<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 period ended June 30, 1996
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 0-1245
CONTEL OF CALIFORNIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-1789511
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
16071 Mojave Drive, Victorville, California 92392
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 619-245-0511
(Former name, former address and formal fiscal year, if changed
since last report)
The registrant, a wholly-owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is
therefore filing this form with reduced disclosure format pursuant to General
Instruction H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The Company had 2,503,667 shares of $5 par value common stock outstanding at
July 31, 1996. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Local services $ 37,086 $ 27,287 $ 73,744 $ 56,218
Network access services 29,150 27,145 57,597 54,797
Toll services 11,087 16,156 25,930 32,330
Other services and sales 6,022 6,367 12,405 13,198
-------- -------- -------- --------
Total revenues and sales 83,345 76,955 169,676 156,543
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 26,180 27,728 54,955 54,047
Selling, general and administrative 7,765 11,665 16,897 26,280
Depreciation and amortization 13,794 17,840 31,214 34,838
-------- -------- -------- --------
Total operating costs and expenses 47,739 57,233 103,066 115,165
-------- -------- -------- --------
OPERATING INCOME 35,606 19,722 66,610 41,378
Interest - net 1,974 2,700 4,152 5,681
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 33,632 17,022 62,458 35,697
Income taxes 15,919 8,623 28,938 15,574
-------- -------- -------- --------
NET INCOME $ 17,713 $ 8,399 $ 33,520 $ 20,123
======== ======== ======== ========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 3
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1995
----- -----
<S> <C> <C>
Net income $33.5 $20.1
</TABLE>
Net income increased 67% or $13.4 for the six months ended June 30, 1996,
compared to the same period in 1995. This increase is primarily due to higher
local service revenues and lower operating costs and expenses.
Revenues and Sales
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
------ ------
<S> <C> <C>
Local services $ 73.8 $ 56.2
Network access services 57.6 54.8
Toll services 25.9 32.3
Other services and sales 12.4 13.2
------ ------
Total revenues and sales $169.7 $156.5
</TABLE>
Total revenues and sales increased 8% or $13.2 for the six months ended June
30, 1996, compared to the same period in 1995.
Local service revenues increased 31% or $17.6 for the six months ended June 30,
1996, compared to the same period in 1995. This increase primarily reflects
$11.4 in payments received from the California High Cost Fund and a 6% growth
in switched access lines, which generated $2.5 of additional revenues. A
portion of the increase is attributable to the Company's decision to
consolidate special access tariffs during the first quarter of 1996. The total
revenue impact of the tariff consolidation is offset by reductions in toll
service revenues.
Network access service revenues increased 5% or $2.8 for the six months ended
June 30, 1996, compared to the same period in 1995. This increase partially
reflects a 10% increase in minutes of use, which generated $1.6 of additional
revenues, and the Company's decision to consolidate special access tariffs
during the first quarter of 1996. The total revenue impact of the tariff
consolidation is offset by reductions in toll service revenues. These
increases are partially offset by a $0.8 decline in revenues reflecting August
1995 interstate rate reductions associated with the Federal Communications
Commission's (FCC) price cap.
Toll service revenues decreased 20% or $6.4 for the six months ended June 30,
1996, compared to the same period in 1995, primarily reflecting the
consolidation of special access tariffs mentioned above and $3.6 of unfavorable
settlement impacts. The decrease is also due to optional discount calling
plans, which effectively lowered intrastate long distance rates, and 10XXX
intraLATA toll competition. These decreases are slightly offset by increased
toll volumes.
2
<PAGE> 4
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Operating Costs and Expenses
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
------ ------
<S> <C> <C>
Total operating costs and $103.1 $115.2
expenses
</TABLE>
Total operating costs and expenses decreased 11% or $12.1 for the six months
ended June 30, 1996, compared to the same period in 1995. This decrease is
primarily due to productivity gains from process re-engineering and other cost
containment programs and a $4 decrease in depreciation expense.
Income Taxes
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1995
----- -----
<S> <C> <C>
Income taxes $28.9 $15.6
</TABLE>
Income taxes increased 85% or $13.3 for the six months ended June 30, 1996,
compared to the same period in 1995. This increase is primarily due to a
corresponding increase in pre-tax income.
OTHER MATTERS
In connection with the re-engineering plan, during the first six months of
1996, costs of approximately $9.3 have been incurred, including $6.5 to
re-engineer customer service processes and $2.8 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $37.8 have been incurred, including $23.8 to re-engineer customer
service processes and $10.9 to re-engineer administrative processes. The
restructuring costs also include $3.1 to consolidate facilities and operations
and other related costs. These expenditures were primarily associated with the
closure and relocation of various service centers, software enhancements and
separation benefits associated with employee reductions. Implementation of
the re-engineering plan is expected to be substantially completed by the end of
1996. As of June 30, 1996, $11.2 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
On August 1, 1996, the Federal Communications Commission (FCC) voted to release
its rules implementing Section 251 of the Telecommunications Act of 1996 (the
Telecommunications Act) dealing with interconnection, unbundling of network
elements and wholesale prices and other terms for competitive entry into
local-exchange service (Competitive Entry Terms). The terms of the FCC's
Report and Order (Order) were published on August 8, 1996, and GTE is in the
process of reviewing the Order.
The Order acknowledges that the Telecommunications Act calls for negotiation of
terms and prices for Competitive Entry Terms between the local-exchange carrier
(LEC) and the competing carriers. The Order, among other things, prescribes
the rules for interconnection of a LEC's facilities with those of carriers
competing in the local-exchange market and the pricing methodology to be used
by states in establishing interconnection rates. The FCC methodology calls for
the states to use forward-looking costs defined as Total Element Long Run
Incremental Cost (TELRIC), including a reasonable amount of forward-looking
joint and common costs. State regulatory commissions are to establish the
appropriate prices based on this methodology. The FCC also identified network
elements to be unbundled and priced by the states using the same TELRIC plus
reasonable joint and common costs. Proxy prices for the various network
elements are set out and may be used by states which have not approved cost
studies by statutory deadlines for completing any arbitration of issues
unresolved by negotiation between the LEC and other carriers. Access to the
unbundled elements are to be at technically feasible points.
Additionally, the Order mandated use of a method of determining a LEC's avoided
costs for purposes of resale rates. States are to determine the specific rates
using this methodology but, on an interim basis, may instead elect to use a
default range of rates established by the FCC. The default discount rates
range from 17% - 25% off retail rates.
To continue to support universal service, the FCC established a temporary
access framework. A competitor purchasing local service for resale or
providing only long distance service must pay full current access rates. If
unbundled local switching is purchased, the competitor must pay 75% of the
existing Transport Interconnection Charge and all of the existing Carrier
Common Line Charge. A competitor providing its own switching facility pays no
access charges even if it purchases an unbundled loop from a LEC.
The Order also provides for mutual compensation for interconnection but
presumes calling will be balanced and permits "bill and keep" arrangements. If
the LEC demonstrates calling is not balanced, interconnection prices are to be
set by the state for both carriers at the LEC's forward-looking costs.
GTE is still reviewing the impact of the approximately 700-page Order. In
addition, the FCC is scheduled to release additional rules relating to
universal service and access charge reform in the second quarter of 1997.
Until all the rules have been issued, it is difficult to determine the effect
on GTE. However, GTE has concerns about the Order as it relates to the ability
of a local-exchange carrier to recover all of its present costs from its
ongoing retail customers and the wholesale prices to be set by state regulatory
agencies pursuant to the FCC's guidelines.
GTE plans to appeal various aspects of the Order. Although it is too early to
determine the impact of these rules, GTE believes that, if implemented as
contained in the Order, they may advantage new entrants and competitors in a
LEC's territory. Thus, while the Order may contribute to some market erosion in
GTE's franchised territories, it may also advantage GTE outside of its
franchised territory.
On October 5, 1995, the Governor of the State of California signed a law which
clarified the authority of the California Public Utilities Commission (CPUC) to
allocate utility merger benefits between ratepayers and shareholders with not
less than 50% going to the ratepayers of the merged company. The new law
became effective January 1, 1996. On April 10, 1996, the CPUC issued a
decision approving the merger of the Company into GTE California Incorporated
under the terms of the amended legislation. It is currently anticipated that
the merger will occur by year end 1996.
As a part of this order, the CPUC ordered $69.7 of merger savings to be
returned to the local, toll and access customers of the merged company over a
five year period. GTE California Incorporated had previously provided for the
impact of this decision in its financial statements. These savings represent
half of the total savings expected to be realized by this merger. Rate
integration and the determination of the Company's premerger New Regulatory
Framework (NRF) startup revenue requirement will be handled in Phase III of
this proceeding. If a negotiated settlement is reached between the Company and
interested parties, it is anticipated that a Phase III order could be issued by
year end 1996. If full evidentiary hearings are required, then a Phase III
decision may be delayed until the second half of 1997.
3
<PAGE> 5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 5.3% to 4.0% for its Arizona (Contel)
tariff entity. On June 24, 1996, the FCC ordered all local-exchange carriers
(LECs) subject to price cap regulation, including the Company, to update their
GDP-PI inflation factors through the fourth quarter of 1995. Overall, the
final 1996interstate access filing resulted in an annual price decrease of
$2.4, effective July 1, 1996.
On July 18, 1996, GTE, through a separate subsidiary, began offering long
distance service to its customers in California, marketed under the name GTE
Easy Savings Plan(SM). GTE plans to offer this service in all 28 states where
it currently offers local telephone service by December 1996.
4
<PAGE> 6
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 1,347 $ 2,139
Receivables, less allowances of $2,246 and $4,895 76,119 120,872
Inventories and supplies 641 652
Deferred income tax benefits 14,037 18,432
Other 520 841
---------- ----------
Total current assets 92,664 142,936
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost 930,186 915,291
Accumulated depreciation (651,049) (635,134)
---------- ----------
Total property, plant and equipment, net 279,137 280,157
---------- ----------
Other assets 16,637 16,331
---------- ----------
Total assets $ 388,438 $ 439,424
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable to affiliates $ 4,036 $ 51,838
Accounts payable 16,687 35,491
Taxes payable 16,883 21,943
Accrued interest 2,369 2,389
Accrued payroll costs 7,582 9,369
Accrued restructuring costs 11,194 20,455
Other 16,861 27,619
---------- ----------
Total current liabilities 75,612 169,104
---------- ----------
NON-CURRENT LIABILITIES:
Long-term debt 90,000 90,000
Deferred income taxes 5,124 5,781
Employee benefit plans 70,315 60,516
Other liabilities 5,672 5,828
---------- ----------
Total non-current liabilities 171,111 162,125
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock (2,503,667 shares issued) 12,518 12,518
Additional paid-in capital 78,917 78,917
Retained earnings 50,280 16,760
---------- ----------
Total shareholder's equity 141,715 108,195
---------- ----------
Total liabilities and shareholder's equity $ 388,438 $ 439,424
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS:
Net income $ 33,520 $ 20,123
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 31,214 34,838
Deferred income taxes 4,227 4,551
Provision for uncollectible accounts 1,032 2,457
Changes in current assets and current liabilities 17,878 12,699
Other - net 397 5,124
--------- ---------
Net cash from operations 88,268 79,792
--------- ---------
INVESTING:
Capital expenditures (22,094) (23,108)
--------- ---------
Cash used in investing (22,094) (23,108)
--------- ---------
FINANCING:
Dividends -- (20,261)
Net change in affiliate notes (66,966) (37,159)
--------- ---------
Net cash used in financing (66,966) (57,420)
--------- ---------
Decrease in cash and temporary investments (792) (736)
Cash and temporary investments:
Beginning of period 2,139 2,244
--------- ---------
End of period $ 1,347 $ 1,508
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 financial statements and the notes
thereto included in the Company's 1995 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where
appropriate, to conform to the 1996 presentation.
7
<PAGE> 9
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the second
quarter of 1996.
8
<PAGE> 10
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.
Contel of California, Inc.
------------------------------
(Registrant)
Date: August 14, 1996 William M. Edwards, III
--------------- ------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
9
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,347
<SECURITIES> 0
<RECEIVABLES> 78,365
<ALLOWANCES> 2,246
<INVENTORY> 641
<CURRENT-ASSETS> 92,664
<PP&E> 930,186
<DEPRECIATION> 651,049
<TOTAL-ASSETS> 388,438
<CURRENT-LIABILITIES> 75,612
<BONDS> 90,000
<COMMON> 12,518
0
0
<OTHER-SE> 129,197
<TOTAL-LIABILITY-AND-EQUITY> 388,438
<SALES> 169,676
<TOTAL-REVENUES> 169,676
<CGS> 54,955
<TOTAL-COSTS> 103,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,152
<INCOME-PRETAX> 62,458
<INCOME-TAX> 28,938
<INCOME-CONTINUING> 33,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,520
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
