<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
F O R M 10 - Q
X Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1998
..............
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-2755
......
GTE Corporation
......................................................
(Exact name of registrant as specified in its charter)
New York 13-1678633
............................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Stamford Forum, Stamford, Conn. 06904
.........................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-965-2000
............
............................................................................
Former name, former address and former fiscal year, if changed since last
report
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 .
GTE had 962,582,201 shares of $.05 par value common stock outstanding
(excluding 24,650,299 treasury shares) at April 30, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
1998 1997
(In Millions)
REVENUES AND SALES
Local services $1,730 $1,605
Network access services 1,326 1,152
Toll services 591 643
Wireless services 718 677
Directory services 195 186
Other services and sales 1,325 1,018
Total revenues and sales 5,885 5,281
OPERATING COSTS AND EXPENSES
Cost of services and sales 2,498 1,952
Selling, general & administrative 1,071 1,027
Depreciation and amortization 969 956
Special charges 755 -
Total costs and expenses 5,293 3,935
OPERATING INCOME 592 1,346
OTHER (INCOME) EXPENSE
Interest expense 326 303
Interest capitalized (10) (13)
Interest income (27) (15)
Other - net 23 20
312 295
Income before income taxes 280 1,051
Income taxes 138 386
INCOME BEFORE EXTRAORDINARY CHARGES 142 665
Extraordinary charges (320) -
NET INCOME (LOSS) $ (178) $ 665
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .15 $ .69
Extraordinary charges (.33) -
NET INCOME (LOSS) $ (.18) $ .69
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .15 $ .69
Extraordinary charges (.33) -
NET INCOME (LOSS) $ (.18) $ .69
AVERAGE COMMON SHARES OUTSTANDING:
Basic 959 960
Diluted 968 964
The accompanying notes are an integral part of these statements.
-1-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net loss for the first quarter of 1998 was $178 million, or
$(.18) per share, compared with consolidated net income of $665 million, or
$.69 per share in the first quarter of last year. The results for the first
quarter of 1998 include after-tax special charges of $482 million, or $.50
per share, related to cost reductions, the write-down of Hybrid Fiber Coax
("HFC") test market technologies in GTE's video business, a reserve for the
disposition of GTE Airfone ("Airfone") assets, and other items. In
addition, the 1998 quarterly results reflect a non-cash extraordinary charge
of $300 million, or $.31 per share, to discontinue the use of regulatory
accounting principles at GTE's Canadian telephone operations and a one-time
$20 million, or $.02 per share, after-tax charge for the redemption of
high-coupon debt and preferred stock. During the first quarter of 1998,
costs associated with GTE's new data initiatives reduced net income by $109
million, or $.11 per share. Excluding these costs, the costs associated
with the special charges and the extraordinary charges previously described,
net income for the first quarter of 1998 would have been $733 million, or
$.76 per share, an increase of 10.2 percent and 10.1 percent, respectively.
Operating income was $592 million, compared with $1.35 billion reported in
the first quarter of last year, reflecting the pre-tax special charge of
$755 million and costs associated with the data initiatives of $142 million.
Excluding these items, operating income for the first quarter of 1998
reached $1.49 billion, an 11 percent increase over the year-ago quarter.
Consolidated revenues and sales for the first quarter of 1998 increased 11
percent to $5.88 billion, compared to $5.28 billion in the first quarter of
last year. This increase primarily resulted from continued growth in core
domestic wireline, as well as improvement in data and long-distance results
and international Canadian operations and wireless services.
For the first quarter of 1998, minutes of use of GTE's domestic
local-exchange network for long-distance calling grew at an annual rate of
14.1 percent, while total domestic access lines increased 8.1 percent to
21.9 million. Internationally, GTE serves 6.2 million access lines, an
increase of 6.5 percent over the first quarter of 1997.
Domestic wireless service revenues in the first quarter of 1998 totaled $650
million, a 5 percent increase over the same period last year. Revenue
growth is driven by customer additions and increasing revenue from existing
customers through continuous emphasis on customer service levels to improve
retention and from new products and services. U.S. wireless customers
served grew to 4,545,000 an increase of 13 percent over a year ago.
Customer growth at GTE's international operations increased significantly,
bringing total wireless customers served worldwide to 6.3 million.
GTE is one of the world's largest telecommunications companies and a leading
provider of integrated telecommunications services. In the United States,
GTE provides local service in 28 states and wireless service in 17 states;
nationwide long-distance service and internetworking services ranging from
dial-up Internet access for residential and small business consumers to
Web-based applications for Fortune 500 companies; as well as video service
in selected markets. Outside the United States, GTE serves over 7 million
telecommunications customers. GTE is also a leader in government and
defense communications systems and equipment, directories and
telecommunications-based information services, and aircraft-passenger
telecommunications.
-2-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
CAPITAL RESOURCES AND LIQUIDITY
Cash from operations for the first three months of 1998 totaled $1.33
billion compared to $1.69 billion for the first quarter of 1997. The
decrease in cash from operations is primarily due to an increase in working
capital requirements.
Cash used in investing activities for the first three months of 1998 totaled
$1.06 billion, compared with $857 million in the first quarter of 1997.
Capital expenditures for the first quarter of 1998 totaled $1.08 billion
compared with $800 million in the same period last year. For the full year
1998, capital expenditures are expected to be approximately equal to 1997.
The majority of new investment is being made to meet the demands of growth,
modernize facilities and position GTE as a provider of high-quality voice,
data and video telecommunications services. Significant investments are
also being made to build and expand GTE's data network.
Cash provided from financing activities for the first three months of 1998
totaled $18 million, compared with cash used of $297 million in the same
period last year. During the first quarter of 1998, dividend payments
totaled $451 million. In addition, financing activities during the first
quarter of 1998 included a $386 million net increase in long and short-term
borrowings, as well as other net items. In April 1998, GTE issued $2.1
billion of debentures, which was used to reduce short-term debt obligations.
The transaction consisted of four tranches with maturities ranging from 8 to
30 years. This long-term debt offering was the largest in GTE's history.
In its April 2, 1998 filing on Form 8-K, GTE stated that because the MCI
shareholders had accepted a competing offer, GTE's offer for MCI was no
longer outstanding. As a result, GTE and its subsidiaries were removed from
"Credit Watch" by all the rating agencies. GTE believes that its present
investment grade credit rating and those of its subsidiaries provides ready
access to the capital markets at reasonable rates and provides GTE with the
financial flexibility necessary to pursue growth opportunities as they
arise. At March 31, 1998, GTE had $6.4 billion of unused bank lines of
credit available to back up commercial paper borrowings and for working
capital requirements.
RECENT DEVELOPMENTS
In May 1998, GTE filed a private antitrust lawsuit in federal court to block
the proposed $38 billion merger of WorldCom and MCI to ensure the combined
mega-company will not have the ability to monopolize the Internet or
significantly endanger competition in long distance telephone markets.
The suit, which was filed in U.S. federal district court in Washington,
D.C., asserts that the merger of WorldCom-MCI, the number one and number two
backbone providers, will allow the combined company to monopolize the market
for Internet backbone services. GTE said in its suit that the combined
company would own 40-60 percent of the critical Internet "backbone" network
that transmits and routes data for consumer and Internet service providers.
The suit also cites the significantly diminished competition in the retail
long distance market that would be created by merging the second- and
fourth-largest long distance telephone companies. Combining WorldCom-MCI
-3-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
removes the key supplier from the wholesale long distance market, i.e.,
WorldCom, and lessens competition for long distance resellers, like GTE,
that compete with AT&T, MCI, and Sprint.
In April 1998, GTE announced a series of actions designed to further sharpen
its strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate
after-tax proceeds of $2-$3 billion by selling non-strategic or
under-performing operations, and plans to reduce annual costs by more than
$500 million through improved efficiencies and productivity while it
continues to invest in new high-growth opportunities. For more information
regarding these announcements, please refer to the Forms 8-K filed by GTE,
dated April 2, 1998 and April 14, 1998.
GTE's Year 2000 Program, as described in it's 1997 Annual Report on
Form 10-K, continues. As of March 31, 1998, expenditures totaled $98
million.
-4-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(In Millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 847 $ 551
Receivables, less allowances
of $333 million 4,718 4,782
Inventories and supplies 884 846
Deferred income tax benefits 65 51
Other 480 307
Total Current Assets 6,994 6,537
PROPERTY, PLANT AND EQUIPMENT, at cost 57,049 56,490
Accumulated depreciation (34,042) (32,410)
Total Property, Plant and Equipment, net 23,007 24,080
INVESTMENTS AND OTHER ASSETS:
Prepaid pension costs 4,501 4,361
Franchises, goodwill and other intangibles,
net of accumulated amortization of
$726 and $677 million 3,174 3,232
Investments in unconsolidated companies 2,405 2,335
Other assets 1,497 1,597
Total Investments and Other Assets 11,577 11,525
Total Assets $41,578 $42,142
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(In Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations, including
current maturities $ 4,192 $ 3,398
Accounts payable and accrued expenses 4,746 4,672
Taxes payable 880 771
Dividends payable 468 466
Other 553 534
Total Current Liabilities 10,839 9,841
Long-term debt 14,114 14,494
Employee benefit plans 4,802 4,756
Deferred income taxes 1,250 1,782
Minority interests in equity of subsidiaries 1,987 2,253
Other liabilities 1,009 978
Total Liabilities 34,001 34,104
SHAREHOLDERS' EQUITY:
Common stock - shares issued 986,080,818
and 984,252,887 49 49
Additional paid-in capital 7,648 7,560
Retained earnings 1,746 2,372
Accumulated other comprehensive income (224) (243)
Guaranteed ESOP obligations (540) (550)
Treasury stock- 25,168,460 and
26,253,088 shares, at cost (1,102) (1,150)
Total Shareholders' Equity 7,577 8,038
Total Liabilities and Shareholders' Equity $41,578 $42,142
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
1998 1997
(In Millions)
Operations
Income before extraordinary charges $ 142 $ 665
Adjustments to reconcile income before
extraordinary charges to net cash
from operations:
Depreciation and amortization 969 956
Special charges 755 -
Change in current assets and current
liabilities, excluding the effects of
acquisitions and dispositions (437) (6)
Deferred income taxes and other - net (96) 76
Net cash from operations 1,333 1,691
Investing
Capital expenditures (1,079) (800)
Other - net 24 (57)
Net cash used in investing (1,055) (857)
Financing
Common stock issued 137 107
Purchase of treasury stock - (402)
Long-term debt issued 846 613
Long-term debt and preferred securities retired (1,711) (88)
Dividends paid (451) (452)
Increase (decrease) in short-term obligations,
excluding current maturities 1,251 (66)
Other - net (54) (9)
Net cash provided from (used in) financing 18 (297)
Increase in cash and cash equivalents 296 537
Cash and cash equivalents:
Beginning of period 551 405
End of period $ 847 $ 942
Cash paid during the period for:
Interest $ 298 $ 203
Income taxes 93 125
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The unaudited Condensed Consolidated Financial Statements included
herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, in the opinion of management of the Company, the
Condensed Consolidated Financial Statements include all adjustments,
which consist only of normal recurring accruals, necessary to present
fairly the financial information for such periods. These Condensed
Consolidated Financial Statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company's 1997 Annual Report on Form 10-K.
Reclassifications of prior-year data have been made, where appropriate,
to conform to the 1998 presentation.
(2) EXTRAORDINARY AND SPECIAL CHARGES:
During the first quarter of 1998 GTE recorded special charges of $755
million pre-tax, which reduced net income by $482 million, or $.50 per
share. The special charges are related to cost reductions, the write-
down of HFC test market technologies in GTE's video business, a reserve
for the disposition of Airfone assets, and other items. In addition,
first quarter 1998 results include after-tax extraordinary charges
totaling $320 million, or $.33 per share, reflecting the discontinuance
of regulatory accounting at GTE's Canadian telephone operations, and
the redemption of high-coupon debt and preferred stock.
(3) COMPREHENSIVE INCOME:
Effective January 1, 1998, GTE adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). Comprehensive income includes both net income and other
comprehensive income. In accordance with the disclosure requirements
of FAS 130, other comprehensive income (loss) for the three months
ended March 31, 1998 and 1997 was $19 million and $(48) million,
respectively. Included in other comprehensive income are unrealized
gains (losses) on marketable securities and foreign currency tranlation
gains (losses).
(4) RECENT ACCOUNTING PRONOUNCEMENT:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 defines internal-use software and establishes accounting
standards for the costs of such software. GTE is currently assessing
the impact of adopting SOP 98-1.
-8-
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting - April 15, 1998.
(b) Proxies for the meeting were solicited pursuant to Regulation
14A. There was no solicitation in opposition to management's
nominees as listed in the proxy statement. All of
management's nominees as listed in the proxy statement were
elected, the vote on said proposal being as follows:
Shares Voted
Directors Shares For Shares Withheld
Class II Director:
Robert D. Storey 800,620,200 18,639,230
Class III Directors:
Edwin L. Artzt 800,745,817 18,513,613
Kent B. Foster 800,929,339 18,330,091
Sandra O. Moose 800,901,085 18,358,345
Russell E. Palmer 801,144,182 18,115,248
(c) Other matters voted upon:
Proposal to Ratify the Appointment of Auditors
Shareholders ratified the appointment of Arthur Andersen LLP to
conduct the annual audit of the financial statements of GTE
Corporation and its subsidiary companies for the year ending
December 31, 1998. The vote was:
FOR - 807,647,843 shares, or 99.25 percent of the shares voted.
AGAINST - 6,106,203 shares, or .75 percent of the shares voted.
ABSTENTIONS - 5,505,384 shares.
Proposal that the Board of Directors Provide a Comprehensive Report
on Foreign Military Sales
Shareholders voted against a shareholder proposal to require the
Board of Directors to provide a comprehensive report on GTE's
foreign military sales. The vote was:
FOR - 132,759,123 shares, or 20.51 percent of the shares voted.
AGAINST - 514,615,588 shares, or 79.49 percent of the shares voted.
ABSTENTIONS - 43,064,303 shares.
BROKERS NON-VOTES - 128,820,416 shares.
-9-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(11) Statement re: Calculation of earnings per common
share.
(12) Statement re: Calculation of the ratio of earnings to
fixed charges.
(27) Financial Data Schedule.
(b) GTE filed a report on Form 8-K dated April 2, 1998 under
Item 5, "Other Events", and Item 7, "Financial Statements and
Exhibits." No financial information was included with this
report. GTE also filed a report on Form 8-K dated
April 14, 1998 under Item 7, "Financial Statements and
Exhibits." No financial information was included with this
report.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements 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 CORPORATION
.............................
(Registrant)
Date: May 12, 1998 By Paul R. Shuell
.............................
Paul R. Shuell
Vice President and Controller
Date: May 12, 1998 By Marianne Drost
.............................
Marianne Drost
Secretary
-11-
<PAGE>
EXHIBIT 11
GTE CORPORATION AND SUBSIDIARIES
CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
Three Months Ended
March 31
1998 1997
(In Thousands)
Net income (loss):
Before extraordinary charges $ 141,723 $665,347
Extraordinary charges (319,523) -
Consolidated net income (loss) $(177,800) $665,347
Average common shares 959,449 960,434
Adjustments to common shares:
Add: Employees' stock and
stock option plans 8,469 3,820
Adjusted average common shares 967,918 964,254
EARNINGS (LOSS) PER COMMON SHARE:
Basic (1)
Before extraordinary charges $ .15 $.69
Extraordinary charges (.33) -
Consolidated $(.18) $.69
Diluted (2)
Before extraordinary charges $ .15 $.69
Extraordinary charges (.33) -
Consolidated $(.18) $.69
(1) Computed by dividing net income (loss) available to common
stockholders by the weighted-average number of common shares
outstanding during the period.
(2) Reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock.
<PAGE>
<TABLE>
Exhibit 12
GTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended Years Ended December 31
March 31, 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income from continuing operations $141,723 $2,793,566 $2,798,270 $2,537,949 $2,440,869 $ 971,978
Add (deduct) -
Income taxes 137,903 1,624,000 1,613,261 1,466,426 1,532,482 567,747
Interest expense 326,057 1,282,579 1,146,481 1,150,625 1,139,233 1,298,234
Capitalized interest (net of
amortization) (1,870) (12,917) (34,984) (22,971) (6,045) (3,421)
Preferred stock dividends of Parent - - - 5,598 9,910 17,825
Dividends on preferred securities of
subsidiaries 24,729 101,604 106,643 98,604 18,252 22,162
Additional income requirement on preferred
dividends of subsidiaries 2,181 6,789 9,640 9,664 11,426 12,739
Minority interests 43,627 155,332 149,467 145,437 140,464 112,335
Portion of rent expense representing
interest 39,677 132,891 130,660 128,034 139,715 153,058
714,027 6,083,844 5,919,438 5,519,366 5,426,306 3,152,657
Deduct - Minority interests (70,822) (280,206) (263,122) (246,678) (242,937) (236,944)
Adjusted earnings available
for fixed charges from
continuing operations $643,205 $5,803,638 $5,656,316 $5,272,688 $5,183,369 $2,915,713
Fixed Charges:
Interest charges $326,057 $1,282,579 $1,146,481 $1,150,625 $1,139,233 $1,298,234
Dividends on preferred securities
of subsidiaries 24,729 101,604 106,643 98,604 18,252 22,162
Additional income requirement on preferred
dividends of subsidiaries 2,181 6,789 9,640 9,664 11,426 12,739
Portion of rent expense representing
interest 39,677 132,891 130,660 128,034 139,715 153,058
392,644 1,523,863 1,393,424 1,386,927 1,308,626 1,486,193
Deduct - Minority interests (13,868) (66,291) (68,166) (70,052) (68,096) (78,421)
Adjusted fixed charges $378,776 $1,457,572 $1,325,258 $1,316,875 $1,240,530 $1,407,772
Ratio of Earnings to Fixed Charges - continuing
operations 1.70 (a) 3.98 4.27 4.00 4.18 2.07
(a) Excluding special charges, GTE's ratio of earnings to fixed charges for the three months ended March 31, 1998 would
have been 3.70.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 847
<SECURITIES> 0
<RECEIVABLES> 4,718
<ALLOWANCES> 0
<INVENTORY> 884
<CURRENT-ASSETS> 6,994
<PP&E> 57,049
<DEPRECIATION> 34,042
<TOTAL-ASSETS> 41,578
<CURRENT-LIABILITIES> 10,839
<BONDS> 14,114
<COMMON> 49
0
0
<OTHER-SE> 7,528
<TOTAL-LIABILITY-AND-EQUITY> 41,578
<SALES> 5,885
<TOTAL-REVENUES> 5,885
<CGS> 5,293
<TOTAL-COSTS> 5,293
<OTHER-EXPENSES> 23
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326
<INCOME-PRETAX> 280
<INCOME-TAX> 138
<INCOME-CONTINUING> 142
<DISCONTINUED> 0
<EXTRAORDINARY> (320)
<CHANGES> 0
<NET-INCOME> (178)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
