<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 period ended March 31, 1996
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 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 214-718-5600
(Former name, former address and formal 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 April 30, 1996. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1996 1995
------------ -----------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $ 281,062 $ 263,519
Network access services 269,880 263,211
Toll services 92,201 94,722
Other services and sales 88,418 65,980
--------- ---------
Total revenues and sales 731,561 687,432
--------- ---------
Operating costs and expenses:
Cost of services and sales 257,657 235,376
Selling, general and administrative 106,855 97,014
Depreciation and amortization 136,367 140,642
--------- ---------
Total operating costs and expenses 500,879 473,032
--------- ---------
Operating income 230,682 214,400
Interest - net 28,011 28,400
--------- ---------
Income before income taxes 202,671 186,000
Income taxes 73,628 70,045
--------- ---------
Net income $ 129,043 $ 115,955
========= =========
</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 North Incorporated and Subsidiary
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,
---------------------------
1996 1995
--------- --------
<S> <C> <C>
Net income $129.0 $116.0
</TABLE>
Net income increased 11% or $13 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to higher
revenues and sales, primarily local services and other services and sales,
partially offset by corresponding higher operating expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
-------- ---------
<S> <C> <C>
Local services $281.1 $263.5
Network access services 269.9 263.2
Toll services 92.2 94.7
Other services and sales 88.4 66.0
------ ------
Total revenues and sales $731.6 $687.4
</TABLE>
Total revenues and sales increased 6% or $44.2 for the three months ended March
31, 1996, compared to the same period in 1995.
Local service revenues increased 7% or $17.6 for the three months ended March
31, 1996, compared to the same period in 1995. The number of switched access
lines increased 3% for the three months ended March 31, 1996, which generated
additional revenue of $6.7. The increase is also due to growth in revenues of
$3.9 from enhanced custom calling features, such as SmartCall(R), and $3.8 of
growth in measured usage service revenue.
Network access service revenues increased 3% or $6.7 for the three months ended
March 31, 1996, compared to the same period in 1995. Minutes of use increased
11% for the three months ended March 31, 1996, which generated additional
revenues of $14.1. The increase is also due to $2.4 of higher special access
revenue associated with growth in special access lines and an increase in
revenue of $1.9 associated with access fees charged to cellular service
providers. The increase is partially offset by favorable carrier settlements
of $10 recorded in 1995.
Toll service revenues decreased 3% or $2.5 for the three months ended March 31,
1996, compared to the same period in 1995. The decrease is primarily due to a
decline in toll volume resulting from 10XXX and 1+ intraLATA toll competition
of approximately $4, partially offset by favorable intrastate settlement
activity of $1.5.
2
<PAGE> 4
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other services and sales revenues increased 34% or $22.4 for the three months
ended March 31, 1996, compared to the same period in 1995. The increase is
primarily due to additional business equipment sales, primarily private branch
exchange phone systems sales and the associated maintenance contracts,
previously marketed through GTE Telecom Marketing Incorporated (TMC).
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
--------- --------
<S> <C> <C>
Total operating costs and expenses $500.9 $473.0
</TABLE>
Total operating costs and expenses increased 6% or $27.9 for the three months
ended March 31, 1996, compared to the same period in 1995.
The three month increase in operating costs and expenses is primarily
attributable to a $10.3 increase in purchases of network software, higher
material costs related to voice and data equipment sales of $6.1, higher pole
attachment rental expense of $3.4 and increased advertising expense of $4.0.
INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
-------- ---------
<S> <C> <C>
Income taxes $73.6 $70.0
</TABLE>
Income taxes increased 5% or $3.6 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to a
corresponding increase in pretax income.
3
<PAGE> 5
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 March 31,
1996, 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 three months of 1996 was
cash from operations of $316.8 compared to $369.1 for the same period in 1995.
The year-to-year decrease in cash flow from operations is primarily the result
of an increase in working capital requirements, partially offset by improved
results from operations. Cash from operations is also being utilized to fund
the Company's re-engineering plan.
The Company's capital expenditures during the first three months of 1996 were
$128.6 compared to $114.8 for the same period in 1995. The 1996 expenditures
reflect the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services, including
broadband digital services and switched digital services. Although higher in
the first quarter, total year 1996 capital expenditures are expected to
decrease from the 1995 level.
Cash used in financing activities was $196.3 during the first three months of
1996 compared to $270.7 for the same period in 1995. This included dividend
payments of $98.5 in the first three months of 1996 compared to $54.8 for the
same period in 1995. Financing activities also included a decrease in
short-term debt of $98.2 for the first three months of 1996 compared to a
decrease of $215.1 for the same period in 1995.
During 1995, the Company entered into forward contracts to sell $200 of
U.S.Treasury bonds in order to hedge against future changes in market interest
rates related to the debt the Company called and redeemed in the fourth quarter
of 1995, and will refinance in May 1996. Due to a mark-to-market valuation of
these contracts at March 31, 1996, collateral of $17.9 was received from the
counterparty and is being held in general funds until final settlement of the
contracts. Final settlement of the forward contracts will occur at the time of
the debt issuance in May 1996, at which time any gain or loss will be amortized
over the life of the associated refinanced debt as an offset or addition to
interest expense.
OTHER MATTERS
In connection with the re-engineering plan, during the first three months of
1996, costs of approximately $1.9 have been incurred, including $1.1 to
re-engineer customer service processes and $0.8 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $283 have been incurred, including $199.8 to re-engineer customer
service processes and $50.9 to re-engineer administrative processes. The
restructuring costs also include $32.3 to consolidate facilities and operations
and other related costs. These expenditures were primarily associated with the
closure and relocation of various service centers, software enhancements and
separation benefits associated with employee reductions. Implementation of the
re-engineering plan is expected to be substantially completed by the end of
1996. As of March 31, 1996, $91.6 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
4
<PAGE> 6
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In 1996, GTE, through a separate subsidiary, began offering long distance
service to its customers in selected states, including Illinois, Indiana and
Michigan, marketed under the name GTE Easy Savings Plan(SM). GTE plans to
offer this service in all 28 states where it currently offers local telephone
service by December 1996.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 4.0% to 5.3% for its Michigan tariff
entity. Overall, the proposed rates result in a $5.5 price reduction,
effective July 1, 1996. The Company anticipates the FCC will issue an order
prior to the effective date, which may require changes to the Company's annual
filing.
The Company's intrastate business is regulated by the state regulatory
commissions in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.
The Telecommunications Act of 1996 (the Telecommunications Act) forbids states
from imposing any barriers to entry into local and toll competition. Local
competition has been authorized in Illinois, Michigan, Pennsylvania and
Wisconsin. In addition, Illinois, Michigan and Pennsylvania have concluded
that intraLATA 1+ competition is in the public interest. The Company will be
converting all capable offices in Illinois to 1+ intraMarket Service Area (MSA)
toll presubscription by November 1996. On March 26, 1996, to comply with
Public Act 216, the Michigan Public Service Commission (MPSC) ordered the
Company to provide intraLATA 1+ dialing parity in all capable switches by June
30, 1996. The Telecommunications Act requires GTE to negotiate intraLATA
dialing parity provisions with its competitors. In subsequent negotiations,
GTE will address implementation of 1+ in those states which have not previously
ordered implementation. In Wisconsin, a Commission order is expected in July
1996 mandating when the Company is required to provide 1+ intraLATA equal
access in its technically capable exchanges. In written comments, the Company
has proposed a schedule implementing intraLATA equal access in Wisconsin
beginning in September 1996, with all exchanges converted by March 1997. In
Indiana, hearings will take place in July 1996 to hear testimony on the manner
in which local-exchange carriers (LECs) should make 1+ and 0+ intraLATA access
available.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. On December 20, 1995, an order was issued by the Illinois
Commerce Commission (ICC) granting the Joint Petition for Approval of
Stipulation and Agreement terminating Primary Toll Carrier (PTC) arrangements
in the state of Illinois. Private line PTC was eliminated on March 31, 1996,
and toll PTC will be eliminated July 15, 1996, thus dissolving the PTC
arrangement for GTE in Illinois. After PTC termination, each LEC will be
responsible for providing 1+ intraMarket Service Area (MSA) toll to its end
users.
The ICC initiated a statewide access rate investigation in January 1996. The
scope of this generic access docket includes the elimination of the Residual
Interconnection Charge (RIC) as well as rate structures, wholesale usage, small
LEC issues, classification of access services for incumbent versus new LECs,
and effects of the Telecommunications Act. The Company is advocating a revenue
neutral rate rebalancing in this docket.
In Michigan pursuant to Public Act 216, the Company eliminated an interLATA
carrier common line surcharge retroactive to December 1, 1995, resulting in an
access revenue reduction of $5.2. On January 15, 1996, an end user charge was
implemented to generate local revenue of $5.2 resulting in a revenue neutral
issue.
5
<PAGE> 7
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 23,529 $ 31,655
Receivables, less allowances of $26,770 and $24,059 647,729 662,350
Inventories and supplies 57,233 48,257
Deferred income tax benefits 70,086 76,993
Prepaid taxes and other 53,450 33,961
------------ ------------
Total current assets 852,027 853,216
------------ ------------
Property, plant and equipment, at cost 8,957,858 8,902,302
Accumulated depreciation (6,126,680) (6,060,728)
------------ ------------
Total property, plant and equipment, net 2,831,178 2,841,574
Other assets, primarily employee benefit plans 613,634 594,291
------------ ------------
Total assets $ 4,296,839 $ 4,289,081
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 534,946 $ 435,443
Accounts payable 173,011 147,272
Taxes payable 209,007 126,179
Accrued interest 19,335 21,149
Accrued payroll costs 109,517 150,728
Dividends payable 132,293 98,229
Accrued restructuring costs 91,601 93,501
Other 127,834 134,691
------------ ------------
Total current liabilities 1,397,544 1,207,192
------------ ------------
Non-current liabilities:
Long-term debt 1,134,356 1,330,811
Deferred income taxes 186,866 177,199
Employee benefit plans 281,505 268,430
Other liabilities 17,032 22,382
------------ ------------
Total non-current liabilities 1,619,759 1,798,822
------------ ------------
Preferred stock, subject to mandatory redemption 17,626 17,626
------------ ------------
Shareholders' equity:
Preferred stock 29,033 29,033
Common stock (978,351 shares issued) 978,351 978,351
Additional paid-in capital 43,110 43,110
Retained earnings 211,416 214,947
------------ ------------
Total shareholders' equity 1,261,910 1,265,441
------------ ------------
Total liabilities and shareholders' equity $ 4,296,839 $ 4,289,081
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
--------- --------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 129,043 $ 115,955
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 136,367 140,642
Deferred income taxes 16,574 15,545
Provision for uncollectible accounts 10,271 8,318
Changes in current assets and current liabilities 30,653 97,578
Other - net (6,087) (8,926)
---------- ----------
Net cash from operations 316,821 369,112
---------- ----------
Investing:
Capital expenditures (128,602) (114,847)
---------- ----------
Cash used in investing (128,602) (114,847)
---------- ----------
Financing:
Long-term debt retired (17,598) (860)
Dividends (98,511) (54,792)
Decrease in short-term obligations, excluding current maturities (98,179) (215,097)
Other - net 17,943 --
---------- ----------
Net cash used in financing (196,345) (270,749)
---------- ----------
Decrease in cash and temporary investments (8,126) (16,484)
Cash and temporary investments:
Beginning of period 31,655 30,373
---------- ----------
End of period $ 23,529 $ 13,889
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
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 1995
Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
8
<PAGE> 10
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
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the first quarter
of 1996.
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 North Incorporated
----------------------------------
(Registrant)
Date: May 10, 1996 William M. Edwards, III
----------------- ----------------------------------
William M. Edwards, III
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 North Incorporated and Subsidiary
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
--------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 129,043
Add - Income taxes 73,628
- Fixed charges 32,272
---------
Adjusted earnings $ 234,943
=========
Fixed charges:
Interest expense $ 29,502
Portion of rent expense
representing interest 2,770
---------
Adjusted fixed charges $ 32,272
=========
RATIO OF EARNINGS TO FIXED CHARGES 7.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 23,529
<SECURITIES> 0
<RECEIVABLES> 674,499
<ALLOWANCES> 26,770
<INVENTORY> 57,233
<CURRENT-ASSETS> 852,027
<PP&E> 8,957,858
<DEPRECIATION> 6,126,680
<TOTAL-ASSETS> 4,296,839
<CURRENT-LIABILITIES> 1,397,544
<BONDS> 1,134,356
<COMMON> 978,351
17,626
29,033
<OTHER-SE> 254,526
<TOTAL-LIABILITY-AND-EQUITY> 4,296,839
<SALES> 731,561
<TOTAL-REVENUES> 731,561
<CGS> 257,657
<TOTAL-COSTS> 500,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,011
<INCOME-PRETAX> 202,671
<INCOME-TAX> 73,628
<INCOME-CONTINUING> 129,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,043
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
