<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-3090
GTE FLORIDA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-0397520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-718-5600
Securities registered pursuant to Section 12(b) of
the act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
$1.30 CUMULATIVE PREFERRED, SERIES B NEW YORK STOCK EXCHANGE
$1.25 CUMULATIVE PREFERRED NEW YORK STOCK EXCHANGE
8.16% CUMULATIVE PREFERRED NEW YORK STOCK EXCHANGE
FIRST MORTGAGE BONDS - 7 1/2% - SERIES O AMERICAN STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
(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
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
-----
THE COMPANY HAD 23,400,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1997. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
Part I
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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 13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
Part III
10. Directors and Executive Officers of the Registrant 34
11. Executive Compensation 37
12. Security Ownership of Certain Beneficial Owners and Management 45
13. Certain Relationships and Related Transactions 45
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
</TABLE>
<PAGE> 3
PART I
Item 1. Business
GTE Florida Incorporated (the Company) (formerly General Telephone Company of
Florida, formerly Peninsular Telephone Company) was incorporated on June 20,
1901, as a corporation for profit pursuant to the general corporation laws of
the state of Florida. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).
The Company has two wholly-owned subsidiaries, GTE Communications Corporation
(GTECC) and GTE Funding Incorporated (GTE Funding). GTECC contains the
majority of the Company's nonregulated operations, including the provision of
telecommunications customer premise equipment to business and residential
customers and other products and services. GTE Funding provides short-term
financing and investment vehicles and cash management services for seven of
GTE's domestic telephone operating subsidiaries. In addition, the accounts of
Televac, Inc. (Televac), a wholly-owned subsidiary of GTE and a special-purpose
entity which purchased the Company's customer and other accounts receivable,
have been consolidated with the Company.
The Company's principal line of business is providing 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)
toll service between the Company's exchanges within the central-west coast
Florida market area. InterLATA service to other points in and out of Florida
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. Business and residential
customers also pay access charges to connect to the local network to obtain
long distance services. The Company earns other revenues by providing such
services as billing and collection and operator services to interexchange
carriers. At December 31, 1996, the Company served 2,499,673 access lines in
its service territories.
At December 31, 1996, the Company had 7,182 employees.
The Company has written agreements with the International Brotherhood of
Electrical Workers (IBEW) covering substantially all hourly employees. In
1996, a new agreement was reached with the IBEW. No agreements expire in 1997.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the Florida Public Service Commission
(FPSC) as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless
carriers and cable providers, as well as more recent entry by media and
computer companies, is expected to increase in the rapidly changing
telecommunications marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The new law removes regulatory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
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The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.
Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform. In August 1996, the FCC released its rules implementing
the provision of number portability and dialing parity in accord with the
Telecommunications Act. In August 1996, the FCC also adopted its rules
governing interconnection, unbundling of network elements and wholesale prices
and other terms for competitive entry into local-exchange service. These rules
generally require local-exchange carriers (LECs) to make their services
available to competitors at a wholesale discount and to make their network
elements available to competitors at below-cost prices. GTE petitioned for
judicial review of these rules on the grounds that they were inconsistent with
the Telecommunications Act. In October 1996, the U.S. Court of Appeals for the
Eighth Circuit granted GTE's request for stay of the pricing provisions of the
FCC's rules pending the Court's resolution of the merits of GTE's petition.
Oral arguments on the merits were held in January 1997, and the Court's ruling
is expected in the spring of 1997.
GTE is continuing to negotiate with requesting carriers over the terms of
interconnection, unbundled network elements and resale rates. In some cases,
the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions. Since November 1996, a number of state commission decisions
determining the prices and terms of unresolved issues have been released (See
Note 11 of the Company's consolidated financial statements included in Item 8).
Subsequent decisions are expected to be issued over a period extending through
the first half of 1997.
The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors. The Company has filed lawsuits in
federal district courts in Florida.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services. This action will simplify GTE's ability to market local,
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. To date, local competition has been
authorized in all 28 states where GTE currently offers local telephone service,
including Florida. In addition, nineteen states, including Florida, have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. GTE has proposals pending in all nine states which have not ordered
implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. 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 Company's
markets. The FPSC has adopted price regulation for its intrastate telephone
service.
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For the provision of interstate access 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 LEC may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. LECs have limited
pricing flexibility provided they do not exceed the allowed price cap.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
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 telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities.
GTE Florida Incorporated (the Company):
Restructuring and Cost Control
During 1996, the Company substantially completed the implementation of its
three-year $194.3 million re-engineering program. Total costs of the program
included $125.2 million related to improvements in customer service processes,
$45.1 million related to improvements in administrative processes and $24
million related to the consolidation of facilities and operations and other
related costs. These costs were primarily associated with the closure and
relocation of various centers, software enhancements and separation benefits
related to employee reductions.
GTE Corporation (GTE):
Video Services
The Telecommunications Act eliminates the telephone company programming ban and
allows GTE the flexibility to choose whether it will enter the wireline video
distribution business through an open video platform arrangement or via a
standard cable television operation (Title VI). The legislation also allows
GTE to deploy video networks which are fully integrated with its telephone
operations.
GTE, through a separate subsidiary, made its initial entry into the video
market under Title VI. The most technologically-advanced hybrid fiber/coaxial
network available is being deployed. At the end of 1996, GTE had been granted
six franchises, including three franchises in Pinellas County, Florida.
Construction of the networks in those markets is underway and approximately
7,000 video subscribers were acquired in 1996, bringing GTE's total video
subscribers to approximately 15,000.
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Internet Access
GTE, through a separate subsidiary, was the first local-exchange carrier to
introduce nationwide Internet services to residential and business customers in
1996. By year-end 1996, GTE's Internet access service, marketed as GTE
Internet Solutions, was offered in over 350 cities covering 49 states,
including Florida. An agreement with UUNET Technologies provides the Internet
backbone and local dialing capabilities. Over 70,000 customers were
subscribing to GTE Internet Solutions at December 31, 1996.
GTE Long Distance
One of the most significant impacts of the Telecommunications Act's passage was
the removal of certain restrictions previously included in GTE's Consent
Decree. Prior to February 8, 1996, GTE was restricted from jointly marketing
the products and services of the Company with those of GTE's interexchange
subsidiaries. With this joint marketing restriction lifted, GTE can now offer
its customers many services on one monthly bill, with one point of contact.
This opportunity facilitated GTE's entry into the long distance business, as
discussed above. By December 31, 1996, GTE, through a separate subsidiary, was
offering the service, marketed under the name GTE Easy Savings Plan (sm), in
all 50 states and was serving over 825,000 customers.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. Currently, the Company has been named as a potentially responsible
party at a number of "Superfund Sites". GTE has reviewed each site in which it
has an involvement to establish an expected remediation cost. Based on this
review, management believes the Company is not subject to administrative or
judicial proceedings which would result in a material adverse effect on the
Company's results of operations or financial position. The Company has
established adequate reserves for estimated remediation and cleanup costs.
The Company's annual expenditures for site cleanups and environmental
compliance have not been and are not expected to be material. Costs incurred
include the Company's share of cleanup expenses for Superfund Sites, outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
4
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Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of these
properties, located in the Florida counties of Hillsborough, Manatee, Pasco,
Pinellas, Polk and Sarasota, are generally in good operating condition and
adequate to satisfy the needs of the business. Substantially all of the
Company's property is subject to the liens of its respective mortgages securing
funded debt. From January 1, 1992 to December 31, 1996, the Company made
capital expenditures of $1.4 billion for new plant and facilities required to
meet telecommunication service needs and to modernize plant and facilities.
These additions were equal to 34% of gross plant of $4.1 billion at December
31, 1996.
In the fourth quarter of 1995, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71).
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 of the Company's
consolidated financial statements in Item 8.
Item 3. Legal Proceedings
There are no pending legal proceedings which would have a material impact on
the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
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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 (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock and preferred stock, should be contacted with any
questions relating to shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call 1-
617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1996 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE through the
following universal resource: http://www.gte.com
PRODUCTS AND SERVICES HOTLINE
Shareholders may call 1-800-828-7280 to receive information concerning GTE
products and services.
6
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Item 6. Selected Financial Data
GTE Florida Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
Selected Income Statement Items (a) 1996 1995 1994 1993(b) 1992
- ----------------------------------- --------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales $1,506,272 $1,401,948 $1,327,133 $1,246,531 $1,286,725
Operating costs and expenses 1,122,670 1,058,263 1,040,478 1,210,721 947,803
--------------------------------------------------------------
Operating income 383,602 343,685 286,655 35,810 338,922
Interest - net 61,786 63,600 60,233 67,961 74,209
Income taxes (benefit) 123,736 104,612 86,167 (16,924) 98,789
--------------------------------------------------------------
Income (loss) before extraordinary charges 198,080 175,473 140,255 (15,227) 165,924
Extraordinary charges -- (378,641)(c) -- (19,751) --
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Net income (loss) $ 198,080 $(203,168) $140,255 $(34,978) $165,924
==============================================================
Dividends declared on common stock $ 319,056 $137,357 $110,504 $70,017 $110,788
Dividends declared on preferred stock 4,258 4,258 4,264 4,258 4,257
- ------------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------
Selected Balance Sheet Items 1996 1995 1994 1993 1992
- ---------------------------- --------------------------------------------------------------
(Thousands of Dollars)
Property, plant and equipment, net (c) $1,877,122 $1,949,598 $2,552,102 $2,564,383 $2,557,031
Total assets 2,398,893 2,444,771 2,990,255 2,963,152 2,884,912
Long-term debt 766,096 785,155 729,754 747,946 782,843
Shareholders' equity 778,342 903,576 1,198,359 1,172,872 1,282,125
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100%
owned by GTE Corporation.
(b) Operating income in 1993 includes a $194.3 million pre-tax charge for
restructuring costs which reduced net income by $119.7 million.
(c) See Note 2 to the consolidated financial statements included in Item 8.
7
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE Florida Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services in
24 exchanges on the central-west coast of Florida. At December 31, 1996, the
Company served 2,499,673 access lines in its service territories.
RESULTS OF OPERATIONS
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
Net income (loss) $198.1 $(203.2) $140.3
The net loss for 1995 includes one-time extraordinary charges (net of tax) of
$374.3 for the discontinuance of Statement of Financial Accounting Standards
No. 71 "Accounting for the Effects of Certain Types of Regulation" (FAS 71) and
$4.3 for the early retirement of debt in the fourth quarter of 1995.
Excluding these charges, net income increased 13% or $22.6 and 25% or $35.1 in
1996 and 1995, respectively. The increases in 1996 and 1995 are primarily
attributable to higher revenues and sales resulting from continued customer
growth, partially offset by increased operating costs and expenses associated
with higher depreciation costs.
REVENUES AND SALES
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Local services $662.4 $615.6 $578.5
Network access services 505.3 456.1 427.1
Toll services 73.7 80.8 82.0
Other services and sales 264.9 249.4 239.5
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Total revenues and sales $1,506.3 $1,401.9 $1,327.1
Total revenues and sales increased 7% or $104.4 and 6% or $74.8 in 1996 and
1995, respectively.
Local service revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. Local service
revenues increased 8% or $46.8 and 6% or $37.1 in 1996 and 1995, respectively.
The number of access lines increased by 5% and 4% in 1996 and 1995,
respectively, which generated additional revenues of $21.4 and $15.6. The 1996
increase is also attributable to a $7.4 increase in revenues from enhanced
customer calling features, such as SmartCall (R); a $5.1 increase in Centranet
(R) sales; a $5.9 growth in integrated digital services revenues and a $10.3
favorable settlement from a previous rate case (as discussed in Note 11 of the
consolidated financial statements included in Item 8). The 1996 increase is
slightly offset by a $5 decrease in private line sales and public telephone
services. Additionally, the 1995 increase is driven by a $5.7 growth in
revenues from enhanced custom calling features, a $6.4 growth in new services
revenues, including Integrated Services Digital Network (ISDN), a $2.5 growth
in private line revenues and a $2.8 growth in operator services revenues.
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Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local- exchange network in providing long
distance services. In addition, business and residential customers pay access
fees to connect to the local network to obtain long distance service. Cellular
service providers and other local-exchange carriers also pay access charges for
cellular and intraLATA (Local Access and Transport Area) toll calls hauled or
terminated by the Company. Network access service revenues increased 11% or
$49.2 and 7% or $29 in 1996 and 1995, respectively. Minutes of use increased
9% and 8% in 1996 and 1995, respectively, generating $27.9 and $25 of
additional revenues. Also contributing to the 1996 increase are a $4.4 growth
in end user access charge revenues, an $11 growth in special access revenues
due to an increase in lines and a $3 increase in support payments received from
the National Exchange Carrier Association (NECA). The 1996 increase also
includes the net effect of interstate rate changes that resulted in additional
revenues of $3.4 associated with the Federal Communications Commission (FCC)
Price Cap (as discussed in Note 11 of the consolidated financial statements
included in Item 8). Additionally, the 1995 increase reflects a $6.3 growth in
end user access charges and the net effect of interstate rate changes of $13.1
related to the FCC Price Cap. The 1995 increase is partially offset by $14.1
of lower interstate access revenues associated with the affiliate audit price
reductions and a $2.5 reduction in support payments from NECA.
Toll service revenues are based on fees charged for service beyond a customer's
local calling area but within the LATA. Toll service revenues decreased 9% or
$7.1 and 1% or $1.2 in 1996 and 1995, respectively. The 1996 decrease reflects
the impact of optional discount calling plans, which effectively lowered
intrastate toll rates, and intraLATA competition, partially offset by an
increase in toll volumes. The 1995 decrease is primarily driven by a decline
in toll usage resulting from intraLATA toll competition.
Other services and sales revenues increased 6% or $15.5 and 4% or $9.9 in 1996
and 1995, respectively. The 1996 increase is a result of a $6.3 increase in
equipment sales, a $4.1 increase in revenues derived from sales of voice
messaging services and a $4.2 increase related to the timing of directory
publications. The 1995 increase is attributable to an increase of $5.2 from
sales of voice messaging services, a $3.8 growth in Radio Paging sales, a $2.9
increase in cellular operator services, and a $1.7 growth in directory
revenues, partially offset by a decrease of $6.1 in equipment sales.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cost of services and sales $ 549.7 $ 540.1 $ 538.3
Selling, general and administrative 223.6 232.6 225.0
Depreciation and amortization 349.4 285.6 277.2
------------------------------------------
Total operating costs and expenses $1,122.7 $1,058.3 $1,040.5
</TABLE>
Total operating costs and expenses increased 6% or $64.4 and 2% or $17.8 in
1996 and 1995, respectively. The 1996 increase in operating costs and expenses
reflects an increase in depreciation expense of $63.8 primarily due to changes
in plant balances, one-time adjustments and prospective rate changes to reflect
revised salvage values and an increase of $16.3 in uncollectibles. Also
contributing to the 1996 increase is a $3.5 change in costs related to
actuarial adjustments to the Company's benefit plans. In addition, the 1996
increase includes an $11.5 increase in the reserve for potential settlement
costs associated with inside wire maintenance costs and other non-regulated
services, as discussed below. The 1996 increase is partially offset by an $8.9
reduction in labor and benefit costs associated with productivity gains from
process re-engineering and other cost containment programs, a $12.2 increase in
settlement gains recorded in 1996 for the Company's pension plans and $4.6 of
lower costs related to the collection of interexchange carrier receivables.
The 1995 increase in operating costs and expenses is primarily attributable to
a $6.4 increase of costs associated with the deployment of the Company's video
dialtone network in the Clearwater, Florida area, an $8.4 increase in
depreciation costs, primarily related to higher gross plant balances and other
non-recurring adjustments, and $3.3 of higher costs associated with the
collection of interexchange carrier receivables. The increase also includes
$3.1 of
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higher rental costs, $3.6 of higher advertising expenses, $2.4 of higher
digital switching software fees and a $3.4 increase in uncollectibles. These
increases are partially offset by $7.9 in nonrecurring unfavorable settlement
activities recorded in 1994, a $6.4 decrease in charges related to unbillable
calling card calls and a $5.5 settlement gain resulting from lump-sum payments
from the Company's pension plans.
OTHER EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Interest-net $ 61.8 $ 63.6 $ 60.2
Income taxes 123.7 104.6 86.2
</TABLE>
Interest - net decreased 3% or $1.8 in 1996 and increased 6% or $3.4 in 1995.
The 1996 decrease reflects an increase in interest income from affiliate
receivables. The 1995 increase is attributable to higher levels of commercial
paper balances and additional long-term debt issued in October and November
1995, partially offset by long-term debt retired in November 1995.
Income taxes increased 18% or $19.1 and 21% or $18.4 in 1996 and 1995,
respectively. These increases are primarily driven by the corresponding
increases in pre-tax income.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. On July 1, 1996, the
Company began participating with other affiliates in a $1,500 syndicated line
of credit to back up commercial paper borrowings. Through this shared
arrangement, the Company can issue up to $300 of commercial paper.
The Company's primary source of funds during 1996 was cash flow from operations
of $482.7 compared to $385.9 for the same period in 1995. The year-to-year
increase in cash from operations primarily reflects improved results from
operations and a decrease in the Company's working capital requirements.
The Company's capital expenditures during 1996 were $282.8 compared to $283
during the same period in 1995. The 1996 expenditures reflect the Company's
continued access line growth and modernization of current facilities to support
new products and expanded service capabilities. The video network originally
constructed by the Company was transferred at its cost of $10.4 to Media
Ventures Incorporated (Media Ventures), a separate subsidiary of GTE, in the
third quarter of 1996 (as discussed in Note 11 of the Company's consolidated
financial statements included in Item 8). The Company's anticipated
construction costs for 1997 are expected to increase from the 1996 level,
reflecting the continued expansion of existing networks, upgrades associated
with the support of expanded services and compliance with the local number
portability requirements of the Telecommunications Act of 1996 (the
Telecommunications Act).
Net cash used in financing was $213 in 1996 compared to $110.4 in 1995.
Financing included an increase in short-term borrowings of $156.5 in 1996
compared to a decrease in short-term borrowings of $106.7 in 1995. The Company
retired $71.1 of long-term debt in 1996 compared to total retirements of $95.2
in 1995. In December 1995, the Company called $75.3 of long-term debt prior to
stated maturity with proceeds from short-term borrowings. The cost of calling
this debt is reflected as an after-tax charge of $4.3 in the consolidated
statements of income (as discussed in Note 2 of the consolidated financial
statements included in Item 8). External financing in 1995 included long-term
borrowings of $197.1. The Company made dividend payments of $298.3 in 1996
compared to $151.3 in 1995. In May 1995, the Company received a capital
contribution of $50 from GTE to improve the Company's financial position.
10
<PAGE> 13
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the Florida Public Service Commission
(FPSC) as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate operations.
Significant regulatory and legislative developments occurred during 1996,
including the passage of the Telecommunications Act. The Telecommunications
Act is intended to promote competition in all sectors of the telecommunications
marketplace, while preserving and advancing universal telephone service.
As a result of the Telecommunications Act, the Company may be faced with
increased competition from numerous sources, including competitive access
providers (CAPs), alternative local-exchange carriers (ALECs), interexchange
carriers (IXCs), wireless carriers, cable providers, media and computer
companies. These companies collectively have the ability to offer a broad
array of voice, video and data services to business and residential customers.
Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform. In August 1996, the FCC adopted its rules governing
interconnection. These rules generally require local-exchange carriers (LECs)
to make their services available to competitors at a wholesale discount and to
make their network elements available to competitors at below-cost prices. GTE
petitioned for judicial review of these rules on the grounds that they were
inconsistent with the Telecommunications Act. In October 1996, the U. S. Court
of Appeals for the Eighth Circuit granted GTE's request for a stay of the
pricing provisions of the FCC's rules pending the Court's resolution of the
merits of GTE's petition. Oral arguments on the merits were held in January
1997, and the Court's ruling is expected in the spring of 1997.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services. This action will simplify GTE's ability to market local,
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. To date, local competition has been
authorized in all 28 states where GTE currently offers local telephone service,
including Florida. In addition, nineteen states, including Florida, have
authorized plans that would allow customers to pre- subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. GTE has proposals pending in all nine states which have not ordered
implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. 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 Company's
markets. The FPSC has adopted price regulation for its intrastate telephone
service.
For the provision of interstate access 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
LECs may charge are increased or
11
<PAGE> 14
decreased each year by a price index based upon inflation less a predetermined
productivity target. LECs have limited pricing flexibility provided they do not
exceed the allowed price cap.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
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 telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
OTHER MATTERS
Eleven separate class action lawsuits were brought against GTE and twelve of
its subsidiaries (GTE Defendants), including the Company, relating to the
provision of inside wire maintenance services. On August 6, 1996, the GTE
Defendants and class counsel executed and filed a settlement agreement in one
of the lawsuits. The Court preliminarily approved the agreement and
conditionally certified a national class of plaintiffs for settlement purposes.
A fairness hearing on the settlement was held on December 18, 1996. On January
21, 1997, the Court approved the settlement as written and issued a permanent
injunction to prohibit future lawsuits covering any claims from 1987 to the
date of settlement. Pursuant to the settlement, a proof of claim form was
inserted into the March 1997 customer bills for the national class to request
their benefits under the settlement. Management believes that the Company has
adequately provided for this settlement in its financial statements for the
year ended December 31, 1996.
The Company is managing a class action lawsuit involving disputes over amounts
billed for rental telephones. An agreement has been reached for an indefinite
extension of time to allow the parties to discuss the possibility of a
settlement. Management believes that the Company has adequately provided for
this settlement in its financial statements for the year ended December 31,
1996.
INITIATIVES
In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities. Further information regarding these initiatives is discussed in
Item 1.
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.
12
<PAGE> 15
Item 8. Financial Statements and Supplementary Data
GTE Florida Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- ----------------------- --------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
REVENUES AND SALES (a)
Local services $662,413 $615,646 $578,535
Network access services 505,247 456,052 427,076
Toll services 73,677 80,825 81,993
Other services and sales 264,935 249,425 239,529
--------------------------------------------
Total revenues and sales 1,506,272 1,401,948 1,327,133
--------------------------------------------
OPERATING COSTS AND EXPENSES (b)
Cost of services and sales 549,629 540,082 538,271
Selling, general and administrative 223,620 232,555 224,971
Depreciation and amortization 349,421 285,626 277,236
--------------------------------------------
Total operating costs and expenses 1,122,670 1,058,263 1,040,478
--------------------------------------------
OPERATING INCOME 383,602 343,685 286,655
OTHER EXPENSES
Interest - net 61,786 63,600 60,233
--------------------------------------------
INCOME BEFORE INCOME TAXES 321,816 280,085 226,422
Income taxes 123,736 104,612 86,167
--------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGES 198,080 175,473 140,255
Extraordinary charges -- (378,641) --
--------------------------------------------
NET INCOME (LOSS) $198,080 $(203,168) $140,255
============================================
</TABLE>
(a) Includes billings to affiliates of $100,073, $96,172 and $94,765 for the
years 1996-1994, respectively.
(b) Includes billings from affiliates of $86,586, $93,354 and $85,340 for
the years 1996-1994, respectively.
See Notes to Consolidated Financial Statements.
13
<PAGE> 16
GTE Florida Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
- ----------- -----------------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 365 $ 3,066
Receivables, less allowances of $33,486 and $17,717 339,578 332,842
Note receivable from affiliate 2,227 5,412
Inventories and supplies 22,350 17,733
Deferred income tax benefits -- 9,394
Other 4,793 7,961
-----------------------------
Total current assets 369,313 376,408
-----------------------------
Property, plant and equipment, net 1,877,122 1,949,598
Employee benefit plans 135,028 96,448
Other assets 17,430 22,317
-----------------------------
Total assets $ 2,398,893 $ 2,444,771
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 178,700 $ 78,634
Accounts payable 42,588 71,104
Affiliate payables and accruals 60,882 54,331
Advanced billings and customer deposits 33,004 33,682
Taxes payable 10,614 876
Accrued interest 8,960 9,111
Accrued payroll costs 40,520 38,177
Dividends payable 59,004 34,027
Accrued restructuring costs -- 101,905
Deferred tax liabilities 4,845 --
Other 51,280 14,252
-----------------------------
Total current liabilities 490,397 436,099
-----------------------------
Long-term debt 766,096 785,155
Deferred income taxes 181,882 199,598
Employee benefit plans 175,675 117,050
Other liabilities 6,501 3,293
-----------------------------
Total liabilities 1,620,551 1,541,195
-----------------------------
Shareholders' equity:
Preferred stock 60,096 60,096
Common stock (23,400,000 shares issued) 585,000 585,000
Additional paid-in capital 50,289 50,289
Retained earnings 82,957 208,191
-----------------------------
Total shareholders' equity 778,342 903,576
-----------------------------
Total liabilities and shareholders' equity $ 2,398,893 $ 2,444,771
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE> 17
GTE Florida Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- ----------------------- -------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATIONS
Income before extraordinary charges $ 198,080 $175,473 $ 140,255
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 349,421 285,626 277,236
Deferred income taxes (3,477) 27,786 1,768
Provision for uncollectible accounts 42,472 27,444 23,956
Change in current assets and current liabilities:
Receivables - net (58,768) (67,550) (54,606)
Other current assets (4,501) 2,614 16,441
Accrued taxes and interest 12,639 (29,331) 23,935
Other current liabilities (51,659) (33,580) (32,215)
Other - net (1,537) (2,622) 1,589
-------------------------------------------
Net cash from operations 482,670 385,860 398,359
-------------------------------------------
INVESTING
Capital expenditures (282,828) (282,957) (263,572)
Proceeds from the transfer of assets 10,434 -- --
-------------------------------------------
Net cash used in investing (272,394) (282,957) (263,572)
-------------------------------------------
FINANCING
Long-term debt issued -- 197,131 --
Long-term debt retired (71,119) (95,228) (392)
Dividends (298,337) (151,257) (71,642)
Capital contribution from GTE -- 50,000 --
Increase (decrease) in short-term obligations,
excluding current maturities 156,479 (106,694) (58,914)
Other - net -- (4,316) --
-------------------------------------------
Net cash used in financing (212,977) (110,364) (130,948)
-------------------------------------------
Increase (decrease) in cash and cash equivalents (2,701) (7,461) 3,839
Cash and cash equivalents:
Beginning of year 3,066 10,527 6,688
-------------------------------------------
End of year $ 365 $ 3,066 $ 10,527
===========================================
Cash paid during the year for:
Interest $65,059 $ 64,485 $ 59,842
Income taxes 115,845 99,388 59,460
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 18
GTE Florida Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
-----------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1993 $ 60,096 $ 585,000 $ 289 $ 527,487 $ 1,172,872
Net income 140,255 140,255
Dividends declared (114,768) (114,768)
----------------------------------------------------------------
Shareholders' equity, December 31, 1994 60,096 585,000 289 552,974 1,198,359
Net loss (203,168) (203,168)
Dividends declared (141,615) (141,615)
Capital contribution from GTE 50,000 -- 50,000
----------------------------------------------------------------
Shareholders' equity, December 31, 1995 60,096 585,000 50,289 208,191 903,576
Net income 198,080 198,080
Dividends declared (323,314) (323,314)
---------------------------------------------------------------
Shareholders' equity, December 31, 1996 $ 60,096 $ 585,000 $ 50,289 $ 82,957 $ 778,342
===============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 19
GTE Florida Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE Florida Incorporated (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 various industries. At
December 31, 1996, the Company served 2,499,673 access lines in 24 exchanges on
the central-west coast of Florida. The Company is a wholly-owned subsidiary of
GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of GTE Florida
Incorporated and its wholly-owned subsidiaries, GTE Communications Corporation
(GTECC) and GTE Funding Incorporated (GTE Funding). GTE Funding provides
short-term financing and investment vehicles and cash management services for
seven of GTE's domestic telephone operating subsidiaries. In addition, the
accounts of Televac, Inc. (Televac), a wholly-owned subsidiary of GTE and a
special-purpose entity which purchased the Company's customer and other
accounts receivable, have also been consolidated with the Company. All
significant intercompany transactions have been eliminated.
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2).
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
TRANSACTIONS WITH AFFILIATES
GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company. These purchases and
services amounted to $102 million, $86.6 million and $70.6 million for the
years 1996-1994, respectively. Such purchases and services are recorded in the
accounts of the Company, at cost, which includes a normal return realized by
GTE Supply.
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
$86.6 million, $93.4 million and $85.3 million for the years 1996-1994,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's consolidated financial statements include allocated expenses
based on the sharing of certain executive, administrative, financial,
accounting, marketing, personnel, engineering and other support services being
performed at consolidated work centers among the domestic GTE Telephone
Operating Companies. The amounts charged for these affiliated transactions are
based on a proportional cost allocation method as filed with the Federal
Communications Commission (FCC).
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 $100.1 million, $96.2 million and $94.8 million for the
years 1996-1994, respectively.
17
<PAGE> 20
TELEPHONE PLANT
In 1996, the Company began providing for depreciation on a straight-line basis
over the estimated economic lives of its assets (see Note 2). The Company had
previously provided for depreciation on a straight-line basis over asset lives
approved by regulators. Maintenance and repairs of property 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 or extraordinary retirements of property where profit or
loss is recognized.
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, revenues are generally recognized when services are rendered or
products are delivered to customers.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
STOCK OPTION PLANS
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). As permitted by FAS 123, the Company continues to apply the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). The difference between the
recognition and measurement provisions of FAS 123 and APB 25 is not significant
to the Company's results of operations.
INCOME TAXES
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and
remits tax payments to GTE based on its tax liability on a separate company
basis.
Deferred tax assets and liabilities are established for temporary differences
between the way certain income and expense items are reported for financial
reporting and tax purposes and subsequently adjusted to reflect changes in tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for any deferred tax asset for which
realization is not likely.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
18
<PAGE> 21
2. EXTRAORDINARY CHARGES
In response to legislation (see Note 11) and the increasingly competitive
environment, the Company discontinued the use of FAS 71 in the fourth quarter
of 1995.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $374.3 million (net of tax benefits
of $235.2 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. In addition to the one-time
charge, beginning in 1996, the Company shortened the depreciable lives of its
telephone plant and equipment as follows:
<TABLE>
<CAPTION>
Depreciable Lives
-----------------------------
Average
Asset Category Before After
-------------- ------------------------------
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
In addition, during 1995, the Company redeemed prior to stated maturity,
approximately $75.3 million of long-term debt. These redemptions resulted in
an after-tax extraordinary charge of $4.3 million (net of tax benefits of $2.7
million).
3. RESTRUCTURING COSTS
During 1993, the Company recorded one-time restructuring costs of $194.3
million, which reduced net income by $119.7 million, primarily for incremental
costs related to implementation of the Company's re-engineering plan to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The
restructuring costs included $125.2 million to re-engineer customer service
processes and $45.1 million to re-engineer administrative processes. The
restructuring costs also included $24 million primarily to consolidate
facilities and operations and other related costs. These expenditures were
primarily associated with the closure and relocation of various service
centers, software enhancements and separation benefits associated with employee
reductions. The re-engineering plan was substantially completed in 1996,
consistent with the original cost estimates.
19
<PAGE> 22
4. PREFERRED STOCK
Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
Shares
<S> <C> <C>
Authorized ----------
$ 25 par value 4,880,000
$100 par value 1,200,000
----------
6,080,000
==========
Shares Amount
---------- ---------------------
(Thousands of Dollars)
Outstanding
$ 25 par value --
$ 1.30 Series B 475,900 $ 11,897
$ 1.25 Series 371,900 9,298
$100 par value --
8.16 % Series 389,010 38,901
---------- ----------------
Total 1,236,810 $ 60,096
========== ================
</TABLE>
There were no retirements, redemptions or other activity for the years
1996-1994.
In the event of non-payment of at least twelve months of accrued dividends,
each class of preferred shareholders, voting as a class, will be entitled to
elect two directors in addition to those 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, 1996.
At December 31, 1996 and 1995, the Company held 3,130 shares as treasury stock.
No shares of preferred stock were reserved for officers and employees, or for
options, warrants, conversions or other rights.
5. COMMON STOCK
The authorized common stock of the Company consists of 50,000,000 shares with a
par value of $25 per share. All outstanding shares of common stock are held by
GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1996, $8.5 million of retained earnings were restricted as to
the payment of cash dividends on common stock under the terms of the Company's
Articles of Incorporation.
20
<PAGE> 23
6. DEBT
Long-term debt as of December 31, was as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
5 3/8 % Series K, due 1996 $ $
-- 16,000
6 1/2 % Series L, due 1997 20,000 20,000
8.0 % Series N, due 2001 45,000 45,000
7 1/2 % Series O, due 2002 50,000 50,000
5 1/4 % Series Y, due 1996 -- 30,000
8 3/8 % Series BB, due 2027 75,000 75,000
Debentures:
6.31 % Series A, due 2002 200,000 200,000
7.41 % Series B, due 2023 200,000 200,000
7.25 % Series C, due 2025 100,000 100,000
6.25 % Series D, due 2005 100,000 100,000
Promissory note - affiliated company:
7 3/4 % Note payable to GTE Finance Corporation, due 1996 -- 25,000
Other 253 372
----------------------------------------
Total principal amount 790,253 861,372
Less: discount and premium - net (4,047) (5,106)
----------------------------------------
Total 786,206 856,266
Less: current maturities of long-term debt (20,110) (71,111)
----------------------------------------
Total long-term debt $ 766,096 $ 785,155
========================================
</TABLE>
The aggregate principal amount of first mortgage 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 discounts and
premiums on the Company's outstanding long-term debt are amortized over the
lives of the respective issues. Substantially all of the Company's telephone
plant is subject to the liens of the indentures under which the bonds listed
above were issued.
Estimated payments of long-term debt during the next five years are: $20.1
million in 1997; do not exceed $0.1 million in 1998-2000 and $45 million in
2001.
21
<PAGE> 24
Total short-term obligations at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rate 5.4% $120,600 $ --
Notes payable to affiliate - average rates 5.6% and 6.1% 37,990 7,523
Current maturities of long-term debt 20,110 71,111
-------- --------
Total $178,700 $ 78,634
======== ========
</TABLE>
On July 1, 1996, the Company began participating with other affiliates in a
$1.5 billion syndicated line of credit to back up commercial paper borrowings.
Through this shared arrangement, the Company can issue up to $300 million of
commercial paper.
7. FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1996, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, was lower than the carrying value by approximately $11
million. The estimated fair value of long-term debt as of December 31, 1995,
exceeded the carrying value by approximately $22 million.
22
<PAGE> 25
8. INCOME TAXES
The income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $ 105,591 $ 64,469 $ 71,291
State 21,622 12,357 13,108
----------------------------------------------
127,213 76,826 84,399
Deferred: ----------------------------------------------
Federal (2,073) 27,490 5,077
State 182 4,686 2,246
----------------------------------------------
(1,891) 32,176 7,323
----------------------------------------------
Amortization of deferred investment tax credits (1,586) (4,390) (5,555)
----------------------------------------------
Total $ 123,736 $104,612 $ 86,167
==============================================
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 111,145 $ 96,539 $ 79,248
State and local income taxes, net of federal income tax 14,173 11,078 9,980
benefits
Amortization of deferred investment tax credits, net of
federal income tax benefits (1,031) (4,390) (5,555)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net -- 1,797 2,581
Rate differentials applied to reversing temporary -- (2,875) (1,622)
differences
Other differences - net (551) 2,463 1,535
----------------------------------------------
Total provision $ 123,736 $ 104,612 $ 86,167
==============================================
</TABLE>
The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 200,215 $ 224,349
Employee benefit obligations (66,627) (53,183)
Prepaid pension cost 53,081 36,896
Revenue and expense recognition: directory publications 14,604 22,412
Investment tax credits 53 1,084
Other - net (14,599) (41,354)
----------------------------
Total $ 186,727 $ 190,204
============================
</TABLE>
23
<PAGE> 26
9. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors 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 1996-1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------
(Thousands of Dollars)
<S> <S> <C> <C>
Benefits earned during the year $ 18,804 $ 16,083 $ 19,154
Interest cost on projected benefit obligations 45,075 42,713 39,581
Return on plan assets:
Actual (151,659) (181,297) 1,374
Deferred 71,591 109,493 (71,412)
Other - net (11,976) (16,429) (14,831)
---------------------------------------------
Net pension credit $ (28,165) $ (29,437) $(26,134)
=============================================
</TABLE>
The expected long-term rate of return on plan assets was 9.0% for 1996 and 8.5%
for 1995 and 1994.
The funded status of the plans and the net prepaid pension cost at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 406,305 $ 377,788
===========================
Accumulated benefit obligations $ 473,638 $ 451,830
===========================
Plan assets at fair value $1,060,818 $ 998,213
Less: projected benefit obligations 616,557 598,476
---------------------------
Excess of assets over projected obligations 444,261 399,737
Unrecognized net transition asset (42,645) (51,466)
Unrecognized net gain (266,588) (251,823)
---------------------------
Net prepaid pension cost $ 135,028 $ 96,448
===========================
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <S> <C>
Discount rate 7.50% 7.50%
Rate of compensation increase 5.25% 5.25%
</TABLE>
24
<PAGE> 27
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 1996-1994 included the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 8,119 $ 6,895 $ 7,777
Interest on accumulated postretirement benefit obligations 27,530 26,038 25,012
Amortization of transition obligation 12,678 12,884 13,059
Other - net 508 645 (1,136)
---------------------------------------------
Postretirement benefit cost $48,835 $46,462 $44,712
=============================================
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $187,767 $183,525
Fully eligible active plan participants 12,704 7,055
Other active plan participants 191,301 179,605
-------------------------
Total accumulated postretirement benefit obligations 391,772 370,185
Less: fair value of plan assets -- --
-------------------------
Excess of accumulated obligations over plan assets 391,772 370,185
Unrecognized transition obligation (199,261) (215,532)
Unrecognized net loss (19,821) (41,379)
-------------------------
Accrued postretirement benefit obligations $172,690 $113,274
=========================
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1996 and December 31, 1995. The
assumed health care cost trend rate was 8.75% in 1996 and averaged 9.75% in
1995 and is assumed to decrease gradually to an ultimate rate of 6.0% in the
year 2004. A one percentage point increase in the assumed health care cost
trend rates for each future year would have increased 1996 costs by $5.7
million and the accumulated postretirement benefit obligations, as of December
31, 1996, by $60.6 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 $6.3 million, $8 million, and $6 million in 1996-1994,
respectively.
25
<PAGE> 28
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------
(Thousands of Dollars)
<S> <C> <C>
Land $ 20,266 $ 21,135
Buildings 207,365 208,668
Plant and equipment 3,555,745 3,368,946
Other 305,437 336,331
----------------------------
Total 4,088,813 3,935,080
Accumulated depreciation (see Note 2) (2,211,691) (1,985,482)
----------------------------
Total property, plant and equipment - net $1,877,122 $1,949,598
============================
</TABLE>
Depreciation expense in 1996-1994 was equivalent to a composite average
percentage of 8.8%, 7.6%, and 7.5%, respectively.
11. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the Florida Public Service
Commission (FPSC). The Company is subject to regulation by the FCC for
interstate business.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) in conformity
with state commission orders. The Company also provides long distance access
services directly to interexchange carriers and other customers who provide
services between LATAs. The FPSC has approved extended area calling plans for
certain intraLATA long distance routes. Under these plans, residential
customers pay a flat rate per message and business customers pay a reduced rate
per minute for these calls. Revenues from calls under the extended area
calling plans are classified as local network services.
On January 21, 1993, the FPSC issued an order effective January 6, 1993 to
reduce rates by $14.5 million. This order established a midpoint return on
equity of 12.2% for 1993 and beyond for all state ratemaking purposes. The
Company filed a motion for reconsideration of the rate order and the FPSC
lowered the rate reduction by $0.8 million. The Company filed an appeal of
various aspects of the FPSC's rate case decision with the Florida Supreme
Court. Oral arguments were heard by the Court on January 31, 1994. On July 7,
1994, the Court issued its opinion accepting the Company's argument that the
FPSC should not have made a $4.8 million adjustment for expenses associated
with affiliate transactions and remanded this issue to the FPSC. Effective May
2, 1995, the FPSC approved a $4.8 million increase to certain local rates;
however, it did not approve a surcharge to recover lost revenues for the period
that the wrongful decision was in effect. Consequently, the Company filed an
appeal of the surcharge issue with the Florida Supreme Court. On February 29,
1996, the Florida Supreme Court reversed the FPSC's surcharge decision, finding
that the Company is entitled to recovery of its erroneously disallowed expenses
for the period of May 27, 1993, through May 3, 1995. On remand, the FPSC
approved a one-time surcharge; therefore, the Company recorded $10.3 million of
revenues in the first quarter of 1996. The Company billed the surcharge in
October 1996.
On February 13, 1995, the FPSC ordered implementation of intraLATA 1+
pre-subscription which allows customers to choose their primary carrier for
intraLATA toll calls. Currently, the local phone company carries all intraLATA
toll calls when the customer dials one plus the called number. With
pre-subscription, the customer is able to choose the
26
<PAGE> 29
local telephone company, or other company, to carry these calls. The Company
completed the necessary system changes in February 1997.
Effective July 1, 1995, the Florida Legislature passed a bill which replaces
earnings regulation with price regulation and opens the local-exchange to
competition. The Company became subject to price regulation effective January
3, 1996. Under the price regulation provisions, basic service, multi-line
business local-exchange service and intrastate access rates are capped for
three years, until January 1, 1999. Basic service rates can continue to be
capped for an additional two years if the level of competition does not justify
elimination of the cap. Subsequent to the price cap period, prices for basic
services can be increased by an inflation factor (measured by GDP-PI) less 1%
annually. Rates for non-basic services, defined as services other than basic,
interconnection and network access, can increase by up to 6% per year if no
competition exists and up to 20% if there is more than one certified provider
of the service. Additionally, intrastate access rates that are higher than
interstate access rates must be reduced by at least 5% annually until parity
with 1994 interstate rates is attained. The estimated impact of the intrastate
access rate reductions to the Company is a loss of $7.7 million of revenues
annually, effective October 1, 1996. The rates from the first annual filing
under these provisions were effective October 1, 1996. Other provisions of
this legislation included the following: (1) interconnection prices, terms and
conditions will be negotiated between the companies, with the FPSC to resolve
the matter if an agreement cannot be reached; (2) LECs must unbundle services
to the extent that it is technically and economically feasible; (3) LECs retain
carrier of last resort responsibility until January 1, 2000; (4) lifeline
funding, which is designed to support low income customers, is required, of
which the Company is expected to fund approximately $3 million annually; (5) a
temporary number portability solution was reached by the FPSC; and (6) LECs
subject to price regulation are allowed to set their own depreciation rates.
On January 17, 1997, the FPSC issued its decision in the Company's arbitration
with AT&T and MCI to determine interconnection, resale, and unbundling terms
and conditions. The discount rate for the Company's resold services was set at
13.04%. The FPSC also established prices for unbundled network elements and
ordered the Company to provide real- time and interactive access to its
operation support systems by January 1, 1997. On January 13, 1997, the Company
filed a lawsuit in the U.S. District Court challenging portions of the FPSC's
arbitration determinations.
On February 6, 1997, the FPSC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T and MCI.
This decision reaffirmed the rates issued in the previous arbitration
proceedings involving AT&T and MCI.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. LECs may, within certain
ranges, price individual services above or below the overall cap.
In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options reflected an increase to the 3.3% productivity factor
used since 1991. The Company selected a 4.0% productivity factor for use in
the 1995-1996 tariff year. The Company must share with customers 50% of
returns over a 12.25% ROR and up to a 13.25% ROR, and share with customers 100%
of returns over a 13.25% ROR. Since the Company's access fees were priced
significantly below the FCC's maximum price, the Company was permitted to file
tariffs effective May 24, 1995, to increase rates $30.2 million, annually. In
addition, the Company filed tariffs effective August 1, 1995, under the interim
rules to reduce rates $13.4 million, annually. On September 20, 1995, the FCC
released its proposed rulemaking proceeding on price caps which proposes
specific changes to reflect and encourage emerging competition in local and
access services markets and to establish the path towards decreased regulation
of LECs' services. On September 27, 1995, the FCC solicited comments on a
number of specific issues regarding methods for establishing the price caps,
such as productivity measurements, sharing, the common line formula, and
exogenous costs.
27
<PAGE> 30
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. On June 24, 1996, the FCC
ordered all LECs subject to price cap regulation, including the Company, to
update their GDP-PI inflation factors through the fourth quarter of 1995.
Overall, the final 1996 interstate access filing resulted in an annual price
reduction of $1 million, effective July 1, 1996.
In May 1995, the FCC approved GTE's applications to construct a new fiber optic
and coaxial-cable video dialtone network in four markets. During 1995 and the
first six months of 1996, the Company had expended $10.4 million on the
construction of its broadband video dialtone network in Clearwater, Florida.
In June 1996, the City of Clearwater, Florida approved a cable TV franchise
application which enabled GTE to begin offering cable service through its
subsidiary, Media Ventures Incorporated (Media Ventures), on June 24, 1996.
As a result, the network originally constructed by the Company was transferred
at its cost to Media Ventures in the third quarter of 1996. All future cable
services will be offered by GTE through Media Ventures.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The new law removes regulatory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.
On August 8, 1996, the FCC published its First Report and Order (the Order)
containing rules implementing Section 251 of the Telecommunications Act dealing
with interconnection, unbundling of network elements and wholesale prices and
other terms for competitive entry into local-exchange service. On August 9,
1996, the FCC released its Second Report and Order implementing the provision
of number portability and dialing parity in accordance with the
Telecommunications Act.
On September 16, 1996, GTE filed an appeal and motion for stay of the Order
with the United States Court of Appeals for the District of Columbia. This
appeal argued that the FCC had no jurisdiction to impose national pricing rules
for what is essentially local service. This appeal was subsequently
transferred to the Court of Appeals for the Eighth Circuit together with
appeals by other LECs and state regulatory commissions. On October 15, 1996,
the Eighth Circuit granted a partial stay. The stay delays implementation of
the Order's pricing provisions and associated rules, as well as the rules
requiring GTE and other LECs to permit requesting carriers to select terms and
conditions from various agreements between them and other carriers for purposes
of interconnection. On November 12, 1996, the Supreme Court denied
applications to vacate the stay filed by the FCC and various companies seeking
to enter the local-exchange business. Additionally, the Court held oral
arguments on the merits on January 17, 1997. The Court's ruling is expected in
the spring of 1997.
While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access and billing and
collection during the years 1996-1994 under various arrangements and amounted
to $195.7 million, $194.2 million and $182.1 million, respectively.
28
<PAGE> 31
12. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. The majority of lease commitments relate to the lease of the
Company's headquarters building at One Tampa City Center. Rental expense was
$28.4 million in 1996 and $27.4 million in 1995 and 1994. Minimum rental
commitments under noncancelable leases through 2001 do not exceed $18.4 million
annually and aggregate $16 million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
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. The Company continues to support greater competition in
telecommunications, provided that, overall, the actions to eliminate existing
legal and regulatory barriers benefit consumers by allowing an opportunity for
all service providers to participate in a competitive marketplace under
comparable conditions.
29
<PAGE> 32
13. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized 1996 and 1995 quarterly financial data is as follows:
<TABLE>
<CAPTION>
Revenues Operating Net Income
and Sales Income (Loss)
-----------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
1996
First Quarter $ 357,961 $ 100,153 $ 52,585
Second Quarter 384,508 101,842 53,512
Third Quarter 363,859 81,317 41,928
Fourth Quarter 399,944 100,290 50,055
----------------------------------------
Total $1,506,272 $ 383,602 $ 198,080
========================================
1995
First Quarter $ 326,105 $ 79,805 $ 39,331
Second Quarter 360,267 101,041 53,816
Third Quarter 343,600 68,047 31,774
Fourth Quarter (a) 371,976 94,792 (328,089)
----------------------------------------
Total $1,401,948 $ 343,685 $(203,168)
========================================
</TABLE>
(a) Net income includes $378.6 million of extraordinary charges (net of tax)
for the discontinuance of FAS 71 and the early retirement of debt as
discussed in Note 2. Income before extraordinary charges was $50.6
million.
30
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE Florida Incorporated:
We have audited the accompanying consolidated balance sheets of GTE Florida
Incorporated (a Florida corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements and the schedule and exhibit 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 and exhibit 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 Florida Incorporated and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 of the consolidated financial statements, in 1995, the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation".
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 28, 1997
31
<PAGE> 34
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 on
Form 10-K, 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.
PETER A. DAKS
President
GERALD K. DINSMORE
Senior Vice President-Finance and Planning
32
<PAGE> 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
33
<PAGE> 36
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 1,
1997 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John C. Appel 48 1996 Executive Vice President - Network Operations, GTE
Telephone Operations, 1996; Executive Vice President -
Network Operations, all GTE domestic telephone
subsidiaries of which he is not President, 1996;
Director, all GTE domestic telephone subsidiaries,
1996; President - GTE South Incorporated and GTE North
Incorporated, 1995; Senior Vice President - Regulatory
Operations, GTE Telephone Operations, 1994; President -
GTE Southwest Incorporated, 1994; State President -
Texas/New Mexico, 1993; Vice President and General
Manager - California, GTE Telephone Operations West
Area, 1992.
Richard M. Cahill 58 1993 Vice President - General Counsel, GTE Telephone
Operations, 1988; Director, all GTE domestic telephone
subsidiaries, 1993 and/or 1994; Director, GTE Vantage
Incorporated, 1991; Vice President - General Counsel,
all GTE domestic telephone subsidiaries, 1995.
Gerald K. Dinsmore 47 1993 Senior Vice President - Finance and Planning, GTE
Telephone Operations, 1994; Senior Vice President -
Finance and Planning, all GTE domestic telephone
subsidiaries, 1994; Vice President - Finance, GTE
Telephone Operations, 1993; 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.
Michael B. Esstman 50 1993 Executive Vice President - Customer Segments, GTE
Telephone Operations, 1994; Executive Vice President -
Operations, GTE Telephone Operations, 1993; Director,
all Central Area Companies, 1991; Director, all other
GTE domestic telephone subsidiaries, 1993 and/or 1994.
Thomas W. White 50 1993 President, GTE Telephone Operations, 1995; Executive
Vice President - Network Operations, GTE Telephone
Operations, 1994; Executive Vice President - GTE
Telephone Operations, 1993; Director, all GTE domestic
telephone subsidiaries, 1993 and/or 1994; Director,
Quebec-Telephone.
</TABLE>
Directors are elected annually. There are no family relationships between any
of the directors or executive officers of the Company, except that Mr. Jacobson
and Ms. Jacobson are married to one another.
34
<PAGE> 37
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.
Accordingly, the list below contains the names, ages and positions of the
executive officers of both the Company and GTE Telephone Operations (Telops) as
of March 1, 1997.
<TABLE>
<CAPTION>
Year Assumed
Present Position
---------------------
the
Name Age Telops Company Position
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas W. White 50 1995 -- President of GTE Telephone Operations
John C. Appel 48 1996 1995 Executive Vice President - Network Operations
of GTE Telephone Operations and the Company
James G. Badders 44 1994 -- Vice President-Consumer Customer Contact of GTE
Telephone Operations
Mary Beth Bardin 42 1994 1995 Vice President - Public Affairs of GTE
Telephone Operations and the Company
C. F. Bercher 53 1994 -- President - Consumer Markets of GTE Telephone
Operations
-- 1995 Vice President - Consumer Markets of the
Company
Richard M. Cahill 58 1988 1995 Vice President - General Counsel of GTE
Telephone Operations and the Company
Terri L. Compton 40 1996 -- Vice President-Business Development of GTE
Telephone Operations
C. Michael Crawford 50 1996 -- Vice President-Information Technology of GTE
Telephone Operations
Peter A. Daks 51 -- 1994 President of the Company
Gerald K. Dinsmore 47 1994 1993 Senior Vice President - Finance and Planning of
GTE Telephone Operations and the Company
William M. Edwards, 48 -- 1993 Vice President-Controller of the Company
III
Michael B. Esstman 50 1994 -- Executive Vice President - Customer Segments of
GTE Telephone Operations
Oscar C. Gomez 50 1997 -- Vice President-Diversity Marketing and
Management of GTE Telephone Operations
Gregory D. Jacobson 45 -- 1994 Treasurer of the Company
Pamela S. Jacobson 39 1996 -- Vice President-Strategic Planning of GTE
Telephone Operations
Brad M. Krall 55 1993 1995 Vice President - Centralized Operations of GTE
Telephone Operations and the Company
Michael J. McDonough 47 1996 -- Senior Vice President-Market Integration of GTE
Telephone Operations
Paul E. Miner 52 1995 -- Vice President-Program Management Office of GTE
Telephone Operations
Christopher D. Owens 41 1996 1996 Vice President-Regulatory and Governmental
Affairs of GTE Telephone Operations and the
Company
Barry W. Paulson 45 1996 1996 Vice President-Network Operations Planning and
Support of GTE Telephone Operations and the
Company
Richard L. Schaulin 54 1989 1995 Vice President - Human Resources of GTE
Telephone Operations and the Company
Leland W. Schmidt 63 1987 -- Vice President-Industry Affairs of GTE
Telephone Operations
Charles J. Somes 50 -- 1994 Secretary of the Company
Larry J. Sparrow 53 1994 -- President - Carrier Markets of GTE Telephone
Operations
-- 1995 Vice President - Carrier Markets of the Company
Lewis O. Wilks (1) 43 1996 -- President - Business Markets of GTE Telephone
Operations
-- 1996 Vice President - Business Markets of the
Company
</TABLE>
(1) Lewis O. Wilks was appointed President-Business Markets of GTE
Telephone Operations and Vice President-Business Markets of the
Company replacing Michael J. McDonough, who was appointed Senior Vice
President-Market Integration of GTE Telephone Operations.
35
<PAGE> 38
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.
36
<PAGE> 39
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 1996
Principal Executive Officer of the Company and each of the other four most
highly compensated executive officers (the named executive officers) of GTE
Telephone Operations in 1996. The information in this table under the caption
"Annual Compensation" sets forth all compensation paid to the named executive
officers by GTE Telephone Operations. The caption "Long-Term Compensation" in
this table sets forth all long-term compensation paid to the named executive
officers under employee benefit plans administered by GTE Corporation or GTE
Service Corporation. Footnote 1 to this table sets forth the actual 1996
annual compensation for each of the named executive officers that was allocated
to the Company.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------
Annual Compensation (1) Awards Payouts
------------------------------ ----------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Awards Options/ Payouts Compensation
Position in Group Year ($) (2) ($) (3) ($) ($) (4) SARs (#) ($) ($)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter A. Daks 1996 193,038 114,800 -- 19,809 19,900 202,100 8,740
President 1995 184,315 127,200 -- -- 16,900 99,400 8,294
1994 175,469 130,900 -- -- 14,300 14,600 4,390
Thomas W. White 1996 463,115 533,700 -- 81,511 183,400 770,000 10,613
President- 1995 418,884 443,800 -- -- 98,800 331,800 10,613
GTE Telephone 1994 353,508 368,200 -- -- 53,700 164,100 7,075
Operations
Michael B. Esstman 1996 369,958 359,600 -- 61,702 124,400 627,400 10,613
Executive Vice President 1995 350,731 349,400 -- -- 63,500 305,900 7,238
Customer Segments 1994 327,546 358,200 -- -- 53,700 158,300 4,998
GTE Telephone
Operations
John C. Appel 1996 295,977 380,700 -- 51,229 124,400 439,200 10,572
Executive Vice 1995 239,600 258,100 -- -- 63,500 162,800 10,194
President-
Network Operations 1994 193,023 182,400 -- -- 24,800 34,700 6,230
GTE Telephone
Operations
Larry J. Sparrow 1996 294,812 260,800 -- 41,561 81,400 404,100 10,613
President- 1995 261,866 255,600 -- -- 36,400 211,300 10,613
Carrier Markets 1994 260,662 233,800 -- -- 30,900 117,200 7,075
GTE Telephone
Operations
</TABLE>
(1) Annual Compensation represents the total annual cash compensation of
salaries, bonuses and other compensation. The Company's allocated share
for Messrs. Daks, White, Esstman, Appel and Sparrow, for whom total
annual amounts are shown above, is $307,838; $103,077; $76,647; $73,169
and $58,373, respectively.
(2) The data in the table includes fees of $15,692 and $16,607
received by Mr. White for serving as director of BC TEL during 1996 and
1995. BC TEL, a Canadian company, is an indirectly-owned subsidiary
of GTE Corporation.
37
<PAGE> 40
(3) The data in this column represents the annual bonus received by each of
the named executive officers under the GTE Corporation Executive
Incentive Plan (the EIP) in 1996. In connection with GTE's Equity
Participation Program (EPP), a portion of this amount has been deferred
into restricted stock units payable at maturity (generally, a minimum
of three years) in GTE Common Stock (Restricted Stock Units). The
number of Restricted Stock Units received was calculated by dividing
the amount of the annual bonus deferred by the average closing price of
GTE Common Stock on the NYSE composite tape for the 20 consecutive
trading days following the release to the public of GTE's financial
results for the fiscal year in which the bonus was earned (the Average
Closing Price). Additional Restricted Stock Units are received on each
dividend payment date based upon the amount of the dividend paid and
the closing price of GTE Common Stock on the composite tape of NYSE
issues on the dividend declaration date.
(4) The data in this column represents the dollar value of the matching
Restricted Stock Units based upon the Average Closing Price. Matching
Restricted Stock Units are received on the basis of one additional
Restricted Stock Unit for every four Restricted Stock Units deferred
through annual bonus deferrals described in footnote 3 above. The
matching Restricted Stock Units were designed as an inducement to
encourage full participation in the EPP and to compensate the
executives for their agreement not to realize the economic value
associated with the Restricted Stock Units representing deferred annual
bonus for a minimum of three years. Additional Restricted Stock Units
are received on each dividend payment date based upon the amount of the
dividend paid and the closing price of GTE Common Stock on the
composite tape of NYSE issues on the dividend declaration date.
Messrs. Daks, White, Esstman, Appel and Sparrow each hold a total of
2,090; 8,598; 6,509; 5,406 and 4,385 Restricted Stock Units,
respectively, which had a dollar value of $94,834; $390,134; $295,346;
$245,298 and $198,970, respectively, based solely upon the closing
price of GTE Common Stock on December 31, 1996.
(5) The column "All Other Compensation" includes, for 1996, contributions
by GTE and its related companies to the GTE Savings Plan of $6,750 for
each Messrs. Daks, White, Esstman, Appel and Sparrow and contributions
by GTE and its related companies to the GTE Executive Salary Deferral
Plan of $1,990 for Mr. Daks, $3,822 for Mr. Appel, and $3,863 for each
of Messrs. White, Esstman and Sparrow.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1996, whether
or not specifically allocated to the Company. The options and SARs were
granted under the Long-Term Incentive Plan (LTIP). Pursuant to Securities and
Exchange Commission (the SEC) rules, the table also shows the value of the
options granted at the end of the option terms (ten years) if the stock price
were to appreciate annually by 5% and 10%, respectively. There is no assurance
that the stock price will appreciate at the rates shown in the table. The
table also indicates that if the stock price does not appreciate, there will be
no increase in the potential realizable value of the options granted.
38
<PAGE> 41
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants Option Term
------------------------------------------------------- ----------------------------------
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to Or Base
Options / SARs Employees in Price Expiration
Name Granted Fiscal Year ($/SH) Date 0% 5% 10%
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter A. Daks 19,900 (1) .15% 43.75 2/20/06 -- $ 547,342 $1,386,962
Thomas W. White 91,700 (1) .69% 43.75 2/20/06 -- 2,522,173 6,391,179
91,700 (2) .69% 43.06 6/05/06 -- 2,482,539 6,290,746
Michael B. Esstman 62,200 (1) .47% 43.75 2/20/06 -- 1,710,787 4,335,129
62,200 (2) .47% 43.06 6/05/06 -- 1,683,903 4,267,005
John C. Appel 62,200 (1) .47% 43.75 2/20/06 -- 1,710,787 4,335,129
62,200 (2) .47% 43.06 6/05/06 -- 1,683,903 4,267,005
Larry J. Sparrow 40,700 (1) .31% 43.75 2/20/06 -- 1,119,438 2,836,652
40,700 (2) .31% 43.06 6/05/06 -- 1,101,847 2,792,076
</TABLE>
(1) Each option was granted in tandem with a SAR, which will expire upon
exercise of the option. Under the LTIP, each option granted may be
exercised with respect to one-third of the aggregate number of shares
subject to the grant each year, commencing one year after the date of
grant.
(2) Messrs. White, Esstman, Appel and Sparrow also received a special
"performance-based" stock option grant during 1996. The options were
granted in tandem with SARs at a price equal to the fair market value
on the date of grant. They are intended both to motivate the
executives to remain with GTE during a period of unprecedented
opportunities and challenges, and to give them an opportunity to
accelerate the enhancement of their equity position in GTE, but only if
specific and aggressive shareholder returns are met. Unlike the
three-year graduated vesting schedule that applies to the other options
reflected in the table, each performance-based option grant will vest
in three stages according to the following schedule: (i) each option
may be exercised with respect to one-third of the aggregate number of
shares represented by the grant if the closing price of GTE Common
Stock on the NYSE is $60 or more per share for 20 consecutive days (or,
if earlier, on the fifth anniversary of the grant date); (ii) each
option may be exercised with respect to an additional one-third of the
aggregate number of shares represented by the grant if the closing
price of GTE Common Stock on the NYSE is $70 or more per share for 20
consecutive days (or, if earlier, on the sixth anniversary of the grant
date); and (iii) each option may be exercised with respect to the final
one-third of the aggregate number of shares represented by the grant if
the closing price of GTE Common Stock on the NYSE is $80 or more per
share for 20 consecutive days (or, if earlier, on the seventh
anniversary of the grant date).
39
<PAGE> 42
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1996. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) Common Stock on
December 31, 1996.
<TABLE>
<CAPTION> Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs at FY-End at FY-End ($)
Acquired Value -----------------------------------------------------------
Name On Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter A. Daks -- -- 27,766 35,934 335,948 235,952
Thomas W. White 43,800 697,575 120,132 267,168 1,474,402 1,377,266
Michael B. Esstman -- -- 95,766 184,634 1,180,292 1,019,121
John C. Appel 25,467 316,222 6,400 175,001 62,400 841,706
Larry J. Sparrow 48,466 601,963 37,567 115,967 469,003 606,460
</TABLE>
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
The LTIP provides for awards, currently in the form of stock options with
tandem SARs, other stock-based awards and dollar denominated awards, to
participating employees. The stock options and tandem SARs awarded under the
LTIP to the named executive officers are shown in the table on page 39.
<TABLE>
<CAPTION>
Estimated Future Payouts
Performance Under Non-Stock Price Based Plans (1)
Number of Or Other Period --------------------------------------------
Shares, Units Until Maturation Threshold (2) Target (3)
Name Or Other Rights Or Payout (# of Units) (# of Units) Maximum (4)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter A. Daks 2,400 3 Years 697 2,679
Thomas W. White 10,900 3 Years 3,164 12,169
Michael B. Esstman 7,400 3 Years 2,148 8,262
John C. Appel 7,400 3 Years 2,148 8,262
Larry J. Sparrow 4,900 3 Years 1,422 5,471
</TABLE>
(1) An individual's award may not exceed the applicable individual award
limit, which is expressed as a percentage of the LTIP Award Pool (the
Award Limit). The Award Limit depends on the individual's base salary
at the end of the cycle, and may not exceed 3.5% of the LTIP Award
Pool. The amounts described in footnotes 2 through 4 below are subject
to and cannot exceed the Award Limit. An individual is initially
granted a specified number of GTE Common Stock equivalent units
(Equivalent Units) at the beginning of an award cycle. During the
award cycle, additional Equivalent Units are added based upon the price
of GTE Common Stock and the amount of the per share dividend paid on
each dividend payment date. It is not possible to predict future
dividends and, accordingly, estimated Equivalent Unit accruals in this
table are calculated for illustrative purposes only and are based upon
the dividend rate and price of GTE Common Stock at the close of
business on December 31, 1996. The Target future payout or award is
the dollar amount derived by multiplying the Equivalent Unit balance
credited to the participant at the end of the award cycle by the price
of GTE Common Stock. The Target award measures performance attainment
as described in footnote 3.
(2) The Threshold represents attainment of minimum acceptable levels of
performance (the Threshold Levels) with respect to the five Long-Term
Performance Bonus measures (the Measures) adopted for the 1996-1998
40
<PAGE> 43
Performance Bonus award cycle -- revenue growth; earnings per share
(EPS) growth; earnings before interest, taxes, depreciation and
amortization (EBITDA) growth; average return on investment (ROI); and
relative total shareholder return (TSR). If the Threshold Level is
attained with respect to each of the Measures, the award will be equal
to approximately 25% of the combined Target award (the TSR Threshold is
set at 50%, while the Threshold for the other four Measures is set at
20%). Because performance is measured separately for each Measure, it
is possible to receive an award if the Threshold Level is achieved with
respect to at least one but not all of the Measures. If the actual
results for all Measures are below the Threshold Levels, no award will
be paid.
(3) The Target represents attainment of levels of three-year revenue
growth, EPS growth, EBITDA growth, ROI and TSR established at the
beginning of a cycle (the Target Levels). If GTE's actual results for
each of the Measures are equivalent to the Target Levels, this would
represent outstanding performance, and the award will be equal to 100%
of the combined Target award. GTE's performance is measured separately
for each Measure. Accordingly, if the actual result for any Measure is
at the applicable Target Level, the portion of the award determined by
that Measure will be at 100% of the Target award for that Measure.
Similarly, the portion of the award determined by any Measure
performing at less than the applicable Target Level, but above the
Threshold, will be less than the Target award for that Measure.
(4) This column has intentionally been left blank because it is not
possible to determine the maximum number of Equivalent Units until the
award cycle has been completed. Subject to the Award Limit discussed
in footnote 1 above, the maximum amount of the award is limited by the
extent to which GTE's actual results for the five Measures exceed the
Target Levels. If GTE's actual results during the cycle for the five
Measures exceed the respective Target Levels, additional awards may be
paid, based on a linear interpolation. For example, for revenue
growth, the schedule is as follows:
<TABLE>
<CAPTION>
Performance Increment Above
Revenue Performance Target Added Percentage to Combined Awards
-------------------------- -----------------------------------
<S> <C>
Each 0.1% improvement in cumulative
revenue growth +2%
</TABLE>
Thus, if the revenue growth Measure exceeds its Target Level by .5%
while the remaining four Measures are precisely at their respective
Target Levels, then the performance bonus will equal 110% of the
combined Target award.
41
<PAGE> 44
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. White, Esstman
and Appel 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) any person or group of
persons acquires, other than from GTE or as described below, 20% (or under
certain circumstances, a lower percentage, not less than 10%) of GTE's voting
power, (b) three or more directors are elected in any twelve-month period
without the approval of a majority of the members of GTE's Incumbent Board (as
defined in the Agreements) then serving as members of the Board, (c) the
members of the Incumbent Board no longer constitute a majority of the Board of
Directors or (d) GTE's shareholders approve (i) a merger, consolidation or
reorganization involving GTE, (ii) a complete liquidation or dissolution of GTE
or (iii) an agreement for the sale or other disposition of all or substantially
all of the assets of the Corporation to any person other than a subsidiary of
GTE. 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. Notwithstanding the foregoing, 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 consist of members of the Board and
no person owns more than 20% (or under certain circumstances, a lower
percentage, not less than 10%) of the voting power of the surviving corporation
following the transaction, and (2) transactions in which GTE's securities are
acquired directly from GTE.
The Agreements provide for benefits to be paid in the event these individuals
separate from service and have a "good reason" for leaving or are terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes but is not limited to the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his percentage awards under the EIP for the previous three years.
The executive will also continue to receive medical and life insurance coverage
for up to two years and will be provided with financial and outplacement
counseling.
In addition, the Agreements with Messrs. White, Esstman and Appel provide that
in the event of a separation from service, they will receive service credit in
the following amounts: two times years of service otherwise credited if the
executive has five or fewer years of credited service; 10 years if credited
service is more than five and not more than 10 years; and, if the executive's
credited service exceeds 10 years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan (SERP) and the GTE Corporation
Executive Retired Life Insurance Plan (ERLIP). In addition, each executive
covered under an Agreement 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.
Each of the Agreements remain in effect until July 1, 1999 unless 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 his
respective 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.
42
<PAGE> 45
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 (integrated with social security as
described below) and years of service, is illustrated in the following table:
PENSION PLAN TABLE
<TABLE>
<CAPTION> Years of Service
Final Average ---------------------------------------------------------------------------
Earnings 15 20 25 30 35
- -------------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$150,000 $31,388 $41,850 $52,313 $62,775 $73,238
200,000 42,263 56,350 70,438 84,525 98,613
300,000 64,013 85,350 106,688 128,025 149,363
400,000 85,763 114,350 142,938 171,525 200,113
500,000 107,513 143,350 179,188 215,025 250,863
600,000 129,263 172,350 215,438 258,525 301,613
700,000 151,013 201,350 251,688 302,025 352,363
800,000 172,763 230,350 287,938 345,525 403,113
900,000 194,513 259,350 324,188 389,025 453,863
1,000,000 216,263 288,350 360,438 432,525 504,613
1,200,000 259,763 346,350 432,938 519,525 606,113
1,500,000 325,013 433,350 541,688 650,025 758,363
2,000,000 433,763 578,350 722,938 867,525 1,012,113
</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 all GTE employees
based on years of service and earnings. Pension benefits to be paid from the
Service Corporation Plan and contributions to the Service Corporation Plan are
related to basic salary exclusive of overtime, differentials, incentive
compensation (except as otherwise described) and other similar types of
payments. 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 Social Security
Act), and the 1.45% service credit being applied to that portion of the average
annual salary for the five highest consecutive years that exceeds said level up
to the statutory limit on compensation. As of December 31, 1996, the credited
years of service under the Service Corporation Plan for Messrs. Daks, White,
Esstman, Appel and Sparrow are 18, 28, 28, 25 and 29, 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 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.
43
<PAGE> 46
Executive Retired Life Insurance Plan
The ERLIP provides Messrs. Daks, White, Esstman, Appel and Sparrow a
postretirement life insurance benefit of three times final base salary. Upon
retirement, ERLIP benefits may be paid as life insurance or, alternatively, 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, may be paid 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 service on the Board.
44
<PAGE> 47
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1997:
<TABLE>
<CAPTION>
Name and Address of Shares of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
---------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C>
Common Stock of GTE GTE Corporation 23,400,000 100%
Florida Incorporated One Stamford Forum shares of record
Stamford, Connecticut 06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1996:
<TABLE>
<CAPTION>
Title of Class Name of Director or Nominee (1) (2) (3)
---------------------------------------------------------------------------------
<S> <C> <C>
Common Stock of GTE John C. Appel 45,162
Corporation Richard M. Cahill 78,150
Gerald K. Dinsmore 37,724
Michael B. Esstman 162,084
Thomas W. White 203,785
----------------------
526,905
======================
Executive Officers (1) (2) (3)
-----------------------------------------------------
Peter A. Daks 46,956
Thomas W. White 203,785
Michael B. Esstman 162,084
John C. Appel 45,162
Larry J. Sparrow 86,892
----------------------
544,879
======================
All directors and executive
officers as a group (1) (2) (3) 1,442,682
======================
</TABLE>
(1) Includes shares acquired through participation in the GTE Savings
Plan.
(2) Included in the number of shares beneficially owned by Messrs. Appel,
Cahill, Dinsmore, Esstman, White, Daks, Sparrow and all directors and
executive officers as a group are 41,667; 72,100; 35,999; 155,566;
189,765; 44,799; 73,566 and 1,261,616 shares, respectively, which such
persons have the right to acquire within 60 days pursuant to stock
options.
(3) No director, nominee for director or executive officer owns as much as
one-tenth of one percent of the total outstanding shares of GTE Common
Stock, and all directors and executive officers as a group own less
than one-fifth of one percent of the total outstanding shares of GTE
Common Stock.
(c) There were no changes in control of the Company during 1996.
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.
45
<PAGE> 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - See GTE Florida 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,
1996-1994 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
3.1* Amended Articles of Incorporation (Exhibit 3.1 of the
September 30, 1995 Form 10-Q,File No. 1-3090)
3.2* Amended Bylaws (Exhibit 3.2 of the September 30, 1995 Form
10-Q, File No. 1-3090)
4* Indenture dated as of November 1, 1993 between GTE Florida
Incorporated and NationsBank of Georgia, National
Association, as Trustee (Exhibit 4.1 of the Company's
Registration Statement on Form S-3, File No. 33-50711)
10* Material Contracts - Agreements Between GTE and Certain
Executive Officers (Exhibit 10 of the 1995 Form 10-K, File
No. 1-3090)
12 Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
1996.
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commission as designated.
46
<PAGE> 49
GTE Florida Incorporated and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
(Thousands of Dollars)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Deductions
Balance at Charged Charged from
Beginning (Credited) to (Credited) to Reserves Balance at
Description of Year Income Other Accounts (Note 1) Close of Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:
December 31, 1996 $ 17,717 $ 42,472 $ 29,930(2) $ 56,633 $ 33,486
===========================================================================
December 31, 1995 $ 19,737 $ 27,444 $ 35,928(2) $ 65,392 $ 17,717
===========================================================================
December 31, 1994 $ 25,229 $ 23,973 $ 11,665(2) $ 41,130 $ 19,737
===========================================================================
Accrued restructuring costs for the
years ended (Note 4):
December 31, 1996 $101,905 $ -- $(22,437)(3) $ 79,468 $ --
===========================================================================
December 31, 1995 $150,831 $ -- $ -- $ 48,926 $101,905
===========================================================================
December 31, 1994 $194,330 $ -- $ -- $ 43,499 $150,831
===========================================================================
</TABLE>
NOTES:
(1) Charges for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) Represents amounts necessary to satisfy commitments related to the
re-engineering program that have been reclassified to Accounts Payable and
Accrued Expenses.
(4) See Note 3 to the consolidated financial statements included elsewhere
herein.
47
<PAGE> 50
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 FLORIDA INCORPORATED
--------------------------------------
(Registrant)
Date March 25, 1997 By PETER A. DAKS
-------------- --------------------------------------
Peter A. Daks
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>
PETER A. DAKS President March 25, 1997
- ----------------------- (Principal Executive Officer)
Peter A. Daks
GERALD K. DINSMORE Senior Vice President - Finance and March 25, 1997
- ----------------------- Planning and Director
Gerald K. Dinsmore (Principal Financial Officer)
WILLIAM M. EDWARDS, III Vice President - Controller March 25, 1997
- ----------------------- (Principal Accounting Officer)
William M. Edwards, III
John C. Appel Director March 25, 1997
- -----------------------
John C. Appel
Richard M. Cahill Director March 25, 1997
- ------------------------
Richard M. Cahill
Michael B. Esstman Director March 25, 1997
- -----------------------
Michael B. Esstman
Thomas W. White Director March 25, 1997
- -----------------------
Thomas W. White
</TABLE>
48
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------- --------------------------------------------------------------------
<S> <C>
12 Statements re: Calculation of the Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE Florida Incorporated and Subsidiaries
STATEMENTS OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1993(a) 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed
charges:
Income (loss) before extraordinary
charges $198,080 $175,473 $140,255 $106,908 $(15,227) $165,924
Add - Income taxes (benefit) 123,736 104,612 86,167 59,076 (16,924) 98,789
- Fixed charges 74,240 74,226 70,285 76,786 76,786 82,184
-------------------------------------------------------------------
Adjusted earnings $396,056 $354,311 $296,707 $242,770 $ 44,635 $346,897
===================================================================
Fixed charges:
Interest expense $ 64,772 $ 65,078 $ 61,152 $ 69,529 $ 69,529 $ 74,856
Portion of rent expense
representing interest 9,468 9,148 9,133 7,257 7,257 7,328
-------------------------------------------------------------------
Adjusted fixed charges $ 74,240 $74,226 $70,285 $76,786 $76,786 $82,184
===================================================================
RATIO OF EARNINGS TO FIXED
CHARGES 5.33 4.77 4.22 3.16 -- 4.22
</TABLE>
(a) Results for 1993 include an after-tax restructuring charge of
approximately $120 million for the implementation of a re-engineering
plan and a one-time after-tax charge of approximately $2 million related
to the enhanced early retirement and voluntary separation programs
offered to eligible employees in 1993. Earnings were not adequate to
cover fixed charges in 1993. The amount of such deficiency was
approximately $32 million for the year ended December 31, 1993.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 375,291
<ALLOWANCES> 33,486
<INVENTORY> 22,350
<CURRENT-ASSETS> 4,793
<PP&E> 4,088,813
<DEPRECIATION> 2,211,691
<TOTAL-ASSETS> 2,398,893
<CURRENT-LIABILITIES> 490,397
<BONDS> 766,096
0
60,096
<COMMON> 585,000
<OTHER-SE> 133,246
<TOTAL-LIABILITY-AND-EQUITY> 2,398,893
<SALES> 1,506,272
<TOTAL-REVENUES> 1,506,272
<CGS> 549,629
<TOTAL-COSTS> 1,122,670
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,786
<INCOME-PRETAX> 321,816
<INCOME-TAX> 123,736
<INCOME-CONTINUING> 198,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,080
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
