<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly 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 1-3090
GTE FLORIDA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-0397520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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
(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
April 30, 1998. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE Florida Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
REVENUES AND SALES
Local services $ 180,891 $ 173,987
Network access services 117,955 117,650
Toll services 12,022 17,188
Other services and sales 50,771 47,146
---------- ----------
Total revenues and sales 361,639 355,971
---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 149,726 131,124
Selling, general and administrative 64,595 58,953
Depreciation and amortization 95,875 88,619
---------- ----------
Total operating costs and expenses 310,196 278,696
---------- ----------
OPERATING INCOME 51,443 77,275
Interest - net 17,260 15,738
---------- ----------
INCOME BEFORE INCOME TAXES 34,183 61,537
Income taxes 12,948 24,231
---------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE 21,235 37,306
Extraordinary charge (3,400) --
---------- ----------
NET INCOME $ 17,835 $ 37,306
========== ==========
</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
<PAGE> 3
GTE Florida Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 17.8 $ 37.3
</TABLE>
Net income for 1998 includes an extraordinary after-tax charge of $3.4 related
to the early retirement of debt. Excluding this charge, net income decreased 43%
or $16.1 for the three months ended March 31, 1998, compared to the same period
in 1997. The decrease is primarily due to higher operating costs and expenses,
which were partially offset by slightly increased revenues and sales.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Local services $ 180.9 $ 174.0
Network access services 117.9 117.7
Toll services 12.0 17.2
Other services and sales 50.8 47.1
----------- -----------
Total revenues and sales $ 361.6 $ 356.0
</TABLE>
Total revenues and sales increased 2% or $5.6 for the three months ended March
31, 1998, compared to the same period in 1997.
Local service revenues increased 4% or $6.9 for the three months ended March 31,
1998, compared to the same period in 1997. Access line growth of 6% generated
increased revenues of $4.1 from basic local services and $2 from Integrated
Services Digital Network (ISDN) and Digital Channel Services (DCS). Growth in
private line revenue of $2.7 also contributed to the increase, which was
partially offset by a decrease in directory assistance and operator services of
$2.1.
Network access service revenues remained relatively unchanged, increasing by
$0.2 for the three months ended March 31, 1998, compared to the same period in
1997. Minutes of use increased 12%, generating $12.9 of additional revenue.
Special access revenues grew $5.7 due to greater demand for increased bandwidth
by Internet Service Providers (ISPs) and other high-capacity users. Offsetting
these increases was a decrease of $12.2 resulting from the impact of interstate
access rate reductions from the 1997 Federal Communications Commission (FCC)
price cap. In 1997, the FCC ordered significant changes that altered the
structure of access charges collected by the Company. These changes, effective
January 1, 1998, reduced and restructured the per minute charges paid by long
distance carriers and implemented new per line charges. The FCC also created a
structure that resulted in different access charges for residential primary and
secondary lines and single line and multi-line business access lines. In
aggregate, these changes resulted in a $2.1 decrease in network access service
revenues during the first quarter of 1998.
2
<PAGE> 4
GTE Florida Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Finally, a decrease of $29.2 resulting from the sharing provisions of the 1996
and 1997 FCC price caps, recorded during the first quarter of 1998, was offset
by reserves of $27.9 which were established in the first quarter of 1997.
Toll service revenues decreased 30% or $5.2 for the three months ended March 31,
1998, compared to the same period in 1997, primarily due to lower toll volumes
resulting from intraLATA (local access transport area) toll competition,
including 10XXX and 1+ presubscription.
Other services and sales revenues increased 8% or $3.7 for the three months
ended March 31, 1998, compared to the same period in 1997, primarily due to a
$1.9 increase relating to the FCC's order on payphone compensation and a $1
increase in rental revenue.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cost of services and sales $ 149.7 $ 131.1
Selling, general and administrative 64.6 59.0
Depreciation and amortization 95.9 88.6
----------- -----------
Total operating costs and expenses $ 310.2 $ 278.7
</TABLE>
Total operating costs and expenses increased 11% or $31.5 for the three months
ended March 31, 1998, compared to the same period in 1997. The increase is
primarily due to a $12.5 rise in maintenance and repair costs associated with
storm damage within the Company's service territories. An increase of $7.3 in
depreciation costs related to additions to plant, $3 in Info Page billings from
directory publications and the effect of pension settlement gains of $3.5
recorded during the first quarter of 1997 were additional factors in the
overall increase in operating costs and expenses.
OTHER EXPENSE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest - net $ 17.2 $ 15.7
Income taxes 12.9 24.2
Extraordinary charge 3.4 --
</TABLE>
Interest - net increased 10% or $1.5 for the three months ended March 31, 1998,
compared to the same period in 1997, primarily due to an increase in interest
expense due to higher average short-term debt levels.
Income taxes decreased 47% or $11.3 for the three months ended March 31, 1998,
compared to the same period in 1997, primarily due to a corresponding decrease
in pre-tax income.
3
<PAGE> 5
GTE Florida Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.4, reflecting premiums paid on the redemption of
high-coupon debt prior to stated maturity.
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 financings can be obtained through borrowings
from GTE or GTE Funding Incorporated (GTE Funding), a wholly-owned subsidiary of
the Company. GTE Funding provides short-term financing and investment vehicles
and cash management services for the Company and six other of GTE's domestic
telephone operating subsidiaries, each of which is contractually obligated to
repay all amounts borrowed by it from GTE Funding. The Company participates with
other affiliates in a $1,500, 364-day syndicated line of credit. In December
1997, the Company began participating with its parent, GTE, and other of its
affiliates in a series of five bilateral credit agreements for an additional
$2,000 in credit capacity. These facilities, which are shared by the
participating companies, are aligned with the maturity date of the existing
364-day line of credit. The Company has an existing shelf registration statement
for an additional $100 of debentures.
The Company's primary source of funds during the first three months of 1998 was
cash from operations of $336.2 compared to $231.2 for the same period in 1997.
The year-to-year increase in cash from operations primarily reflects a decrease
in the Company's working capital requirements, offset by a decline in results
from operations.
The Company's capital expenditures during the first three months of 1998 were
$101.7 compared to $67.7 for the same period in 1997. The 1998 expenditures
reflect the Company's continued growth in primary and secondary access lines and
the modernization of interoffice facilities to mitigate Internet congestion.
Although the capital expenditures during the first three months of 1998 were
higher than the same period in 1997, the overall anticipated capital
expenditures for 1998 are expected to be comparable to capital expenditures
during 1997.
Net cash used in financing activities was $230.4 during the first three months
of 1998 compared to $113.7 for the same period in 1997. This included dividend
payments of $41 in the first three months of 1998 compared to $59.5 for the same
period in 1997. Short-term financings, including the net change in affiliate
notes, decreased $349.2 for the first three months of 1998, compared to a
decrease of $54.2 for the same period in 1997. The Company paid $3.4 in premiums
on the retirement of $125 of long-term debt redeemed prior to stated maturity.
The Company issued $300 of 6.86% Series E debentures in February 1998. The
Company recognized a loss of approximately $8.8 on the settlement of forward
contracts related to that debt issuance. The loss is being amortized over the
life of the associated refinanced debt.
In its April 2, 1998 filing on Form 8-K, GTE, the Company's parent, stated that
because the MCI shareholders had accepted a competing offer, GTE's offer for MCI
was no longer outstanding. As a result, the Company and GTE were removed from
"Credit Watch" by all rating agencies. The Company believes that its present
investment grade credit rating provides ready access to the capital markets at
reasonable rates and provides the Company with the financial flexibility
necessary to pursue growth opportunities as they arise.
4
<PAGE> 6
GTE Florida Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS
In April 1998, the Company's parent, 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 $2,000 - $3,000 by selling
non-strategic or under-performing operations and plans to reduce annual costs
by more than $500 through improved efficiencies and productivity while it
continues to invest in new high-growth opportunities. The impact of this
announcement on the Company is unknown at this time. GTE's management is
currently assessing its options and, as decisions are finalized regarding the
sale of non-strategic operations and cost reductions, the Company could be
affected.
5
<PAGE> 7
GTE Florida Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,811 $ 57,675
Receivables, less allowances of $27,883 and $30,172 318,850 510,425
Notes receivable from affiliates 1,222,920 1,167,253
Inventories and supplies 31,185 31,006
Other 27,747 28,242
------------ ------------
Total current assets 1,662,513 1,794,601
------------ ------------
Property, plant and equipment, at cost 4,472,258 4,384,458
Accumulated depreciation (2,552,264) (2,470,494)
------------ ------------
Total property, plant and equipment, net 1,919,994 1,913,964
------------ ------------
Prepaid pension costs 175,954 169,869
Other assets 28,060 15,788
------------ ------------
Total assets $ 3,786,521 $ 3,894,222
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 1,290,657 $ 1,294,261
Notes payable to affiliates 82,311 72,287
Accounts payable 144,998 161,348
Taxes payable 16,402 2,980
Accrued interest 14,333 11,444
Accrued payroll costs 47,645 37,823
Dividends payable 52,568 40,853
Other 115,462 87,721
------------ ------------
Total current liabilities 1,764,376 1,708,717
------------ ------------
Long-term debt 889,248 1,021,064
Deferred income taxes 202,445 203,924
Employee benefit plans 200,975 196,076
Other liabilities 6,705 6,803
------------ ------------
Total liabilities 3,063,749 3,136,584
------------ ------------
Shareholders' equity:
Preferred stock 21,195 21,195
Common stock (23,400,000 shares issued) 585,000 585,000
Additional paid-in capital 50,289 50,289
Retained earnings 66,288 101,154
------------ ------------
Total shareholders' equity 722,772 757,638
------------ ------------
Total liabilities and shareholders' equity $ 3,786,521 $ 3,894,222
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE Florida Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Income before extraordinary charge $ 21,235 $ 37,306
Adjustments to reconcile income before extraordinary
charge to net cash from operations:
Depreciation and amortization 95,875 88,619
Deferred income taxes (587) (8,426)
Provision for uncollectible accounts 8,011 7,441
Changes in current assets and current liabilities 176,912 99,633
Other - net 34,736 6,602
------------ ------------
Net cash from operations 336,182 231,175
------------ ------------
INVESTING
Capital expenditures (101,674) (67,742)
------------ ------------
Cash used in investing (101,674) (67,742)
------------ ------------
FINANCING
Long-term debt issued 297,069 --
Long-term debt retired, including premiums paid
on early retirement (128,435) (28)
Dividends (40,986) (59,524)
Decrease in short-term obligations,
excluding current maturities (303,569) (120,600)
Net change in affiliate notes (45,643) 66,442
Other - net (8,808) --
------------ ------------
Net cash used in financing (230,372) (113,710)
------------ ------------
Increase in cash and cash equivalents 4,136 49,723
Cash and cash equivalents:
Beginning of period 57,675 365
------------ ------------
End of period $ 61,811 $ 50,088
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
GTE Florida Incorporated 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 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 CHARGE:
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.4 million, reflecting premiums paid on the
redemption of high-coupon debt prior to stated maturity.
(3) 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. The Company is currently
assessing the impact of adopting SOP 98-1.
8
<PAGE> 10
GTE Florida Incorporated and Subsidiaries
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
12 Statement re: Calculation of the Consolidated Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K, dated January 27, 1998, under
Item 7 "Financial Statements and Exhibits." No financial statements
were filed with this report.
9
<PAGE> 11
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, thereunto duly authorized.
GTE Florida Incorporated
-------------------------------
(Registrant)
Date: May 14, 1998 /s/ Stephen L. Shore
----------------------------- -------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
10
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- --------------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE Florida Incorporated and Subsidiaries
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1998(a)
------------ ------------
<S> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $ 21,235 $ 21,235
Add - Income taxes 12,948 12,948
- Fixed charges 41,804 23,273
------------ ------------
Adjusted earnings $ 75,987 $ 57,456
============ ============
Fixed charges:
Interest expense $ 38,330 $ 19,799
Portion of rent expense representing interest 3,474 3,474
------------ ------------
Adjusted fixed charges $ 41,804 $ 23,273
============ ============
RATIO OF EARNINGS TO FIXED CHARGES 1.82 2.47
</TABLE>
(a) Excludes $18.5 million of interest expense associated with commercial paper
issued by the Company's wholly-owned subsidiary, GTE Funding Incorporated (GTE
Funding), on behalf of GTE's other domestic telephone operating subsidiaries.
This interest is approximately equal to the interest income received by the
Company on affiliate notes between GTE Funding and such domestic telephone
operating subsidiaries. GTE Funding provides short-term financing and investment
vehicles and cash management services for the Company and six other of GTE's
domestic telephone operating subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 61,811
<SECURITIES> 0
<RECEIVABLES> 1,569,653
<ALLOWANCES> 27,883
<INVENTORY> 31,185
<CURRENT-ASSETS> 1,662,513
<PP&E> 4,472,258
<DEPRECIATION> 2,552,264
<TOTAL-ASSETS> 3,786,521
<CURRENT-LIABILITIES> 1,764,376
<BONDS> 889,248
0
21,195
<COMMON> 585,000
<OTHER-SE> 116,577
<TOTAL-LIABILITY-AND-EQUITY> 3,786,521
<SALES> 361,639
<TOTAL-REVENUES> 361,639
<CGS> 149,726
<TOTAL-COSTS> 310,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,260
<INCOME-PRETAX> 34,183
<INCOME-TAX> 12,948
<INCOME-CONTINUING> 21,235
<DISCONTINUED> 0
<EXTRAORDINARY> 3,400
<CHANGES> 0
<NET-INCOME> 17,835
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
