<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 0-1210
GTE NORTH INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 35-1869961
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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
NONE
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C> <C>
$1.15 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$1.25 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$2.00 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$2.10 SERIES CUMULATIVE PREFERRED STOCK-PA NO PAR VALUE
$2.20 SERIES CUMULATIVE PREFERRED STOCK-OH NO PAR VALUE
$2.25 SERIES CUMULATIVE PREFERRED STOCK-PA NO PAR VALUE
$2.30 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.375 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.40 SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
$2.50 SERIES CUMULATIVE PREFERRED STOCK-IL NO PAR VALUE
$2.50 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$2.50C SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
$4.50 SERIES CUMULATIVE PREFERRED STOCK-WI $100 PAR VALUE
$5.00 SERIES CUMULATIVE PREFERRED STOCK-WI $100 PAR VALUE
$7.60 SERIES CUMULATIVE PREFERRED STOCK-IN NO PAR VALUE
4.60% SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
5.16% SERIES CUMULATIVE PREFERRED STOCK-MI $50 PAR VALUE
</TABLE>
(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 978,351 SHARES OF $1,000 STATED VALUE COMMON STOCK OUTSTANDING
AT FEBRUARY 28, 1997. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
<S> <C> <C>
Part I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for the Registrant's Common Equity and Related 6
Shareholder Matters
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on 37
Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners and Management 49
13. Certain Relationships and Related Transactions 49
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
</TABLE>
<PAGE> 3
PART I
Item 1. Business
GTE North Incorporated (the Company) was incorporated in Wisconsin on January
27, 1987 and was the successor to the merger of eight telephone companies into
the Company on March 31, 1987. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).
The Company has one wholly-owned subsidiary, GTW Telephone Systems
Incorporated, which markets and services telecommunications customer premises
equipment in Wisconsin. In addition, on August 30, 1995, the Company purchased
certain assets from GTE Telecom Marketing Incorporated (TMC), an affiliated
telephone sales and services 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 various industries. The Company provides local
telephone service within its franchise areas and intraLATA (Local Access
Transport Area) toll service between the Company's facilities and the
facilities of other telephone companies within the Company's LATAs. InterLATA
service to other points in and out of the states in which the Company operates
is provided through connection with interexchange (long distance) common
carriers. These common carriers are charged fees (access charges) for
interconnection to the Company's local facilities. Business and residential
customers also pay access charges to connect to the local network to obtain
long distance service. The Company earns other revenues by providing such
services as billing and collection and operator services to interexchange
carriers.
The number of access lines in the states in which the Company operates as of
December 31, 1996, was as follows:
<TABLE>
<CAPTION>
Access
State Lines Served
---------- ------------
<S> <C>
Illinois 904,598
Indiana 990,725
Michigan 697,137
Ohio 896,498
Pennsylvania 676,675
Wisconsin 512,858
---------
Total 4,678,491
=========
</TABLE>
At December 31, 1996, the Company had 11,543 employees.
In 1996, agreements were reached on four contracts with the International
Brotherhood of Electrical Workers (IBEW) and three contracts with the
Communications Workers of America (CWA). During 1997, six contracts with the
IBEW, two contracts with the CWA, and one contract with the Bakery,
Confectionary and Tobacco Workers (BCTW) will expire.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin as to its
intrastate business operations and by the Federal Communications Commission
(FCC) as to its interstate operations.
1
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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.
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 Illinois, Indiana, Michigan, Ohio, Pennsylvania and
Wisconsin.
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.
2
<PAGE> 5
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 Illinois, Indiana, Michigan, Ohio, Pennsylvania, and Wisconsin. In
addition, nineteen states, including Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, 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 of
the 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 state regulatory commissions in Michigan and Wisconsin have
adopted price regulation for intrastate telephone service. Regulatory
commissions in the states of Illinois, Indiana, Ohio and Pennsylvania continue
to remain under the traditional cost-based, rate-of-return regulatory framework
for 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 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 North Incorporated (the Company):
Restructuring and Cost Control
During 1996, the Company substantially completed the implementation of its
three-year $374.6 million re-engineering program. Total costs of the program
included $251.6 million related to improvements in customer service processes,
$90.7 million related to improvements in administrative processes and $32.3
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 service centers, software enhancements and separation
benefits related to employee reductions.
3
<PAGE> 6
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, three in California and three in 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.
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 Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. 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
<PAGE> 7
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 states of Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, 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 $3 billion for new plant and facilities required to
meet telecommunication service needs and to modernize plant and facilities.
These additions were equal to 33% of gross plant of $9.2 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 included 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
<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (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
<PAGE> 9
Item 6. Selected Financial Data
GTE North Incorporated and Subsidiary
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
Selected Income Statement Items (a) 1996 1995 1994 1993(b) 1992
- ----------------------------------- ----------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Revenues and sales $2,988,803 $ 2,861,163 $2,794,465 $2,637,564 $2,591,750
Operating costs and expenses 2,002,253 1,981,530 1,924,409 2,383,648 1,920,300
------------------------------------------------------------------
Operating income 986,550 879,633 870,056 253,916 671,450
Interest - net 113,875 114,646 109,487 113,775 115,144
Income taxes 321,175 271,743 284,293 34,925 186,764
------------------------------------------------------------------
Income before extraordinary charges 551,500 493,244 476,276 105,216 369,542
Extraordinary charges -- (1,253,960)(c) -- (14,270) --
------------------------------------------------------------------
Net income (loss) $ 551,500 $ (760,716) $ 476,276 $ 90,946 $ 369,542
==================================================================
Dividends declared on common stock $ 548,502 $ 336,000 $ 277,729 $ 165,052 $ 364,162
Dividends declared on preferred stock 2,559 2,592 2,643 2,680 2,731
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
Selected Balance Sheet Items 1996 1995 1994 1993(b) 1992
- ---------------------------- ----------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Property, plant and equipment, net (c) $2,939,321 $2,841,574 $4,780,079 $4,680,338 $4,635,444
Total assets 4,609,928 4,289,081 6,120,013 5,813,016 5,679,570
Long-term debt and preferred stock,
subject to mandatory redemption 1,549,587 1,348,437 1,384,397 1,486,589 1,387,072
Shareholders' equity 1,265,880 1,265,441 2,364,657 2,168,750 2,245,719
</TABLE>
- --------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Operating income in 1993 included a $374.6 million pre-tax charge for
restructuring costs which reduced net income by $230.8 million.
(c) See Note 2 of the consolidated financial statements included in Item 8.
7
<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE North Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services to
customers in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. At
December 31, 1996, the Company served 4,678,491 access lines in its service
territories.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
------- ------ --------
<S> <C> <C> <C>
Net income (loss) $551.5 $(760.7) $476.3
</TABLE>
The net loss for 1995 includes one-time extraordinary charges (net of tax) of
$1,241.5 for the discontinuance of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71)
and $12.5 for the early retirement of debt in the fourth quarter of 1995.
Excluding the extraordinary charges discussed above, net income increased 12%
or $58.3 in 1996 and 4% or $17 in 1995. The 1996 increase represents higher
revenues and sales, reflecting customer growth with a 3.7% increase in access
lines and an 11% increase in minutes of use, and lower depreciation expense,
partially offset by higher operating costs. The 1995 increase is primarily
attributable to higher revenues and sales reflecting customer growth, partially
offset by higher depreciation expense and higher operating costs.
REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Local services $1,148.3 $1,081.1 $1,040.2
Network access services 1,081.4 1,060.7 1,032.8
Toll services 352.4 366.6 395.6
Other services and sales 406.7 352.8 325.9
-------- -------- --------
Total revenues and sales $2,988.8 $2,861.2 $2,794.5
</TABLE>
Total revenues and sales increased 4% or $127.6 in 1996 and 2% or $66.7 in
1995.
Local service revenues are based on fees charged to customers for providing
local telephone exchange service within designated franchise areas. Local
service revenues increased 6% or $67.2 in 1996 and 4% or $40.9 in 1995. The
number of access lines increased 3.7% in 1996, generating $30.9 of additional
revenues which reflects both customer growth and second line promotions. A
revenue-neutral rate restructuring in Michigan, effective fourth quarter 1995,
resulted in an increase in local service revenues of $13, which is offset by
corresponding decreases in both network access and toll services revenues.
Also contributing to the 1996 increase are growth of $10.7 in sales of
CentraNet (R), growth of $9.7 in sales of enhanced custom calling features,
such as SmartCall (R), and growth of $4.8 in sales of
8
<PAGE> 11
integrated digital services, which enable rapid transmission of voice, data,
image and text, such as Internet access. An adjustment to correct the billing
of certain state excise taxes in the second quarter of 1996 of $7.2 partially
offsets the 1996 increases. The 1995 increase is attributable to customer
growth as reflected by a 3.5% increase in access lines, which generated
additional revenues of $28.4, and $5.2 growth in E911 revenues. In addition,
the increase represents a $13.5 growth in sales of custom calling features
(e.g. SmartCall (R), CLASS services, etc.) and Integrated Services Digital
Network (ISDN), a service that permits rapid transmission of voice, data, image
and text over one line. These increases are partially offset by a $3.4 decline
in revenues associated with rate reductions.
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 Transport Area) toll calls hauled or
terminated by the Company. Revenues derived from network access services
increased 2% or $20.7 in 1996 and 3% or $27.9 in 1995. The 1996 increase is
primarily due to an 11% increase in minutes of use, which generated $59.2 of
additional revenues. In addition, special access revenues increased $9.7
reflecting growth in dedicated lines. A reduction of $44.2 in interstate
access revenues reflecting the net effect of the rate changes associated with
the Federal Communications Commission's (FCC) 1995 and 1996 price caps and the
rate restructure in Michigan, as discussed above, partially offset the
increases to revenues in 1996. The 1995 increase is primarily due to a 10%
increase in minutes of use, which generated $38.3 of additional revenues, an $8
increase in end user access charge revenues associated with growth in access
lines and a growth in cellular and directory assistance revenues of $4.6.
These increases are partially offset by a decrease in network access service
revenues as the result of interstate price reductions of $24.5.
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 4% or
$14.2 in 1996 and 7% or $29 in 1995. The 1996 decrease reflects the impact of
optional discount calling plans, which effectively lowered intrastate long
distance rates. Additionally, this reduction results from intraLATA toll
competition, partially offset by an increase in toll volumes primarily due to
the Illinois conversion to an Originating Responsibility Plan (ORP).
Furthermore, the effect of the rate restructure in Michigan, as discussed above
in local service revenues, and $5.9 of unfavorable intrastate settlement
activity contributed to the 1996 decline in toll service revenues. The 1995
decrease is driven by a decline in toll usage resulting from 10XXX intraLATA
toll competition, price reductions and lower toll revenues for extended area
service which is offset in local service revenues.
Other services and sales revenues increased 15% or $53.9 in 1996 and 8% or
$26.9 in 1995. The 1996 and 1995 increases are primarily due to $57.1 and
$36.3, respectively, of additional Telephone Sales and Services (TSS) revenues
generated from the sale of products and services previously marketed through
GTE Telecom Marketing Incorporated (TMC). The Company purchased certain assets
from TMC, an affiliated sales and services company, in the third quarter of
1995. The 1996 increase is also related to higher directory advertising
revenues of $6.1 due to timing of publications and growth of $3.4 in sales of
radio paging and voice messaging services. These 1996 increases are partially
offset by a decrease of $12.5 in billing and collection revenues. The 1995
increase is also attributable to growth of $9 in E911 equipment, radio paging
and voice messaging revenues. These 1995 increases are partially offset by a
decrease in billing and collection revenues of $21.
9
<PAGE> 12
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cost of services and sales $1,061.0 $1,003.3 $1,027.1
Selling, general and administrative 447.1 412.8 363.4
Depreciation and amortization 494.2 565.4 533.9
Total operating costs and expenses $2,002.3 $1,981.5 $1,924.4
</TABLE>
Total operating costs and expenses increased 1% or $20.8 in 1996 and 3% or
$57.1 in 1995.
The 1996 increase represents higher cost of services and sales expense and
higher selling, general and administrative costs associated with revenue
generation efforts, reduced partially by lower depreciation costs. The 1996
increase generally reflects higher material costs of $23.8 related to business
equipment sales, greater labor costs of $17.1, including contractor costs, and
increased telecommunication costs of $15. In addition, the 1996 increase is
related to higher application software costs of $14.7, higher data processing
costs of $11.9, and higher operating taxes of $5.8. Also contributing to the
1996 increase are the change in actuarial adjustments to the Company's benefit
plans of $7.8 and a reserve of $5.7 for inside wire maintenance settlements, as
discussed below. These increases are partially offset by a net $71.2 decrease
in depreciation due to revised estimates of future net salvage value and
remaining useful lives, partially offset by growth in depreciable plant
investment. The impact of $28.1 in pension settlement gains recorded in 1996
was offset by settlement gains of $13.2 recorded in 1995 which resulted from
lump-sum payments from the Company's pension plans.
The increase in operating costs and expenses for 1995 includes the effect of
settlement gains associated with lump-sum payments from the Company's pension
plan of $13.2 recorded in 1995 offset by $62.6 recorded in 1994. Also
contributing to the 1995 increase is higher depreciation expense of $31.5 due
to revised estimates of future net salvage value and remaining useful lives and
by growth in depreciable plant investment. These 1995 increases are partially
offset by lower contractor costs of $11.5 and net decreases in carrier billing
settlements of $11.
OTHER EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest - net $113.9 $114.6 $109.5
Income taxes 321.2 271.7 284.3
</TABLE>
Interest - net remained relatively unchanged in 1996 and increased 5% or $5.1
in 1995. The 1995 increase is primarily due to higher average commercial paper
levels and higher average short-term interest rates.
Income taxes increased 18% or $49.5 in 1996 and decreased 4% or $12.6 in 1995.
The 1996 increase corresponds to the increase in pre-tax income and adjustments
to prior years' tax liabilities. The 1995 decrease includes adjustments to
prior years' tax liabilities.
10
<PAGE> 13
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 $700 of commercial paper. The Company
has an existing shelf registration statement for an additional $150 of
debentures.
The Company's primary source of funds during 1996 was cash flow from operations
of $1,094.7 compared to $819.3 in 1995. The increase in cash flow from
operations is primarily the result of lower working capital requirements and
improved results from operations. Cash from operations was also utilized to
fund the Company's re-engineering plan.
The Company's capital expenditures during 1996 were $609 compared to $608.4
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 Company's anticipated
construction costs for 1997 are expected to increase slightly from the 1996
level, reflecting the continued expansion of existing networks and upgrades
associated with the support of expanded services.
On August 30, 1995, the Company purchased certain assets from TMC, an
affiliated telephone sales and services company, for $5.2. The Company used
cash from operations to fund the purchase.
Net cash used in financing was $504.4 in 1996 compared to $204.7 in 1995. This
included dividend payments of $524.7 in 1996 compared to $294.9 in 1995. The
Company issued $200 of 7.625% debentures in May 1996 and $250 of 6.90%
debentures in November 1996 to refinance the debt called and redeemed in the
fourth quarter of 1995. Financing activities also included a decrease in
short-term debt of $398.4 for 1996 compared to an increase of $392.9 for the
same period in 1995 reflecting the repayment of commercial paper primarily from
the proceeds of the debt issuances.
At December 31, 1995, the Company had entered into forward contracts to sell
$200 of U.S. Treasury Bonds to hedge against changes in market interest rates
related to the debt the Company called and subsequently refinanced in May 1996,
discussed above. A gain of approximately $19 occurred upon settlement of the
forward contracts and is being amortized over the life of the associated
refinanced debt as an offset to interest expense.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin as to its
intrastate business operations and by the FCC as to its interstate operations.
Significant regulatory and legislative developments occurred during 1996,
including the passage of the Telecommunications Act of 1996 (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.
11
<PAGE> 14
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 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 Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. In
addition, nineteen states, including Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, 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 of
the 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 state regulatory commissions in Michigan and Wisconsin have
adopted price regulation for intrastate telephone service. Regulatory
commissions in the states of Illinois, Indiana, Ohio and Pennsylvania continue
to remain under the traditional cost-based, rate-of-return regulatory framework
for 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 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.
12
<PAGE> 15
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.
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.
13
<PAGE> 16
Item 8. Financial Statements and Supplementary Data
GTE North Incorporated and Subsidiary
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 $ 1,148,302 $ 1,081,085 $ 1,040,206
Network access services 1,081,374 1,060,670 1,032,752
Toll services 352,431 366,649 395,636
Other services and sales 406,696 352,759 325,871
----------- ----------- -----------
Total revenues and sales 2,988,803 2,861,163 2,794,465
----------- ----------- -----------
OPERATING COSTS AND EXPENSES (b)
Cost of services and sales 1,060,968 1,003,323 1,027,139
Selling, general and administrative 447,127 412,802 363,363
Depreciation and amortization 494,158 565,405 533,907
----------- ----------- -----------
Total operating costs and expenses 2,002,253 1,981,530 1,924,409
----------- ----------- -----------
OPERATING INCOME 986,550 879,633 870,056
OTHER EXPENSE
Interest - net 113,875 114,646 109,487
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 872,675 764,987 760,569
Income taxes 321,175 271,743 284,293
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY CHARGES 551,500 493,244 476,276
Extraordinary charges -- (1,253,960) --
----------- ----------- -----------
NET INCOME (LOSS) $ 551,500 $ (760,716) $ 476,276
=========== =========== ===========
</TABLE>
(a) Includes billings to affiliates of $96,491, $91,192 and $92,406 for the
years 1996-1994, respectively.
(b) Includes billings from affiliates of $201,630, $203,520, and $155,446 for
the years 1996-1994, respectively.
See Notes to Consolidated Financial Statements.
14
<PAGE> 17
GTE North Incorporated and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,975 $ 31,655
Receivables, less allowances of $31,248 and $24,059 805,965 662,350
Inventories and supplies 40,996 48,257
Deferred income tax benefits 59,438 76,993
Other 24,623 33,961
---------- ----------
Total current assets 943,997 853,216
---------- ----------
Property, plant and equipment, net 2,939,321 2,841,574
Employee benefit plans 686,134 560,087
Other assets 40,476 34,204
---------- ----------
Total assets $4,609,928 $4,289,081
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 257,766 $ 435,443
Accounts payable 159,098 108,210
Affiliate payables and accruals 67,989 39,062
Advanced billings and customer deposits 62,743 58,680
Taxes payable 159,589 126,179
Accrued interest 24,031 21,149
Accrued payroll costs 219,406 150,728
Dividends payable 124,555 98,229
Accrued restructuring costs -- 93,501
Other 135,272 76,011
---------- ----------
Total current liabilities 1,210,449 1,207,192
---------- ----------
Long-term debt 1,532,650 1,330,811
Deferred income taxes 206,386 177,199
Employee benefit plans 352,200 268,430
Other liabilities 25,426 22,382
---------- ----------
Total liabilities 3,327,111 3,006,014
---------- ----------
Preferred stock, subject to mandatory redemption 16,937 17,626
---------- ----------
Shareholders' equity:
Preferred stock 29,033 29,033
Common stock (978,351 shares issued) 978,351 978,351
Additional paid-in capital 43,110 43,110
Retained earnings 215,386 214,947
---------- ----------
Total shareholders' equity 1,265,880 1,265,441
---------- ----------
Total liabilities and shareholders' equity $4,609,928 $4,289,081
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 18
GTE North Incorporated and Subsidiary
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 $ 551,500 $ 493,244 $ 476,276
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 494,158 565,405 533,907
Deferred income taxes 46,742 42,038 30,888
Provision for uncollectible accounts 39,836 35,409 38,292
Change in current assets and current liabilities:
Receivables - net (135,210) (57,605) (102,965)
Other current assets 16,599 (630) 14,302
Accrued taxes and interest 36,292 (17,438) 14,093
Other current liabilities 132,659 (180,091) (99,139)
Other - net (87,841) (61,042) (41,843)
---------- ---------- ----------
Net cash from operations 1,094,735 819,290 863,811
---------- ---------- ----------
INVESTING
Capital expenditures (608,984) (608,395) (634,738)
Acquisition of assets -- (5,200) --
Other - net -- 334 (443)
---------- ---------- ----------
Net cash used in investing (608,984) (613,261) (635,181)
---------- ---------- ----------
FINANCING
Long-term debt issued 446,100 -- 445,942
Long-term debt and preferred stock retired (46,844) (290,329) (16,170)
Dividends (524,735) (294,870) (235,257)
Increase (decrease) in short-term obligations,
excluding current maturities (398,390) 392,887 (398,494)
Other - net 19,438 (12,435) --
---------- ---------- ----------
Net cash used in financing (504,431) (204,747) (203,979)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (18,680) 1,282 24,651
Cash and cash equivalents:
Beginning of year 31,655 30,373 5,722
---------- ---------- ----------
End of year $ 12,975 $ 31,655 $ 30,373
========== ========== ==========
Cash paid during the year for:
Interest $ 117,724 $ 122,917 $ 100,037
Income taxes 249,322 229,354 258,789
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 19
GTE North Incorporated and Subsidiary
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 $ 29,033 $ 978,351 $ 43,018 $ 1,118,351 $2,168,753
Net income 476,276 476,276
Dividends declared (280,372) (280,372)
-------- --------- -------- ----------- ----------
Shareholders' equity, December 31, 1994 29,033 978,351 43,018 1,314,255 2,364,657
Net loss (760,716) (760,716)
Dividends declared (338,592) (338,592)
Redemption of preferred stock below stated par 92 92
-------- --------- -------- ----------- ----------
Shareholders' equity, December 31, 1995 29,033 978,351 43,110 214,947 1,265,441
Net income 551,500 551,500
Dividends declared (551,061) (551,061)
-------- --------- -------- ----------- ----------
Shareholders' equity, December 31, 1996 $ 29,033 $ 978,351 $ 43,110 $ 215,386 $1,265,880
======== ========= ======== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 20
GTE North Incorporated and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE North 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 4,678,491 access lines in the states of Illinois, Indiana,
Michigan, Ohio, Pennsylvania and Wisconsin. 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 the Company and
its wholly-owned subsidiary, GTW Telephone Systems Incorporated. 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 $219.3 million, $179.8 million and $167.4 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
$201.6 million, $203.5 million and $155.4 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 $96.5 million, $91.2 million and $92.4 million for the
years 1996-1994, respectively.
18
<PAGE> 21
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.
19
<PAGE> 22
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 $1,241.5 million (net of tax
benefits of $758 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, $190.6
million of long-term debt. These redemptions resulted in an after-tax
extraordinary charge of $12.5 million (net of tax benefits of $7.7 million).
3. RESTRUCTURING COSTS
During 1993, the Company recorded one-time restructuring costs of $374.6
million, which reduced net income by $230.8 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 $251.6 million to re-engineer customer service
processes and $90.7 million to re-engineer administrative processes. The
restructuring costs also included $32.3 million 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.
20
<PAGE> 23
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>
Authorized
No par value 388,396
$100 par value 33,524
-------
Total 421,920
=======
</TABLE>
<TABLE>
<CAPTION>
Shares Amount
---------- ----------------------
Outstanding (Thousands of Dollars)
<S> <C> <C>
$2.00 No par value 45,484 $ 2,215
$2.10 No par value 66,390 3,542
$2.20 No par value 34,379 1,719
$2.25 No par value 90,765 4,538
$4.50 $100 par value 7,297 730
$5.00 $100 par value 24,639 2,464
$7.60 No par value 140,000 13,825
------- --------
Total 408,954 $ 29,033
======= ========
</TABLE>
Cumulative preferred stock, subject to mandatory redemption, is as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Authorized
No par value 462,934
$50 par value 166,721
-------
Total 629,655
=======
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------
Shares Amount Shares Amount
------- ------- ------- --------
Outstanding (Thousands of Dollars) (Thousands of Dollars)
<S> <C> <C> <C> <C>
$1.15 No par value 121,600 $ 3,040 128,000 $ 3,200
$1.25 No par value 18,584 465 18,614 465
$2.30 No par value 25,200 1,260 25,200 1,260
$2.375 No par value 28,429 1,422 30,897 1,545
$2.40 $50 par value 27,490 1,375 29,490 1,474
$2.50 No par value 39,800 1,990 39,800 1,990
$2.50 No par value 44,631 2,208 47,587 2,355
$2.50C No par value 23,237 1,162 23,237 1,162
4.60% $50 par value 57,300 2,865 60,500 3,025
5.16% $50 par value 23,000 1,150 23,000 1,150
------- --------- ------- ---------
Total 409,271 $ 16,937 426,325 $ 17,626
======= ========= ======= =========
</TABLE>
21
<PAGE> 24
The outstanding preferred stock is redeemable at a premium, at any time, in
whole or in part, on thirty days notice. Cumulative preferred stock, not
subject to mandatory redemption, held as treasury shares by the Company were 46
shares at December 31, 1996, 1995 and 1994.
The Company is also required, for Series subject to mandatory redemption, to
purchase and retire shares each year through the operation of a purchase fund.
Shares can be acquired or tendered on a best efforts basis at not more than $50
per share, except for the $1.15 and $1.25 Series, at not more than $25 per
share. The maximum number of shares that can be purchased and retired each
year are: $1.15 Series - 6,400 shares; $1.25 Series - 1,200 shares; $2.30
Series - 1,200 shares; $2.375 Series - 2,468 shares; $2.40 Series - 2,000
shares; $2.50 Series (IL) - 2,000 shares; $2.50 (IN) - 2,958 shares; $2.50C
Series - 1,200 shares; 4.60% Series - 3,200 shares and the 5.16% Series - 1,000
shares. The aggregate maximum total of these shares per year is 23,626 shares.
The Company met this requirement through treasury stock and the purchase of
17,054; 23,626 and 22,387 shares in 1996- 1994 respectively. The aggregate
retirement of preferred stock subject to a purchase fund is $985,000 in each of
the years 1997-2001.
At December 31, 1996 and December 31, 1994, the Company held no cumulative
preferred stock, subject to mandatory redemption as treasury shares. At
December 31, 1995, the Company held 1,200 shares of treasury stock to cover
future redemption requirements. No shares were reserved for officers or
employees or for options, warrants, conversions or other rights. The preferred
shareholders have no voting rights.
5. COMMON STOCK
The authorized common stock of the Company consists of 2,200,000 shares with a
par value of $1,000 per share. All outstanding shares of common stock are held
by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1996, $35.8 million of retained earnings were restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Company's indentures.
22
<PAGE> 25
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:
Maturing 1997 through 2031, weighted average rates of 7.92%
and 7.76%, respectively $ 642,566 $ 688,418
Debentures:
6.00 % Series A, due 2004 250,000 250,000
5.50 % Series B, due 1999 200,000 200,000
7.625 % Series C, due 2026 200,000 --
6.90 % Series D, due 2008 250,000 --
Other:
GTE Finance Corporation promissory notes-maturing 1998 through 2016,
weighted average rate of 9.02% 45,000 45,000
Commercial paper expected to be refinanced on a long-term basis -- 200,000
Capitalized leases 143 446
------------ ------------
Total principal amount 1,587,709 1,383,864
Premium (discount) - net 10,807 (7,900)
------------ ------------
Total 1,598,516 1,375,964
Less: current maturities (65,866) (45,153)
------------ ------------
Total long-term debt $ 1,532,650 $ 1,330,811
============ ============
</TABLE>
The Company issued $200 million of 7.625% Series C debentures, due 2026, in May
1996 and $250 million of 6.90% Series D debentures, due 2008, in November 1996.
Net proceeds were applied toward the repayment of short-term borrowings
incurred in connection with the redemption of long-term debt in December 1995
prior to stated maturity (see Note 2). Net proceeds were also used to finance
the Company's construction program and for general corporate purposes.
Long-term debt as of December 31, 1995 includes $200 million of commercial
paper which the Company refinanced in May 1996, as discussed above and in Note
7.
None of the securities shown above were held in sinking or other special funds
of the Company, pledged by the Company or held by affiliates, except for the
promissory notes held by GTE Finance Corporation. Debt 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: $65.9
million in 1997; $33.1 million in 1998; $213.9 million in 1999; $1 million in
2000 and $71.9 million in 2001.
23
<PAGE> 26
Total short-term obligations as of December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rates 5.4% and 5.7% $ 191,900 $ 390,290
Current maturities of long-term debt 65,866 45,153
------------ ------------
Total $ 257,766 $ 435,443
============ ============
</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 $700 million of
commercial paper.
7. FINANCIAL INSTRUMENTS
At December 31, 1995, the Company had entered into forward contracts to sell
$200 million of U.S. Treasury Bonds to hedge against changes in market interest
rates related to the debt the Company called and subsequently refinanced in May
1996. A gain of approximately $19 million occurred upon settlement of the
forward contracts and is being amortized over the life of the associated
refinanced debt as an offset to interest expense.
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 $8
million. The estimated fair value of long-term debt as of December 31, 1995
exceeded the carrying value by approximately $44 million.
24
<PAGE> 27
8. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $244,128 $205,299 $221,180
State 30,305 24,406 32,225
-------- -------- --------
274,433 229,705 253,405
-------- -------- --------
Deferred:
Federal 49,139 45,433 42,589
State 6,931 9,903 4,772
-------- -------- --------
56,070 55,336 47,361
-------- -------- --------
Amortization of deferred investment tax credits (9,328) (13,298) (16,473)
-------- -------- --------
Total $321,175 $271,743 $284,293
======== ======== ========
</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 $304,541 $266,838 $266,199
State and local income taxes, net of federal income tax 24,203 22,301 24,047
benefits
Amortization of deferred investment tax credits, net of
federal income tax benefits (6,063) (13,298) (16,473)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net -- 5,325 6,315
Rate differentials applied to reversing temporary -- (6,743) (7,337)
differences
Other differences - net (1,506) (2,680) 11,542
-------- -------- --------
Total provision $321,175 $271,743 $284,293
======== ======== ========
</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 $ 79,174 $ 43,989
Employee benefit obligations (190,078) (116,521)
Prepaid pension cost 255,829 206,020
Investment tax credits 10,382 16,445
Other - net (8,359) (49,727)
--------- ---------
Total $ 146,948 $ 100,206
========= =========
</TABLE>
25
<PAGE> 28
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> <C> <C> <C>
Benefits earned during the year $ 44,618 $ 38,142 $ 46,407
Interest cost on projected benefit obligations 113,639 108,922 101,768
Return on plan assets:
Actual (432,535) (509,740) 2,633
Deferred 200,931 305,521 (201,449)
Other - net (33,369) (40,728) (43,237)
---------- --------- ----------
Net pension credit $ (106,716) $ (97,883) $ (93,878)
========== ========= ==========
</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 $1,225,528 $1,034,151
========== ==========
Accumulated benefit obligations $1,345,246 $1,187,042
========== ==========
Plan assets at fair value $3,185,513 $2,798,177
Less: projected benefit obligations 1,672,419 1,514,849
---------- ----------
Excess of assets over projected obligations 1,513,094 1,283,328
Unrecognized net transition asset (113,869) (139,780)
Unrecognized net gain (713,091) (583,461)
---------- ----------
Net prepaid pension cost $ 686,134 $ 560,087
========== ==========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Discount rate 7.50% 7.50%
Rate of compensation increase 5.25% 5.25%
</TABLE>
26
<PAGE> 29
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 $ 7,469 $ 8,254 $ 9,499
Interest on accumulated postretirement benefit obligations 42,740 45,049 41,828
Actual (return) loss on plan assets (574) (2,509) 749
Amortization of transition obligation 17,144 19,879 21,791
Other - net (678) 1,404 (3,616)
--------- --------- --------
Postretirement benefit cost $ 66,101 $ 72,077 $ 70,251
========= ========= ========
</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 $ 414,580 $ 426,776
Fully eligible active plan participants 15,290 12,952
Other active plan participants 173,329 204,065
---------- -----------
Total accumulated postretirement benefit obligations 603,199 643,793
Less: fair value of plan assets 21,900 19,993
---------- -----------
Excess of accumulated obligations over plan assets 581,299 623,800
Unrecognized transition obligation (258,146) (315,606)
Unrecognized net gain (loss) 8,455 (74,442)
---------- -----------
Accrued postretirement benefit obligations $ 331,608 $ 233,752
========== ===========
</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 $5.5
million and the accumulated postretirement benefit obligations as of December
31, 1996, by $59.2 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 $17.9 million, $18.3 million and $14.4 million in
1996-1994, respectively.
27
<PAGE> 30
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 $ 28,506 $ 29,867
Buildings 547,408 559,583
Plant and equipment 7,822,174 7,556,178
Other 784,235 756,674
------------- ------------
Total 9,182,323 8,902,302
Accumulated depreciation (see Note 2) (6,243,002) (6,060,728)
------------- ------------
Total property, plant and equipment - net $ 2,939,321 $ 2,841,574
============= ============
</TABLE>
Depreciation expense in 1996-1994 was equivalent to a composite average
percentage of 5.7%, 6.7% and 6.4%, respectively.
28
<PAGE> 31
11. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the state regulatory
commissions in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.
Interstate operations are subject to regulation by the FCC.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company also provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
individual state regulatory orders. Provisioning of intrastate toll services
by the Company is accomplished by either bill-and-keep arrangements or by
participation with other LECs in settlement arrangements. A portion of
intrastate toll compensation is earned through access rates which are billed to
other LECs for completing toll calls.
Illinois
All Primary Toll Carrier (PTC) agreements in Illinois were terminated by July
1996 pursuant to the order issued by the Illinois Commerce Commission (ICC) on
December 20, 1995. Under the PTC plan, each PTC was responsible for filing
toll rates and developing and administering compensation with other LECs. Each
of the other LECs were compensated through access charges relating to their
involvement in carrying, handling, and billing the calls. With PTC
termination, each LEC is responsible for providing intraMarket Service Area
(MSA) toll to its end users.
On October 3, 1995, the ICC also issued an order requiring Line Side
Interconnection (unbundling) to be effective November 1, 1995. LECs are
required to unbundle local access lines into loops, ports and loop subelements
and offer them as separate services within 180 days of a bona fide request.
Line side interconnection is a term which describes the ability of a competitor
or customer to interconnect its facilities with the portion of the LEC network
which extends from the central office to the customer's premises.
As of November 1, 1996, the Company converted all capable offices in Illinois
to 1+ IntraMSA toll pre-subscription pursuant to the ICC's order issued October
3, 1995.
On December 3, 1996, the ICC issued its decision in the Company's arbitration
with AT&T Corp. (AT&T) to determine interconnection, resale, and unbundling
terms and conditions. Interim discount rates for the Company's resold services
were set equal to Ameritech's average rate of 20.07%. Where the Company does
not have services similar to Ameritech's, a default discount of 17.5% is to be
used. The Company's cost studies are to be used in the interim until permanent
discounts are established in a separate generic cost proceeding. The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
ICC's arbitration determinations.
Indiana
On September 7, 1995, AT&T, LCI International, Inc., Sprint Corporation
(Sprint) and WorldCom Inc. filed a petition requesting the Indiana Utility
Regulatory Commission (IURC) to require LECs to allow 1+ and 0+ intraLATA
pre-subscription in the state of Indiana. On November 26, 1996, the IURC
ordered all LECs to allow 1+ pre-subscription. The Company was ordered to
implement the change by May 26, 1997. Implementation costs shall be amortized
over three years and recovered through an Equal Access Recovery Charge.
On December 12, 1996, the IURC issued its order in the arbitration proceeding
between the Company and AT&T Communications of Indiana, Inc. The IURC ordered
interim proxy rates for interconnection and unbundled network elements using
rates established in the AT&T-Ameritech Indiana Interconnection Agreement plus
20%. The wholesale
29
<PAGE> 32
discount was set at 17%. A separate cost investigation has been established to
review the Company's costs for establishing permanent interconnection rates.
The proceeding is expected to be resolved by late 1997. Resale issues will
continue to be addressed in Cause No. 39983, the Commission's investigation
into local telephone exchange competition.
On July 1, 1996, the IURC issued an interim order in its investigation relating
to local telephone exchange competition (Cause No. 39983) which addressed the
resale of bundled local services. The order required that existing LECs file
wholesale tariffs for all its retail local-exchange services, with certain
exceptions, reflecting the applicable discounts for avoided costs. Requests
for reconsideration or clarification were received by several parties. The
Company filed a Petition for Rehearing, Reconsideration and Clarification
stating that, among other items, the filing of wholesale tariffs was in
conflict with the negotiation process permitted by the Telecommunications Act
of 1996 (the Telecommunications Act). The IURC issued its Order on
Reconsideration and Resale Issues on December 18, 1996 addressing services
available for discount and the applicable wholesale discount. The Commission
ruled that, on an interim basis and subject to true-up, the 17% discount
ordered in the GTE-AT&T arbitration agreement would apply on a statewide basis.
Michigan
On June 9, 1995, the Company filed an application with the Michigan Public
Service Commission (MPSC) to increase basic local service rates by
approximately $18.1 million annually to offset planned reductions in intraLATA
toll rates and the implementation of new optional toll calling plans. On
October 25, 1995, the MPSC issued an order approving a settlement agreement,
signed by all parties, to increase basic local service rates by $12.9 million
annually, effective November 24, 1995. In addition, the Company implemented
reduced intraLATA toll rates, including the impacts of new optional calling
plans, totaling $12.9 million annually.
LECs have been under price cap regulation in the state of Michigan since
January 1, 1992, concurrent with the passage of Public Act 179. On November
30, 1995, Public Act 216, a second generation regulatory reform law, became law
in Michigan replacing Public Act 179. While price caps are maintained, Public
Act 216 allows for the rebalancing of local service rates based on the existing
variations in cost and the expansion of local competition by requiring tariffs
for unbundled service and local interconnection.
In Michigan, pursuant to Public Act 216, the Company eliminated an interLATA
carrier common line (CCL) surcharge retroactive to December 1, 1995, resulting
in an access revenue reduction of $5.2 million. On January 15, 1996, an end
user charge was implemented to generate local revenue of $5.2 million in order
to compensate the Company for CCL surcharge revenues lost.
The Company provided intraLATA 1+ dialing parity in all capable switches in
Michigan by June 30, 1996 as mandated by the MPSC in order to comply with
Public Act 216.
On December 12, 1996, the MPSC issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale, and unbundling terms and
conditions. The interim discount rate for the Company's resold services was
set at 25%. The Company has filed a lawsuit in the U.S. District Court
challenging portions of the MPSC's arbitration determinations.
On January 15, 1997, the MPSC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T. These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the MPSC's arbitration determinations.
Effective March 19, 1997, the Company increased the intrastate end user charge
by $18.4 million annually, and effective April 1, 1997, the Company reduced
intraLATA toll rates by $6 million annually.
30
<PAGE> 33
Ohio
On March 1, 1995, the Company filed a package of proposed access, toll and
local rate reductions with the Public Utilities Commission of Ohio (PUCO) in
the amount of $22 million on an annual basis. The Company's proposal also
included a commitment to eliminate multi-party services by 1998 and to install
digital switches in all exchanges by 1999. On April 13, 1995, the PUCO
approved the Company's proposal in its entirety.
On June 29, 1995, the Governor of Ohio signed the State of Ohio Biennium
Budget. This budget contains a provision which reduced the telecommunications
utility property tax assessment rate from 88 percent to 25 percent on all new
investments beginning with 1994 vintage with a resulting 1995 favorable pre-tax
impact of $3.7 million.
On December 21, 1995, the PUCO issued an order approving the Company's request
to continue an $11.1 million annual depreciation amortization for two years,
beginning January 1, 1996. The amortization was scheduled to expire on
December 31, 1995.
On October 9, 1996, the Company filed to reduce its intrastate terminating
Carrier Common Line Charge (CCLC) by $10 million, effective November 15, 1996.
On November 19, 1996, the Company filed to reduce the intrastate CCLC an
additional $6 million, effective January 1, 1997.
On December 24, 1996, the PUCO issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale, and unbundling terms and
conditions. The interim discount rate for the Company's resold services was
set at 12.16%. The Company has filed a lawsuit in the U.S. District Court
challenging portions of the PUCO's arbitration determinations.
On January 30, 1997, the PUCO issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T. These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the PUCO's arbitration determinations.
Pennsylvania
On December 6, 1996, the Pennsylvania Public Utility Commission (PPUC) issued
its decision in the Company's arbitration with AT&T to determine
interconnection, resale, and unbundling terms and conditions. The interim
discount rate for the Company's resold services was set at 22.8%. The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
PPUC's arbitration determinations.
On December 19, 1996, the PPUC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T. These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the PPUC's arbitration determinations.
Wisconsin
On July 5, 1994, regulatory reform legislation was signed into law in
Wisconsin. Effective September 1, 1994, this legislation allows LEC's to
choose to be regulated under price cap regulation or remain under traditional
rate of return regulation. Regardless of the LEC's choice, the legislation
opens the LEC's local-exchange franchises to competition and requires
interconnection with competitors and provision of basic local services on an
unbundled basis. If a LEC chooses to operate under the price cap plan, it is
required to file a network modernization plan. On November 2, 1994, the
Company formally notified the Public Service Commission of Wisconsin (PSCW)
that it would elect price cap regulation as of January 1, 1995. On that same
date, the Company also filed intrastate access charge reductions of $4 million,
effective January 1, 1995. This reduction was a legislative requirement of
those companies electing price cap regulation.
31
<PAGE> 34
On May 23, 1995, the PSCW approved the infrastructure plan filed by the
Company. The plan was filed in compliance with the 1994 legislation allowing
LECs to elect price regulation. The Company stated that it would make capital
investments within the range of $235-$290 million over a six year period
(1995-2000). The actual amount spent will depend on the demand for new
services such as Frame Relay, Integrated Services Digital Network (ISDN) and
Video Broadband services. The plan also stated that the Company would provide
schools and public libraries with credits towards the purchase of GTE-provided
enhanced services.
On March 15, 1996, the Company filed the results of its first year under price
regulation (1995). The PSCW authorized a price increase of 0.63% in basic
Message Telecommunication Service (MTS) rates based on the established price
cap formula and the Company's results of service quality and infrastructure
investment levels. No price increase was implemented due to competitive market
conditions. The Company will file its results for 1996 by April 1997.
In September 1996, the Company converted all capable offices in Wisconsin to 1+
pre-subscription pursuant to the PSCW's Order issued July 29, 1996.
On December 12, 1996, the PSCW issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale and unbundling terms and
conditions. The discount rate for resale was set at 18.45%. Interim rates
based on the Company's cost studies will be used for interconnection and
unbundled network elements until new cost studies are completed which is
expected later in 1997. The Company has filed a lawsuit in the U.S. District
Court challenging portions of the PSCW's arbitration determinations.
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 have limited pricing
flexibility provided they do not exceed the allowed price 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 the following productivity factors and
sharing thresholds for use in the 1996-1997 and 1995-1996 tariff years:
<TABLE>
<CAPTION>
Tariff Productivity Sharing Parameters
Entity Factor 50% 100%
------------------------------ ---------------- --------------- ---------------
<S> <C> <C> <C>
1996-1997 Tariff Year
---------------------
Illinois, Indiana, Michigan,
Ohio, Pennsylvania, Wisconsin 5.3% None None
1995-1996 Tariff Year
---------------------
Michigan 4.0% 12.25-13.25% ROR Over 13.25% ROR
Illinois, Indiana, Ohio,
Pennsylvania, Wisconsin 5.3% None None
</TABLE>
Under the interim rules, the Company filed tariffs to reduce rates by $34.1
million annually, effective August 1, 1995. On September 20, 1995, the FCC
released its proposed rulemaking proceeding on price caps which proposes
specific
32
<PAGE> 35
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.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 4.0% to 5.3% for its Michigan tariff
entity. 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 $5.2 million, effective July 1,
1996.
On February 8, 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 accord 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 include amounts for access and billing and
collection during the years 1996-1994 under various arrangements and amounted
to $375.3 million, $407.5 million and $402.8 million, respectively.
33
<PAGE> 36
12. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain land, buildings, office
space and equipment that contain varying renewal options. The majority of
lease commitments relate to the lease for the centralized GTE Telephone
Operations general facilities entered into in 1991. The lease agreement
requires rental payments over 30 years (beginning in 1992) sufficient to pay
scheduled principal and interest payments for $210 million of Telephone
Facility Lease Bonds issued by the lessor. The lease expense is shared by all
GTE Telephone Operating Companies.
Rental expense was $25.4 million, $27.6 million and $27.2 million in 1996-1994,
respectively. Minimum rental commitments for noncancelable leases through 2001
do not exceed $32.9 million annually and aggregate $621.8 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.
34
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE North Incorporated:
We have audited the accompanying consolidated balance sheets of GTE North
Incorporated (a Wisconsin corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 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 North Incorporated and
subsidiary 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
35
<PAGE> 38
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.
JOHN C. APPEL
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
36
<PAGE> 39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
37
<PAGE> 40
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.
38
<PAGE> 41
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 President of the Company and Executive Vice
President - Network Operations of GTE Telephone
Operations
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 1995 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
Gerald K. Dinsmore 47 1994 1993 Senior Vice President - Finance and Planning of
GTE Telephone Operations and the Company
William M. Edwards, III 48 -- 1993 Vice President-Controller of the Company
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
William A. Griswold 44 -- 1994 Vice President - Northeast Region of the
Company
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 for 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 1995 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
William A. Zielke 50 -- 1994 Vice President - North Region 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.
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.
39
<PAGE> 42
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the 1996
Principal Executive Officers 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) ($) (3) ($) ($) (4) SARs (#) ($) ($) (5)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John C. Appel 1996 295,977 380,700 -- 51,229 124,400 439,200 10,572
President 1995 239,600 258,100 -- -- 63,500 162,800 10,194
1994 193,023 182,400 -- -- 24,800 34,700 6,230
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
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
Gerald K. Dinsmore 1996 288,619 263,700 -- 41,751 81,400 404,100 10,613
Senior Vice President - 1995 265,125 255,600 -- -- 36,400 211,300 10,613
Finance and Planning 1994 248,438 233,800 -- -- 30,900 97,800 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. Appel, White, Esstman, Sparrow and Dinsmore, for
whom total annual amounts are shown above, is $152,611; $214,984;
$159,861; $121,746 and $121,024, 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.
40
<PAGE> 43
(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. Appel, White, Esstman, Sparrow and Dinsmore each hold a total
of 5,406; 8,598; 6,509; 4,385 and 4,404 Restricted Stock Units,
respectively, which had a dollar value of $245,298; $390,134;
$295,346; $198,970 and $199,832, 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 of Messrs. Appel, White, Esstman, Sparrow and Dinsmore and
contributions by GTE and its related companies to the GTE Executive
Salary Deferral Plan of $3,822 for Mr. Appel, and $3,863 for each of
Messrs. White, Esstman, Sparrow and Dinsmore.
41
<PAGE> 44
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1996, whether
or not specifically allocated to the Company. The options and SARs were
granted under the Long-Term Incentive Plan (LTIP). Pursuant to Securities and
Exchange Commission rules, the table also shows the value of the options
granted at the end of the option terms (ten years) if the stock price were to
appreciate annually by 5% and 10%, respectively. There is no assurance that the
stock price will appreciate at the rates shown in the table. The table also
indicates that if the stock price does not appreciate, there will be no
increase in the potential realizable value of the options granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants Option Term
------------------------------------------------------------ --------------------------------
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to Or Base
Options / SARs Employees in Price Expiration
Name Granted Fiscal Year ($/SH) Date 0% 5% 10%
- ------------------- ----------------- ------------------ ----------- ----------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
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
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
Gerald K. Dinsmore 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. Appel, White, Esstman, Sparrow and Dinsmore 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 $80 or more per
share for 20 consecutive days (or, if earlier, on the seventh
anniversary of the grant date).
42
<PAGE> 45
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1996. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) Common Stock on
December 31, 1996.
<TABLE>
<CAPTION> Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs at FY-End at FY-End ($)
Acquired Value ---------------------------- ---------------------------
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------------- ------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
John C. Appel 25,467 316,222 6,400 175,001 62,400 841,706
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
Larry J. Sparrow 48,466 601,963 37,567 115,967 469,003 606,460
Gerald K. Dinsmore 40,100 462,995 -- 115,967 -- 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 42.
<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>
John C. Appel 7,400 3 Years 2,148 8,262
Thomas W. White 10,900 3 Years 3,164 12,169
Michael B. Esstman 7,400 3 Years 2,148 8,262
Larry J. Sparrow 4,900 3 Years 1,422 5,471
Gerald K. Dinsmore 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.
43
<PAGE> 46
(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
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.
44
<PAGE> 47
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Appel, White,
Esstman and Dinsmore 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. Appel, White, Esstman and Dinsmore
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.
45
<PAGE> 48
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings (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 Corporate Plan for Messrs. Appel, White,
Esstman, Sparrow and Dinsmore are 25, 28, 28, 29 and 21, respectively.
Under Federal law, an employee's benefits under a qualified pension plan, such
as the Service Corporation Plan, are limited to certain maximum amounts. GTE
maintains a SERP, which supplements the benefits of any participant in the
Service Corporation Plan in an amount by which any participant's benefits under
the Service Corporation Plan are limited by law. In addition, the SERP
includes a provision permitting the payment of additional retirement benefits
determined in a similar manner as under the Service Corporation Plan on
remuneration accrued under management incentive plans as determined by the
Committee. SERP benefits are payable in a lump sum or an annuity.
46
<PAGE> 49
Executive Retired Life Insurance Plan
The ERLIP provides Messrs. Appel, White, Esstman, Sparrow and Dinsmore 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), may be paid
as a lump sum payment, as an annuity or as installment payments.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for service on the Board.
47
<PAGE> 50
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1997:
<TABLE>
<CAPTION>
Name and Address of Shares of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
------------------- --------------------------- --------------------- ----------------
<S> <C> <C> <C>
Common Stock of GTE GTE Corporation 978,351 100%
North 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)
------------------------------------------------------
John C. Appel 45,162
Thomas W. White 203,785
Michael B. Esstman 162,084
Larry J. Sparrow 86,892
Gerald K. Dinsmore 37,724
---------
535,647
=========
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, Sparrow and all directors and
executive officers as a group are 41,667; 72,100; 35,999; 155,566;
189,765; 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.
48
<PAGE> 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - See GTE North Incorporated's
consolidated financial statements and report of independent
accountants thereon in the Financial Statements section
included elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended December
31, 1996-1994 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than that listed above are omitted as not
applicable, not required, or the information is included in
the consolidated financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
3.1* Articles of Incorporation and amendments are referenced
in the 1986 and 1987 Form 10-K's, respectively
3.2* Amended Bylaws (Exhibit 3.2 of the 1995 Form 10-K, File
No. 0-1210)
4.1* Indenture dated as of January 1, 1994 between GTE North
Incorporated and The First National Bank of Chicago, as
Trustee (Exhibit 4.1 of the Company's Registration Statements
on Form S-3, File Nos. 33-50449 and 33-51911)
4.2* First Supplemental Indenture dated as of May 1, 1996
between GTE North Incorporated and The First National Bank of
Chicago, as Trustee (Exhibit 4.3 of the Company's Report on
Form 8-K, dated May 7, 1996)
10* Material Contracts - Agreements Between GTE and Certain
Executive Officers (Exhibit 10 of the 1995 Form 10-K, File No.
0-1210)
12 Statements re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commissionas designated.
49
<PAGE> 52
GTE North Incorporated and Subsidiary
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) (Credited) to Reserves Balance at
Description of Year to Income Other Accounts (Note 1) Close of Year
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:
December 31, 1996 $ 24,059 $39,836 $47,446(2) $80,093 $31,248
==========================================================================
December 31, 1995 $ 23,241 $35,409 $52,959(2) $87,550 $24,059
==========================================================================
December 31, 1994 $ 25,173 $38,292 $16,974(2) $57,198 $23,241
==========================================================================
Accrued restructuring costs for the
years ended (Note 4):
December 31, 1996 $ 93,501 $ -- $(46,796)(3) $46,705 $--
==========================================================================
December 31, 1995 $231,049 $ -- $ -- $137,548 $93,501
==========================================================================
December 31, 1994 $374,558 $ -- $ -- $143,509 $231,049
==========================================================================
</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.
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE NORTH INCORPORATED
-----------------------------------
(Registrant)
Date March 25, 1997 By John C. Appel
------------------ -----------------------------------
John C. Appel
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
John C. Appel President and Director March 25, 1997
- ----------------------------- (Principal Executive Officer)
John C. Appel
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
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>
51
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------------- ------------------------------------------------------
<S> <C>
12 Statements re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE North Incorporated and Subsidiary
STATEMENTS OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993(a) 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed
charges:
Income before extraordinary charges $551,500 $493,244 $476,276 $340,316 $105,216 $369,542
Add - Income tax expense 321,175 271,743 284,293 181,325 34,925 186,764
- Fixed charges 129,084 128,105 121,978 136,262 136,262 137,369
---------- -------- -------- -------- -------- --------
Adjusted earnings $1,001,759 $893,092 $882,547 $657,903 $276,403 $693,675
========== ======== ======== ======== ======== ========
Fixed charges:
Interest expense $120,607 $118,921 $112,885 $123,557 $123,557 $124,197
Portion of rent expense
representing interest 8,477 9,184 9,093 12,705 12,705 13,172
---------- -------- -------- -------- -------- --------
Adjusted fixed charges $129,084 $128,105 $121,978 $136,262 $136,262 $137,369
========== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED
CHARGES 7.76 6.97 7.24 4.83 2.03 5.05
</TABLE>
(a)Results for 1993 exclude an after-tax restructuring charge of approximately
$230.8 million for the implementation of a re-engineering plan and a one-time
after-tax charge of approximately $4.3 million related to the enhanced early
retirement and voluntary separation programs offered to eligible employees in
1993.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, dated January 28, 1997, on the consolidated financial statements
and supporting schedule and exhibit of GTE North Incorporated and subsidiary
included in this Form 10-K, into the Registration Statement previously filed on
Form S-3 (File No. 333-02013).
ARTHUR ANDERSEN LLP
Dallas, Texas
March 25, 1997
<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> 12,975
<SECURITIES> 0
<RECEIVABLES> 837,213
<ALLOWANCES> 31,248
<INVENTORY> 40,996
<CURRENT-ASSETS> 943,997
<PP&E> 9,182,323
<DEPRECIATION> (6,243,002)
<TOTAL-ASSETS> 4,609,928
<CURRENT-LIABILITIES> 1,210,449
<BONDS> 1,532,650
16,937
29,033
<COMMON> 978,351
<OTHER-SE> 258,496
<TOTAL-LIABILITY-AND-EQUITY> 4,609,928
<SALES> 2,988,803
<TOTAL-REVENUES> 2,988,803
<CGS> 1,060,968
<TOTAL-COSTS> 2,002,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,875
<INCOME-PRETAX> 872,675
<INCOME-TAX> 321,175
<INCOME-CONTINUING> 551,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 551,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
