 1993 decrease was due to
reductions in revenues from leased facilities and higher provisions for
uncollectible accounts partially offset by an increase in operator service
revenue.
OPERATING EXPENSES
Cost of sales and services were $214 million compared to $213 million for 1993.
The slight increase in 1994 is primarily due to the payment of access charges
under the PTC plan to other local exchange carriers for intraLATA toll calls
that are originated by the Company and terminated by another local exchange
carrier, and the final resolution of certain settlement activities
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<PAGE> 12
partially offset by the continuing cost reduction efforts of the Company and
lower expenses relating to product sales and installation and maintenance.
Costs of sales and services increased 5% or $9 million in 1993. The 1993
increase primarily reflected costs associated with the adoption of SFAS No. 106
effective January 1, 1993.
Depreciation and amortization were $182 million in 1994 compared to $167
million in 1993, reflecting increases of 9% or $15 million in 1994 and 7% or
$10 million in 1993. The 1994 increase is primarily due to depreciation and
amortization rate adjustments effective January 1994. The 1993 increase was
due to an increase in plant activity.
Expenses for marketing, selling, general and administrative costs were $295
million in 1994 and $313 million in 1993. The 1993 expense included a one-time
charge of $8 million associated with the enhanced early retirement and
voluntary separation programs offered to eligible employees. Excluding this
charge, marketing, selling, general and administrative expenses decreased 3% or
$10 million in 1994 compared to an increase of 10% or $28 million in 1993. The
1994 decrease primarily reflects lower systems costs, a decrease in labor and
benefits costs and lower costs associated with billing and collection services.
These decreases are partially offset by an increase in regulated sales expenses
and higher property taxes. The 1993 increase reflected costs of $5 million
associated with the adoption of SFAS No. 106. The increase was also due to
higher data processing costs due to system conversions and higher property and
gross receipt taxes.
OTHER (INCOME) DEDUCTIONS
Interest expense was $52 million in 1994 compared to $58 million in 1993. This
represents a decrease of 10% or $6 million in 1994 compared to an increase of
7% or $4 million in 1993. The 1994 decrease reflects an overall decrease in
the coupon rates of the first mortgage bonds due to the early extinguishment of
high-coupon first mortgage bonds in November 1993 and refinancing with
debentures that were issued in May 1994. The 1993 increase reflected higher
than 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 $12 million pretax gain on disposition of assets represents the excess of
cash proceeds over book value of assets and liabilities sold to Citizens
Utilities Company on November 30, 1994. In 1993 a $20 million pretax gain on
the disposition of assets was recognized resulting from the excess of cash
proceeds over the book value of assets and liabilities sold to Citizens
Utilities Company in December 1993. See Note 3 to the consolidated financial
statements included in Item 8 for additional information related to the above
transactions.
Income tax expense was $58 million and $6 million in 1994 and 1993,
respectively. This reflects an increase of $52 million in 1994 compared to a
decrease of $61 million in 1993. The changes are primarily due to
corresponding changes in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
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<PAGE> 13
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. In addition, a $2.8
billion line of credit is available to the Company through shared lines of
credit with GTE and other affiliates to support short-term financing needs.
The Company's primary source of funds during 1994 and 1993 was cash flows from
operations of $226 million and $308 million, respectively. The decrease
primarily reflects timing differences in the payment of taxes and the
collection of receivables.
Cash used for investing activities was $236 million in 1994 compared to $220
million in 1993. Capital expenditures represent the largest use of funds
during 1994 and 1993, reflecting the Company's continued growth in access lines
and modernization of current facilities and provisioning of new products and
services. The Company's capital expenditures during 1994 were $263 million
compared to $251 million in 1993. These expenditures were partially offset by
the proceeds from the sale of certain non-strategic properties in Montana to
Citizens Utilities Company for $22 million on November 30, 1994. 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.
Construction expenditures in 1995 are expected to be lower than 1994.
Net cash received from financing activities was $8 million in 1994 compared to
cash used of $87 million in 1993. This includes dividend payments of $41
million in 1994 compared to $82 million in 1993. The Company issued $200
million of 7 3/8% Series A Debentures in May 1994, of which $143 million was
used toward the repayment of short-term borrowings incurred in connection with
the early extinguishment of high-coupon first mortgage bonds.
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 9.25% to 9.75%. The cost of calling these bonds was reflected as
an extraordinary after-tax charge of $4.5 million in the Consolidated
Statements of Income.
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, but was
subsequently withdrawn from consideration. Telecommunications legislation has
been introduced again in 1995.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has also continued. Regulatory authorities have adopted
various alternative forms of regulation, which provide economic incentives to
telephone service providers to improve productivity and provide the foundation
for implementing pricing flexibility necessary to address competitive entry
into the markets the Company serves.
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<PAGE> 14
During 1992-1994, the FCC took a number of steps to increase competition for
LEC access services. These steps, known as Expanded Interconnection
requirements, allow competing communications carriers to interconnect to the
local exchange network for the purpose of providing switched access transport
services and private line services. Expanded Interconnection requires LECs to
permit competitors to connect directly to LEC central offices and the LEC
network under negotiated terms and conditions. Competitors are thereby able to
compete more effectively than previously to replace LEC services between large
users and interexchange carriers (IXCs), or between large users and the LEC
switch. The FCC accompanied its Expanded Interconnection mandate with a slight
relaxation of the rigid pricing rules that govern how LECs price their access
services. In 1994, the FCC also reaffirmed the switched access rate structure
changes adopted in 1993 that allow LECs to better reflect the actual cost
characteristics of transport services and improve the LEC's ability to compete
with alternative access providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 13 of the Company's consolidated
financial statements included in Item 8.
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and cellular telephone
companies. Competition from IXCs, wireless and cable TV companies, as well as
more recent entry by media and computer companies, is expected to increase in
the rapidly changing telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal
Communications Services (PCS). PCS will compete with the Company's traditional
wireline services.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company
has embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $125 million
re-engineering plan. During 1994, the initial year of the three-year plan,
-12-
<PAGE> 15
$26 million was expended as significant progress was made in implementing this
program. These expenditures were primarily associated with the consolidation
of customer contact, network operations and operator service centers,
separation benefits associated with employee reductions and incremental
expenditures to redesign and streamline systems and processes. During 1995,
the level of re-engineering activities and related expenditures are expected to
accelerate as pilot programs are rolled out and other major initiatives are
completed. Continued implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services and to
reach its stated objective of being the easiest company to do business with in
the industry.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Seattle, Washington and Portland, Oregon, to provide advanced
communications for business customers. This program includes sophisticated
high-speed, digital fiber-optic rings, a high-capacity switching network (known
as SONET), and a new centralized operations center that monitors the entire
network. These SONET rings are an integral part of the high-speed information
network that enables GTE to provide advanced services such as high-speed data
transmission and video conferencing.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, SFAS No. 71 requires companies to depreciate plant and equipment over
lives approved by regulators which may extend beyond the assets' actual
economic and technological lives. SFAS No. 71 also requires deferral of
certain costs and obligations based upon approvals received from regulators to
permit recovery in the future. Consequently, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, may be
greater than that which would otherwise be recorded by unregulated
-13-
<PAGE> 16
enterprises. On an ongoing basis, the Company reviews the continued
applicability of SFAS No. 71 based on the current regulatory and competitive
environment. Although recent developments suggest that the telecommunications
industry will become increasingly competitive, the degree to which regulatory
oversight of LECs, including the Company, will be lifted and competition will
be permitted to establish the cost of service to the consumer is uncertain. As
a result, the Company continues to believe that accounting under SFAS No. 71 is
appropriate. If the Company were to determine that the use of SFAS No. 71 was
no longer appropriate, it would be required to write-off the deferred costs and
obligations referred to above. It may also be necessary for the Company to
reduce the carrying value of its plant and equipment to the extent that it
exceeds fair market value. At this time, it is not possible to estimate the
amount of the Company's plant and equipment, if any, that would be considered
unrecoverable in such circumstances. The financial impact of such a
determination, however, which would be non-cash, could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
-14-
<PAGE> 17
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME (NOTE 4)
GTE Northwest Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (a):
Local network services $ 347,387 $ 331,369 $ 321,575
Network access services 359,307 370,980 382,997
Long distance services 72,317 14,444 17,789
Equipment sales and services 67,525 77,989 78,279
Other 60,329 80,513 86,147
---------- ---------- ----------
906,865 875,295 886,787
---------- ---------- ----------
OPERATING EXPENSES (b):
Cost of sales and services 214,396 212,682 203,210
Depreciation and amortization 181,992 167,448 157,214
Marketing, selling, general and
administrative 295,432 313,427 277,733
Restructuring costs -- 125,003 --
---------- ---------- ----------
691,820 818,560 638,157
---------- ---------- ----------
NET OPERATING INCOME 215,045 56,735 248,630
---------- ---------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 52,086 58,185 54,352
Gain on disposition of assets (11,940) (19,578) --
Other - net (1,909) (1,783) 912
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 176,808 19,911 193,366
---------- ---------- ----------
INCOME TAX PROVISION 58,159 5,581 66,586
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE 118,649 14,330 126,780
EXTRAORDINARY CHARGE - EARLY RETIREMENT OF
DEBT (NET OF INCOME TAXES OF $2,522) -- 4,501 --
---------- ---------- ----------
NET INCOME $ 118,649 $ 9,829 $ 126,780
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $42,368, $49,454 and $50,400 for the
years 1994-1992, respectively.
(b) Includes billings from affiliates of $55,040, $46,352 and $45,170 for the
years 1994-1992, respectively.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS (NOTE 4)
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 391,749 $ 434,434 $ 396,835
ADD -
Net income 118,649 9,829 126,780
DEDUCT -
Cash dividends declared on common stock 50,982 52,177 88,713
Cash dividends declared on
preferred stock 207 337 468
---------- ---------- ----------
BALANCE AT END OF YEAR $ 459,209 $ 391,749 $ 434,434
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE> 18
CONSOLIDATED BALANCE SHEETS (NOTE 4)
GTE Northwest Incorporated and Subsidiary
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- ---------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 953 $ 2,535
Accounts receivable
Customers (including unbilled revenues) 209,913 166,224
Affiliated companies 9,667 1,924
Other 20,049 38,223
Allowance for uncollectible accounts (7,745) (6,602)
Materials and supplies 11,915 12,375
Deferred income tax benefits 7,459 16,598
Net assets held for sale -- 10,013
Prepayments and other 3,922 6,487
----------- -----------
256,133 247,777
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 2,989,912 2,886,310
Accumulated depreciation (910,694) (887,035)
----------- -----------
2,079,218 1,999,275
----------- -----------
OTHER ASSETS 70,682 56,517
----------- -----------
TOTAL ASSETS $ 2,406,033 $ 2,303,569
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 45,600 $ 188,550
Current maturities of long-term debt 12,678 3,773
Accounts payable 69,832 87,695
Affiliate payables and accruals 36,221 41,457
Advanced billings and customer deposits 19,369 18,491
Accrued taxes 55,845 54,776
Accrued payroll and vacations 17,569 15,994
Accrued interest 13,617 11,304
Accrued dividends 10,693 54
Accrued restructuring costs and other 65,534 78,904
----------- -----------
346,958 500,998
----------- -----------
LONG-TERM DEBT 658,040 473,241
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 323,415 321,445
Restructuring costs and other 110,324 106,449
----------- -----------
433,739 427,894
----------- -----------
PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION 2,400 4,000
----------- -----------
SHAREHOLDER'S EQUITY:
Common stock (17,920,000 shares outstanding) 448,000 448,000
Other capital 57,687 57,687
Reinvested earnings 459,209 391,749
----------- -----------
964,896 897,436
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,406,033 $ 2,303,569
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 4)
GTE Northwest Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 118,649 $ 14,330 $ 126,780
Adjustments to reconcile income
before extraordinary charge to net
cash from operating activities:
Depreciation and amortization 181,992 167,448 157,214
Restructuring costs -- 125,003 --
Deferred income taxes and investment
tax credits 6,568 (28,838) 27,204
Provision for uncollectible accounts 9,642 12,724 9,340
Gain on disposition of assets,
net of tax (7,504) (11,159) --
Change in current assets and current
liabilities (70,486) 20,588 (22,096)
Other - net (12,820) 8,177 (20,623)
---------- ---------- ----------
Net cash from operating activities 226,041 308,273 277,819
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (263,123) (251,373) (246,043)
Acquisition of assets -- (25,039) --
Proceeds from sale of assets 21,842 53,972 --
Other - net 5,437 2,323 (2,626)
---------- ---------- ----------
Net cash used in investing activities (235,844) (220,117) (248,669)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 195,934 123,730 --
Common stock issued and additional
paid-in capital -- 38,000 20,000
Early retirement of debt and related
call premium -- (130,003) --
Long-term debt and preferred stock
retired (4,213) (59,907) (22,856)
Dividends paid to shareholders (40,550) (82,127) (74,809)
Increase (decrease) in short-term debt (142,950) 23,045 33,476
---------- ---------- ----------
Net cash from (used in) financing
activities 8,221 (87,262) (44,189)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH (1,582) 894 (15,039)
CASH:
Beginning of year 2,535 1,641 16,680
---------- ---------- ----------
End of year $ 953 $ 2,535 $ 1,641
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-17-
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTE Northwest Incorporated and Subsidiary
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE Northwest
Incorporated (the Company) and its wholly-owned subsidiary, GTE West Coast
Incorporated. All significant intercompany transactions have been eliminated.
The Company is a wholly-owned subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $55.2 million, $61.5
million and $72.0 million for the years 1994-1992, respectively. Such
purchases are recorded in the accounts of the Company at cost which includes a
normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$55.0 million, $46.4 million and $45.2 million for the years 1994-1992,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $42.4 million, $49.5 million and $50.4 million for the
years 1994-1992, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant on a straight-line
basis over asset lives approved by regulators. Depreciation is based upon
rates prescribed by the Federal Communications Commission (FCC) and the state
regulatory commissions. The provisions for depreciation and amortization were
equivalent to composite annual rates of 6.3%, 6.0% and 6.0% for the years
1994-1992, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the regulatory commissions in each of the Company's operating
jurisdictions and Statement of Financial Accounting Standards (SFAS)
-18-
<PAGE> 21
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
accounting recognizes the economic effects of rate regulation by recording
costs and a return on investment as such amounts are recovered through rates
authorized by regulatory authorities. Accordingly, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators to permit recovery of such amounts in future years.
The Company annually reviews the continued applicability of SFAS No. 71 based
upon the current regulatory and competitive environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when services are rendered or products are
delivered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average cost) or market
value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company
elected to adopt this new accounting standard on the delayed recognition method
and commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company 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
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
As further explained in Note 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.
-19-
<PAGE> 22
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $22 million.
The estimated fair value of long-term debt as of December 31, 1993, exceeded
the carrying value by approximately $28 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of $125.0
million, which reduced net income by $77.0 million, primarily for incremental
costs related to implementation of the Company's three-year re-engineering
plan. The re-engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the time necessary
to introduce new products and services and further reduce costs. The
re-engineering plan included $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.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $25.5 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
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 1993 net income by $5.1 million.
-20-
<PAGE> 23
3. PROPERTY REPOSITIONING
On November 30, 1994, the Company sold 7,000 access lines in Montana to
Citizens Utilities Company for $22 million in cash. This represents less than
1% of the Company's access lines. The transaction was accounted for as a sale.
The net sales proceeds exceeded the book value and therefore, a pretax gain of
$12 million was recognized on the transaction. The proceeds from this
transaction were used to pay down short-term commercial paper borrowings.
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.
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 of the separate
entities for the year ended December 31, 1992 were as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
GTE Contel GTE
Northwest of the Northwest
Inc. Northwest Inc.
(Pre-Merger) Inc. (Post-Merger)
------------ ----------- -------------
<S> <C> <C> <C>
Total operating revenues $ 801,116 $ 85,671 $ 886,787
Net income $ 111,504 $ 15,276 $ 126,780
</TABLE>
-21-
<PAGE> 24
5. PREFERRED STOCK
Cumulative preferred stock (without par value), subject to mandatory
redemption, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ------------------------- -------------------------
Shares Shares
--------- ---------
<S> <C> <C> <C> <C>
AUTHORIZED 5,000,000 5,000,000
OUTSTANDING Shares Amount* Shares Amount*
--------- -------- --------- --------
8.16% Series 24,000 $ 2,400 40,000 $ 4,000
</TABLE>
* 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 1992-1994, the Company redeemed 16,000 shares
at its $100 stated value.
The aggregate redemption requirement of preferred stock subject to mandatory
redemption is $800,000 in each of the years 1995-1999.
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, 1994.
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, 1994, $127.7 million of reinvested earnings was restricted as
to the payment of cash dividends or the repurchase of common stock under the
most restrictive terms of the Company's indentures.
-22-
<PAGE> 25
7. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS:
4 5/8 % Series, due 1995 $ -- $ 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
7 7/8 % Series U, due 2002 20,000 20,000
8 1/4 % Series W, due 2007 48,000 48,000
8 3/4 % Series BB, due 2016 75,000 75,000
7 3/4 % Series CC, due 1998 50,000 50,000
9 3/4 % Series EE, due 2030 75,000 75,000
6 1/8 % Series FF, due 1999 125,000 125,000
10 1/4 % Series GG, due 1997 1,999 2,999
9.67 % Series HH, due 2010 13,236 14,118
10.40 % Series II, due 2013 13,950 14,100
----------- -----------
462,785 474,817
DEBENTURE:
7 3/8 % Series A, due 2001 200,000 --
CAPITALIZED LEASES -- 2,613
----------- -----------
Total principal amount 662,785 477,430
DISCOUNT (4,745) (4,189)
----------- -----------
Total long-term debt $ 658,040 $ 473,241
=========== ===========
</TABLE>
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 cost of calling these bonds is reflected as
an extraordinary after-tax charge of $4.5 million in the Consolidated
Statements of Income.
In May 1994, the Company issued $200 million of 7 3/8% Series A Debentures, due
2001, for the repayment of short-term borrowings incurred in connection with
the 1993 early retirement of high-coupon first mortgage bonds and for the
purpose of financing the Company's construction program.
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.
-23-
<PAGE> 26
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 12,678
1996 11,041
1997 2,031
1998 64,632
1999 144,605
</TABLE>
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial paper -
Maximum month-end balance $221,435 $188,550 $144,000
Average monthly balance $ 97,503 $111,023 $130,547
Weighted average interest rate 3.72% 3.19% 3.72%
AT DECEMBER 31 -
Balance outstanding -
Notes payable to affiliate $ -- $ -- $ 26,805
Average interest rate -- -- 3.72%
Commercial paper $ 45,600 $188,550 $ 13,700
Average interest rate 5.97% 3.32% 3.50%
</TABLE>
Unused lines of credit of $2.8 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.
-24-
<PAGE> 27
9. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
CURRENT
Federal $ 48,853 $ 28,929 $ 36,347
State 2,738 5,490 3,035
-------------- -------------- --------------
Total 51,591 34,419 39,382
-------------- -------------- --------------
DEFERRED
Federal 14,509 (17,776) 30,743
State 1,234 (5,762) 2,277
-------------- -------------- --------------
Total 15,743 (23,538) 33,020
-------------- -------------- --------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (9,175) (5,300) (5,816)
-------------- -------------- --------------
Total $ 58,159 $ 5,581 $ 66,586
============== ============== ==============
</TABLE>
The components of deferred income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation and
amortization $ 7,486 $ 26,643 $ 17,631
Employee benefit
obligations (4,010) (9,933) 139
Prepaid pension costs 4,747 3,525 2,224
Restructuring costs 10,043 (46,506) --
Other - net (2,523) 2,733 13,026
-------------- -------------- --------------
Total $ 15,743 $ (23,538) $ 33,020
============== ============== ==============
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pretax income and income taxes provided in the Consolidated
Statements of Income is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
AMOUNTS COMPUTED AT STATUTORY
RATES $ 61,883 $ 6,969 $ 65,744
State income taxes, net
of federal income tax
benefits 2,582 (177) 3,506
Amortization of deferred
investment tax credits (9,175) (5,300) (5,816)
Depreciation of telephone
plant construction costs
previously deducted for
tax purposes - net 3,184 3,353 3,434
Rate differentials applied
to reversing temporary
differences (1,721) (1,498) (2,066)
Other differences - net 1,406 2,234 1,784
-------------- -------------- --------------
TOTAL PROVISION $ 58,159 $ 5,581 $ 66,586
============== ============== ==============
</TABLE>
-25-
<PAGE> 28
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established
rate-making practices. Since the manner in which income taxes are treated for
rate-making has not changed, pursuant to SFAS No. 71 a corresponding regulatory
asset was also established. In addition, deferred income taxes were adjusted
and a regulatory liability established to give effect to the current statutory
federal income tax rate and for unamortized investment tax credits. The
unamortized regulatory asset and regulatory liability balances at December 31,
1994 amounted to $18.5 million and $1.8 million, respectively, and the
unamortized regulatory asset and liability balances at December 31, 1993
amounted to $16.7 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:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 336,483 $ 325,746
Employee benefit obligations (20,321) (16,311)
Prepaid pension costs 11,356 6,609
Restructuring costs (36,463) (46,506)
Investment tax credits 8,875 17,879
Other - net 16,026 17,430
--------- ---------
Total $ 315,956 $ 304,847
========= =========
</TABLE>
-26-
<PAGE> 29
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 components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year $ 11,538 $ 13,745 $ 13,216
Interest cost on projected benefit
obligations 22,823 27,015 26,456
Return on plan assets:
Actual 1,111 (81,538) (29,278)
Deferred (41,108) 39,562 (9,743)
Other - net (8,141) (9,123) (7,413)
--------- --------- ---------
Net pension credit $ (13,777) $ (10,339) $ (6,762)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for 1993 and 1992.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Plan assets at fair value $ 493,965 $ 521,935
Projected benefit obligations 292,470 331,533
--------- ---------
Excess of assets over projected
benefit obligations 201,495 190,402
Unrecognized net transition asset (31,010) (35,343)
Unrecognized net gain (140,761) (133,290)
--------- ---------
Prepaid pension cost $ 29,724 $ 21,769
========= =========
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $221.9 million and $245.0 million and vested
benefit obligations of $189.7 million and $214.2 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
-27-
<PAGE> 30
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Benefits earned during the year $ 2,761 $ 3,854
Interest cost on accumulated postretirement
benefit obligations 11,026 10,749
Actual return on assets 126 --
Amortization of transition obligation 4,904 7,198
Other - net 131 --
--------- ---------
Postretirement benefit cost $ 18,948 $ 21,801
========= =========
</TABLE>
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $4.6 million.
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations
attributable to:
Retirees $ 94,192 $ 85,087
Fully eligible active plan participants 4,038 4,576
Other active plan participants 45,155 53,161
--------- ---------
Total accumulated postretirement benefit obligations 143,385 142,824
Fair value of plan assets 4,917 2,474
--------- ---------
Excess of accumulated obligations over plan assets 138,468 140,350
Unrecognized transition obligation (85,798) (99,161)
Unrecognized net loss (18,107) (14,016)
--------- ---------
Accrued postretirement benefit obligations $ 34,563 $ 27,173
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and
13% for pre-65 participants and 9.0% and 9.5% for post-65 retirees, each rate
declining on a graduated basis to an ultimate rate in the year 2004 of 6%. A
one percentage point increase in the assumed health care cost trend rate for
each future year would have increased 1994 costs by $1.8 million and the
accumulated postretirement benefit obligations at December 31, 1994 by $16.6
million.
-28-
<PAGE> 31
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes include newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
cost sharing schedule based on a retiree's years of service. The net effect of
these changes reduced the accumulated postretirement benefit obligations at
December 31, 1993 by $26.0 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions
charged to income were $3.1 million for the years 1994-1992.
11. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment. Minimum rental commitments for noncancelable leases through
1999 and thereafter are minimal. Rental expense was $12.0 million, $11.3
million and $11.9 million in 1994-1992, respectively.
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 12,396 $ 12,653
Buildings 212,140 206,810
Central office equipment 1,140,924 1,102,509
Outside plant 1,353,660 1,278,064
Other 270,792 286,274
---------- ----------
Total property, plant and equipment 2,989,912 2,886,310
Accumulated depreciation (910,694) (887,035)
--------- ----------
Net property, plant and equipment $2,079,218 $1,999,275
========== ==========
</TABLE>
-29-
<PAGE> 32
13. 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, Oregon and Washington regulate the Company's intrastate
operations. Prior to the sale of properties described in Note 3, the state
regulatory commission in Montana also regulated the Company's intrastate
operations.
INTRASTATE SERVICES
A filing was made on July 9, 1992 with the Washington Utility and
Transportation Commission (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, local service rates
were reduced by $8.0 million annually and a filing was made to reduce switched
access rates 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
filing was not in accordance with the settlement agreement. The Company
disagreed with the allegations. On February 11, 1994, as a resolution to the
WUTC complaint associated with the legal entity merger, the WUTC ordered the
Company to reduce its switched access rates $6.7 million, effective
immediately.
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.
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. On August 29, 1994 the OPUC ordered
the expansion of the Portland Metro area to add new EAS routes, eleven of which
involved the Company's exchanges. The net revenue reduction from this EAS
expansion is projected to be $2.4 million.
In 1992, the Company filed tariffs in both Washington and Oregon that would
allow it to operate under a Primary Toll Carrier (PTC) plan in its service
areas. Under this plan, the toll billed to end users for intraLATA toll calls
originating in the Company's service area are retained by the Company. The
Company, in turn, pays access charges to the company terminating the call based
on that company's approved access charge tariff. Likewise the Company will
receive access charges for terminating any intraLATA toll call that originates
outside of its service area based on its approved access charge tariff. On
January 28, 1993, the WUTC authorized the Company to operate as a PTC in its
service areas, effective July 1, 1994. As a result of the order, the Company
reduced its toll rates by an average of 4.5%, its switched access rates by $8.4
million and special access rates by $2.6 million. Special access meet point
billing will be implemented in the second quarter of 1995. In Oregon, when the
Company filed for authority to operate under a PTC plan, it agreed that as part
of the PTC proceeding, it would file financial data to enable the OPUC staff to
review its earnings. On February 22, 1994 the OPUC approved the Company's
request to operate under a PTC plan effective
-30-
<PAGE> 33
May 1, 1994. It also ordered $5.1 million of local and access rate reductions
effective April 1, 1994 to reflect the findings from the earnings review part
of the proceeding. The Company was authorized a return on equity (ROE) of
10.36% and a rate of return (ROR) of 9.48%. The Company had requested an ROE
and ROR of 13.25% and 11.31%, respectively.
On December 21, 1994, the WUTC authorized the Company an ROE of 11.25% and an
overall ROR of 9.76%. The Company had requested a 13.8% ROE and an 11.58% ROR.
No rate changes were required.
The Company received approval December 21, 1994, from the WUTC for the
represcription of its depreciation rates and amortization of analog switching
investments resulting in increased intrastate depreciation expenses of $12.9
million.
On January 1, 1995, GTE West Coast Incorporated's Implementation Rate Design
(IRD) rates became effective in California. This IRD order authorized
intraLATA toll competition. The net impact of this filing was intended to be
revenue neutral to the Company as toll rates were reduced by 40% with an
offsetting increase in basic local rates. Effective February 1, 1995, GTE West
Coast Incorporated is also authorized to recover $345,000 for its High Cost
Fund filing.
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 price cap regulatory plan, the FCC adopted a
productivity sharing feature. Because of this feature, under the minimum
productivity-gain option, the Company must share equally with its ratepayers
any realized interstate returns above 12.25% up to 16.25%, and all returns
higher than 16.25%, by temporarily lowering the prospective prices. During
1995, the FCC is scheduled to review the LEC price cap plan to determine
whether it should be continued or modified.
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 CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994-1992 under
various arrangements and amounted to $128.3 million, $129.3 million and $131.7
million, respectively.
-31-
<PAGE> 34
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $(41,757) $(14,705) $(25,173)
Materials and supplies 460 8,989 3,776
Prepayments and other current assets 2,727 1,703 (3,596)
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (17,863) 3,015 18,942
Affiliate payables and accruals (5,236) 14,514 (1,691)
Advanced billings and customer deposits 878 (1,882) (163)
Accrued liabilities 6,353 4,214 (1,391)
Other (16,048) 4,740 (12,800)
-------- -------- --------
Total $(70,486) $ 20,588 $(22,096)
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest $ 48,347 $ 55,102 $ 54,028
Income taxes 45,766 21,079 34,511
</TABLE>
-32-
<PAGE> 35
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, 1994 and 1993, and the related
consolidated statements of income, reinvested earnings and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Northwest Incorporated and
subsidiary as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions. Also as discussed in Note 1,
effective January 1, 1992, the Company changed its method of accounting for
income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This supporting schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 25, 1995.
-33-
<PAGE> 36
MANAGEMENT REPORT
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has also instituted
policies and guidelines which require employees to maintain the highest level of
ethical standards.
EILEEN O'NEILL ODUM
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
-34-
<PAGE> 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-35-
<PAGE> 38
PART III
Item 10. Directors and Executive Officers of the Registrant
a. Identification of Directors
The names, ages and positions of the directors of the Company as of March 27,
1995 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
------------------ --- -------- ------------------------------------------
<S> <C> <C> <C>
Kent B. Foster 51 1993 Vice Chairman of the Board of Directors,
GTE Corporation, October 1993; President,
GTE Telephone Operations, 1989; Director,
GTE Corporation, 1992; Director, all GTE
domestic telephone subsidiaries, 1993
and/or 1994; Director, BC Telecom, Inc.;
Director, Compania Anonima Nacional
Telefonos de Venezuela; Director,
NationsBank of Texas; Director, Dallas
Symphony Orchestra.
Richard M. Cahill 56 1993 Vice President - General Counsel, GTE
Telephone Operations, 1988; Director, all
GTE domestic telephone subsidiaries, 1993
and/or 1994; former Director, GTE Vantage
Incorporated, 1991.
Gerald K. Dinsmore 45 1993 Senior Vice President - Finance and
Planning, GTE Telephone Operations, 1994;
former Vice President - Finance, GTE
Telephone Operations, 1993; former Vice
President - Intermediary Customer Markets,
GTE Telephone Operations, 1988; former
President of all South Area companies, GTE
Telephone Operations, 1992; Director, GTE
Florida Incorporated and GTE South
Incorporated, 1992; Director, all other
GTE domestic telephone subsidiaries, 1993
and/or 1994.
</TABLE>
-36-
<PAGE> 39
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
---------------- --- -------- ------------------------------------------
<S> <C> <C> <C>
Michael B. Esstman 48 1993 Executive Vice President - Customer
Segments, GTE Telephone Operations, 1994;
former Executive Vice President -
Operations, GTE Telephone Operations,
1993; former President and Director of all
Central Area companies, GTE Telephone
Operations, 1991; former President, Contel
Eastern Region, Telephone Operations
Sector, 1983; Director, AG Communications
Systems; Director, all other GTE domestic
telephone subsidiaries, 1993 and/or 1994.
Thomas W. White 48 1993 Executive Vice President - Network
Operations, GTE Telephone Operations,
1994; former Executive Vice President -
Telephone Operations, GTE Telephone
Operations, 1993; former Senior Vice
President - General Office Staff, GTE
Telephone Operations, 1989; Director, all
GTE domestic telephone subsidiaries, 1993
and/or 1994; Director, Quebec - Telephone.
</TABLE>
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which is to be held on the third
Friday in March.
There are no family relationships between any of the directors or executive
officers of the Company.
b. Identification of Executive Officers
The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations
(Telops). Accordingly, the list below contains the names, ages and positions
of the executive officers of both the Company and GTE Telephone Operations as
of March 27, 1995.
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- -------------------------------
<S> <C> <C> <C> <C>
Kent B. Foster 51 1989 -- President of GTE Telephone
Operations
John C. Appel 46 1994 1995 Senior Vice President -
Regional Operations of GTE
Telephone Operations and the
Company
Mary Beth Bardin(1) 40 1994 1995 Vice President - Public Affairs
of GTE Telephone Operations
and the Company
</TABLE>
-37-
<PAGE> 40
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- ---------------------------------
<S> <C> <C> <C> <C>
Clarence F. Bercher 51 1994 1995 President - Consumer Markets of
GTE Telephone Operations and
Vice President - Consumer
Markets of the Company
Richard M. Cahill 56 1989 1995 Vice President - General
Counsel of GTE Telephone
Operations and the Company
Robert C. Calafell 53 1993 -- Vice President - Video Services
of GTE Telephone Operations
Gerald K. Dinsmore 45 1994 1994 Senior Vice President - Finance
and Planning of GTE Telephone
Operations and the Company
William M. Edwards, III 46 -- 1993 Controller of the Company
Michael B. Esstman 48 1994 -- Executive Vice President -
Customer Segments of GTE
Telephone Operations
Bruce E. Haddad 41 1994 -- Senior Vice President -
International of GTE
Telephone Operations
Donald A. Hayes 57 1992 -- Vice President - Information
Technology of GTE Telephone
Operations
Gregory D. Jacobson 43 -- 1994 Treasurer of the Company
Andrew T. Jones 54 1992 -- Vice President - International
of GTE Telephone Operations
Brad M. Krall 53 1993 1995 Vice President - Centralized
Operations of GTE Telephone
Operations and the Company
Michael J. McDonough 45 1994 1995 President - Business Markets of
GTE Telephone Operations and
Vice President - Business
Markets of the Company
Paul E. Miner 50 1993 1995 Vice President - Network
Operations Support of GTE
Telephone Operations and the
Company
Eileen O'Neill Odum (2) 40 -- 1995 President of the Company
Richard L. Schaulin 52 1989 1995 Vice President - Human
Resources of GTE Telephone
Operations and the Company
Leland W. Schmidt 61 1989 -- Vice President - Industry
Affairs of GTE Telephone
Operations
Charles J. Somes (3) 49 -- 1995 Secretary of the Company
Larry J. Sparrow 51 1994 1995 President - Carrier Markets of
GTE Telephone Operations and
Vice President - Carrier
Markets of the Company
Alex Stadler 44 1994 1995 Vice President - Strategy &
Technology Planning of GTE
Telephone Operations and the
Company
</TABLE>
-38-
<PAGE> 41
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- ----------------------------
<S> <C> <C> <C> <C>
Thomas W. White 48 1994 -- Executive Vice President -
Network Operations of GTE
Telephone Operations
</TABLE>
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years.
Except for duly elected officers and directors, no other employees had a
significant role in decision making.
All officers are appointed for a term of one year.
NOTES:
(1) Mary Beth Bardin was elected Vice President - Public Affairs of GTE
Telephone Operations replacing G. Bruce Redditt who was appointed Vice
President - Public Affairs and Communications, GTE Corporation.
(2) Eileen O'Neill Odum was elected President replacing Larry J. Sparrow who
was elected President - Carrier Markets of GTE Telephone Operations and
Vice President - Carrier Markets of the Company.
(3) Charles J. Somes was elected Secretary replacing Kenneth K. Okel who was
appointed Assistant Vice President and Associate General Counsel -
Regional Operations - Western, GTE Telephone Operations.
During 1994, the organizational structure of GTE Telephone Operations was
restructured to included 11 regions, eliminating the previous Area management
structure.
-39-
<PAGE> 42
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the 1994
Chief Executive Officer and each of the other three most highly compensated
executive officers (the named executive officers) of the Company in 1994 for
services in all capacities to the Company and its subsidiary.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------------------
Annual Compensation(1) Awards Payouts
---------------------------------- ----------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Compensation Stock Options/ Payouts Compensation
Position in Group Year ($) Bonus($) ($) Awards(#) SARs(#) ($)(2) ($)(3)
------------------ ---- -------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow (4) 1994 49,020 43,968 -- -- 30,900 22,041 4,500
President 1993 45,580 32,185 -- -- 14,500 7,101 1,366
1992 38,138 40,204 -- -- 9,000 8,835 1,095
Elizabeth A. Edwards (5) 1994 148,569 51,900 -- -- 4,000 -- 4,403
Regional Vice President - 1993 141,231 37,100 -- -- 2,700 -- 4,237
General Manager-Northwest 1992 139,591 55,577 -- -- -- -- 4,196
Anthony W. Armstrong (6) 1994 124,700 24,100 -- -- 900 -- --
Regional Vice President - 1993 124,700 21,200 -- -- -- -- 3,597
External Affairs-Northwest 1992 124,725 34,797 -- -- -- -- 3,749
Kent B. Foster 1994 52,091 65,691 -- -- 138,100 31,188 4,500
President - 1993 41,156 37,804 -- -- 58,800 8,326 462
GTE Telephone Operations 1992 34,642 40,475 -- -- -- 12,600 441
</TABLE>
(1) Annual Compensation represents the Company's pro rata share, if
applicable, of salaries, bonuses and other annual compensation. Total
annual cash compensation for Mr. Sparrow, Ms. Edwards and Messrs.
Armstrong and Foster, for whom allocated amounts are shown above, is
$494,462; $200,469; $148,800 and $1,525,508 for 1994, respectively.
(2) 1994 Long-Term Incentive Plan (LTIP) Payouts include transition awards
for the 1994 period, which were established by the Committee as a special
grant to allow for the smooth transitioning from a single long-term
performance measure (return on equity) to a combined measure (return on
equity and operating cash flow margin).
(3) All other compensation includes Company contributions to defined
contribution plans.
(4) Mr. Sparrow served as President until February 15, 1995, when he was
elected Vice President - Carrier Markets for all GTE domestic telephone
companies. On February 15, 1995, Ms. O'Neill Odum was elected President
of the Company.
(5) Ms. Edwards served as Regional Vice President - General Manager until
February 1995. In September 1994, she was also appointed Vice President
- Commercial Services, GTE Data Services.
(6) Mr. Armstrong served as Regional Vice President - External Affairs until
February 1995. In September 1994, he was also appointed Regional
Director - Governmental Affairs (California, Arizona and Nevada), GTE
Telephone Operations.
-40-
<PAGE> 43
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1994, whether
or not specifically allocated to the Company. The options and SARs were
granted under the LTIP. Pursuant to Securities and Exchange Commission rules,
the table also shows the value of the options granted at the end of the option
terms (ten years) if the stock price were to appreciate annually by 5% and 10%,
respectively. There is no assurance that the stock price will appreciate at
the rates shown in the table. The table also indicates that if the stock price
does not appreciate, there will be no increase in the potential realizable
value of the options granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants(1) Option Term
------------------------------------------------------- ----------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted (1) Fiscal Year ($/SH) Date 0% 5% 10%
---- ----------- ------------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow 30,900 .75% $32.44 02/16/04 $ -- $ 630,135 $1,596,759
Elizabeth A. Edwards 4,100 -- 32.44 02/16/04 -- 81,571 206,700
Anthony W. Armstrong 900 -- 32.44 02/16/04 -- 18,353 46,508
Kent B. Foster 69,050 1.68 34.44 02/16/04 -- 1,270,016 3,430,063
69,050 1.68 32.44 02/16/04 -- 1,408,116 3,568,163
</TABLE>
(1) Each option was granted in tandem with a SAR, which will expire upon
exercise of the option. Under the LTIP, one-third of these grants vest
annually commencing one year after the date of grant.
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1994. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) common stock on
December 30, 1994.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry J. Sparrow -- $ -- 35,583 48,617 $ -- $ --
Elizabeth A. Edwards -- -- 6,800 5,800 24,750 --
Anthony W. Armstrong -- -- -- 900 -- --
Kent B. Foster -- -- 152,374 210,626 -- --
</TABLE>
-41-
<PAGE> 44
Long-Term Incentive Plan - Awards in Last Fiscal Year
The GTE 1991 LTIP provides for awards, currently in the form of stock options
with tandem SARs and cash bonuses, to participating employees. The primary
purpose of the LTIP is to offer participants an incentive to cause GTE to
achieve superior financial performance, thereby helping to assure superior
performance for the shareholders. The stock options and tandem SARs awarded
under the LTIP to the named executive officers in 1994 are shown in the table
on page 40.
The named executive officers are eligible to receive annual grants of
performance bonuses which are earned during a 36-month performance cycle. The
performance bonuses are paid in cash. Awards for the three-year performance
cycle ending in 1994 are based on GTE's financial performance during the
relevant cycle as measured by GTE's average return on equity (ROE) against
pre-established target levels. In 1994, the Executive Compensation and
Organizational Structure Committee of the Board of Directors of GTE (the
Committee) established an additional measure of corporate performance -
operating cash flow margin (OCFM). The Committee views OCFM as an excellent
complement to ROE due to its capacity to accurately measure profitable revenue
growth, a key determinant of financial strength, especially for high growth
businesses. To transition from awards based solely on performance against ROE
targets to awards based on a combination of ROE and OCFM performance, the
Committee established two performance periods - a one-year period to run
concurrently with the final year of the three-year ROE performance cycle ending
in 1994 and a two-year period to run concurrently with the final two years of
the three-year ROE performance cycle ending in 1995. The awards for the two
award periods will be based on GTE's performance against ROE and OCFM
performance for the one- and two-year periods. Awards for the three-year
performance cycle ending in 1996 will be based on GTE's performance against the
ROE and OCFM targets established for the full three-year cycle. Seventy-five
percent of the award is determined based on ROE performance and 25% of the
award is determined based on OCFM performance.
At the time performance targets for the current LTIP cycles are established, a
Common Stock Unit account is set up for each participant in the LTIP. An
initial dollar amount for each account (target award) is determined based on
the competitive performance bonus grant practices of other major companies in
the telecommunications industry and with practices of other major corporations
not involved in the telecommunications industry that have a reputation for
excellence, are comparable to GTE in terms of such quantitative measures as
revenues, market value and total shareholder return and are viewed as direct
competitors for executive talent in the overall labor market as well as GTE's
past and projected financial performance. That amount is then divided by the
average market price of GTE common stock for the calendar week preceding the
day the account is established to determine the number of Common Stock Units in
the account. The value of the account increases or decreases based on the
market price of the GTE common stock. An amount equal to the dividends paid on
an equivalent number of shares of GTE common stock is added on each dividend
payment date. This amount is then converted into the number of Common Stock
Units obtained by dividing the amount of the dividend by the average price of
the GTE common stock on the composite tape of the New York Stock Exchange on
the dividend payment date and added to the Common Stock Unit account. Messrs.
Sparrow and Foster are the only individuals of the named executive officers
eligible to receive a cash award under the LTIP. The
-42-
<PAGE> 45
number of Common Stock Units initially allocated in 1994 to the named executive
officers' accounts and estimated future payouts under the LTIP are shown in the
following table:
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans(1)
-------------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of Or Other
Shares, Units Period Until
Or Other Maturation
Name Rights Or Payout Threshold(2) Target(3) Maximum(4)
---------------- ------------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Larry J. Sparrow 3,800 3 Years 873 4,367
1,400 2 Years 316 1,582
1,400 1 Year 298 1,488
Elizabeth A. Edwards -- N/A -- --
Anthony W. Armstrong -- N/A -- --
Kent B. Foster 15,400 3 Years 3,701 18,507
5,400 2 Years 1,221 6,103
5,400 1 Year 1,148 5,739
</TABLE>
(1) It is not possible to predict future dividends and, accordingly,
estimated Common Stock Unit accruals in this table are calculated for
illustrative purposes only and are based upon the dividend rate and price
of GTE common stock at the close of business on December 30, 1994. The
target award is the dollar amount derived by multiplying the Common Stock
Unit balance at the end of the award cycle by the price of GTE common
stock.
(2) The Threshold is the level of the average ROE and the average OCFM during
the relevant cycle which represents the minimum acceptable performance
level for both the ROE and OCFM performance measures. If the Threshold
is attained with respect to both performance measures, the award will be
equal to 20% of the combined target award for ROE and OCFM. Because ROE
and OCFM are separate performance measures, it is possible to receive an
award if the Threshold is achieved with respect to only one of the
performance measures. If the actual results for one, but not both,
performance measures is at the Threshold level, the portion of the award
determined by the measure performing at the Threshold level will be at
20% of the target award for that performance measure, and no award will
be made for the portion of the award determined by the measure performing
at less than the Threshold level. However, if the actual results for
both performance measures are below the minimum acceptable performance
level, no award will be earned.
(3) The Target is the level of the average ROE and the average OCFM during
the cycle which represents outstanding performance for both the ROE and
OCFM performance measures. If the Target is attained with respect to
both performance measures, the award will be equal to 100% of the target
award for ROE and OCFM. If the actual results for one, but not both,
performance measures is at the Target level, the portion of the award
determined by the measure performing at the Target level will be at 100%
of the target award for that performance measure, and the portion of the
award determined by the measure performing at less than 100% will be
determined accordingly.
(4) This column has intentionally been left blank because it is not possible
to determine the maximum award until the award cycle has been completed.
The maximum amount of the award is limited by the amount the actual
ROE
-43-
<PAGE> 46
and the actual OCFM exceed the targeted ROE and the targeted OCFM. If
GTE's average ROE and OCFM during the cycle exceed their performance
targets, additional bonuses may be earned according to the following
schedule:
<TABLE>
<CAPTION>
Performance Increment Above Added Percentage
Maximum ROE and OCFM Performance Targets to Maximum Awards
--------------------------------------------------------------------
<S> <C> <C>
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
</TABLE>
For example, if average ROE and OCFM performance each exceed the ROE and
OCFM targets by 0.5%, respectively, the performance bonus will equal 114%
of the combined target award.
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Sparrow and
Foster regarding benefits to be paid in the event of a change in control of GTE
(a Change in Control).
A Change in Control is deemed to have occurred if a majority of the members of
the Board do not consist of members of the incumbent Board (as defined in the
Agreements) or if, in any 12-month period, three or more directors are elected
without the approval of the incumbent Board. An individual whose initial
assumption of office occurred pursuant to an agreement to avoid or settle a
proxy or other election contest is not considered a member of the incumbent
Board. In addition, a director who is elected pursuant to such a settlement
agreement will not be deemed a director who is elected or nominated by the
incumbent Board for purposes of determining whether a Change in Control has
occurred. A Change in Control will not occur in the following situations: (1)
certain merger transactions in which there is at least 50% GTE shareholder
continuity in the surviving corporation, at least a majority of the members of
the board of directors of the surviving corporation consists of members of the
Board of GTE and no person owns more than 20% (or under certain circumstances,
a lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event this individual
separates from service and has a "good reason" for leaving or is terminated
without "cause" within two years after a Change in Control.
Good reason for leaving includes, but is not limited to, the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the EIP for the previous
three years. The executive will also continue to receive medical and life
insurance coverage for up to two years and will be provided with financial and
outplacement counseling.
-44-
<PAGE> 47
In addition, the Agreements with Messrs. Sparrow and Foster provide that in the
event of a separation from service, they will receive service credit in the
following amounts: two times years of service otherwise credited if the
executive has five or fewer years of credited service; ten years if credited
service is more than five and not more than ten years; and, if the executive's
credited service exceeds ten years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan (SERP) and the Executive Retired Life
Insurance Plan. In addition, each executive will be considered to have not
less than 76 points and 15 years of accredited service for the purpose of
determining his or her eligibility for early retirement benefits. The
Agreements provide that there will be no duplication of benefits.
The Agreements remain in effect until the earlier of July 1 of each successive
year or the date on which the executive reaches age 65, unless the Agreement is
terminated earlier pursuant to its terms. The Agreements will be automatically
renewed on each successive July 1 unless, not later than December 31 of the
preceding year, one of the parties notifies the other that he does not wish to
extend the Agreement. If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings and years of employment, are illustrated
in the table below:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Final Average Years of Service
---------------------------------------------------------------------
Earnings 15 20 25 30 35
------------ ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,532 $ 42,042 $ 52,553 $ 63,063 $ 73,574
200,000 42,407 56,542 70,678 84,813 98,949
300,000 64,157 85,542 106,928 128,313 149,699
400,000 85,907 114,542 143,178 171,813 200,449
500,000 107,657 143,542 179,428 215,313 251,199
600,000 129,407 172,542 215,678 258,813 301,949
700,000 151,157 201,542 251,928 302,313 352,699
800,000 172,907 230,542 288,178 345,813 403,449
900,000 194,657 259,542 324,428 389,313 454,199
1,000,000 216,407 288,542 360,678 432,813 509,949
1,200,000 259,907 346,542 433,178 519,813 606,449
1,500,000 325,157 433,542 541,928 650,313 758,699
2,000,000 433,907 578,542 723,178 867,813 1,012,449
</TABLE>
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains the GTE
Service Corporation Plan for Employees' Pensions (the Service Corporation
Plan), a noncontributory pension plan for the benefit of GTE employees based on
years of service. Pension benefits to be paid from the Service Corporation
Plan and contributions to this plan are related to basic salary exclusive of
-45-
<PAGE> 48
overtime, differentials, incentive compensation (except as otherwise described)
and other similar types of payment. Under the Service Corporation Plan,
pensions are computed on a two-rate formula basis of 1.15% and 1.45% for each
year of service, with the 1.15% service credit being applied to that portion of
the average annual salary for the five highest consecutive years that does not
exceed the Social Security Integration Level (the portion of salary subject to
the Federal Security Act), and the 1.45% service credit being applied to that
portion of the average annual salary that exceeds said level. As of February
15, 1995, the credited years of service under the plan for Mr. Sparrow, Ms.
Edwards, Messrs. Armstrong and Foster are 27, 18, 21, and 24, respectively.
Under Federal law, an employee's benefits under a qualified pension plan such
as the Service Corporation Plan are limited to certain maximum amounts. GTE
maintains a SERP, which supplements, on an unfunded basis, the benefits of any
participant in the Service Corporation Plan in an amount by which any
participant's benefits under the Service Corporation Plan are limited by law.
In addition, the SERP includes a provision permitting the payment of additional
retirement benefits determined in a similar manner as under the Service
Corporation Plan on remuneration accrued under management incentive plans as
determined by the Committee. SERP benefits are payable in a lump sum or an
annuity.
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Sparrow and
Foster a maximum postretirement life insurance benefit of three times final
base salary and provides Ms. Edwards a postretirement life insurance benefit of
one times final base salary. Upon retirement, ERLIP benefits may be paid as
life insurance, or optionally, an equivalent amount equal to the present value
of the life insurance amount (based on actuarial factors and the interest rate
then in effect), as a lump sum payment, as an annuity or as installment
payments.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for services on the Board.
-46-
<PAGE> 49
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1995:
<TABLE>
<CAPTION>
Name and Shares of
Title ddress of Beneficial Percent
of Class Beneficial Owner Ownership of Class
-------- ---------------- ---------- --------
<S> <C> <C> <C>
Common Stock of GTE Corporation 17,920,000 100%
GTE Northwest One Stamford Forum shares of
Incorporated Stamford, Connecticut record
06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1994:
<TABLE>
<S> <C> <C> <C>
Common Stock of Name of Director or Nominee(1)(2)
---------------------------------
GTE Corporation Kent B. Foster 268,305 No director
Richard M. Cahill 36,287 or nominee or
Gerald K. Dinsmore 41,529 executive
Michael B. Esstman 67,631 officer owns
Thomas W. White 120,994 as much as
--------- 1/10 of
534,746 1 percent.
=========
Executive Officers(1)(2)
------------------------
Larry J. Sparrow 64,836
Elizabeth A. Edwards 14,411
Anthony W. Armstrong 960
Kent B. Foster 268,305
---------
348,512
=========
All directors and executive
officers as a group(1)(2) 1,208,310 Represents
========= less than 1/5
of 1 percent
of outstanding
common stock.
</TABLE>
(1) Includes shares acquired through participation in GTE's Consolidated
Employee Stock Ownership Plan and/or the GTE Savings Plan.
(2) Included in the number of shares beneficially owned by Messrs.
Foster, Cahill, Dinsmore, Esstman, White, Sparrow, Ms. Edwards and
Mr. Armstrong and all directors and executive officers as a group
are 214,539; 32,616; 39,499; 46,466; 109,299; 50,716; 9,033; 300 and
959,759 shares, respectively, which such persons have the right to
acquire within 60 days pursuant to stock options.
(c) There were no changes in control of the Company during 1994.
The Federal securities laws require the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
any equity securities of the Company.
-47-
<PAGE> 50
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required, all persons subject to these reporting requirements filed the
required reports on a timely basis. All of the Company's common stock is owned
by GTE and, to the Company's knowledge, none of such directors or executive
officers currently owns, or has ever owned, any shares of the Company's
registered preferred stock (which is the only registered class of the Company's
equity securities).
Item 13. Certain Relationships and Related Transactions
The Company's executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest. None of the Company's directors were involved
in any business relationships with the Company.
-48-
<PAGE> 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE Northwest Incorporated's
consolidated financial statements and report of independent
accountants thereon in the Financial Statements section included
elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended December
31, 1994-1992 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than that listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1* Agreement of Merger dated November 18, 1992 between
Contel of the Northwest, Inc. and GTE Northwest
Incorporated. (Exhibit 2.1 of the 1993 Form 10-K, File
No. 0-2908.)
3*
4* Indenture dated as of April 1, 1994 between GTE
Northwest Incorporated and Bank of America National
Trust and Savings Association, as Trustee (Exhibit 4.1
of the Company's Registration Statement on Form S-3,
File No. 33-52909).
27 Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth
quarter of 1994.
* Denotes exhibits incorporated herein by reference to previous
filings with the Securities and Exchange Commission as designated.
-49-
<PAGE> 52
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Thousands of Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
---------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Deductions
Balance at Charged Charged from Balance at
Beginning to to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1994 $ 6,602 $ 9,642 $ 14,683(2) $ 23,182 $ 7,745
=======================================================================
December 31, 1993 $ 3,654 $ 12,724 $ 13,690(2) $ 23,466 $ 6,602
=======================================================================
December 31, 1992 $ 2,265 $ 9,340 $ 18,471(2) $ 26,422 $ 3,654
=======================================================================
Accrued restructuring costs
for the year ended (Note 3):
December 31, 1994 $ 125,003 $ 0 $ 0 $ 25,459 $ 99,544
=======================================================================
December 31, 1993 $ 0 $ 125,003 $ 0 $ 0 $ 125,003
=======================================================================
December 31, 1992 $ 0 $ 0 $ 0 $ 0 $ 0
=======================================================================
</TABLE>
_____________________________________________________
NOTES:
(21 Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 2 to the Consolidated Financial Statements included elsewhere
herein.
-50-
<PAGE> 53
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 27, 1995 By EILEEN O'NEILL ODUM
-----------------------
EILEEN O'NEILL ODUM
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
EILEEN O'NEILL ODUM President March 27, 1995
----------------------------------
EILEEN O'NEILL ODUM (Principal Executive Officer)
GERALD K. DINSMORE Senior Vice President - Finance March 27, 1995
----------------------------------
GERALD K. DINSMORE and Planning and Director
(Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 27, 1995
----------------------------------
WILLIAM M. EDWARDS, III (Principal Accounting Officer)
RICHARD M. CAHILL Director March 27, 1995
----------------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 27, 1995
----------------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 27, 1995
----------------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 27, 1995
----------------------------------
THOMAS W. WHITE
</TABLE>
-51-
<PAGE> 54
Exhibit Index
Exhibit No.
-----------
2.1* Agreement of Merger dated November 18, 1992 between
Contel of the Northwest, Inc. and GTE Northwest
Incorporated. (Exhibit 2.1 of the 1993 Form 10-K, File
No. 0-2908.)
3*
4* Indenture dated as of April 1, 1994 between GTE
Northwest Incorporated and Bank of America National
Trust and Savings Association, as Trustee (Exhibit 4.1
of the Company's Registration Statement on Form S-3,
File No. 33-52909).
27 Financial Data Schedule.
* Denotes exhibits incorporated herein by reference to previous
filings with the Securities and Exchange Commission as designated.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000040877
<NAME> GTE NORTHWEST INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 953
<SECURITIES> 0
<RECEIVABLES> 239,629
<ALLOWANCES> 7,745
<INVENTORY> 11,915
<CURRENT-ASSETS> 256,133
<PP&E> 2,989,912
<DEPRECIATION> 910,694
<TOTAL-ASSETS> 2,406,033
<CURRENT-LIABILITIES> 346,958
<BONDS> 658,040
<COMMON> 448,000
2,400
0
<OTHER-SE> 516,896
<TOTAL-LIABILITY-AND-EQUITY> 2,406,033
<SALES> 906,865
<TOTAL-REVENUES> 906,865
<CGS> 214,396
<TOTAL-COSTS> 691,820
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,086
<INCOME-PRETAX> 176,808
<INCOME-TAX> 58,159
<INCOME-CONTINUING> 118,649
<DISCONTINUED> 0
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<NET-INCOME> 118,649
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</TABLE>
