<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 April 30, 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
March 31,
---------------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
REVENUES AND SALES
Local services $ 301,691 $ 281,062
Network access services 272,630 269,880
Toll services 82,389 92,201
Other services and sales 84,939 88,418
----------- -----------
Total revenues and sales 741,649 731,561
----------- -----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 212,186 257,657
Selling, general and administrative 94,609 106,855
Depreciation and amortization 122,401 136,367
----------- -----------
Total operating costs and expenses 429,196 500,879
----------- -----------
OPERATING INCOME 312,453 230,682
Interest - net 29,078 28,011
----------- -----------
INCOME BEFORE INCOME TAXES 283,375 202,671
Income taxes 105,376 73,628
----------- -----------
NET INCOME $ 177,999 $ 129,043
=========== ===========
</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,
------------------------
1997 1996
------ ------
<S> <C> <C>
Net income $178.0 $129.0
</TABLE>
Net income increased 38% or $49 for the three months ended March 31, 1997,
compared to the same period in 1996. This increase is primarily due to
significantly lower operating costs and expenses combined with higher revenues,
partially offset by higher income taxes.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
------ ------
<S> <C> <C>
Local services $301.7 $281.1
Network access services 272.6 269.9
Toll services 82.4 92.2
Other services and sales 84.9 88.4
------ ------
Total revenues and sales $741.6 $731.6
</TABLE>
Total revenues and sales increased 1% or $10 for the three months ended March
31, 1997, compared to the same period in 1996.
Local service revenues increased 7% or $20.6 for the three months ended March
31, 1997, compared to the same period in 1996. The number of access lines
increased 4% for the three months ended March 31, 1997, which generated
additional revenue of $4.7. The increase is also due to growth in revenues of
$6.1 from enhanced custom calling features, such as SmartCall(R), $2.5 of growth
in revenues from CentraNet(R) services, $0.9 of growth in directory assistance
and operator services, and $1.9 of growth in revenues from integrated digital
services, enabling rapid transmission of voice, data, image and text, such as
Internet access.
Network access service revenues increased 1% or $2.7 for the three months ended
March 31, 1997, compared to the same period in 1996. Minutes of use increased
13% for the three months ended March 31, 1997, which generated additional
revenues of $20.1. The increase is partially offset by a decrease of $12.3 in
interstate and intrastate access revenues from the rate changes associated with
the Federal Communications Commission's (FCC's) 1995 and 1996 price caps and the
rate restructure in Michigan. The increase is also offset by a $5.2 reduction
in access revenues associated with the conversion to an Originating
Responsibility Plan (ORP) in Illinois 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 11% or $9.8 for the three months ended March 31,
1997, compared to the same period in 1996. The decrease is due to the impact of
optional discount calling plans, which effectively lowered intrastate long
distance rates. In addition, the decrease results from intraLATA (local access
transport area) toll competition, partially offset by an increase in toll
volumes primarily due to the Illinois conversion to an ORP (as discussed in
Other Matters). The decrease is also due to unfavorable intrastate settlement
activity.
Other services and sales revenues decreased 4% or $3.5 for the three months
ended March 31, 1997, compared to the same period in 1996. The decrease is
primarily due to a decline of $4.2 in intrastate billing and collection
revenues resulting from the Illinois conversion to an ORP (as discussed in
Other Matters). This decrease is partially offset by a $1 growth in sales of
paging and voice messaging services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
------ ------
<S> <C> <C>
Total operating costs and expenses $429.2 $500.9
</TABLE>
Total operating costs and expenses decreased 14% or $71.7 for the three months
ended March 31, 1997, compared to the same period in 1996.
The decrease is primarily attributable to the impact of $27.6 in pension
settlement gains resulting from lump-sum payments from the Company's pension
plans which were recorded in the first quarter of 1997, partially offset by $7.2
in settlement gains recorded during the same period of 1996. The decrease is
also attributable to lower depreciation charges of $14, decreased application
software costs of $12.9, lower contract labor costs of $9 and lower labor and
employee benefit costs of $14.1. The decrease is partially offset by an
increase in advertising and promotion costs of $11.9.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest - net $29.1 $28.0
Income taxes 105.4 73.6
</TABLE>
Interest - net increased 4% or $1.1 for the three months ended March 31, 1997,
compared to the same period in 1996. This increase is primarily attributable
to higher interest expense reflecting higher interest rates on the long-term
debt refinanced from commercial paper.
Income taxes increased 43% or $31.8 for the three months ended March 31, 1997,
compared to the same period in 1996. This increase is primarily due to a
corresponding increase in pre-tax 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 financings can be obtained through
borrowings from 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 as existing shelf
registration statement outstanding for an additional $150 of debentures.
The Company's primary source of funds during the first three months of 1997 was
cash from operations of $336.1 compared to $316.8 for the same period in 1996.
The year-to-year increase in cash flow from operations is primarily
attributable to improved results from operations. This increase is partially
offset by an increase in working capital requirements.
The Company's capital expenditures during the first three months of 1997 were
$129.9 compared to $128.6 for the same period in 1996. The 1997 expenditures
reflect the Company's continued access line growth and modernization of current
facilities to support new products and expanded services. The Company
anticipates capital expenditures to increase slightly during the remainder of
1997 compared to 1996, reflecting the continued expansion of existing networks
and upgrades associated with the support of expanded services.
Cash used in financing activities was $187 during the first three months of
1997 compared to $196.3 for the same period in 1996. This included dividend
payments of $124.8 during the first three months of 1997 compared to $98.5 for
the same period in 1996. Financing activities also included a decrease in
short-term debt of $46.3 for the first three months of 1997 compared to a
decrease of $98.2 for the same period in 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.
OTHER MATTERS
On May 7, 1997, in accordance with the Telecommunications Act of 1996 (the
Telecommunications Act), the FCC announced its decisions concerning price caps,
access charge reform and universal service. The text of the universal service
order was released on May 8, 1997. The FCC price cap and access reform orders
are expected to be released by May 20, 1997. GTE is currently assessing the
effect of these recent decisions.
The Company is continuing to negotiate with requesting carriers over the terms
of interconnection, unbundled network elements 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 over a period extending throughout 1997.
4
<PAGE> 6
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, unbundled network
elements (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 third quarter of 1997. The schedule for UNEs is expected to
run through the first quarter of 1998.
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.
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. AT&T has filed a motion to dismiss the Company's complaint.
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 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.
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 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 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.
On January 17, 1997, the Company filed a petition with the Indiana Utility
Regulatory Commission (IURC) for a change to economic depreciation rates to
be effective retroactively to January 1, 1997. An order is expected in the
third quarter of 1997.
On March 26, 1997, the IURC opened an investigation into access charge reform
and universal service. This docket has been established in anticipation of the
FCC decisions on the same issues. A final resolution is expected by the end of
1997.
On July 5, 1994, regulatory reform legislation was signed into law in
Wisconsin. Effective September 1, 1994, this legislation allows local-exchange
carriers (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 April 30, 1997,
the Company filed its second year results (1996) under this regulation. An
order approving these results is expected in the third quarter 1997.
As discussed above, Illinois went through a conversion to an Originating
Responsibility Plan (ORP) in July 1996. Under an ORP, the Company keeps the
revenues from originating toll calls, records them as toll service 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.
5
<PAGE> 7
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS (CONTINUED)
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications services, including the
acquisition of BBN Corporation, 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.
6
<PAGE> 8
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $32,105 $12,975
Receivables, less allowances of $30,760 and $31,248 800,122 805,965
Inventories and supplies 44,102 40,996
Deferred income tax benefits 63,132 59,438
Prepaid taxes and other 78,639 24,623
------------ -------------
Total current assets 1,018,100 943,997
------------ -------------
Property, plant and equipment, at cost 9,250,266 9,182,323
Accumulated depreciation (6,311,777) (6,243,002)
------------ -------------
Total property, plant and equipment, net 2,938,489 2,939,321
Employee benefit plans 706,514 686,134
Other assets 47,711 40,476
------------ -------------
Total assets $4,710,814 $4,609,928
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $197,451 $257,766
Accounts payable 253,159 227,087
Taxes payable 208,714 159,589
Accrued interest 31,184 24,031
Accrued payroll costs 201,748 219,406
Dividends payable 190,356 124,555
Other 219,499 198,015
------------ -------------
Total current liabilities 1,302,111 1,210,449
------------ -------------
Long-term debt 1,530,946 1,532,650
Deferred income taxes 218,181 206,386
Employee benefit plans 363,994 352,200
Other liabilities 25,402 25,426
------------ -------------
Total liabilities 3,440,634 3,327,111
------------ -------------
Preferred stock, subject to mandatory redemption 16,937 16,937
------------ -------------
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 202,749 215,386
------------ -------------
Total shareholders' equity 1,253,243 1,265,880
------------ -------------
Total liabilities and shareholders' equity $4,710,814 $4,609,928
============ =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
--------- --------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $177,999 $129,043
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 122,401 136,367
Deferred income taxes 7,733 16,574
Provision for uncollectible accounts 8,509 10,271
Changes in current assets and current liabilities 25,637 30,653
Other - net (6,178) (6,087)
----------- ----------
Net cash from operations 336,101 316,821
----------- ----------
INVESTING
Capital expenditures (129,942) (128,602)
----------- ----------
Cash used in investing (129,942) (128,602)
----------- ----------
FINANCING
Long-term debt retired (15,862) (17,598)
Dividends (124,835) (98,511)
Decrease in short-term obligations, excluding current maturities (46,332) (98,179)
Other - net -- 17,943
----------- ----------
Net cash used in financing (187,029) (196,345)
----------- ----------
Increase (decrease) in cash and cash equivalents 19,130 (8,126)
Cash and cash equivalents:
Beginning of period 12,975 31,655
----------- ----------
End of period $32,105 $23,529
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 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 1996
Annual Report on Form 10-K.
9
<PAGE> 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.
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 1997.
10
<PAGE> 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, thereunto duly authorized.
<TABLE>
<S> <C>
GTE North Incorporated
----------------------------------
(Registrant)
Date: May 15, 1997 William M. Edwards, III
-------------------------------------- ----------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
</TABLE>
11
<PAGE> 13
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,
1997
----------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $177,999
Add - Income taxes 105,376
- Fixed charges 32,523
----------
Adjusted earnings $315,898
==========
Fixed charges:
Interest expense $30,360
Portion of rent expense
representing interest 2,163
----------
Adjusted fixed charges $32,523
==========
RATIO OF EARNINGS TO FIXED CHARGES 9.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,105
<SECURITIES> 0
<RECEIVABLES> 830,882
<ALLOWANCES> 30,760
<INVENTORY> 44,102
<CURRENT-ASSETS> 1,018,100
<PP&E> 9,250,266
<DEPRECIATION> 6,311,777
<TOTAL-ASSETS> 4,710,814
<CURRENT-LIABILITIES> 1,302,111
<BONDS> 1,530,946
16,937
29,033
<COMMON> 978,351
<OTHER-SE> 245,859
<TOTAL-LIABILITY-AND-EQUITY> 4,710,814
<SALES> 741,649
<TOTAL-REVENUES> 741,649
<CGS> 212,186
<TOTAL-COSTS> 429,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,078
<INCOME-PRETAX> 283,375
<INCOME-TAX> 105,376
<INCOME-CONTINUING> 177,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,999
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
