<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 June 30, 1998
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 75038
Irving, Texas
(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 July 31, 1998. 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 Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 320,257 $ 299,176 $ 632,385 $ 596,195
Network access services 298,862 299,327 616,115 571,957
Toll services 45,401 70,172 98,184 152,561
Other services and sales 108,282 108,885 198,187 198,496
------------ ------------ ------------ ------------
Total revenues and sales 772,802 777,560 1,544,871 1,519,209
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 274,798 262,012 535,123 474,198
Selling, general and administrative 99,915 106,732 195,716 201,341
Depreciation and amortization 132,925 124,815 260,181 247,216
------------ ------------ ------------ ------------
Total operating costs and expenses 507,638 493,559 991,020 922,755
------------ ------------ ------------ ------------
OPERATING INCOME 265,164 284,001 553,851 596,454
OTHER (INCOME) EXPENSE
Interest - net 37,869 33,194 68,317 62,272
Other - net 16 1,872 (156) 1,872
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 227,279 248,935 485,690 532,310
Income taxes 85,175 92,396 182,623 197,772
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY CHARGE 142,104 156,539 303,067 334,538
Extraordinary charge -- -- (3,543) --
------------ ------------ ------------ ------------
NET INCOME $ 142,104 $ 156,539 $ 299,524 $ 334,538
============ ============ ============ ============
</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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 142.1 $ 156.5 $ 299.5 $ 334.5
</TABLE>
Year-to-date net income for 1998 includes an extraordinary after-tax charge of
$3.5 related to the early retirement of debt. Excluding this charge, net income
decreased 9% or $14.4 and 9% or $31.5 for the three and six months ended June
30, 1998, respectively, compared to the same periods in 1997. Net income for the
three months ended June 30, 1998 decreased primarily as a result of an increase
in operating expenses and a slight decrease in revenues and sales. Year-to-date
net income decreased as a result of an increase in operating expenses, partially
offset by increased local and network access service revenues.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Local services $ 320.2 $ 299.2 $ 632.4 $ 596.2
Network access services 298.9 299.3 616.1 571.9
Toll services 45.4 70.2 98.2 152.6
Other services and sales 108.3 108.9 198.2 198.5
--------- --------- --------- ---------
Total revenues and sales $ 772.8 $ 777.6 $ 1,544.9 $ 1,519.2
</TABLE>
Total revenues and sales decreased 1% or $4.8 and increased 2% or $25.7 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997.
Local service revenues increased 7% or $21 and 6% or $36.2 for the three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
The number of access lines grew 4% for both the three and six months ended June
30, 1998, which generated additional revenues of $6.5 and $12.4 from basic local
services, and $2.3 and $4.3 from CentraNet(R) services for the respective time
periods. Demand for enhanced custom calling features, such as SmartCall(R)
services, contributed $7.6 and $14.9 to the increases for the three and six
months ended June 30, 1998, respectively.
Network access service revenues remained essentially unchanged for the three
months, and increased 8% or $44.2 for the six months ended June 30, 1998,
compared to the same periods in 1997. Increased demand for access services by
interexchange carriers resulted in a 14% year-to-date growth in minutes of
2
<PAGE> 4
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
use, which generated additional revenues of $46.8. The year-to-date increase
also reflects an increase of $22.5 in special access revenues resulting from
customer demand for increased bandwidth by Internet Service Providers (ISPs) and
other high capacity users. For the six month period ended June 30, 1998, the
above mentioned increases were partially offset by intrastate rate reductions of
$20 associated with the requirements of various state commissions for intrastate
access rates to mirror interstate access rates. Revenues increased $6 as a
result of interstate access rate changes from the 1997 Federal Communications
Commission (FCC) price cap. Additionally, in 1997, the FCC ordered significant
changes that altered the structure of access charges collected by the Company.
These changes, effective January 1, 1998, resulted in decreases of $5.9 in
network access service revenues.
Toll service revenues decreased 35% or $24.8 and 36% or $54.4 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. This decline in revenues is primarily attributable to lower toll volumes
related to intraLATA (local access transport area) toll competition, including
10XXX and 1+ presubscription.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of services and sales $ 274.8 $ 262.0 $ 535.1 $ 474.2
Selling, general and administrative 99.9 106.7 195.7 201.3
Depreciation and amortization 132.9 124.8 260.2 247.2
--------- --------- --------- ---------
Total operating costs and expenses $ 507.6 $ 493.5 $ 991.0 $ 922.7
</TABLE>
Total operating costs and expenses increased 3% or $14.1 and 7% or $68.3 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997.
The increase in second quarter operating costs and expenses is primarily due to
increases in switch software right-to-use license fees of $23.8, partially
offset by a reduction in labor and benefit costs of $6.1 for the three month
period ended June 30, 1998, compared to the same period in 1997.
The increase in total operating costs and expenses for the six month period
ended June 30, 1998 is primarily due to the impact of $27.6 in pension
settlement gains recorded during the first quarter of 1997. Additionally,
operating costs and expenses reflect an increase in switch software right-to-use
license fees of $25.9.
3
<PAGE> 5
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest - net $ 37.9 $ 33.2 $ 68.3 $ 62.3
Income taxes 85.2 92.4 182.6 197.8
Extraordinary charge -- -- 3.5 --
</TABLE>
Interest-net increased 14% or $4.7 for the three months and 10% or $6 for the
six months ended June 30, 1998, compared to the same periods in 1997. These
increases are primarily attributable to higher average short-term debt levels.
Income taxes decreased 8% or $7.2 for the three months and 8% or $15.2 for the
six months ended June 30, 1998, compared to the same periods in 1997. These
decreases are primarily due to corresponding decreases in pre-tax income.
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.5, reflecting premiums paid on the redemption of
high-coupon debt prior to stated maturity.
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. The Company participates with other affiliates in a $1,500, 364-day
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 six months of 1998 was
cash from operations of $188.9 compared to $459.7 for the same period in 1997.
The year-to-year decrease in cash from operations primarily reflects an increase
in the Company's working capital requirements and a decline in results from
operations.
The Company's capital expenditures during the first six months of 1998 were
$349.5 compared to $312.1 for the same period in 1997. The 1998 expenditures
reflect the Company's continued access line growth and modernization of current
facilities to mitigate Internet congestion. Although expenditures for the first
half of 1998 were higher than those for the same period of 1997, the Company's
anticipated capital expenditures for 1998 are expected to be comparable to the
1997 level.
4
<PAGE> 6
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash provided by financing activities was $176 during the first six months of
1998 compared to cash used of $109.9 during the same period in 1997. These
results included dividend payments of $222.5 in the first six months of 1998
compared to $315.4 for the same period in 1997. During the first six months of
1998, the Company paid a total of $177.8 for the retirement of debt and
preferred stock compared to $221.9 for the same period in 1997. These
retirements include $4.1 paid in premiums on the March 1998 retirement of $157.5
of long-term debt and preferred stock, redeemed prior to stated maturity; as
compared to $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. Also, in
February 1998, the Company issued $200 of 6.375% debentures and $200 of 6.73%
debentures. Short-term financings, including the net change in affiliate notes,
increased $201.7 during the first six months of 1998, compared to an increase of
$427.4 for the same period of 1997. Additionally, the Company recognized an
interest rate hedge loss of approximately $22.1 on the settlement of forward
contracts related to the February 1998 debt issuances. The loss is being
amortized over the life of the associated refinanced debt.
In its April 2, 1998 filing on Form 8-K, GTE stated that because the MCI
shareholders had accepted a competing offer, GTE's offer for MCI was no longer
outstanding. As a result, the Company and GTE were removed from "Credit Watch"
by all rating agencies. The Company believes that its present investment grade
credit rating provides ready access to the capital markets at reasonable rates
and provides the Company with the financial flexibility necessary to pursue
growth opportunities as they arise.
OTHER MATTERS
Federal Regulatory Developments
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price increase of $4.8. On December 1, 1997, the FCC issued an order to file
revised access rates effective January 1, 1998, which resulted in interstate
access charge reductions of approximately $6 annually. In 1997, the FCC also
ordered significant changes that altered the structure of access charges
collected by the Company, effective January 1, 1998. Generally, the FCC reduced
and restructured the per minute charges paid by long distance carriers and
implemented new per line charges. The FCC also created an access charge
structure that resulted in different access charges for residential primary and
secondary lines and single line and multi-line business access lines. In
aggregate, new per line charges and the charges paid by end-users of $24.1
annually exceed the reductions in usage sensitive access charges of $14.6 paid
by long
5
<PAGE> 7
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
distance carriers. Effective July 1, 1998, access charges were further reduced
by $31 annually in compliance with FCC requirements to restate the impacts of
access charge reform.
In May 1997, the FCC released a major decision relating to implementation of
the Telecommunications Act's provision on universal service. GTE and numerous
other parties have challenged the FCC's decision before the U.S. Court of
Appeals for the Fifth Circuit on the grounds that the FCC did not follow the
requirements of the Telecommunications Act to develop a sufficient, explicit
and competitively neutral universal service program. Oral argument is not
expected until mid-September 1998 at the earliest, with a final decision to be
issued by mid-1999.
On March 9, 1998, the FCC adopted a Memorandum Opinion and Order (MO&O)
clarifying the payphone-specific coding digit requirements set forth in the
previous payphone orders and granting limited waivers of the requirement that
local exchange carriers (LECs) provide payphone-specific coding digits to
payphone service providers (PSPs), and that PSPs provide payphone-specific
coding digits from their payphones to interexchange carriers (IXCs), before PSPs
can receive per-call compensation from IXCs for subscriber 800 and access code
calls. GTE was granted waivers through 1998 in this order for Flex-ANI (Flexible
Automatic Number Identification) implementation due to technical problems
associated with switch conversions.
On April 3, 1998, the FCC issued another MO&O which granted the IXCs a waiver
of the per-call compensation requirement so that they may pay per-phone instead
of per-call compensation for the payphones for which the FCC had granted
technology waivers. GTE will receive per-phone compensation under this waiver
until the Flex-ANI capable offices are activated. Qualifying payphone
calls from Flex-ANI capable switches will then be eligible for per-call
compensation rather than per-phone.
In a related court case between MCI and the FCC the U.S. Court of Appeals,
District of Columbia Circuit, upheld the fundamental premise underlying the
FCC's approach to setting the per-call compensation rate for uncompensated
payphone calls, thereby supporting the ordered per-call compensation rate noted
in the March 9th order. At the same time, however, the Court held that the FCC
had failed to clearly explain its methodology on the development of that same
per-call compensation rate. The Court remanded this portion back to the FCC.
6
<PAGE> 8
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 to establish rates for interconnection, unbundled network
elements (UNE) and transport and termination of traffic. The proceeding will
address wholesale rates separately from UNEs, with each issue having a separate
procedural schedule. Cost studies for UNEs were filed during the first quarter
of 1998 and refiled on June 30, 1998, with status hearings tentatively scheduled
for October 1998, which will determine the remaining schedule for the docket.
Briefs on wholesale rates will be filed during August 1998, with the Hearing
Examiner's Proposed Order expected by October of 1998.
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, which was subsequently dismissed. The Company and AT&T filed a
drafted agreement with the list of disputed items on April 29, 1998 as ordered
by the PUCO.
Pennsylvania
On December 6, 1996, the Pennsylvania Public Utility Commission's (PPUC's)
Administrative Law Judge (ALJ) established a schedule for addressing the 22.8%
interim wholesale discount rate set during arbitration through the examination
of the parties' avoided cost studies. In September 1997, the ALJ recommended the
wholesale discount rate of 18.98%. All parties filed exceptions to this ruling.
On March 10, 1998, the PPUC issued an order which remanded the docket back to
the ALJ for examination of more current avoided cost studies from the parties.
A prehearing conference was held on May 7, 1998 in which the ALJ combined the
wholesale discount rate docket and the docket regarding UNE rates into one
docket. The ALJ ordered that new avoided cost studies be submitted by September
11, 1998. Hearings are scheduled to begin in January 1999.
In January 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 in August and October 1997, respectively. A
revised non-recurring charge cost study was filed in March 1998. Hearings were
suspended until after the prehearing conference on May 7, 1998. As discussed
above, the ALJ combined the wholesale discount rate docket
7
<PAGE> 9
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
and the docket regarding UNE rates into one docket. The ALJ ordered that new
non-recurring cost studies and Integrated Cost Models (ICMs) be submitted by
September 11, 1998. Hearings are scheduled to begin in January 1999.
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 ruling and agreements, and rate-making
standards. Hearings were conducted in September 1997. The PPUC's ALJ issued a
favorable recommendation on July 2, 1998. Subsequent to filing of exceptions,
the PPUC will render its order.
Wisconsin
In January 1995, the Company elected to operate under price cap regulation in
Wisconsin. On April 30, 1998, the Company filed its third year results (1997)
under price regulation with the Public Service Commission of Wisconsin (PSCW).
Following review, the PSCW authorized a price increase of .09% in intraLATA toll
rates. The Company deferred the opportunity to implement the price increases due
to the competitive market conditions. This amount may be deferred and
accumulated for a maximum of three years into a single increase or may be used
to offset a mandated decrease in the same time frame.
As required in the statutes, a docket has been opened to review Price Cap
Regulation in Wisconsin. This is considered a Five Year Review. The Company
filed its report on progress under Price Cap Regulation on July 31, 1998.
Further proceedings will follow in which recommendations will be made on how or
if Price Cap Regulation should be changed. This docket should conclude in the
second quarter of 1999.
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 issued its final order on February 25, 1998. The
discount rate on resold services was set at 16.76% including operator services
and 15.8% without operator services. The Company disagrees with the MPSC's final
order, since it contains prices, terms and conditions which are in conflict with
the U.S. District Court for the Eighth Circuit's ruling. The Company filed a
motion for rehearing with the MPSC, which has
8
<PAGE> 10
GTE North Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
been denied. On March 18, 1998, the Company filed a lawsuit in the U.S. District
Court for the Western District of Michigan challenging the MPSC's decision. On
June 10, 1998, GTE filed a claim of appeal with the Michigan Court of Appeals
challenging the MPSC's decisions on various factors used to calculate costs. On
July 17, 1998, the U.S. District Court dismissed the action without prejudice
finding it does not have subject matter jurisdiction at this time.
RECENT DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies in a merger of equals
transaction. Under terms of the definitive agreement, which was unanimously
approved by the board of directors of both companies, GTE shareholders will
receive 1.22 shares of Bell Atlantic stock for each GTE share they own. The
merger is expected to be accounted for as a pooling of interests, is subject to
shareholder and regulatory approval, and is expected to be completed during the
second half of 1999. For additional information regarding the merger, refer to
the Form 8-K filed by GTE dated July 27, 1998.
In April 1998, GTE announced a series of actions designed to further sharpen its
strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate after-tax
proceeds of $2,000 to $3,000 by selling non-strategic or under-performing
operations and plans to reduce annual costs by more than $500 through improved
efficiencies and productivity while it continues to invest in new high-growth
opportunities. The impact of this announcement on the Company is unknown at this
time. GTE's management is currently assessing its options and, as decisions are
finalized regarding the sale of non-strategic operations and cost reductions,
the Company could be affected.
9
<PAGE> 11
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,550 $ 12,208
Receivables, less allowances of $37,198 and $29,851 846,849 657,928
Inventories and supplies 39,593 38,001
Deferred income tax benefits 37,112 40,981
Prepaid insurance 20,800 3,692
Prepaid taxes 19,175 14,325
Other 7,432 9,738
------------ ------------
Total current assets 998,511 776,873
------------ ------------
Property, plant and equipment, at cost 9,829,461 9,563,746
Accumulated depreciation (6,614,201) (6,432,421)
------------ ------------
Total property, plant and equipment, net 3,215,260 3,131,325
------------ ------------
Prepaid pension costs 890,941 837,271
Other assets 58,038 30,412
------------ ------------
Total assets $ 5,162,750 $ 4,775,881
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 200,050 $ 16,229
Notes payable to affiliates 486,041 18
Accounts payable 216,873 248,730
Taxes payable 201,591 197,081
Accrued interest 30,483 19,348
Accrued payroll costs 128,911 205,249
Dividends payable 128,423 100,849
Other 114,647 137,991
------------ ------------
Total current liabilities 1,507,019 925,495
------------ ------------
Long-term debt 1,520,466 1,768,132
Deferred income taxes 241,843 215,261
Other liabilities, primarily employee benefit plans 427,265 434,890
------------ ------------
Total liabilities 3,696,593 3,343,778
------------ ------------
Preferred stock, subject to mandatory redemption 1,177 16,253
------------ ------------
Shareholders' equity:
Preferred stock 15,208 15,208
Common stock (978,351 shares issued) 978,351 978,351
Additional paid-in capital 43,110 43,110
Retained earnings 428,311 379,181
------------ ------------
Total shareholders' equity 1,464,980 1,415,850
------------ ------------
Total liabilities and shareholders' equity $ 5,162,750 $ 4,775,881
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
GTE North Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Income before extraordinary charge $ 303,067 $ 334,538
Adjustments to reconcile income before extraordinary
charge to net cash from operations:
Depreciation and amortization 260,181 247,216
Deferred income taxes 30,451 14,636
Provision for uncollectible accounts 25,426 18,096
Changes in current assets and current liabilities (363,347) (140,700)
Other - net (66,928) (14,097)
------------ ------------
Net cash from operations 188,850 459,689
------------ ------------
INVESTING
Capital expenditures (349,476) (312,127)
------------ ------------
Cash used in investing (349,476) (312,127)
------------ ------------
FINANCING
Long-term debt issued 396,648 --
Long-term debt and preferred stock retired, including
premiums paid on early retirement (177,790) (221,908)
Dividends (222,463) (315,383)
Net change in affiliate notes 201,661 619,306
Decrease in short-term obligations, excluding current
maturities -- (191,900)
Other - net (22,088) --
------------ ------------
Net cash provided by (used in) financing 175,968 (109,885)
------------ ------------
Increase in cash and cash equivalents 15,342 37,677
Cash and cash equivalents:
Beginning of period 12,208 12,975
------------ ------------
End of period $ 27,550 $ 50,652
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
11
<PAGE> 13
GTE North Incorporated and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
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 consolidated financial statements and the notes thereto included in
the Company's 1997 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate,
to conform to the 1998 presentation.
(2) EXTRAORDINARY CHARGE:
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.5 million, reflecting premiums paid on the
redemption of high-coupon debt prior to stated maturity.
(3) DEBT:
In February 1998, the Company issued $200 million of 6.375% Series F
Debentures, due 2010 and $200 million of 6.73% Series G Debentures, due
2028. The net proceeds were applied toward the repayment of short-term
borrowings, financing the Company's construction program and for
general corporate purposes.
(4) RECENT ACCOUNTING PRONOUNCEMENTS:
Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 defines internal-use software and establishes accounting
standards for the costs of such software. The Company is currently
assessing the impact of adopting SOP 98-1, and intends to implement as
of January 1, 1999.
12
<PAGE> 14
GTE North Incorporated and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. The Company has not yet assessed the impact
of adopting FAS 133.
13
<PAGE> 15
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 second quarter of
1998.
14
<PAGE> 16
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: August 14, 1998 /s/ Stephen L. Shore
------------------------ ---------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
15
<PAGE> 17
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>
Six Months
Ended
June 30, 1998
-------------
<S> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $303,067
Add - Income taxes 182,623
- Fixed charges 75,195
--------
Adjusted earnings $560,885
========
Fixed charges:
Interest expense $ 71,251
Portion of rent expense
representing interest 3,944
========
Adjusted fixed charges $ 75,195
========
RATIO OF EARNINGS TO FIXED CHARGES 7.46
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,550
<SECURITIES> 0
<RECEIVABLES> 884,047
<ALLOWANCES> 37,198
<INVENTORY> 39,593
<CURRENT-ASSETS> 998,511
<PP&E> 9,829,461
<DEPRECIATION> 6,614,201
<TOTAL-ASSETS> 5,162,750
<CURRENT-LIABILITIES> 1,507,019
<BONDS> 1,520,466
1,117
15,208
<COMMON> 978,351
<OTHER-SE> 471,421
<TOTAL-LIABILITY-AND-EQUITY> 5,162,750
<SALES> 1,554,871
<TOTAL-REVENUES> 1,544,871
<CGS> 535,123
<TOTAL-COSTS> 991,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,251
<INCOME-PRETAX> 485,690
<INCOME-TAX> 182,623
<INCOME-CONTINUING> 303,067
<DISCONTINUED> 0
<EXTRAORDINARY> 3,543
<CHANGES> 0
<NET-INCOME> 299,524
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
