<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 0-2908
GTE NORTHWEST INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-0466810
(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)
The registrant, a wholly owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and
is therefore filing this form with reduced disclosure format pursuant to
General Instruction (H) (2).
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 17,920,000 shares of no par 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 Northwest 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 $ 109,462 $ 100,415
Network access services 97,555 88,480
Toll services 28,171 29,951
Other services and sales 28,561 28,036
------------------ ------------------
Total revenues and sales 263,749 246,882
------------------ ------------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 89,331 91,378
Selling, general and administrative 37,563 25,798
Depreciation and amortization 53,719 49,664
------------------ ------------------
Total operating costs and expenses 180,613 166,840
------------------ ------------------
OPERATING INCOME 83,136 80,042
OTHER (INCOME) EXPENSE
Interest - net 13,497 12,525
Gain on disposition of assets (5,101) --
Other - net -- 182
------------------ ------------------
INCOME BEFORE INCOME TAXES 74,740 67,335
Income taxes 26,673 23,848
------------------ ------------------
NET INCOME $ 48,067 $ 43,487
================== ==================
</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 Northwest 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 $ 48.1 $ 43.5
</TABLE>
Net income increased 11% or $4.6 for the three months ended March 31, 1997,
compared to the same period in 1996. This increase is primarily due to higher
local and network access service revenues partially offset by higher operating
costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Local services $ 109.5 $ 100.4
Network access services 97.5 88.5
Toll services 28.2 30.0
Other services and sales 28.5 28.0
-------------- --------------
Total revenues and sales $ 263.7 $ 246.9
</TABLE>
Total revenues and sales increased 7% or $16.8 for the three months ended March
31, 1997, compared to the same period in 1996.
Local service revenues increased 9% or $9.1 for the three months ended March
31, 1997, compared to the same period in 1996. The number of access lines
increased 6% for the three months ended March 31, 1997, which generated
$2.7 of additional revenues. The increase also reflects a $4.2 growth in
revenues from CentraNet(R) and custom calling features, such as SmartCall(R).
Finally, a $1.8 growth in revenues from data services, primarily Integrated
Services Digital Network (ISDN) and Digital Channel Service (DCS), contributed
to the increase.
Network access service revenues increased 10% or $9 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 $7.3 of
additional revenues. The increase also reflects $4.2 of higher support payments
received from the National Exchange Carrier Association (NECA). The increase is
also due to higher special access revenues of $3.2 associated with growth in
dedicated lines. The increase is partially offset by a $5.3 decline in revenues
associated with the sharing provisions of the Federal Communications
Commission's (FCC) 1996 price cap.
Toll service revenues decreased 6% or $1.8 for the three months ended March 31,
1997, compared to the same period in 1996. Lower toll volumes resulting from
expansion of local calling scopes and intraLATA (local access transport area)
competition, including 10XXX and 1+ presubscription, contributed to the decline.
The decrease was partially offset by favorable toll settlements recorded in the
first three months of 1997.
2
<PAGE> 4
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Total operating costs and expenses $ 180.6 $ 166.8
</TABLE>
Total operating costs and expenses increased 8% or $13.8 for the three months
ended March 31, 1997, compared to the same period in 1996. The increase is
primarily attributable to higher labor and benefit costs of $0.8, contractor
charges of $3.2 and advertising expenses of $2. The increase also includes a
$4.1 increase in depreciation and amortization expense associated with
additions to plant balances.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Gain on disposition of assets $ (5.1) $ --
Income taxes 26.7 23.8
</TABLE>
In the first quarter of 1997, the Company recorded a $5.1 pre-tax gain on the
sale of a portion of its telephone plantin-service, inventories and supplies
and customers in the state of Washington (representing 1,800 access lines).
Income taxes increased 12% or $2.9 for the three months ended March 31, 1997,
compared to the same period in 1996, primarily due to a corresponding increase
in pre-tax income.
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 Oregon and
Washington. Subsequent decisions are expected to be issued over a period
extending through the third quarter of 1997.
On December 29, 1995, GTE West Coast Incorporated, a subsidiary of the Company,
filed a proposal with the California Public Utilities Commission (CPUC) to
restructure certain rates in compliance with an order from the CPUC that all
small local-exchange carriers (LECs) file by the end of that year. The Company
requested an ROR of 11.30% and an ROE of 13.36%. On April 23, 1997, the CPUC
issued its decision on the GTE West Coast Incorporated rate proposal. The CPUC
authorized an ROR of 10% and an ROE of 11.16%. The decision resulted in an
annual revenue reduction of $0.3.
3
<PAGE> 5
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In May 1997, in accordance with the Telecommunications Act, 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, purchase of a national, state-of-the-art
fiber-optic network from Qwest Communications.
4
<PAGE> 6
GTE Northwest 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 $ 51,378 $ 2,074
Receivables, less allowances of $19,496 and $17,384 216,765 258,275
Inventories and supplies 14,865 14,361
Deferred income tax benefits 3,505 2,744
Other 34,548 17,749
------------------ ------------------
Total current assets 321,061 295,203
------------------ ------------------
Property, plant and equipment, at cost 3,261,462 3,258,268
Accumulated depreciation (2,056,369) (2,067,357)
------------------ ------------------
Total property, plant and equipment, net 1,205,093 1,190,911
------------------ ------------------
Employee benefit plans and other assets 87,211 84,266
------------------ ------------------
Total assets $ 1,613,365 $ 1,570,380
================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 2,182 $ 60,879
Accounts payable 118,956 93,558
Taxes payable 52,422 24,614
Accrued interest 16,605 10,602
Accrued payroll costs 25,667 25,834
Dividends payable 50,000 27,753
Other 81,377 73,686
------------------ ------------------
Total current liabilities 347,209 316,926
------------------ ------------------
Long-term debt 697,309 697,242
Deferred income taxes 57,774 45,982
Employee benefit plans 65,359 62,873
Other liabilities 25,601 25,311
------------------ ------------------
Total liabilities 1,193,252 1,148,334
------------------ ------------------
Shareholder's equity:
Common stock (17,920,000 shares issued) 448,000 448,000
Additional paid-in capital 57,671 57,671
Retained deficit (85,558) (83,625)
------------------ ------------------
Total shareholder's equity 420,113 422,046
------------------ ------------------
Total liabilities and shareholder's equity $ 1,613,365 $ 1,570,380
================== ==================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
GTE Northwest 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 $ 48,067 $ 43,487
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 53,719 49,664
Deferred income taxes 2,917 6,772
Gain on disposition of assets (5,101) --
Provision for uncollectible accounts 4,365 3,773
Changes in current assets and current liabilities 71,347 7,278
Other - net (2,678) (3,993)
------------------ ------------------
Net cash from operations 172,636 106,981
------------------ ------------------
INVESTING
Capital expenditures (44,712) (38,515)
Proceeds from disposition of assets 7,600 --
Other - net 233 344
------------------ ------------------
Net cash used in investing (36,879) (38,171)
------------------ ------------------
FINANCING
Long-term debt retired -- (1,339)
Dividends (27,753) (19,140)
Decrease in short-term obligations, excluding current maturities (58,700) (40,097)
------------------ ------------------
Net cash used in financing (86,453) (60,576)
------------------ ------------------
Increase in cash and cash equivalents 49,304 8,234
Cash and cash equivalents:
Beginning of period 2,074 16,310
------------------ ------------------
End of period $ 51,378 $ 24,544
================== ==================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE Northwest 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 period. 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) In the first quarter of 1997, the Company sold a portion of its telephone
plant-in-service, inventories and supplies and customers (representing 1,800
access lines) in the state of Washington to Pend Oreille Telephone Company for
$7.6 million in cash. A pre-tax gain of $5.1 million was recorded on the sale.
7
<PAGE> 9
GTE Northwest 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.
8
<PAGE> 10
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 Northwest Incorporated
------------------------------------
(Registrant)
Date: May 14, 1997 William M. Edwards, III
----------------------------- ------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
9
<PAGE> 11
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>
10
<PAGE> 1
Exhibit 12
GTE Northwest 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 $ 48,067
Add - Income taxes 26,673
- Fixed charges 13,892
--------------
Adjusted earnings $ 88,632
==============
Fixed charges:
Interest expense $ 13,555
Portion of rent expense
representing interest 337
--------------
Adjusted fixed charges $ 13,892
==============
RATIO OF EARNINGS TO FIXED CHARGES 6.38
</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> 51,378
<SECURITIES> 0
<RECEIVABLES> 236,261
<ALLOWANCES> 19,496
<INVENTORY> 14,865
<CURRENT-ASSETS> 321,061
<PP&E> 3,261,462
<DEPRECIATION> 2,056,369
<TOTAL-ASSETS> 1,613,365
<CURRENT-LIABILITIES> 347,209
<BONDS> 697,309
448,000
0
<COMMON> 0
<OTHER-SE> (27,887)
<TOTAL-LIABILITY-AND-EQUITY> 1,613,365
<SALES> 263,749
<TOTAL-REVENUES> 263,749
<CGS> 89,331
<TOTAL-COSTS> 180,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,497
<INCOME-PRETAX> 74,740
<INCOME-TAX> 26,673
<INCOME-CONTINUING> 48,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,067
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
