<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 quarterly period ended June 30, 1998
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, 75038
Irving, Texas
(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, 1998. 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,
--------------------------- -----------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 366,705 $ 346,067 $ 720,991 $ 705,692
Network access services 257,192 243,332 468,813 464,921
Toll services 81,993 103,339 159,606 220,652
Other services and sales 133,474 117,114 225,222 199,669
--------- --------- ---------- ----------
Total revenues and sales 839,364 809,852 1,574,632 1,590,934
--------- --------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 237,512 281,584 515,970 532,750
Selling, general and
administrative 118,891 144,437 224,312 268,316
Depreciation and amortization 147,977 168,644 291,584 333,717
--------- --------- ---------- ----------
Total operating costs and
expenses 504,380 594,665 1,031,866 1,134,783
--------- --------- ---------- ----------
OPERATING INCOME 334,984 215,187 542,766 456,151
OTHER EXPENSES
Interest - net 32,325 26,815 59,443 51,633
Other - net 21 675 21 675
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 302,638 187,697 483,302 403,843
Income taxes 120,767 70,235 193,335 158,084
--------- --------- ---------- ----------
NET INCOME $ 181,871 $ 117,462 $ 289,967 $ 245,759
========= ========= ========== ==========
</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,
--------------------------- -----------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net income $ 181.9 $ 117.5 $ 290.0 $ 245.8
</TABLE>
Net income increased 55% or $64.4 and 18% or $44.2 for the three and six months
ended June 30, 1998, respectively, compared to the same periods in 1997. The
three month increase is primarily due to revenue growth offset by lower
operating expenses, creating positive operating income. The six month increase
is primarily due to a reduction of operating expenses leading to a higher net
income.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Local services $ 366.7 $ 346.1 $ 721.0 $ 705.7
Network access services 257.2 243.3 468.8 464.9
Toll services 82.0 103.4 159.6 220.6
Other services and sales 133.5 117.1 225.2 199.7
-------- -------- -------- --------
Total revenues and sales $ 839.4 $ 809.9 $1,574.6 $1,590.9
</TABLE>
Total revenues and sales increased 4% or $29.5 for the three months and
decreased 1% or $16.3 for the six months ended June 30, 1998, compared to the
same periods in 1997.
Local service revenues increased 6% or $20.6 and 2% or $15.3 for the three and
six months ended June 30, 1998, compared to the same periods in 1997. Growth in
access lines was 5% for both the three and six month periods ended June 30,
1998 generating $14.6 and $29.1 of additional revenues from basic local
services, CentraNet(R) services, Integrated Service Digital Network (ISDN) and
Digital Channel Services (DCS). Revenues also were increased by $9 for both the
three and six month periods due to a change in the California local index. The
three and six month increases are partially offset by settlement reserves of
$11.4 and $5.7, respectively. The six month increase for the period ended June
30, 1998 is partially offset by reduced revenues from non-recurring service
charges of $15.8.
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 6% or $13.9 and 1% or $3.9 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997. Minutes of use increased 15% for both the three and six month
periods ended June 30, 1998, which generated $18.1 and $34.7 of additional
revenues, respectively. These increases also reflect $14.1 and $27.4 of higher
support payments received from the National Exchange Carrier Association (NECA)
and special access revenue growth of $15.2 and $26.9 related to customer demand
for increased bandwidth. The three and six month increases are partially offset
by unfavorable impacts of $6.7 and $39.2 from sharing provisions of the Federal
Communications Commission's (FCC) 1996 and 1997 price caps and decreases in
cellular access revenues of $4.9 and $3.4. The increase in revenues is also
offset by $1.3 and $5 decreases related to other intraLATA (local access
transport area) switched access revenues for the second quarter and first half
of 1998, respectively. In 1997, the FCC also ordered significant changes that
altered the structure of access charges collected by the Company. These changes,
effective January 1, 1998, resulted in a decrease of $17.3 and $30.3 in network
access service revenues during the three and six months ended June 30, 1998.
Toll service revenues decreased 21% or $21.4 and 28% or $61 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. The three and six month decreases are primarily due to lower toll volumes
resulting from intraLATA toll competition, including 10XXX and 1+
presubscription, and the impact of optional discount calling plans, which
effectively lowered intrastate long distance rates.
Other services and sales revenues increased 14% or $16.4 and 13% or $25.5 for
the three and six month periods ended June 30, 1998, respectively, compared to
the same periods in 1997. The three and six month increases are primarily due to
$6.1 and $11.3 associated with the FCC's order increasing payphone compensation
from interexchange carriers and $5.4 and $9 from revenues relating to billing
and collection services. Also, both periods had increases of $9.3 from
Tele-Go(R) activation commissions and related accessory sales. These increases
are partially offset by a reduction in directory advertising revenues of $3.9
and $5.4 for the three and six month periods ended June 30, 1998, respectively.
3
<PAGE> 5
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of services and sales $ 237.5 $ 281.6 $ 516.0 $ 532.8
Selling, general and
administrative 118.9 144.4 224.3 268.3
Depreciation and amortization 148.0 168.7 291.6 333.7
-------- -------- -------- --------
Total operating costs and expenses $ 504.4 $ 594.7 $1,031.9 $1,134.8
</TABLE>
Total operating costs and expenses decreased 15% or $90.3 and 9% or $102.9 for
the three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997. The decrease is primarily due to lower labor and employee
benefit costs of $60.3 and $71.3 and lower depreciation costs of $20.7 and $42.1
for the three and six months ended June 30, 1998, respectively. The lower
depreciation costs are attributable to a change in depreciation rates during
1997 to reflect higher net salvage values related to certain telephone plant and
equipment. These decreases are partially offset by cost increases of $12 and
$21.5 for the three and six months ended June 30, 1998, respectively, for
activities related to Street Address directories and information pages and
increases of $7.6 and $18.7 for labor, maintenance and repair costs associated
with storm damage within the Company's service territories.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest - net $ 32.3 $ 26.8 $ 59.4 $ 51.6
Income taxes 120.8 70.2 193.3 158.1
</TABLE>
Interest - net increased 21% or $5.5 and 15% or $7.8 for the three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997,
primarily due to higher average short-term debt levels.
Income taxes increased 72% or $50.6 and 22% or $35.2 for the three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
The increase is primarily due to the corresponding increase in pre-tax income.
4
<PAGE> 6
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 financing can be obtained through borrowings
from the Company's parent, GTE, or GTE Funding Incorporated, an affiliate of the
Company. The Company participates with other affiliates in a $1,500, 364-day
line of credit. The Company has an existing shelf registration statement
outstanding for an additional $200 of debentures.
The Company's primary source of funds during the first six months of 1998 was
cash from operations of $567.1 compared to $514.4 for the same period in 1997.
The year-to-year increase in cash from operations primarily reflects the
improved results from operations and a decrease in working capital requirements.
Net cash used in investing activities during the first six months of 1998 was
$330.5 compared to $224 for the same period in 1997. The increase in capital
expenditures reflects the Company's continued growth in primary and secondary
access lines and the modernization of interoffice facilities to mitigate
Internet congestion. Although the capital expenditures during the first half of
1998 were higher than the same period in 1997, the overall anticipated capital
expenditures for 1998 are expected to be comparable to the total capital
expenditures incurred during 1997.
Net cash used in financing activities was $240.8 during the first six months of
1998 compared to $235 for the same period in 1997. This included dividend
payments of $349.1 in the first six months of 1998 compared to $358.8 for the
same period in 1997. Short-term financings, including the net change in
affiliate notes, increased $60.8 in the first six months of 1998, compared to an
increase of $382.5 for the same period in 1997. The Company retired $150.1 of
long-term debt and preferred stock during the first six months of 1998 compared
to $258.6 during the first six months of 1997. The Company issued $200 of 6.75%
debentures in May of 1998. The proceeds were applied toward the repayment of the
Company's short-term borrowings.
In its April 2, 1998 filing on Form 8-K, GTE stated that because the MCI
shareholders had accepted a competing offer, GTE's offer for MCI was no longer
outstanding. As a result, the Company and GTE were removed from "Credit Watch"
by all rating agencies. The Company believes that its present investment grade
credit rating provides ready access to the capital markets at reasonable rates
and provides the Company with the financial flexibility necessary to pursue
growth opportunities as they arise.
5
<PAGE> 7
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
Federal Regulatory Developments
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price reduction of $36.9. On December 1, 1997, the FCC issued an order to file
revised access rates effective January 1, 1998, which resulted in additional
interstate access charge reductions of approximately $10 annually. In 1997, the
FCC also ordered significant changes that altered the structure of access
charges collected by the Company, effective January 1, 1998. Generally, the FCC
reduced and restructured the per minute charges paid by long distance carriers
and implemented new per line charges. The FCC also created an access charge
structure that resulted in different access charges for residential primary and
secondary lines and single line and multi-line business access lines. In
aggregate, the annual reductions in usage sensitive access charges of $35.1 paid
by long distance carriers were partially offset by $30 of new per line charges
and the charges paid by end-users. Effective July 1, 1998, access charges were
further reduced by $22.8 annually in compliance with FCC requirements to restate
the impacts of access charge reform.
In May 1997, the FCC released a major decision relating to implementation of the
Telecommunications Act's provision on universal service. GTE and numerous other
parties have challenged the FCC's decision before the U.S. Court of Appeals for
the Fifth Circuit on the grounds that the FCC did not follow the requirements of
the Telecommunications Act to develop a sufficient, explicit and competitively
neutral universal service program. Oral argument is not expected until
mid-September 1998 at the earliest, with a final decision to be issued by
mid-1999.
On March 9, 1998, the FCC adopted a Memorandum Opinion and Order (MO&O)
clarifying the payphone-specific coding digit requirements set forth in the
previous payphone orders and granting limited waivers of the requirement that
local exchange carriers (LECs) provide payphone-specific coding digits to
payphone service providers (PSPs), and that PSPs provide payphone-specific
coding digits from their payphones to interexchange carriers (IXCs), before PSPs
can receive per-call compensation from IXCs for subscriber 800 and access code
calls. GTE was granted waivers through 1998 in this order for Flex-ANI (Flexible
Automatic Number Identification) implementation due to technical problems
associated with switch conversions.
On April 3, 1998, the FCC issued another MO&O which granted the IXCs a waiver of
the per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted technology
waivers. GTE will receive per-phone compensation under this waiver until the
Flex-ANI capable offices are activated. Qualifying payphone
6
<PAGE> 8
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
calls from Flex-ANI capable switches will then be eligible for per-call
compensation rather than per-phone.
In a related court case between MCI and the FCC, the U.S. Court of Appeals,
District of Columbia Circuit, upheld the fundamental premise underlying the
FCC's approach to setting the per-call compensation rate for uncompensated
payphone calls, thereby supporting the ordered per-call compensation rate noted
in the March 9th order. At the same time, however, the Court held that the FCC
had failed to clearly explain its methodology on the development of that same
per-call compensation rate. The Court remanded this portion back to the FCC.
State Regulatory Developments
New Regulatory Framework
Effective January 1, 1990, the California Public Utilities Commission (CPUC)
adopted the new regulatory framework (NRF) for the Company. Under the NRF, rates
are adjusted annually by the Price Cap Index (PCI), which is based on inflation
minus a productivity improvement factor. Rates for partially competitive
services, such as Centrex and custom calling features, may be priced below the
price cap within a range set by the CPUC. Rates are also adjusted for exogenous
events that are beyond the control of management as defined in this plan. Fully
competitive services, such as directory advertising, are not subject to pricing
limits set by the CPUC.
In May 1998, the Company and Pacific Bell participated in a NRF review
proceeding. The scope of the review is limited to whether changes should be made
to the existing price cap mechanism. Both Pacific Bell and the Company supported
a pure price cap model in that the vestiges of earnings be eliminated. However,
the Company disagrees with Pacific Bell's proposal to cap the basic residential
service at its existing rates through year 2001. A final decision is expected to
be issued in the fourth quarter of 1998.
Competition
In January 1998, the CPUC approved the Company's petition to operate both as a
reseller and facilities-based competitive local-exchange carrier offering
local-exchange service within the territories of mid-sized local-exchange
7
<PAGE> 9
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
carriers. Authority to commence facilities-based service was effective February
1, 1998 and authority to resell services was effective April 1, 1998, upon the
filing of tariffs.
Open Access and Network Architecture Development (OANAD) Proceeding
On September 15, 1997, the Company submitted cost studies for unbundled network
elements (UNEs) and retail services to the CPUC. A final order on the Company's
UNE costs is anticipated in September 1998 and a final order on UNE prices is
anticipated in the first quarter of 1999.
In a separate phase of the OANAD proceeding, the CPUC allowed comments on
parties' Operational Support Systems (OSS) and Non-Recurring Cost (NRC) studies
which were submitted in September 1997. The Company filed a pricing proposal for
OSS and NRCs in April 1998 along with testimony regarding what constitutes a
"reasonable markup" for UNEs, arbitrage and price floor determinations. A final
order on these matters is expected in late 1998.
Other Developments
In March and April 1998, the Company took action to correct errors discovered in
certain specialty directories known as "Street Address" directories. Less than
two percent of the Company's customers with non-published, non-listed and
non-address directory listings had their information erroneously printed in the
Street Address books, which are specialty marketing directories generally used
by a limited number of California businesses on a leased basis. Once the full
scope of the errors was known, the Company took immediate action to develop and
implement a comprehensive plan to retrieve and replace the directories in
question. This included seeking and obtaining a temporary restraining order
preventing the use, copy or distribution of the directories by any remaining
holders. Efforts were also made to contact all customers who had requested
non-published, non-listed or non-address listings, in addition to the small
percentage impacted by the errors. The financial impact, if any, of potential
CPUC or legal actions that may arise as a result of this occurrence cannot be
determined at this time.
RECENT DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies in a merger of equals
transaction. Under terms of the definitive agreement, which was unanimously
approved by the board of directors of both companies, GTE shareholders will
receive 1.22 shares of Bell Atlantic stock for each GTE share they own. The
merger is expected to be accounted for as a pooling of interests, is subject to
shareholder and regulatory approval, and is expected to be completed during the
second half of 1999. For additional information regarding the merger, refer to
the Form 8-K filed by GTE dated July 27, 1998.
In April 1998, GTE announced a series of actions designed to further sharpen its
strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate after-tax
proceeds of $2,000 to $3,000 by selling non-strategic or under-performing
operations, and plans to reduce annual costs by more than $500 through improved
efficiencies and productivity while it continues to invest in new high-growth
opportunities. The impact of this announcement on the Company is
8
<PAGE> 10
GTE California Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
unknown at this time. GTE's management is currently assessing its options and,
as decisions are finalized regarding the sale of non-strategic operations and
cost reductions, the Company could be affected.
The CPUC is conducting an investigation of allegations that personnel of the
Company destroyed or altered documents during a 1992-1993 CPUC probe of sales
improprieties at the Company's Foreign Language Assistance Center. During 1997,
the Company asked former California Supreme Court Chief Justice Malcolm M. Lucas
to investigate the allegations. In October 1997, Chief Justice Lucas submitted
his report to the Company and the CPUC. In response to the Lucas report, the
Company has disciplined four employees. In February 1998, the CPUC ordered a
formal investigation into the marketing practices of the Foreign Language
Assistance Center as well as allegations that the Company provided misleading
information. The Company agreed with the CPUC staff to settle this proceeding
for $9.8, payable over three years with no interest. The settlement is
contingent on CPUC approval. Resolution is expected in the third quarter of
1998.
9
<PAGE> 11
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,664 $ 9,871
Receivables, less allowances of $60,978 and $65,169 662,980 699,038
Inventories and supplies 52,196 51,050
Prepaid insurance 23,720 6,529
Deferred income tax benefits 3,146 1,684
Other 8,546 27,186
------------ ------------
Total current assets 756,252 795,358
------------ ------------
Property, plant and equipment, at cost 10,348,727 10,077,872
Accumulated depreciation (6,508,515) (6,278,551)
------------ ------------
Total property, plant and equipment, net 3,840,212 3,799,321
------------ ------------
Prepaid pension costs 769,718 706,556
Other assets 38,197 19,095
------------ ------------
Total assets $ 5,404,379 $ 5,320,330
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 232,889 $ 246,052
Accounts payable 250,878 356,322
Advanced billings and customer deposits 76,899 65,548
Taxes payable 205,782 26,760
Accrued interest 27,676 30,163
Accrued payroll costs 89,185 89,221
Dividends payable 147,302 158,246
Other 207,299 192,574
------------ ------------
Total current liabilities 1,237,910 1,164,886
------------ ------------
Long-term debt 1,575,883 1,466,679
Deferred income taxes 463,925 394,883
Employee benefit plans 200,270 225,425
Other liabilities 178,796 272,648
------------ ------------
Total liabilities 3,656,784 3,524,521
------------ ------------
Shareholders' equity:
Preferred stock 49,984 49,984
Common stock (70,000,000 shares issued) 1,400,000 1,400,000
Additional paid-in capital 82,239 82,239
Retained earnings 215,372 263,586
------------ ------------
Total shareholders' equity 1,747,595 1,795,809
------------ ------------
Total liabilities and shareholders' equity $ 5,404,379 $ 5,320,330
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
GTE California Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS:
Net income $ 289,967 $ 245,759
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 291,584 333,717
Deferred income taxes 67,580 40,443
Provision for uncollectible accounts 36,410 38,258
Changes in current assets and current liabilities (11,106) (70,983)
Other - net (107,348) (72,784)
--------- ---------
Net cash from operations 567,087 514,410
--------- ---------
INVESTING:
Capital expenditures (330,812) (227,781)
Proceeds from sale of assets 281 3,794
--------- ---------
Net cash used in investing (330,531) (223,987)
--------- ---------
FINANCING:
Long-term debt issued 197,591 --
Long-term debt and preferred stock retired,
including premiums paid on early retirement (150,070) (258,634)
Dividends (349,125) (358,821)
Decrease in short-term obligations, excluding
current maturities -- (71,001)
Net change in affiliate notes 60,841 453,485
--------- ---------
Net cash used in financing (240,763) (234,971)
--------- ---------
Increase (decrease) in cash and cash equivalents (4,207) 55,452
Cash and cash equivalents:
Beginning of period 9,871 22,158
--------- ---------
End of period $ 5,664 $ 77,610
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
11
<PAGE> 13
GTE California Incorporated and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
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 consolidated financial statements and the notes thereto included in
the Company's 1997 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate,
to conform to the 1998 presentation.
(2) DEBT:
In May 1998, the Company issued $200 million of 6.75% Series F
Debentures, due 2027. The net proceeds were applied toward the
repayment of short-term borrowings.
In compliance with Financial Accounting Standards No. 6,
"Classification of Short-Term Obligations Expected to Be Refinanced"
(FAS 6), long-term debt as of June 30, 1998 includes $110 million of
short-term borrowings in the form of affiliate notes payable. These
affiliate notes payable represent notes payable to GTE Funding
Incorporated, an affiliate company that provides short-term financing
and investment vehicles and cash management services for the Company
and six of its affiliates.
(3) RECENT ACCOUNTING PRONOUNCEMENTS:
Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 defines internal-use software and establishes accounting
standards for the costs of such software. The Company is currently
assessing the impact of adopting SOP 98-1, and intends to implement as
of January 1, 1999.
12
<PAGE> 14
GTE California Incorporated and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. The Company has not yet assessed the impact
of adopting FAS 133.
13
<PAGE> 15
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 1998.
14
<PAGE> 16
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.
<TABLE>
<S> <C>
GTE California Incorporated
---------------------------------------------------
(Registrant)
Date: August 14, 1998 /s/ Stephen L. Shore
------------------------------ ---------------------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
</TABLE>
15
<PAGE> 17
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, 1998
----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $289,967
Add - Income taxes 193,335
- Fixed charges 71,758
--------
Adjusted earnings $555,060
========
Fixed charges:
Interest expense $ 64,897
Portion of rent expense
representing interest 6,861
--------
Adjusted fixed charges $ 71,758
========
RATIO OF EARNINGS TO FIXED CHARGES 7.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,664
<SECURITIES> 0
<RECEIVABLES> 723,958
<ALLOWANCES> 60,978
<INVENTORY> 52,196
<CURRENT-ASSETS> 756,252
<PP&E> 10,348,727
<DEPRECIATION> 6,508,515
<TOTAL-ASSETS> 5,404,379
<CURRENT-LIABILITIES> 1,237,910
<BONDS> 1,575,883
0
49,984
<COMMON> 1,400,000
<OTHER-SE> 297,611
<TOTAL-LIABILITY-AND-EQUITY> 5,404,379
<SALES> 1,574,632
<TOTAL-REVENUES> 1,574,632
<CGS> 515,970
<TOTAL-COSTS> 1,031,866
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,443
<INCOME-PRETAX> 483,302
<INCOME-TAX> 193,335
<INCOME-CONTINUING> 289,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,967
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
