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, 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: 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 964,030,640 shares of $.05 par value common stock outstanding (excluding 24,055,445 treasury shares) at July 31, 1998.
<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 1998 1997 1998 1997 (In Millions) <S> <C> <C> <C> <C> REVENUES AND SALES Local services $1,771 $1,613 $ 3,501 $ 3,218 Network access services 1,290 1,260 2,616 2,412 Toll services 572 608 1,163 1,251 Wireless services 745 719 1,463 1,396 Directory services 379 372 574 558 Other services and sales 1,520 1,120 2,845 2,138 Total revenues and sales 6,277 5,692 12,162 10,973 OPERATING COSTS AND EXPENSES Cost of services and sales 2,671 2,194 5,169 4,146 Selling, general & administrative 1,231 1,115 2,302 2,142 Depreciation and amortization 943 977 1,912 1,933 Special charges - - 755 - Total costs and expenses 4,845 4,286 10,138 8,221 OPERATING INCOME 1,432 1,406 2,024 2,752 OTHER (INCOME) EXPENSE Interest expense 349 312 675 616 Interest capitalized (6) (10) (15) (23) Interest income (32) (13) (60) (29) Other - net 21 20 44 40 332 309 644 604 INCOME BEFORE INCOME TAXES 1,100 1,097 1,380 2,148 Income taxes 427 426 565 812 INCOME BEFORE EXTRAORDINARY CHARGES 673 671 815 1,336 Extraordinary charges - - (320) - NET INCOME $ 673 $ 671 $ 495 $1,336 BASIC EARNINGS (LOSS) PER COMMON SHARE: Before extraordinary charges $ .70 $ .70 $ .85 $ 1.39 Extraordinary charges - - (.33) - NET INCOME $ .70 $ .70 $ .52 $ 1.39 DILUTED EARNINGS (LOSS) PER COMMON SHARE: Before extraordinary charges $ .69 $ .70 $ .84 $ 1.39 Extraordinary charges - - (.33) - NET INCOME $ .69 $ .70 $ .51 $ 1.39 AVERAGE COMMON SHARES OUTSTANDING: Basic 962 956 961 958 Diluted 972 959 969 962 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 1998 was $673 million and $495 million, or $.70 per share and $.52 per share, respectively, compared with $671 million and $1.34 billion, or $.70 per share and $1.39 per share in the second quarter and first half of 1997, respectively. The results for the first six months of 1998 include after-tax special charges of $482 million, or $.50 per share, related to cost reductions, the write-down of Hybrid Fiber Coax ("HFC") test market technologies in GTE's video business, a reserve for the disposition of GTE Airfone ("Airfone") assets, and other items. In addition, the 1998 year to date results reflect a non-cash extraordinary charge of $300 million after-tax, or $.31 per share, to discontinue the use of regulatory accounting principles at GTE's Canadian telephone operations and a one-time $20 million, or $.02 per share, charge for the redemption of high-coupon debt and preferred stock. During the first six months of 1998, costs associated with GTE's new data initiatives reduced net income by $219 million, or $.23 per share. Excluding these costs, the amount associated with the special charges and the extraordinary charges previously described, net income for the first half of 1998 would have been $1.52 billion, or $1.58 per share, an increase of 11.4 percent and 11.3 percent, respectively, primarily as a result of core revenue growth from both domestic and international operations. Operating income for the second quarter and first six months of 1998 was $1.43 billion and $2.02 billion, respectively, compared with $1.41 billion and $2.75 billion, in the second quarter and first half of 1997, respectively. The 1998 year to date results reflect the pre-tax special charge of $755 million. Operating income for the second quarter and first six months of 1998 reflect results associated with the data initiatives of $159 million and $301 million, respectively. Excluding these items, operating income for the second quarter and first six months of 1998 rose 10.6 percent to $1.59 billion and $3.08 billion, respectively, primarily as a result of core revenue growth from both domestic and international operations. Consolidated revenues and sales for the second quarter of 1998 increased 10.3 percent to $6.28 billion compared with $5.69 billion in the second quarter of 1997. This increase primarily resulted from continued growth in core domestic wireline, as well as increased long-distance revenues, international Canadian operations and wireless services. In addition, data revenues for the second quarter of 1998 were $191 million compared to $11 million in the year-ago quarter in which the data initiatives were launched. Consolidated revenues and sales for the first six months of 1998 increased 10.8 percent to $12.16 billion compared to $10.97 billion in the same period last year. Excluding revenues related to the new data initiatives, consolidated revenues and sales for the second quarter and first six months of 1998 grew 7.1 percent and 7.6 percent, respectively. For the second quarter of 1998, minutes of use of GTE's domestic local-exchange network for long-distance calling grew at an annual rate of 12.5 percent, while total domestic access lines increased 7.8 percent to 22.3 million. Internationally, GTE serves an additional 6.2 million access lines, an increase of 5.1 percent over the second quarter of 1997. -2-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Domestic wireless service revenues in the second quarter of 1998 totaled $671 million, a 2.6 percent increase over the same period last year. Revenue growth is driven by customer additions and increasing revenue from existing customers through continuous emphasis on customer service levels to improve retention and from new products and services. U.S. wireless customers served grew to 4,631,000, an increase of 11.6 percent over a year ago. Customer growth at GTE's international operations increased significantly, bringing total wireless customers served worldwide to 6.8 million. GTE is one of the largest publicly held telecommunications companies in the world. In the United States, GTE offers local service in 28 states and wireless service in 17 states; nationwide long-distance service and internetworking services ranging from dial-up Internet access for residential and small business consumers to Web-based applications for Fortune 500 companies; as well as video service in selected markets. Outside the United States, GTE serves over 8 million telecommunication customers. GTE is also a leader in government and defense communications systems and equipment, directories and telecommunication-based information services, and aircraft-passenger telecommunications. CAPITAL RESOURCES AND LIQUIDITY Cash from operations for the first six months of 1998 totaled $2.58 billion compared to $2.83 billion for the first half of 1997. The decrease in cash from operations is primarily due to an increase in working capital requirements. Cash used in investing activities totaled $2.45 billion, compared with $2.74 billion in the first six months of 1997. Capital expenditures totaled $2.55 billion compared with $2.03 billion in the first six months of last year. For the full year 1998, capital expenditures are expected to be approximately equal to 1997. The majority of new investment is being made to meet the demands of growth, modernize facilities and position GTE as a provider of high-quality voice, data and video telecommunications services. Significant investments are also being made to build and expand GTE's data network. In July, a GTE-led group agreed to purchase a majority stake (51% plus one share) in the Puerto Rico Telephone Company ("PRTC") for $444 million. At closing, which is expected by year-end 1998, GTE will sell 6% to Popular, Inc., which will then contribute 1% to the PRTC Employee Stock Ownership Plan. In addition, GTE will sell another 5% to other partners in the group which will leave GTE with a 40% investment in PRTC for $348 million. Cash provided from financing activities for the first six months of 1998 totaled $267 million, compared with $454 million in the same period last year. During the first six months of 1998, dividend payments totaled $901 million. In addition, financing activities during the first half of 1998 included a $970 million net increase in long and short-term borrowings and the issuance of $235 million of common stock, as well as other net items. In April 1998, GTE issued $2.1 billion of debentures, and used the net proceeds to reduce short-term debt obligations. The transaction consisted of four tranches with maturities ranging from 8 to 30 years. This long-term debt offering was the largest in GTE's history. -3-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 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, GTE and its subsidiaries were removed from "Credit Watch" by all the rating agencies. GTE believes that its present investment grade credit rating and those of its subsidiaries provides 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, 1998, GTE had $4.4 billion of unused bank lines of credit available to back up commercial paper borrowings and for working capital requirements. 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 approvals, 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 May 1998, GTE filed a private antitrust lawsuit in federal court to block the proposed $38 billion merger of WorldCom and MCI to ensure the combined mega-company will not have the ability to monopolize the Internet or significantly endanger competition in long distance telephone markets. The suit, which was filed in U.S. federal district court in Washington, D.C., asserts that the merger of WorldCom-MCI, the number one and number two backbone providers, will allow the combined company to monopolize the market for Internet backbone services. GTE said in its suit that the combined company would own 40-60 percent of the critical Internet "backbone" network that transmits and routes data for consumer and Internet service providers. The suit also cites the significantly diminished competition in the retail long distance market that would be created by merging the second- and fourth-largest long distance telephone companies. Combining WorldCom-MCI removes the key supplier from the wholesale long distance market, i.e., WorldCom, and lessens competition for long distance resellers, like GTE, that compete with AT&T, MCI, and Sprint. 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-$3 billion by selling non-strategic or under-performing operations, and plans to reduce annual costs by more than $500 million through improved efficiencies and productivity while it continues to invest in new high-growth opportunities. For more information regarding these announcements, please refer to the Forms 8-K filed by GTE, dated April 2, 1998 and April 14, 1998. GTE 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 reduction of $106 million. In 1997, the FCC also ordered significant changes that altered the structure of access charges collected by GTE, -4-
GTE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 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 lines. In aggregate, the reductions in usage sensitive access charges paid by long-distance carriers were offset by new per line charges and the charges paid by end-users. Effective July 1, 1998, GTE further reduced access charges by $120 million in compliance with FCC requirements to restate the impacts of access charge reform and in making its 1998 Annual Filing. GTE's Year 2000 Program, as described in its 1997 Annual Report on Form 10-K, continues. However, due to GTE's recently announced pending acquisition of PRTC, the current estimate for the total cost of remediation for GTE and affiliates is approximately $370 million. As of June 30, 1998, expenditures totaled $135 million. -5-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1998 1997 (In Millions) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 953 $ 551 Receivables, less allowances of $354 and $333 million 4,647 4,782 Inventories and supplies 825 846 Deferred income tax benefits 48 51 Other 352 307 Total Current Assets 6,825 6,537 PROPERTY, PLANT AND EQUIPMENT, at cost 57,822 56,490 Accumulated depreciation (34,403) (32,410) Total Property, Plant and Equipment, net 23,419 24,080 INVESTMENTS AND OTHER ASSETS: Prepaid pension costs 4,639 4,361 Franchises, goodwill and other intangibles, net of accumulated amortization of $759 and $677 million 3,081 3,232 Investments in unconsolidated companies 2,416 2,335 Other assets 1,538 1,597 Total Investments and Other Assets 11,674 11,525 Total Assets $41,918 $42,142 The accompanying notes are an integral part of these statements. -6-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1998 1997 (In Millions) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations, including current maturities $ 3,950 $ 3,398 Accounts payable and accrued expenses 4,302 4,672 Taxes payable 896 771 Dividends payable 470 466 Other 578 534 Total Current Liabilities 10,196 9,841 Long-term debt 14,912 14,494 Employee benefit plans 4,717 4,756 Deferred income taxes 1,390 1,782 Minority interests in equity of subsidiaries 1,989 2,253 Other liabilities 895 978 Total Liabilities 34,099 34,104 SHAREHOLDERS' EQUITY: Common stock - shares issued 987,827,834 and 984,252,887 49 49 Additional paid-in capital 7,721 7,560 Retained earnings 1,968 2,372 Accumulated other comprehensive income (313) (243) Guaranteed ESOP obligations (529) (550) Treasury stock _ 24,585,828 and 26,253,088 shares, at cost (1,077) (1,150) Total Shareholders' Equity 7,819 8,038 Total Liabilities and Shareholders' Equity $41,918 $42,142 The accompanying notes are an integral part of these statements. -7-
GTE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30 1998 1997 (In Millions) Operations Income before extraordinary charges $ 815 $1,336 Adjustments to reconcile income before extraordinary charges to net cash from operations: Depreciation and amortization 1,912 1,933 Special charges 755 - Change in current assets and current liabilities, excluding the effects of acquisitions and dispositions (695) (532) Deferred income taxes and other - net (206) 91 Net cash from operations 2,581 2,828 Investing Capital expenditures (2,548) (2,033) Acquisitions and investments (50) (700) Proceeds from sales of assets 83 17 Other - net 69 (22) Net cash used in investing (2,446) (2,738) Financing Common stock issued 235 162 Purchase of treasury stock - (576) Long-term debt issued 3,479 1,533 Long-term debt and preferred securities retired (1,745) (1,379) Dividends paid (901) (903) Increase (decrease) in short-term obligations, excluding current maturities (764) 1,634 Other - net (37) (17) Net cash provided from financing 267 454 Increase in cash and cash equivalents 402 544 Cash and cash equivalents: Beginning of period 551 405 End of period $ 953 $ 949 Cash paid during the period for: Interest $ 652 $ 531 Income taxes 395 540 The accompanying notes are an integral part of these statements. -8-
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 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 AND SPECIAL CHARGES: During the first quarter of 1998 GTE recorded special charges of $755 million pre-tax, which reduced net income by $482 million, or $.50 per share. The special charges are related to cost reductions, the write- down of HFC test market technologies in GTE's video business, a reserve for the disposition of Airfone assets, and other items. In addition, results for the first half of 1998 include after-tax extraordinary charges totaling $320 million, or $.33 per share, reflecting the discontinuance of regulatory accounting at GTE's Canadian telephone operations, and the redemption of high-coupon debt and preferred stock. (3) COMPREHENSIVE INCOME: Effective January 1, 1998, GTE adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). Comprehensive income includes both net income and other comprehensive income. In accordance with the disclosure requirements of FAS 130, other comprehensive loss for the six months ended June 30, 1998 and 1997 was $(70) million and $(56) million, respectively. Included in other comprehensive income are unrealized gains (losses) on marketable securities and foreign currency translation gains (losses). (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. GTE is currently assessing the impact of adopting SOP 98-1, and intends to implement as of January 1, 1999. -9-
GTE CORPORATION AND SUBSIDIARIES 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. GTE is currently assessing the impact of adopting FAS 133. -10-
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 a report on Form 8-K dated April 2, 1998 under Item 5, "Other Events", and Item 7, "Financial Statements and Exhibits." No financial statements were included with this report. GTE also filed a report on Form 8-K dated April 14, 1998 under Item 7, "Financial Statements and Exhibits." No financial statements were included with this report. In addition, GTE filed a report on Form 8-K dated July 27, 1998 under Item 5, "Other Events", and Item 7, "Financial Statements and Exhibits." No financial statements were included with this report. -11-
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 7, 1998 By Paul R. Shuell ............................. Paul R. Shuell Vice President and Controller Date: August 7, 1998 By Marianne Drost ............................. Marianne Drost Secretary -12-