UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 F O R M 10 - Q X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 1996 .............. or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-2755 ...... GTE Corporation ...................................................... (Exact name of registrant as specified in its charter) New York 13-1678633 ............................................................................. . (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Stamford Forum, Stamford, Conn. 06904 ......................................................... (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 203-965-2000 ............ ............................................................................ 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 . GTE had 973,784,230 shares of $.05 par value common stock outstanding (excluding 5,932,455 treasury shares) at April 30, 1996. PART I. FINANCIAL INFORMATION GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31 1996 1995 (In Millions) REVENUES AND SALES Local services $1,510 $1,409 Network access services 1,132 1,084 Toll services 607 642 Cellular services 603 492 Directory services 223 224 Other services and sales 876 814 Total revenues and sales 4,951 4,665 OPERATING COSTS AND EXPENSES Cost of services and sales 1,921 1,770 Selling, general & administrative 851 837 Depreciation and amortization 929 894 Total operating costs and expenses 3,701 3,501 OPERATING INCOME 1,250 1,164 OTHER (INCOME) EXPENSE Interest expense 283 281 Interest capitalized (10) (8) Interest income (14) (13) Other - net (3) 26 256 286 INCOME BEFORE INCOME TAXES 994 878 Income taxes 378 335 NET INCOME $ 616 $ 543 EARNINGS PER COMMON SHARE $ .63 $ .56 DIVIDENDS DECLARED PER COMMON SHARE $ .47 $ .47 AVERAGE COMMON SHARES 975 967 The accompanying notes are an integral part of these statements. - 1 - GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated net income for the first quarter of 1996 was $616 million, or $.63 per share, compared with $543 million, or $.56 per share in the first quarter of last year. The results for the first quarter of 1996 include an after-tax gain on the sale of nonstrategic telephone properties of $8 million, or $.01 per share. Excluding this gain, earnings per share for the quarter increased 11 percent over the first quarter of 1995. Operating income increased 7 percent to $1.25 billion, compared with $1.16 billion reported in the first quarter of last year, reflecting increased revenues and the favorable effects of ongoing cost reductions from process re-engineering activities. Consolidated revenues and sales for the first quarter increased 6 percent to $4.95 billion, compared to $4.67 billion in the first quarter of last year. This increase resulted from growth in both network usage and the number of customers. For the first quarter of 1996, minutes of use of GTE's domestic local-exchange network for long-distance calling grew at an annual rate of 9.7 percent, while total domestic access lines increased 6.6 percent to 18.8 million. Access lines per employee, a key indicator of productivity, increased from 261 a year ago to 298, representing a 14 percent improvement. Internationally, GTE serves an additional 5.7 million access lines. Domestic cellular service revenues in the first quarter of 1996 totaled $555 million, a 22 percent increase over the same period last year, as customer growth continued. During the first quarter of 1996, GTE added 83,000 new domestic cellular customers bringing total U.S. customers served to 3,094,000 an increase of 26 percent over a year ago, excluding properties sold in 1995. Growth at GTE's international operations increased total cellular customers by 30 percent, excluding properties sold in 1995, bringing total cellular customers served worldwide to 3.7 million, almost double the customers just two years ago. In connection with Telephone Operations' re-engineering plan, during the first three months of 1996, costs of approximately $59 million have been incurred, including $47 million to re-engineer customer service processes and $12 million to re-engineer administrative processes. Since the plan's inception at the beginning of 1994, 286 work centers have been consolidated to 58 and workforce reductions of approximately 13,000 have occurred resulting in total costs of $917 million, including $632 million to re-engineer customer service processes and $115 million to re-engineer administrative processes. The restructuring costs also include $170 million to consolidate facilities and operations and other related costs. These expenditures were primarily associated with the closure and relocation of the various centers, software enhancements and separation benefits associated with employee reductions. Implementation of the re-engineering plan is expected to be substantially completed by year-end 1996. As of March 31, 1996, $453 million remains in the restructuring reserve which management believes is adequate to cover future expenditures. - 2 - GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) GTE is one of the largest publicly held telecommunications companies in the world. GTE is also the largest U.S.-based local telephone company and a leading cellular service provider, with wireline and wireless operations that form a market area covering about one-third of the country's population. Outside the United States, where GTE has operated for more than 40 years, GTE serves over 6 million customers. GTE is also a world-wide leader in government and defense communications systems and equipment, aircraft-passenger telecommunications, directories and telecommunication-based information services and systems. Other (Income) Expense Other-net for the first quarter of 1996 includes a pre-tax gain of $12 million, resulting from the sale of nonstrategic local-exchange telephone properties. CAPITAL RESOURCES AND LIQUIDITY Cash from operations for the first three months of 1996 totaled $1.64 billion compared to $1.36 billion for the first quarter of 1995. The increase in cash from operations is due to improved operating results in the first quarter of 1996. Cash used in investing activities for the first three months of 1996 totaled $891 million, compared with $830 million in the first quarter of 1995. Capital expenditures for the first quarter of 1996 totaled $729 million compared with $771 million in the same period last year. For the full year 1996, capital expenditures are expected to be approximately $4.1 billion compared with $4.0 billion in 1995. The majority of new investment is being made in GTE's telephone operations to meet the demands of growth, modernize facilities and position GTE as a low-cost provider of high-quality voice, data and video telecommunications services. Significant investments are also being made in GTE's other businesses, such as mobile-cellular, to increase capacity and continue to improve and expand the network. Cash used in financing activities for the first three months of 1996 totaled $692 million, compared with $519 million in the same period last year. During the first quarter of 1996, dividend payments of $456 million and net reductions in short and long-term borrowings and preferred securities outstanding of $233 million were partially offset by $157 million received through GTE's employee stock purchase and dividend reinvestment plans. During the first quarter of 1996, $205 million was used to repurchase approximately 4.6 million shares of GTE common stock. GTE believes that its present investment grade credit rating and those of its subsidiaries provide it with the financial flexibility necessary to pursue growth opportunities as they arise. At March 31, 1996, GTE had $4.5 billion of unused bank lines of credit available to back up commercial paper borrowings and for working capital requirements. - 3 - GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) RECENT DEVELOPMENTS GTE began offering long-distance service to its customers in selected states during the first quarter of 1996. To date, the service, marketed under the name "GTE Easy Savings Plan" is available to GTE customers in the states of Texas, Michigan, Illinois, Minnesota, Florida, Washington, Kentucky and Indiana. GTE plans to offer this service to its customers in all 28 states where it currently offers local telephone service by December 31, 1996. In March 1996, the California Public Utilities Commission ("CPUC") approved rules permitting local resale competition effective March 31, 1996. The CPUC required GTE to provide interim wholesale discounts of 7 percent on basic residential service and 12 percent on toll and business services to future resale competitors. On April 12, 1996, GTE filed an application for rehearing with the CPUC regarding the need to discount residential services which are already priced below cost. In addition, GTE will be providing the CPUC with service category specific cost studies of its wholesale discounts in the CPUC's unbundling proceedings. GTE's 1996 annual interstate access filing was submitted to the Federal Communications Commission ("FCC") in April 1996. Overall, the proposed rates result in a $19.3 million price reduction, effective July 1, 1996. GTE anticipates the FCC will issue an order prior to the effective date, which may require changes to GTE's annual filing. The CPUC approved the merger of Contel of California into GTE California in April 1996. As part of this order, the CPUC ordered $69.7 million of merger savings to be flowed to the ratepayers of both companies, which represents half of the total savings expected to be realized by this merger. GTE will file a proposal to flowthrough these savings to local, toll, and access customers over a five year period beginning in mid-1996. In April 1996, Unicom, a joint venture of GTE, Bancomer-Valores Industriales and Telefonica Internacional, signed a Memorandum of Understanding to merge with Alestra, a joint venture formed by AT&T and Alfa. The merged company will be known as Alestra and market services under the AT&T name. The Unicom and Alestra merger is expected to result in an increased ability to provide competitive long-distance and other telecommunication services in Mexico once that market opens to competition later this year. Alestra's new proposed ownership and investment structure are subject to regulatory approval in Mexico. This transaction is not expected to have a material effect on GTE's current financial position or results of operations. Also, in April 1996, the Venezuelan government lifted foreign exchange controls allowing the local currency to move to a market-based exchange rate. As a result, the local currency devalued by approximately 65 percent. However, due to the mix of local currency and U.S. dollar denominated assets and liabilities, the devaluation is not expected to have a significant impact on GTE's results. GTE believes the current economic difficulties in Venezuela are temporary and will be corrected, and continues to view its interest in CANTV as a sound long-term investment. - 4 - GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (In Millions) ASSETS CURRENT ASSETS: Cash and temporary investments $ 388 $ 332 Receivables, less allowances of $266 and $263 million 3,831 4,227 Inventories and supplies 681 719 Deferred income tax benefits 278 330 Other 309 284 Total Current Assets 5,487 5,892 PROPERTY, PLANT AND EQUIPMENT, at cost 51,502 50,947 Accumulated depreciation (29,152) (28,510) Total Property, Plant and Equipment, net 22,350 22,437 INVESTMENTS AND OTHER ASSETS: Employee benefit plans 3,199 3,058 Franchises, goodwill and other intangibles, net of accumulated amortization of $424 and $404 million 2,803 2,765 Investments in unconsolidated companies 1,690 1,745 Other assets 1,121 1,122 Total Investments and Other Assets 8,813 8,690 Total Assets $36,650 $37,019 The accompanying notes are an integral part of these statements. - 5 - GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (In Millions) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations, including current maturities $ 2,753 $ 2,156 Accounts payable and accrued expenses 3,216 3,858 Taxes payable 1,124 890 Accrued restructuring costs 453 512 Dividends payable 463 476 Other 458 420 Total Current Liabilities 8,467 8,312 Long-term debt 11,971 12,744 Employee benefit plans 4,673 4,638 Deferred income taxes 1,218 1,203 Minority interests in equity of subsidiaries 2,259 2,230 Other liabilities 1,113 1,021 Total Liabilities 29,701 30,148 SHAREHOLDERS' EQUITY: Common stock - shares issued 979,312,302 and 977,483,844 49 49 Additional paid-in capital 7,668 8,049 Retained earnings (deficit) 85 (534) Guaranteed ESOP obligations (596) (603) Treasury stock- 6,030,601 and 2,423,284 shares, at cost (257) (90) Total Shareholders' Equity 6,949 6,871 Total Liabilities and Shareholders' Equity $36,650 $37,019 The accompanying notes are an integral part of these statements. - 6 - GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31 1996 1995 (In Millions) Operations Net income $ 616 $ 543 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 929 894 Change in current assets and current liabilities, excluding the effects of acquisitions and dispositions 17 (250) Deferred income taxes and other - net 77 169 Net cash from operations 1,639 1,356 Investing Capital expenditures (729) (771) Other - net (162) (59) Net cash used in investing (891) (830) Financing Common stock issued 157 107 Purchase of treasury stock (205) - Long-term debt and preferred securities issued 546 532 Long-term debt and preferred securities retired (82) (191) Dividends (456) (454) Decrease in short-term obligations, excluding current maturities (697) (525) Other - net 45 12 Net cash used in financing (692) (519) Increase in cash and temporary investments 56 7 Cash and temporary investments: Beginning of period 332 323 End of period $ 388 $ 330 Cash paid during the period for: Interest $ 198 $ 207 Income taxes 119 122 The accompanying notes are an integral part of these statements. - 7 - GTE CORPORATION AND SUBSIDIARIES 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. 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 1995 Annual Report on Form 10-K. Reclassifications of prior year data have been made in the accompanying condensed consolidated financial statements where appropriate to conform to the 1996 presentation. (2) PROPERTY SALES: In connection with the program to sell or trade a small percentage of nonstrategic domestic local-exchange telephone properties, during the first quarter of 1996, GTE recorded a pre-tax gain of $12 million, which increased net income by $8 million, or $.01 per share. - 8 - PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Annual Meeting - April 17, 1996 (b) Proxies for the meeting were solicited pursuant to Regulation 14A. There was no solicitation in opposition to management's nominees as listed in the proxy statement. All of management's nominees as listed in the proxy statement were elected, the vote on said proposal being as follows: Shares Voted Directors Shares For Shares Withheld Class I Directors: Edward H. Budd 778,338,632 22,378,831 James L. Johnson 775,365,288 25,352,175 James L. Ketelsen 778,185,338 22,532,125 Charles R. Lee 775,763,554 24,953,909 Class II Directors: Robert F. Daniell 777,958,659 22,758,804 Michael T. Masin 776,446,144 24,271,319 (c) Other matters voted upon: Proposal to Ratify the Appointment of Auditors Shareholders ratified the appointment of Arthur Andersen LLP to conduct the annual audit of the financial statements of GTE Corporation and its subsidiary companies for the year ending December 31, 1996. The vote was: FOR - 783,627,693 shares, or 98.83 percent of the shares voted. AGAINST - 9,311,127 shares, or 1.17 percent of the shares voted. ABSTENTIONS - 7,778,643 shares. Proposal to Eliminate the Staggered Election of Directors Shareholders voted against a shareholder proposal to eliminate the staggered election of Directors. The vote was: FOR - 251,681,811 shares, or 38.48 percent of the shares voted. AGAINST - 402,404,437 shares, or 61.52 percent of the shares voted. ABSTENTIONS - 16,784,607 shares. BROKERS NON-VOTES - 129,846,608 shares. - 9 - Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - (Continued) Proposal that the Board of Directors Provide a Comprehensive Report on Foreign Military Sales Shareholders voted against a shareholder proposal to require the Board of Directors to provide a comprehensive report on GTE's foreign military sales. The vote was: FOR - 138,450,973 shares, or 21.80 percent of the shares voted. AGAINST - 496,681,188 shares, or 78.20 percent of the shares voted. ABSTENTIONS - 36,409,794 shares. BROKERS NON-VOTES - 129,175,508 shares. Proposal to Request a Report of the Board of Directors Regarding Equal Employment Opportunity ("EEO") and Affirmative Action Policies and Programs Shareholders voted against a shareholder proposal to request a report of GTE's Board of Directors regarding EEO and Affirmative Action policies and programs. The vote was: FOR - 98,524,079 shares, or 15.63 percent of the shares voted. AGAINST - 531,740,565 shares, or 84.37 percent of the shares voted. ABSTENTIONS - 41,277,759 shares. BROKERS NON-VOTES - 129,175,060 shares. Proposal to endorse the Coalition for Environmentally Responsible Economies ("CERES") Principles Shareholders voted against a shareholder proposal to request that GTE endorse the CERES Principles. The vote was: FOR - 75,101,747 shares, or 12.18 percent of the shares voted. AGAINST - 541,381,714 shares, or 87.82 percent of the shares voted. ABSTENTIONS - 55,059,642 shares. BROKERS NON-VOTES - 129,174,360 shares. - 10 - Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - (Continued) Proposal that All Bonuses in Excess of $30,000 be Approved by Stockholders Shareholders voted against a shareholder proposal to require that all bonuses in excess of $30,000 be approved by the stockholders at the Annual Stockholders Meeting. The vote was: FOR - 128,136,234 shares, or 19.54 percent of the shares voted. AGAINST - 527,758,837 shares, or 80.46 percent of the shares voted. ABSTENTIONS - 15,656,715 shares. BROKERS NON-VOTES - 129,165,677 shares. Proposal to Require Shareholder Approval of Future Compensation Agreements Contingent on a Change in Control Shareholders voted against a shareholder proposal for the adoption of a policy against future agreements with officers and directors providing compensation contingent on a change in control unless approved by a majority of shareholders. The vote was: FOR - 262,004,131 shares, or 40.60 percent of the shares voted. AGAINST - 383,319,973 shares, or 59.40 percent of the shares voted. ABSTENTIONS - 26,219,998 shares. BROKERS NON-VOTES - 129,173,361 shares. Proposal to Eliminate Non-Employee Directors' Pension Benefits Shareholders voted against a shareholder proposal to eliminate future non-employee directors' pension benefits and the relinquishment of pension benefits for current non-employee directors. The vote was: FOR - 275,062,130 shares, or 42.25 percent of the shares voted. AGAINST - 375,972,199 shares, or 57.75 percent of the shares voted. ABSTENTIONS - 20,515,558 shares. BROKERS NON-VOTES - 129,167,576 shares. - 11 - Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - (Continued) Proposal for the Establishment of Criteria to Limit Executive Officers' Compensation Shareholders voted against a shareholder proposal for the Board of Directors to establish criteria to limit executive officers' compensation. The vote was: FOR - 146,641,047 shares, or 22.36 percent of the shares voted. AGAINST - 509,106,533 shares, or 77.64 percent of the shares voted. ABSTENTIONS - 15,803,404 shares. BROKERS NON-VOTES - 129,166,479 shares. Proposal to Limit Executive Officers' Pay Increases Shareholders voted against a shareholder proposal to limit executive officers' pay increases. The vote was: FOR - 145,090,391 shares, or 22.14 percent of the shares voted. AGAINST - 510,205,139 shares, or 77.86 percent of the shares voted. ABSTENTIONS - 16,254,648 shares. BROKERS NON-VOTES - 129,167,285 shares. - 12 - Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K. (11) Statement re: Calculation of earnings per common share (12) Statement re: Calculation of the ratio of earnings to fixed charges (27) Financial Data Schedule (b) GTE filed a report on Form 8-K dated January 26, 1996 under Item 5, "Other Events." Financial information was included with this report. GTE also filed a report on Form 8-K dated February 15, 1996 under Item 5, "Other Events." No financial information was included with this report. - 13 - SIGNATURES 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 CORPORATION ............................. (Registrant) Date: May 13, 1996 By Lawrence R. Whitman ............................. Lawrence R. Whitman Vice President - Controller Date: May 13, 1996 By Marianne Drost ............................. Marianne Drost Secretary - 14 -