GTE NORTH INC
10-Q, 1997-11-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<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 September 30, 1997       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     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 978,351 shares of $1,000 stated value common stock outstanding
at October 31, 1997. 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              Nine Months Ended
                                                   September 30,                  September 30,
                                            -------------------------     -------------------------
                                              1997           1996           1997           1996
                                            ----------     ----------     ----------     ----------
                                                               (Thousands of Dollars)
<S>                                         <C>            <C>            <C>            <C>       
REVENUES AND SALES
  Local services                            $  306,346     $  286,926     $  902,541     $  838,391
  Network access services                      308,787        271,652        880,744        813,569
  Toll services                                 66,502         89,142        219,063        266,470
  Other services and sales                     106,158        114,509        304,654        311,544
                                            ----------     ----------     ----------     ----------
    Total revenues and sales                   787,793        762,229      2,307,002      2,229,974
                                            ----------     ----------     ----------     ----------

OPERATING COSTS AND EXPENSES
  Costs of services and sales                  221,247        283,753        695,445        798,692
  Selling, general and administrative           95,413        114,479        296,754        344,186
  Depreciation and amortization                126,959        119,706        374,175        374,509
                                            ----------     ----------     ----------     ----------
    Total operating costs and expenses         443,619        517,938      1,366,374      1,517,387
                                            ----------     ----------     ----------     ----------
OPERATING INCOME                               344,174        244,291        940,628        712,587

OTHER EXPENSE
  Interest - net                                31,675         29,708         93,947         85,307
  Other - net                                       --             --          1,872             --
                                            ----------     ----------     ----------     ----------
INCOME BEFORE INCOME TAXES                     312,499        214,583        844,809        627,280
  Income taxes                                 116,464         76,557        314,236        228,455
                                            ----------     ----------     ----------     ----------
NET INCOME                                  $  196,035     $  138,026     $  530,573     $  398,825
                                            ==========     ==========     ==========     ==========
</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     Nine Months Ended
                                          September 30,         September 30,
                                       -----------------     -----------------
                                        1997       1996       1997       1996
                                       ------     ------     ------     ------

<S>                                    <C>        <C>        <C>        <C>   
Net income                             $196.0     $138.0     $530.6     $398.8
</TABLE>

Net income increased 42% or $58 and 33% or $131.8 for the three and nine months
ended September 30, 1997, respectively, compared to the same periods in 1996.
The increases are primarily due to lower operating expenses combined with
higher revenues and sales, primarily from local services and network access
services.

REVENUES AND SALES

<TABLE>
<CAPTION>

                                Three Months Ended       Nine Months Ended
                                    September 30,          September 30,
                               --------------------    ---------------------
                                   1997        1996        1997         1996
                               --------    --------    --------     --------
<S>                            <C>         <C>         <C>          <C>     
Local services                 $  306.3    $  286.9    $  902.5     $  838.4
Network access services           308.8       271.7       880.7        813.6
Toll services                      66.5        89.1       219.1        266.5
Other services and sales          106.2       114.5       304.7        311.5
                               --------    --------    --------     --------
  Total revenues and sales     $  787.8    $  762.2    $2,307.0     $2,230.0
</TABLE>

Total revenues and sales increased 3% or $25.6 and 3% or $77 for the three and
nine months ended September 30, 1997, respectively, compared to the same
periods in 1996.

Local service revenues increased 7% or $19.4 and 8% or $64.1 for the three and
nine months ended September 30, 1997, respectively, compared to the same
periods in 1996. The number of access lines increased 4% for both the three and
nine months ended September 30, 1997, which generated additional revenues of
$5.9 and $16.7, respectively. The increase in local service revenues for both
periods of 1997 also reflects growth of $10.3 and $25.7 in revenues from
enhanced custom calling features, such as SmartCall(R) services, $2.2 and $6.6
growth in revenues from CentraNet(R) services and $1.7 and $5.6 growth in
revenues from sales of Integrated Services Digital Network (ISDN). ISDN enables
the simultaneous transmission of voice, data, image and text, over one phone
line and facilitates Internet access.

Network access service revenues increased 14% or $37.1 and 8% or $67.1 for the
three and nine months ended September 30, 1997, respectively, compared to the
same periods in 1996. This growth is largely due to increased demand for access
services by interexchange carriers and growing demand for increased bandwidth
services. Minutes of use increased 15% and 14% for the three and nine month
periods ended September 30, 1997, generating additional revenues of $22.6 and
$62.4, respectively. Special access revenues grew $10.9 and $22.8 for the three
and nine month periods, respectively, due to greater demand for increased
bandwidth services by Internet Service Providers (ISPs) and other high-capacity
users. These favorable items were partially offset by 1997 quarter and
year-to-date reductions in interstate and intrastate access revenues of $9.7
and $33.1 from the rate changes associated with the Federal Communication
Commission's (FCC) 1996 and 1997 price caps and the Illinois conversion to an
Originating Responsibility Plan (ORP) in July 1996 (as discussed in Other
Matters).


                                      2

<PAGE>   4



GTE NORTH INCORPORATED AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

Toll service revenues decreased 25% or $22.6 and 18% or $47.4 for the three and
nine months ended September 30, 1997, respectively, compared to the same
periods in 1996. The decline in revenues reflects the impact of lower toll
volumes from intraLATA (local access transport area) toll competition,
including 10XXX and 1+ presubscription. The decrease in revenues is also due to
the impact of optional discount calling plans, which effectively lowered
intrastate long distance rates. These decreases are partially offset by an
increase in toll revenues primarily due to the Illinois conversion to an ORP
(as discussed in Other Matters).

Other services and sales revenues decreased 7% or $8.3 and 2% or $6.8 for the
three and nine months ended September 30, 1997, respectively, compared to the
same periods in 1996. The three and nine month decreases are primarily
attributable to the decline in equipment sales and single-line rent revenues of
$11.4 and $16.4. These decreases are partially offset by a $2.3 increase for
both periods in revenues from directory publications, and increases in
affiliate rent revenues of $1 and $3.3 for the three and nine month periods,
respectively. The year-to-date decrease is further offset by the increase in
wireless activation commissions and related accessory sales of $1.3.

OPERATING COSTS AND EXPENSES

<TABLE>
<CAPTION>


                                              Three Months Ended          Nine Months Ended
                                                September 30,               September 30,
                                           -----------------------     ----------------------
                                              1997          1996          1997         1996
                                           ---------     ---------     ---------     --------
<S>                                       <C>           <C>           <C>           <C>     
                                           $   443.6     $   517.9     $ 1,366.4     $1,517.4
</TABLE>

Total operating costs and expenses 


Total operating costs and expenses decreased 14% or $74.3 and 10% or $151 for
the three and nine months ended September 30, 1997, respectively, compared to
the same periods in 1996. Excluding the pension settlement gains discussed
below, total operating expenses decreased 6% or $30.6 and 6% or $86.9 for the
three and nine month periods, respectively.

Pension settlement gains of $71.3 were recorded during the first nine months of
1997, which included a $43.7 gain recorded during the third quarter. These
gains are partially offset by $7.2 in gains recorded during the first quarter
of 1996. Additionally, administrative productivity gains of $32.8 and $46 were
achieved during the three and nine month periods, respectively, as well as
lower operating taxes of $7 and $10.3 and lower access charges incurred to
terminate customers' intraLATA toll calls outside of the Company's service
territories of $3.2 and $7.4. These decreases are partially offset by higher
labor and benefits costs of $12 and $11.6 required to support access line
growth and customer demand for products and services. The year-to-date decrease
is also partially offset by an increase in advertising costs of $24.5 aimed 
at stimulating sales of enhanced services and preserving market share in an
increasingly competitive environment.

INCOME TAXES

<TABLE>
<CAPTION>

                    Three Months Ended       Nine Months Ended
                      September 30,            September 30,
                   -------------------     -------------------
                      1997        1996        1997        1996
                   -------     -------     -------     -------
<S>                <C>         <C>         <C>         <C>    
Interest - net     $  31.7     $  29.7     $  93.9     $  85.3
Income taxes         116.5        76.6       314.2       228.5
</TABLE>

Interest - net increased 7% or $2 for the three months and 10% or $8.6 for the
nine months ended September 30, 1997 compared to the same periods in 1996.
These increases are primarily attributable to higher average debt levels.



                                      3

<PAGE>   5



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

Income taxes increased 52% or $39.9 and 38% or $85.7 for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. These increases are primarily due to corresponding increases in pre-tax
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 financings can be obtained through
borrowings from the Company's parent, GTE, or GTE Funding Incorporated, an
affiliate of the Company. On July 1, 1996, the Company began participating with
other affiliates in a $1,500 syndicated line of credit. The Company has an
existing shelf registration statement outstanding for an additional $150 of
debentures.

The Company's primary source of funds during the first nine months of 1997 was
cash from operations of $782.9 compared to $859.9 for the same period in 1996.
The year-to-year decrease in cash from operations primarily reflects the
increase in working capital requirements, partially offset by improved results
from operations.

The Company's capital expenditures during the first nine months of 1997 were
$508.3 compared to $428.1 for the same period in 1996. The 1997 expenditures
reflect the Company's continued growth in primary and secondary access lines
and the modernization of interoffice facilities to mitigate Internet
congestion. The Company anticipates capital expenditures to increase during the
remainder of 1997 compared to 1996, reflecting the continued growth of existing
networks and upgrades associated with the support of expanded services.

Cash used in financing activities was $268.4 during the first nine months of
1997 compared to $453 for the same period in 1996. This included dividend
payments of $438.3 in the first nine months of 1997 compared to $382.7 for the
same period in 1996. During the first nine months of 1997, the Company paid a
total of $240.2 for the retirement of debt and preferred stock compared to
$46.8 for the same period of 1996. Retirements for 1997 included $2.1 paid in
premiums on the May 1997 retirement of $185.3 of long-term debt and preferred
stock redeemed prior to stated maturity. In May 1996, the Company issued $200
of 7 5/8% debentures. Short-term financings, including the net change in
affiliate notes, increased $410 during the first nine months of 1997, compared
to a decrease of $239.8 for the same period of 1996. The Company entered into
forward contracts to hedge against changes in interest rates related to the
1996 debt refinancing. A $19 gain on the settlement of forward contracts is
being amortized over the life of the refinanced debt as an offset to interest
expense.

On October 15, 1997, the Company's parent, GTE, proposed a merger with MCI
Communications Corporation (MCI) valued at approximately $28 billion. As a
result of the proposed merger, the rating agencies have placed GTE, the Company
and its affiliates on "Credit Watch" for possible rating reductions. On
November 10, 1997, MCI announced that it had reached an agreement to merge with
WorldCom, Inc. (WorldCom).

OTHER MATTERS

Federal Regulatory Developments

In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the FCC's rules
purporting to implement the local competition provisions of the



                                      4

<PAGE>   6



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Telecommunications Act of 1996 (the Telecommunications Act). The Company's
parent, GTE, together with other incumbent local-exchange carriers (ILECs) and
a number of state commissions, had challenged various portions of the FCC
rules.

In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements (UNEs) and services for resale. In
addition, the Eighth Circuit made a number of other rulings favorable to GTE,
including that the FCC's rule allowing requesting carriers to pick and choose
among individual provisions of other interconnection agreements, rather than to
adopt the terms and conditions of a single agreement in its entirety, was
unlawful; that the FCC does not have the authority to review interconnection
agreements approved by state commissions or to enforce the terms of such
agreements; that the FCC rule requiring ILECs to provide interconnection and
UNEs at levels of quality that are superior to those levels at which the ILECs
provide them to themselves was unlawful; and that it is the requesting
carriers, not the ILECs, that must combine UNEs.

In addition, the Eighth Circuit rejected certain arguments advanced by GTE. For
example, it ruled that a requesting carrier may gain access to all of the UNEs
that, when combined by the requesting carrier, are sufficient to enable the
requesting carrier to provide a finished service, and it upheld most of the
standards applied by the FCC in determining which network elements an ILEC must
make available.

In October 1997, the Eighth Circuit, granting a petition for rehearing filed by
GTE and others, further ruled that the Telecommunications Act "does not permit
a new entrant to purchase the ILEC's assembled platform(s) of combined network
elements (or any lesser existing combination of two or more elements) in order
to offer competitive telecommunications services." The FCC has announced plans
to seek Supreme Court review of the Eighth Circuit's rulings; it has until
January 12, 1998 to file a petition for certiorari.

In May 1997, the FCC issued orders on universal service and access charge
reform. GTE has filed petitions for review of these FCC orders with the U.S.
Court of Appeals for the Tenth Circuit. GTE anticipates that those petitions
will be decided in 1998.

In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5%. The order also eliminated the
sharing requirements of the price cap rules. In June 1997, in accordance with
the order, the Company submitted its 1997 annual price cap filing. The 1997
interstate access filing resulted in an annual price reduction of $4.1,
effective July 1, 1997. Prior to this order, the Company had submitted a rate
change filing in May 1997, as the Company's access rates were priced
significantly below the FCC's maximum allowable price. This rate change filing
resulted in an annual price increase of $8.9, effective June 3, 1997. Overall,
the net effect of these access filings resulted in an annual price increase of
$4.8.

On June 4, 1996, the FCC issued the first Report and Order implementing Section
276 of the Telecommunications Act. As part of the overall goal of promoting
competition among payphone service providers (PSPs), this order mandated
compensation to all PSPs for all calls originating from payphones, including
"dial-around" access calls and toll-free subscriber calls for which PSPs were
not previously compensated. This compensation was to occur in two separate
phases. During phase one, from April 15, 1997 through October 6, 1997, PSPs
were to be paid a monthly, flat-rate compensation from interexchange carriers
(IXCs). During phase two, beginning October 7, 1997, PSPs were to be
compensated on a per-call basis, with the prevailing local coin rate of 35
cents established as the default rate.



                                      5

<PAGE>   7



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

On July 19, 1997, the U.S. Court of Appeals in Washington, D.C. vacated the
FCC's directive concerning per-call compensation, stating that the FCC had not
shown that the 35 cent rate was a reasonable surrogate for fair compensation.
The court also set aside the FCC's flat-rate compensation mandate.
Subsequently, on October 9, 1997, the FCC issued a second Report and Order to
address those issues vacated by the court. In this second order, the FCC
established a new per-call rate of 28.4 cents for phase two compensation. The
FCC also tentatively concluded that this per-call rate should also be used to
calculate phase one compensation obligations. It is likely, however, that the
entire phase one compensation directive will be revisited in a subsequent
order.

In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs and
resale rates. In some cases, the parties have been unable to agree within the
statutory period for negotiation and have gone to arbitration before various
state regulatory commissions. Since December 1996, state commission decisions
determining the prices and terms of unresolved issues have been released in
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. Subsequent
decisions are expected to be issued throughout 1997 and 1998.

The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors. The Company has filed lawsuits in
federal district courts in Illinois, Indiana, Michigan, Ohio, Pennsylvania and
Wisconsin. A number of these complaints have been dismissed without prejudice
on the grounds that they were filed before the arbitrated agreements had
received final approval from state commissions. In such cases, the Company is
refiling complaints after final approval has occurred.

Additionally, the Company has made appropriate filings with the states and
Federal District Courts requesting that the Eighth Circuit's favorable rulings
be taken into consideration in connection with any future arbitration ruling or
complaint actions.

Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. Cost studies have been filed in Indiana and
Pennsylvania, and additional studies in other states are expected to be filed
during the remainder of 1997 and throughout 1998.

Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
have begun in Illinois, Indiana, Pennsylvania and Wisconsin and additional
proceedings are scheduled to occur during the remainder of 1997 and into 1998.
Separate USF proceedings to address discount rates for intrastate
telecommunications services to elementary schools, secondary schools and public
libraries have also begun in Indiana and Wisconsin.

State Regulatory Developments

Illinois

On October 6, 1996, the Illinois Commerce Commission (ICC) initiated its
investigation into the Company's total element long run incremental cost
(TELRIC ) studies and to establish rates for interconnection, UNEs and
transport and termination of traffic. The docket will address wholesale rates
separately from UNEs, with each issue having a separate procedural schedule.
The determination of wholesale rates is expected to conclude in the first
quarter of 1998. The filing for UNEs is scheduled to occur in January 1998.
Hearings are tentatively scheduled to take place during the second quarter of
1998.


                                       6

<PAGE>   8



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

On December 3, 1996, the ICC issued its decision in the Company's arbitration
with AT&T Corp. (AT&T) to determine interconnection, resale and unbundling
terms and conditions. Interim discount rates for the Company's resold services
were set equal to Ameritech's average rate of 20.07%. Where the Company does
not have services similar to Ameritech's, a default discount of 17.5% is to be
used. The Company's cost studies are to be used in the interim until permanent
discounts are established in a separate generic cost proceeding. The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
ICC's arbitration determinations. AT&T withdrew its arbitration agreement with
the Company for the ICC's consideration causing the time period for an ICC
decision to expire. Negotiations would have to run their course before another
request for arbitration can be submitted to the ICC. The Company remains in
negotiations with AT&T.

As discussed above, Illinois converted to an ORP in July 1996. Under an ORP,
the Company keeps the revenues from originating intraLATA toll calls, records
them as toll revenues and remits access charges to other LECs for calls
terminating outside the Company's service territories. The Company also
receives access revenues for intraLATA toll calls that are terminated by the
Company. On an overall basis, the ORP plan is intended to be income neutral, as
decreases in access revenues are offset by increases in toll revenues and
corresponding increases in access charge expenses.

Ohio

On December 24, 1996, the Public Utilities Commission of Ohio (PUCO) issued its
decision in the Company's arbitration with AT&T to determine interconnection,
resale and unbundling terms and conditions. The interim discount rate for the
Company's resold services was set at 12.16%. The Company filed a lawsuit in the
U.S. District Court challenging portions of the PUCO's arbitration
determinations. The U.S. District Court dismissed the case on May 12, 1997. On
October 2, 1997, the PUCO directed the Company and AT&T to file a composite
agreement by October 17, 1997. An extension has been granted through the end of
November.

On January 30, 1997, the PUCO issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T. These
decisions reaffirmed the rate of 12.16% issued in the previous arbitration
proceedings. The Company filed a lawsuit in the U.S. District Court challenging
portions of the PUCO's arbitration determinations. Sprint has filed a motion to
dismiss the Company's complaint.

Pennsylvania

On December 6, 1996, the Pennsylvania Public Utility Commission (PPUC) issued
its decision in the Company's arbitration with AT&T to determine
interconnection, resale and unbundling terms and conditions. The interim
discount rate for the Company's resold services was set at 22.8%. The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
PPUC's arbitration determinations. Both the PPUC and AT&T have filed motions to
dismiss the Company's complaint. On December 12, 1996, the PPUC's
Administrative Law Judge established a schedule for addressing the 22.8%
interim wholesale discount rate set during arbitration through the examination
of the parties' avoided cost studies. On September 3, 1997, the Administrative
Law Judge recommended the wholesale discount rate of 18.98%. All parties filed
exceptions to this ruling. The PPUC is expected to issue an order during the
first quarter of 1998.

On December 19, 1996, the PPUC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T. These
decisions reaffirmed the rate of 22.8% issued in the previous arbitration
proceedings. The Company filed a lawsuit in the U.S. District Court challenging
portions of the PPUC's arbitration determinations. Sprint has filed a motion to
dismiss the Company's complaint.


                                       7

<PAGE>   9



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

On January 17, 1997, the PPUC entered an order directing the Company to file
revised cost studies to establish permanent rates for UNEs. The Company filed
the required cost studies and revisions on August 29, 1997 and October 2, 1997,
respectively. Hearings are scheduled for February 1998.

On January 28, 1997, the PPUC issued its Universal Service Order which
prescribed initial levels of basic universal service rates and cost study
methodology. On July 31, 1997, the PPUC issued an order in response to the
petitions for reconsideration of its Universal Service Order. The PPUC has
ordered that the record be reopened and that technical workshops be conducted
on the record to select a final basic universal service model. Technical
workshops and hearings were held during October 1997. A decision from the
Administrative Law Judge is expected in December 1997.

On February 13, 1997, the PPUC initiated a generic investigation into
Intrastate Access Charge Reform. The investigation's focus was on cost
standards, coordinating with local interconnection rulings and agreements, and
rate making standards. Hearings were conducted in September 1997. An order is
expected during the fourth quarter of 1997.

Indiana

On March 26, 1997, the Indiana Utility Regulatory Commission (IURC) opened an
investigation into access charge reform and universal service. This docket was
established in anticipation of the FCC decisions on the same issues.
A final resolution is expected during the first quarter of 1998.

On May 23, 1997, the Company filed its cost studies and supporting testimony
for UNEs with the IURC. Hearings are scheduled for December 1997.

Wisconsin

On July 5, 1994, regulatory reform legislation was signed into law in
Wisconsin. Effective September 1, 1994, this legislation allows LECs to choose
to be regulated under price cap regulation or remain under traditional rate of
return regulation. Regardless of the LEC's choice, the 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. On November 2, 1994, the Company formally notified
the Public Service Commission of Wisconsin (PSCW) that it would elect price cap
regulation as of January 1, 1995.

On March 15, 1996, the Company filed the results of its first year under price
regulation (1995). The PSCW authorized a price increase of 0.63% in intraLATA
toll rates based on the established price cap formula and the Company's results
of service quality and infrastructure investment levels. No price increase was
implemented due to competitive market conditions. On April 30, 1997, the
Company filed its second year results (1996) under price cap regulation. On May
27, 1997, the PSCW issued a letter order authorizing a 0.63% price increase in
intraLATA toll rates. Again, due to the competitive market conditions, the
Company deferred the opportunity to implement the price increase.

On July 17, 1997, the PSCW ordered that intraLATA toll be removed from price
cap regulation. IntraLATA toll rates will no longer be subject to changes based
upon a formula related to the Gross Domestic Product Price Index.




                                       8

<PAGE>   10



GTE North Incorporated and Subsidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

On January 24, 1997, the PSCW issued a Notice of Investigation to review the
degree to which the Company has met its infrastructure commitments during the
first two years under price cap regulation. On May 27, 1997, the PSCW approved,
as a result of the review, the Company's plan for incremental investment in
outside plant and high-speed data transmission services and discounted rates
for schools and public libraries.

Michigan

On December 12, 1996, the Michigan Public Service Commission (MPSC) issued an
order initiating proceedings related to applications filed by the Company and
by Ameritech which address pricing and costs of UNEs, interconnection services,
and resold services. The MPSC is expected to issue an order during the first
quarter of 1998.

On December 12, 1996 and January 15, 1997, the MPSC issued its decisions in the
Company's arbitrations with AT&T and Sprint, respectively, to determine
interconnection, resale, and unbundling terms and conditions. The interim
discount rate for the Company's resold services was set at 25%. The Company
filed lawsuits in the U.S. District Court challenging portions of the MPSC's
arbitration determinations. On May 30, 1997, the U.S. District Court dismissed
both cases.

On October 6, 1997, GTE was served with a petition for local interconnection in
Michigan by BRE Communications. The Company filed its response on October 31,
1997. Hearings are scheduled for December 1997. The MPSC is expected to issue
its decision in January 1998.

Other Developments

The Company has reviewed and estimated its current and planned expenditures to
become Year 2000 compliant. These costs are currently estimated to be $45.5
over the next three years.

On October 15, 1997, the Company's parent, GTE, announced its proposal to
acquire MCI in a transaction valued at approximately $28 billion in cash or 40
dollars per share. On November 10, 1997, MCI announced that it had reached an
agreement to merge with WorldCom. GTE is continuing to monitor the situation
and may reevaluate its position depending on a number of factors, including the
relative stock performance of both WorldCom and MCI, the financial and
operating results of MCI and the ongoing status of the regulatory approval
process, as well as other pertinent information.

In May 1997, GTE announced initiatives to become a leading national provider of
telecommunications service, including the acquisition of BBN Corporation (BBN),
a leading provider of end-to-end Internet solutions. In addition, GTE announced
a strategic alliance with Cisco Systems, Inc. to jointly develop enhanced data
and Internet services for customers; and, the purchase of a national,
state-of-the-art fiber-optic network from Qwest Communications. As of September
30, 1997, GTE had completed the acquisition of BBN.


                                       9

<PAGE>   11



GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                       September 30,    December 31,
                                                                          1997             1996
                                                                       -----------      -----------
                                                                          (Thousands of Dollars)
<S>                                                                    <C>              <C>        
ASSETS
Current assets:
  Cash and cash equivalents                                            $    19,130      $    12,975
  Receivables, less allowances of $26,539 and $31,248                      834,548          805,965
  Inventories and supplies                                                  56,552           40,996
  Deferred income tax benefits                                              73,882           59,438
  Prepaid taxes and other                                                   80,290           24,623
                                                                       -----------      -----------
    Total current assets                                                 1,064,402          943,997
                                                                       -----------      -----------
Property, plant and equipment, at cost                                   9,516,336        9,182,323
  Accumulated depreciation                                              (6,460,344)      (6,243,002)
                                                                       -----------      -----------
    Total property, plant and equipment, net                             3,055,992        2,939,321
                                                                       -----------      -----------
Employee benefit plans                                                     801,588          686,134
Other assets                                                                33,904           40,476
                                                                       -----------      -----------
    Total assets                                                       $ 4,955,886      $ 4,609,928
                                                                       ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term obligations, including current maturities                 $    42,063      $   257,766
  Notes payable to affiliates                                              251,933               --
  Accounts payable                                                         231,800          227,087
  Taxes payable                                                            208,943          159,589
  Accrued interest                                                          31,617           24,031
  Accrued payroll costs                                                    192,687          219,406
  Dividends payable                                                        152,687          124,555
  Other                                                                    218,579          198,015
                                                                       -----------      -----------
    Total current liabilities                                            1,330,309        1,210,449
                                                                       -----------      -----------

  Long-term debt                                                         1,683,831        1,532,650
  Deferred income taxes                                                    209,045          206,386
  Other liabilities, primarily employee benefit plans                      400,837          377,626
                                                                       -----------      -----------
    Total liabilities                                                    3,624,022        3,327,111
                                                                       -----------      -----------

Preferred stock, subject to mandatory redemption                            15,941           16,937
                                                                       -----------      -----------

Shareholders' equity:
  Preferred stock                                                           15,208           29,033
  Common stock (978,351 shares issued)                                     978,351          978,351
  Additional paid-in capital                                                43,110           43,110
  Retained earnings                                                        279,254          215,386
                                                                       -----------      -----------
    Total shareholders' equity                                           1,315,923        1,265,880
                                                                       -----------      -----------
    Total liabilities and shareholders' equity                         $ 4,955,886      $ 4,609,928
                                                                       ===========      ===========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       10

<PAGE>   12



GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                                ------------------------
                                                                                  1997           1996
                                                                                ---------      ---------
                                                                                  (Thousands of Dollars)
<S>                                                                             <C>            <C>      
OPERATIONS
  Net income                                                                    $ 530,573      $ 398,825

  Adjustments to reconcile net income to net cash from operations:
    Depreciation and amortization                                                 374,175        374,509
    Deferred income taxes                                                         (12,203)        40,831
    Provision for uncollectible accounts                                           26,759         28,897
    Change in current assets and current liabilities                              (71,067)        75,263
    Other - net                                                                   (65,354)       (58,475)
                                                                                ---------      ---------
    Net cash from operations                                                      782,883        859,850
                                                                                ---------      ---------

INVESTING
  Capital expenditures                                                           (508,302)      (428,087)
                                                                                ---------      ---------
    Net cash used in investing                                                   (508,302)      (428,087)
                                                                                ---------      ---------

FINANCING
  Long-term debt issued                                                               --         196,902
  Long-term debt and preferred stock retired, including premiums paid on
    early retirement                                                             (240,152)       (46,846)
  Dividends                                                                      (438,307)      (382,732)
  Net change in affiliate notes                                                   601,933             --
  Decrease in short-term obligations, excluding current maturities               (191,900)      (239,790)
  Other - net                                                                          --         19,438
                                                                                ---------      ---------
    Net cash used in financing                                                   (268,426)      (453,028)
                                                                                ---------      ---------
Increase (decrease) in cash and cash equivalents                                    6,155        (21,265)

Cash and cash equivalents:
  Beginning of period                                                              12,975         31,655
                                                                                ---------      ---------
  End of period                                                                 $  19,130      $  10,390
                                                                                =========      =========
</TABLE>










See Notes to Condensed Consolidated Financial Statements.

                                       11

<PAGE>   13



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 (SEC). 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 1996 Annual Report on Form 10-K.

(2) Long-term debt as of September 30, 1997 includes $350 million of affiliate
    notes payable which the Company anticipates refinancing during the first
    quarter of 1998. These affiliate notes payable represent notes payable to
    GTE Funding Incorporated, a company that provides short-term financing and
    investment vehicles and cash management services for the Company and six of
    its affiliates.

(3) In January 1997, the SEC issued amendments to its rules which clarify and
    expand disclosure requirements for derivative financial instruments. As of
    September 30, 1997, there has been no significant change in the market
    risk, or accounting policy associated with derivative financial instruments
    as stated in the Company's 1996 Annual Report on Form 10-K.

(4) Reclassifications of prior year data have been made, where appropriate, to
    conform to the 1997 presentation.



























                                                        
                                      12
<PAGE>   14



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 third
             quarter of 1997.
        










































                                       13

<PAGE>   15



                                  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:           November 14, 1997                   William M. Edwards, III
          -----------------------------          ------------------------------
                                                    William M. Edwards, III
                                                  Vice President - Controller
                                                 (Principal Accounting Officer)





































                                       14

<PAGE>   16


<TABLE>

EXHIBIT INDEX

    <S>                      <C>
     Exhibit
      Number                                                     Description
- ------------------         ----------------------------------------------------------------------------------------

        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>

                                                                    Nine Months Ended
                                                                    September 30, 1997
                                                                   --------------------

<S>                                                                <C>                 
Net earnings available for fixed charges:
  Income from continuing operations                                $            530,573
  Add - Income taxes                                                            314,236
      - Fixed charges                                                           103,733
                                                                   --------------------
Adjusted earnings                                                  $            948,542
                                                                   ====================

Fixed charges:
  Interest expense                                                 $             96,471
  Portion of rent expense
      representing interest                                                       7,262
                                                                   --------------------
Adjusted fixed charges                                             $            103,733
                                                                   ====================

RATIO OF EARNINGS TO FIXED CHARGES                                                 9.14
</TABLE>




                                                        


<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               SEP-30-1997
<CASH>                                          19,130
<SECURITIES>                                         0
<RECEIVABLES>                                  861,087
<ALLOWANCES>                                    26,539
<INVENTORY>                                     56,552
<CURRENT-ASSETS>                             1,064,402
<PP&E>                                       9,516,336
<DEPRECIATION>                               6,460,344
<TOTAL-ASSETS>                               4,955,886
<CURRENT-LIABILITIES>                        1,330,309
<BONDS>                                      1,683,831
                           15,941
                                     15,208
<COMMON>                                       978,351
<OTHER-SE>                                     322,364
<TOTAL-LIABILITY-AND-EQUITY>                 4,955,886
<SALES>                                      2,307,002
<TOTAL-REVENUES>                             2,307,002
<CGS>                                          695,445
<TOTAL-COSTS>                                1,366,374
<OTHER-EXPENSES>                                 1,872
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              93,947
<INCOME-PRETAX>                                844,809
<INCOME-TAX>                                   314,236
<INCOME-CONTINUING>                            530,573
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   530,573
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        

</TABLE>



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