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 June 30, 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 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 967,729,707 shares of $.05 par value common stock outstanding (excluding 12,496,316 treasury shares) at July 31, 1996. <TABLE> PART I. FINANCIAL INFORMATION GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME <CAPTION> Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 (In Millions) <S> <C> <C> <C> <C> REVENUES AND SALES Local services $1,534 $1,441 $ 3,044 $2,850 Network access services 1,161 1,075 2,293 2,159 Toll services 609 639 1,216 1,281 Cellular services 643 536 1,246 1,028 Directory services 399 362 622 586 Other services and sales 947 879 1,823 1,693 Total revenues and sales 5,293 4,932 10,244 9,597 OPERATING COSTS AND EXPENSES Cost of services and sales 1,948 1,860 3,869 3,630 Selling, general & administrative 1,065 931 1,916 1,768 Depreciation and amortization 941 906 1,870 1,800 Total operating costs and expenses 3,954 3,697 7,655 7,198 OPERATING INCOME 1,339 1,235 2,589 2,399 OTHER (INCOME) EXPENSE Interest expense 285 279 568 560 Interest capitalized (11) (8) (21) (16) Interest income (13) (14) (27) (27) Other - net 35 14 32 40 296 271 552 557 INCOME BEFORE INCOME TAXES 1,043 964 2,037 1,842 Income taxes 401 383 779 718 NET INCOME $ 642 $ 581 $ 1,258 $1,124 EARNINGS PER COMMON SHARE $ .66 $ .60 $ 1.29 $ 1.16 DIVIDENDS DECLARED PER COMMON SHARE $ .47 $ .47 $ .94 $ .94 AVERAGE COMMON SHARES 972 970 973 968 The accompanying notes are an integral part of these statements. -1- </TABLE> GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated net income for the second quarter of 1996 was $642 million, or $.66 per share, compared with $581 million, or $.60 per share in the second quarter last year, representing a 10 percent increase in earnings per share. For the first half of 1996, consolidated net income was $1.26 billion, or $1.29 per share, compared with $1.12 billion, or $1.16 per share last year. The results for the first six months 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 first half of 1996 increased 10 percent over last year. Operating income for the second quarter and first six months of 1996 rose 8 percent to $1.34 billion and $2.59 billion, respectively. This increase resulted from increased revenues and the favorable effects of ongoing cost reduction programs. Consolidated revenues and sales for the second quarter of 1996 increased 7 percent to $5.29 billion compared with $4.93 billion in the second quarter of 1995. The increase reflects the growth in network usage, the number of cellular customers served, and new and enhanced service offerings. Consolidated revenues and sales for the first six months of 1996 increased 7 percent to $10.24 billion compared to $9.60 billion in the same period last year. For the second 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 6.7 percent to 19.1 million. Access lines per employee, a key indicator of productivity, increased from 264 a year ago to 305, representing a 15.5 percent improvement. Internationally, GTE serves an additional 5.7 million access lines. Domestic cellular service revenues in the second quarter of 1996 totaled $587 million, an 18 percent increase over the same period last year, as customer growth continued. During the second quarter of 1996, GTE added 149,000 new domestic cellular customers bringing total U.S. customers served to 3,243,000 an increase of 21 percent over a year ago, excluding properties sold in 1995. Growth at GTE's international operations increased total cellular customers by 26 percent, excluding properties sold in 1995, bringing total cellular customers served worldwide to 3.9 million. In connection with Telephone Operations' re-engineering plan, during the first six months of 1996, costs of approximately $132 million have been incurred, including $110 million to re-engineer customer service processes and $22 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 15,000 have occurred resulting in total costs of $990 million, including $695 million to re-engineer customer service processes and $125 million to re-engineer administrative processes. The restructuring costs also include $170 -2- GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 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 June 30,1996, $380 million remains in the restructuring reserve which management believes is adequate to cover future expenditures. 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 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 includes the equity in earnings of unconsolidated subsidiaries, which includes GTE's ownership interests in international joint ventures. For the second quarter and first six months of 1996, the equity in earnings of unconsolidated subsidiaries was $26 million and $82 million, respectively, reflecting increases of $22 million and $57 million from the respective year-ago periods. These increases primarily reflect improved operational performance and the favorable effects of currency translation at CANTV, the Venezuelan telephone company in which GTE owns a 20.4% interest. Other-net also includes pre-tax gains resulting from the sales of nonstrategic cellular properties of $11 million and $10 million for the second quarter and first six months of 1996, respectively. This compares to similar gains recorded in the prior year second quarter and first six months of $35 million and $38 million, respectively. In addition to the gains recorded on the sales of cellular properties, Other-net for the first six months of 1996 includes a pre-tax gain of $12 million related to the program to sell or trade a small percentage of nonstrategic domestic local-exchange telephone properties. CAPITAL RESOURCES AND LIQUIDITY Cash from operations for the first six months of 1996 totaled $2.82 billion compared with $2.16 billion in 1995. The increase in cash from operations reflects the improved operating results during the first six months of 1996, combined with lower income tax and interest payments and overall improvement in working capital requirements. -3- GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Cash used in investing activities totaled $1.54 billion compared with $2.37 billion in the first six months of 1995. Proceeds from sales of assets for the first half of 1996 includes approximately $261 million from the sales of the Atlanta and Denver personal communications services ("PCS") licenses. These transactions, which were announced in early 1996, approximated book value and closed during the second quarter of 1996. Acquisitions and investments for the first six months of 1995, includes approximately $350 million expended to acquire PCS licenses during the Federal Communications Commission's ("FCC") auction process. Capital expenditures totaled $1.66 billion, compared to $1.81 billion in the first six months last year. For the full year 1996, capital expenditures are expected to be approximately $4.2 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 six months of 1996 totaled $1.0 billion, compared with cash provided of $282 million in the same period last year. In August 1996, GTE's Board of Directors authorized the repurchase of up to 25 million shares of GTE common stock in the open market or in privately negotiated transactions. The repurchase of shares will occur from time-to-time through July 1997, depending upon market conditions, and may be either suspended or discontinued. The shares will be used to satisfy the requirements of GTE's employee benefit and dividend reinvestment programs. The repurchase program is in addition to the 20 million share buy-back program announced in August 1995. The 1995 program is now approximately 80 percent complete. During the first half of 1996, $915 million of dividend payments and $464 million expended for the repurchase of approximately 10.5 million shares of GTE common stock, were partially offset by $263 million received through GTE's employee stock purchase and dividend reinvestment plans. 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. As of July 1, 1996, GTE has installed a two-part $4 billion syndicated line of credit to back up commercial paper borrowings and for working capital requirements. Part one is a five-year $2.5 billion facility for GTE. Part two is a 364-day $1.5 billion facility for certain of its telephone companies. In addition, GTE's international operations have unused lines of credit under other facilities of approximately $300 million. -4- GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) RECENT DEVELOPMENTS On August 1, 1996, the Federal Communications Commission ("FCC") voted to release its rules implementing Section 251 of the Telecommunications Act of 1996 ("Act") dealing with interconnection, unbundling of network elements and wholesale prices and other terms for competitive entry into local-exchange service ("Competitive Entry Terms"). The terms of the FCC's Report and Order ("Order") were published on August 8, 1996, and GTE is in the process of reviewing the Order. The Order acknowledges that the Act calls for negotiation of terms and prices for Competitive Entry Terms between the local-exchange carrier ("LEC") and the competing carriers. The Order, among other things, prescribes the rules for interconnection of a LEC's facilities with those of carriers competing in the local-exchange market and the pricing methodology to be used by states in establishing interconnection rates. The FCC methodology calls for the states to use forward-looking costs defined as Total Element Long Run Incremental Cost ("TELRIC"), including a reasonable amount of forward-looking joint and common costs. State regulatory commissions are to establish the appropriate prices based on this methodology. The FCC also identified the network elements to be unbundled and priced by the states using the same TELRIC plus reasonable joint and common costs. Proxy prices for the various network elements are set out and may be used by states which have not approved cost studies by statutory deadlines for completing any arbitration of issues unresolved by negotiation between the LEC and other carriers. Access to the unbundled elements are to be at technically feasible points. Additionally, the Order mandated use of a method of determining a LEC's avoided costs for purposes of resale rates. States are to determine the specific rates using this methodology but, on an interim basis, may instead elect to use a default range of rates established by the FCC. The default discount rates range from 17%-25% off retail rates. To continue to support universal service, the FCC established a temporary access framework. A competitor purchasing local service for resale or providing only long distance service must pay full current access rates. If unbundled local switching is purchased, the competitor must pay 75% of the existing Transport Interconnection Charge and all of the existing Carrier Common Line Charge. A competitor providing its own switching facility pays no access charges even if it purchases an unbundled loop from a LEC. The Order also provides for mutual compensation for interconnection but presumes calling will be balanced and permits "bill and keep" arrangements. If the LEC demonstrates calling is not balanced, interconnection prices are to be set by the state for both carriers at the LEC's forward-looking costs. GTE is still reviewing the impact of the approximately 700-page Order. In addition, the FCC is scheduled to release additional rules relating to universal service and access charge reform in the second quarter of 1997. Until all the rules have been issued, it is difficult to determine the -5- GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) effect on GTE. However, GTE has concerns about the Order as it relates to the ability of a local-exchange carrier to recover all of its present costs from its ongoing retail customers and the wholesale prices to be set by state regulatory agencies pursuant to the FCC's guidelines. GTE plans to appeal various aspects of the Order. Although it is too early to determine the impact of these rules, GTE believes that, if implemented as contained in the Order, they may advantage new entrants and competitors in a LEC's territory. Thus, while the Order may contribute to some market erosion in GTE's franchised territories, it may also advantage GTE outside of its franchised territory. 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. 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 returned to the ratepayers of both companies, which represents half of the total savings expected to be realized by this merger. GTE had previously provided for the impact of this decision in its financial statements. GTE received approval to return these savings to local, toll, and access customers over a five-year period beginning in mid-1996. On May 8, 1996, the CPUC denied GTE's motion to suspend the application of the price cap formula for 1996. The impact of the 1996 price cap filing, a reduction of approximately $40 million, was flowed-through to ratepayers beginning July 1, 1996. The price cap formula will be suspended for 1997 and 1998. GTE's 1996 annual interstate access filing was approved by the FCC in June 1996. Overall, the rates result in $18.3 million of price reductions, effective July 1, 1996. 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"SM is available to GTE customers in 17 states (Alabama, Arkansas, California, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, North Carolina, Texas, Virginia, Washington, and Wisconsin). GTE plans to offer this service by December 31, 1996 in all 28 states where it offers local telephone service. -6- GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 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 did not have a significant impact on GTE's results. -7- GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (In Millions) ASSETS CURRENT ASSETS: Cash and temporary investments $ 597 $ 332 Receivables, less allowances of $280 and $263 million 3,979 4,227 Inventories and supplies 742 719 Deferred income tax benefits 240 330 Other 308 284 Total Current Assets 5,866 5,892 PROPERTY, PLANT AND EQUIPMENT, at cost 52,005 50,947 Accumulated depreciation (29,646) (28,510) Total Property, Plant and Equipment, net 22,359 22,437 INVESTMENTS AND OTHER ASSETS: Employee benefit plans 3,315 3,058 Franchises, goodwill and other intangibles, net of accumulated amortization of $447 and $404 million 2,530 2,765 Investments in unconsolidated companies 1,755 1,745 Other assets 1,164 1,122 Total Investments and Other Assets 8,764 8,690 Total Assets $36,989 $37,019 The accompanying notes are an integral part of these statements. -8- GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 (In Millions) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations, including current maturities $ 2,679 $ 2,156 Accounts payable and accrued expenses 3,321 3,858 Taxes payable 963 890 Accrued restructuring costs 380 512 Dividends payable 477 476 Other 454 420 Total Current Liabilities 8,274 8,312 Long-term debt 12,342 12,744 Employee benefit plans 4,753 4,638 Deferred income taxes 1,299 1,203 Minority interests in equity of subsidiaries 2,287 2,230 Other liabilities 1,092 1,021 Total Liabilities 30,047 30,148 SHAREHOLDERS' EQUITY: Common stock - shares issued 979,835,724 and 977,483,844 49 49 Additional paid-in capital 7,224 8,049 Retained earnings (deficit) 730 (534) Guaranteed ESOP obligations (589) (603) Treasury stock - 10,906,899 and 2,423,284 shares, at cost (472) (90) Total Shareholders' Equity 6,942 6,871 Total Liabilities and Shareholders' Equity $36,989 $37,019 The accompanying notes are an integral part of these statements. -9- GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30 1996 1995 (In Millions) Operations Net income $1,258 $1,124 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 1,870 1,800 Change in current assets and current liabilities, excluding the effects of acquisitions and dispositions (475) (902) Deferred income taxes and other - net 166 137 Net cash from operations 2,819 2,159 Investing Capital expenditures (1,655) (1,810) Acquisitions and investments (233) (657) Proceeds from sales of assets 316 75 Other - net 29 20 Net cash used in investing (1,543) (2,372) Financing Common stock issued 263 202 Purchase of treasury stock (464) - Long-term debt and preferred securities issued 1,099 589 Long-term debt and preferred securities retired (317) (277) Dividends (915) (911) Increase (decrease) in short-term obligations, excluding current maturities (740) 660 Other - net 63 19 Net cash (used in) from financing (1,011) 282 Increase in cash and temporary investments 265 69 Cash and temporary investments: Beginning of period 332 323 End of period $ 597 $ 392 Cash paid during the period for: Interest $ 505 $ 552 Income taxes 560 681 The accompanying notes are an integral part of these statements. -10- 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, consisting 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. -11- PART II. OTHER INFORMATION 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 no reports on Form 8-K during the second quarter of 1996. -12- 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: August 13, 1996 By Lawrence R. Whitman ............................. Lawrence R. Whitman Vice President - Controller Date: August 13, 1996 By Marianne Drost ............................. Marianne Drost Secretary -13-