<PAGE> 1
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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: MARCH 31, 2000
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)
<TABLE>
<S> <C>
CALIFORNIA 95-0510200
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code 972-507-5000
(Former name, former address and former fiscal year,
if changed since last report)
The registrant, a wholly-owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is
therefore filing this form with reduced disclosure format pursuant to General
Instruction (H)(2).
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
April 30, 2000. The Company's common stock is 100% owned by GTE Corporation.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
REVENUES AND SALES
Local services $ 379.9 $ 359.7
Network access services 292.3 277.5
Other services and sales 147.4 189.9
------------ ------------
Total revenues and sales 819.6 827.1
------------ ------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 175.6 216.7
Selling, general and administrative 84.5 134.6
Depreciation and amortization 161.7 154.1
------------ ------------
Total operating costs and expenses 421.8 505.4
------------ ------------
OPERATING INCOME 397.8 321.7
OTHER EXPENSE
Interest - net 35.8 35.1
------------ ------------
INCOME BEFORE INCOME TAXES 362.0 286.6
Income taxes 148.6 116.5
------------ ------------
NET INCOME $ 213.4 $ 170.1
============ ============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 0.4 $ 11.6
Receivables, less allowances of
$67.9 million and $65.5 million 592.1 689.2
Receivables from affiliates 7.2 14.7
Inventories and supplies 57.6 45.2
Net assets held for sale 45.8 53.8
Deferred income tax benefits 77.2 68.7
Prepayments and other 26.1 50.2
------------ ------------
Total current assets 806.4 933.4
------------ ------------
Property, plant and equipment, at cost 10,588.5 10,489.8
Accumulated depreciation (6,763.3) (6,665.0)
------------ ------------
Total property, plant and equipment, net 3,825.2 3,824.8
------------ ------------
Prepaid pension costs 1,316.1 1,170.6
Other assets 17.9 15.5
------------ ------------
Total assets $ 5,965.6 $ 5,944.3
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 305.3 $ 5.2
Notes payable to affiliates 126.0 204.1
Accounts payable 153.5 156.5
Affiliate payables 149.1 122.3
Taxes payable 178.6 77.2
Dividends payable 185.0 185.5
Other 341.4 355.2
------------ ------------
Total current liabilities 1,438.9 1,106.0
------------ ------------
Long-term debt 1,665.9 1,966.4
Deferred income taxes 854.8 810.3
Employee benefit plans and other 174.2 202.9
------------ ------------
Total liabilities 4,133.8 4,085.6
------------ ------------
Shareholders' equity
Preferred stock -- 50.0
Common stock (70,000,000 shares issued) 1,400.0 1,400.0
Additional paid-in capital 93.1 92.5
Retained earnings 338.7 316.2
------------ ------------
Total shareholders' equity 1,831.8 1,858.7
------------ ------------
Total liabilities and shareholders' equity $ 5,965.6 $ 5,944.3
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Net income $ 213.4 $ 170.1
Adjustments to reconcile net income to net cash
from operations:
Depreciation and amortization 161.7 154.1
Employee retirement benefits (148.0) (36.8)
Provision for uncollectible accounts 15.8 11.8
Changes in current assets and current liabilities 212.4 188.4
Deferred income taxes and other - net 4.0 21.9
------------ ------------
Net cash from operations 459.3 509.5
------------ ------------
INVESTING
Capital expenditures (150.3) (113.9)
Other - net 0.5 --
------------ ------------
Net cash used in investing (149.8) (113.9)
------------ ------------
FINANCING
Long-term debt issued 273.6 222.4
Preferred stock retired, including premiums paid
on early retirement (55.4) --
Dividends (185.9) (205.6)
Net change in affiliate notes (353.0) (422.9)
------------ ------------
Net cash used in financing (320.7) (406.1)
------------ ------------
Decrease in cash and cash equivalents (11.2) (10.5)
Cash and cash equivalents:
Beginning of period 11.6 16.4
------------ ------------
End of period $ 0.4 $ 5.9
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
------------- ------------- ------------- ------------- -------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1999 $ 50.0 $ 1,400.0 $ 92.5 $ 316.2 $ 1,858.7
Net income 213.4 213.4
Redemption of preferred stock (50.0) (5.4) (55.4)
Tax benefit from exercise of stock options 0.6 0.6
Dividends declared (185.5) (185.5)
------------- ------------- ------------- ------------- -------------
Shareholder's equity, March 31, 2000 $ -- $ 1,400.0 $ 93.1 $ 338.7 $ 1,831.8
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
GTE California Incorporated (the Company) is incorporated under the laws of the
State of California and is a subsidiary of GTE Corporation (GTE).
The accompanying unaudited condensed consolidated financial statements have been
prepared based upon Securities and Exchange Commission (SEC) rules that permit
reduced disclosure for interim periods. These condensed consolidated financial
statements reflect all adjustments that are necessary for a fair presentation of
results of operations and financial position for the interim periods shown
including normal recurring accruals. The results for the interim periods are not
necessarily indicative of results for the full year. For a more complete
discussion of significant accounting policies and certain other information,
please refer to the consolidated financial statements and the notes thereto
included in the Company's 1999 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 2000 presentation.
NOTE 2. DEBT
In March 2000, the Company issued $275.0 million of 7.65% Series H Debentures,
due 2007. The net proceeds were applied toward the repayment of short-term
borrowings used to finance the Company's construction program and for general
corporate purposes.
NOTE 3. PREFERRED STOCK
In March 2000, the Company redeemed all 2,499,174 outstanding shares of
preferred stock and paid premiums of $5.4 million pretax on the early
redemption.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which currently must be adopted
by June 30, 2000. SAB No. 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned and also requires the deferral of incremental costs. The Company is
currently assessing the impact of SAB No. 101.
6
<PAGE> 8
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements Unaudited) - Continued
NOTE 5. NET ASSETS HELD FOR SALE
During May 1999, the Company entered into an agreement to sell approximately
46,000 switched access lines located in California and Arizona to Citizens
Utilities Company. This agreement consummates the Company's previously announced
1998 plan to sell selected access lines located in California and Arizona. The
sale is subject to regulatory approval and is expected to close in 2000. The
associated net assets, which approximate $45.8 million and $53.8 million at
March 31, 2000 and December 31, 1999, respectively, consist of property, plant
and equipment, and have been classified as "Net assets held for sale" in the
consolidated balance sheets. The Company intends to continue to operate all of
these assets until sold. Based on the decision to sell, however, the Company
stopped recording depreciation expense for these assets. Accordingly,
depreciation expense was lowered by $2.1 million and $1.9 million for the three
months ended March 31, 2000 and 1999, respectively. No charges were recorded for
the access lines to be sold because their estimated fair values were in excess
of their carrying values. The access line agreement represents approximately 1%
of the switched access lines that the Company had in service at the end of 1999,
and contributed approximately 1% to 1999 consolidated revenues and approximately
1% of 1999 consolidated operating income.
NOTE 6. DIRECTORY PUBLISHING REVENUES
Consistent with industry practice, effective January 1, 2000, GTE changed its
method of recognizing directory publishing revenues. GTE Directories, a
wholly-owned subsidiary of GTE, publishes telephone directories for which it
receives advertising revenue. Under the previous method of revenue recognition,
approximately 60% of the advertising revenue for directories published in the
Company's operating areas was recognized as revenue by the Company. The
remaining 40% was recognized as revenue by GTE Directories. Under the new
method, GTE Directories now recognizes 100% of the directory publishing
revenues. The Company, in-turn, bills GTE Directories for customer listing
information and billing and collection services. As a result, the Company's
other services and sales revenues and operating income for the three months
ended March 31, 2000 decreased $3.9 million and $2.4 million, respectively,
compared to the first quarter of 1999.
NOTE 7. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock that they own. Bell Atlantic
shareholders will continue to own their existing shares after the merger.
The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. At annual meetings held in May 1999, the
shareholders of each company approved the merger. The completion of the merger
is subject to a number of conditions, including certain regulatory approvals and
receipt of opinions that the merger will be tax-free. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the Federal Communications Commission.
7
<PAGE> 9
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
RESULTS OF OPERATIONS
Net income increased $43.3 million or 25% for the three months ended March 31,
2000, compared to the same period in 1999, primarily due to lower cost of
services and sales and selling, general and administrative expenses, partially
offset by a slight decline in total revenues and a corresponding increase in
income taxes.
<TABLE>
<CAPTION>
REVENUES AND SALES
(Dollars in Millions) Three Months Ended
March 31,
------------------------ Increase Percent
2000 1999 (Decrease) Change
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Local services $ 379.9 $ 359.7 $ 20.2 6%
Network access services 292.3 277.5 14.8 5%
Other services and sales 147.4 189.9 (42.5) (22)%
--------- --------- ---------
Total revenues and sales $ 819.6 $ 827.1 $ (7.5) (1)%
========= ========= =========
</TABLE>
Local Services Revenues
Local services revenues increased for the first quarter of 2000 compared to the
first quarter of 1999 primarily due to 3% growth in switched access lines, which
generated $10.1 million of additional revenues from basic local services,
Integrated Services Digital Network and Digital Channel Services. Revenues from
enhanced customer calling services, such as SmartCall(R) and CLASS services,
contributed $4.9 million to the first quarter increase. In addition, operator
services generated $1.8 million in revenue growth.
Network Access Services Revenues
Minutes of use increased 14%, generating additional network access services
revenues of $15.4 million for the first quarter of 2000 compared to the first
quarter of 1999. Special access revenues grew by $27.1 million as a result of
greater demand for increased bandwidth services by high-capacity users. These
increases are partially offset by the impact of mandated interstate and
intrastate access price reductions and rate element adjustments of $29.2
million.
Other Services and Sales Revenues
The decrease in other services and sales revenues for the first quarter of 2000
is primarily the result of reduced toll revenues of $15.2 million resulting from
intraLATA (Local Access Transport Area) toll competition and reduced public
telephone revenues of $10.6 million due to decreased volumes associated with
wireless product substitution. E911 revenues decreased $6.2 million and
telecommunications equipment rental income decreased $6.5 million. Furthermore,
the impact of a change in the recognition of directory publishing revenues
contributed $3.9 million to the decrease (for further information see "OTHER
DEVELOPMENTS - Directory Publishing Revenues").
8
<PAGE> 10
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
<TABLE>
<CAPTION>
OPERATING COSTS AND EXPENSES
(Dollars in Millions) Three Months Ended
March 31,
------------------------ Increase Percent
2000 1999 (Decrease) Change
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of services and sales $ 175.6 $ 216.7 $ (41.1) (19)%
Selling, general and administrative 84.5 134.6 (50.1) (37)%
Depreciation and amortization 161.7 154.1 7.6 5%
--------- --------- ---------
Total operating costs and expenses $ 421.8 $ 505.4 $ (83.6) (17)%
========= ========= =========
</TABLE>
The decrease in operating costs and expenses is primarily due to the recognition
of a pretax gain of $102.1 million associated with lump-sum settlements of
pension obligations for former employees electing deferred vested pension
cash-outs and for current employees who met certain eligibility requirements. A
one-time special charge of $19.9 million in the first quarter of 1999,
associated with an employee-reduction program, also contributed to the decrease
in costs for the first quarter of 2000 compared to the same period in 1999.
Partially offsetting these decreases were higher costs of $25.3 million
associated with customer and access line growth and costs for new initiatives,
such as digital subscriber line (DSL) service. Further offsetting these cost
reductions were higher access charges of $4.5 million, primarily resulting from
increased competitive local exchange carrier (CLEC) activity. The increase in
depreciation and amortization expense is associated with the investment in
network facilities necessary to support switched access line growth due to
higher demand from both Internet Service Providers (ISPs) and customers.
OTHER INCOME STATEMENT ITEMS
Income tax expense increased $32.1 million or 28% for the three months ended
March 31, 2000 compared to the same period in 1999, primarily due to a
corresponding increase in pretax income.
INTERSTATE REGULATORY DEVELOPMENTS
During the first quarter of 2000, regulatory and legislative activity at both
the state and federal levels continued to be a direct result of the
Telecommunications Act of 1996 (Telecommunications Act). Along with promoting
competition in all segments of the telecommunications industry, the
Telecommunications Act was intended to preserve and advance universal service.
GTE continued in 2000 to meet the wholesale requirements of new competitors. GTE
has continued to sign interconnection agreements with other carriers, providing
them the capability to purchase unbundled network elements (UNEs), resell retail
services and interconnect facilities-based networks.
Universal Service
In November 1999, the Federal Communications Commission (FCC) released an order
dealing with implementation of the new FCC federal high cost support mechanism
for non-rural incumbent local exchange carriers (ILECs), including GTE. The
effective date for the new federal universal service plan was January 1, 2000.
This plan will distribute federal high cost funds to states with higher than
average costs. The role of state commissions is to ensure reasonable
comparability within the borders of a state. Federal high cost support will be
calculated by comparing the nationwide average cost with each state's average
cost per line, and providing federal support for only states that exceed 135% of
the nationwide average. To guard against rate shock, the FCC also adopted a
"hold harmless" approach so that the amount of support provided to each
non-rural carrier under the new plan will not be less than
9
<PAGE> 11
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
the amount provided today. U S WEST has appealed this order on the basis that it
fails to provide a sufficient amount of support. This FCC order also established
a May 1, 2000 deadline by which state commissions must create at least three
deaveraged price zones for UNEs. In January 2000, GTE requested the FCC grant a
one year delay to give state commissions ample opportunity to implement
deaveraged retail rates and establish state universal service funds in concert
with UNE deaveraging. However, on April 6, 2000, the FCC denied GTE's request
for an extension of time. The FCC expects state commissions, rather than the
individual telephone companies, to file a waiver of the May 1, 2000 deadline, if
necessary. On April 28, 2000, the FCC granted temporary waivers to seven state
commissions allowing them to delay compliance up to six months. The remaining
states that GTE operates in have already adopted permanent deaveraged UNE rates.
INTRASTATE REGULATORY DEVELOPMENTS
California
Open Access and Network Architecture Development
In January 2000, the California Public Utilities Commission (CPUC) issued a
ruling directing the Company and Pacific Bell to file an amendment to existing
interconnection agreements to provide for line sharing service, including
interim prices. In a subsequent ruling, a new phase of the Open Access and
Network Architecture Development (OANAD) proceeding was opened to address the
interim and permanent line sharing issues, and a procedural schedule was issued.
The Company, Pacific Bell and all interested CLECs were directed to negotiate in
good faith throughout the month of March 2000 to reach agreement on amended
contract language for interim line sharing service. Arbitration was requested
and testimony has been filed. Hearings were held in April 2000 and an interim
arbitrated decision is expected in August 2000. The scope and schedule to
address final prices and other issues of line sharing will be set after interim
contract language is adopted. Performance standards for line sharing are being
addressed in a separate proceeding.
Operations Support Systems
The CPUC issued an order in April 2000 adopting line sharing performance
measurements for the the Company and Pacific Bell in compliance with the FCC's
line sharing order and California law.
OTHER DEVELOPMENTS
Proposed Merger with Bell Atlantic Corporation
Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock that they own. Bell Atlantic
shareholders will continue to own their existing shares after the merger.
The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. At annual meetings held in May 1999, the
shareholders of each company approved the merger. The completion of the merger
is subject to a number of conditions, including certain regulatory approvals and
receipt of opinions that the merger will be tax-free. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC.
10
<PAGE> 12
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
Both companies are working diligently to complete the merger and are targeting
completion of the merger in the second quarter of 2000.
Net Assets Held for Sale
During May 1999, the Company entered into an agreement to sell approximately
46,000 switched access lines located in California and Arizona to Citizens
Utilities Company. This agreement consummates the Company's previously announced
1998 plan to sell selected access lines located in California and Arizona. The
sale is subject to regulatory approval and is expected to close in 2000. The
associated net assets, which approximate $45.8 million and $53.8 million at
March 31, 2000 and December 31, 1999, respectively, consist of property, plant
and equipment, and have been classified as "Net assets held for sale" in the
consolidated balance sheets. The Company intends to continue to operate all of
these assets until sold. Based on the decision to sell, however, the Company
stopped recording depreciation expense for these assets. Accordingly,
depreciation expense was lowered by $2.1 million and $1.9 million for the three
months ended March 31, 2000 and 1999, respectively. No charges were recorded for
the access lines to be sold because their estimated fair values were in excess
of their carrying values. The access line agreement represents approximately 1%
of the switched access lines that the Company had in service at the end of 1999,
and contributed approximately 1% to 1999 consolidated revenues and approximately
1% of 1999 consolidated operating income.
Directory Publishing Revenues
Consistent with industry practice, effective January 1, 2000, GTE changed its
method of recognizing directory publishing revenues. GTE Directories, a
wholly-owned subsidiary of GTE, publishes telephone directories for which it
receives advertising revenue. Under the previous method of revenue recognition,
approximately 60% of the advertising revenue for directories published in the
Company's operating areas was recognized as revenue by the Company. The
remaining 40% was recognized as revenue by GTE Directories. Under the new
method, GTE Directories now recognizes 100% of the directory publishing
revenues. The Company, in-turn, bills GTE Directories for customer listing
information and billing and collection services. As a result, the Company's
other services and sales revenues and operating income for the three months
ended March 31, 2000 decreased $3.9 million and $2.4 million, respectively,
compared to the first quarter of 1999. Other services and sales revenues and
operating income for the year ended December 31, 2000 are expected to decrease
by approximately $125.9 million and $115.1 million, respectively, compared to
1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
currently must be adopted by June 30, 2000. SAB No. 101 provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and
11
<PAGE> 13
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
earned and also requires the deferral of incremental costs. The Company is
currently assessing the impact of SAB No. 101.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis, the Company has made
forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets" or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service, UNEs
and resale rates; and (4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA toll service
markets.
12
<PAGE> 14
PART II. OTHER INFORMATION
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
10 Material Contracts - Letter Agreement between GTE Service
Corporation and John Appel
12 Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K dated March 10, 2000 under Item
5, "Other Events", and Item 7, "Financial Statements and Exhibits." No
financial statements were included with this report.
13
<PAGE> 15
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 12, 2000 /s/ Stephen L. Shore
------------------- --------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
<S> <C>
10 Material Contracts - Letter Agreement between GTE
Service Corporation and John Appel
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
PERSONAL & CONFIDENTIAL
April 26, 2000
Mr. John Appel
[Address]
[Address]
Dear John:
As we have discussed, it is important to GTE that you remain with the company at
least through the closing of the merger. That being the case, if you remain with
GTE at least through the closing (or, if later, June 30, 2000) but separate as a
result of the merger thereafter, GTE will calculate your lump sum pension
benefit using the interest rate as of July 1, 2000 or the interest rate that
would ordinarily be used given your actual separation date, whichever would
provide you with the highest lump sum benefit. This special interest rate
protection will only be applicable if you elect to receive a lump sum pension
distribution following your separation, and any increase in the amount to which
you are entitled as a result of this commitment will be payable from the general
assets of GTE.
John, I want to thank you again for your flexibility. We need your leadership
now - more than ever. I truly appreciate this additional commitment.
Sincerely,
J. Randall MacDonald
Executive Vice President -
Human Resources & Administration
JRM:wh
c: J. T. D'Angelo, Jr.
E. D. Singer
<PAGE> 1
Exhibit 12
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Statement of the Consolidated Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
March 31, 2000
-----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 213.4
Add - Income taxes 148.6
- Fixed charges 40.3
-----------------
Adjusted earnings $ 402.3
=================
Fixed charges:
Interest expense $ 36.8
Portion of rent expense representing interest 3.5
-----------------
Adjusted fixed charges $ 40.3
=================
RATIO OF EARNINGS TO FIXED CHARGES 9.98
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 400
<SECURITIES> 0
<RECEIVABLES> 667,200
<ALLOWANCES> 67,900
<INVENTORY> 57,600
<CURRENT-ASSETS> 806,400
<PP&E> 10,588,500
<DEPRECIATION> 6,763,300
<TOTAL-ASSETS> 5,965,600
<CURRENT-LIABILITIES> 1,438,900
<BONDS> 1,665,900
0
0
<COMMON> 1,400,000
<OTHER-SE> 431,800
<TOTAL-LIABILITY-AND-EQUITY> 5,965,600
<SALES> 819,600
<TOTAL-REVENUES> 819,600
<CGS> 175,600
<TOTAL-COSTS> 421,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,800
<INCOME-PRETAX> 362,000
<INCOME-TAX> 148,600
<INCOME-CONTINUING> 213,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 213,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
