<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 March 31, 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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
April 30, 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
March 31,
--------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $ 309,641 $ 312,783
Network access services 177,016 189,348
Toll services 110,008 106,004
Other services and sales 64,803 76,626
--------- ---------
Total revenues and sales 661,468 684,761
--------- ---------
Operating costs and expenses:
Cost of services and sales 266,199 254,233
Selling, general and administrative 94,920 110,214
Depreciation and amortization 151,762 147,694
--------- ---------
Total operating costs and expenses 512,881 512,141
--------- ---------
Operating income 148,587 172,620
Other (income) expense:
Interest - net 23,449 25,421
Other - net (1,488) --
--------- ---------
Income before income taxes 126,626 147,199
Income taxes 49,396 59,296
--------- ---------
Net income $ 77,230 $ 87,903
========= =========
</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
March 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net income $77.2 $87.9
</TABLE>
Net income decreased 12% or $10.7 for the three months ended March 31, 1996,
compared to the same period in 1995. This decrease is primarily the result of
lower revenues and sales, primarily network access and other services and sales
revenues, partially offset by lower interest expense.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Local services $309.7 $312.8
Network access services 177.0 189.4
Toll services 110.0 106.0
Other services and sales 64.8 76.6
------ ------
Total revenues and sales $661.5 $684.8
</TABLE>
Total revenues and sales decreased 3% or $23.3 for the three months ended March
31, 1996, compared to the same period in 1995.
Local service revenues decreased 1% or $3.1 for the three months ended March
31, 1996, compared to the same period in 1995. This decrease is primarily due
to a $3.6 decline in directory assistance and operator service revenues, a
$2.9 reduction in revenues relating to customers electing measured usage rate
plans, and a $2.8 scheduled reduction in revenues resulting from a previous
rate order. These decreases are partially offset by a 4% increase in
switched access lines for the three months ended March 31, 1996, which
generated $8 of additional revenues.
Network access service revenues decreased 7% or $12.4 for the three months ended
March 31, 1996, compared to the same period in 1995. The decrease is primarily
due to $22.1 of 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. Minutes of use increased 10% for the three months ended March 31, 1996,
which generated $9.3 of additional revenues. Also offsetting the decrease is a
$2.7 increase in special access revenues associated with growth in special
access lines.
Toll service revenues increased 4% or $4 for the three months ended March 31,
1996, compared to the same period in 1995, primarily reflecting $4.1 of
unfavorable revenue adjustments recorded in the first quarter of 1995 and a
$1.1 increase in revenues associated with the revision of the annual California
rate index filing. The increase is partially offset by a $2.1 decline in
revenues related to lower toll volumes resulting from 10XXX intraLata toll
competition.
2
<PAGE> 4
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other services and sales revenues decreased 15% or $11.8 for the three months
ended March 31, 1996, compared to the same period in 1995, primarily due to
$9.5 of losses incurred to complete the State of California's
telecommunications network (CALNET) project.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Total operating costs and expenses $512.9 $512.1
</TABLE>
Total operating costs and expenses increased less than 1% or $0.8 for the three
months ended March 31, 1996, compared to the same period in 1995. The increase
is primarily attributable to $11.3 in application software amortization and a
$4.1 increase in depreciation expense, primarily associated with additions to
plant balances. These increases are partially offset by $9.6 of settlement
gains recorded in the first quarter of 1996 which resulted from lump-sum
payments from the Company's pension plans.
OTHER (INCOME) EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest - net $23.4 $25.4
Other - net (1.5) --
Income taxes 49.4 59.3
</TABLE>
Interest - net decreased 8% or $2 for the three months ended March 31, 1996,
compared to the same period in 1995, primarily due to lower average short-term
debt levels.
Other - net for the first quarter of 1996 includes a $1.5 pre-tax gain
resulting from the sale of a parcel of land.
Income taxes decreased 17% or $9.9 for the three months ended March 31, 1996,
compared to the same period in 1995, primarily due to a corresponding decrease
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 March 31,
1996, 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.
3
<PAGE> 5
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 three months of 1996 was
cash from operations of $265.4, compared to $266.2 for the same period in 1995.
The year-to-year decrease in cash from operations is primarily the result of
lower results from operations, partially offset by lower working capital
requirements. Cash from operations is also being utilized to fund the Company's
re-engineering plan.
The Company's capital expenditures during the first three months of 1996 were
$70.3, compared to $81.6 for the same period in 1995. The declining
requirements 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. The Company anticipates capital expenditures for 1996 to approximate
those of 1995.
Cash used in financing activities was $205.5 during the first three months of
1996, compared to $209.3 for the same period in 1995. This included dividend
payments of $89.2 in the first three months of 1996, compared to $133.8 for the
same period in 1995. Financing activities also included a decrease in
short-term debt of $120.3 for the first three months of 1996, compared to $40.4
for the same period in 1995.
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 the debt the Company called and redeemed in November 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 three months of
1996, costs of approximately $22.2 have been incurred, including $17 to
re-engineer customer service processes and $5.2 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $263 have been incurred, including $171 to re-engineer customer
service processes and $39.5 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 March 31, 1996, $182.2 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
On May 8, 1996, the California Public Utilities Commission (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 will be required to reduce its rates $41.7
associated with its 1996 Price Cap Index (PCI) effective January 1, 1996.
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 Implementation Rate Design (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 23, 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. The CPUC is expected to rule on this petition
during the second quarter of 1996.
4
<PAGE> 6
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 (LECs) 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 July 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 LECs. On February 23, 1996,
the CPUC approved the Company's request to provide resale-based local services
outside of its current franchise areas.
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, imposing onerous restrictions on the
Company's pricing flexibility; and allowing facilities-based competitive local
carriers (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. In addition, GTE will be providing the CPUC
with service category specific cost studies of its wholesale discounts in the
CPUC's unbundling proceedings.
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
competitive LECs 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.
5
<PAGE> 7
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. As part of
this order, the CPUC ordered $69.7 of merger savings to be flowed to the
ratepayers of the merged company; which represents half of the total savings
expected to be realized by this merger. Rate integration and the determination
of Contel of California's premerger New Regulatory Framework (NRF) startup
revenue requirement will be handled in Phase III of this proceeding. It is
currently anticipated that the merger will occur in the second half of 1996.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. Overall, the proposed rates
result in a $0.3 price increase, effective July 1, 1996. The Company
anticipates the FCC will issue an order prior to the effective date, which may
require changes to the Company's annual filing.
6
<PAGE> 8
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 22,896 $ 31,126
Receivables, less allowances of $53,523 and $56,810 509,403 554,271
Inventories and supplies 32,396 31,022
Deferred income tax benefits 70,340 81,181
Other 10,516 13,906
----------- -----------
Total current assets 645,551 711,506
----------- -----------
Property, plant and equipment, at cost 8,623,377 8,597,000
Accumulated depreciation (5,000,850) (4,882,561)
----------- -----------
Total property, plant and equipment, net 3,622,527 3,714,439
----------- -----------
Employee benefit plans 477,515 443,591
Other assets 23,933 36,562
----------- -----------
Total assets $ 4,769,526 $ 4,906,098
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 76,121 $ 221,518
Accounts payable 163,295 239,503
Taxes payable 118,008 67,808
Accrued interest 20,322 22,836
Accrued payroll costs 103,875 100,041
Dividends payable 99,482 88,754
Accrued restructuring costs 182,198 204,430
Other 163,514 153,160
----------- -----------
Total current liabilities 926,815 1,098,050
----------- -----------
Non-current liabilities:
Long-term debt 1,315,034 1,285,771
Deferred income taxes 311,954 316,716
Employee benefit plans 114,059 98,676
Other liabilities 390,803 373,352
----------- -----------
Total non-current liabilities 2,131,850 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 238,191 260,863
----------- -----------
Total shareholders' equity 1,710,861 1,733,533
----------- -----------
Total liabilities and shareholders' equity $ 4,769,526 $ 4,906,098
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 77,230 $ 87,903
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 151,762 147,694
Deferred income taxes 6,079 6,956
Provision for uncollectible accounts 16,405 17,125
Changes in current assets and current liabilities 11,589 (6,094)
Other - net 2,362 12,664
--------- ---------
Net cash from operations 265,427 266,248
--------- ---------
Investing:
Capital expenditures (70,283) (81,564)
Other - net 2,131 --
--------- ---------
Net cash used in investing (68,152) (81,564)
--------- ---------
Financing:
Long-term debt retired (40) (35,106)
Dividends (89,174) (133,822)
Decrease in short-term obligations,
excluding current maturities (120,328) (40,405)
Other - net 4,037 --
--------- ---------
Net cash used in financing (205,505) (209,333)
--------- ---------
Decrease in cash and temporary investments (8,230) (24,649)
Cash and temporary investments:
Beginning of period 31,126 43,118
--------- ---------
End of period $ 22,896 $ 18,469
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 10
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) Long-term debt as of March 31, 1996, includes $100 million of commercial
paper which the Company refinanced on May 3, 1996.
(3) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
9
<PAGE> 11
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
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the first quarter of
1996.
10
<PAGE> 12
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: May 14, 1996 William M. Edwards, III
---------------- -------------------------------
William M. Edwards, III
Controller
(Principal Accounting Officer)
11
<PAGE> 13
EXHIBIT INDEX
Exhibit
Number Description
------- ------------------------------------------------------
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
GTE California Incorporated and Subsidiary
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 77,230
Add - Income taxes 49,396
- Fixed charges 26,388
--------
Adjusted earnings $153,014
========
Fixed charges:
Interest expense $ 24,592
Portion of rent expense
representing interest 1,796
--------
Adjusted fixed charges $ 26,388
========
RATIO OF EARNINGS TO FIXED CHARGES 5.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,896
<SECURITIES> 0
<RECEIVABLES> 562,926
<ALLOWANCES> 53,523
<INVENTORY> 32,396
<CURRENT-ASSETS> 645,551
<PP&E> 8,623,377
<DEPRECIATION> 5,000,850
<TOTAL-ASSETS> 4,769,526
<CURRENT-LIABILITIES> 926,815
<BONDS> 1,315,034
<COMMON> 1,388,764
0
81,866
<OTHER-SE> 240,231
<TOTAL-LIABILITY-AND-EQUITY> 4,769,526
<SALES> 661,468
<TOTAL-REVENUES> 661,468
<CGS> 266,199
<TOTAL-COSTS> 512,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,449
<INCOME-PRETAX> 126,626
<INCOME-TAX> 49,396
<INCOME-CONTINUING> 77,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,230
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
