<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 March 31, 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
April 30, 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
March 31,
-------------------------------
1996 1995
---------- ---------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $36,658 $28,931
Network access services 28,447 27,652
Toll services 14,843 16,174
Other services and sales 6,383 6,831
------- -------
Total revenues and sales 86,331 79,588
------- -------
Operating costs and expenses:
Cost of services and sales 28,775 26,319
Selling, general and administrative 9,132 14,615
Depreciation and amortization 17,420 16,998
------- -------
Total operating costs and expenses 55,327 57,932
------- -------
Operating income 31,004 21,656
Interest - net 2,178 2,981
------- -------
Income before income taxes 28,826 18,675
Income taxes 13,019 6,951
------- -------
Net income $15,807 $11,724
======= =======
</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>
Three Months Ended
March 31,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Net income $15.8 $11.7
</TABLE>
Net income increased 35% or $4.1 for the three months ended March 31, 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>
Three Months Ended
March 31,
----------------------------
1996 1995
-------- ----------
<S> <C> <C>
Local services $36.7 $28.9
Network access services 28.4 27.7
Toll services 14.8 16.2
Other services and sales 6.4 6.8
----- -----
Total revenues and sales $86.3 $79.6
</TABLE>
Total revenues and sales increased 8% or $6.7 for the three months ended March
31, 1996, compared to the same period in 1995.
Local service revenues increased 27% or $7.8 for the three months ended March
31, 1996, compared to the same period in 1995. This increase primarily
reflects $5.7 in payments received from the California High Cost Fund and a 3%
growth in switched access lines, which generated $0.6 of additional revenues.
The increase is also due to tariff revenue increases of $0.3 associated with
the Company's decision to consolidate its special access tariffs during the
first quarter of 1966. This increase is offset in toll service revenues
discussed below.
Network access service revenues increased 3% or $0.7 for the three months ended
March 31, 1996, compared to the same period in 1995. This increase is partially
due to a 6% increase in minutes of use, which generated $0.3 of additional
revenues. This increase is also due to tariff revenue increases of $0.6
associated with the Company's decision to consolidate its special access tariffs
during the first quarter of 1996. This tariff revenue increase is offset in
toll service revenues discussed below. These increases are partially offset by
a $0.4 decline in revenues reflecting the August 1995 interstate rate reductions
associated with the FCC price cap.
Toll service revenues decreased 9% or $1.4 for the three months ended March 31,
1996, compared to the same period in 1995, primarily reflecting the
consolidation of special access tariffs discussed above and lower toll volumes
resulting from 10XXX intraLATA toll competition.
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>
Three Months Ended
March 31,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Total operating costs and expenses $55.3 $57.9
</TABLE>
Total operating costs and expenses decreased 4% or $2.6 for the three months
ended March 31, 1996, compared to the same period in 1995. This decrease is
primarily attributable to $1.8 of lower labor and benefits costs associated
with the Company's re-engineering plan and a $0.5 decrease in end-user
uncollectibles.
INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
--------- --------
<S> <C> <C>
Income taxes $13.0 $7.0
</TABLE>
Income taxes increased 86% or $6 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to a
corresponding increase in pretax income and an increase in permanent tax
differences.
OTHER MATTERS
In connection with the re-engineering plan, during the first three months of
1996, costs of approximately $6.1 have been incurred, including $4.3 to
re-engineer customer service processes and $1.8 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $34.6 have been incurred, including $21.6 to re-engineer customer
service processes and $9.9 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 March 31, 1996, $14.4 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
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. As part of this order, the CPUC ordered $69.7
of merger savings to be flowed to the ratepayers of the merged company; which
represents 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. It is currently anticipated that the merger will occur in the
second half of 1996.
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. Overall, the proposed rates result in a $2.4 price reduction,
effective July 1, 1996. The Company anticipates the FCC will issue an order
prior to the effective date, which may require changes to the Company's annual
filing.
4
<PAGE> 6
Contel of California, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- --------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 1,033 $ 2,139
Receivables, less allowances of $5,133 and $4,895 62,425 120,872
Inventories and supplies 712 652
Deferred income tax benefits 16,235 18,432
Other 1,352 841
--------- ---------
Total current assets 81,757 142,936
--------- ---------
Property, plant and equipment, at cost 923,650 915,291
Accumulated depreciation (649,747) (635,134)
--------- ---------
Total property, plant and equipment, net 273,903 280,157
--------- ---------
Deferred income tax benefits and other assets 16,228 16,331
--------- ---------
Total assets $ 371,888 $ 439,424
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable to affiliates $ -- $ 51,838
Accounts payable 16,058 35,491
Taxes payable 24,290 21,943
Accrued interest 3,593 2,389
Accrued payroll costs 7,977 9,369
Accrued restructuring costs 14,426 20,455
Other 18,763 27,619
--------- ---------
Total current liabilities 85,107 169,104
--------- ---------
Non-current liabilities:
Long-term debt 90,000 90,000
Deferred income taxes 5,452 5,781
Employee benefit plans 61,391 60,516
Other liabilities 5,936 5,828
--------- ---------
Total non-current liabilities 162,779 162,125
--------- ---------
Shareholder's equity:
Common stock (2,503,667 shares issued) 12,518 12,518
Additional paid-in capital 78,917 78,917
Retained earnings 32,567 16,760
--------- ---------
Total shareholder's equity 124,002 108,195
--------- ---------
Total liabilities and shareholder's equity $ 371,888 $ 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>
Three Months Ended
March 31,
--------------------------------
1996 1995
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 15,807 $ 11,724
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 17,420 16,998
Deferred income taxes 2,820 2,275
Provision for uncollectible accounts 664 1,162
Changes in current assets and current liabilities 30,900 17,126
Other - net (401) 5,471
-------- --------
Net cash from operations 67,210 54,756
-------- --------
Investing:
Capital expenditures (10,982) (9,787)
-------- --------
Cash used in investing (10,982) (9,787)
-------- --------
Financing:
Dividends -- (15,261)
Net change in affiliate notes (57,334) (30,031)
-------- --------
Net cash used in financing (57,334) (45,292)
-------- --------
Decrease in cash and temporary investments (1,106) (323)
Cash and temporary investments:
Beginning of period 2,139 2,244
-------- --------
End of period $ 1,033 $ 1,921
======== ========
</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
Contel of California, Inc. and Subsidiary
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 first 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: May 14, 1996 Michael W. Bollinger
------------ --------------------------------------------
Michael W. Bollinger
Assistant Vice President - Controller
(Principal Financial and 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,033
<SECURITIES> 0
<RECEIVABLES> 67,558
<ALLOWANCES> 5,133
<INVENTORY> 712
<CURRENT-ASSETS> 81,757
<PP&E> 923,650
<DEPRECIATION> 649,747
<TOTAL-ASSETS> 371,888
<CURRENT-LIABILITIES> 85,107
<BONDS> 90,000
<COMMON> 12,518
0
0
<OTHER-SE> 111,484
<TOTAL-LIABILITY-AND-EQUITY> 371,888
<SALES> 86,331
<TOTAL-REVENUES> 86,331
<CGS> 28,775
<TOTAL-COSTS> 55,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,178
<INCOME-PRETAX> 28,826
<INCOME-TAX> 13,019
<INCOME-CONTINUING> 15,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,807
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
