<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-3090
GTE FLORIDA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-0397520
(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
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The Company had 23,400,000 shares of $25 par value common stock outstanding at
October 31, 1998. The Company's common stock is 100% owned by GTE Corporation.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------- ---------------- --------------- --------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 181.1 $ 170.6 $ 545.1 $ 521.6
Network access services 139.9 136.6 392.4 395.5
Toll services 10.8 12.6 34.4 45.8
Other services and sales 75.5 70.8 214.3 198.9
------------- -------------- -------------- --------------
Total revenues and sales 407.3 390.6 1,186.2 1,161.8
------------- -------------- -------------- --------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 145.7 139.4 455.7 411.4
Selling, general and administrative 64.8 55.5 191.7 179.3
Depreciation and amortization 89.1 97.1 269.1 281.2
------------- -------------- -------------- --------------
Total operating costs and expenses 299.6 292.0 916.5 871.9
------------- -------------- -------------- --------------
OPERATING INCOME 107.7 98.6 269.7 289.9
OTHER (INCOME) EXPENSE
Interest - net 18.1 15.8 52.5 46.6
Other - net -- -- (0.1) 0.4
------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 89.6 82.8 217.3 242.9
Income taxes 35.1 32.7 83.7 96.0
------------- -------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY CHARGE 54.5 50.1 133.6 146.9
Extraordinary charge -- -- (3.4) --
------------- -------------- -------------- --------------
NET INCOME $ 54.5 $ 50.1 $ 130.2 $ 146.9
============= ============== ============== ==============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.
The accompanying notes are an integral part of these statements.
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<PAGE> 3
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(Dollars in Millions)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 64.6 $ 57.7
Receivables, less allowances
of $28.4 and $30.2 337.7 455.5
Accounts receivable from affiliates 41.4 54.9
Notes receivable from affiliates 1,066.6 1,167.3
Inventories and supplies 28.6 31.0
Prepaid taxes -- 17.4
Prepaid interest 1.4 9.1
Prepaid insurance 13.3 0.7
Other 0.3 1.0
--------------- ---------------
Total current assets 1,553.9 1,794.6
--------------- ---------------
Property, plant and equipment, at cost 4,675.1 4,384.5
Accumulated depreciation (2,692.5) (2,470.5)
--------------- ---------------
Total property, plant and equipment, net 1,982.6 1,914.0
--------------- ---------------
Prepaid pension costs 189.3 169.8
Other assets 26.2 15.8
--------------- ---------------
Total assets $ 3,752.0 $ 3,894.2
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ----------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term obligations,
including current maturities $ 1,235.2 $ 1,294.3
Notes payable to affiliate 51.7 72.3
Accounts payable 87.2 110.7
Affiliate payables 84.6 50.6
Taxes payable 64.7 3.0
Accrued interest 19.6 11.4
Accrued payroll costs 56.8 37.8
Dividends payable 19.9 40.9
Other 97.7 87.7
--------------- ---------------
Total current liabilities 1,717.4 1,708.7
--------------- ---------------
Long-term debt 889.3 1,021.1
Deferred income taxes 176.9 203.9
Deferred employee benefit obligations 201.0 196.1
Other liabilities 6.2 6.8
--------------- ---------------
Total liabilities 2,990.8 3,136.6
--------------- ---------------
Shareholders' equity
Preferred stock 21.2 21.2
Common stock (23,400,000 shares issued) 585.0 585.0
Additional paid-in capital 50.3 50.3
Retained earnings 104.7 101.1
--------------- ---------------
Total shareholders' equity 761.2 757.6
--------------- ---------------
Total liabilities and shareholders' equity $ 3,752.0 $ 3,894.2
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 5
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1997
-------------- -------------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Income before extraordinary charge $ 133.6 $ 146.9
Adjustments to reconcile income before extraordinary charge to net cash from
operations:
Depreciation and amortization 269.1 281.2
Deferred income taxes (24.0) (23.9)
Provision for uncollectible accounts 29.5 25.0
Changes in current assets and current liabilities 180.3 108.3
Other - net 23.5 (9.8)
--------------- -------------
Net cash from operations 612.0 527.7
--------------- -------------
INVESTING
Capital expenditures (338.3) (273.4)
Other - net 0.1 --
--------------- -------------
Cash used in investing (338.2) (273.4)
--------------- -------------
FINANCING
Long-term debt issued 297.0 --
Long-term debt and preferred stock retired,
including premiums paid on early retirement (128.5) (105.2)
Dividends (147.7) (176.3)
Increase (decrease) in short-term obligations,
excluding current maturities (359.0) 1,165.9
Net change in affiliate notes 80.1 (1,032.4)
Other - net (8.8) --
--------------- -------------
Net cash used in financing (266.9) (148.0)
--------------- -------------
Increase in cash and cash equivalents 6.9 106.3
Cash and cash equivalents:
Beginning of period 57.7 0.4
--------------- -------------
End of period $ 64.6 $ 106.7
=============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
GTE Florida Incorporated (the Company) is incorporated under the laws of the
State of Florida and is a subsidiary of GTE Corporation (GTE).
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management of the Company, the
condensed consolidated financial statements include all adjustments, which
consist only of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1997 Annual Report on
Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1998 presentation.
NOTE 2. EXTRAORDINARY CHARGE
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.4 million, reflecting premiums paid on the redemption
of high-coupon debt prior to stated maturity.
NOTE 3. AFFILIATE NOTES
GTE Funding Incorporated (GTE Funding), a wholly-owned subsidiary of the
Company, provides short-term financing and investment vehicles and cash
management services for the Company and six other of GTE's domestic telephone
operating subsidiaries, each of which is contractually obligated to repay all
amounts borrowed by it from GTE Funding.
NOTE 4. DEBT
In February 1998, the Company issued $300 million of 6.86% Series E Debentures,
due 2028. The net proceeds were used to finance the Company's construction
program and for general corporate purposes. The Company recognized an interest
rate hedge loss of approximately $8.8 million on the settlement of forward
contracts related to that debt issuance. The loss is being amortized over the
life of the associated refinanced debt.
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<PAGE> 7
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
Employee Benefit Disclosures
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This new standard
does not change the measurement or recognition of costs for pension or other
postretirement plans. It standardizes disclosures and eliminates those that are
no longer useful. The Company will provide the new disclosures in the 1998
Annual Report on Form 10-K. The adoption of SFAS No. 132 will have no impact on
the consolidated results of operations or financial condition.
Computer Software
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 defines internal-use
software and requires that the cost of such software be capitalized and
amortized over its useful life. Presently, the Company's practice is to
capitalize initial operating system and certain application software and expense
the cost of other software, including right-to-use fees. The Company is
currently assessing the impact of capitalizing and amortizing the cost of all
types of internal-use software as required by SOP 98-1, effective January 1,
1999.
Costs of Start-Up Activities
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" to provide guidance to all non-governmental entities on
financial reporting of costs of start-up activities. SOP 98-5 must be adopted no
later than January 1, 1999, and requires that costs of start-up activities be
expensed as incurred instead of being capitalized and amortized. It applies to
start-up activities and costs of organization of both development stage and
established operating entities. Based on the Company's current policy for costs
of start-up activities, SOP 98-5 will not have an impact on the consolidated
results of operations or financial condition.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently assessing the impact of adopting SFAS No. 133 and intends to
implement as of January 1, 2000.
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<PAGE> 8
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 6. LEGAL ENTITY MERGER
Effective September 30, 1998, the Company merged with its subsidiary, GTE
Florida Business Connections Corporation (FBCC). This merger has no effect on
the financial position or results of operations of the Company as FBCC was a
fully consolidated subsidiary of the Company prior to the merger.
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<PAGE> 9
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations
RESULTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
September 30,
-------------------------------- Increase Percent
Net income 1998 1997 (Decrease) Change
- ---------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Three months ended $ 54.5 $ 50.1 $ 4.4 9%
Nine months ended 130.2 146.9 (16.7) (11)%
</TABLE>
Net income for the three months ended September 30, 1998 increased from the
prior year as a result of an increase in local services revenues, partially
offset by an increase in operating expenses. Year-to-date net income includes an
extraordinary after-tax charge of $3.4 million related to the early retirement
of debt. Excluding this charge, net income decreased 9% or $13.3 million for the
first nine months of 1998, compared to the same period in 1997. The nine month
decline is primarily due to lower toll services revenues and higher operating
expenses, partially offset by increased local services and other revenues.
REVENUES AND SALES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
September 30,
-------------------------------- Increase Percent
1998 1997 (Decrease) Change
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Local services $ 181.1 $ 170.6 $ 10.5 6%
Network access services 139.9 136.6 3.3 2%
Toll services 10.8 12.6 (1.8) (14)%
Other services and sales 75.5 70.8 4.7 7%
------------ ------------ -----------
Total revenues and sales $ 407.3 $ 390.6 $ 16.7 4%
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended
September 30,
----------------------------- Increase Percent
1998 1997 (Decrease) Change
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Local services $ 545.1 $ 521.6 $ 23.5 5%
Network access services 392.4 395.5 (3.1) (1)%
Toll services 34.4 45.8 (11.4) (25)%
Other services and sales 214.3 198.9 15.4 8%
------------ ------------ -----------
Total revenues and sales $ 1,186.2 $ 1,161.8 $ 24.4 2%
============ ============ ===========
</TABLE>
Local Services Revenues
The three and nine month increases in local services revenues are primarily the
result of a 6% increase in access lines over the third quarter of 1997
generating additional revenues of $10.5 million and $24.3 million, respectively,
from basic local services, CentraNet(R) services and Integrated Services Digital
Network and Digital Channel Services. Additional revenues
8
<PAGE> 10
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
were derived from increased demand for enhanced custom calling features which
contributed to both the three and nine month increases.
Network Access Services Revenues
Network access services revenue variances were primarily caused by the impact of
interstate access rate reductions from the 1997 Federal Communications
Commission (FCC) price cap which resulted in a decrease of $9.4 million in the
third quarter and $35.7 million year-to-date compared to the same periods in
1997 (for further information see "FEDERAL REGULATORY DEVELOPMENTS - Interstate
Access Revision"). Partially offsetting the decreases was an increase in minutes
of use of 9% in both the third quarter and year-to-date. Also, special access
revenues grew due to greater demand for increased bandwidth by Internet Service
Providers (ISPs) and other high-capacity users.
Toll Services Revenues
Toll services revenues declined for both the three and nine months ended
September 30, 1998 reflecting the continuing impacts of intraLATA (local access
transport area) toll competition price adjustments and lower volumes from
10-10-XXX and 1+ presubscription competition.
Other Services and Sales Revenues
Other services and sales revenues increased for both the three and nine months
ended September 30, 1998 primarily due to increases in billing and collection
service revenues of $3.5 million and $7.5 million, respectively. The results for
both periods also reflect increases resulting from the FCC's order increasing
payphone compensation from interexchange carriers (for further information see
"FEDERAL REGULATORY DEVELOPMENTS - Payphone Orders") and from an increase in
directory advertising revenues.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
September 30, Increase Percent
--------------------------------
1998 1997 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cost of services and sales $ 145.7 $ 139.4 $ 6.3 5%
Selling, general and administrative 64.8 55.5 9.3 17%
Depreciation and amortization 89.1 97.1 (8.0) (8)%
--------------- --------------- --------------
Total operating costs and expenses $ 299.6 $ 292.0 $ 7.6 3%
=============== =============== ==============
</TABLE>
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<PAGE> 11
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended
September 30, Increase Percent
--------------------------------
1998 1997 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cost of services and sales $ 455.7 $ 411.4 $ 44.3 11%
Selling, general and administrative 191.7 179.3 12.4 7%
Depreciation and amortization 269.1 281.2 (12.1) (4)%
--------------- --------------- --------------
Total operating costs and expenses $ 916.5 $ 871.9 $ 44.6 5%
=============== =============== ==============
</TABLE>
Total operating costs and expenses for the nine months ended September 30, 1998
were higher than the same period in 1997 primarily due to a rise in maintenance
and repair costs associated with storm damage within the Company's service
territories. The third quarter and year-to-date results also reflect the impact
of a settlement gain recorded during 1997, which resulted from lump sum payments
from the Company's pension plans. Additionally, expenses for the three and nine
month periods were higher in 1998 due to increased access charges incurred to
terminate intraLATA toll calls outside the Company's territory. These increases
were partially offset by lower depreciation and amortization expense which
declined due to rate changes made during 1997 to reflect higher net salvage
value estimates.
OTHER INCOME STATEMENT ITEMS
Interest-net increased 15% or $2.3 million in the third quarter of 1998 and 13%
or $5.9 million year-to-date, compared to the same periods in 1997. The increase
is primarily due to an increase in interest expense associated with higher
average short-term debt levels.
Income taxes increased 7% or $2.4 million in the third quarter of 1998 and
decreased 13% or $12.3 million year-to-date, compared to the same periods in
1997. These variances are primarily due to corresponding changes in pretax
income and other tax adjustments.
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $3.4 million, reflecting premiums paid on the redemption
of high-coupon debt prior to stated maturity.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations, although external
financing is available. Short-term financing can be obtained through borrowings
from GTE or GTE Funding. The Company participates with
10
<PAGE> 12
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
other affiliates in a $1.5 billion, 364-day syndicated revolving line of credit
and has an existing shelf registration statement for an additional $300.0
million of debentures.
The Company's primary source of funds during the first nine months of 1998 was
cash from operations of $612.0 million compared to $527.7 million for the same
period in 1997. The year-to-year increase in cash from operations primarily
reflects a decrease in the Company's working capital requirements, partially
offset by a slight decline in results from operations.
The Company's capital expenditures during the first nine months of 1998 were
$338.3 million compared to $273.4 million for the same period in 1997. The
majority of new investment is being made to meet the demands of growth,
modernize facilities and develop and install new software, all of which are
required to support new products and enhanced services. The overall anticipated
capital expenditures for 1998 are expected to be comparable to capital
expenditures during 1997.
Cash used in financing activities was $266.9 million during the first nine
months of 1998 compared to $148.0 million for the same period in 1997. This
included dividend payments of $147.7 million in the first nine months of 1998
compared to $176.3 million for the same period in 1997. Short-term financings,
including the net change in affiliate notes, decreased $278.9 million for the
first nine months of 1998, compared to an increase of $133.5 million for the
same period in 1997. In 1998, the Company paid $5.5 million pretax ($3.4 million
after-tax) in premiums on the retirement of $125.0 million of long-term debt
redeemed prior to stated maturity, compared to $1.2 million pretax in premiums
on the retirement of $103.9 million of long-term debt and preferred stock
redeemed prior to stated maturity in 1997. The Company issued $300.0 million of
6.86% Series E debentures in February 1998 and recognized an interest rate hedge
loss of approximately $8.8 million on the settlement of forward contracts
related to that debt issuance. The loss is being amortized over the life of the
associated refinanced debt.
FEDERAL REGULATORY DEVELOPMENTS
Interstate Access Revision
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price reduction of $49.0 million. On December 1, 1997, the FCC issued an order
to file revised access rates effective January 1, 1998, which resulted in
interstate access revenue reductions of approximately $4.9 million annually. In
May 1997, the FCC also ordered significant changes that altered the structure of
access charges collected by the Company, effective
11
<PAGE> 13
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
January 1, 1998. Generally, the FCC reduced and restructured the per minute
charges paid by long-distance carriers and implemented new per-line charges. The
FCC also created an access charge structure that resulted in different access
charges for residential primary and secondary lines and single line and
multi-line business access lines. In aggregate, the new per-line charges and the
charges paid by end-user customers of $17.9 million annually exceed the
reductions in usage sensitive access charges of $17.3 million paid by
long-distance carriers. Effective July 1, 1998, access charges were further
reduced by $12.3 million annually in compliance with FCC requirements to reflect
the impacts of access charge reform.
The FCC Access Reform Order released in May 1997 revamped the rate structure
through which local and long-distance companies charge customers for using the
local phone network to make long-distance calls. GTE and numerous other parties
challenged the FCC's decisions in this order before the Eighth Circuit Court of
Appeals based on the belief that the FCC did not eliminate the universal service
subsidies hidden within interstate access charges as directed by the
Telecommunications Act of 1996 (TA96), and that the FCC created additional
subsidy charges paid only by business and multi-line residential customers. In
August 1998, the Eighth Circuit announced its decision on the multiple appeals
of the FCC Access Reform Order. The opinion denies all of the petitions for
review of the access charge order. The Company is considering its options.
In October, 1998, the FCC began a proceeding to "refresh the record" used in the
1997 access charge reform proceedings. The FCC will determine whether to retain
or modify its "market based" access charge reform approach, or to adopt a
"prescriptive" approach.
Universal Service
In May 1997, the FCC released a decision relating to implementation of the
TA96's provision on universal service. GTE and numerous other parties have
challenged the FCC's decision before the U.S. Court of Appeals for the Fifth
Circuit on the grounds that the FCC did not follow the requirements of the TA96
to develop a sufficient, explicit and competitively neutral universal service
program. Oral argument is scheduled for December 1998. A final decision on the
appeal is expected to be issued by mid-1999.
In its Order on Reconsideration dated July 13, 1998, the FCC referred some key
issues back to the Federal-State Joint Board (the Board) on universal service.
The Board's recommendations are due in the fourth quarter of 1998. In its
October 22, 1998 Order, the FCC selected a "synthesis" model platform for
universal service and plans to select cost inputs by the first quarter of 1999
and a revenue benchmark by mid-1999. The implementation date of the new
12
<PAGE> 14
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
universal service mechanism for non-rural carriers was moved to July 1999. The
Company is assessing the Order and its options.
The Eighth Circuit Court ruling on FCC access reform (see previous discussion of
"Interstate Access Revision") also impacts universal service. Specifically, the
FCC is not required to eliminate all implicit subsidies before the explicit
universal service mechanism is implemented in July 1999.
Payphone Orders
On June 4, 1996, the FCC issued its first Report and Order implementing the
payphone compensation provisions of the TA96. As part of the overall goal of
promoting competition among payphone service providers (PSPs), this order
mandated compensation to all PSPs for all calls originating from payphones,
including credit card and toll-free calls for which PSPs were not previously
compensated.
Subsequently, on October 9, 1997, the FCC issued a second Report and Order to
address some of the issues vacated by the U.S. Court of Appeals in Washington,
D.C. concerning the FCC's first Order and Report mentioned above. In this second
order, the FCC established a new per-call rate of 28.4 cents for compensation
that all PSPs were eligible to receive beginning October 9, 1997.
On April 3, 1998, the FCC issued an order, which granted the interexchange
carriers a waiver of the per-call compensation requirement so that they may pay
per-phone instead of per-call compensation for the payphones for which the FCC
had granted technology waivers. GTE will receive per-phone compensation under
this waiver until the technology is installed on those payphones that are not
currently capable of measuring per-call detail.
Price Cap
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis. The price
caps for a variety of service categories change annually using a price cap index
that is a function of inflation less a predetermined productivity offset. The
FCC's May 1997 Price Cap Order revised the price cap plan for incumbent price
cap local exchange carriers by adopting a productivity offset of 6.5%. This
matter is before the FCC as discussed above.
In June 1997, GTE and several other parties challenged the FCC's Price Cap Order
before the Court of Appeals for the District of Columbia Circuit. The issue
presented for review is whether, in computing its new 6.5% productivity
13
<PAGE> 15
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
offset, the FCC arbitrarily manipulated the evidence to achieve a predetermined
outcome. Oral arguments are set for the first quarter of 1999 with a decision
expected later in the year. Associated with the FCC's current activity to
"refresh the record" for access reform discussed above, the FCC will decide
whether the 6.5% productivity offset should be changed.
STATE REGULATORY DEVELOPMENTS
Florida statutes, enacted in 1995 and revised in 1998, have replaced earnings
regulation with price regulation and opened the local exchange to competition.
The Company became subject to price regulation effective January 1996. Under the
price regulation provisions, basic service, multi-line business local exchange
service and intrastate access rates are capped until January 2000 and will
continue to be capped for an additional two years unless the Florida Public
Service Commission (FPSC) determines that the level of competition justifies the
elimination of the cap. Subsequent to the price cap period, prices for basic
services can be increased by an inflation factor less 1% annually. Rates for
non-basic services, defined as services other than basic, interconnection and
network access, can increase by up to 6% per year if no competition exists and
up to 20% if there is more than one certified provider of the service. The
statutes also mandate a reduction of intrastate access rates of 5% in July 1998
and an additional 10% in October 1998 with no further reductions required. The
estimated impact is an $8.8 million network access revenue reduction in the
second half of 1998. The estimated annual impact is a $26.4 million reduction in
network access revenues. Moreover, this legislation requires the FPSC to address
certain matters which will allow the legislature to take further action
regarding universal service fund (USF) and reasonable rates in order that a
permanent USF mechanism can be set.
Telecommunications legislation has been before the Florida legislature
continuously for the last 6 legislative sessions creating a regulatory
environment that is difficult to predict.
OTHER DEVELOPMENTS
The Company is managing a class action lawsuit involving disputes over amounts
billed for rental telephones. In July 1997, a tentative settlement was reached
with the plaintiff. An order was issued which conditionally certified the class,
preliminarily approved the settlement, preliminarily enjoined all other actions
affecting the class, approved the class notice and established a fairness
hearing for November 1997. The class notice was included in residential bills in
August 1997. A similar class action was
14
<PAGE> 16
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
filed in June 1997 and enjoined by the preliminary injunction. Having been
denied intervention in the first class action, the plaintiff in the second
lawsuit filed objections to the proposed settlement. In December 1997, the Court
issued a final order approving the settlement, certifying the class, overruling
the objections of the second class action suit that had been filed in June and
dismissing the case with prejudice. The appeal of the Court's order by the
plaintiff in the second lawsuit was dismissed and the settlement became
effective in June 1998. The Company is in the process of implementing the
settlement. The Company has adequately reserved for this settlement, therefore
it will not have a material impact on the Company's results of operations or
financial condition.
RECENT DEVELOPMENTS
Proposed GTE/Bell Atlantic Merger
On July 27, 1998, GTE and Bell Atlantic Corporation (Bell Atlantic) entered into
a merger agreement providing for the combination of the two companies in a
merger of equals transaction. Under terms of the definitive agreement, which was
unanimously approved by the board of directors of both companies, GTE
shareholders will receive 1.22 shares of Bell Atlantic stock for each GTE share
they own. The merger is expected to be accounted for as a pooling of interests,
is subject to shareholder and regulatory approval, and is expected to be
completed during the second half of 1999. For additional information regarding
the merger, refer to the Form 8-K filed by GTE dated July 27, 1998.
Property Repositioning
In April 1998, GTE announced a series of actions designed to further sharpen its
strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate after-tax
proceeds of $2 billion to $3 billion by selling non-strategic or
under-performing operations and plans to reduce annual costs by more than $500
million through improved efficiencies and productivity while it continues to
invest in new high-growth opportunities. This announcement is expected to have
no impact on the Company; however, GTE's management is currently assessing its
options and, as decisions are finalized regarding the sale of non-strategic
operations and cost reductions, the Company could be affected.
YEAR 2000 CONVERSION
General
The Year 2000 issue concerns the potential inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. GTE has had an active Year 2000
program in place since 1995. This program is necessary because the Year 2000
issue could impact telecommunications networks, systems and business processes
at GTE.
15
<PAGE> 17
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Although GTE maintains a significant portion of its own systems and
infrastructure, GTE also depends on certain, material external supplier products
that it must verify as Year 2000 compliant in their condition of use. GTE's
program methodology is very similar to the General Accounting Office (GAO)
methodology, and in 1997 GTE's Year 2000 methodology and processes were
certified by the Information Technology Industry Association of America. GTE
presently expects that its core operations and essential functions will be ready
for the millennium transition.
State of Readiness
GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for which
GTE is responsible; 2) systems that directly support GTE's telecommunications
network operations and interactions with customers; 3) legacy software that
supports basic business operations, customer premise equipment and
interconnection with other telecommunications carriers; and 4) systems that
support GTE's physical infrastructure, financial operations and facilities.
Corporate-wide, essential remediation was approximately 63% complete as of
September 30, 1998. In addition to the essential remediation budget, GTE has set
aside funds equivalent to 12% of its overall Year 2000 budget. These funds are
planned for program closeout and verification in the last six months of 1999 and
to address contingencies and millennium program operations and control through
March 2000. GTE's portion of the PSTN in the United States has been upgraded
substantially for Year 2000; 69% of GTE's digital access lines are already
operational using Year 2000 compliant central office switches. Additionally,
over 75% of GTE's legacy software has been remediated. Over the next nine months
GTE's focus will be the deployment of these systems throughout operations and
the testing of those systems under actual operating conditions.
Using the nomenclature of the GAO, GTE's Year 2000 program can be characterized
as follows: Management, including transition into the Year 2000, is 43%
complete, with a projected end date of March 2000; Awareness is approximately
60% complete and is expected to continue until June 1999; System Assessment is
approximately 62% complete and is expected to be completed by December 1998;
System Renovation, including supplier products, is approximately 76% complete,
with intended completion by December 1998 for essential functions; Validation,
including enterprise testing in operational environments, is 44% complete, with
an expected completion in June 1999; and Implementation, including regional
deployment, is 63% complete, with an expected completion in June 1999.
16
<PAGE> 18
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
In summary, compliant product rollout (deployment) and enterprise testing of
GTE's telecommunications-related businesses, including national and
international interoperability and verification, are presently expected to be
complete by the end of June 1999. Due to its relatively recent acquisition of
BBN Corporation, GTE's data initiative is presently targeting completion of its
key infrastructure systems by the end of September 1999.
Successful conclusion of GTE's Year 2000 program depends upon timely delivery of
Year 2000-compliant products and services from external suppliers. Approximately
1,450 of third-party products used by GTE have been determined to be "vital"
products, critical to GTE's business and operations. As of September 30, 1998,
Year 2000-compliant versions, or suitable alternatives, for 53% of these vital
supplier products have been provided. GTE presently expects that by December 31,
1998, Year 2000-compliant versions, or suitable alternatives, of third-party
supplier products for GTE's critical or major legacy and support systems will
have been delivered.
Use of Independent Verification and Validation
GTE's Year 2000 program management office has established a corporate-wide
quality oversight and control function that reviews and evaluates quality
reports on the Year 2000 issue. Each GTE business unit has access to an
independent quality team that evaluates the conversion and testing of legacy
applications and third-party supplier products. Separately, GTE's corporate
internal and external auditors conduct periodic reviews of each business unit's
Year 2000 activities and report significant findings, if any, to business unit
and corporate management.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is approximately
$370 million. Through September 30, 1998, expenditures totaled $177 million.
Year 2000 remediation costs are expensed in the year incurred. These
expenditures constitute approximately 6% of GTE's 1998 IT budget and are
projected to be approximately 4% of GTE's 1999 IT budget. The current estimate
for the cost of remediation for the Company is approximately $20.0 million.
Through September 30, 1998 expenditures totaled $8.7 million. GTE has not
elected to replace, or to accelerate the schedule of a planned replacement of,
systems due to the Year 2000 issue.
Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000 to
1,200 full-time equivalent workers (both corporate employees and contractors).
Approximately 12% of these full-time equivalent workers are engaged in all
aspects of program management; 30% are engaged in legacy system conversion; 25%
are involved in external supplier management; 30% are involved in testing at all
levels; and 3% are addressing contingency planning and interoperability
operations both nationally and internationally.
17
<PAGE> 19
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Approximately 78% of GTE's program effort involves U.S. domestic operations of
all types. Twenty-two percent (22%) of the effort is dedicated to GTE's
international operations.
Risks of Year 2000 Issues
GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios." To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to threaten
GTE's present schedule. GTE's program and plans currently indicate a compliant
network infrastructure to be deployed by the end of June 1999. A general,
unspecific, schedule shift that would erode progress beyond January 1, 2000,
cannot reasonably be calculated. If, however, there were a schedule delay
lasting no more than six months, such schedule erosion would likely affect only
nonessential systems due to the prioritization of work schedules.
Other scenarios might include a possible but presently unforeseen failure of key
supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.
To date, GTE has not encountered any conditions requiring tactical contingency
planning to its existing Year 2000 program; however, contingency planning for
business and network operations and customer contact during 1999 and 2000 is
ongoing.
GTE is bolstering its normal business continuity planning to address potential
Year 2000 interruptions. In addition, GTE's disaster preparedness recovery teams
are including procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs. GTE is also developing its plans with respect to
possible occurrences immediately before, during, and after the millennium
transition. Under consideration are: "follow-the-sun" time-zone impact analysis;
coordination with other (non-PSTN) telecommunications providers; a Year 2000
"war room" operation to provide high priority recovery support, plans for key
personnel availability, command structures and contingency traffic routing; and
plans for round-the-clock, on-call repair teams.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis with respect
to expected financial results and future events and trends is forward-looking,
based on the Company's estimates and assumptions and is subject to risks and
uncertainties. For those statements, the Company claims
18
<PAGE> 20
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
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 pending and potential future
federal, state and local regulatory initiatives and proceedings, and judicial
review of those initiatives and proceedings pertaining to, among other matters,
the terms of interconnection, access charges, universal service, unbundled
network elements and resale rates; (4) the extent, timing, success and overall
effects of competition from others in the local telephone and intraLATA toll
service markets; (5) the success and expense of our remediation efforts and
those of our suppliers, customers and all interconnecting carriers in achieving
Year 2000 compliance; and (6) the success of new GTE products, services and
businesses such as bundled services through marketing and sales initiatives.
19
<PAGE> 21
PART II. OTHER INFORMATION
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
12 Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the third quarter of
1998.
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
GTE Florida Incorporated
--------------------------------------------------
(Registrant)
Date: November 12, 1998 /s/ Stephen L. Shore
------------------------------ --------------------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
</TABLE>
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------- -----------------------------------------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
GTE FLORIDA INCORPORATED AND SUBSIDIARY
Statement of the Consolidated Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1998 (a)
------------------------ --------------------------
<S> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $ 133.6 $ 133.6
Add - Income taxes 83.7 83.7
- Fixed charges 139.5 58.9
------------------------ --------------------------
Adjusted earnings $ 356.8 $ 276.2
======================== ==========================
Fixed charges:
Interest expense $ 131.7 $ 51.1
Portion of rent expense
representing interest 7.8 7.8
------------------------ --------------------------
Adjusted fixed charges $ 139.5 $ 58.9
======================== ==========================
RATIO OF EARNINGS TO FIXED CHARGES 2.56 4.69
</TABLE>
(a) Excludes $80.6 million of interest expense associated with commercial
paper issued by the Company's wholly-owned subsidiary, GTE Funding
Incorporated (GTE Funding), on behalf of GTE's other domestic telephone
operating subsidiaries. This interest is approximately equal to the
interest income received by the Company on affiliate notes between GTE
Funding and such domestic telephone operating subsidiaries. GTE Funding
provides short-term financing and investment vehicles and cash
management services for the Company and six other of GTE's domestic
telephone operating subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 64,600
<SECURITIES> 0
<RECEIVABLES> 1,474,100
<ALLOWANCES> 28,400
<INVENTORY> 28,600
<CURRENT-ASSETS> 1,553,900
<PP&E> 4,675,100
<DEPRECIATION> 2,692,500
<TOTAL-ASSETS> 3,752,000
<CURRENT-LIABILITIES> 1,717,400
<BONDS> 889,300
0
21,200
<COMMON> 585,000
<OTHER-SE> 155,000
<TOTAL-LIABILITY-AND-EQUITY> 3,752,000
<SALES> 1,186,200
<TOTAL-REVENUES> 1,186,200
<CGS> 455,700
<TOTAL-COSTS> 916,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,700
<INCOME-PRETAX> 217,300
<INCOME-TAX> 83,700
<INCOME-CONTINUING> 133,600
<DISCONTINUED> 0
<EXTRAORDINARY> 3,400
<CHANGES> 0
<NET-INCOME> 130,200
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
