UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended September 30, 1994
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: 1-6417
GTE CALIFORNIA INCORPORATED
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-0510200
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
One GTE Place, Thousand Oaks, California
91362-3811
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 805-372-
6000
(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
The Company had 69,438,190 shares of $20 stated value common
stock outstanding at October 31, 1994.
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Statements of Income . . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .
. . . . 2
Condensed Consolidated Balance Sheets - Assets . . . . . . .
. . . . 6
Condensed Consolidated Balance Sheets - Liabilities and
Shareholders' Equity . . . . . . . . . . . . . . . . . . .
. . . . 7
Condensed Consolidated Statements of Cash Flows . . . . . . .
. . . . 8
Notes to Condensed Consolidated Financial Statements . . . .
. . . . 9
PART II. OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 11
PART I. FINANCIAL INFORMATION
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 245,632 $ 219,766 $ 716,207 $ 709,308
Network access services 161,271 160,859 491,605 466,332
Long distance services 240,166 262,170 719,620 755,812
Equipment sales and services 42,565 38,718 113,371
123,134
Other 37,021 26,471 70,080 83,764
726,655 707,984 2,110,883 2,138,350
OPERATING EXPENSES:
Cost of sales and services 150,396 170,551 447,368 506,377
Depreciation and amortization 144,632 141,363 432,578
433,805 Marketing, selling, general and
administrative 202,800 217,231 621,274 649,090
497,828 529,145 1,501,220 1,589,272
Net operating income 228,827 178,839 609,663 549,078
OTHER (INCOME) DEDUCTIONS:
Interest expense 28,375 32,123 75,363 98,002
Other - net (1,407) (1,075) (4,016)
(4,476)
INCOME BEFORE INCOME TAXES 201,859 147,791 538,316
455,552
INCOME TAXES 83,843 60,944 220,606 179,916
INCOME BEFORE EXTRAORDINARY
CHARGE 118,016 86,847 317,710
275,636
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF DEBT (net of
income taxes of $13,554) -- 20,214 -- 20,214
NET INCOME $ 118,016 $ 66,633 $ 317,710 $ 255,422
Per share data is omitted since the Company's common stock is 100%
owned by GTE
Corporation (Parent Company).
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income was $118.0 million for the three months and $317.7
million for the nine months ended September 30, 1994 as compared
to $66.6 million and $255.4 million for the same periods in 1993.
Net income for 1993 includes a one-time charge for the enhanced
early retirement and voluntary separation programs recorded in
the second quarter of 1993 and the extraordinary charge related
to the early retirement of debt during the third quarter of 1993.
Excluding these special items, net income increased 36% or $31.2
million for the three months and 7% or $20.8 million for the nine
months ended September 30, 1994 compared to the same periods in
1993. The increases are the result of higher operating income
primarily due to cost control efforts and lower interest expense
due to lower average long-term debt levels and interest rates.
Operating Revenues
Operating revenues increased 3% or $18.7 million for the three
months and decreased 1% or $27.5 million for the nine months
ended September 30, 1994 compared to the same periods in 1993.
Local network service revenues increased 12% or $25.9 million for
the three months and 1% or $6.9 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are primarily due to continued customer growth, as
experienced through an increase in access lines, partially offset
by a rate reduction related to the price cap index and the new
regulatory framework (NRF) review. The three month increase is
also due to a reserve established in the third quarter of 1993
for the price cap index under the NRF.
Network access service revenues remained relatively unchanged for
the three months and increased 5% or $25.3 million for the nine
months ended September 30, 1994 compared to the same periods in
1993. The three month activity consisted of increased minutes of
use which were offset by lower rates. The nine month increase is
due to a large increase in minutes of use driven by natural
disasters in the first half of 1994 partially offset by lower
rates.
Long distance service revenues decreased 8% or $22.0 million for
the three months and 5% or $36.2 million for the nine months
ended September 30, 1994 compared to the same periods in 1993.
The decreases are primarily due to rate reductions related to the
price cap index and NRF review.
2
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and service revenues increased 10% or $3.8
million for the three months and decreased 8% or $9.8 million for
the nine months ended September 30, 1994 compared to the same
periods in 1993. The three month increase is primarily the
result of user fees from the CALNET project, a large government
contract for the installation of a private network between state
office buildings which is nearing completion. The nine month
decrease is primarily the result of a reduction in revenues
related to the Cerritos project, GTE's testing facility in
California for various video services and the CALNET project.
Revenue from the CALNET project is recognized on the percentage
of completion method and revenue recognition has slowed as the
project nears completion.
Other operating revenues increased 40% or $10.6 million for the
three months and decreased 16% or $13.7 million for the nine
months ended September 30, 1994 compared to the same periods in
1993. The increase for the three month period is primarily due
to higher directory advertising revenue as a result of higher
directory sales and lower provisions for uncollectible accounts.
The decrease for the nine month period is primarily due to lower
directory advertising revenue reflecting a change in the timing
of publication dates partially offset by lower provisions for
uncollectible accounts.
Operating Expenses
Operating expenses decreased 6% or $31.3 million for the three
months and 6% or $88.1 million for the nine months ended
September 30, 1994 compared to the same periods in 1993.
Excluding the $34.7 million one-time charge associated with the
enhanced early retirement and voluntary separation programs
recorded in the second quarter of 1993, operating expenses
decreased 3% or $53.4 million for the nine months ended September
30, 1994 compared to the same period in 1993. The decreases are
primarily the result of ongoing quality and cost control programs
and the 1993 reduction in work force.
Restructuring
As previously reported, during the fourth quarter of 1993, the
Company recorded a one-time, pretax restructuring charge of
$445.2 million primarily for incremental costs related to
implementation of its three year re-engineering plan. The re-
engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the
time necessary to introduce new products and services and reduce
costs.
3
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In connection with the re-engineering plan, in the first nine
months of 1994 expenditures of $37.9 million were incurred and
charged to the restructuring reserve. These costs primarily
reflect costs associated with the consolidation of customer
contact, network operations and operator service centers,
separation benefits associated with employee reductions and
incremental expenditures to redesign and streamline processes.
The level of re-engineering activities and related expenditures
are expected to accelerate during the remainder of 1994 and
throughout 1995. There have been no significant changes made to
the overall re-engineering plan as originally reported.
Other (Income) Deductions
Interest expense decreased 12% or $3.7 million for the three
months and 23% or $22.6 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
decreases are due to lower average long-term debt levels and
lower average interest rates. In November 1993, the Company
called $785 million of bonds with rates ranging from 8.5% to 11%
and refinanced these bonds in early 1994 with 5 5/8%, 6 3/4% and
8.07% Debentures.
Income taxes increased 38% or $22.9 million for the three months
and 23% or $40.7 million for the nine months ended September 30,
1994 compared to the same periods in 1993. The increases are
primarily due to higher pretax income and the declining effects
of amortization of deferred investment tax credits.
CAPITAL RESOURCES AND LIQUIDITY
Cash from operating activities for the first nine months of 1994
totaled $647.8 million compared to $747.2 million during the same
period in 1993. The decrease primarily reflects timing
differences in the payment of taxes and the collection of
receivables.
The Company's capital expenditures during the first nine months
of 1994 were $299.5 million compared to $340.0 million during the
same period in 1993, reflecting the Company's continued growth in
access lines, modernization of current facilities and
introduction of new products and services. The Company's
anticipated construction costs for 1994 are approximately $417
million.
Cash used in financing activities was $330.2 million for the
first nine months of 1994 compared to $408.8 million for the same
period in 1993. This included dividend payments of $279.3
million for the first nine months of 1994 compared to $232.9
million for the same period in 1993. Financing activities for
the first nine months of 1994 include the issuance of $850
million of long-term debt to redeem commercial paper issued
during the fourth quarter of 1994 in connection with the
refinancing of high-coupon debt. Proceeds from this debt were
used primarily to reduce short-term borrowings.
4
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Management believes that the Company has adequate internal and
external resources available to meet ongoing operating
requirements for construction of new plant, modernization of
facilities and payment of dividends. The Company generally funds
its construction program from operations although external
financing is available. Short-term borrowings can be obtained
through commercial paper borrowings or borrowings from GTE. In
addition, a $2.8 billion line of credit is available to the
Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs.
OTHER MATTERS
The Company follows the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("FAS
71"). In general, FAS 71 requires companies to depreciate plant
and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon
approvals received from regulators. In the event that
recoverability of these costs becomes unlikely or uncertain,
whether resulting from actual or anticipated increases in
competition or specific regulatory, legislative or judicial
actions, continued application of FAS 71 would no longer be
appropriate. If the Company no longer qualifies for the
provisions of FAS 71, the financial effects of the required
accounting change (which would be non-cash) could be material.
In September 1994, the California Public Utilities Commission
(CPUC) issued a final order in its Implementation Rate Design
(IRD) proceeding. The decision authorizes intraLATA toll
competition (except 1+) in California, effective January 1,
1995. It also permits rate rebalancing that would allow rate
reductions for intralata toll service and access charges while
increasing basic local exchange rates closer to the actual cost
of providing this service. Although the rate rebalancing is
intended to be revenue neutral, its ultimate effect on revenue
will depend, in part, on the extent to which rate reductions
result in increased calling volumes. The decision does not
permit rate increases to compensate for competitive losses. On
October 17, 1994, the Company filed its application for rehearing
of the IRD decision. GTE believes that the CPUC has over-
estimated the calling volume that will be stimulated by reduced
toll rates. At present, however, it is not possible to
accurately quantify the potential effect.
5
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 30,235 $ 6,620
Accounts and notes receivable, less allowances
of $50,538 and $51,980, respectively 515,347 519,170
Materials and supplies, at average cost 39,339 37,361
Deferred income tax benefits 102,340 94,459
Prepayments and other 13,886 15,512
Total current assets 701,147 673,122
PROPERTY, PLANT AND EQUIPMENT:
Original cost 8,333,583 8,215,120
Accumulated depreciation (3,504,343)
(3,252,741)
Net property, plant and equipment 4,829,240 4,962,379
PREPAID PENSION COST 301,513 233,640
OTHER ASSETS 113,359 125,630
TOTAL ASSETS $ 5,945,259 $ 5,994,771
See Notes to Condensed Consolidated Financial Statements.
6
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 137,612 $
693,724
Accounts payable 207,858 232,720
Accrued taxes 70,459 86,299
Accrued interest 25,371 8,746
Accrued payroll and vacations 85,498 81,777
Accrued dividends 91,188 111,046
Accrued restructuring costs and other 290,247 330,950
Total current liabilities 908,233 1,545,262
LONG-TERM DEBT 1,370,029 860,398
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 1,326,777 1,307,201
SHAREHOLDERS' EQUITY:
Preferred stock 81,866 81,866
Common stock 1,388,764 1,388,764
Other capital 2,040 2,040
Reinvested earnings 867,550 809,240
Total shareholders' equity 2,340,220 2,281,910
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,945,259 $
5,994,771
See Notes to Condensed Consolidated Financial Statements.
7
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 317,710 $ 275,636
Adjustments to reconcile income before
extraordinary charge to net cash from
operating activities:
Depreciation and amortization 432,578 433,805
Deferred income taxes and investment
tax credits 9,498 (30,705)
Provision for uncollectible accounts 59,104
64,324
Changes in current assets and current
liabilities (116,696)
4,239
Other - net (54,430)
(82) Net cash from
operating activities 647,764 747,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (299,537)
(340,023)
Other - net 5,603 9,758
Net cash used in investing activities (293,934)
(330,265)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 840,406 149,601
Long-term debt retired (85,400)
(176,333)
Dividends paid to shareholders (279,258)
(232,870)
Decrease in short-term debt (805,963)
(149,177)
Net cash used in financing activities (330,215)
(408,779)
Increase in cash and cash equivalents 23,615 8,173
Cash and cash equivalents at beginning of period 6,620
12,768
Cash and cash equivalents at end of period $ 30,235 $
20,941
See Notes to Condensed Consolidated Financial Statements.
8
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion
of management of the Company, the condensed consolidated
financial statements include all adjustments, which consist only
of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Company's 1993 Annual Report to Shareholders incorporated by
reference in the Annual Report on Form 10-K.
(2) Effective January 1, 1994, pursuant to its agreement with
the California Public Utilities Commission (CPUC) and its normal
annual price cap filing, the Company reduced its rates by
approximately $100 million on an annual basis.
(3) On April 20, 1994 the CPUC issued a decision giving final
approval to the merger of Contel of California, Inc. into the
Company. The decision requires the merging companies to flow
through to their ratepayers all of the estimated savings that
will be produced from the merger. This flow through requirement
is based on the CPUC's interpretation of certain statutory
requirements. The CPUC, however, provided the parties with the
opportunity to supplement the evidentiary record to show why the
estimated merger savings should be apportioned between ratepayers
and shareholders. That filing was made on April 29, 1994. By
making the filing, the effective date of the decision approving
the merger has been delayed. The Company and other interested
parties have filed reports and comments pursuant to this
proceeding. The Company expects that the Commission will make a
determination in late 1994 as to whether the merger proceeding
will be reopened.
(4) During the third quarter of 1993, the Company called $785
million of high-coupon first-mortgage bonds. As a result, a
pretax extraordinary charge of $33.8 million was recorded to
reflect the expenses of calling these bonds. The after-tax
extraordinary charge amounted to $20.2 million.
(5) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
9
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
third
quarter of 1994.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
GTE CALIFORNIA INCORPORATED
(Registrant)
Date: November 10, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 30,235
<SECURITIES> 0
<RECEIVABLES> 565,885
<ALLOWANCES> 50,538
<INVENTORY> 39,339
<CURRENT-ASSETS> 701,147
<PP&E> 8,333,583
<DEPRECIATION> 3,504,343
<TOTAL-ASSETS> 5,945,259
<CURRENT-LIABILITIES> 908,233
<BONDS> 1,370,029
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 869,590
<TOTAL-LIABILITY-AND-EQUITY> 5,945,259
<SALES> 2,110,883
<TOTAL-REVENUES> 2,110,883
<CGS> 447,368
<TOTAL-COSTS> 1,501,220
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,363
<INCOME-PRETAX> 538,316
<INCOME-TAX> 220,606
<INCOME-CONTINUING> 317,710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 317,710
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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