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, 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: 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 956,180,846 shares of $.05 par value common stock outstanding (excluding 27,120,592 treasury shares) at July 31, 1997.
<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 1997 1996 1997 1996 (In Millions) <S> <C> <C> <C> <C> REVENUES AND SALES Local services $1,613 $1,511 $ 3,218 $ 2,997 Network access services 1,260 1,161 2,412 2,293 Toll services 608 609 1,251 1,216 Cellular services 719 643 1,396 1,246 Directory services 372 399 558 622 Other services and sales 1,120 970 2,138 1,870 Total revenues and sales 5,692 5,293 10,973 10,244 OPERATING COSTS AND EXPENSES Cost of services and sales 2,194 1,948 4,146 3,869 Selling, general & administrative 1,115 1,065 2,142 1,916 Depreciation and amortization 977 941 1,933 1,870 Total costs and expenses 4,286 3,954 8,221 7,655 OPERATING INCOME 1,406 1,339 2,752 2,589 OTHER (INCOME) EXPENSE Interest expense 312 285 616 568 Interest capitalized (10) (11) (23) (21) Interest income (13) (13) (29) (27) Other - net 20 35 40 32 309 296 604 552 INCOME BEFORE INCOME TAXES 1,097 1,043 2,148 2,037 Income taxes 426 401 812 779 NET INCOME $ 671 $ 642 $ 1,336 $1,258 EARNINGS PER COMMON SHARE $ .70 $ .66 $ 1.39 $ 1.29 DIVIDENDS DECLARED PER COMMON SHARE $ .47 $ .47 $ .94 $ .94 AVERAGE COMMON SHARES 956 972 958 973 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 and first six months of 1997 was $671 million and $1.34 billion, or $.70 per share and $1.39 per share, respectively, compared with $642 million and $1.26 billion, or $.66 per share and $1.29 per share in the second quarter and first half of 1996, respectively. Results for the second quarter of 1997 include the impact of recently announced data initiatives. Excluding the effects of the new data initiatives, second quarter 1997 earnings per share increased 11 percent over 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 and the 1997 data initiatives, earnings per share for the first half of 1997 increased 11 percent over last year. Operating income for the second quarter and first six months of 1997 was $1.41 billion and $2.75 billion, respectively, compared with $1.34 billion and $2.59 billion, in the second quarter and first half of 1996, respectively. These increases are due primarily to continued growth in GTE's core wireline and wireless revenues and the favorable impact of ongoing operating cost-reduction programs. Partially offsetting these improvements were costs associated with the data initiatives, higher selling and marketing expenses associated with the growth of wireless and long-distance customers, the launch of personal communications services ("PCS") and increased video activities. Excluding the effects associated with the new data initiatives, operating income for the second quarter and first six months of 1997 rose 7.5 percent and 7.6 percent to $1.44 billion and $2.78 billion, respectively. Consolidated revenues and sales for the second quarter of 1997 increased 7.5 percent to $5.69 billion compared with $5.29 billion in the second quarter of 1996. The increase reflects continued strength in GTE's core wireline and wireless services, combined with new and expanded services. Consolidated revenues and sales for the first six months of 1997 increased 7 percent to $10.97 billion compared to $10.24 billion in the same period last year. For the second quarter of 1997, minutes of use of GTE's domestic local-exchange network for long-distance calling grew at an annual rate of 14.4 percent, while total domestic access lines increased 8.3 percent to 20.7 million. Access lines per employee, a key indicator of productivity, increased from 305 a year ago to 324, representing a 6.2 percent improvement. Internationally, GTE serves an additional 5.9 million access lines. Domestic cellular service revenues in the second quarter of 1997 totaled $654 million, an 11 percent increase over the same period last year, as customer growth continued. During the second quarter of 1997, GTE added 137,000 new domestic cellular customers bringing total U.S. customers served to 4,146,000 an increase of 28 percent over a year ago. Customer growth at -2-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) GTE's international operations increased 31 percent, bringing total cellular customers served worldwide to over 5 million. GTE is one of the largest publicly held telecommunications companies in the world. In the United States, GTE offers local and wireless service in 29 states and long-distance service in all 50 states. GTE was the first among its peers to offer "one-stop shopping" for local, long-distance and Internet access services. Outside the United States, where GTE has operated for more than 40 years, GTE serves over 6.8 million customers. GTE is also a leader in government and defense communications systems and equipment, directories and telecommunication-based information services, and aircraft-passenger telecommunications. Other (Income) Expense Other-net for the first half 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 six months of 1997 totaled $2.83 billion compared with $2.82 billion in 1996. The increase in cash from operations reflects the improved operating results during the first six months of 1997. Cash used in investing activities totaled $2.74 billion compared with $1.54 billion in the first six months of 1996. Acquisitions and investments for the first six months of 1997, includes approximately $593 million to acquire approximately 96 percent of the outstanding shares of BBN Corporation ("BBN") common stock at a price of $29 per share. BBN, based in Cambridge, Massachusetts, is a leading provider of high performance end-to-end Internet solutions such as World Wide Web site hosting, network security, consulting, systems integration, and dedicated and dial-up Internet access for government and commercial customers. Its 2,200 employees have extensive experience in leading-edge Internet and other telecommunications applications. Twenty-eight years ago, BBN created ARPANET, the forerunner of the Internet. Proceeds from sales of assets for the first half of 1996 includes approximately $261 million from the sales of PCS licenses. Capital expenditures totaled $2.03 billion, compared with $1.66 billion in the first six months last year. For the full year 1997, capital expenditures are expected to be approximately $5 billion compared with $4.1 billion in 1996. The majority of this 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. -3-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Cash from financing activities for the first six months of 1997 totaled $454 million, compared with cash used of $1.0 billion in the same period last year. During the first half of 1997, $903 million of dividend payments and $576 million expended for the repurchase of approximately 11.7 million shares of GTE common stock, were offset by a net increase in long and short-term borrowings of $1.9 billion. In August 1997, GTE's Board of Directors authorized the repurchase of up to an additional 20 million shares of currently issued GTE common stock in the open market or in privately negotiated transactions. This program is in addition to the 25 million share buy-back program announced in August 1996. The repurchase of shares under this new program, and the remaining shares under the 1996 program, will occur from time to time in the future, depending upon market conditions and GTE's need to finance new or expanded business opportunities. The shares acquired will be made available for use in GTE's employee benefit and dividend reinvestment programs, as well as other general corporate purposes. In June 1997, GTE's Board of Directors approved the filing of a $3 billion shelf registration statement with the Securities and Exchange Commission ("SEC") which included a Medium-Term Note ("MTN") program. The first transaction under this program is expected to occur during the third quarter of 1997. GTE expects that this program will replace a significant portion of its traditional long-term bond financings. The benefits of an MTN program include lower rates than traditional debentures and more flexibility with regard to amounts issued, timing and speed to market. The MTN program has received the same ratings as GTE Corporation's debenture program. In March 1997, GTE's senior debt was upgraded by Standard and Poor's to an "A" rating. This rating, along with the investment grade ratings of GTE's subsidiaries, provide ready access to the capital markets at reasonable rates and provides GTE with the financial flexibility necessary to pursue growth opportunities as they arise. At June 30, 1997, GTE had $4.5 billion of unused bank lines of credit available to back up commercial paper borrowings and for working capital requirements. RECENT DEVELOPMENTS In July 1997, the U.S. Court of Appeals for the Eighth Circuit ("Eighth Circuit") issued an opinion and order vacating significant portions of the Federal Communications Commission's ("FCC") rules purporting to implement the local competition provisions of the Telecommunications Act of 1996 ("the Act"). GTE, together with other incumbent local-exchange carriers ("ILECs") and a number of state commissions, had challenged various portions of the FCC rules. In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to promulgate rules setting the prices at which ILECs must make available to competitors unbundled network elements and services for resale. In addition, the Eighth Circuit made a number of other rulings favorable to -4-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) GTE, including, that the FCC's rule allowing requesting carriers to pick and choose among individual provisions of other interconnection agreements, rather than to adopt the terms and conditions of a single agreement in its entirety, was unlawful; that the FCC does not have the authority to review interconnection agreements approved by state commissions or to enforce the terms of such agreements; that the FCC rule requiring ILECs to provide interconnection and unbundled network elements at levels of quality that are superior to those levels at which the ILECs provide them to themselves was unlawful; and that it is the requesting carriers, not the ILECs, that must combine unbundled network elements. On the other hand, the Eighth Circuit rejected certain arguments advanced by GTE. For example, it ruled that a requesting carrier may gain access to all of the unbundled network elements that, when combined by the requesting carrier, are sufficient to enable the requesting carrier to provide a finished service, and it upheld most of the standards applied by the FCC in determining which network elements an ILEC must make available. The time for parties to seek rehearing before the Eighth Circuit has not yet expired. In addition, the FCC has announced that it intends to seek Supreme Court review of the Eighth Circuit's ruling. In May 1997, the FCC issued orders on universal service and access charge reform. GTE Midwest Incorporated has filed petitions for review of each of these orders in Federal Court, and GTE is currently assessing the effect of these orders. In its order on access charge reform, the FCC revised the price cap plan for regulating ILECs by requiring price cap LECs to increase their productivity factor to 6.5 percent retroactive to July 1996. The order also eliminated the sharing requirements of the price cap rules. In June 1997, in accordance with the order, GTE submitted its 1997 annual price cap filing. The 1997 interstate access filing resulted in an annual price reduction of approximately $254 million, effective July 1, 1997. Prior to this order, GTE had submitted a rate change filing in May 1997, as GTE's access rates were priced significantly below the FCC's maximum price. This rate change filing resulted in an annual price increase of $151 million, effective June 3, 1997. Overall, the net effect of these access filings resulted in an annual price reduction of approximately $103 million. In accordance with the Act, GTE 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 November 1996, a number of state commission decisions determining the prices and terms of unresolved issues were released. Subsequent decisions are expected to be issued throughout 1997. -5-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) GTE is challenging state arbitration decisions in cases where GTE believes that state commissions have made decisions that violate the Act and are inconsistent with its pro-competitive objectives. GTE fully endorses genuine local competition. Through the second quarter of 1997, GTE operating companies had filed one or more complaints in Federal District Court in each of the following states: California, Florida, Hawaii, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Virginia, Washington and Wisconsin. A number of these complaints have been dismissed without prejudice on the ground that they were filed before the arbitrated agreements had received final approval from state commissions. In such cases, GTE is refiling complaints after final approval has occurred. In May 1997, GTE announced initiatives to become a leading national provider of telecommunications services, including the acquisition of BBN Corporation, a leading provider of end-to-end Internet solutions. In addition, GTE announced a strategic alliance with Cisco Systems, Inc. to jointly develop enhanced data and Internet services for customers; and, the purchase of a national, state-of-the-art fiber-optic network from Qwest Communications. For additional information, including the modification of certain financial projections previously made by GTE, reference is made to GTE Corporation's Form 8-K and Schedule 14D-1 and 13D filed on May 6, 1997 and May 12, 1997, respectively, which are incorporated herein by reference. As of June 30, 1997, GTE had expended $593 million related to the acquisition of BBN, and made payments totaling approximately $113 million toward the purchase of the network from Qwest. In April 1997, GTE announced the relocation of its corporate-staff functions to the greater-Dallas area, where its Telephone Operations and Directories businesses are headquartered. The transfers to Dallas and the consolidation of certain staffs are expected to begin within the next few months, and will continue through 1998. GTE is continuing to develop the specific transition plan associated with the announcement which will determine the timing and extent of any financial impact. -6-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1997 1996 (In Millions) ASSETS CURRENT ASSETS: Cash and temporary investments $ 949 $ 405 Receivables, less allowances of $310 and $299 million 4,460 4,482 Inventories and supplies 885 673 Deferred income tax benefits 174 200 Other 311 273 Total Current Assets 6,779 6,033 PROPERTY, PLANT AND EQUIPMENT, at cost 54,596 53,481 Accumulated depreciation (31,696) (30,579) Total Property, Plant and Equipment, net 22,900 22,902 INVESTMENTS AND OTHER ASSETS: Employee benefit plans 3,904 3,639 Franchises, goodwill and other intangibles, net of accumulated amortization of $525 and $488 million 3,075 2,507 Investments in unconsolidated companies 2,187 2,035 Other assets 1,402 1,306 Total Investments and Other Assets 10,568 9,487 Total Assets $40,247 $38,422 The accompanying notes are an integral part of these statements. -7-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1997 1996 (In Millions) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations, including current maturities $ 3,479 $ 2,497 Accounts payable and accrued expenses 3,753 4,156 Taxes payable 927 754 Dividends payable 468 472 Other 461 435 Total Current Liabilities 9,088 8,314 Long-term debt 14,098 13,210 Employee benefit plans 4,755 4,688 Deferred income taxes 1,518 1,474 Minority interests in equity of subsidiaries 2,249 2,316 Other liabilities 1,183 1,084 Total Liabilities 32,891 31,086 SHAREHOLDERS' EQUITY: Common stock - shares issued 982,938,821 and 980,911,281 49 49 Additional paid-in capital 7,279 7,248 Retained earnings 1,809 1,370 Guaranteed ESOP obligations (562) (575) Treasury stock - 27,845,587 and 17,813,275 shares, at cost (1,219) (756) Total Shareholders' Equity 7,356 7,336 Total Liabilities and Shareholders' Equity $40,247 $38,422 The accompanying notes are an integral part of these statements. -8-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30 1997 1996 (In Millions) Operations Net income $1,336 $1,258 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 1,933 1,870 Change in current assets and current liabilities, excluding the effects of acquisitions and dispositions (532) (475) Deferred income taxes and other - net 91 166 Net cash from operations 2,828 2,819 Investing Capital expenditures (2,033) (1,655) Acquisitions and investments (700) (233) Proceeds from sales of assets 17 316 Other - net (22) 29 Net cash used in investing (2,738) (1,543) Financing Common stock issued 162 263 Purchase of treasury stock (576) (464) Long-term debt issued 1,533 1,099 Long-term debt and preferred securities retired (1,379) (317) Dividends paid (903) (915) Increase (decrease) in short-term obligations, excluding current maturities 1,634 (740) Other - net (17) 63 Net cash (used in) from financing 454 (1,011) Increase in cash and temporary investments 544 265 Cash and temporary investments: Beginning of period 405 332 End of period $ 949 $ 597 Cash paid during the period for: Interest $ 540 $ 505 Income taxes 531 560 The accompanying notes are an integral part of these statements. -9-
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 1996 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 1997 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. (3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), establishing standards for computing and presenting earnings per share ("EPS"). The new standard is effective for year-end 1997 financial statements. Upon adoption, all prior-period EPS data, including the first three quarters of 1997, must be restated. The goal of FAS 128 is to harmonize the EPS calculation in the United States with those common in other countries and to simplify complex provisions of APB Opinion No. 15, "Earnings per Share" ("APB 15"). The primary change is that the concept of primary EPS has been replaced by basic EPS. Basic EPS is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. No dilution for any potentially dilutive securities is included. Fully diluted EPS, now called diluted EPS, is still required. -10-
GTE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As required, GTE currently calculates EPS in accordance with APB 15. Had GTE calculated EPS in accordance with FAS 128, basic EPS and diluted EPS would not have been materially different than the amounts reported as primary and fully diluted EPS in accordance with APB 15. Derivative Financial Instruments In January 1997, the SEC issued amendments to its rules which clarify and expand disclosure requirements for derivative financial instruments. As of June 30, 1997, there has been no significant change in the market risk, or accounting policy associated with derivative financial instruments as stated in GTE's 1996 Annual Report on Form 10-K. -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. (10) Material Contracts - Employment Agreement between GTE Service Corporation and George H. Conrades. (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 May 6, 1997, under Item 5, "Other Events" and Item 7 "Financial Statements and Exhibits." GTE also filed a report on Form 8-K dated June 10, 1997, under Item 5, "Other Events." No financial information was included in either report. -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, 1997 By William M. Edwards, III ............................. William M. Edwards, III Vice President and Controller Date: August 13, 1997 By Marianne Drost ............................. Marianne Drost Secretary -13-