<PAGE> 1
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, 1995
-----------------------------------------------------------
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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
-----------------------------
- --------------------------------------------------------------------------------
(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 par value common stock outstanding at
September 30, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
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,
---------------------------- ---------------------------
1995 1994 1995 1994
---------- ----------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 309,220 $ 245,632 $ 937,136 $ 716,207
Network access services 175,714 161,271 532,650 491,605
Long distance services 119,179 240,166 335,239 719,620
Equipment sales and services 39,150 42,565 118,246 113,371
Other 46,808 37,021 93,707 70,080
---------- ---------- ---------- ----------
690,071 726,655 2,016,978 2,110,883
---------- ---------- ---------- ----------
Operating expenses:
Cost of sales and services 254,962 262,953 779,399 783,770
Depreciation and amortization 152,275 144,632 448,035 432,578
Selling, general and administrative 102,398 90,794 304,640 287,374
---------- ---------- ---------- ----------
509,635 498,379 1,532,074 1,503,722
---------- ---------- ---------- ----------
Net operating income 180,436 228,276 484,904 607,161
---------- ---------- ---------- ----------
Interest expense - net 24,836 26,417 75,159 68,845
---------- ---------- ---------- ----------
Income before income taxes 155,600 201,859 409,745 538,316
Income taxes 65,424 83,843 171,030 220,606
---------- ---------- ---------- ----------
Net income $ 90,176 $ 118,016 $ 238,715 $ 317,710
========== ========== ========== ==========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 3
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 90.2 $ 118.0 $ 238.7 $ 317.7
</TABLE>
Net income decreased 24% or $27.8 and 25% or $79.0 for the three and nine
months ended September 30, 1995, respectively, compared to the same periods in
1994. These decreases are the result of lower operating income primarily due
to decreases in operating revenues associated with the Implementation Rate
Design (IRD) discussed below.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in long distance services (without
customer pre-subscription) became effective in California. The order also
provided for rate rebalancing with significant rate reductions for long
distance services and network access services while increasing basic local
network services rates closer to the actual cost of providing such service.
Although the CPUC intended for the rate rebalancing to be revenue neutral, its
ultimate effect on total revenues is dependent, in part, on the extent to which
long distance services rate reductions result in increased calling volumes. In
the first nine months of 1995, total revenues decreased by approximately $148.0
as a result of the implementation of this order.
OPERATING REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Local network services $ 309.2 $ 245.6 $ 937.1 $ 716.2
Network access services 175.7 161.3 532.7 491.6
Long distance services 119.2 240.2 335.2 719.6
Equipment sales & services 39.2 42.6 118.3 113.4
Other 46.8 37.0 93.7 70.1
----------- ----------- ----------- -----------
Total operating revenues $ 690.1 $ 726.7 $ 2,017.0 $ 2,110.9
</TABLE>
Operating revenues decreased 5% or $36.6 and 4% or $93.9 for the three and nine
months ended September 30, 1995, respectively, compared to the same periods in
1994.
Local network services revenues increased 26% or $63.6 and 31% or $220.9 for
the three and nine months ended September 30, 1995, respectively, compared to
the same periods in 1994. These increases are primarily the result of $70.4 and
$206.6 in rate increases associated with the IRD for the three and nine months
ended September 30, 1995, respectively. The number of access lines increased
3% for the three and nine months ended September 30, 1995, compared to the same
periods in 1994. This growth generated additional revenues of $3.5 and $10.9,
respectively. The three and nine month increases are partially offset by $3.0
and $8.1 reductions in revenues, respectively, due to more customers electing
measured usage rate plans. The three and nine month increases are also
partially offset by a $4.2 reduction in revenues associated with the refund of
installation charges to customers.
2
<PAGE> 4
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access services revenues increased 9% or $14.4 and 8% or $41.1 for the
three and nine months ended September 30, 1995, compared to the same periods in
1994. Minutes of use increased 5% and 7% for the three and nine months ended
September 30, 1995, respectively, compared to the same periods in 1994. These
increases generated additional revenues of $3.8 and $18.3, respectively.
The increase in network access services revenues for the three months ended
September 30, 1995 is primarily due to $7.9 of additional revenues associated
with the IRD and the increase in minutes of use. The three month increase is
also due to the net effect of the May and August 1995 interstate rate changes
that resulted in $5.0 of additional revenues associated with the FCC Price Cap,
as mentioned in Other Matters. The three month increase is partially offset by
a $4.7 reduction in interstate access revenues associated with affiliate audit
price reductions.
The increase in network access services revenues for the nine months ended
September 30, 1995 is primarily due to $22.1 in nonrecurring favorable carrier
settlement activities recorded in the first quarter of 1995, reflecting a
switched access meet point billing settlement with Pacific Bell for the period
January 1, 1990 through December 31, 1994. In addition, the nine month
increase is due to $10.5 of additional revenues associated with the IRD, $7.7
of additional revenues related to the May and August 1995 interstate rate
changes discussed above and the increase in minutes of use. The nine month
increase is partially offset by a $14.2 reduction in interstate access revenues
associated with affiliate audit price reductions.
Long distance services revenues decreased 50% or $121.0 and 53% or $384.4 for
the three and nine months ended September 30, 1995, respectively, compared to
the same periods in 1994. These decreases are primarily the result of $123.3
and $372.1 in rate reductions associated with the previously mentioned IRD for
three and nine months ended September 30, 1995, respectively.
Equipment sales and services revenues decreased 8% or $3.4 and increased 4% or
$4.9 for the three and nine months ended September 30, 1995, respectively,
compared to the same periods in 1994. The three month decrease is primarily
due to $4.6 of lower Telephone Sales and Services (TSS) revenues and $0.6 of
lower billing and collection revenues, partially offset by a $1.8 increase in
revenues associated with growth in voice messaging. The nine month increase is
primarily due to an $8.7 increase in revenues due to growth in voice messaging,
increases in radio paging revenues and increases in billing and collection
revenues. The nine month increases are partially offset by $5.1 of lower TSS
revenues.
Other operating revenues increased 26% or $9.8 and 34% or $23.6 for the three
and nine months ended September 30, 1995, respectively, compared to the same
periods in 1994. The three month increase is primarily due to a $2.3 increase
in revenues associated with the IRD, a $1.6 growth in operator services
revenues, a $2.5 increase in billing and collection revenues and $1.6 of lower
provisions for uncollectible accounts. The nine month increase is primarily
due to a $6.9 increase in revenues associated with the IRD, a $5.6 increase in
operator services revenues, a $5.1 increase in billing and collection revenues
and a $3.7 increase in the collections of late payment fees.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
1995 1994 1995 1994
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Operating expenses $ 509.6 $ 498.4 $ 1,532.1 $ 1,503.7
</TABLE>
Operating expenses increased 2% or $11.2 and 2% or $28.4 for the three and
nine months ended September 30, 1995, respectively, compared to the same
periods in 1994.
3
<PAGE> 5
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The increase in operating expenses for the three months ended September 30,
1995, is primarily due to a $7.6 increase in depreciation primarily associated
with additions to plant balances and an $11.5 increase in digital switching
software upgrades. The increase is also due to $15.5 of access charge payments
to other LECs for intraLATA toll calls that are originated by the Company and
terminated by another LEC. As part of the CPUC-ordered rate rebalancing,
effective January 1, 1995 the Company transitioned to an Originating
Responsibility Plan (ORP) for intraLATA access settlement arrangements. These
increases are partially offset by $11.6 of lower labor and benefits costs
associated with the Company's re-engineering plan, $3.5 of lower data
processing costs and a $1.2 increase in pension income.
The increase in operating expenses for the nine months ended September 30,
1995, is primarily due to a $16.9 increase in labor charges related to flood
damage incurred during the first quarter of 1995, a $15.5 increase in
depreciation primarily associated with additions to plant balances, an $8.3
increase in digital switching software upgrades and $12.5 of higher costs
associated with uncollectible interexchange carrier receivables. The increase
is also due to $36.6 of access charge payments under the ORP, as mentioned
above. These increases are partially offset by $25.6 of lower labor and
benefit costs associated with the previously mentioned re-engineering plan,
$5.0 of costs incurred during 1994 related to earthquake damage, a $4.9
settlement gain recorded in the second quarter of 1995 which resulted from
lump-sum payments from the Company's pension plans and $2.9 of insurance
proceeds received in 1995 that were related to 1994 earthquake damage. The
increases are also partially offset by $10.7 of lower data processing costs and
a $12.0 increase in pension income.
OTHER DEDUCTIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest expense - net $ 24.8 $ 26.4 $ 75.2 $ 68.8
Income taxes 65.4 83.8 171.0 220.6
</TABLE>
Interest expense - net decreased 6% or $1.6 for the three months and increased
9% or $6.4 for the nine months ended September 30, 1995, compared to the same
periods in 1994. The increase for the nine months ended September 30, 1995 is
primarily due to higher average long-term debt levels compared to the same
period in 1994.
Income taxes decreased 22% or $18.4 and 22% or $49.6 for the three and nine
months ended September 30, 1995, respectively, compared to the same periods in
1994. These increases are primarily due to corresponding decreases in pretax
income.
CAPITAL RESOURCES AND LIQUIDITY
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, at September
30, 1995, a $3,490 line of credit was available to the Company through shared
lines of credit with GTE and other affiliates to support short- term financing
needs.
4
<PAGE> 6
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's primary source of funds during the first nine months of 1995 was
cash from operations of $615.8 compared to $ 648.5 for the same period in 1994.
The year-to-year decrease in cash from operations is the result of lower
results from operations, partially offset by a decrease in working capital,
primarily accounts receivable. Cash from operations is also being utilized to
fund the Company's re-engineering plan.
The Company's capital expenditures during the first nine months of 1995 were
$293.1 compared to $294.7 for the same period in 1994. The 1995 expenditures
reflect the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services, including
broadband digital services and switched digital services. The Company
anticipates construction costs for 1995 to approximate capital expenditures of
$467.9 incurred during 1994.
Cash used in financing activities was $336.3 during the first nine months of
1995 compared to $ 330.2 for the same period in 1994. The Company retired
$35.3 in long-term debt during the first nine months of 1995 compared to $85.4
for the same period in 1994. Cash used in financing activities also included
dividend payments of $262.1 in the first nine months of 1995 compared to $279.3
for the same period in 1994. External financing included long-term borrowings
of $840.4 during the first nine months of 1994. Proceeds from these borrowings
were used primarily to reduce short-term debt.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $445.2, which reduced net income by $274.2, primarily
for incremental costs related to implementation of the Company's 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 further reduce costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. Expenditures of $202.5 have been made since
inception of the re-engineering plan, including $89.1 during the first nine
months of 1995. These expenditures were primarily associated with the
consolidation of customer contact, network operations and operator service
centers, separation benefits associated with workforce reductions and
incremental expenditures to redesign and streamline processes. There have been
no significant changes made to the overall re-engineering plan as originally
reported. As of September 30, 1995, $242.7 remains in the restructuring
reserve which management believes is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs), including the Company,
for their 1995 Annual Price Cap Filing. The interim rules allowed LECs to
select from three productivity/sharing options for each tariff entity. Each of
the three options reflected an increase to the 3.3% productivity factor used
since 1991. The Company selected a 4.0% productivity factor for use in the
1995- 1996 tariff year. The Company must share with customers 50% of returns
over a 12.25% ROR and up to a 13.25% ROR, and share with customers 100% of
returns over a 13.25% ROR. Since the Company's access fees were priced
significantly below the FCC's maximum price, the Company was permitted to file
tariffs effective May 24, 1995 to increase rates $26.0, annually. In addition,
the Company filed tariffs effective August 1, 1995 under the interim rules to
reduce rates $21.4, annually. On September 20, 1995, the FCC released its
proposed rulemaking proceeding on price caps which proposes specific changes to
reflect and encourage emerging competition in local and access services markets
and to establish the path towards decreased regulation of LECs' services. On
September 27, 1995, the FCC solicited comments on a number of specific issues
regarding methods for establishing the price caps, such as productivity
measurements, sharing, the common line formula and exogenous costs. The
Company anticipates the FCC will issue an order prior to the July 1996 annual
filing.
5
<PAGE> 7
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In April 1995, GTE filed a motion with the U.S. District Court for the District
of Columbia to remove the 1984 Consent Decree, which restricts the manner in
which the Company can provide interLATA services. GTE believes that the
Consent Decree is no longer required since GTE has since divested its interests
in the entities whose purchase gave rise to the Consent Decree.
In May 1995, the FCC approved GTE's applications to construct a new fiber optic
and coaxial-cable video network in four markets, including Ventura County,
California. GTE expects to submit tariffs that set the rates for use of its
video network to the FCC for approval and to initiate construction during the
fourth quarter of 1995 with full deployment over the next two to three year
period.
In December 1994, the CPUC issued a decision which adopts an initial procedural
plan to facilitate opening local exchange telecommunications markets to
competition by January 1, 1997. On April 26, 1995, the CPUC issued a formal
rulemaking proceeding and investigation as a procedural vehicle to develop and
adopt rules for local competition. The rulemaking document contained proposed
interim rules that would authorize competitive LECs to seek authority to offer
local exchange services beginning in June 1995. The parties filed comments on
the proposed rules on May 24, 1995. The Company's comments asserted the need
for evidentiary hearings to address critical issues such as regulatory parity
and interconnection prior to the authorization of local competition. On July
19, 1995 the CPUC issued interim Universal Service rules and obligations as a
precursor to local competition. The CPUC concurrently commenced a proceeding
to examine, and revise as appropriate, the intrastate price cap regulation by
January 1, 1996.
The CPUC issued interim rules for local competition on July 24, 1995 which
permit facilities-based local competition on January 1, 1996, with resale
authority granted two months later. On September 1, 1995, the Company filed
with the CPUC for a certificate of public convenience and necessity (CPCN)
which would enable the Company to compete within certain Pacific Bell
franchised service areas to provide customers with facilities-based and
resale-based local exchange services, high-speed digital private line services,
and intraLATA toll services. Pacific Bell has made a similar filing seeking a
CPCN. Approximately 64 other carriers have requested authority to provide
facilities-based and /or resale- based local exchange service. The majority of
these carriers requested authority to compete in both GTE and Pacific Bell
service territories. Several regulatory proceedings are underway in California
to determine terms and conditions for resale of GTE local services, to consider
additional pricing flexibility under the CPUC's New Regulatory Framework (NRF),
to modify the NRF to reflect the new competitive marketplace and to establish
rules for Universal Service funding.
Also on September 1, 1995, the Company and Pacific Bell filed a joint motion
requesting the CPUC to modify the IRD decision to reflect the actual increase
in calling being experienced as a result of the toll and switched access price
decreases ordered in IRD. The estimated calling stimulation contained in the
IRD decision has proven to be far in excess of what the market is experiencing.
The recovery mechanism proposed by the Company in the joint motion would
increase some discrete rates that were proposed by the Company in IRD but not
adopted, with the remainder being recovered via an increase in the surcharge
mechanism. It is not known when the CPUC will issue a decision on this matter.
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 required
the merging companies to flow through to their ratepayers all of the estimated
savings that would be produced from the merger. 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. On October 5, 1995, the
Governor of the State of California signed a law which clarifies the authority
of the CPUC to allocate utility merger benefits between ratepayers and
shareholders, with not less than 50% going to ratepayers. A final CPUC
decision on the allocation of merger benefits is expected in early 1996.
6
<PAGE> 8
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Federal telecommunications legislation has been passed by both the Senate and
House of Representatives. The bills must now be reconciled by the joint
Senate/House conference committee.
Recent legislative, judicial and regulatory developments, as well as the pace
of technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and cellular telephone
companies. Competition from LECs, interexchange carriers, wireless and cable
TV companies, as well as more recent entry by media and computer companies, is
expected to increase in the rapidly changing telecommunications marketplace.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
REGULATORY ACCOUNTING
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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $450 and $650. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
7
<PAGE> 9
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 35,035 $ 43,118
Accounts and notes receivable, less allowances of
$49,973 and $38,537, respectively 511,074 572,310
Materials and supplies 35,806 40,303
Deferred income tax benefits 73,122 78,924
Prepayments and other 25,009 18,152
------------ -------------
Total current assets 680,046 752,807
------------ -------------
Property, plant and equipment:
Original cost 8,598,499 8,420,252
Accumulated depreciation (3,911,731) (3,582,965)
------------ -------------
Net property, plant and equipment 4,686,768 4,837,287
------------ -------------
Prepaid pension costs 406,463 323,979
------------ -------------
Other assets 147,700 153,571
------------ -------------
Total assets $ 5,920,977 $ 6,067,644
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 10
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Short-term debt, including current maturities $ 198,173 $ 272,199
Accounts payable 170,156 278,211
Accrued taxes 140,804 90,676
Accrued interest 22,804 24,478
Accrued payroll and vacations 95,614 89,918
Accrued dividends 82,726 133,402
Accrued restructuring costs and other 266,016 240,913
------------- -------------
Total current liabilities 976,293 1,129,797
------------- -------------
Long-term debt 1,280,541 1,280,157
------------- -------------
Reserves and deferred credits:
Deferred income taxes 728,370 739,984
Employee benefit obligations 97,147 36,983
Restructuring costs and other 487,494 556,900
------------- -------------
Total reserves and deferred credits 1,313,011 1,333,867
------------- -------------
Shareholders' equity:
Preferred stock 81,866 81,866
Common stock 1,388,764 1,388,764
Other capital 2,040 2,040
Reinvested earnings 878,462 851,153
------------- -------------
Total shareholders' equity 2,351,132 2,323,823
------------- -------------
Total liabilities and shareholders' equity $ 5,920,977 $ 6,067,644
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
9
<PAGE> 11
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1995 1994
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 238,715 $ 317,710
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 448,035 432,578
Deferred income taxes 14,032 10,192
Provision for uncollectible accounts 55,975 59,105
Changes in current assets and current liabilities (118,547) (127,533)
Other - net (22,387) (43,529)
------------- -------------
Net cash from operating activities 615,823 648,523
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (293,060) (294,693)
Other - net 5,469 --
------------- -------------
Net cash used in investing activities (287,591) (294,693)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued -- 840,406
Long-term debt retired (35,280) (85,400)
Dividends paid to shareholders (262,082) (279,258)
Net change in affiliate notes 14,126 9,645
Decrease in short-term debt (53,079) (815,608)
------------- -------------
Net cash used in financing activities (336,315) (330,215)
------------- -------------
Increase (decrease) in cash (8,083) 23,615
Cash at beginning of period 43,118 6,620
------------- -------------
Cash at end of period $ 35,035 $ 30,235
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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 1994
Annual Report on Form 10-K.
(2) 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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $450 and $650. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
(3) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
11
<PAGE> 13
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) GTE California Incorporated filed a report on Form 8-K dated
September 28, 1995 on October 2, 1995, under Item 5 "Other
Events". No financial statements were filed with this report.
12
<PAGE> 14
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: October 31, 1995 William M. Edwards, III
---------------------- --------------------------------
William M. Edwards, III
Controller
(Chief Accounting Officer)
13
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 35,035
<SECURITIES> 0
<RECEIVABLES> 561,047
<ALLOWANCES> 49,973
<INVENTORY> 35,806
<CURRENT-ASSETS> 680,046
<PP&E> 8,598,499
<DEPRECIATION> 3,911,731
<TOTAL-ASSETS> 5,920,977
<CURRENT-LIABILITIES> 976,293
<BONDS> 1,280,541
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 880,502
<TOTAL-LIABILITY-AND-EQUITY> 5,920,977
<SALES> 2,016,978
<TOTAL-REVENUES> 2,016,978
<CGS> 779,399
<TOTAL-COSTS> 1,532,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,159
<INCOME-PRETAX> 409,745
<INCOME-TAX> 171,030
<INCOME-CONTINUING> 238,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,715
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
