GTE CALIFORNIA INC, 10-K405, 2000-03-30

GTE CALIFORNIA INC
10-K405, 2000-03-30
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended: DECEMBER 31, 1999
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)

1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code 972-507-5000

(Former name, former address and former fiscal year,
if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The Company had 70,000,000 shares of $20 par value common stock outstanding at
February 29, 2000. The Company's common stock is 100% owned by GTE Corporation.

The Company meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.

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PART I

Item 1. Business

GTE California Incorporated (the Company) was incorporated in California in
1929. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
provides communications services in the states of California, Nevada and
Arizona.

The Company has a wholly-owned subsidiary, Contel Advanced Systems, Inc., which
markets telecommunications customer premise equipment and other products and
services.

The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for various industries. The Company provides local
telephone service within its franchise area and intraLATA (Local Access
Transport Area) toll service between the Company's facilities and the facilities
of other telephone companies within the Company's LATAs. InterLATA service to
other points in and out of the states in which the Company operates is provided
through connection with long-distance carriers. These other carriers are charged
fees (access charges) for interconnection to the Company's local facilities.
Business and residential customers also pay access charges to connect to the
local network to obtain long distance service. The Company earns other revenues
by providing such services as billing and collection and operator services to
long-distance carriers. At December 31, 1999, the Company served 6,053,815
access lines in its service territories.

At December 31, 1999, the Company had 11,753 employees.

The Company has written agreements with the Communications Workers of America
(CWA) and the International Brotherhood of Electrical Workers (IBEW) covering
substantially all non-management employees. New agreements with both the CWA and
the IBEW were negotiated in 1999 and will expire in 2002.

REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona for its intrastate business operations and by the
Federal Communications Commission (FCC) for its interstate operations.

During 1999, 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.

INTERSTATE SERVICES

GTE continued in 1999 to meet the wholesale requirements of new competitors. GTE
has signed interconnection agreements with other carriers, providing them the
capability to purchase unbundled network elements (UNEs), resell retail services
and interconnect facilities-based networks. Several of these interconnection
agreements were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently appealed to the U.S. Supreme Court
(Supreme Court). GTE challenged a number of such agreements in federal district
courts during 1997.

GTE's position in these challenges was supported by a decision of the Eighth
Circuit Court (Eighth Circuit) in July 1997 which stated the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the Supreme Court
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. In addition,
the Supreme Court vacated the FCC rule setting forth the UNEs that incumbent
local exchange carriers (ILECs) are required to provide to competitive local
exchange carriers

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(CLECs). This latter ruling led to a proceeding before the FCC concerning what
elements had to be offered and under what conditions.

In November 1999, the FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements, which must be available
on either a stand-alone basis, or as a combined local service "platform" if the
elements have been previously combined by the ILEC. ILECs are no longer required
to provide unbundled operator services, including directory assistance where
alternate routing is available. In addition, in certain circumstances, local and
tandem switching need not be unbundled. However, the FCC expanded the definition
of some UNEs by specifying that components of the loop UNE must be made
available in sub-loop components, and augmenting the types of call-related
databases that must be unbundled as UNEs. The FCC also found that state
commissions can require ILECs to unbundle additional elements as long as they
are consistent with the requirements of the Telecommunications Act and the
national policy framework instituted in the FCC's order. Furthermore, the order
precludes states from removing network elements from the FCC's list of
unbundling obligations. The United States Telecom Association (USTA) has
appealed this order and GTE will participate.

In December 1999, the FCC released another order that requires ILECs to provide
line sharing to CLECs by unbundled access to the high-frequency portion of the
local loop over which the ILEC provides voice services. The FCC's stated intent
in adopting the line sharing order is to enable competitive carriers to provide
digital subscriber line (DSL) services over the same lines simultaneously used
by ILECs to provide basic phone services.

In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. Parties to this action have filed briefs and
participated in oral arguments in September 1999. The major issues are: (1) the
FCC's cost methodology used to set prices, (2) its methodology for setting
wholesale discounts, (3) the "proxy rates" it set for interconnection, UNEs, and
wholesale discounts, (4) whether ILECs should be required to combine UNEs that
are not already combined, and (5) whether the FCC can require ILECs to provide
"superior quality" to competitors than what the ILEC provides to itself. A court
decision is expected during the first half of 2000.

Universal Service

GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide explicit
universal service subsidies.

In October 1998, the FCC issued an order selecting a cost model for universal
service. In July 1999, the United States Court of Appeals for the Fifth Circuit
(Fifth Circuit) affirmed in part, reversed in part, and remanded in part the
FCC's universal service regime. In October 1999, the FCC released two orders in
response to the Fifth Circuit decision. One order permits ILECs to continue to
recover their universal service contributions from access charges or to
establish end-user charges. The second order changed the contribution basis for
school/library funding to eliminate calculations based upon intrastate revenues.
In January 2000, GTE requested the Supreme Court to review the Fifth Circuit
decision allowing the FCC to base universal service support from the results of
a hypothetical cost model rather than historical costs that were incurred to
provide local service. GTE argued that the Fifth Circuit ignored long standing
legal precedent in permitting a major revision to ILEC cost recovery mechanisms
without ensuring the new process would not result in a constitutionally
prohibited "taking".

In November 1999, the FCC released an order selecting the cost inputs for the
federal universal service cost model. GTE is seeking reconsideration. Since the
FCC moved the implementation date of the new universal service mechanism for
non-rural carriers to January 2000, many state regulators awaited FCC action
before they began designing their universal service programs.

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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 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.

In December 1999, the FCC asked for comment on requests made by the North Dakota
and South Dakota state commissions and the Rural Utilities Service (RUS) asking
the FCC to redefine "voice grade access" in the FCC's universal service rules.
The FCC requires that, in order to be eligible for universal service support, a
carrier must offer, among other things, voice grade access to the public
switched telephone network. Current FCC rules specify that voice grade access
should occur in a frequency range between approximately 300 Hertz (Hz) to 3,000
Hz. The petitioners requested the frequency range be changed to 200 Hz to 3,500
Hz. GTE participated in this proceeding and opposed any change in FCC
requirements. The network is not designed for the proposed ubiquitous
requirement and would require a significant infrastructure investment and at
least a decade to implement.

Price Cap

The federal price cap regime allows access prices to change each year by a
measure of inflation minus a productivity factor offset. In May 1999, the U.S.
Court of Appeals for the District of Columbia (Court) released a decision
regarding the FCC's choice of a 6.5% price cap productivity factor in a 1997
order. The Court found the FCC's choice of a 6.0% base factor and a 0.5%
Consumer Productivity Dividend to be inadequately supported. The Court remanded
the matter back to the FCC for further action and established an April 2000 date
by which the FCC must issue a revised decision. As a result, in November 1999,
the FCC initiated a rulemaking proposal requesting comments on the interstate
price cap productivity factor. Currently, it is unknown whether the single price
cap productivity factor will be applied retroactively to July 1, 1997 and remain
in effect until the next price cap performance review in 2003, or whether one
factor will apply from 1997 to 2000 and another factor apply from 2000 to 2003.

Interstate Access Revision

Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction was $113 million. Similar filings during 1997
and 1998 had already resulted in price reductions.

In August 1999, GTE, along with a coalition of local exchange and long-distance
companies (CALLS), submitted a proposal for interstate access charge and
universal service reform to the FCC. The proposal would accelerate the shift in
non-usage sensitive access revenue recovery from per-minute to flat-rated
charges, set a schedule for elimination of the price cap productivity factor,
and provide more explicit support for universal service. The coalition filed a
revised plan in March 2000 and the FCC has offered the plan for comments. A
decision by the FCC is expected in 2000.

In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.

Advanced Telecommunications Services

The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.

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In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals, and space
exhaustion. GTE asked the Court to review this order. In March 2000, the Court
issued a ruling granting, in part, challenges raised by GTE to the FCC's March
1999 order. The Court ruled that the FCC failed to justify its requirement that
ILECs must permit collocation of any CLEC equipment that was "used or useful"
for interconnection or access to network elements. The Court remanded this
portion of the decision back to the FCC for further deliberation.

In November 1999, the FCC released an order concluding that an ILEC's offering
of DSL services to Internet Service Providers (ISPs) pursuant to volume and term
discount plans that are a component of the ISPs high-speed Internet service are
not a retail offering, and thus not subject to the discounted resale obligation.
The order also concluded that an ILECs DSL offering to end users is a retail
offering if the ILEC performs certain consumer-oriented functions, such as
provisioning of customer premises equipment and wiring, marketing, billing and
collection, and accepting repair requests directly from the end user. The FCC
concluded that these services are subject to discounted resale obligation,
regardless of whether the service is classified as telephone exchange service
(local tariff) or exchange access service (access tariff).

Number Portability

In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residential customers. In June 1999, GTE's
tariffed LNP charge was reviewed and accepted by the FCC at $0.36 per access
line per month.

Internet Service Traffic

ILECs are required to provide open access to all ISPs, while cable television
operators are not. Several major cable television operators providing Internet
access through cable modem facilities are only offering their affiliated ISPs to
consumers. Cable television operators that do allow customers to select
non-affiliated ISPs often require the customer to also pay for their affiliated
ISP's service (i.e., to pay twice for the same service). GTE has been active in
encouraging municipalities engaged in reviewing cable television mergers or
franchise renewals to require cable modem open access as a condition for
approval. The City of Portland, Oregon was first to adopt such a requirement and
AT&T Corp. has appealed that decision. Arguments took place in November 1999
before the Ninth Circuit Court.

In October 1999, GTE filed an antitrust lawsuit contending that cable TV
providers' refusal to provide ISPs with "open access" to cable modem platforms
is a violation of federal antitrust law. The lawsuit filed in the U.S. District
Court in Pittsburgh, names Tele-Communications, Inc., (now a unit of AT&T
Corp.), Comcast Corp., and Excite@Home and seeks an injunction to require open
access and damages.

GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end user of one party and terminating to the end user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that carry this traffic to their ISP customers. In a
recent ruling, the FCC has clarified that ISP traffic is largely interstate and
is not local traffic. Nevertheless, the FCC permitted state commissions to
arbitrate whether ILECs should pay as reciprocal compensation for ISP-bound
traffic, based upon existing interconnection agreements, until the FCC reaches a
decision on a long-term compensation scheme. GTE challenged this FCC conclusion
in federal district court. In March 2000, the Court vacated and remanded the
FCC's ruling that ISP-bound calls are interstate since the FCC failed to provide
a satisfactory explanation to support its ruling. As a result, the Court did not
address GTE's argument that the Telecommunications Act preempts state commission
authority to arbitrate disputes over non-local traffic.

Further information regarding the Company's activities with the various state
regulatory agencies is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "REGULATORY AND COMPETITIVE
TRENDS - INTRASTATE SERVICES."

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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. 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. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC. Both companies are working diligently to complete the
merger and are targeting completion of the merger in the second quarter of 2000.

Planned Asset Sales

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 $53.8 million, consist of property,
plant and equipment, and have been reclassified as "Net assets held for sale" in
the consolidated balance sheets at December 31, 1999. The net book value of
these access lines is reflected in "Property, plant and equipment, net" in the
consolidated balance sheets at December 31, 1998. 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 $8.5 million in 1999
and $1.9 million in 1998. 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.

ENVIRONMENTAL MATTERS

GTE maintains monitoring and compliance programs related to environmental
matters. Currently, the Company, along with other unrelated corporations, has
been identified as a potentially responsible party at a number of sites which,
although lawfully used in the past, were determined to require remediation.
Remediation activities by GTE also continue at some present or formerly owned
sites pursuant to other federal or state environmental statutes or regulations.
GTE has reviewed each site in which it has an involvement to establish an
expected remediation cost. Factors used to evaluate expected GTE costs include
remediation and investigation cost estimates as well as legal fees, the number
of viable parties involved, the degree of GTE's involvement and past experience.
No present value discounting is used. Based on this review, the remediation cost
at any individual site or at all sites in the aggregate is not expected to be
material.

The Company's annual expenditures for site cleanups and environmental compliance
have not been and are not expected to be material. Costs incurred include the
Company's share of cleanup expenses for remediation sites and outlays required
to keep existing operations in compliance with environmental regulations.

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Item 2. Properties

The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of these
properties, located in the states of California, Nevada and Arizona, are
generally in good operating condition and are adequate to satisfy the needs of
the business. Substantially all of the Company's property is subject to the
liens of its respective mortgages securing funded debt. From January 1, 1995 to
December 31, 1999, the Company made capital expenditures of $2.8 billion for new
plant and facilities required to meet telecommunication service needs and to
modernize plant and facilities. These additions were equal to 27% of gross plant
of $10.5 billion at December 31, 1999.

Item 3. Legal Proceedings

There are no pending legal proceedings which would have a material impact on the
Company's consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

This item has been omitted in accordance with the relief provisions under
General Instruction I (2) of Form 10-K.

PART II

Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters

Market information is omitted since the Company's common stock is wholly-owned
by GTE.

PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1999 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call 800/225-5160.

INFORMATION VIA THE INTERNET
World Wide Web users can access information about GTE at: http://www.gte.com.

SECURITIES
Questions regarding the bonds and debentures of the Company should be directed
to Treasury Department - Capital Markets, GTE Corporation, 1255 Corporate Drive,
Irving, TX 75038, or call 972/507-5038.

PRODUCTS AND SERVICES HOTLINE
For information concerning GTE products and services please call 800/828-7280.

DIVERSITY AT GTE
The Company and GTE strive to be a workplace of choice in which people of
diverse backgrounds are valued, challenged, acknowledged and rewarded, leading
to higher levels of fulfillment and productivity. A copy of our Diversity at GTE
brochure is available upon request from the GTE Corporate Secretary's Office.

Item 6. Selected Financial Data

This item has been omitted in accordance with the relief provisions under
General Instruction I (2) of Form 10-K.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Abbreviated pursuant to General Instruction I (2) of
Form 10-K.)

BUSINESS OPERATIONS

GTE California Incorporated (the Company) provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries. At
December 31, 1999, the Company served 6,053,815 access lines in the states of
California, Nevada and Arizona. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).

RESULTS OF OPERATIONS
(Dollars in Millions)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------- Percent
1999 1998 Increase Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income $ 813.4 $ 681.5 $ 131.9 19%
</TABLE>

Net income increased in 1999 compared to 1998, primarily due to overall growth
in revenues and lower cost of services and sales and selling, general and
administrative expenses, partially offset by increases in depreciation and
amortization, interest and income tax expenses.

REVENUES AND SALES
(Dollars in Millions)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------- Increase Percent
1999 1998 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Local services $ 1,483.7 $ 1,434.4 $ 49.3 3%
Network access services 1,173.7 1,045.6 128.1 12%
Other services and sales 796.1 889.6 (93.5) (11)%
--------------- --------------- ---------------

Total revenues and sales $ 3,453.5 $ 3,369.6 $ 83.9 2%
=============== =============== ===============
</TABLE>

Local Services Revenues

Local services revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. The Company's access
lines grew 4% in 1999 generating additional revenues of $38.9 million from basic
local services, $10.9 million from CentraNet(R) services and $3.0 million from
Integrated Services Digital Network (ISDN) and Digital Channel Services (DCS).
The favorable resolution of regulatory issues in 1999 contributed an additional
$30.1 million to revenues over 1998. These increases were partially offset by a
1999 regulatory surcredit related to the Company's annual price filing,
resulting in a revenue decrease of $27.2 million. Further offsetting the
increases were decreases aggregating $6.6 million related to miscellaneous local
services such as private line and operator services.

Network Access Services Revenues

Network access services revenues are based on fees charged to long-distance
carriers that use the Company's local-exchange network in providing
long-distance services. In addition, residential and business customers pay end
user access fees to connect to the local network to obtain long-distance
services. Cellular service providers and other local-exchange carriers (LECs)
also pay access charges for cellular and intraLATA (Local Access Transport Area)
toll calls carried by the Company. Minutes of use increased 8% generating
additional revenues of $42.1 million in 1999 compared to 1998. Special access
revenues grew $59.8 million as a result of greater demand for increased
bandwidth services by high capacity users. End user surcharges increased $26.8
million, primarily as a result of access line growth and the implementation of
the local number portability (LNP) surcharge (for further information see
"REGULATORY AND COMPETITIVE TRENDS - Interstate Services - Number Portability").
Additionally, revenues increased $34.0 million as a result of the sharing
provisions of the Federal Communications Commission's

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(FCC) 1997 price cap recorded in the first quarter of 1998. Partially offsetting
these increases were decreases of $32.5 million, reflecting the impact of
mandated interstate and intrastate access price changes.

Other Services and Sales Revenues

Other services and sales revenues decreased in 1999 compared to 1998, primarily
due to reduced toll revenues of $76.2 resulting from intraLATA toll competition.
Furthermore, public telephone revenues decreased $13.8 million due to decreased
volumes associated with wireless product substitution. These decreases were
partially offset by increases in nonregulated services and equipment sales of
$12.6 million.

OPERATING COSTS AND EXPENSES
(Dollars in Millions)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------- Increase Percent
1999 1998 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cost of services and sales $ 868.9 $ 1,003.1 $ (134.2) (13)%
Selling, general and administrative 454.2 525.8 (71.6) (14)%
Depreciation and amortization 626.0 588.9 37.1 6%
--------------- --------------- ---------------

Total operating costs and expenses $ 1,949.1 $ 2,117.8 $ (168.7) (8)%
=============== =============== ===============
</TABLE>

Total operating costs and expenses decreased $168.7 million in 1999 compared to
1998. An employee-reduction program initiated in the first quarter of 1999
resulted in the lump-sum settlement of pension obligations for the affected
employees. Accordingly, the Company recognized net pension plan gains of $156.5
million. Reduced labor and benefits, due to productivity improvements, and
adjustments of certain employee benefits in 1999, contributed $110.5 million to
the decrease. Partially offsetting these cost reductions were favorable
adjustments of certain employee benefits and other liabilities recorded in 1998,
which reduced 1998 expenses by $41.1 million. Further offsetting these decreases
was a one-time special charge of $19.9 million associated with the employee
separation programs mentioned above. Higher depreciation charges associated with
additional investment in network facilities resulting from increased demand for
switched access lines, and amortization of capitalized software right-to-use
(RTU) fees, contributed $43.4 million to the increase in depreciation and
amortization expense. The increases in depreciation and amortization were
partially offset by decreases of $6.6 million resulting from the discontinuation
of depreciation on approximately 46,000 switched access lines held for sale (for
further information see "PLANNED ASSET SALES").

OTHER INCOME STATEMENT ITEMS
(Dollars in Millions)

Interest - net increased in 1999, primarily due to higher average debt balances.

Income tax expense increased in 1999, primarily due to an increase in pretax
income.

REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona for its intrastate business operations and by the
FCC for its interstate operations.

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of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.

INTERSTATE SERVICES

Universal Service

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decision. One order permits ILECs to continue to recover their universal service
contributions from access charges or to establish end-user charges. The second
order changed the contribution basis for school/library funding to eliminate
calculations based upon intrastate revenues. In January 2000, GTE requested the
Supreme Court to review the Fifth Circuit decision allowing the FCC to base
universal service support from the results of a hypothetical cost model rather
than historical costs that were incurred to provide local service. GTE argued
that the Fifth Circuit ignored long standing legal precedent in permitting a
major revision to ILEC cost recovery mechanisms without ensuring the new process
would not result in a constitutionally prohibited "taking".

In November 1999, the FCC released an order dealing with implementation of the
new FCC federal high cost support mechanism for non-rural ILECs, including GTE.
The effective date for the new federal universal service plan is 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 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.

Price Cap

Interstate Access Revision

10
<PAGE> 12

Advanced Telecommunications Services

Number Portability

Internet Service Traffic

11
<PAGE> 13

INTRASTATE SERVICES

The Company provides local-exchange services to customers within its designated
franchise areas and toll services within designated geographic areas called
LATAs under agreements with connecting LECs in conformity with state regulatory
orders. The Company also provides long-distance access services directly to
long-distance carriers who provide service between LATAs.

California
- ----------

Interim Pricing Flexibility

In December 1999, a final order was issued granting the Company interim pricing
flexibility for retail services moved from Category I (monopoly services for
which the California Public Utilities Commission (CPUC) sets or changes rates)
to Category II (competitive services, for which the Company can retain
significant pricing flexibility).

Open Access and Network Architecture Development

In March 1996, the CPUC issued a decision adopting an interim discount on resold
services of 12% and indicated that a permanent discount would be addressed in
the Open Access and Network Architecture Development (OANAD) proceeding. In
October 1997, during another phase of the proceeding, the Company submitted
testimony regarding the proper cost model and the resulting permanent resale
discount. Hearings were held in November and December 1997. Opening and reply
briefs were filed in January 1998 and February 1998, respectively. Eight parties
submitted testimony and four cost models will be subject to review. The CPUC's
goal is to select one model to determine the proper resale discount. A final
order is anticipated during the second quarter of 2000.

In December 1998, the CPUC issued a decision that adopted the Pacific Bell UNE
cost study for both Pacific Bell and the Company. The Company's application for
rehearing of this decision was denied. A CPUC decision on the Company's UNE cost
study is expected in the third quarter of 2000. Hearings for the Company's UNE
prices will be set after cost studies are approved.

A collocation phase was added to the OANAD proceeding in June 1998 to determine
appropriate methods and prices of collocation. The Company, Pacific Bell and
AT&T/MCI submitted cost studies in October 1998. In January 2000, the CPUC
issued a ruling adopting the AT&T/MCI collocation cost model. The Company and
the other parties have been given an opportunity to identify specific model
variables and cost inputs. The proposed schedule includes opening and reply
testimony in April 2000 and a final CPUC decision is expected in the third
quarter of 2000.

In January 2000 a ruling was issued directing the Company and Pacific Bell to
file as a compliance filing an offer to amend existing interconnection
agreements to provide for line sharing service, including interim prices subject
to

12
<PAGE> 14

true-up. In a subsequent ruling, a new phase of OANAD 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. All parties participating in
the negotiation process had to either file a signed contract or a request for
arbitration by March 27, 2000. The CPUC will address all requests for
arbitration in a single generic proceeding with an anticipated decision being
issued 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.

Merger

In December 1998, GTE and Bell Atlantic filed a Joint Application in California
requesting approval of the GTE/Bell Atlantic merger. California has a statutory
requirement for rate-regulated public utilities to share with their ratepayers
at least fifty percent of the forecasted merger-related net cost savings
attributable to the regulated intrastate services. In March 2000, the CPUC
approved the merger and determined the net cost savings had a net present value
of $168 million. The decision requires that fifty percent of the net savings or
$84.1 million, be shared with ratepayers through: (1) an annual surcredit of
$19.0 million for a five year period beginning January 1, 2001 that would apply
to local, toll, and access bills; (2) by increasing the level of the Company's
corporate donations by $2.5 million per year for ten years to a "Community
Collaborative" that will disburse funds in underserved communities to promote
access to telecom services, education, and other goals; and (3) by continuing
the Company's Universal Lifeline Telephone Service Partnership program for three
years at $1.3 million per year.

Property Tax Proceeding

In 1995, the CPUC issued a proposed decision directing the Company and Pacific
Bell to refund amounts received in a 1992 property tax settlement. The Company
and Pacific Bell filed applications for rehearing of this decision. In January
2000, the CPUC issued its final order stating that the property tax savings
associated with the favorable settlement need not be passed on to ratepayers
through rate reductions.

Nevada
- ------

In March 1999, the Public Utilities Commission of Nevada (PUCN) approved the
GTE/Bell Atlantic merger. In their ruling, the PUCN ruled that the Company will:
1) establish SS7 interconnectivity with Nevada Bell to enable interoffice
calling number identification; 2) cap its local rates at current levels through
December 2001; and 3) distribute to its Nevada customers the sum of $0.4 million
in the form of a one-time credit to customers' bills.

PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

13
<PAGE> 15

PLANNED ASSET SALES

YEAR 2000 CONVERSION

GTE does not believe that the Year 2000 rollover has had, or will have, any
material adverse impacts on results of operations or liquidity. Additionally,
GTE has not experienced any material contingencies regarding customers or major
suppliers. GTE experienced no significant Year 2000 events, and service to GTE's
customers was unaffected by the rollover to January 1, 2000. GTE completed its
Year 2000 renovation, conducted system testing and returned to production the
essential systems that support its businesses substantially in advance of
December 31, 1999. Additionally, GTE's portion of the public switched telephone
network (PSTN) in the United States was upgraded for Year 2000, and all of GTE's
access lines have been operating using Year 2000 compliant central office
switches and network elements since mid-year 1999. With the successful
transition into 2000, GTE believes that the risk of disruptions arising from
time/date transitions, that would affect GTE's ability to provide basic
services, has been eliminated.

GTE continues to enhance its normal business continuity planning to address
potential Year 2000 and other time/date interruptions. These include: potential
gradual system degradation after January 1, 2000; possible accumulation of
processing errors or degraded performance; leap year processing through February
29, 2000; and potential impacts of degrading performance from partners. GTE's
disaster preparedness recovery plans include procedures and activities for a
"multi-regional" time/date contingency, if it occurs.

The estimated total multi-year cost of GTE's Year 2000 Program is expected to
total approximately $380 million, of which $372 million has been expended
through December 31, 1999. The current estimate for the cost of remediation for
the Company is approximately $31.6 million. Through December 31, 1999,
expenditures totaled $31.5 million. Year 2000 renovation costs are expensed in
the year incurred. Approximately 69% of GTE's program effort involved U.S.
domestic operations. With the successful transition from 1999 to 2000, GTE has
completed its Year 2000 Program. All future efforts will be performed under
normal business operations.

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.

14
<PAGE> 16

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 (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 direct selling costs. The Company is currently assessing the impact
of SAB No. 101.

INFLATION

The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company views derivative financial instruments as risk management tools and,
in accordance with Company policy, does not utilize them for speculative or
trading purposes. The Company is also not a party to any leveraged derivatives.
The Company is exposed to market risk from changes in interest rates. The
Company manages its exposure to market risks through its regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments that have been authorized pursuant to the Company's
policies and procedures. The use of these derivatives allows the Company to
reduce its overall exposure to market risk, as the gains and losses on these
contracts substantially offset the gains and losses on the liabilities being
hedged.

The Company uses derivative financial instruments to manage its exposure to
interest rate movements and to reduce borrowing costs. The Company's net
exposure to interest rate risk primarily consists of floating rate instruments
that are benchmarked to U.S. money market interest rates. The Company manages
this risk by using interest rate swaps to convert floating rate short-term debt
to synthetic fixed rate instruments. The Company also uses forward contracts to
sell U.S. Treasury bonds to hedge interest rates on anticipated long-term debt
issuance.

15
<PAGE> 17

Item 8. Financial Statements and Supplementary Data

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Income

<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------ ---------- ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
REVENUES AND SALES(a)
Local services $ 1,483.7 $ 1,434.4 $ 1,477.1
Network access services 1,173.7 1,045.6 924.6
Other services and sales 796.1 889.6 920.7
---------- ---------- ----------

Total revenues and sales 3,453.5 3,369.6 3,322.4
---------- ---------- ----------

OPERATING COSTS AND EXPENSES(b)
Cost of services and sales 868.9 1,003.1 1,056.4
Selling, general and administrative 454.2 525.8 511.8
Depreciation and amortization 626.0 588.9 618.3
---------- ---------- ----------

Total operating costs and expenses 1,949.1 2,117.8 2,186.5
---------- ---------- ----------

OPERATING INCOME 1,504.4 1,251.8 1,135.9

OTHER (INCOME) EXPENSE
Interest - net(c) 135.4 118.4 101.9
Other - net -- (2.7) 0.7
---------- ---------- ----------

INCOME BEFORE INCOME TAXES 1,369.0 1,136.1 1,033.3
Income taxes 555.6 454.6 390.5
---------- ---------- ----------

NET INCOME $ 813.4 $ 681.5 $ 642.8
========== ========== ==========
</TABLE>

(a) Includes billings to affiliates of $122.9 million, $121.8 million and
$128.5 million for the years 1999-1997, respectively.

(b) Includes billings from affiliates of $328.0 million, $445.3 million and
$184.4 million for the years 1999-1997, respectively.

(c) Includes interest paid to affiliate of $16.6 million, $17.8 million and
$15.3 million for the years 1999-1997, respectively.

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.

16
<PAGE> 18

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets

<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------ ---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11.6 $ 16.4
Receivables, less allowances of $65.5 million and $65.9 million 689.2 661.8
Receivables from affiliates 14.7 11.2
Inventories and supplies 45.2 54.8
Net assets held for sale (see Notes 3 and 10) 53.8 --
Deferred income tax benefits 68.7 27.8
Prepaid insurance and other 50.2 47.7
---------- ----------

Total current assets 933.4 819.7
---------- ----------

Property, plant and equipment, net (see Notes 3 and 10) 3,824.8 3,912.1
Prepaid pension costs 1,170.6 847.9
Other assets 15.5 25.8
---------- ----------

Total assets $ 5,944.3 $ 5,605.5
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 5.2 $ --
Notes payable to affiliate 204.1 281.7
Accounts payable 156.5 113.9
Affiliate payables and accruals 122.3 131.8
Advanced billings and customer deposits 89.6 88.3
Taxes payable 77.2 163.6
Accrued interest 32.4 26.7
Accrued payroll costs 90.8 97.6
Dividends payable 185.5 205.5
Accrued employee benefit plans 87.8 87.8
Other 54.6 82.5
---------- ----------

Total current liabilities 1,106.0 1,279.4
---------- ----------

Long-term debt 1,966.4 1,691.2
Deferred income taxes 810.3 579.2
Deferred employee benefit plans 158.4 157.7
Other liabilities 44.5 134.6
---------- ----------

Total liabilities 4,085.6 3,842.1
---------- ----------

Shareholders' equity:
Preferred stock 50.0 50.0
Common stock (70,000,000 shares issued) 1,400.0 1,400.0
Additional paid-in capital 92.5 82.2
Retained earnings 316.2 231.2
---------- ----------

Total shareholders' equity 1,858.7 1,763.4
---------- ----------

Total liabilities and shareholders' equity $ 5,944.3 $ 5,605.5
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

17
<PAGE> 19

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------ -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
OPERATIONS
Net income $ 813.4 $ 681.5 $ 642.8
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 626.0 588.9 618.3
Deferred income taxes 190.2 158.2 133.0
Employee retirement benefits (325.0) (210.7) (144.5)
Provision for uncollectible accounts 64.7 74.7 71.3
Change in current assets and current liabilities:
Receivables - net (95.9) (62.5) (142.7)
Other current assets 12.8 (35.5) (27.0)
Accrued taxes and interest (70.4) 151.1 (40.5)
Other current liabilities (20.4) (195.9) 56.7
Other - net (70.1) (60.8) (135.3)
-------- -------- --------

Net cash from operations 1,125.3 1,089.0 1,032.1
-------- -------- --------

INVESTING
Capital expenditures (576.1) (692.9) (629.4)
Other - net (0.7) 4.9 3.8
-------- -------- --------

Net cash used in investing (576.8) (688.0) (625.6)
-------- -------- --------

FINANCING
Long-term debt issued 222.4 197.6 295.1
Long-term debt and preferred stock retired, including premiums
paid on early retirement (0.1) (150.2) (318.8)
Dividends (748.4) (666.7) (617.0)
Decrease in short-term obligations, excluding current maturities -- -- (71.0)
Net change in affiliate notes (27.2) 224.6 292.9
Other - net -- 0.2 --
-------- -------- --------

Net cash used in financing (553.3) (394.5) (418.8)
-------- -------- --------

Increase (decrease) in cash and cash equivalents (4.8) 6.5 (12.3)

Cash and cash equivalents:
Beginning of year 16.4 9.9 22.2
-------- -------- --------

End of year $ 11.6 $ 16.4 $ 9.9
======== ======== ========

Cash paid during the year for:
Interest $ 136.3 $ 134.5 $ 101.0
-------- -------- --------
Income taxes $ 346.3 $ 259.0 $ 332.0
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of these statements.

18
<PAGE> 20

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity

<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, 1996 $ 81.9 $ 1,400.0 $ 82.2 $ 284.5 $ 1,848.6

Net income 642.8 642.8
Dividends declared (662.8) (662.8)
Redemption of preferred stock (31.9) (0.9) (32.8)
----------- ---------- ------------ ---------- ----------

Shareholders' equity, December 31, 1997 50.0 1,400.0 82.2 263.6 1,795.8

Net income 681.5 681.5
Dividends declared (713.9) (713.9)
----------- ---------- ------------ ---------- ----------

Shareholders' equity, December 31, 1998 50.0 1,400.0 82.2 231.2 1,763.4

Net income 813.4 813.4
Tax benefit from exercise of stock options 10.3 10.3
Dividends declared (728.4) (728.4)
----------- ---------- ------------ ---------- ----------

Shareholders' equity, December 31, 1999 $ 50.0 $ 1,400.0 $ 92.5 $ 316.2 $ 1,858.7
=========== ========== ============ ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

19
<PAGE> 21

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

BASIS OF PRESENTATION

The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Contel Advanced Systems, Inc. All significant
intercompany transactions have been eliminated.

Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1999 presentation.

TRANSACTIONS WITH AFFILIATES

GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company. These purchases and
services amounted to $165.8 million, $217.6 million and $176.9 million for the
years 1999-1997, respectively. Such purchases and services are recorded in the
accounts of the Company at the lower of cost, including a return realized by GTE
Supply, or fair market value.

The Company is billed for data processing services, software development and
equipment rentals, and receives management, consulting, research and development
and pension management services from other affiliated companies. The Company's
consolidated financial statements also include allocated expenses resulting from
the sharing of certain executive, administrative, financial, accounting,
marketing, personnel, engineering and other support services being performed at
consolidated work centers within GTE. The amounts charged for these affiliated
transactions are based on proportional cost allocation methodologies. These
charges amounted to $300.8 million, $404.6 million and $175.4 million for the
years 1999-1997, respectively. The significant increases, beginning in 1998
charges, are due to a reorganization of support functions within GTE. Prior to
1998, the cost of these support functions was recorded directly by the Company,
and is now allocated to the Company on a proportional cost basis.

GTE Funding Incorporated (GTE Funding) (an affiliate of the Company) provides
short-term financing and investment vehicles and cash management services for
the Company. The Company is contractually obligated to repay all amounts
borrowed on its behalf by GTE Funding. Interest expense on these borrowings
amounted to approximately $16.6 million, $17.8 million and $15.3 million for the
years 1999-1997, respectively.

The Company has an agreement with GTE Directories Corporation (GTE Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to GTE Directories. In addition, when
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Revenues from these activities amounted to $122.9 million, $121.8 million and
$128.5 million for the years 1999-1997, respectively. Also, the Company is
billed for certain printing and other costs associated with telephone
directories, including the cost of customer contact information pages which are
included in the Company's White Pages directories. These charges amounted to
$27.2 million, $40.7 million and $9.0 million for the years 1999-1997,
respectively.

20
<PAGE> 22

REVENUE RECOGNITION

Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.

DEPRECIATION AND AMORTIZATION

Property, plant and equipment of the Company is depreciated on a straight-line
basis over the following estimated useful asset lives:

<TABLE>
<CAPTION>
Average lives (in years)
-----------------------
<S> <C>
Buildings 20 - 40
Inside communications plant 5 - 10
Outside communications plant 8 - 40
Furniture, vehicles and other equipment 3 - 10
</TABLE>

The Company depreciates assets using the remaining life methodology. This method
depreciates the net investment in telephone plant less anticipated net salvage
value, over remaining useful asset lives and requires the periodic review and
revision of depreciation rates.

When depreciable plant of the Company is retired in the normal course of
business, the amount of such plant is deducted from the respective plant and
accumulated depreciation accounts. Gains or losses on disposition are amortized
with the remaining net investment in telephone plant. When depreciable telephone
plant is retired outside the normal course of business, for example if a local
exchange is sold, any resulting gain or loss is included in operating income.

EMPLOYEE BENEFIT PLANS

Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses are recognized when significant pension obligations are settled and the
gain or loss is determinable.

VALUATION OF ASSETS

The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value or expected net sales proceeds depending on the circumstances. In
instances where goodwill has been recorded in connection with impaired assets,
the carrying amount of the goodwill is first eliminated before any reduction to
the carrying value of tangible or identifiable intangible assets. The Company's
policy is to record asset impairment losses, and any subsequent adjustments to
such losses as initially recorded, as well as net gains or losses on sales of
assets as a component of operating income.

INCOME TAXES

The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax sharing agreement with GTE and remits
tax payments to GTE based on its tax liability on a separate company basis.

Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each reporting period. Deferred tax assets and

21
<PAGE> 23

liabilities are subsequently adjusted, to the extent necessary, to reflect tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for deferred tax assets for which realization
is not likely.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities, when purchased, of three months or less.

FINANCIAL INSTRUMENTS

The Company uses a variety of financial instruments to hedge its exposure to
fluctuations in interest rates. The Company does not use financial instruments
for speculative or trading purposes, nor is the Company a party to leveraged
derivatives. Amounts to be paid or received under interest rate swaps are
accrued as interest expense.

INVENTORIES AND SUPPLIES

Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.

SOFTWARE

Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software. As a result of adopting SOP 98-1, the Company
capitalized software expenditures of $41.9 million, $76.8 million and $23.9
million, respectively, for 1999-1997, which would have previously been expensed.

COMPREHENSIVE INCOME

The Company had no comprehensive income components for the years ended December
31, 1999-1997, therefore, comprehensive income is the same as net income for all
three periods.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued 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.

22
<PAGE> 24

2. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

3. 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 $53.8 million, consist of property,
plant and equipment, and have been reclassified as "Net assets held for sale" in
the consolidated balance sheets at December 31, 1999. The net book value of
these access lines is reflected in "Property, plant and equipment, net" in the
consolidated balance sheets at December 31, 1998 (see Note 10). 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 $8.5 million
in 1999 and $1.9 million in 1998. 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.

4. PREFERRED STOCK

Cumulative preferred stock, not subject to mandatory redemption and exclusive of
amounts held in treasury at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
Shares Amount
------------ -------------------
(Dollars in Millions)
<S> <C> <C>
Authorized and outstanding:
$ 20 par value
4 1/2% Series (issued in 1945) 280,312 $ 5.6
4 1/2% Series (issued in 1956) 718,862 14.4
5 % Series (issued in 1957) 1,500,000 30.0
------------ -------------------

Total 2,499,174 $ 50.0
============ ===================
</TABLE>

At the Company's option, these series of preferred stock were redeemable at
premiums, in whole or in part, on thirty days notice. There were no retirements,
redemptions, or other activity in 1999.

The 4 1/2% Series (1945 issue) was entitled to one vote per share, with the
right to vote cumulatively in the election of directors. Otherwise, the
preferred shareholders had no voting rights.

23
<PAGE> 25

No shares of preferred stock were reserved for officers and employees, or for
options, warrants, conversions or other rights. The Company was not in arrears
in its dividend payments at December 31, 1999.

In March 2000, the Company redeemed all 2,499,174 outstanding shares of
preferred stock and paid call premiums of $5.4 million pretax on the early
redemption.

5. COMMON STOCK

The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $20 per share. All 70,000,000 outstanding shares of common stock
are held by GTE. There were no shares of common stock held by or for the account
of the Company and no shares were reserved for officers and employees, or for
options, warrants, conversions or other rights. At December 31, 1999, $49.3
million of retained earnings were restricted as to the payment of cash dividends
on common stock under the most restrictive terms of the Articles of
Incorporation.

6. DEBT

Long-term debt as of December 31, was as follows:

<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
(Dollars in Millions)
<S> <C> <C>
First mortgage bonds:
9.41 % Series W, maturing through 2014 $ 40.0 $ 40.0
9.44 % Series X, due 2015 30.0 30.0

Debentures:
5.625 % Series A, due 2001 300.0 300.0
6.75 % Series B, due 2004 250.0 250.0
8.07 % Series C, due 2024 250.0 250.0
7.00 % Series D, due 2008 100.0 100.0
6.70 % Series E, due 2009 300.0 300.0
6.75 % Series F, due 2027 200.0 200.0
5.50 % Series G, due 2009 225.0 --

Other:
Notes payable expected to be refinanced on a long-term basis 275.0 225.0
Capitalized leases 5.9 0.2
---------------- ----------------

Total principal amount 1,975.9 1,695.2
Unamortized discount - net (4.3) (4.0)
---------------- ----------------
Total 1,971.6 1,691.2
Less: current maturities (5.2) --
---------------- ----------------

Total long-term debt $ 1,966.4 $ 1,691.2
================ ================
</TABLE>

Long-term debt as of December 31, 1999 includes $275.0 million of short-term
borrowings in the form of affiliate notes payable. These affiliate notes payable
represent notes payable to GTE Funding. The $275.0 million of short-term
borrowings was refinanced in March 2000 with the issuance of $275.0 million of
7.65% Series H Debentures, due 2007. Net proceeds from the March 2000 issuance
were applied toward the repayment of other short-term borrowings incurred to
finance the Company's construction program and for general corporate purposes.

Long-term debt as of December 31, 1998 includes $225.0 million of short-term
borrowings in the form of affiliate notes payable. These affiliate notes payable
represent notes payable to GTE and GTE Funding. The $225.0 million of short-term
borrowings was refinanced in January 1999 with the issuance of $225.0 million of
5.50% Series G Debentures, due 2009. Net proceeds from the January 1999 issuance
were applied toward the repayment of other short-term borrowings incurred to
finance the Company's construction program and for general corporate purposes.

24
<PAGE> 26

In May 1998, the Company issued $200.0 million of 6.75% Series F Debentures, due
2027. Net proceeds were applied toward the repayment of short-term borrowings in
connection with redemption of long-term debt and preferred stock, to finance the
Company's construction program and for general corporate purposes.

The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None of
the securities shown above were held in sinking or other special funds of the
Company or pledged by the Company. Debt discounts and premiums on the Company's
outstanding long-term debt are amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.

Estimated payments of long-term debt during the next five years are: $5.2
million in 2000; $305.5 million in 2001; $2.5 million in 2002; $2.5 million in
2003; and $252.5 million in 2004.

Total short-term obligations as of December 31, were as follows:

<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
(Dollars in Millions)
<S> <C> <C>
Notes payable to affiliates - average rates 6.2% and 5.4% $ 204.1 $ 281.7
Current maturities of long-term debt 5.2 --
---------------- ----------------

Total $ 209.3 $ 281.7
================ ================
</TABLE>

At December 31, 1999, the Company had a note payable with GTE Funding in the
amount of $203.6 million, which the Company is contractually obligated to pay.

The Company participates with other affiliates in a $1.5 billion, 364-day
syndicated revolving line of credit and has access to an additional $2.0 billion
in short-term liquidity through GTE and GTE Funding's committed bi-lateral
revolving lines of credit.

7. FINANCIAL INSTRUMENTS

The Company entered into forward interest rate swap agreements to hedge against
changes in market interest rates.

The forward contracts to sell U.S. Treasury Bonds, entered into during 1998,
were executed to hedge planned long-term debt issuances that were completed in
January 1999. The forward interest rate swap agreements and forward contracts to
sell U.S. Treasury Bonds, entered into during 1997, to hedge against changes in
market interest rates of planned long-term debt issuances, were completed in May
1998. In 1998, a gain of approximately $0.2 million occurred upon settlement of
these agreements and is being amortized over the life of the associated
long-term debt issuance as an offset to interest expense.

As of December 31, 1999 and 1998, the Company had the following financial
instruments in effect:

<TABLE>
<CAPTION>
Weighted
Notional Expiration Average Pay
(Dollars in Millions) Amount Dates Rate
--------------------------- ----------- ------------- ----------------
<S> <C> <C> <C>
Forward interest rate
contracts:
1999 -- -- --
1998 $100.0 1999 6.22%

Interest rate swap
agreements:
1999 110.0 2000 6.67%
1998 110.0 2000 6.67%
</TABLE>

25
<PAGE> 27

The Company has entered into interest rate swaps and forward interest rate swap
agreements, where the Company pays fixed rates, as indicated in the table above,
and receives floating rates, primarily based on three-month LIBOR. At December
31, 1999 and 1998, the three-month LIBOR was 6.0% and 5.1%, respectively.

The risk associated with these financial instruments arises from the possible
inability of counterparties to meet the contract terms and from movements in
interest rates. The Company carefully evaluates and continually monitors the
creditworthiness of its counterparties and believes the risk of nonperformance
is remote.

The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1999, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, was lower than the carrying value by approximately $84.1
million. As of December 31, 1998, the estimated fair value of long-term debt
exceeded the carrying value by approximately $128.6 million.

8. INCOME TAXES

The income tax provision is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
(Dollars in Millions)
<S> <C> <C> <C>
Current:
Federal $ 287.8 $ 239.1 $ 202.6
State 77.6 57.3 54.9
------------- ------------- -------------
365.4 296.4 257.5
Deferred:
Federal 154.2 131.6 118.5
State 41.7 35.4 26.5
------------- ------------- -------------
195.9 167.0 145.0

Amortization of deferred investment tax credits (5.7) (8.8) (12.0)
------------- ------------- -------------
Total provision $ 555.6 $ 454.6 $ 390.5
============= ============= =============
</TABLE>

A reconciliation between taxes computed by applying the statutory federal income
tax rate to pretax income and income taxes provided in the consolidated
statements of income is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -----------
(Dollars in Millions)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 478.3 $ 396.8 $ 360.2
State and local income taxes, net of federal income tax effect 77.5 60.3 52.9
Amortization of deferred investment tax credits (5.7) (8.8) (12.0)
Other differences - net 5.5 6.3 (10.6)
------------- ------------- -----------
Total provision $ 555.6 $ 454.6 $ 390.5
============= ============= ===========
</TABLE>

26
<PAGE> 28

The tax effects of temporary differences that give rise to the deferred income
tax benefits and deferred income tax liabilities at December 31, are as follows:

<TABLE>
<CAPTION>
1999 1998
---------- -----------
(Dollars in Millions)
<S> <C> <C>
Depreciation and amortization $ 333.3 $ 297.9
Employee benefit obligations (74.4) (85.1)
Prepaid pension costs 494.1 300.3
Investment tax credits 7.8 13.5
Other - net (19.2) 24.8
---------- -----------
Net deferred tax liability $ 741.6 $ 551.4
========== ===========
</TABLE>

9. EMPLOYEE BENEFIT PLANS

The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in February 1998. Certain disclosures are required to
be made of the components of pension credits, postretirement benefit costs and
the funded status of the plans, including the actuarial present value of
accumulated plan benefits, accumulated or projected benefit obligation and the
fair value of plan assets. We do not present such disclosures because the
structure of the GTE plans does not permit the plans' data to be readily
disaggregated.

Pension Plans

The Company participates in noncontributory defined benefit pension plans
sponsored by GTE covering substantially all employees. The benefits to be paid
under these plans are generally based on years of credited service and average
final earnings. GTE's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities and
corporate debt securities.

The significant weighted-average assumptions used by GTE for the pension
measurements were as follows at December 31:

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Discount rate 8.00% 7.00%
Rate of compensation increase 5.50% 4.75%
Expected return on plan assets 9.00% 9.00%
</TABLE>

Net periodic benefit credit was $322.6 million, $141.4 million and $139.5
million for the years 1999-1997, respectively. Included in the net periodic
benefit credit for 1999 and 1997 were net pension gains of $148.7 million and
$13.2 million, respectively, comprised of one-time costs for special termination
benefits provided under voluntary and involuntary separation programs,
curtailment losses and settlement gains. These curtailment losses and settlement
gains are a result of the separation programs, as well as the required
settlement gain or loss recognition, due to the fact that in 1999, the Company's
lump-sum pension distributions surpassed the settlement threshold equal to the
sum of the service cost and interest cost components of net periodic pension
cost.

Postretirement Benefits Other than Pensions

Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by GTE. The determination
of benefit cost for postretirement health plans is generally based on
comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.

27
<PAGE> 29

Postretirement benefit cost (credit) was $31.4 million, ($2.3) million and $52.4
million for the years 1999-1997, respectively. The weighted-average assumptions
used by GTE in the actuarial computations for postretirement benefits were as
follows at December 31:

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Discount rate 8.00% 7.00%
Expected return on plan assets 8.00% 8.00%
</TABLE>

Savings Plans

The Company sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$12.3 million, $11.1 million and $11.2 million in 1999-1997, respectively.

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows at December 31:

<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Dollars in Millions)
<S> <C> <C>
Land $ 60.9 $ 59.9
Buildings 784.0 754.7
Plant and equipment 9,401.0 9,405.0
Construction in progress and other 243.9 293.7
---------- ----------

Total 10,489.8 10,513.3
Accumulated depreciation (6,665.0) (6,601.2)
---------- ----------

Total property, plant and equipment - net $ 3,824.8 $ 3,912.1
========== ==========
</TABLE>

At December 31, 1998, total property, plant and equipment - net included $40.7
million of access lines and related equipment held for sale. This represents
gross assets of $144.3 million less accumulated depreciation of $103.6 million.
Based on the signing of a definitive agreement in 1999, the net book value of
the access lines and related equipment has been reclassified to "Net assets held
for sale" in the consolidated balance sheets at December 31, 1999 (see Note 3).

11. REGULATORY AND COMPETITIVE MATTERS

28
<PAGE> 30

12. COMMITMENTS AND CONTINGENCIES

The Company has noncancelable operating leases covering certain buildings,
office space and equipment. Rental expense was $24.4 million, $32.9 million and
$43.1 million in 1999-97, respectively. Minimum rental commitments under
noncancelable leases are $13.5 million, $11.3 million, $10.3 million, $8.9
million and $6.3 million for the years 2000-2004, respectively, and aggregate
$14.2 million thereafter.

The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a materially adverse
effect on the results of operations or the financial position of the Company.

13. SEGMENT REPORTING

The Company does not have separate reportable segments of its own. The Company
is part of the Network Services product segment of GTE's National Operations.
Network Services provides wireline communication services within franchised
areas. These services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of the Company's operating areas. Network Services also
provides complex voice and data services to businesses, billing and collection,
and operator assistance services to other telecommunications companies and
receives revenues in the form of a publication right from an affiliate that
publishes telephone directories in its operating areas.

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized 1999 and 1998 quarterly financial data is as follows:

<TABLE>
<CAPTION>
Revenues Operating Net
and Sales Income Income
-------------- -------------- --------------
(Dollars in Millions)
<S> <C> <C> <C>
1999
First Quarter $ 827.1 $ 321.7 $ 170.1
Second Quarter 823.6 325.7 173.0
Third Quarter 854.2 416.5 226.5
Fourth Quarter 948.5 440.5 243.8
-------------- -------------- --------------
Total $ 3,453.4 $ 1,504.4 $ 813.4
============== ============== ==============

1998
First Quarter $ 735.3 $ 207.8 $ 108.1
Second Quarter 839.4 335.0 181.9
Third Quarter 903.5 431.7 237.5
Fourth Quarter 891.4 277.3 154.0
-------------- -------------- --------------
Total $ 3,369.6 $ 1,251.8 $ 681.5
============== ============== ==============
</TABLE>

29
<PAGE> 31

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholder of
GTE California Incorporated:

We have audited the accompanying consolidated balance sheets of GTE California
Incorporated (a California corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999, as set forth under
Item 8 and Schedule II of this report. These financial statements and the
schedule and exhibit referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule and exhibit based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE California Incorporated and
subsidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting schedule and exhibit
listed under Item 14 are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Dallas, Texas ARTHUR ANDERSEN LLP
January 27, 2000

30
<PAGE> 32

MANAGEMENT REPORT

To Our Shareholder:

The management of GTE California Incorporated (the Company) is responsible for
the integrity and objectivity of the financial and operating information
contained in this Annual Report on Form 10-K, including the consolidated
financial statements covered by the Report of Independent Public Accountants.
These statements were prepared in conformity with generally accepted accounting
principles and include amounts that are based on the best estimates and
judgments of management.

The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has also instituted
policies and guidelines which require employees to maintain the highest level of
ethical standards.

DAVID R. BOWMAN
President

LAWRENCE R. WHITMAN
Vice President - Finance and Planning

31
<PAGE> 33

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

The following items have been omitted in accordance with the relief provisions
under General Instruction I (2) of Form 10-K:

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

32
<PAGE> 34

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1) Financial Statements - See GTE California Incorporated's consolidated
financial statements and report of independent public accountants
thereon in the Financial Statements section included elsewhere
herein.

(2) Financial Statement Schedules - Schedules supporting the consolidated
financial statements for the years ended December 31, 1999-1997 (as
required):

II - Valuation and Qualifying Accounts

Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.

(3) Exhibits - Included in this report or incorporated by reference.

2.1* Agreement of Merger, dated September 10, 1992, between GTE
California Incorporated and Contel of California, Inc.
(Exhibit 2.1 of the 1993 Form 10-K)

3.1* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988
Form 10-K)

3.2* Certificate of Amendment of the Articles of Incorporation
dated March 26, 1998 (Exhibit 3.2 of the March 31, 1998 Form
10-Q)

3.3* Amendment to Bylaws (amended April 17, 1998) (Exhibit 3.1 of
the March 31, 1998 Form 10-Q)

3.4* Certificate of Amendment of the Articles of Incorporation
dated April 21, 1998 (Exhibit 3.3 of the March 31, 1998 Form
10-Q)

3.5 Amendment to Bylaws (amended February 22, 1999)

4.1* Indenture dated as of December 1, 1993, between GTE California
Incorporated and Bank of America National Trust and Savings
Association, as Trustee, dated as of December 1, 1993 (Exhibit
4.1 of the Company's Registration Statement on Form S-3, File
No. 33-51541, filed with the Securities and Exchange
Commission on December 17, 1993)

4.2* First Supplemental Indenture dated as of April 15, 1996,
between GTE California Incorporated and First Trust of
California, National Association, as Trustee (as successor
trustee to Bank of America National Trust and Savings
Association) (Exhibit 4.3 of the Company's Report on Form 8-K,
dated April 23, 1996)

10.1* Material Contracts - Severance Agreement between GTE Service
Corporation and John C. Appel (Exhibit 10.1 of the 1998 Form
10-K)

10.2* Material Contracts - Severance Agreements between GTE Service
Corporation and Richard L. Schaulin, Larry J. Sparrow and
Lawrence R. Whitman (Exhibit 10.2 of the 1998 Form 10-K)

10.3* Material Contracts - Retention Agreement between GTE Service
Corporation and John C. Appel (Exhibit 10.3 of the 1998 Form
10-K)

10.4* Material Contracts - Retention Agreements between GTE Service
Corporation and David R. Bowman, Richard L. Schaulin, Larry J.
Sparrow and Lawrence R. Whitman (Exhibit 10.4 of the 1998 Form
10-K)

10.5 Material Contracts - Retention Agreement between GTE Service
Corporation and William M. Edwards, III

33
<PAGE> 35

12 Statements re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges

26* Revised Form of Invitation for Bids pertaining to Registration
Statements on Form S-3 (Exhibit 26.1 of the Company's
Registration Statement on Form S-3, File No. 333-46677)

27 Financial Data Schedule

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of 1999.

* Denotes exhibits incorporated herein by reference to previous filings with the
Securities and Exchange Commission as designated.

34
<PAGE> 36

GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31,
1999, 1998 and 1997

(Dollars in Millions)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
Deductions
Balance at Charged Charged to from
Beginning to Other Accounts Reserves Balance at
Description of Year Income (Note a) (Note b) Close of Year
- ---------------------- ----------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:

December 31, 1999 $ 65.9 $ 64.6 $ 11.4 $ 76.4 $ 65.5
=========== ========== ============== ============ ==============
December 31, 1998 $ 65.2 $ 74.7 $ 14.7 $ 88.7 $ 65.9
=========== ========== ============== ============ ==============
December 31, 1997 $ 72.0 $ 71.3 $ 70.7 $ 148.8 $ 65.2
=========== ========== ============== ============ ==============
</TABLE>

NOTES:

(a) Recoveries of previously written-off amounts.
(b) Charges for which reserve was created.

35
<PAGE> 37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 March 29, 2000 By /s/ David R. Bowman
-------------------- -----------------------------------
David R. Bowman
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<S> <C> <C>
/s/ David R. Bowman President March 29, 2000
- ---------------------------- (Principal Executive Officer)
David R. Bowman

/s/ Lawrence R. Whitman Vice President - Finance and Planning, and Director March 29, 2000
- ---------------------------- (Principal Financial Officer)
Lawrence R. Whitman

/s/ Stephen L. Shore Controller March 29, 2000
- ---------------------------- (Principal Accounting Officer)
Stephen L. Shore

/s/ John C. Appel Director March 29, 2000
- ----------------------------
John C. Appel

/s/ Mateland L. Keith, Jr. Director March 29, 2000
- ----------------------------
Mateland L. Keith, Jr.
</TABLE>

36
<PAGE> 38

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------- -----------------------------------------------------
<S> <C>
3.5 Amendment to Bylaws (amended February 22, 1999)

10.5 Material Contracts - Retention Agreement between GTE
Service Corporation and William M. Edwards, III

12 Statements re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges

27 Financial Data Schedule
</TABLE>

<PAGE> 1

EXHIBIT 3.5

BYLAWS
OF
GTE CALIFORNIA INCORPORATED
---------------------------
(A California Corporation)

AS IN EFFECT
APRIL 1, 1995

Amended: April 17, 1998
February 22, 1999

<PAGE> 2

INDEX

<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE I OFFICES.................................................................................................4
Section 1. Principal Executive Office...................................................................4
Section 2. Other Offices................................................................................4
ARTICLE II SHAREHOLDERS...........................................................................................4
Section 1. Place of Meetings............................................................................4
Section 2. Annual Meetings..............................................................................4
Section 3. Special Meetings.............................................................................4
Section 4. Notice of Annual or Special Meetings.........................................................5
Section 5. Quorum.......................................................................................5
Section 6. Adjourned Meetings and Notice Thereof........................................................5
Section 7. Voting.......................................................................................6
Section 8. Record Date..................................................................................7
Section 9. Consent of Absentees.........................................................................8
Section 10. Action Without Meeting......................................................................8
Section 11. Proxies.....................................................................................8
Section 12. Inspectors of Election......................................................................9
Section 13. Conduct of Meeting..........................................................................9
ARTICLE III DIRECTORS............................................................................................10
Section 1. Powers......................................................................................10
Section 2. Number of Directors.........................................................................10
Section 3. Election and Term of Office.................................................................10
Section 4. Vacancies...................................................................................11
Section 5. Place of Meeting............................................................................11
Section 6. Regular Meetings............................................................................11
Section 7. Special Meetings............................................................................12
Section 8. Quorum......................................................................................12
Section 9. Participation in Meetings by Conference Telephone...........................................12
Section 10. Waiver of Notice...........................................................................12
Section 11. Adjournment................................................................................12
Section 12. Fees and Compensation......................................................................13
Section 13. Action Without Meeting.....................................................................13
Section 14. Rights of Inspection.......................................................................13
Section 15. Committees.................................................................................13
ARTICLE IV OFFICERS..............................................................................................14
Section 1. Officers....................................................................................14
Section 2. Election....................................................................................14
Section 3. Subordinate Officers........................................................................14
Section 4. Removal and Resignation.....................................................................14
Section 5. Vacancies...................................................................................15
Section 6. President...................................................................................15
Section 7. Vice Presidents.............................................................................15
Section 8. Secretary...................................................................................15
Section 9. Treasurer...................................................................................15
Section 10. Controller.................................................................................16
ARTICLE V OTHER PROVISIONS.......................................................................................16
Section 1. Inspection of Corporate Records.............................................................16
</TABLE>

<PAGE> 3

<TABLE>
<S> <C> <C>
Section 2. Inspection of Bylaws........................................................................17
Section 3. Endorsement of Documents; Contracts.........................................................17
Section 4. Certificates of Stock and Lost Certificates.................................................17
Section 5. Representation of Shares of Other Corporations..............................................18
Section 6. Annual Report to Shareholders...............................................................18
Section 7. Construction and Definitions................................................................18
ARTICLE VI INDEMNIFICATION.......................................................................................18
Section 1. Definitions.................................................................................18
Section 2. Indemnification in Actions by Third Parties.................................................18
Section 3. Indemnification in Actions by or in the Right of the Corporation............................19
Section 4. Indemnification Against Expenses............................................................19
Section 5. Required Determinations.....................................................................19
Section 6. Advance of Expenses.........................................................................20
Section 7. Other Indemnification.......................................................................20
Section 8. Forms of Indemnification not Permitted......................................................20
Section 9. Insurance...................................................................................20
Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans..................................20
ARTICLE VII AMENDMENTS...........................................................................................21
</TABLE>

<PAGE> 4

Bylaws
(Bylaws for the regulation, except
as otherwise provided by statute or
its Articles of Incorporation)
OF
GTE CALIFORNIA INCORPORATED

(a California corporation)

ARTICLE I

OFFICES

Section 1. Principal Executive Office. The principal executive office
of the corporation is fixed and located at One GTE Place, Thousand Oaks,
California 91362-3811. The Board of Directors (herein called the "Board") is
granted full power and authority to change said principal executive office from
one location to another. Any such change shall be noted on the Bylaws opposite
this Section, or this Section may be amended to state the new location.

Section 2. Other Offices. Branch or subordinate offices may be
established at any time by the Board at any place or places.

ARTICLE II

SHAREHOLDERS

Section 1. Place of Meetings. Meetings of Shareholders shall be held
either at the principal executive office of the corporation or at any other
place within or without the State of California which may be designated either
by the Board or by the written consent of all persons entitled to vote thereat,
given either before or after the meeting and filed with the Secretary.

Section 2. Annual Meetings. The annual meetings of Shareholders shall
be held on the second Wednesday in May at 10 a.m., local time, or such other
date or such other time as may be fixed by the Board; provided, however, that
should said date fall upon a Saturday, Sunday or legal holiday observed by the
corporation at its principal executive office, then any such annual meeting of
Shareholders shall be held at the same time and place on the next day thereafter
ensuing which is a full business day. At such meetings, Directors shall be
elected and any other proper business may be transacted.

Section 3. Special Meetings. Special meetings of the Shareholders may
be called at any time by the Board, the President, or by the holders of shares
entitled to cast not less than ten percent of the votes at such meeting. Upon
request in writing to the President, any Vice President or the Secretary or by
any person (other than the Board) entitled to call a special meeting of
Shareholders, the officer forthwith shall cause notice to be given to the
Shareholders entitled to vote that a meeting will be held at a time requested by
the

<PAGE> 5

person or persons calling the meeting, not less than 35 nor more than 60 days
after the receipt of the request. If the notice is not given within 20 days
after receipt of the request, the persons entitled to call the meeting may give
the notice.

Section 4. Notice of Annual or Special Meetings. Written notice of each
annual or special meeting of Shareholders shall be given not less than ten nor
more than 60 days before the date of the meeting to each Shareholder entitled to
vote thereat. Such notice shall state the place, date and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted, or (ii) in the case of
the annual meeting, those matters which the Board, at the time of the mailing of
the notice, intends to present for action by the Shareholders, but, subject to
the provisions of applicable law, any proper matter may be presented at the
meeting for such action. The notice of any meeting at which Directors are to be
elected shall include the names of nominees intended at the time of the notice
to be presented by management for election.

Notice of a Shareholders' meeting shall be given either personally or
by mail or by other means of written communication, addressed to the Shareholder
at the address of such Shareholder appearing on the books of the corporation or
given by the Shareholder to the corporation for the purpose of notice; or, if no
such address appears or is given, at the place where the principal executive
office of the corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. Notice by mail shall be deemed to have been given at the time
a written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient.

Section 5. Quorum. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at any meeting of
Shareholders. The Shareholders present at a duly called or held meeting at which
a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough Shareholders to have less than a
quorum, if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum.

Section 6. Adjourned Meetings and Notice Thereof. Any Shareholders'
meeting, whether or not a quorum is present, may be adjourned from time-to-time
by the vote of a majority of the shares, the holders of which are either present
in person or represented by proxy thereat, but in the absence of a quorum
(except as provided in Section 5 of this ARTICLE) no other business may be
transacted at such meeting.

It shall not be necessary to give any notice of the time and place of
the adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken; provided,
however, when any shareholders' meeting is adjourned for more than 45 days or,
if after adjournment a new record date is fixed for the adjourned meeting,
notice of the adjourned meeting shall be given as in the case of an original
meeting.

<PAGE> 6

Section 7. Voting. The Shareholders entitled to notice of any meeting
or to vote at any such meeting shall be only persons in whose name shares stand
on the stock records of the corporation on the record date determined in
accordance with Section 8 of this ARTICLE.

Voting shall in all cases be subject to the provisions of Chapter 7 of
the California General Corporation Law, and to the following provisions:

(a) Subject to clause (g), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of such shares into the holder's name; and
shares standing in the name of a trustee may be voted by the trustee, either in
person or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.

(b) Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.

(c) Subject to the provisions of Section 705 of the California General
Corporation Law and except where otherwise agreed in writing between the
parties, a Shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.

(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation.

(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy holder as the Bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the Chairman of the Board, President or any
Vice President of such other corporation, or by any other person authorized to
do so by the Chairman of the Board, President or any Vice President of such
other corporation. Shares which are purported to be voted or any proxy purported
to be executed in the name of a corporation (whether or not any title of the
person signing is indicated) shall be presumed to be voted or the proxy executed
in accordance with the provisions of this subdivision, unless the contrary is
shown.

(f) Shares of the corporation owned by any subsidiary shall not be
entitled to vote on any matter.

(g) Shares held by the corporation in a fiduciary capacity, and shares
of the issuing corporation held in a fiduciary capacity by any subsidiary, shall
not be entitled to vote on any matter, except to the extent that the settlor or
beneficial owner possesses and

<PAGE> 7

exercises a right to vote or to give the corporation binding instructions as to
how to vote such shares.

(h) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint-tenants, tenants-in-common,
husband and wife as community property, tenants-by-the-entirety, voting
trustees, persons entitled to vote under a Shareholder voting agreement or
otherwise, or if two or more persons (including proxy holders) have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:

(i) If only one votes, such act binds all;

(ii) If more than one vote, the act of the majority so voting
binds all;

(iii) If more than one vote, but the vote is evenly split on
any particular matter, each faction may vote the securities in question
proportionately.

If the instrument so filed or the registration of the shares shows that
any such tenancy is held in unequal interests, a majority or even split for the
purpose of this Section shall be a majority or even split in interest.

Subject to the following sentence and to the provisions of Section 708
of the California General Corporation Law, every Shareholder entitled to vote at
any election of Directors may cumulate such Shareholder's votes and give one
candidate a number of votes equal to the number of Directors to be elected
multiplied by the number of votes to which the Shareholder's shares are
entitled, or distribute the Shareholder's votes on the same principle among as
many candidates as the Shareholder thinks fit. No Shareholder shall be entitled
to cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' names have been placed in
nomination prior to the voting and the Shareholder has given notice at a meeting
prior to the voting of the Shareholder's intention to cumulate the Shareholder's
votes. If any one Shareholder has given such notice, all Shareholders may
cumulate their votes for candidates in nomination.

Elections need not be by ballot; provided, however, that all elections
for Directors must be by ballot upon demand made by a Shareholder at the meeting
and before the voting begins.

In any election of Directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
Directors to be elected by such shares are elected.

Section 8. Record Date. The Board may fix, in advance, a record date
for the determination of the Shareholders entitled to notice of any meeting or
to vote or entitled to receive payment of any dividend or other distribution, or
any allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 days nor less than
ten days prior to the date of the meeting nor more than

<PAGE> 8

60 days prior to any other action. When a record date is so fixed, only
Shareholders of record on that date are entitled to notice of and to vote at the
meeting or to receive the dividend, distribution, or allotment of rights, or to
exercise of the rights, as the case may be, notwithstanding any transfer of
shares on the books of the corporation after the record date. A determination of
Shareholders of record entitled to notice of or to vote at a meeting of
Shareholders shall apply to any adjournment of the meeting unless the Board
fixes a new record date for the adjourned meeting. The Board shall fix a new
record date if the meeting is adjourned for more than 45 days.

If no record date is fixed by the Board, the record date for
determining Shareholders entitled to notice of or to vote at a meeting of
Shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the next business day next preceding the day on which the meeting
is held. The record date for determining Shareholders for any purpose other than
set forth in this Section 8 or Section 10 of this ARTICLE shall be at the close
of business on the day on which the Board adopts the resolution relating
thereto, or the 60th day prior to the date of such other action, whichever is
later.

Section 9. Consent of Absentees. The transactions of any meeting of
Shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Neither the business to be transacted at nor the purpose
of, any regular or special meeting of Shareholders need be specified in any
written waiver of notice, except as provided in Section 601(f) of the California
General Corporation Law.

Section 10. Action Without Meeting. Subject to Section 603 of the
California General Corporation Law, any action which, under any provision of the
California General Corporation Law, may be taken at any annual or special
meeting of Shareholders, may be taken without a meeting and without prior notice
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Unless a
record date for voting purposes be fixed as provided in Section 8 of this
ARTICLE, the record date for determining Shareholders entitled to give consent
pursuant to this Section 10, when no prior action by the Board has been taken,
shall be the day on which the first written consent is given.

Section 11. Proxies. Every person entitled to vote shares has the right
to do so either in person or by one or more persons authorized by a written
proxy executed by such Shareholder and filed with the Secretary. Any proxy duly
executed is not revoked and continues in full force and effect until revoked by
the person executing it prior to the vote pursuant thereto by a writing
delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or by attendance at the meeting and voting in person by the
person

<PAGE> 9

executing the proxy; provided, however, that no proxy shall be valid after the
expiration of eleven months from the date of its execution unless otherwise
provided in the proxy.

Section 12. Inspectors of Election. In advance of any meeting of
Shareholders, the Board may appoint any persons other than nominees for office
Inspectors of Election to act at such meeting and any adjournment thereof. If
Inspectors of Election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the Chairman of any such meeting may, and on the
request of any Shareholder or Shareholder's proxy shall, make such appointment
at the meeting. The number of Inspectors shall be either one or three. If
appointed at a meeting on the request of one or more Shareholders or proxies,
the majority of shares present shall determine whether one or three Inspectors
are to be appointed.

The duties of such Inspectors shall be as prescribed by Section 707(b)
of the California General Corporation Law and shall include: determining the
number of shares outstanding and the voting power of each; the shares
represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining when the polls shall close; determining the result; and doing such
acts as may be proper to conduct the election or vote with fairness to all
shareholders. If there are three inspectors of Election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all.

Section 13. Conduct of Meeting. The President or any Vice President may
preside as Chairman at all meetings of the Shareholders. The Chairman shall
conduct each such meeting in a businesslike and fair manner, but shall not be
obligated to follow any technical, formal or parliamentary rules or principles
of procedure. The Chairman's rulings on procedural matters shall be conclusive
and binding on all Shareholders, unless at the time of a ruling a request for a
vote is made to the Shareholders holding shares entitled to vote and which are
represented in person or by proxy at the meeting, in which case the decision of
a majority if such shares shall be conclusive and binding on all Shareholders.
Without limiting the generality of the foregoing, the Chairman shall have all of
the powers usually vested in the Chairman of a meeting of Shareholders.

<PAGE> 10

ARTICLE III

DIRECTORS

Section 1. Powers. Subject to limitations of the Articles, of these
Bylaws and of the California General Corporation Law relating to action required
to be approved by the Shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the Board. The Board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board. Without prejudice to such general powers,
but subject to the same limitations, it is hereby expressly declared that the
Board shall have the following powers in addition to the other powers enumerated
in these Bylaws:

(a) To select and remove all the other officers, agents and
employees of the corporation, prescribe the powers and duties
for them as may not be inconsistent with law, with the
Articles or these Bylaws, fix their compensation and require
from them security for faithful service.

(b) To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor
not inconsistent with law, or with the Articles or these
Bylaws, as they may deem best.

(c) To adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such
seal and of such certificates from time-to-time as in their
judgment they may deem best.

(d) To authorize the issuance of shares of stock of the
corporation from time-to-time, upon such terms and for such
consideration as may be lawful.

(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered
therefor, in the corporate name, promissory notes, bonds,
debentures, deeds of trust, mortgages, pledges, hypothecations
or other evidences of debt and securities therefor.

Section 2. Number of Directors. The authorized number of Directors
shall be not less than three nor more than five until changed by amendment of
the Articles or by a Bylaw duly adopted by the Shareholders. The exact number of
Directors shall be fixed, within the limits specified, by the Board or the
Shareholders in the same manner provided in these Bylaws for the amendment
hereof. The exact number of Directors shall be THREE (3) until changed as
provided in this Section 2.

Section 3. Election and Term of Office. The Directors shall be elected
at each annual meeting of the Shareholders, but if any such annual meeting is
not held or the Directors are not elected thereat, the Directors may be elected
at any special meeting of Shareholders held for that purpose. Each Director
shall hold office until the next annual

<PAGE> 11

meeting and until a successor has been elected and qualified. A nonemployee
Director who shall have attained the age of 68 shall be ineligible for
reelection as a Director of the corporation and no person who shall have
attained the age of 68 shall be eligible for election as a nonemployee Director
of the corporation. An employee of the corporation or any affiliate, who may be
elected a Director of the corporation, shall automatically cease to be a
Director upon his retirement or termination of his employment from the
corporation or such affiliate.

Section 4. Vacancies. Any Director may resign effective upon giving
written notice to the President, the Secretary or the Board, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.

Vacancies in the Board, except those existing as a result of a removal
of a Director, may be filled by a majority of the remaining Directors, though
less than a quorum, or by a sole remaining Director, and each Director so
elected shall hold office until the next annual meeting and until such
Director's successor has been elected and qualified.

A vacancy or vacancies in the Board shall be deemed to exist in case of
the death, resignation or removal of any Director, or if the authorized number
of Directors be increased, or if the Shareholders fail, at any annual or special
meeting of Shareholders at which any Director or Directors are elected, to elect
the full authorized number of Directors to be voted for at that meeting.

The Board may declare vacant the office of a Director who has been
declared of unsound mind by an order of court or convicted of a felony.

The Shareholders may elect a Director or Directors at any time to fill
any vacancy or vacancies not filled by the Directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a majority of the outstanding shares entitled to vote. Any such
election by written consent to fill a vacancy created by removal requires
unanimous consent.

No reduction of the authorized number of Directors shall have the
effect of removing any Director prior to the expiration of the Director's term
of office.

Section 5. Place of Meeting. Regular or special meetings of the Board
shall be held at any place within or without the State of California which has
been designated from time-to-time by the Board. In the absence of such
designation, regular meetings shall be held at the principal executive office of
the corporation.

Section 6. Regular Meetings. Immediately following each annual meeting
of Shareholders the Board may hold a regular meeting for the purpose of
organization, election of officers and the transaction of other business.

Other regular meetings of the Board may be held without call on such
dates and at such times as may be fixed by the Board. Call and notice of all
regular meetings of the Board are hereby dispensed with.

<PAGE> 12

Section 7. Special Meetings. Special meetings of the Board for any
purpose or purposes may be called at any time by the President or the Secretary
or by any two Directors.

Special meetings of the Board shall be held upon four days' written
notice or 48 hours' notice given personally or by telephone, telegraph, telex or
other similar means of communication. Any such notice shall be addressed or
delivered to each Director at such Director's address as it is shown upon the
records of the corporation or as may have been given to the corporation by the
Director for purposes of notice or, if such address is not shown on such records
or is not readily ascertainable, at the place in which the meetings of the
Directors are regularly held.

Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mails, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.

Section 8. Quorum. A majority of the authorized number of Directors
constitutes a quorum of the Board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the Directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
Directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.

Section 9. Participation in Meetings by Conference Telephone. Members
of the Board may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.

Section 10. Waiver of Notice. Notice of a meeting need not be given to
any Director who signs a waiver of notice or a consent to holding the meeting or
an approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such Director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

Section 11. Adjournment. A majority of the Directors present, whether
or not a quorum is present, may adjourn any Directors' meeting to another time
and place. Notice of the time and place of holding an adjourned meeting need not
be given to absent Directors if the time and place be fixed at the meeting
adjourned. If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the Directors who were not present at the time of the
adjournment.

<PAGE> 13

Section 12. Fees and Compensation. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board.

Section 13. Action Without Meeting. Any action required or permitted to
be taken by the Board may be taken without a meeting if all members of the Board
shall individually or collectively consent in writing to such action. Such
consent or consents shall have the same effect as a unanimous vote of the Board
and shall be filed with the minutes of the proceedings of the Board.

Section 14. Rights of Inspection. Every Director shall have the
absolute right at any reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a Director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.

Section 15. Committees. The Board may appoint one or more committees,
each consisting of two or more Directors, and delegate to such committees any of
the authority of the Board except with respect to:

(i) The approval of any action for which the California
General Corporation Law also requires shareholders'
approval or approval of the outstanding shares;

(ii) The filling of vacancies on the Board or on any
committee;

(iii) The fixing of compensation of the Directors for
serving on the Board or on any committee;

(iv) The amendment or repeal of Bylaws or the adoption of
new Bylaws;

(v) The amendment or repeal of any resolution of the Board
which by its express terms is not so amendable or
repealable;

(vi) A distribution to the shareholders of the corporation
except at a rate or in a periodic amount or within a
price range determined by the Board; or

(vii) The appointment of other committees of the Board or
the members thereof.

Any such committee must be designated, and the members or alternate members
thereof appointed by resolution adopted by a majority of the authorized number
of Directors and any such committee may be designated an Executive Committee or
by such other name as the Board shall specify. Alternate members of a committee
may replace any absent member at any meeting of the committee. The Board shall
have the power to prescribe the manner in which proceedings of any such
committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the

<PAGE> 14

manner in which its proceedings shall be conducted. Unless the Board or such
committee shall otherwise provide, the regular and special meetings and other
actions of any such committee shall be governed by the provisions of this
ARTICLE applicable to meetings and actions of the Board. Minutes shall be kept
of each meeting of each committee.

ARTICLE IV

OFFICERS

Section 1. Officers. The officers of the corporation shall be a
President, a Secretary and a Treasurer. The corporation may also have, at the
discretion of the Board, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers as may be
elected or appointed in accordance with the provisions of Section 3 of this
ARTICLE.

Section 2. Election. The officers of the corporation, except such
officers as may be elected or appointed in accordance with the provisions of
Section 3 or Section 5 of this ARTICLE, shall be chosen annually by, and shall
serve at the pleasure of, the Board and shall hold their respective offices
until their resignation, removal, or other disqualification from service, or
until their respective successors shall be elected.

Section 3. Subordinate Officers. The Board may elect, and may empower
the President to appoint, such other officers as the business of the corporation
may require, each of whom shall hold office for such period, have such authority
and perform such duties as are provided in these Bylaws or as the Board may from
time-to-time determine.

Section 4. Removal and Resignation. Any officer may be removed, either
with or without cause, by the Board of Directors at any time or, except in the
case of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of employment
of the officer.

Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.

Section 5. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular election or appointment to such
office.

Section 6. President. The President is the general manager and chief
executive officer of the corporation and has, subject to the control of the
Board, general supervision, direction and control of the business and officers
of the corporation. The President may preside at all meetings of the
Shareholders. The President has the general powers and duties of management
usually vested in the office of president and general manager of a corporation
and such other powers and duties as may be prescribed by the Board.

<PAGE> 15

Section 7. Vice Presidents. In the absence or disability of the
President, the Vice Presidents in the order of their rank as fixed by the Board
or, if not ranked, the Vice President designated by the Board, shall perform all
the duties of the President and, when so acting, shall have all the powers of,
and be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time-to-time
may be prescribed for them respectively by the Board.

Section 8. Secretary. The Secretary shall keep or cause to be kept, at
the principal executive office or such other place as the Board may order, a
book of minutes of all meetings of Shareholders, the Board and its committees,
with the time and place of holding, whether regular or special, and if special,
how authorized, the notice thereof given, the names of those present at Board
and committee meetings, the number of shares present or, represented at
Shareholders' meetings, and the proceedings thereof. The Secretary shall keep,
or cause to be kept, a copy of the Bylaws of the corporation at the principal
executive office or business office in accordance with Section 213 of the
California General Corporation Law.

The Secretary shall give, or cause to be given, notice of all meetings
of the Shareholders and of the Board and of any committees thereof required by
these Bylaws or by law to be given, shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board.

Section 9. Treasurer. The Treasurer shall send, or cause to be sent, to
the Shareholders of the corporation such financial statements and reports as are
by law or these Bylaws required to be sent to them.

The Treasurer shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's Transfer Agent or
Registrar, if one be appointed, a share register, or a duplicate share register,
showing the names of the Shareholders and their addresses, and number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.

The Treasurer shall deposit all moneys and other valuables in the name
and to the credit of the corporation with such depositaries as may be designated
by the Board. The Treasurer shall disburse the funds of the corporation as may
be ordered by the Board, shall render to the President and the Directors,
whenever they request it, an account of all transactions as Treasurer and shall
have such other powers and perform such other duties as may be prescribed by the
Board.

Section 10. Controller. The Controller is the chief accounting officer
of the corporation and shall keep and maintain, or cause to be kept and
maintained, adequate and correct accounts of the properties and business
transactions of the corporation. The books of account shall at all times be open
to inspection by any Director. All bills, vouchers and other accounts payable
shall be submitted to him, and he shall audit and approve the same for payment
if found proper and correct. The Controller shall render to the President and
Directors, whenever they request it, an account of all transactions as
Controller, and

<PAGE> 16

of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the Board.

ARTICLE V

OTHER PROVISIONS

Section 1. Inspection of Corporate Records.

(a) A Shareholder or Shareholders holding at least five percent in
the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent of such voting
shares and have filed a Schedule 14B with the United States
Securities and Exchange Commission relating to the election of
Directors of the corporation shall have an absolute right to
do either or both of the following:

(i) Inspect and copy the record of Shareholders' names
and addresses and shareholdings during usual
business hours upon five business days' prior
written demand upon the corporation; or

(ii) Obtain from the Transfer Agent, if any, for the
corporation, upon five business days' prior
written demand and upon the tender of its usual
charges for such a list (the amount of which
charges shall be stated to the Shareholder by the
Transfer Agent upon request), a list of the
Shareholders' names and addresses who are entitled
to vote for the election of Directors and their
shareholdings, as of the most recent record date
for which it has been compiled or as of a date
specified by the Shareholder subsequent to the
date of demand.

(b) The record of Shareholders shall also be open to inspection
and copying by any Shareholder or holder of a voting trust
certificate at any time during usual business hours upon
written demand on the corporation, for a purpose reasonably
related to such holder's interest as a Shareholder or holder
of a voting trust certificate.

(c) The accounting books and records and minutes of proceedings of
the Shareholders and the Board and committees of the Board
shall be open to inspection upon written demand on the
corporation of any Shareholder or holder of a voting trust
certificate at any reasonable time during usual business
hours, for a purpose reasonably related to such holder's
interests as a Shareholder or as a holder of such voting trust
certificate.

(d) Any inspection and copying under this ARTICLE may be made in
person or by agent or attorney.

Section 2. Inspection of Bylaws. The corporation shall keep in its
principal executive office the original or a copy of these Bylaws as amended to
date, which shall be

<PAGE> 17

open to inspection by Shareholders at all reasonable times during office hours.
If the principal executive office of the corporation is located outside the
State of California and the corporation has no principal business office in such
state, it shall upon the written notice of any Shareholder furnish to such
Shareholder a copy of these Bylaws as amended to date.

Section 3. Endorsement of Documents; Contracts. Subject to the
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance or other instrument in writing and any
assignment or endorsements thereof executed or entered into between the
corporation and any other person, when signed by the President or any Vice
President, and the Secretary or any Assistant Secretary, the Treasurer or any
Assistant Treasurer of the corporation shall be valid and binding on the
corporation in the absence of actual knowledge on the part of the other person
that the signing officers had no authority to execute the same. Any such
instruments may be signed by any other person or persons and in such manner as
from time-to-time shall be determined by the Board, and, unless so authorized by
the Board, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or amount.

Section 4. Certificates of Stock and Lost Certificates. Every holder of
shares of the corporation shall be entitled to have a certificate signed in the
name of the corporation by the President or any Vice President, and the
Treasurer or any Assistant Treasurer, the Secretary or any Assistant Secretary,
certifying the number of shares and the class or series of shares owned by the
Shareholder. Any or all of the signatures on the certificate may be facsimile.
If any officer, Transfer Agent or Registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, Transfer Agent or Registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if such person were an
officer, Transfer Agent or Registrar at the date of issue.

Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.

Except as provided in this Section, no new certificate for shares shall
be issued in lieu of an old one unless the latter is surrendered and cancelled
at the same time. The Board may, however, if any certificate for shares is
alleged to have been lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.

Section 5. Representation of Shares of Other Corporations. The
President or any other officer or officers authorized by the Board or the
President are each authorized to vote, represent and exercise on behalf of the
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the corporation. The authority herein
granted may be exercised either by any such officer in person or by

<PAGE> 18

any other person authorized so to do by proxy or power of attorney duly executed
by said officer.

Section 6. Annual Report to Shareholders. The annual report to
Shareholders referred to in Section 1501 of the California General Corporation
Law is expressly waived, but nothing herein shall be interpreted as prohibiting
the Board from issuing annual or other periodic reports to Shareholders.

Section 7. Construction and Definitions. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the General Provisions of the California Corporations Code and in
the California General Corporation Law shall govern the construction of these
Bylaws.

ARTICLE VI

INDEMNIFICATION

Section 1. Definitions. For the purposes of this ARTICLE, "agent" means
any person who is or was a Director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
Director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a Director,
officer, employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under Sections 4 or 5(c).

Section 2. Indemnification in Actions by Third Parties. The corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the corporation to procure a judgment in its favor) by reason of
the fact that such person is or was an agent of the corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.

Section 3. Indemnification in Actions by or in the Right of the
Corporation. The corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action if such

<PAGE> 19

person acted in good faith, in a manner such person believed to be in the best
interests of the corporation and with such care, including reasonable inquiry,
as an ordinarily prudent person in a like position would use under similar
circumstances.

No indemnification shall be made under this Section 3:

(a) In respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the
corporation in the performance of such person's duty to the
corporation, unless and only to the extent that the court in
which such proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to
indemnity for the expenses which such court shall determine;

(b) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval;
or

(c) Of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court
approval.

Section 4. Indemnification Against Expenses. To the extent that an
agent of the corporation has been successful on the merits in defense of any
proceeding referred to in Sections 2 or 3 or in defense of any claim, issue or
matter therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.

Section 5. Required Determinations. Except as provided in Section 4,
any indemnification under this ARTICLE shall be made by the corporation only if
authorized in the specific case, upon a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3, by:

(a) A majority vote of a quorum consisting of Directors who are
not parties to such proceeding;

(b) Approval of the Shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon;
or

(c) The court in which such proceeding is or was pending upon
application made by the corporation or the agent or the
attorney or other person rendering services in connection with
the defense, whether or not such application by the agent,
attorney or other person is opposed by the corporation.

Section 6. Advance of Expenses. Expenses incurred in defending any
proceeding may be advanced by the corporation prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this ARTICLE.

<PAGE> 20

Section 7. Other Indemnification. No provision made by the corporation
to indemnify its, or its subsidiary's, Directors or officers for the defense of
any proceeding, whether contained in the Articles, Bylaws, a resolution of
Shareholders or Directors, an agreement or otherwise, shall be valid unless
consistent with this ARTICLE. Nothing contained in this ARTICLE shall affect any
right to indemnification to which persons other than such Directors and officers
may be entitled by contract or otherwise.

Section 8. Forms of Indemnification not Permitted. No indemnification
or advance shall be made under this ARTICLE, except as provided in Sections 4 or
5(c), in any circumstances where it appears:

(a) That it would be inconsistent with a provision of the
Articles, Bylaws, a resolution of the Shareholders or an
agreement in effect at the time of the accrual of the alleged
cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or

(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.

Section 9. Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the corporation would have the
power to indemnify the agent against such liability under the provisions of this
ARTICLE.

Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans.
This ARTICLE does not apply to any proceeding against any trustee investment
manager or other fiduciary of an employee benefit plan in such person's capacity
as such, even though such person may also be an agent of the corporation as
defined in Section 1 of this ARTICLE. The corporation shall have power to
indemnify such trustee, investment manager or other fiduciary to the extent
permitted by subdivision (f) of Section 207 of the California General
Corporation Law.

ARTICLE VII

AMENDMENTS

These Bylaws may be amended or repealed either by approval of the
outstanding shares (as defined in Section 152 of the California General
Corporation Law) or by the approval of the Board; provided, however, that after
the issuance of shares, a Bylaw specifying or changing a fixed number of
Directors or the maximum or minimum number, or changing from a fixed to a
variable number of Directors, or vice versa, may only be adopted by approval of
the outstanding shares, and a bylaw reducing the fixed number or the minimum
number of Directors to a number less than five shall be subject to the
provisions of Section 212(a) of the California General Corporation Law.

<PAGE> 1

EXHIBIT 10.5

PERSONAL & CONFIDENTIAL

November 19, 1999

Mr. William Edwards
(Address)
(Address)

Dear Bill:

I want to take this opportunity to thank you for your many contributions to the
company, including your role in the repositioning efforts that have been so
critical to our success. Your leadership is greatly appreciated by the entire
GTE management team.

We recognize that your original plan, as set forth in our April 27, 1998 letter
agreement, was to retire on April 30, 2000. However, in light of the upcoming
divestitures of wireless properties as a result of GTE's planned merger with
Bell Atlantic, we would like to provide you with an incentive to continue your
employment through an appropriate point in the completion of this process (the
"Retention Period") and to establish a transition arrangement for your
separation from employment. For purposes of this Letter Agreement, the Retention
Period shall be from the date of this agreement through January 2, 2001 or, if
earlier, the date that repositioning efforts have been satisfactorily completed,
as determined by GTE.

A. RETENTION BONUS

1. RETENTION BONUS. Subject to the terms and conditions set forth
herein, on or about 45 days after the conclusion of the Retention Period, you
will receive a Retention Bonus equal (before withholding of applicable taxes) to
one times the sum of (i) your base annual salary as of the conclusion of the
Retention Period and (ii) the prior three-year average corporate rating (as of
the conclusion the Retention Period) under GTE's Executive Incentive Plan or any
successor plan ("EIP") for your grade level as of the conclusion of the
Retention Period multiplied by an amount equal to 100% of norm for that grade
level under EIP.

2. INVOLUNTARY TERMINATION WITHOUT CAUSE. If prior to the end of the
Retention Period your employment is terminated involuntarily without cause, as

<PAGE> 2

William Edwards
November 19, 1999
Page 2

determined by GTE, and for reasons other than your death or disability, you will
receive a payment equal to the Retention Bonus to which you would have been
entitled had your employment continued through the full Retention Period.
Payment will be made at the same time the Retention Bonus would have been paid
had you remained employed through the full Retention Period. Under no
circumstances will your resignation or retirement for any reason constitute an
involuntary termination without cause for purposes of this Letter Agreement.

3. DEATH OR DISABILITY. Should you die or become disabled (within the
meaning of GTE's Long Term Disability Plan) prior to the end of the Retention
Period, you, or, in the event of your death, your estate, will receive a
prorated Retention Bonus based on the ratio of (i) the number of days you
remained actively employed during the Retention Period to (ii) the total number
of days in the Retention Period. For purposes of this paragraph, the Retention
Period will be presumed to run through January 2, 2001, unless an earlier
conclusion date had already been communicated to you prior to your death or
disability. The prorated Retention Bonus payable under this paragraph shall be
paid at the same time the Retention Bonus would have been paid had you remained
employed through the Retention Period.

4. CIRCUMSTANCES WHEN NO BONUS WILL BE PAID. Should you resign or
retire for any reason prior to the end of the Retention Period, or should you at
any time engage in conduct that would constitute cause (as determined by GTE),
you will not be eligible to receive any portion of the Retention Bonus.

5. DEFERRAL. You will not be eligible to defer any Retention Bonus
payable to you under this Letter Agreement.

6. PAYMENT TAXABLE/NOT BENEFIT BEARING. Applicable taxes will be
withheld from any payment made pursuant to this Letter Agreement. Any Retention
Bonus payable under this Letter Agreement shall not be considered compensation
for purposes of computing or determining any benefit under any pension, savings,
insurance, or other employee compensation or benefit plan maintained by GTE.

B. SEPARATION

1. SEPARATION BENEFITS. You will retire from employment with GTE upon
conclusion of the Retention Period. Since your position is being eliminated, you
will be eligible to receive separation benefits in accordance with the terms of
GTE's Involuntary Separation Program or any successor plan which may exist
("ISEP") at that time, subject to signing a release of all claims against GTE.
You will also receive a lump sum payment for all accrued, unused (but unpaid)
vacation upon the

<PAGE> 3

William Edwards
November 19, 1999
Page 3

termination of your employment with GTE, but you will not receive service credit
for same. If your employment continues through January 2, 2001, you will earn
vacation for the 2001 calendar year.

2. EIP. You will continue to participate in EIP during the Retention
Period on the same basis as other executives at your level, subject to the terms
of that plan. Any payments under EIP will be made at the same time such payments
are made to other EIP participants. The Executive Compensation and
Organizational Structure Committee of the Board of Directors of GTE, its
designee, its successor or its successor's designee (the "ECC") will determine
the amount of your actual awards.

3. LTIP. You will continue to participate in GTE's Long Term Incentive
Plan or any successor plan that may exist ("LTIP") on the same terms as other
executives at your level during the Retention Period, subject to the terms of
the plan. All payments under LTIP will be paid at the same time payments are
made to other participants. The ECC will determine the amount of your actual
awards.

4. INTEREST RATE FOR PENSION PURPOSES. Consistent with the terms of
your April 27, 1988 letter and subsequent amendments to the GTE Service
Corporation Plan for Employees' Pensions ("the Plan"), upon retirement under the
terms of the Plan, your lump sum pension distribution amount will be based on
whichever of the following rates produces the largest lump sum distribution: the
GATT rate (based on 30 year Treasury bonds), 120% of the PBGC rate, or the Plan
rate (based on a six-month average of 10-year Treasury bonds). The lump sum
distribution will be payable from the Plan to the extent allowable by Plan
provisions and governmental regulations. The difference, if any, between the
total lump sum amount and the amount eligible to be paid from the Plan may be
paid from GTE's general assets, at GTE's discretion.

5. TERMINATION OF EMPLOYMENT. In accordance with company policy, GTE
reserves the right to terminate your employment prior to the end of the
Retention Period for cause, as determined by GTE. If you are discharged for
cause, elect to resign or retire, or die or become disabled (within the meaning
of GTE's Long Term Disability Plan) prior to the expiration of the Retention
Period, all further obligations under this Letter Agreement shall cease (except
for, in the case of termination due to death or disability, your right to any
prorated Retention Bonus as provided for above), and you will not be entitled to
separation benefits under this Letter Agreement or under any GTE policy or
practice.

<PAGE> 4

William Edwards
November 19, 1999
Page 4

C. GENERAL PROVISIONS

1. PROHIBITION AGAINST RECRUITING OR HIRING. Commencing on the date of
this Retention Agreement, and for one year following your separation from
employment with GTE, you agree that you will not, without the prior written
consent of the ECC:

(i) Recruit or solicit any employee of GTE (which, for purposes of
this Agreement, includes GTE Corporation, any corporate
subsidiary or other company affiliated with GTE Corporation,
any company in which GTE Corporation owns directly or
indirectly an equity interest of at least ten percent, and the
successors and assigns of any such company, including,
following the merger, Bell Atlantic Corporation, its
subsidiaries, affiliates, and other related entities and their
successors and assigns) for employment or retention as a
consultant or provider of services;
(ii) Hire, or participate with another entity or third party in the
process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or should
know could lead to the use of that information for purposes of
recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.

2. PROHIBITION AGAINST SOLICITING GTE CUSTOMERS. Commencing on the date
of this Agreement, and, in the event you separate from employment with GTE for
any reason, for one year following such separation, you agree that you will not
solicit or contact, directly or indirectly, any customer, client, or prospect of
GTE with whom you or any of the GTE employees reporting to you had any contact
at any time during the year preceding your termination for the purpose of
inducing such customer, client, or prospect to cease being, or to not become, a
customer or client of GTE or to divert business from GTE.

3. CONFIDENTIALITY. You agree that you will not disclose or discuss
either the existence or the terms of this Agreement under any circumstances
where such information could reasonably be expected to, directly or indirectly,
come to the attention of any present or former employee, contractor, or
consultant of GTE. You further agree that you will require anyone with whom you
share information regarding this Retention Agreement to adhere to the same
standard of confidentiality.

<PAGE> 5

William Edwards
November 19, 1999
Page 5

4. PROPRIETARY INFORMATION. You agree that you will at all times comply
with your obligations under the Employee Agreement Relating to Intellectual
Property and preserve the confidentiality of all Proprietary Information and
trade secrets of GTE and the Proprietary Information and trade secrets of third
parties, including customers, that are in the possession of GTE by not
disclosing the same to any other party or using the same, or any portion
thereof, for the benefit of anyone other than GTE. "Proprietary Information"
means information obtained or developed by you or to which you had access during
your employment with GTE, including, but not limited to, customer information
and other trade secrets and Proprietary Information of GTE and third parties
that has not been fully disclosed in a writing generally circulated by GTE to
the public at large without any restrictions on use or disclosure. You agree
that you will return all copies, in whole or in part, in any form, of trade
secrets and Proprietary Information in your possession or control in the event
of your termination of employment or upon request by GTE, whichever occurs
earlier, without making or retaining a copy.

5. SURVIVAL OF AND CONSIDERATION FOR COVENANTS. You acknowledge and
agree that any payment made pursuant to this Letter Agreement includes
consideration for the covenants contained in paragraphs 1 through 4 of Section C
of this Letter Agreement and that the obligations set out in those paragraphs
shall survive any cancellation, termination, or expiration of this Letter
Agreement or the termination of your employment with GTE.

6. NO DUPLICATION OF BENEFITS. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
payment provided for by this Letter Agreement and any other payment or benefit
for which you are eligible, including any retention incentive program that
provides for payment of a retention bonus for continued employment during any
part of the same time period covered by this Letter Agreement. As a result, any
payment otherwise due under this Letter Agreement shall be reduced by any
amounts due under any such other duplicative plan, arrangement, agreement, or
program.

7. BUSINESS DISCRETION OF GTE. Nothing in this Letter Agreement is
intended to limit the business discretion of GTE. This Letter Agreement does not
entitle you to remain in the employ of GTE for any minimum or prescribed period
of term and does not modify the at-will status of your employment.

8. ASSIGNMENT BY GTE. GTE may assign this Letter Agreement without your
consent. This Letter Agreement may not be assigned by you, and no person other
than you (or your estate) may assert your rights under this Letter Agreement.

<PAGE> 6

William Edwards
November 19, 1999
Page 6

9. DISPUTE RESOLUTION. You agree that the ECC shall have sole
discretion to interpret this Letter Agreement and to resolve any and all
disputes under this Letter Agreement. You further agree that such determination
shall be final and binding.

10. WAIVER. The waiver by GTE of any breach of this Letter Agreement
shall not be construed as a waiver of any subsequent breach.

11. GOVERNING LAW. This Letter Agreement shall be interpreted and
enforced in accordance with the laws of the State of New York, disregarding its
choice of law rules, and any dispute shall be brought in a court sitting in New
York City, New York.

12. REMEDIES. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Letter Agreement, including other obligations referenced herein. In
the event of a breach of any of your covenants and commitments under this Letter
Agreement, including any other obligations referenced herein, GTE shall not be
obligated to make any payment otherwise required under this Letter Agreement and
may, at GTE's discretion, require you to repay any amounts already paid to you,
including amounts that may have been deferred. In addition, GTE reserves all
rights to seek any and all remedies and damages permitted under law, including,
but not limited to, injunctive relief, equitable relief, and compensatory and
punitive damages.

13. DEFINITIONS/RELATIONSHIP TO OTHER AGREEMENTS. The definitions
contained in this Letter Agreement shall be controlling for purposes of this
Letter Agreement and shall not be modified by, nor shall they modify,
definitions for terms in any plan, policy, program, or other agreement to which
you may be a party. This supersedes and replaces the terms of my prior letter to
you dated April 27, 1998.

14. ENTIRE AGREEMENT. You acknowledge and agree that this Retention
Agreement sets forth the entire understanding of the parties with regard to the
subject matter addressed herein and that this Retention Agreement supersedes all
prior agreements and communications, whether written or oral, pertaining to the
incentive described herein. This Retention Agreement shall not be modified
except by written agreement duly executed by you and GTE.

Bill, on behalf on the management team, I want to thank you for agreeing to
remain with GTE beyond your original planned retirement date. Your assistance in
the upcoming Wireless divestitures will be critical to the success of our
upcoming merger with Bell Atlantic. If this Agreement meets with your
satisfaction, please

<PAGE> 7

William Edwards
November 19, 1999
Page 7

sign below and return an original in the enclosed addressed envelope within
fifteen (15) business days.

Sincerely,

J. Randall MacDonald
Executive Vice President-
Human Resources & Administration

JRM:jls

I have read, understand and agree to the foregoing.

- ---------------------------------------
William Edwards

- ---------------------------------------
Date

<PAGE> 1

Exhibit 12

GTE CALIFORNIA INCORPORATED AND SUBSIDIARIES

Statements of the Consolidated Ratio of Earnings to Fixed Charges

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 813.4 $ 681.5 $ 642.8 $ 515.8 $ 342.9
Add - Income tax expense 555.6 454.6 390.5 329.3 235.5
- Fixed charges 149.3 139.8 124.3 119.7 133.6
----------- ----------- ----------- ----------- -----------

Adjusted earnings $ 1,518.3 $ 1,275.9 $ 1,157.6 $ 964.8 $ 712.0
=========== =========== =========== =========== ===========

Fixed charges:
Interest expense $ 141.2 $ 128.9 $ 110.0 $ 106.1 $ 120.0
Portion of rent expense representing
interest 8.1 10.9 14.3 13.6 13.6
----------- ----------- ----------- ----------- -----------

Adjusted fixed charges $ 149.3 $ 139.8 $ 124.3 $ 119.7 $ 133.6
=========== =========== =========== =========== ===========

RATIO OF EARNINGS TO FIXED CHARGES 10.17 9.13 9.31 8.06 5.33
</TABLE>

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<S> <C>
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