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 September 30, 1994
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
Incorporation or organization)
Identification No.)
19845 N. U.S. 31, P.O. Box 407, Westfield, Indiana 46074
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 317-896-
6464
(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 978,351 shares of $1,000 stated value common
stock outstanding at October 31, 1994.
GTE NORTH INCORPORATED AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Statements of Income . . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .
. . . . 2
Condensed Consolidated Balance Sheets - Assets. . . . . . . .
. . . . 6
Condensed Consolidated Balance Sheets - Liabilities and
Shareholders' Equity . . . . . . . . . . . . . . . . . . .
. . . . 7
Condensed Consolidated Statements of Cash Flows . . . . . . .
. . . . 8
Notes to Condensed Consolidated Financial Statements. . . . .
. . . . 9
PART II. OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 11
PART I. FINANCIAL INFORMATION
GTE NORTH INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 261,613 $ 246,540 $ 772,303 $ 730,441
Network access services 262,728 241,226 774,285 719,443
Long distance services 105,070 101,096 299,977 293,290
Equipment sales and services 38,492 26,453 104,773
77,641
Other 35,138 25,247 102,793 113,037
703,041 640,562 2,054,131 1,933,852
OPERATING EXPENSES:
Cost of sales and services 145,364 153,271 431,212 451,662
Depreciation and amortization 138,176 128,180 394,294
380,728
Marketing, selling, general and
administrative 161,136 214,691 579,276 636,932
444,676 496,142 1,404,782 1,469,322
Net operating income 258,365 144,420 649,349 464,530
OTHER (INCOME) DEDUCTIONS:
Interest expense 28,264 30,775 83,662 94,062
Other - net (161) 248 (336)
(283)
INCOME BEFORE INCOME TAXES 230,262 113,397 566,023 370,751
INCOME TAXES 85,679 45,222 211,799 139,542
INCOME BEFORE EXTRAORDINARY
CHARGE 144,583 68,175 354,224 231,209
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF DEBT (net of
income taxes of $8,456) -- 14,270 -- 14,270
NET INCOME $ 144,583 $ 53,905 $ 354,224 $ 216,939
Per share data is omitted since the Company's common stock is 100%
owned by GTE
Corporation (Parent Company).
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
On April 1, 1993, GTE North Incorporated merged with Contel of
Illinois, Inc., Contel of Indiana, Inc. and Contel of
Pennsylvania, Inc. (indirect, wholly-owned subsidiaries of GTE
Corporation). Prior to the merger, the properties of GTE North
Incorporated located in Iowa, Minnesota, Missouri and Nebraska
were transferred at net book value to a newly created entity, GTE
Midwest Incorporated. The merger was accounted for in a manner
consistent with a transfer of entities under common control which
is similar to that of a "pooling of interests." All previously
issued financial statements have been restated to reflect the
combined historical results of operations, financial position,
and cash flows of GTE North Incorporated excluding operations
transferred to GTE Midwest Incorporated and including Contel of
Illinois, Inc., Contel of Indiana, Inc. and Contel of
Pennsylvania, Inc. All comparative data presented in this
discussion reflects such restatement.
Net income was $144.6 million for the three months and $354.2
million for the nine months ended September 30, 1994 as compared
to $53.9 million and $216.9 million for the same periods in 1993.
Net income includes the extraordinary charge (net of tax) related
to the early retirement of debt during the third quarter of 1993
and a settlement gain associated with the enhanced early
retirement program recorded in the third quarter of 1994.
Excluding these special items, net income increased 54% or $37.1
million in the third quarter. Excluding the items mentioned
above and the charge associated with the enhanced early
retirement and voluntary separation programs recorded in the
second quarter of 1993, net income increased 34% or $79.0 million
for the nine months ended September 30, 1994. The increases are
primarily the result of higher revenues due to increased customer
growth, and lower interest expense, partially offset by increased
operating expenses.
Operating Revenues
Operating revenues increased 10% or $62.5 million for the three
months and 6% or $120.3 million for the nine months ended
September 30, 1994 compared to the same periods in 1993.
Local network service revenues increased 6% or 15.1 million for
the three months and 6% or $41.9 million for the nine months
ended September 30, 1994 compared to the same periods in 1993.
The increases are primarily the result of a growth in access
lines and increased revenue from custom calling, special operator
services and E911 emergency surcharges.
Network access service revenues increased 9% or $21.5 million for
the three months and 8% or 54.8 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are primarily due to increased minutes of use
reflecting greater network usage by interexchange carriers and
end-users.
Long distance revenues increased 4% or $4.0 million for the three
months and 2% or $6.7 million for the nine months ended September
30, 1994 compared to the same periods in 1993. The increases are
primarily due to favorable intrastate settlement activity.
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and service revenues increased 46% or $12.0
million for the three months and 35% or $27.1 million for the
nine months ended September 30, 1994 compared to the same periods
in 1993. The increases are primarily due to growth in revenue
from billing and collections services and wiring maintenance
agreements.
Other operating revenues increased 39% or $9.9 million for the
three months and decreased 9% or $10.2 million for the nine
months ended September 30, 1994 compared to the same periods in
1993. The increase in the third quarter results is primarily due
to higher directory advertising revenue reflecting a change in
the timing of publication dates and higher revenue from operator
services. The decrease in the year-to-date results is primarily
due to lower revenue from carrier billing and collections, lower
directory advertising revenue as a result of lower directory
sales and lower rental revenue from shared facilities.
Operating Expenses
Operating expenses decreased 10% or $51.5 million for the three
months and 4% or $64.5 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. These
decreases are due to settlement gains recorded in the third
quarter of 1994 which resulted from lump-sum payments from the
Company's pension plans. These decreases were partially offset
by higher depreciation expenses caused by the timing of certain
filings, increased billing and collection expenses and the
absence of the charge associated with the enhanced early
retirement and voluntary separation programs recorded in the
second quarter of 1993.
Restructuring
As previously reported, during the fourth quarter of 1993, the
Company recorded a one-time, pre-tax restructuring charge of
$374.6 million primarily for incremental costs related to
implementation of its 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 reduce
costs.
In connection with the re-engineering plan, in the first nine
months of 1994 expenditures of $88.7 million were incurred and
charged to the restructuring reserve. These costs primarily
reflect costs associated with the consolidation of customer
contact, network operations and operator service centers,
separation benefits associated with 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.
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other (Income) Deductions
Interest expense decreased 8% or $2.5 million for the three
months and 11% or $10.4 million for the nine months ended
September 30, 1994 as compared to the same periods in 1993. The
decreases are primarily due to the retirement of $316 million of
high-coupon first mortgage bonds in late 1993 with proceeds from
commercial paper. The commercial paper was refinanced on a long-
term basis at lower interest rates in February 1994.
Income tax expense increased 89% or $40.5 million for the three
months and 52% or $72.3 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases were primarily attributable to increases in pretax
income.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine
months of 1994 was cash flow from operating activities of $751.0
million compared to $634.3 million for the same period in 1993.
The increase in cash flow from operations is primarily the result
of improved operating results and the timing of tax payments.
The Company's capital expenditures during the first nine months
of 1994 were $433.5 million compared to $401.3 million during the
same period in 1993, reflecting the Company's continued growth in
access lines, modernization of facilities and introduction of new
products and services. The Company's anticipated construction
costs for 1994 are approximately $640 million.
Cash used in financing activities was $260.7 million in 1994
compared to $217.8 million for the same period in 1993. This
included dividend payments of $95.8 million to shareholders
during the first nine months of 1994 compared to $229.2 million
for the same period in 1993. Financing activities in 1994
included the issuance of $450 million of long-term debt to retire
short-term commercial paper borrowings incurred in connection
with the retirement of high-coupon debt in 1993.
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 through the issuance of short-term or long-
term debt. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from the parent, GTE.
In addition, a $2.8 billion line of credit is available to the
Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs.
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
The Company follows the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("FAS
71"). In general, FAS 71 requires companies to depreciate plant
and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon
approvals received from regulators. In the event that
recoverability of these costs becomes unlikely or uncertain,
whether resulting from actual or anticipated increases in
competition or specific regulatory, legislative or judicial
actions, continued application of FAS 71 would no longer be
appropriate. If the Company no longer qualifies for the
provisions of FAS 71, the financial effects of the required
accounting change (which would be non-cash) could be material.
On July 5, 1994, regulatory reform legislation was signed into
law in Wisconsin. Effective September 1, 1994, this legislation
allows local exchange companies (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 new
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. Under current regulatory
law in Wisconsin, the Company must file a rate case by May 1,
1995, unless it elects to participate in the price cap plan prior
to that date. The Company has notified the Wisconsin Commission
of its intent to enter a price cap plan, effective January 1,
1995.
On October 11, 1994, the Illinois Commerce Commission issued an
order in a rate restructuring case to reduce the Company's rates
by $1.2 million, effective November 1, 1994. The rate
restructuring case combined the Company's customers and former
Contel customers under a common rate structure and restructured
the Company's rates to bring them closer to underlying costs.
The Company also requested and was granted approval to implement
a term discount plan for intrastate access charges in Illinois.
This plan offers discounted access to interexchange carriers who
are willing to commit to specific time periods and usage volumes.
The term discount plan will result in a further decrease in
revenues of $4.0 million as compared to full price access
charges.
GTE NORTH INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash and temporary investments $ 66,098 $ 5,722
Receivables, less allowances of
$21,042 and $25,173, respectively 501,054 568,730
Materials and supplies, at average cost 40,015 40,949
Prepaid taxes 39,416 40,707
Deferred income tax benefits 64,162 66,984
Prepayments and other 11,279 17,236
Total current assets 722,024 740,328
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,625,053 8,335,305
Accumulated depreciation (3,917,718)
(3,654,967)
Net property, plant and equipment 4,707,335 4,680,338
PREPAID PENSION COSTS 435,650 335,874
OTHER ASSETS 62,700 56,473
TOTAL ASSETS $ 5,927,709 $ 5,813,013
See Notes to Condensed Consolidated Financial Statements.
GTE NORTH INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 57,597 $
163,750
Accounts payable 193,243 208,283
Accrued taxes 113,950 144,788
Accrued payroll and vacations 95,889 84,021
Accrued dividends 139,178 9,392
Accrued interest 27,091 14,855
Accrued restructuring costs and other 278,249 328,173
Total current liabilities 905,197 953,262
LONG-TERM DEBT 1,410,906 1,467,045
DEFERRED CREDITS AND RESERVES, primarily deferred
income taxes, investment tax credits
and restructuring costs 1,295,594 1,204,412
PREFERRED STOCK, subject to
mandatory redemption 18,616 19,544
SHAREHOLDERS' EQUITY:
Preferred stock 29,030 29,030
Common stock 978,351 978,351
Other capital 43,018 43,018
Reinvested earnings 1,246,997 1,118,351
Total shareholders' equity 2,297,396 2,168,750
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,927,709 $
5,813,013
See Notes to Condensed Consolidated Financial Statements.
GTE NORTH INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 354,224 $ 231,209
Adjustments to reconcile income before
extraordinary charge to net cash from
operating activities:
Depreciation and amortization 394,294 380,728
Deferred income taxes and investment
tax credits 46,663 (24,810)
Provision for uncollectible accounts 31,065
31,769
Changes in current assets and current
liabilities (26,903)
3,654
Other - net (48,320)
11,785
Net cash from operating activities 751,023 634,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (433,459)
(401,322)
Other - net 3,512 5,966
Net cash used in investing activities (429,947)
(395,356)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 446,970 --
Long-term debt retired (13,803)
(34,607)
Dividends paid to shareholders (95,792)
(229,204)
Increase (decrease) in short-term debt (598,075)
45,980
Net cash used in financing activities (260,700)
(217,831)
Increase in cash and temporary investments 60,376
21,148
Cash and temporary investments at beginning
of period 5,722 5,079
Cash and temporary investments at end
of period $ 66,098 $ 26,227
See Notes to Condensed Consolidated Financial Statements.
GTE NORTH 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 1993 Annual Report to Shareholders incorporated by
reference in the Annual Report on Form 10-K.
(2) During the third quarter of 1993, the Company called $316
million of high-coupon first-mortgage bonds. As a result, a
pretax extraordinary charge of $22.7 million was recorded to
reflect the expenses of calling these bonds. The after-tax
extraordinary charge amounted to $14.3 million.
(3) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
GTE NORTH 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
third quarter
of 1994.
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 NORTH INCORPORATED
(Registrant)
Date: November 10, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 66,098
<SECURITIES> 0
<RECEIVABLES> 522,096
<ALLOWANCES> 21,042
<INVENTORY> 40,015
<CURRENT-ASSETS> 722,024
<PP&E> 8,625,053
<DEPRECIATION> 3,917,718
<TOTAL-ASSETS> 5,927,709
<CURRENT-LIABILITIES> 905,197
<BONDS> 1,410,906
<COMMON> 978,351
19,546
28,100
<OTHER-SE> 1,290,015
<TOTAL-LIABILITY-AND-EQUITY> 5,927,709
<SALES> 2,054,131
<TOTAL-REVENUES> 2,054,131
<CGS> 431,212
<TOTAL-COSTS> 1,404,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,662
<INCOME-PRETAX> 566,023
<INCOME-TAX> 211,799
<INCOME-CONTINUING> 354,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 354,224
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
