<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: MARCH 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 1-3090
GTE FLORIDA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
FLORIDA 59-0397520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
<S> <C>
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code 972-507-5000
(Former name, former address and former fiscal year, if changed since last
report)
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
April 30, 1999. The Company's common stock is 100% owned by GTE Corporation.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
--------------- --------------
(Dollars in Millions)
REVENUES AND SALES
<S> <C> <C>
Local services $ 185.0 $ 180.9
Network access services 149.8 117.9
Other services and sales 62.0 62.8
------------- --------------
Total revenues and sales 396.8 361.6
------------- --------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 151.3 149.7
Selling, general and administrative 75.7 64.6
Depreciation and amortization 95.6 95.9
------------- --------------
Total operating costs and expenses 322.6 310.2
------------- --------------
OPERATING INCOME 74.2 51.4
OTHER EXPENSE
Interest - net 16.7 17.2
------------- --------------
INCOME BEFORE INCOME TAXES 57.5 34.2
Income taxes 22.4 13.0
------------- --------------
INCOME BEFORE EXTRAORDINARY CHARGE 35.1 21.2
Extraordinary charge -- (3.4)
------------- --------------
NET INCOME $ 35.1 $ 17.8
============= ==============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- -------------
(Dollars in Millions)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 113.2 $ 113.5
Receivables, less allowances of $32.8 million and $33.1 million 288.8 328.6
Accounts receivable from affiliates 25.4 12.1
Notes receivable from affiliates 843.6 1,218.1
Inventories and supplies 26.1 21.6
Other 17.2 27.3
--------------- -------------
Total current assets 1,314.3 1,721.2
--------------- -------------
Property, plant and equipment, at cost 4,750.9 4,693.7
Accumulated depreciation (2,767.0) (2,709.3)
--------------- -------------
Total property, plant and equipment, net 1,983.9 1,984.4
--------------- -------------
Prepaid pension costs 202.3 195.8
Other assets 37.1 26.0
--------------- -------------
Total assets $ 3,537.6 $ 3,927.4
=============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- -------------
(Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
<S> <C> <C>
Short-term obligations, including current maturities $ 979.4 $ 1,396.5
Notes payable to affiliate 43.4 105.5
Accounts payable 100.8 62.9
Affiliate payables 82.5 99.5
Taxes payable 47.5 12.9
Dividends payable 42.1 28.1
Other 165.4 141.7
--------------- -------------
Total current liabilities 1,461.1 1,847.1
--------------- -------------
Long-term debt 889.5 889.4
Deferred income taxes 191.6 192.1
Employee benefit plans 208.6 205.1
Other liabilities 6.8 6.5
--------------- -------------
Total liabilities 2,757.6 3,140.2
--------------- -------------
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 123.5 130.7
--------------- -------------
Total shareholders' equity 780.0 787.2
--------------- -------------
Total liabilities and shareholders' equity $ 3,537.6 $ 3,927.4
=============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
--------------- -----------
(Dollars in Millions)
OPERATIONS
<S> <C> <C>
Income before extraordinary charge $ 35.1 $ 21.2
Adjustments to reconcile income before extraordinary
charge to net cash from operations:
Depreciation and amortization 95.6 95.9
Provision for uncollectible accounts 6.2 8.0
Changes in current assets and current liabilities 92.1 176.9
Deferred income taxes and other - net (2.2) 34.2
--------------- -----------
Net cash from operations 226.8 336.2
--------------- -----------
INVESTING
Capital expenditures (94.1) (101.7)
--------------- -----------
Cash used in investing (94.1) (101.7)
--------------- -----------
FINANCING
Long-term debt issued -- 297.0
Long-term debt retired, including premiums paid on early retirement -- (128.5)
Dividends (28.3) (41.0)
Decrease in short-term obligations, excluding current maturities (417.1) (303.5)
Net change in affiliate notes 312.4 (45.6)
Other - net -- (8.8)
--------------- -----------
Net cash used in financing (133.0) (230.4)
--------------- -----------
Increase (decrease) in cash and cash equivalents (0.3) 4.1
Cash and cash equivalents:
Beginning of period 113.5 57.7
--------------- -----------
End of period $ 113.2 $ 61.8
=============== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
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 1998 Annual Report on
Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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 Company is
currently assessing the impact of adopting SFAS No. 133 which is effective
January 1, 2000.
NOTE 3. CAPITALIZED SOFTWARE
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." As a
result of adopting SOP 98-1, in the first quarter of 1999 the Company
capitalized $4.1 million of software expenditures which would previously have
been expensed.
NOTE 4. SPECIAL CHARGE
In 1999, GTE continued the review of its operations and cost structure to ensure
they were consistent with its growth objectives. In connection with this ongoing
review, GTE initiated voluntary and involuntary employee separation programs
that resulted in a one-time charge for GTE during the first quarter of 1999. The
charge pertaining to the Company totaled $16.2 million and is reflected as
"Selling, general and administrative" costs and expenses in the condensed
consolidated statements of income. The components of the charge include
voluntary and involuntary separation programs and related benefits such as
outplacement and benefit continuation costs. These programs were completed
during the first quarter of 1999.
NOTE 5. 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 from GTE Funding.
NOTE 6. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE Corporation have announced a proposed merger of equals
under a definitive merger agreement dated as of 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.
5
<PAGE> 7
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
We expect the merger 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, receipt of
opinions that the merger will be tax-free, and the approval of the shareholders
of both Bell Atlantic and GTE. Special meetings to vote on the merger will be
held on May 18, 1999 for GTE shareholders and on May 19, 1999 for Bell Atlantic
shareholders.
NOTE 7. SEGMENT REPORTING
The Company has two reportable segments, Telephone Operations and GTE Funding.
The telephone operations segment primarily provides wireline communication
services to local markets. The GTE Funding segment 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 from GTE Funding.
GTE Funding has no reportable revenue or net income. Its interest expense is
approximately equal to the interest income received on affiliate notes between
GTE Funding and the various domestic telephone operating subsidiaries.
The following table represents segment income statement results for the three
months ended March 31, and balance sheet results as of March 31, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
(Dollars in Millions)
TELEPHONE OPERATIONS:
<S> <C> <C>
Total external revenues $ 396.8 $ 361.6
Operating income 75.9 51.9
Depreciation and amortization 95.6 95.9
Interest expense 18.5 18.4
Interest income -- 0.6
Capital expenditures 94.1 101.7
Total assets 2,626.6 2,651.2
GTE FUNDING:
Operating loss $ (1.7) $ (0.5)
Interest expense 25.7 19.5
Interest income 27.4 20.0
Total assets (a) 1,249.8 1,655.8
CONSOLIDATED REVENUES $ 396.8 $ 361.6
CONSOLIDATED OPERATING INCOME $ 74.2 $ 51.4
CONSOLIDATED ASSETS $ 3,537.6 $ 3,927.4
</TABLE>
(a) Assets consist primarily of cash and notes receivable from affiliates.
6
<PAGE> 8
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations
RESULTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
March 31,
----------------------------- Percent
Net income 1999 1998 Increase Change
- ---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Three months ended $ 35.1 $ 17.8 $ 17.3 97%
</TABLE>
Net income for the three months ended March 31, 1999 increased from the prior
year primarily as a result of an increase in network access services revenues,
partially offset by a one-time special charge of $16.2 million in the first
quarter of 1999.
REVENUES AND SALES
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------- Increase Percent
1999 1998 (Decrease) Change
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Local services $ 185.0 $ 180.9 $ 4.1 2%
Network access services 149.8 117.9 31.9 27%
Other services and sales 62.0 62.8 (0.8) (1)%
------------ ------------ -----------
Total revenues and sales $ 396.8 $ 361.6 $ 35.2 10%
============ ============ ===========
</TABLE>
Local Services Revenues
The increase in local services revenues in the first quarter of 1999 was
primarily the result of a 5% increase in access lines over the first quarter of
1998 generating additional revenues of $6.0 million from basic local services,
CentraNet(R) services, Integrated Services Digital Network and Digital Channel
Services. Partially offsetting this increase was a slight decline in
installation and other non-recurring charges in the first quarter of 1999
compared to the same period in 1998.
Network Access Services Revenues
Network access services revenues were higher for the first quarter of 1999
compared to the first quarter of 1998 primarily due to an increase of $29.2
million resulting from the sharing provisions of the Federal Communications
Commission's (FCC's) 1997 price cap recorded in the first quarter of 1998.
Special access revenues, driven by growing demand for increased bandwidth by
high-capacity users, grew by $9.0 million. These increases were offset by
interstate and intrastate price changes which resulted in a $14.0 million
decline in revenues compared to the first quarter of 1998.
Other Services and Sales Revenues
Other services and sales revenues decreased in the first quarter of 1999
compared to the same period in 1998 primarily due to a $4.3 million decline in
toll services revenues reflecting the continuing impacts of intraLATA toll
competition. This decrease in toll services revenues was partially offset by a
$3.8 million increase in nonregulated service revenues and equipment sales in
the first quarter of 1999 compared to the first quarter of 1998.
7
<PAGE> 9
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
OPERATING COSTS AND EXPENSES
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------- Increase Percent
1999 1998 (Decrease) Change
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Cost of services and sales $ 151.3 $ 149.7 $ 1.6 1%
Selling, general and administrative 75.7 64.6 11.1 17%
Depreciation and amortization 95.6 95.9 (0.3) --
------------ ------------ -----------
Total operating costs and expenses $ 322.6 $ 310.2 $ 12.4 4%
============ ============ ===========
</TABLE>
Total operating costs and expenses for the three months ended March 31, 1999
were higher than the same period in 1998 primarily due to the special charge of
$16.2 million associated with voluntary and involuntary employee separation
programs completed in the first quarter of 1999. Also, expenses for the first
quarter of 1999 were $3.1 million higher than the first quarter of 1998 due to
increased access charges incurred to terminate intraLATA toll calls outside the
Company's territory. These increases were partially offset by lower right-to-use
(RTU) software fees associated with network switching equipment of $5.0 million,
resulting from a reduction in RTU costs of $4.1 million due to the
capitalization of software costs beginning in 1999 as a result of the adoption
of the American Institute of Certified Public Accountants' Statement of Position
98-1, "Accounting for Costs of Computer Software Development or Obtained for
Internal Use," in addition to a reduction in overall 1999 RTU fees of $0.9
million.
OTHER INCOME STATEMENT ITEMS
Income taxes increased 72% or $9.4 million in the first quarter of 1999,
compared to the first quarter of 1998, primarily due to a corresponding increase
in pretax income and other tax adjustments.
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 other affiliates in a
$1.5 billion, 364-day syndicated revolving line of credit and has access to an
additional $1.0 billion in short-term liquidity through GTE and GTE Funding's
bilateral revolving lines of credit. The Company also has an existing shelf
registration statement for an additional $300.0 million of debentures.
The Company's primary source of funds during the first three months of 1999 was
cash from operations of $226.8 million compared to $336.2 million for the same
period in 1998. The year-to-year decrease in cash from operations primarily
reflects an increase in the Company's working capital requirements partially
offset by an increase in results from operations.
The Company's capital expenditures during the first three months of 1999 were
$94.1 million compared to $101.7 million for the same period in 1998. 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 1999 are expected to be less than capital expenditures
during 1998.
Net cash used in financing activities was $133.0 million during the first three
months of 1999 compared to $230.4 million for the same period in 1998. This
included dividend payments of $28.3 million in the first three months of 1999
compared to $41.0 million for the same period in 1998. Short-term financings,
including the net change in affiliate notes, decreased $104.7 million and $349.1
million for the first three months of 1999 and 1998,
8
<PAGE> 10
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
respectively. In 1998, the Company paid $5.5 million pretax ($3.4 million
after-tax) in premiums on the retirement of $125.1 million of long-term debt
redeemed prior to stated maturity. 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.
INTERSTATE REGULATORY DEVELOPMENTS
During the first quarter of 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.
GTE continued in the first quarter of 1999 to meet the wholesale requirements of
new competitors. GTE signed interconnection agreements with other carriers,
providing them the capability to purchase individual 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 Federal Communications Commission (FCC)
rules that were subsequently overturned by the Eighth Circuit Court (Eighth
Circuit) in July 1997. GTE challenged a number of such agreements in federal
district courts during 1997.
GTE's position in these challenges was supported by the Eighth Circuit's July
1997 decision stating that the FCC had overstepped its authority in several
areas concerning implementation of the interconnection provisions of the
Telecommunications Act. In January 1999, the U.S. Supreme Court (Supreme Court)
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit on many of the FCC rules related to
pricing and costing, that had previously been reversed by the Eighth Circuit on
jurisdictional grounds. The pricing rules established by the FCC will now be
remanded back to the Eighth Circuit for a determination on the merits. On the
other hand, the Supreme Court vacated the FCC rule requiring incumbent local
exchange carriers (LECs) to provide unbundled network elements to competitive
LECs. This latter ruling will be the subject of continued proceedings before the
FCC and the state commissions concerning what elements will have to be offered
under what conditions. Pending the final rulemaking by the FCC on the provisions
of unbundled network elements, GTE will continue to provide individual unbundled
network elements set forth in existing interconnection agreements even though it
is not legally obligated to do so.
UNIVERSAL SERVICE
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs in the second quarter of 1999. For this
reason, the FCC moved the implementation date of the new universal service
mechanism for nonrural carriers to July 1999. GTE filed a Petition for
Reconsideration in December 1998, stating that the adopted model is incomplete
and requires additional time for proper evaluation.
GTE is currently awaiting action from the FCC.
ADVANCED TELECOMMUNICATIONS SERVICES
Section 706 of 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.
In an Order and Notice of Proposed Rule Making (NPRM) released in August 1998,
the FCC clarified that advanced services offered by an incumbent LEC are subject
to the unbundling and resale requirements
9
<PAGE> 11
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
of the Telecommunications Act. In the NPRM, the FCC sought comment on extensive,
new separate affiliate rules under which an incumbent LEC's affiliate could
offer advanced services free from the unbundling and resale obligations of the
Telecommunications Act. In addition, the NPRM sought comment on a number of
issues regarding collocation, local loops and unbundling and resale obligations
for network facilities needed for advanced services.
On March 31, 1999, the FCC released an Order stemming from the August 1998 NPRM.
In the Order the FCC adopted a number of new collocation rules designed to make
competitive entry easier and less costly. These rules specify how incumbent LECs
will manage such items as alternate collocation arrangements, security, space
preparation cost allocation, provisioning intervals and space exhaustion. The
FCC also released a Further NPRM seeking comment on spectrum compatibility
issues and line sharing. Line sharing is a concept wherein two or more service
providers are allowed to use the same local loop (e.g., voice and xDSL). GTE
will vigorously oppose line sharing.
The FCC has yet to release an order addressing separate affiliates, local loops,
unbundling and resale.
RECENT DEVELOPMENTS
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own.
We expect the merger 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, receipt of
opinions that the merger will be tax-free, and the approval of the shareholders
of both Bell Atlantic and GTE. Special meetings to vote on the merger will be
held on May 18, 1999 for GTE shareholders and on May 19, 1999 for Bell Atlantic
shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, which is effective January 1, 2000.
10
<PAGE> 12
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
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. Although GTE maintains a significant portion of its own systems and
infrastructure, it also depends on certain, material external supplier products
that GTE must verify as Year 2000 compliant in their condition of use. In 1997,
GTE's Year 2000 methodology and processes were certified by the Information
Technology Industry Association of America. GTE presently expects that the
essential functions of its domestic wireline telecommunications business will
complete Year 2000 testing by June 30, 1999, and remaining businesses will
complete before October 1999.
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) systems and products that
support GTE's national and international business units; 4) software that
supports basic business operations, customer premise equipment and
interconnection with other telecommunications carriers; and 5) systems that
support GTE's physical infrastructure, financial operations and facilities.
Corporate-wide, essential remediation was approximately 88% complete as of March
31, 1999. In addition to the essential remediation budget, GTE has set aside
funds equivalent to approximately 11% of the it's overall Year 2000 budget.
These funds are planned for verification, problem resolution and administrative
program closeout 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; 97%
of GTE's access lines are already operational using Year 2000 compliant central
office switches. Additionally, over 98% of GTE's essential software has been
remediated. GTE's focus continues to be on deployment and testing of these
systems throughout GTE's operations.
GTE's Year 2000 program has been organized into five phases as follows:
Awareness: program definition and general education; Assessment: analysis and
prioritization of systems supporting the core business; Renovation: rectifying
Year 2000 issues; Validation: testing the Year 2000 solutions; Implementation:
placing the tested systems into production. Awareness and Assessment are more
than 95% complete; System Renovation, including supplier products, is
approximately 91% complete; Validation, including enterprise testing in
operational environments, and Implementation, including regional deployment, are
approximately 73% complete. It is anticipated that the Renovation, Validation
and Implementation phases for essential functions will be substantially complete
in June 1999.
In summary, compliant product deployment and enterprise testing for GTE's
domestic telecommunications-related business, including national and
international interoperability and validation, are presently expected to be
complete by the end of June 1999. The remaining domestic and international
businesses are on schedule for completing testing before October 1999.
Successful conclusion of GTE's Year 2000 program depends upon timely delivery of
Year 2000 compliant products and services from external suppliers. With the
addition of new products, approximately 1,500 of third-party products used by
GTE have been determined to be "vital" products, critical to GTE's business and
operations. As of March 31, 1999, Year 2000 compliant versions, or suitable
alternatives, for 95% of these vital supplier products have been provided and
are currently undergoing certification testing by GTE.
11
<PAGE> 13
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Use of Independent Verification and Validation
Independent verification and validation is the final step in GTE's process. As
part 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 applications and third-party supplier products. This
quality assurance process is expected to be completed in October 1999.
Separately, GTE's corporate internal auditors conduct periodic reviews and
report significant findings, if any, to business unit and corporate management
and the audit committee of the Board of Directors. Program status is also
reported each quarter to GTE's external auditors.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is expected not to
exceed $400 million. Through March 31, 1999, expenditures totaled $283 million.
The current estimate for the cost of remediation for the Company is
approximately $20.0 million. Through March 31, 1999, expenditures totaled $11.5
million. Year 2000 remediation costs are expensed in the year incurred. GTE has
not elected to replace or accelerate the 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 company employees and contractors).
Approximately 10% of these full-time equivalent workers are engaged in all
aspects of program management; 4% are engaged in system conversion; 27% are
involved in external supplier management; 54% are involved in testing at all
levels; and 5% are addressing contingency planning and interoperability
operations both nationally and internationally. Approximately 66% of GTE's
program effort involves U.S. domestic operations of all types.
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
12
<PAGE> 14
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
before, during, and after the millennium transition. These plans are expected to
be completed by June 30, 1999, and tested (as appropriate) by the end of
September 1999. This contingency plan includes: business continuity planning;
disaster recovery/emergency preparedness; millennium rollover planning; post
millennium degradation tracking; a network and information technology
"stabilization" period; employee availability and logistics backup planning;
"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
In this Management's Discussion and Analysis, the Company has made
forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets" or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service,
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; and (5) the success and expense of our remediation efforts
and those of our suppliers, customers and all interconnecting carriers in
achieving Year 2000 compliance.
13
<PAGE> 15
PART II. OTHER INFORMATION
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
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 first quarter of
1999.
14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE Florida Incorporated
----------------------------------------
(Registrant)
Date: May 13, 1999 /s/ Stephen L. Shore
-------------------------- ----------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------- ----------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE FLORIDA INCORPORATED AND SUBSIDIARIES
Statement of the Consolidated Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended Three Months Ended
March 31, 1999 March 31, 1999 (a)
---------------------- ------------------
Net earnings available for fixed charges:
<S> <C> <C>
Income from continuing operations $ 35.1 $ 35.1
Add - Income taxes 22.4 22.4
- Fixed charges 43.7 18.0
---------------------- ------------------
Adjusted earnings $ 101.2 $ 75.5
====================== ==================
Fixed charges:
Interest expense $ 41.6 $ 15.9
Portion of rent expense
representing interest 2.1 2.1
---------------------- ------------------
Adjusted fixed charges $ 43.7 $ 18.0
====================== ==================
RATIO OF EARNINGS TO FIXED CHARGES 2.32 4.19
</TABLE>
(a) Excludes $25.7 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 113,200
<SECURITIES> 0
<RECEIVABLES> 1,190,600
<ALLOWANCES> 32,800
<INVENTORY> 26,100
<CURRENT-ASSETS> 1,314,300
<PP&E> 4,750,900
<DEPRECIATION> 2,767,000
<TOTAL-ASSETS> 3,537,600
<CURRENT-LIABILITIES> 1,461,100
<BONDS> 889,500
0
21,200
<COMMON> 585,000
<OTHER-SE> 173,800
<TOTAL-LIABILITY-AND-EQUITY> 3,537,600
<SALES> 396,800
<TOTAL-REVENUES> 396,800
<CGS> 151,300
<TOTAL-COSTS> 322,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,600
<INCOME-PRETAX> 57,500
<INCOME-TAX> 22,400
<INCOME-CONTINUING> 35,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
