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: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 July 31, 1995. The Company's common stock is 100% owned by
GTE Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE NORTH 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 $ 266,839 $ 260,497 $ 530,358 $ 510,690
Network access services 269,049 265,199 532,260 511,557
Long distance services 91,199 92,226 185,921 194,907
Equipment sales and services 27,973 32,869 55,958 66,281
Other 41,395 30,669 71,737 67,655
696,455 681,460 1,376,234 1,351,090
OPERATING EXPENSES:
Cost of sales and services 131,523 146,074 260,777 285,848
Depreciation and amortization 139,608 129,422 280,250 256,118
Marketing, selling, general
and administrative 193,880 214,631 389,031 418,140
465,011 490,127 930,058 960,106
Net operating income 231,444 191,333 446,176 390,984
OTHER (INCOME) DEDUCTIONS:
Interest expense 28,550 27,250 57,647 55,398
Other - net 432 (93) 67 (175)
INCOME BEFORE INCOME TAXES 202,462 164,176 388,462 335,761
INCOME TAXES 73,238 61,622 143,283 126,120
NET INCOME $ 129,224 $ 102,554 $ 245,179 $ 209,641
</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 NORTH 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 $ 129.2 $ 102.6 $ 245.2 $ 209.6
Net income increased 26% or $26.6 and 17% or $35.6 for the three months and
six months ended June 30, 1995, respectively, compared to the same periods
in 1994. The increase is primarily due to higher operating revenues,
primarily local network and network access services revenues, settlement
gains and lower operating expenses reflecting cost savings generated from
the Company's re-engineering plan, partially offset by an increase in
depreciation expense.
OPERATING REVENUES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Local network services $ 266.8 $ 260.5 $ 530.3 $ 510.7
Network access services 269.1 265.2 532.3 511.6
Long distance services 91.2 92.2 185.9 194.9
Equipment sales & services 28.0 32.9 56.0 66.3
Other 41.4 30.7 71.7 67.6
Total operating revenues $ 696.5 $ 681.5 $1,376.2 $1,351.1
Operating revenues increased 2% or $15.0 and 2% or $25.1 for the three
months and six months ended June 30, 1995, respectively, compared to the
same periods in 1994.
Local network services revenues increased 2% or $6.3 and 4% or $19.6 for
the three months and six months ended June 30, 1995, respectively, compared
to the same periods in 1994. Access lines increased 4% for the three
months and six months ended June 30, 1995. This growth generated
additional revenues of $7.4 and $14.8, respectively. The three month and
six month increases are also due to a $1.5 and $4.2 growth in custom
calling features (e.g. SmartCall (Trademark), CLASS services, etc.).
2
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access services revenues increased 1% or $3.9 for the three months
and increased 4% or $20.7 for the six months ended June 30, 1995 compared
to the same periods in 1994. Minutes of use increased 9% for the three
months and six months ended June 30, 1995, compared to the same periods in
1994. These increases generated additional revenues of $10.0 and $26.0,
respectively. The three month and six month increases are also due to $2.3
and $5.0 in higher end user access charges revenues associated with growth
in access lines, partially offset by a reduction in interstate access
revenues associated with price reductions of $8.0 and $15.5.
Long distance services revenues decreased 1% or $1.0 and 5% or $9.0 for the
three months and six months ended June 30, 1995, respectively, compared to
the same period in 1994. The six month decrease is primarily due to a
decline in toll message volume, which generated a revenue reduction of
$7.1, and rate reductions of approximately $2.0.
Equipment sales and services revenues decreased 15% or $4.9 and 16%
or $10.3 for the three months and six months ended June 30, 1995,
respectively, compared to the same periods in 1994. The decreases are
primarily due to a $4.1 and $9.9 reduction in billing and collection
services revenues.
Other operating revenues increased 35% or $10.7 for the three months and
increased 6% or $4.1 for the six months ended June 30, 1995 compared to the
same periods in 1994. The three month increase is primarily due to a $6.1
reduction in the provision for end user uncollectibles and a $7.1 increase
in revenues from shared facilities. The six month increase is primarily
due to a $5.4 reduction in the provision for end user uncollectibles and a
$5.2 increase in revenues from shared facilities, partially offset by a
$5.2 reduction in directory revenues, attributable to the timing of
directory publications and a decline in directory revenues in Wisconsin.
OPERATING EXPENSES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Operating expenses $ 465.0 $ 490.1 $ 930.1 $ 960.1
Operating expenses decreased 5% or $25.1 and 3% or $30.0 for the three
months and six months ended June 30, 1995, respectively, compared to the
same periods in 1994. These decreases are primarily the result of lower
cost of sales and services and marketing, selling, general, and
administrative costs, reflecting the favorable effects of ongoing
cost-reduction programs from process re-engineering activities, partially
offset by higher depreciation expense.
3
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The three month decrease is primarily due to lower labor and benefits costs
of $8.7, a decline in data processing costs of 20.4, a decrease in software
costs of $3.3, lower employee business expenses of $4.4, a $2.0 decrease in
telecommunications expenses, and $10.5 of settlement gains recorded in the
second quarter of 1995 which resulted from lump-sum payments from the
Company's pension plans. These decreases were partially offset by
increases in depreciation of $10.2, primarily due to rate adjustments in
Illinois and Michigan and increased plant balances, higher contractor
expenses of $6.7, and increases of $4.9 in sales incentive costs.
The six month decrease is primarily due to lower labor and benefits
costs of $37.6, a decline in data processing costs of $35.9, lower
telecommunications expenses of $11.6, and the $10.5 of settlement gains
mentioned above. These decreases are partially offset by increases in
depreciation of $24.1 primarily due to rate adjustments in Illinois and
Michigan and increased plant balances, higher contractor expenses of $20.9,
increased sales incentive costs of $6.3, higher postage of $6.3, a $5.6
increase in employee business expenses, and higher software costs of $3.0.
OTHER DEDUCTIONS
Income taxes were $73.2 for the three months and $143.3 for the six months
ended June 30, 1995 compared to $61.6 and $126.1 for the same periods in
1994. Income taxes increased 19% or $11.6 and 14% or $17.2 for the three
months 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, partially offset by adjustments to prior years' tax
liabilities.
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 $408.4 compared to $484.2 for the same period
in 1994. The year-to-year decrease in cash from operations is the result
of an increase in working capital, partially offset by improved results
from operations.
4
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's capital expenditures during the first six months of 1995
were $263.2 compared to $274.3 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. The Company's construction costs in 1995 are expected to
increase slightly from the capital expenditures of $656.4 incurred during
1994, reflecting the Company's expanding network and the replacement of
outdated technologies with digital switches and fiber optic networks.
Cash used in financing activities was $155.5 during the first six months
of 1995 compared to $163.3 for the same period in 1994. This included
dividend payments of $132.2 during the first six months of 1995 compared to
$10.3 for the same period in 1994 and decreases in short-term debt of $21.0
during the first six months of 1995 compared to $598.1 for the same period
in 1994. The Company also issued $447.4 of long-term debt during the first
six months of 1994.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $374.6, which reduced net income by $230.8,
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 $209.1 have been made
since inception of the re-engineering plan, including $65.5 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, $165.5 remains in the
restructuring reserve, of which $89.9 is classified as a current liability.
Management believes the reserve is adequate to cover future expenditures.
5
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 the following
productivity factors and sharing thresholds for use in the 1995-1996 tariff
year:
Tariff Productivity Sharing Parameters
Entity Factor 50% 100%
Michigan 4.0% 12.25-13.25% ROR Over 13.25% ROR
Illinois, Indiana, 5.3% None None
Ohio, Pennsylvania,
Wisconsin
Under the interim rules, the Company filed tariffs to reduce rates by $34.1
annually, effective August 1, 1995. 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.
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.
On April 7, 1995, the Illinois Commerce Commission (ICC) issued its
order in the Ameritech Customer First Plan (CFP) authorizing Ameritech
Corporation to file tariffs for unbundled services, terms and conditions of
interconnection and other matters. In addition, the ICC directed that
proceedings be initiated to address the following: (1) termination of the
Primary Toll Carrier (PTC) arrangements; (2) resale restrictions and the
role of resellers in exchange competition; (3) regulatory rules applicable
to new LECs; (4) preservation of Universal Service; and (5) number
portability. These rulemakings will have dramatic impacts to the Company
as the rules for local competition are finalized. Workshops are
progressing on certain issues and the ICC Staff will initiate a docket to
review comprehensive standards and rules to be applicable to the new LECs.
An interim ruling was made in the above mentioned CFP Order that incumbent
LEC's "obligation to serve" will be enforced during the transition to a
competitive market.
6
GTE NORTH INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $22.0 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 February 24, 1994, the Michigan Public Service Commission (MPSC) issued
an order on the rehearing matter of intraLATA 1+ dialing parity. The
order requires that intraLATA dialing parity shall be implemented no later
than January 1, 1996. On March 10, 1995, the MPSC issued an order
detailing the procedures to implement intraLATA dialing parity. The
Company has appealed the MPSC's orders to the Michigan Court of Appeals.
In anticipation of intraLATA 1+ competition, the Company filed a Section
203 Rate Restructuring Filing with the MPSC. The filing was made primarily
to seek a local rate offset of $18.0 million for competitive intraLATA toll
rate reductions. A decision is expected in January 1996.
LECs have been under price cap regulation in the state of Michigan since
January 1, 1992. Legislation that established this form of regulation
sunsets December 31, 1995. The future mode of regulation for Michigan LECs
is currently under review by the Michigan legislature.
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 NORTH INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 20,116 $ 30,373
Receivables, less allowances
of $23,242 and $23,241, respectively 573,389 631,222
Materials and supplies 36,232 29,201
Deferred income tax benefits 43,236 94,535
Prepayments and other 88,857 61,233
Total current assets 761,830 846,564
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,756,758 8,598,565
Accumulated depreciation (4,001,254) (3,818,486)
Net property, plant and equipment 4,755,504 4,780,079
PREPAID PENSION COSTS 507,220 458,065
OTHER ASSETS 56,454 35,305
TOTAL ASSETS $ 6,081,008 $ 6,120,013
See Notes to Condensed Consolidated Financial Statements.
8
GTE NORTH 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 $ 291,534 $ 296,898
Accounts payable 125,230 194,279
Accrued taxes 136,149 143,889
Accrued payroll and vacations 23,511 25,589
Accrued interest 124,820 127,662
Accrued dividends 85,262 54,507
Accrued restructuring costs and other 244,081 252,643
Total current liabilities 1,030,587 1,095,467
LONG-TERM DEBT 1,347,406 1,365,781
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 878,489 895,962
Employee benefit obligations 230,904 187,707
Restructuring costs and other 128,937 191,823
Total reserves and deferred credits 1,238,330 1,275,492
PREFERRED STOCK, subject to
mandatory redemption 17,684 18,616
SHAREHOLDERS' EQUITY:
Preferred Stock 29,033 29,033
Common stock 978,351 978,351
Other capital 43,110 43,018
Reinvested earnings 1,396,507 1,314,255
Total shareholders' equity 2,447,001 2,364,657
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,081,008 $ 6,120,013
See Notes to Condensed Consolidated Financial Statements.
9
GTE NORTH 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 $ 245,179 $ 209,641
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 280,250 256,118
Deferred income taxes and investment
tax credits 30,752 6,478
Provision for uncollectible accounts 18,278 21,995
Changes in current assets and
current liabilities (126,900) (24,199)
Other - net (39,128) 14,136
Net cash from operating activities 408,431 484,169
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (263,197) (274,319)
Cash used in investing activities (263,197) (274,319)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued -- 447,443
Long-term debt and preferred stock retired (2,314) (4,535)
Dividends paid to shareholders (132,167) (10,344)
Net change in affiliate notes -- 2,181
Decrease in short-term debt (21,010) (598,075)
Net cash used in financing activities (155,491) (163,330)
Increase (decrease) in cash (10,257) 46,520
Cash at beginning of period 30,373 5,722
Cash at end of period $ 20,116 $ 52,242
See Notes to Condensed Consolidated Financial Statements.
10
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 1994
Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
11
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
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 NORTH INCORPORATED
(Registrant)
Date: August 9, 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> 20,116
<SECURITIES> 0
<RECEIVABLES> 596,631
<ALLOWANCES> 23,242
<INVENTORY> 36,232
<CURRENT-ASSETS> 761,830
<PP&E> 8,756,758
<DEPRECIATION> 4,001,254
<TOTAL-ASSETS> 6,081,008
<CURRENT-LIABILITIES> 1,030,587
<BONDS> 1,347,406
<COMMON> 978,351
17,684
29,033
<OTHER-SE> 1,439,617
<TOTAL-LIABILITY-AND-EQUITY> 6,081,008
<SALES> 1,376,234
<TOTAL-REVENUES> 1,376,234
<CGS> 260,777
<TOTAL-COSTS> 930,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,647
<INCOME-PRETAX> 388,462
<INCOME-TAX> 143,283
<INCOME-CONTINUING> 245,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245,179
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
