<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 1-6417
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 formal 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
July 31, 1996. 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 Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------- -------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Local services $ 324,395 $ 315,133 $ 634,036 $ 627,916
Network access services 186,771 167,588 363,787 356,936
Toll services 114,187 110,056 224,195 216,060
Other services and sales 70,048 88,590 134,851 165,216
------------- -------------- ------------- -------------
Total revenues and sales 695,401 681,367 1,356,869 1,366,128
------------- -------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 239,023 263,467 505,222 517,700
Selling, general and administrative 147,475 137,986 242,395 248,200
Depreciation and amortization 152,007 148,066 303,769 295,760
------------- -------------- ------------- -------------
Total operating costs and expenses 538,505 549,519 1,051,386 1,061,660
------------- -------------- ------------- -------------
OPERATING INCOME 156,896 131,848 305,483 304,468
OTHER (INCOME) EXPENSES:
Interest - net 22,899 24,902 46,348 50,323
Other - net 365 -- (1,123) --
------------- -------------- ------------- -------------
INCOME BEFORE INCOME TAXES 133,632 106,946 260,258 254,145
Income taxes 53,930 46,310 103,326 105,606
------------- -------------- ------------- -------------
NET INCOME $ 79,702 $ 60,636 $ 156,932 $ 148,539
============= ============== ============= =============
</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 Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income $ 79.7 $ 60.6 $ 156.9 $ 148.5
</TABLE>
Net income increased 32% or $19.1 and 6% or $8.4 for the three and six months
ended June 30, 1996, respectively, compared to the same periods in 1995. The
increases are primarily associated with revenue growth and lower operating
costs and expenses. In addition, favorable revenue adjustments recorded in the
second quarter of 1996 were primarily offset by nonrecurring settlement
activity recorded in the first quarter of 1995.
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Local services $ 324.4 $ 315.1 $ 634.0 $ 627.9
Network access services 186.8 167.6 363.8 356.9
Toll services 114.2 110.1 224.2 216.1
Other services and sales 70.0 88.6 134.9 165.2
-------------- ------------- ------------- -------------
Total revenues and sales $ 695.4 $ 681.4 $ 1,356.9 $ 1,366.1
</TABLE>
Total revenues and sales increased 2% or $14 and decreased 1% or $9.2 for the
three and six months ended June 30, 1996, respectively, compared to the same
periods in 1995.
Local service revenues increased 3% or $9.3 and 1% or $6.1 for the three and
six months ended June 30, 1996, respectively, compared to the same periods in
1995.
The increase in local service revenues for the three months ended June 30, 1996
is primarily because of a favorable ruling by the California Public Utilities
Commission (CPUC), associated with the Implementation Rate Design (IRD), which
entitled the Company to a retroactive local service revenue adjustment of
$28.7. This increase was recorded in June 1996 and is partially offset by a
$15.2 revenue reduction associated with the Company's 1996 California Price Cap
Index (PCI) as discussed in Other Matters. In addition, revenue growth of $7.8
related to a 4% increase in switched access lines was offset by a $9.2
reduction in revenues associated with customers electing measured usage rate
plans and a $2 decline in directory assistance and operator service revenues.
The increase in local service revenues for the six months ended June 30, 1996
is primarily because of the favorable IRD ruling mentioned above, which is
partially offset by the 1996 PCI revenue reduction also mentioned above. In
addition, revenue growth of $15.8 related to a 4% increase in switched access
lines was offset by a $12.1 reduction in revenues associated with customers
electing measured usage rate plans and a $5.6 decline in directory assistance
and operator service revenues.
2
<PAGE> 4
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Network access service revenues increased 11% or $19.2 and 2% or $6.9 for the
three and six months ended June 30, 1996, respectively, compared to the same
periods in 1995. Minutes of use increased 9% for both the three and six months
ended June 30, 1996, which generated additional revenues of $4.2 and $13.5,
respectively. The increases also reflect $7.1 and $9.8 increases in special
access revenues associated with growth in special access lines. The six month
increase is offset by $22.1 of nonrecurring favorable carrier settlement
activities recorded in the first quarter of 1995, the most significant of which
was a switched access meet point billing settlement with Pacific Bell for the
period January 1, 1990 through December 31, 1994. In addition, $4.3 and $3.2 of
other favorable meet point billing revenues were recognized for the three and
six months ended June 30, 1996, respectively.
Toll service revenues increased 4% or $4.1 and 4% or $8.1 for the three and six
months ended June 30, 1996, respectively, compared to the same periods in 1995.
The increase in toll service revenues for the three months ended June 30, 1996
is driven by an increase in toll volume, which is offset by a reduction in
revenues primarily resulting from effective price reductions as customers
elected to use optional discount calling plans. The increase is also
attributable to a favorable ruling by the CPUC, associated with the IRD, which
entitled the Company to a retroactive toll service revenue adjustment of $10.8.
In addition, a $1.7 increase in revenues resulted from residential and business
800 services. These increases are partially offset by a $5.9 revenue reduction
associated with the Company's 1996 PCI mentioned above and $4.9 of other
unfavorable revenue reductions associated with the annual California rate
index.
The increase in toll service revenues for the six months ended June 30, 1996 is
driven by an increase in toll volume, which is offset by a reduction in
revenues primarily resulting from effective price reductions as customers
elected to use optional discount calling plans. The increase is also
attributable to a $10.8 increase in revenues related to the IRD adjustment
mentioned above and a $4.6 increase in revenues from residential and business
800 services. In addition, a $4.1 increase in revenues resulted from
unfavorable revenue adjustments recorded in the first quarter of 1995. These
increases are partially offset by a $5.9 revenue reduction associated with the
Company's 1996 PCI mentioned above and $3.8 of other unfavorable revenue
reductions associated with the annual California rate index.
Other services and sales revenues decreased 21% or $18.6 and 18% or $30.3 for
the three and six months ended June 30, 1996, respectively, compared to the
same periods in 1995. These decreases are primarily due to lower directory
advertising revenues of $12.8 and $11.9 for the three and six month periods,
respectively, related to timing of directory publications and lower equipment
sales of $6.9 and $7.7. In addition, losses of $9.5 were incurred to complete
the State of California's telecommunications network (CALNET) project during
the first quarter of 1996.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total operating costs and expenses $ 538.5 $ 549.5 $ 1,051.4 $ 1,061.7
</TABLE>
Total operating costs and expenses decreased 2% or $11 and 1% or $10.3 for the
three and six months ended June 30, 1996, respectively, compared to the same
periods in 1995.
3
<PAGE> 5
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The decrease in operating costs and expenses for the three months ended June
30, 1996 is primarily due to an $8.5 reduction in labor and benefit costs
associated with the Company's re-engineering plan and a $4.9 decrease in costs
reflecting labor charges recorded in the second quarter of 1995, which were
related to flood damage incurred during the first quarter of 1995. The decrease
is also attributable to a $5.8 reduction in data processing costs. In addition,
the decrease partially reflects a $4.4 reduction in material costs and a $1.7
reduction in uncollectible charges related to calling card calls. These
decreases are partially offset by a $3.9 increase in depreciation expense
associated with additions to plant balances and a settlement gain of $4.9
recorded in the second quarter of 1995, which resulted from lump sum payments
from the Company's pension plans. The company also recorded in the second
quarter of 1996, an $11.3 charge related to the Customer Notification and
Education Plan (CNEP), which is a CPUC regulated program to educate consumers
about Caller ID, blocking options and related privacy issues.
The decrease in operating costs and expenses for the six months ended June 30,
1996 is primarily due to a $22.2 reduction in labor and benefit costs
associated with the Company's re-engineering plan and a $16.9 decrease in labor
charges related to the 1995 flood damages mentioned above. The decrease is also
attributable to a $6 reduction in data processing costs. The impact of $9.6 in
pension settlement gains recorded in the first quarter of 1996 was partially
offset by $4.9 of settlement gains recorded in the second quarter of 1995 which
resulted from lump sum payments from the Company's pension plans. In addition,
the decrease partially reflects a reduction in uncollectible charges related to
calling card calls. These decreases are partially offset by an $8 increase in
depreciation expense associated with additions to plant balances, $16.6 of
application software amortization and $11.3 associated with the CNEP mentioned
above.
Other (Income) Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest - net $ 22.9 $ 24.9 $ 46.3 $ 50.3
Other - net 0.4 -- (1.1) --
Income taxes 53.9 46.3 103.3 105.6
</TABLE>
Interest - net decreased 8% or $2 and 8% or $4 for the three and six months
ended June 30, 1996, respectively, compared to the same periods in 1995,
primarily due to lower average short-term debt levels and the favorable effects
of the long-term debt refinancing program completed in May 1996.
Other - net for the six months ended June 30, 1996 includes a $1.2 pre-tax gain
resulting from the sale of a parcel of land.
Income taxes increased 16% or $7.6 and decreased 2% or $2.3 for the three and
six months ended June 30, 1996, respectively, compared to the same periods in
1995. The three month increase is primarily due to a corresponding increase in
pre-tax income, and the six month decrease is mainly the result of prior year
tax adjustments.
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. As of
4
<PAGE> 6
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
July 1, 1996, the Company participated with other affiliates in a $1,500
syndicated line of credit to back up commercial paper borrowings. Through this
shared arrangement the Company can issue up to $500 of commercial paper.
The Company's primary source of funds during the first six months of 1996 was
cash from operations of $574.4 compared to $424.7 for the same period in 1995.
The year-to-year increase is primarily due to improved results of operations,
enhanced accounts receivable collection and the favorable timing of tax
payments. Cash from operations is also being utilized to fund the Company's
re-engineering plan.
The Company's capital expenditures during the first six months of 1996 were
$153.7 compared to $183.6 for the same period in 1995. The declining
requirement for modernization of current facilities continues to offset the
expenditures associated with continued growth in access lines and the
introduction of new products and services, including broadband digital
services. Future capital expenditures related to the deployment of broadband
video networks will be incurred by Media Ventures Incorporated, a separate
subsidiary of GTE (see discussion in Other Matters). However, the Company
anticipates capital expenditures for the remainder of 1996 to increase from the
1995 level, reflecting anticipated growth.
In December 1995, the Company entered into an agreement to sell a parcel of
land. By June 1996, the total proceeds of $12.5 related to this sale were
received. The Company recognized a pre-tax gain of $1.2 as a result of this
sale.
Cash used in financing activities was $424.7 during the first six months of
1996 compared to $274.7 for the same period in 1995. This included dividend
payments of $188.5 in the first six months of 1996 compared to $193.8 for the
same period in 1995. The Company issued $100 of 7% debentures in May 1996 to
refinance the debt called and redeemed in the fourth quarter of 1995. Financing
activities also included a decrease in short-term debt of $339.4 for the first
six months of 1996, compared to $45.7 for the same period in 1995, reflecting a
reduction in commercial paper partially from the proceeds of the long-term debt
issuance.
During 1995, the Company entered into forward contracts to sell $75 of U.S.
Treasury bonds in order to hedge against future changes in market interest
rates related to debt that was called and redeemed by the Company during the
fourth quarter of 1995, and subsequently refinanced in May 1996. A gain of
approximately $5 occurred upon the settlement of the forward contracts and will
be amortized over the life of the associated refinanced debt as an offset to
interest expense.
OTHER MATTERS
In connection with the re-engineering plan, during the first six months of
1996, costs of approximately $37.2 have been incurred, including $30 to
re-engineer customer service processes and $7.2 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $278 have been incurred, including $184 to re-engineer customer
service processes and $41.5 to re-engineer administrative processes. The
restructuring costs also include $52.5 to consolidate facilities and operations
and other related costs. These expenditures were primarily associated with the
closure and relocation of various service centers, software enhancements and
separation benefits associated with employee reductions. Implementation of the
re-engineering plan is expected to be substantially completed by the end of
1996. As of June 30, 1996, $167.2 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
On August 1, 1996, the Federal Communications Commission (FCC) voted to release
its rules implementing Section 251 of the Telecommunications Act of 1996 (the
Telecommunications Act) dealing with interconnection, unbundling of network
elements and wholesale prices and other terms for competitive entry into
local-exchange service (Competitive Entry Terms). The terms of the FCC's
Report and Order (Order) were published on August 8, 1996, and GTE is in the
process of reviewing the Order.
The Order acknowledges that the Telecommunications Act calls for negotiation of
terms and prices for Competitive Entry Terms between the local-exchange carrier
(LEC) and the competing carriers. The Order, among other things, prescribes
the rules for interconnection of a LEC's facilities with those of carriers
competing in the local-exchange market and the pricing methodology to be used
by states in establishing interconnection rates. The FCC methodology calls for
the states to use forward-looking costs defined as Total Element Long Run
Incremental Cost (TELRIC), including a reasonable amount of forward-looking
joint and common costs. State regulatory commissions are to establish the
appropriate prices based on this methodology. The FCC also identified network
elements to be unbundled and priced by the states using the same TELRIC plus
reasonable joint and common costs. Proxy prices for the various network
elements are set out and may be used by states which have not approved cost
studies by statutory deadlines for completing any arbitration of issues
unresolved by negotiation between the LEC and other carriers. Access to the
unbundled elements are to be at technically feasible points.
Additionally, the Order mandated use of a method of determining a LEC's avoided
costs for purposes of resale rates. States are to determine the specific rates
using this methodology but, on an interim basis, may instead elect to use a
default range of rates established by the FCC. The default discount rates
range from 17% - 25% off retail rates.
To continue to support universal service, the FCC established a temporary
access framework. A competitor purchasing local service for resale or
providing only long distance service must pay full current access rates. If
unbundled local switching is purchased, the competitor must pay 75% of the
existing Transport Interconnection Charge and all of the existing Carrier
Common Line Charge. A competitor providing its own switching facility pays no
access charges even if it purchases an unbundled loop from a LEC.
The Order also provides for mutual compensation for interconnection but
presumes calling will be balanced and permits "bill and keep" arrangements. If
the LEC demonstrates calling is not balanced, interconnection prices are to be
set by the state for both carriers at the LEC's forward-looking costs.
GTE is still reviewing the impact of the approximately 700-page Order. In
addition, the FCC is scheduled to release additional rules relating to
universal service and access charge reform in the second quarter of 1997.
Until all the rules have been issued, it is difficult to determine the effect
on GTE. However, GTE has concerns about the Order as it relates to the ability
of a local-exchange carrier to recover all of its present costs from its
ongoing retail customers and the wholesale prices to be set by state regulatory
agencies pursuant to the FCC's guidelines.
GTE plans to appeal various aspects of the Order. Although it is too early to
determine the impact of these rules, GTE believes that, if implemented as
contained in the Order, they may advantage new entrants and competitors in a
LEC's territory. Thus, while the Order may contribute to some market erosion in
GTE's franchised territories, it may also advantage GTE outside of its
franchised territory.
5
<PAGE> 7
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the Federal Communications Commission's (FCC) interim price
cap rules. On June 24, 1996, the FCC ordered all LECs subject to price cap
regulation, including the Company, to update their GDP-PI inflation factors
through the fourth quarter of 1995. Overall the final 1996 interstate access
filing resulted in an annual price increase of $0.3, effective July 1, 1996.
On May 8, 1996, the CPUC denied the Company's petition to modify its New
Regulatory Framework (NRF) Settlement Agreement and the NRF Phase I decision.
As a result of the CPUC's denial of the Company's petition, the Company reduced
its rates $41.7 associated with its 1996 Price Cap effective January 1, 1996 of
which $21.1 ($15.2 local services and $5.9 toll services) was recorded in the
second quarter of 1996. These refunds begin in the third quarter of 1996 and
are to be completed by year end.
In September 1994, the CPUC issued a final order that authorized intraLATA toll
competition (without pre-subscription) in California, effective January 1,
1995, associated with the IRD. The final order also provides for rate
rebalancing with significant rate reductions for toll service and access
charges while increasing basic local-exchange rates closer to the actual cost
of providing such service. Although this rate rebalancing was not intended to
cause significant changes in revenue, the actual increase in volumes did not
fully compensate for the toll and access rate reductions. This decision did not
permit rate increases to compensate for competitive losses of market share.
Revenues decreased by approximately $194.3 in 1995 as a result of the
implementation of this order. The Company's request for reconsideration of this
aspect of the order was denied on February 7, 1996. On March 11, 1996, the
Company filed a petition to correct calculations contained in the February 7
decision which denied the request for rehearing. In this petition the Company
presented a calculation error in the application of the adopted elasticity
factor to message toll revenue.
On April 17, 1996, the Company filed a petition to modify the February 7
decision to allow recovery of the revenue shortfall associated with the
elasticity factor error surcharge applicable to all of its intrastate
surchargeable services rather than only toll and access services. On June 6,
1996, the CPUC approved the Company's request to correct mathematical errors,
which will result in $53 of revenue for the Company in 1996. Based on this
order, $13.5 will be recognized by current year end. In addition, this decision
entitled the Company to a retroactive favorable revenue adjustment of $39.5
($28.7 local services and $10.8 toll services) which was recorded in June 1996
for the period January 26, 1995 through June 30, 1996.
The Company expects to net the $53 of favorable surcharges related to the
CPUC's June 6, 1996 decision against $41.7 of unfavorable surcredits associated
with the 1996 Price Cap rate reduction, discussed above, and $11.3 of
unfavorable surcredits resulting from the savings due to ratepayers associated
with the 1996 merger of the Company and Contel of California, Inc., which is
discussed below.
On May 17, 1996, the CPUC consolidated a joint petition filed by AT&T, MCI,
Sprint and the California Association of Long Distance Carriers (CALTEL) and a
motion by Pacific Bell. The consolidated filing requested a procedural order
requiring the Company to initiate immediate implementation of intraLATA equal
access and pre- subscription rulings as a result of the Telecommunications Act
of 1996. In July, the Company received "provisional" authority to begin
converting its central offices to intraLATA equal access. The Company expects
this conversion to be completed by the end of the first quarter of 1997.
Settlement discussions and workshops are currently progressing with respect to
the remaining issues related to intraLATA equal access.
6
<PAGE> 8
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In December 1994, the CPUC issued a decision which adopted 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 authorized competitive local-exchange carriers (CLCs) to
seek authority to offer local-exchange services beginning in June 1995. On July
19, 1995, the CPUC issued interim Universal Service rules and obligations as a
precursor to local competition. The CPUC is expected to adopt final Universal
Service rules and obligations by September 1996.
The CPUC issued interim rules for local competition on July 24, 1995, which
permitted facilities-based local competition on January 1, 1996, with resale
authority granted two months later. On December 20, 1995, the Company was
granted approval by the CPUC to provide intraLATA toll, high-speed digital
private line services, and facilities-based local services outside of its
current franchise areas in competition with other local-exchange carriers
(LECs). On February 23, 1996, the CPUC approved the Company's request to
provide resale-based local services outside of its current franchise areas.
On February 23, 1996, the CPUC also adopted additional local competition rules
addressing interconnection terms and conditions, joint provisioning of access
services, information-mass announcement services and additional intercompany
arrangements. On April 10, 1996, the CPUC adopted interim number portability
(INP) rates and rules, effective April 18, 1996, which will be charged to CLCs
in order to allow their customers to retain use of their existing LEC telephone
numbers when switching providers of local telephone service. The Company is
required to establish a memorandum account to track the revenues collected from
billings of INP rates to allow for a subsequent true-up once permanent rates
are adopted in the Open Access Network Architecture Development (OANAD)
proceeding.
In March 1996, the CPUC approved rules permitting local resale competition
effective March 31, 1996. The CPUC required the Company to provide wholesale
discounts of 7 percent on basic residential service and 12 percent on toll and
business services to future resale competitors. On April 12, 1996, the Company
filed an Application for Rehearing of the resale decision requesting the
correction of three legal errors including ordering the Company to file resale
tariffs prior to allowing LECs the opportunity to negotiate wholesale rates as
permitted in the Telecommunications Act of 1996, imposing onerous restrictions
on the Company's pricing flexibility and allowing facilities-based CLCs to
establish their own rating areas before mitigation measures are implemented. On
April 12, 1996, the Company also filed a Motion for a Stay of the
implementation of certain resale rates ordered in the resale decision. In its
motion, the Company is requesting that the CPUC authorize the Company to charge
its existing retail rates for the resale of business and residential services
pending action on the Company's Application for Rehearing and the establishment
of an interest-bearing memorandum account to track the difference between the
revenues based on adopted resale rates and revenues based on existing retail
rates. On May 1, 1996, the Company provided the CPUC with service category
specific cost studies for wholesale services in the CPUC's unbundling
proceedings. A final decision is expected by year end 1996.
Evidentiary hearings were held in the first quarter of 1996 to address whether
the CPUC's local competition rules have changed the CPUC's regulatory structure
so drastically, that they have violated their obligation to ensure the Company
an opportunity to earn a fair return on investment and a fair opportunity to
recover invested capital. On April 17, 1996, the Company filed a petition to
reopen LEC franchise impact hearings for the limited purpose of submitting
additional evidence quantifying the financial impact the Company will suffer
under the resale and pricing flexibility rules recently adopted by the CPUC. A
final decision is expected by the end of the third quarter of 1996.
7
<PAGE> 9
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
On October 5, 1995, the Governor of the State of California signed a law which
clarified the authority of the CPUC to allocate utility merger benefits between
ratepayers and shareholders with not less than 50% going to the ratepayers of
the merged company. The new law became effective January 1, 1996. On April 10,
1996, the CPUC issued a decision approving the merger of Contel of California,
Inc. into the Company under the terms of the amended legislation. It is
currently anticipated that the merger will occur by year end 1996.
As a part of this order the CPUC ordered $69.7 of merger savings to be returned
to the local, toll and access customers of the merged company over a five year
period. The Company had previously provided for the impact of this decision in
its financial statements. These savings represent half of the total savings
expected to be realized by this merger. Rate integration and the determination
of Contel of California Inc.'s premerger NRF startup revenue requirement will
be handled in Phase III of this proceeding. If a negotiated settlement is
reached between the Company and interested parties, it is anticipated that a
Phase III order could be issued by year end 1996. If full evidentiary hearings
are required, then a Phase III decision may be delayed until the second half of
1997.
During 1995 and the first six months of 1996, the Company had expended $4.7 on
the construction of its broadband video dialtone network in Ventura County,
California. On July 2, 1996, the Ventura County, California County Board
approved a cable TV franchise application which will enable Media Ventures
Incorporated (Media Ventures), a separate subsidiary of GTE, to begin offering
cable service in September 1996. As a result of Media Ventures receiving
approval to pursue video entry as a cable operator, the network originally
constructed by the Company will be transferred at cost to Media Ventures in the
third quarter of 1996. All future cable services will be offered by GTE through
Media Ventures.
On July 18, 1996, GTE, through a separate subsidiary, began offering long
distance service to its customers in California, marketed under the name GTE
Easy Savings Plan(sm). GTE plans to offer this service in all 28 states where
it currently offers local telephone service by December 1996.
8
<PAGE> 10
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------------ ------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 39,605 $ 31,126
Receivables, less allowances of $54,094 and $56,810 441,117 554,171
Note receivable from affiliate 88,267 100
Inventories and supplies 24,095 31,022
Deferred income tax benefits 59,498 81,181
Other 12,170 13,906
------------------ ------------------
Total current assets 664,752 711,506
------------------ ------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 8,643,442 8,597,000
Accumulated depreciation (5,085,617) (4,882,561)
------------------ ------------------
Total property, plant and equipment, net 3,557,825 3,714,439
OTHER ASSETS, primarily employee benefit plans 510,856 480,153
------------------ ------------------
Total assets $ 4,733,433 $ 4,906,098
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 95,240 $ 221,518
Accounts payable 203,421 239,503
Taxes payable 111,066 67,808
Accrued interest 23,486 22,836
Accrued payroll costs 78,733 100,041
Dividends payable 132,527 88,754
Accrued restructuring costs 167,216 204,430
Other 187,274 153,160
------------------ ------------------
Total current liabilities 998,963 1,098,050
------------------ ------------------
NON-CURRENT LIABILITIES:
Long-term debt 1,265,035 1,285,771
Deferred income taxes 313,990 316,716
Employee benefit plans 126,079 98,676
Other liabilities 371,154 373,352
------------------ ------------------
Total non-current liabilities 2,076,258 2,074,515
------------------ ------------------
SHAREHOLDERS' EQUITY:
Preferred stock 81,866 81,866
Common stock (69,438,190 shares issued) 1,388,764 1,388,764
Additional paid-in capital 2,040 2,040
Retained earnings 185,542 260,863
------------------ ------------------
Total shareholders' equity 1,658,212 1,733,533
------------------ ------------------
Total liabilities and shareholders' equity $ 4,733,433 $ 4,906,098
================== ==================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
9
<PAGE> 11
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------
1996 1995
------------------ ------------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS:
Net income $ 156,932 $ 148,539
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 303,769 295,760
Deferred income taxes 18,957 13,913
Provision for uncollectible accounts 34,879 39,465
Changes in current assets and current liabilities 92,721 (67,405)
Other - net (32,874) (5,575)
------------------ ------------------
Net cash from operations 574,384 424,697
------------------ ------------------
INVESTING:
Capital expenditures (153,738) (183,602)
Proceeds from sale of land 12,496 --
Other-net -- 5,469
------------------ ------------------
Net cash used in investing (141,242) (178,133)
------------------ ------------------
FINANCING:
Long-term debt issued 98,405 --
Long-term debt retired (179) (35,214)
Dividends (188,480) (193,785)
Decrease in short-term obligations, excluding current maturities (339,409) (45,653)
Other-net 5,000 --
------------------ ------------------
Net cash used in financing (424,663) (274,652)
------------------ ------------------
Increase (decrease) in cash and temporary investments 8,479 (28,088)
Cash and temporary investments:
Beginning of period 31,126 43,118
------------------ ------------------
End of period $ 39,605 $ 15,030
================== ==================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
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 1995 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where appropriate,
to conform to the 1996 presentation.
11
<PAGE> 13
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
(12) Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
(27) Financial Data Schedule
(b) GTE California Incorporated filed a report on Form 8-K dated
April 23, 1996, under Item 5 "Other Events," and Item 7
"Financial Statements and Exhibits." 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, thereunto duly authorized.
GTE California Incorporated
---------------------------------------
(Registrant)
Date: August 14, 1996 William M. Edwards, III
----------------------------- ---------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
--------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 156,932
Add - Income taxes 103,326
- Fixed charges 52,571
--------------------
Adjusted earnings $ 312,829
====================
Fixed charges:
Interest expense $ 48,964
Portion of rent expense
representing interest 3,607
--------------------
Adjusted fixed charges $ 52,571
====================
RATIO OF EARNINGS TO FIXED CHARGES 5.95
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 39,605
<SECURITIES> 0
<RECEIVABLES> 583,478
<ALLOWANCES> 54,094
<INVENTORY> 24,095
<CURRENT-ASSETS> 664,752
<PP&E> 8,643,442
<DEPRECIATION> 5,085,617
<TOTAL-ASSETS> 4,733,433
<CURRENT-LIABILITIES> 998,963
<BONDS> 1,265,035
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 187,582
<TOTAL-LIABILITY-AND-EQUITY> 4,733,433
<SALES> 1,356,869
<TOTAL-REVENUES> 1,356,869
<CGS> 505,222
<TOTAL-COSTS> 1,051,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,348
<INCOME-PRETAX> 260,258
<INCOME-TAX> 103,326
<INCOME-CONTINUING> 156,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,932
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
