<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, 1997
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 972-718-5600
(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 70,000,000 shares of $20 par value common stock outstanding at
July 31, 1997. 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,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 346,067 $ 354,787 $ 705,692 $ 694,112
Network access services 243,332 215,921 464,921 421,384
Toll services 103,339 125,274 220,652 250,125
Other services and sales 117,114 82,764 199,669 160,924
----------- ---------- ----------- ----------
Total revenues and sales 809,852 778,746 1,590,934 1,526,545
----------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 281,584 265,203 532,750 560,177
Selling, general and administrative 144,437 155,605 268,316 258,169
Depreciation and amortization 168,644 165,801 333,717 334,983
----------- ---------- ----------- -----------
Total operating costs and expenses 594,665 586,609 1,134,783 1,153,329
----------- ---------- ----------- -----------
OPERATING INCOME 215,187 192,137 456,151 373,216
OTHER EXPENSES
Interest - net 26,815 24,873 51,633 50,500
Other - net 675 -- 675 --
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 187,697 167,264 403,843 322,716
Income taxes 70,235 69,849 158,084 132,264
----------- ---------- ----------- -----------
NET INCOME $ 117,462 $ 97,415 $ 245,759 $ 190,452
=========== ========== =========== ===========
</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,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 117.5 $ 97.4 $ 245.8 $ 190.5
</TABLE>
Net income increased 21% or $20.1 and 29% or $55.3 for the three and six months
ended June 30, 1997, respectively, compared to the same periods in 1996. The
three and six month increases are primarily due to strong revenue growth, while
reducing operating expenses, creating positive operating income.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1997 1996 1997 1996
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Local services $ 346.1 $ 354.8 $ 705.7 $ 694.1
Network access services 243.3 215.9 464.9 421.4
Toll services 103.4 125.2 220.6 250.1
Other services and sales 117.1 82.8 199.7 160.9
--------- ----------- --------- ------------
Total revenues and sales $ 809.9 $ 778.7 $ 1,590.9 $ 1,526.5
</TABLE>
Total revenues and sales increased 4% or $31.2 and 4% or $64.4 for the three
and six months ended June 30, 1997, respectively, compared to the same periods
in 1996.
Local service revenues decreased 2% or $8.7 for the three months and increased
2% or $11.6 for the six months ended June 30, 1997, compared to the same
periods in 1996. The three and six month variances include $15.7 related to
the combination of the 1996 favorable settlement associated with the
Implementation Rate Design (IRD) and the 1996 revenue reduction associated with
the Company's 1996 California Price Cap Index (PCI). Excluding these items,
local service revenues increased 2% or $7 and 4% or $27.3 for the three and six
month periods, respectively.
The three and six month increases in local service revenues are primarily due
to a $10.3 and $15.1 increase, respectively, in revenues from SmartCall(R) and
CLASS services, primarily driven by the introduction of Caller ID in 1996, and
a 5% increase in access lines for both periods, which generated additional
revenues of $3.7 and $7.9, respectfully. These increases are partially offset
by a $5.7 reduction in payments received from the California universal service
fund.
Network access service revenues increased 13% or $27.4 and 10% or $43.5 for the
three and six months ended June 30, 1997, respectively, compared to the same
periods in 1996. Minutes of use increased 18% for both the three and six
months ended June 30, 1997, which generated additional revenues of $22.1 and
$38, respectively. The increases also reflect a $4.9 and $10.7 growth in
special access revenues resulting from customer demand for increased bandwidth
services. The six month increase is partially offset by an $8.3 unfavorable
impact from sharing provisions of the Federal Communications Commission's (FCC)
1996 Price Cap.
2
<PAGE> 4
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Toll service revenues decreased 17% or $21.8 and 12% or $29.5 for the three and
six months ended June 30, 1997, respectively, compared to the same periods in
1996. The three and six month decreases primarily reflect a $14.6 and a $21.3
reduction in toll revenues, respectively, as a result of lower toll volumes
resulting from intraLATA (local access transport area) toll competition,
including 10XXX and 1+ presubscription, and the impact of optional discount
calling plans, which effectively lowered intrastate long distance rates. Also
contributing to the three and six month decreases were a $3.7 and $6.6 decrease
in revenues associated with the revision of the annual California price index
filing, respectively. The six month decrease was partially offset by $3.5 of
favorable revenue adjustments recorded in the first quarter of 1996.
Other services and sales revenues increased 41% or $34.3 and 24% or $38.8 for
the three and six months ended June 30, 1997, respectively, compared to the
same periods in 1996. The three and six month increases are primarily due to
higher directory advertising revenues of $15.2 and $2.4 related to timing of
directory publications, a $2.4 and $4.5 growth in voice messaging services
revenue and a $1.1 and $1.9 growth in radio paging. The three and six month
periods also reflect a $2.7 and $4.4 increase in billing and collection
revenues, partially due to a favorable billing and collection contract rate
negotiation. Both periods reflect an increase in database 800 revenues of
$1.6. The six month increase also reflects a $2.1 increase in equipment sales
and the impact of a $9.5 revenue reduction, recorded in the first quarter of
1996, related to the State of California's telecommunications network (CALNET)
project.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total operating $ 594.7 $ 586.6 $ 1,134.8 $ 1,153.3
costs and expenses
</TABLE>
Total operating costs and expenses increased 1% or $8.1 and decreased 2% or
$18.5 for the three and six months ended June 30, 1997, respectively, compared
to the same periods in 1996.
The increase in operating costs and expenses for the three months ended June
30, 1997 is primarily due to higher material costs of $11 related to increased
revenues and sales, a $5.4 increase in payphone commission costs, higher
advertising costs of $4.4 and a $2.8 increase in depreciation costs, primarily
associated with additions to plant balances. These increases are partially
offset by a $7 decrease in billing and collection costs and the favorable
effects of an $11.3 charge, taken in the second quarter of 1996, related to the
Customer Notification and Education Plan (CNEP), which was a California Public
Utilities Commission (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,
1997 is primarily due to a $19.5 reduction in labor and employee benefit costs,
a $9.8 decrease in network switching software fees and a $4.6 decrease in
billing and collection costs. The decrease is also the result of the favorable
effect of the $11.3 charge associated with the CNEP recorded in the second
quarter of 1996 as mentioned above. These decreases are partially offset by
higher advertising costs of $12.4, higher material costs of $10.7 related to
increased revenues and sales and increased payphone commissions of $7.4.
3
<PAGE> 5
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Interest - net $ 26.8 $ 24.9 $ 51.6 $ 50.5
Income taxes 70.2 69.8 158.1 132.3
</TABLE>
Interest - net increased 8% or $1.9 and 2% or $1.1 for the three and six months
ended June 30, 1997, respectively, compared to the same periods in 1996,
primarily due to higher average short-term debt levels.
Income taxes remained virtually unchanged for the three months and increased
20% or $25.8 for the six months ended June 30, 1997, compared to the same
periods in 1996. The six month increase is primarily due to the corresponding
increase in pre-tax income, partially offset by adjustments to prior years' tax
provision.
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 financings can be obtained through
borrowings from GTE or GTE Funding Incorporated, an affiliate of the Company.
On July, 1, 1996, the Company began participating with other affiliates in a
$1,500 syndicated line of credit. The Company has an existing shelf
registration statement outstanding for an additional $400 of debentures.
The Company's primary source of funds during the first six months of 1997 was
cash from operations of $514.4 compared to $662.7 for the same period in 1996.
The year-to-year decrease in cash from operations reflects an increase in
working capital requirements, partially offset by improved results from
operations.
The Company's capital expenditures during the first six months of 1997 were
$227.8 compared to $175.8 for the same period in 1996. The 1997 expenditures
reflect the Company's continued access line growth and modernization of current
facilities to support new products and expanded services. The Company
anticipates capital expenditures to increase during the remainder of 1997
compared to 1996, reflecting the Company's continued expansion of existing
networks, upgrades associated with the support of expanded services and
compliance with the local number portability requirements of the
Telecommunications Act of 1996 (the Telecommunications Act).
Cash used in financing activities was $235 during the first six months of 1997
compared to $491.6 for the same period in 1996. This included dividend
payments of $358.8 in the first six months of 1997 compared to $188.5 for the
same period in 1996. Short-term financings, including the net change in
affiliate notes, increased $382.5 in the first six months of 1997, compared to
a decrease of $406.4 for the same period of 1996. The Company retired $258.6 of
long-term debt and preferred stock during the first six months of 1997, which
included $1.6 in premiums paid on the May 1997 retirement of $206.9 of
long-term debt and preferred stock redeemed prior to stated maturity. The
Company retired an additional $50.1 of long-term debt and preferred stock
during the first six months of 1997. The Company issued $100 of 7% debentures
in May 1996. The Company entered into forward contracts to hedge against
changes in interest rates related to the 1996 refinancing. A $5 gain on the
settlement of forward contracts is being amortized over the life of the
refinanced debt as an offset to interest expense.
4
<PAGE> 6
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
Federal Regulatory Developments
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the FCC's rules
purporting to implement the local competition provisions of the
Telecommunications Act. The Company's parent, GTE, together with other
incumbent local-exchange carriers (ILECs) and a number of state commissions,
had challenged various portions of the FCC rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements and services for resale. In addition,
the Eighth Circuit made a number of other rulings favorable to GTE, including
that the FCC's rule allowing requesting carriers to pick and choose among
individual provisions of other interconnection agreements, rather than to adopt
the terms and conditions of a single agreement in its entirety, was unlawful;
that the FCC does not have the authority to review interconnection agreements
approved by state commissions or to enforce the terms of such agreements; that
the FCC rule requiring ILECs to provide interconnection and unbundled network
elements (UNEs) at levels of quality that are superior to those levels at which
the ILECs provide them to themselves was unlawful; and that it is the
requesting carriers, not the ILECs, that must combine UNEs.
On the other hand, the Eighth Circuit rejected certain arguments advanced by
GTE. For example, it ruled that a requesting carrier may gain access to all of
the UNEs that, when combined by the requesting carrier, are sufficient to
enable the requesting carrier to provide a finished service, and it upheld most
of the standards applied by the FCC in determining which network elements an
ILEC must make available.
The time for parties to seek rehearing before the Eighth Circuit has not yet
expired. In addition, the FCC has announced that it intends to seek Supreme
Court review of the Eighth Circuit's ruling.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE Midwest Incorporated, a separate subsidiary of GTE and affiliate
of the Company, has filed petitions for review of each of these orders in
Federal Court, and GTE is currently assessing the effect of these orders.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5% retroactive to July 1996. The order
also eliminated the sharing requirements of the price cap rules. In June 1997,
in accordance with the order, the Company submitted its 1997 annual price cap
filing. The 1997 interstate access filing resulted in an annual price reduction
of $94.8, effective July 1, 1997. Prior to this order, the Company had
submitted a rate change filing in May 1997, as the Company's access rates were
priced significantly below the FCC's maximum price. This rate change filing
resulted in an annual price increase of $57.9, effective June 3, 1997. Overall,
the net effect of these access filings resulted in an annual price reduction of
$36.9.
In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs and
resale rates. In some cases, the parties have been unable to agree within the
statutory period for negotiation and have gone to arbitration before various
state regulatory commissions. Since October 1996, state commission decisions
determining the prices and terms of unresolved issues have been released in
California. Subsequent decisions are expected to be issued throughout 1997.
5
<PAGE> 7
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. The Company is expecting to begin filing cost
studies in the states in which it operates during the second half of 1997.
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
are scheduled to begin in California during the fourth quarter of 1997, with
decisions expected in the first quarter of 1998.
State Regulatory Developments
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% on basic residential service and 12% 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-exchange
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 requested 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 April 23, 1997, the CPUC issued a decision denying
the Company's application for rehearing of the resale decision. However, the
CPUC did grant CLCs a rehearing concerning the interim discount rate for
residential service. The CPUC determined that the record supports the use of
avoided cost wholesale discounts of 12% rather than 7% for the Company for
residential services. The CPUC determined that no further proceedings are
necessary, as the existing evidentiary record, the application for rehearings,
and any responses to it provide an adequate basis for its order on rehearing.
On May 1, 1996, the Company provided the CPUC with service category specific
cost studies for resale services in the CPUC's unbundling proceedings. On
January 24, 1997, an Administrative Law Judge (ALJ) ruling was issued setting
forth a schedule for submission of permanent resale rate proposals and avoided
costs models. The Company submitted its resale pricing proposal and avoided
cost model on April 14, 1997. On June 27, 1997, an ALJ ruling modified the
dates previously set in an April 1, 1997 CPUC ruling scheduling evidentiary
hearings beginning August 4, 1997 through August 22, 1997. The evidentiary
hearings schedule will be reset at least four weeks forward with an anticipated
commencement date of mid-August 1997. A final decision adopting permanent
wholesale rates for resold services is now expected by February 1998.
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 June 18, 1997, a ruling was issued suspending the schedule
for supplementary pricing testimony associated with the UNEs. Specific issues
to be addressed included: 1) what constituted a reasonable markup over costs
for the UNEs; 2) special pricing issues for the additional FCC UNEs; and 3) how
to deal with arbitrage between rates for rebundled network elements and
wholesale services. A new schedule will be set when the CPUC determines when
the interim costing order for Pacific Bell will be issued.
6
<PAGE> 8
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On June 18, 1997, a ruling was issued approving the Company's cost study
workplan with some modifications. The ruling provides for new cost studies to
be submitted by September 15, 1997, with opening comments on the new cost
studies and a reply yet to be scheduled. Overall, the ruling was favorable to
the Company in that the Integrated Cost Model (ICM) will be allowed to be used
for cost development, and that the views that Pacific Bell proxies should be
used as the Company's inputs for expenses and fill factors were rejected.
On January 13, 1997, the CPUC issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale and unbundling terms and
conditions. The interim discount rate for the Company's resold services was
set at 17%. On January 23, 1997, an arbitration agreement conforming to this
decision was executed under protest. Also on January 23, 1997, the CPUC issued
its decision in the Company's arbitration with MCI.
The Company filed suit on January 14, 1997 in U.S. District Court seeking
judicial review of the CPUC's final arbitration order in the AT&T proceeding,
pursuant to Section 252 of the Telecommunications Act. The Company's suit
focused on various aspects of the decision including: rates for UNEs; rate
arbitrage opportunities created by the decision for AT&T; unbundled rate
elements which do not allow recovery of actual costs; collocation requirements;
rules for reservations of pole and duct space; and imposition of contractual
terms not before the CPUC for arbitration. On January 24, 1997, a similar suit
was filed requesting review of the CPUC's final order in the MCI arbitration.
The Company requested a review of the same issues as in the AT&T suit except for
the issue of collocation which was not included in the MCI review request.
On March 18, 1997, the CPUC issued a decision granting Sprint's request to
adopt the AT&T agreement pursuant to Section 252(I) of the Telecommunications
Act.
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 presubscription rulings as a result of the Telecommunications Act.
In July 1996, the Company received "provisional" authority to begin converting
its central offices to intraLATA equal access. The Company completed
conversion of its central offices on July 8, 1997.
On October 12, 1994, the CPUC issued a decision which authorized further
proceedings to be held with regard to a previous CPUC decision that adopted
accrual accounting for Statement of Financial Accounting Standards No.106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106), which permitted the Company to recover its FAS 106 costs as an exogenous
factor in annual price cap filings. This decision reaffirmed the CPUC decision
to adopt FAS 106 for rate making purposes. However, the issue of exogenous
recovery was to be further reviewed and any revenues collected in rates
subsequent to October 12, 1994, were subject to refund pending further
investigation. On April 9, 1997, the CPUC issued a decision concluding that
the exogenous recovery for FAS 106 accounting changes previously granted is
consistent with its New Regulatory Framework (NRF) and should be upheld.
Other Developments
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications service, including the
acquisition of BBN Corporation, a leading provider of end-to-end Internet
solutions. In addition, GTE announced a strategic alliance with Cisco Systems,
Inc. to jointly develop enhanced data and Internet services for customers; and,
the purchase of a national, state-of-the-art fiber-optic network from Qwest
Communications.
7
<PAGE> 9
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------ -----------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,610 $ 22,158
Receivables, less allowances of $73,558 and $72,010 628,784 600,818
Inventories and supplies 40,726 25,658
Deferred income tax benefits 42,769 58,364
Other 25,876 14,387
------------------ ----------------
Total current assets 815,765 721,385
------------------ ----------------
Property, plant and equipment, at cost 9,853,704 9,706,947
Accumulated depreciation (6,168,112) (5,952,312)
------------------ -----------------
Total property, plant and equipment, net 3,685,592 3,754,635
------------------ -----------------
Employee benefit plans 631,472 567,065
Other assets 15,911 40,300
------------------ -----------------
Total assets $ 5,148,740 $ 5,083,385
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 160,297 $ 196,284
Notes payable to affiliates 268,838 --
Accounts payable 287,800 285,201
Taxes payable 77,417 54,418
Accrued interest 29,231 25,272
Accrued payroll costs 83,048 97,680
Dividends payable 113,616 112,466
Other 212,831 196,311
------------------ ----------------
Total current liabilities 1,233,078 967,632
------------------ ----------------
Long-term debt 1,195,429 1,280,151
Deferred income taxes 356,255 342,349
Employee benefit plans 249,931 229,914
Other liabilities 412,451 414,711
------------------ ----------------
Total liabilities 3,447,144 3,234,757
------------------ ----------------
Shareholders' equity:
Preferred stock 49,984 81,866
Common stock (70,000,000 shares issued) 1,400,000 1,400,000
Additional paid-in capital 82,239 82,239
Retained earnings 169,373 284,523
------------------ ----------------
Total shareholders' equity 1,701,596 1,848,628
------------------ ----------------
Total liabilities and shareholders' equity $ 5,148,740 $ 5,083,385
================== ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 10
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
------------ --------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS:
Net income $ 245,759 $ 190,452
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 333,717 334,983
Deferred income taxes 40,443 23,184
Provision for uncollectible accounts 38,258 35,911
Changes in current assets and current liabilities (70,983) 110,599
Other - net (72,784) (32,477)
------------- -------------
Net cash from operations 514,410 662,652
------------- -------------
INVESTING:
Capital expenditures (227,781) (175,832)
Proceeds from sale of assets 3,794 12,496
------------- -------------
Net cash used in investing (223,987) (163,336)
------------- -------------
FINANCING:
Long-term debt issued -- 98,405
Long-term debt and preferred stock retired, including premiums paid
on early retirement (258,634) (179)
Dividends (358,821) (188,480)
Decrease in short-term obligations, excluding current maturities (71,001) (339,409)
Net change in affiliate notes 453,485 (66,966)
Other - net -- 5,000
------------- -------------
Net cash used in financing (234,971) (491,629)
------------- -------------
Increase in cash and cash equivalents 55,452 7,687
Cash and cash equivalents:
Beginning of period 22,158 33,265
------------- -------------
End of period
$ 77,610 $ 40,952
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
9
<PAGE> 11
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 (SEC). 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 1996 Annual Report on Form 10-K.
(2) Long-term debt as of June 30, 1997 includes $175 million of affiliate notes
payable which the Company anticipates refinancing during the second half of
1997. These affiliate notes payable represent notes payable to GTE Funding
Incorporated, a company that provides short-term financing and investment
vehicles and cash management services for the Company and six of its
affiliates.
(3) In January 1997, the SEC issued amendments to its rules which clarify and
expand disclosure requirements for derivative financial instruments. As of
June 30, 1997, there has been no significant change in the market risk, or
accounting policy associated with derivative financial instruments as
stated in the Company's 1996 Annual Report on Form 10-K.
(4) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1997 presentation.
10
<PAGE> 12
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 second
quarter of 1997.
11
<PAGE> 13
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, 1997 William M. Edwards, III
----------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
12
<PAGE> 14
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>
Six Months Ended
June 30, 1997
----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $245,759
Add - Income taxes 158,084
- Fixed charges 60,828
--------
Adjusted earnings $464,671
========
Fixed charges:
Interest expense $ 54,275
Portion of rent expense
representing interest 6,553
--------
Adjusted fixed charges $ 60,828
========
RATIO OF EARNINGS TO FIXED CHARGES 7.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 77,610
<SECURITIES> 0
<RECEIVABLES> 702,342
<ALLOWANCES> 73,558
<INVENTORY> 40,726
<CURRENT-ASSETS> 815,765
<PP&E> 9,853,704
<DEPRECIATION> 6,168,112
<TOTAL-ASSETS> 5,148,740
<CURRENT-LIABILITIES> 1,233,078
<BONDS> 1,195,429
0
49,984
<COMMON> 1,400,000
<OTHER-SE> 251,612
<TOTAL-LIABILITY-AND-EQUITY> 5,148,740
<SALES> 1,590,934
<TOTAL-REVENUES> 1,590,934
<CGS> 532,750
<TOTAL-COSTS> 1,134,783
<OTHER-EXPENSES> 675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,633
<INCOME-PRETAX> 403,843
<INCOME-TAX> 158,084
<INCOME-CONTINUING> 245,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245,759
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
