UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-3090
GTE FLORIDA INCORPORATED
(Exact name of registrant as specified in its charter)
FLORIDA 59-0397520
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
One Tampa City Center, Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 813-224-4011
(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
The Company had 23,400,000 shares of $25 par value common stock outstanding
at July 31, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE FLORIDA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 155,329 $ 146,824 $ 306,979 $ 290,326
Network access services 110,520 111,807 225,325 219,770
Long distance services 21,023 20,345 41,625 41,170
Equipment sales and services 26,864 23,758 54,904 49,242
Other 38,324 39,034 44,760 44,437
352,060 341,768 673,593 644,945
OPERATING EXPENSES:
Cost of sales and services 77,531 72,898 151,619 154,053
Depreciation and amortization 71,559 65,786 141,409 131,408
Marketing, selling, general
and administrative 101,170 106,282 199,118 220,039
250,260 244,966 492,146 505,500
Net operating income 101,800 96,802 181,447 139,445
OTHER (INCOME) DEDUCTIONS:
Interest expense 15,876 15,523 31,897 31,095
Other - net 689 377 303 (520)
INCOME BEFORE INCOME TAXES 85,235 80,902 149,247 108,870
INCOME TAXES 31,419 30,143 56,100 40,283
NET INCOME $ 53,816 $ 50,759 $ 93,147 $ 68,587
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Net income $ 53.8 $ 50.8 $ 93.1 $ 68.6
Net income increased 6% or $3.0 and 36% or $24.5 for the three and six
months ended June 30, 1995, respectively, compared to the same periods in
1994. These increases are primarily due to higher operating revenues
resulting from continued customer growth, partially offset by increased
depreciation expense. The six month increase is also due to lower
operating expenses related to decreased labor and benefit costs and data
processing charges.
OPERATING REVENUES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Local network services $ 155.3 $ 146.8 $ 307.0 $ 290.3
Network access services 110.5 111.8 225.3 219.8
Long distance services 21.0 20.3 41.6 41.2
Equipment sales & services 26.9 23.8 54.9 49.2
Other 38.3 39.0 44.8 44.4
Total operating revenues $ 352.0 $ 341.7 $ 673.6 $ 644.9
Operating revenues increased 3% or $10.3 and 4% or $28.7 for the three and
six months ended June 30, 1995, respectively, compared to the same periods
in 1994.
Local network services revenues increased 6% or $8.5 and 6% or $16.7 for
the three and six months ended June 30, 1995, respectively, compared to the
same periods in 1994. The number of access lines increased 5% for the
three and six months ended June 30, 1995, compared to the same periods in
1994. This growth generated additional revenues of $3.0 and $7.3,
respectively. The three and six month increases are also due to a $1.4 and
$3.1 growth in revenues from enhanced custom calling features, a $1.0 and
$1.9 growth in Private Line revenue and a $1.6 and $3.0 growth in revenues
from Integrated Services Digital Network (ISDN), a service that permits
rapid transmission of voice, data, image and text over one phone line.
2
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access services revenues decreased 1% or $1.3 for the three months
and increased 3% or $5.5 for the six months ended June 30, 1995, compared
to the same periods in 1994. The three month decrease is primarily due to
a $3.6 reduction in interstate access revenues associated with price
changes, partially offset by $2.8 of additional revenues generated from a
3% increase in minutes of use. The year-to-date increase is primarily due
to an 8% increase in minutes of use, which generated additional revenues of
$13.5, and a $3.4 increase in end user access charge revenues. The
year-to-date increase is partially offset by a $7.2 reduction in interstate
access revenues associated with price changes and $4.6 of unfavorable
interstate access settlements.
Equipment sales and services revenues increased 13% or $3.1 and 12% or $5.7
for the three and six months ended June 30, 1995, respectively, compared to
the same periods in 1994. The three and six month increases are primarily
due to a $1.6 and $2.4 increase in revenues derived from sales of Personal
Secretary (Trademark) voice messaging services and a $1.1 and $2.6 increase
in data wire equipment sales, respectively.
OPERATING EXPENSES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Operating expenses $ 250.3 $ 245.0 $ 492.1 $ 505.5
Operating expenses increased 2% or $5.3 for the three months and decreased
3% or $13.4 for the six months ended June 30, 1995, compared to the same
periods in 1994. The year-to-date decrease is primarily due to lower
marketing, selling, general and administrative costs, which reflects the
favorable effects of ongoing cost-reduction programs from process
re-engineering activities, partially offset by higher depreciation costs.
The three month increase is primarily due to increased depreciation costs
of $5.8, primarily related to higher plant balances, a $0.8 increase in
rental costs, and a $2.6 increase in expenses from shared facilities. Also
contributing to the three month increase are higher material and postage
costs of $2.6 and higher costs of $1.2 associated with uncollectible
interexchange carrier receivables. These increases are partially offset by
a $7.1 decrease in data processing charges and a $5.5 settlement gain
recorded in the second quarter of 1995 which resulted from lump-sum
payments from the Company's pension plans.
3
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The year-to-date decrease is primarily due to the $5.5 settlement gain
mentioned above, an $11.5 decrease in data processing charges, an $8.2
decrease in labor and benefit costs, a $4.4 decrease in digital switching
software upgrades, and a $2.4 decrease in charges related to unbillable
calling card calls. These decreases are partially offset by a $4.0
increase in rental costs, a $3.7 increase in expenses from shared
facilities, higher costs of $1.2 associated with uncollectible
interexchange carrier receivables and a $10.0 increase in depreciation
costs, primarily related to higher plant balances and other non-recurring
adjustments. Also offsetting the six month decrease is $3.7 of higher
material and postage costs.
OTHER DEDUCTIONS
Income taxes were $31.4 for the three months and $56.1 for the six months
ended June 30, 1995 compared to $30.1 and $40.3 for the same periods in
1994. Income taxes increased 4% or $1.3 and 39% or $15.8 for the three and
six months ended June 30, 1995, as compared to the same periods in 1994.
These increases are primarily due to corresponding increases in pretax
income.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction
of new plant, modernization of facilities and payment of dividends. The
Company generally funds its construction program from operations, although
external financing is available. Short-term borrowings can be obtained
through commercial paper borrowings or borrowings from GTE. In addition,
at June 30, 1995, a $3,490 line of credit was available to the Company
through shared lines of credit with GTE and other affiliates to support
short-term financing needs.
The Company's primary source of funds during the first six months of 1995
was cash from operations of $191.7 compared to $231.8 for the same period
in 1994. The year-to-year decrease in cash from operations is primarily
the result of an increase in working capital, partially offset by improved
results from operations.
The Company's capital expenditures during the first six months of 1995 were
$127.3 compared to $110.6 for the same period in 1994. The 1995
expenditures reflect the Company's continued growth in access lines and
modernization of current facilities and introduction of new products and
services, including Video Connect (service mark) services (an interactive
and broadcast video product utilized in the broadcast, educational and
business markets), broadband digital services and switched digital
services. In 1995, construction costs are expected to increase from $274.0
of capital expenditures incurred during 1994, reflecting the Company's
expanding network and the replacement of outdated technologies with digital
switches and fiber optic networks.
4
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash used in financing activities was $64.6 during the first six months of
1995 compared to $122.5 for the same period in 1994. This included
dividend payments of $72.2 in the first six months of 1995 compared to
$13.6 for the same period in 1994 and short-term debt payments of $38.0 and
$104.0 in the first six months of 1995 and 1994, respectively. The Company
retired $19.8 of long-term debt during the first six months of 1995
compared to less than one million for the same period in 1994. In
May 1995, the Company received a capital contribution of $50.0 from GTE to
improve the Company's financial leverage.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $194.3, which reduced net income by $119.7,
primarily for incremental costs related to implementation of the Company's
three-year re-engineering plan. The re-engineering plan will redesign and
streamline processes to improve customer-responsiveness and product
quality, reduce the time necessary to introduce new products and services
and further reduce costs.
Implementation of the re-engineering plan began during 1994 and is expected
to be completed by the end of 1996. Expenditures of $68.2 have been made
since inception of the re-engineering plan, including $24.7 during the
first six months of 1995. These expenditures were primarily associated
with the consolidation of customer contact, network operations and operator
service centers, separation benefits from employee reductions and
incremental expenditures to redesign and streamline processes. There have
been no significant changes made to the overall re-engineering plan as
originally reported. As of June 30, 1995, $126.1 remains in the
restructuring reserve, of which $57.1 is classified as a current liability.
Management believes the reserve is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs), including the
Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff
entity. Each of the three options reflected an increase to the 3.3%
productivity factor used since 1991. The Company selected a 4.0%
productivity factor for use in the 1995-1996 tariff year. The Company must
share with customers 50% of returns over a 12.25% ROR and up to a 13.25%
ROR, and share with customers 100% of returns over a 13.25% ROR. Since the
Company's access fees are priced significantly below the FCC's maximum
price, the Company was permitted to file tariffs effective May 24, 1995 to
increase rates $30.2, annually. In addition, the Company filed tariffs
effective August 1, 1995 under the interim rules to reduce rates $13.4,
annually. The FCC is continuing to consider how the price cap plan should
be modified in order to adapt the system to the emergence of competition.
5
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In April 1995, GTE filed a motion with the U.S. District Court for the
District of Columbia to remove the 1984 Consent Decree, which restricts the
manner in which the Company can provide interLATA services. GTE believes
that the Consent Decree is no longer required since GTE has since divested
its interests in the entities whose purchase gave rise to the Consent
Decree.
In May 1995, the FCC approved GTE's applications to construct a new
fiber-optic and coaxial-cable video network in four markets, including
Pasco and Pinellas Counties, Florida. GTE expects to submit tariffs that
set the rates for use of its video network to the FCC for approval and to
commence the initial deployment of the network in late 1995 and early 1996.
On January 21, 1993, the Florida Public Service Commission (FPSC) issued an
order effective January 6, 1993 to reduce rates $14.5. This order
established a midpoint return on equity of 12.2% for 1993 and beyond for
all state ratemaking purposes. The Company filed a motion for
reconsideration of the rate order and the Commission lowered the rate
reduction by $0.8. The Company filed an appeal of various aspects of the
FPSC's rate case decision with the Florida Supreme Court. Oral arguments
were heard by the Court on January 31, 1994. On July 7, 1994, the Court
issued its opinion accepting the Company's argument that the Commission
should not have made a $4.8 adjustment for expenses associated with
affiliate transactions and remanded this issue to the Commission. On
April 3, 1995, the Commission approved a $4.8 increase to certain local
rates, effective May 2, 1995. However, the FPSC did not approve a
surcharge to recover lost revenues of approximately $11.0 for the period
that the wrongful decision was in effect. On May 25, 1995, the Company
filed an appeal of the surcharge issue with the Florida Supreme Court.
Briefs were filed with the Supreme Court on August 3, 1995. An expected
decision date is unknown at this time.
Effective July 1, 1995, the Florida Legislature passed a bill which
replaces earnings regulation with price regulation and opens the local
exchange to competition. The Company will become subject to price
regulation effective either January 1, 1996, or when an alternative LEC is
certified to provide local service in the Company's territory, whichever is
later. It is anticipated that alternative LECs will begin the
certification process in the near future, thus making the Company subject
to price regulation on January 1, 1996. Under the price regulation
provisions, basic service, multi-line business local exchange service and
intrastate access rates are capped for three years, until January 1, 1999.
Basic service rates can continue to be capped for an additional two years
if the level of competition does not justify elimination of the cap.
Subsequent to the price cap period, prices for basic services can be
increased by an inflation factor (measured by GDP-PI) less 1% annually.
Rates for non-basic services, defined as services other than basic,
interconnection and network access, can increase by up to 6% per year if no
competition exists and up to 20% if there is more than one certified
6
GTE FLORIDA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
provider of the service. Additionally, intrastate access rates that are
higher than interstate access rates must be reduced by at least 5% annually
until parity with 1994 interstate rates is attained. Other provisions of
this legislation include the following: (1) interconnection prices, terms
and conditions will be negotiated between the companies, with the FPSC to
resolve the matter if an agreement cannot be reached; (2) LECs must
unbundle services to the extent that it is technically and economically
feasible; (3) LECs retain carrier of last resort responsibility until
January 1, 2000; (4) lifeline funding, which is designed to support low
income customers, is required, of which the Company is expected to fund
approximately $3.0 annually; (5) a temporary number portability solution
must be implemented by January 1, 1996; and (6) LECs subject to price
regulation are allowed to set their own depreciation rates.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
In general, SFAS No. 71 requires companies to depreciate plant and
equipment over lives approved by regulators which may extend beyond the
assets' actual economic and technological lives. SFAS No. 71 also requires
deferral of certain costs and obligations based upon approvals received
from regulators to permit recovery in the future. Consequently, the
recorded net book value of certain assets and liabilities, primarily
telephone plant and equipment, may be greater than that which would
otherwise be recorded by unregulated enterprises. On an ongoing basis, the
Company reviews the continued applicability of SFAS No. 71 based on the
current regulatory and competitive environment. Although recent
developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result,
the Company continues to believe that accounting under SFAS No. 71 is
appropriate. If the Company were to determine that the use of SFAS No. 71
was no longer appropriate, it would be required to write-off the deferred
costs and obligations referred to above. It may also be necessary for the
Company to reduce the carrying value of its plant and equipment to the
extent that it exceeds fair market value. At this time, it is not possible
to estimate the amount of the Company's plant and equipment, if any, that
would be considered unrecoverable in such circumstances. The financial
impact of such a determination, however, which would be non-cash, could be
material.
7
GTE FLORIDA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 10,303 $ 10,527
Accounts and notes receivable, less allowances
of $20,663 and $19,737, respectively 277,821 301,231
Materials and supplies 18,885 15,713
Prepayments and other 11,962 19,365
Total current assets 318,971 346,836
PROPERTY, PLANT AND EQUIPMENT:
Original cost 3,876,341 3,781,735
Accumulated depreciation (1,337,586) (1,229,633)
Net property, plant and equipment 2,538,755 2,552,102
OTHER ASSETS 109,055 91,317
TOTAL ASSETS $ 2,966,781 $ 2,990,255
See Notes to Condensed Consolidated Financial Statements.
8
GTE FLORIDA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 157,185 $ 137,508
Accounts payable 87,729 117,191
Accrued taxes 28,041 32,073
Accrued payroll and vacations 35,671 40,466
Accrued interest 8,465 8,911
Accrued dividends 44,800 43,669
Accrued restructuring costs and other 94,676 94,224
Total current liabilities 456,567 474,042
LONG-TERM DEBT 659,954 729,754
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 388,970 381,035
Employee benefit obligations 98,835 75,762
Restructuring costs and other 94,316 131,303
Total reserves and deferred credits 582,121 588,100
SHAREHOLDERS' EQUITY:
Preferred stock 60,096 60,096
Common stock 585,000 585,000
Other capital (Note 2) 50,289 289
Reinvested earnings 572,754 552,974
Total shareholders' equity 1,268,139 1,198,359
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,966,781 $ 2,990,255
See Notes to Condensed Consolidated Financial Statements.
9
GTE FLORIDA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 93,147 $ 68,587
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 141,409 131,408
Deferred income taxes and investment
tax credits 11,718 19,419
Provision for uncollectible accounts 13,934 11,795
Changes in current assets and
current liabilities (64,734) (18,852)
Other - net (3,774) 19,446
Net cash from operating activities 191,700 231,803
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (127,301) (110,573)
Cash used in investing activities (127,301) (110,573)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 272 --
Long-term debt retired (19,817) (71)
Dividends paid to shareholders (72,236) (13,590)
Capital contribution from GTE 50,000 --
Net change in affiliate notes 15,191 (4,845)
Decrease in short-term debt (38,033) (103,995)
Net cash used in financing activities (64,623) (122,501)
Decrease in cash (224) (1,271)
Cash at beginning of period 10,527 6,688
Cash at end of period $ 10,303 $ 5,417
See Notes to Condensed Consolidated Financial Statements.
10
GTE FLORIDA INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 financial statements and the notes thereto
included in the Company's 1994 Annual Report on Form 10-K.
(2) On May 26, 1995, the Company received from GTE an infusion of $50.0
million in the form of additional paid-in capital to improve the Company's
financial leverage.
(3) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
11
GTE FLORIDA INCORPORATED AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the second
quarter of 1995.
12
SIGNATURE
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 hereunto duly authorized.
GTE FLORIDA INCORPORATED
(Registrant)
Date: August 8, 1995 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 10,303
<SECURITIES> 0
<RECEIVABLES> 298,484
<ALLOWANCES> 20,663
<INVENTORY> 18,885
<CURRENT-ASSETS> 318,971
<PP&E> 3,876,341
<DEPRECIATION> 1,337,586
<TOTAL-ASSETS> 2,966,781
<CURRENT-LIABILITIES> 456,567
<BONDS> 659,954
<COMMON> 585,000
0
60,096
<OTHER-SE> 623,043
<TOTAL-LIABILITY-AND-EQUITY> 2,966,781
<SALES> 673,593
<TOTAL-REVENUES> 673,593
<CGS> 151,619
<TOTAL-COSTS> 492,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,897
<INCOME-PRETAX> 149,247
<INCOME-TAX> 56,100
<INCOME-CONTINUING> 93,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,147
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
