<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 September 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 former 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
October 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 32,678 $ 28,760 $ 106,422 $ 84,978
Network access services 30,474 23,277 88,071 78,074
Toll services 13,443 15,636 39,373 47,966
Other services and sales 11,042 8,040 23,447 21,238
-------- -------- --------- --------
Total revenues and sales 87,637 75,713 257,313 232,256
-------- -------- --------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 26,413 32,207 81,368 86,254
Selling, general and administrative 8,442 9,670 25,339 35,950
Depreciation and amortization 14,223 17,610 45,437 52,448
-------- -------- --------- --------
Total operating costs and expenses 49,078 59,487 152,144 174,652
-------- -------- --------- --------
OPERATING INCOME 38,559 16,226 105,169 57,604
Interest - net 1,682 2,585 5,834 8,266
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 36,877 13,641 99,335 49,338
Income taxes 14,766 6,013 43,704 21,587
-------- -------- --------- --------
NET INCOME $ 22,111 $ 7,628 $ 55,631 $ 27,751
======== ======== ========= ========
</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>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Net income $ 55.6 $ 27.8
</TABLE>
Net income increased $27.8 for the nine months ended September 30, 1996,
compared to the same period in 1995. This increase is primarily due to higher
local service and network access service revenues and lower operating costs and
expenses.
Revenues and Sales
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Local services $ 106.4 $ 85.0
Network access services 88.1 78.1
Toll services 39.4 48.0
Other services and sales 23.4 21.2
-------- --------
Total revenues and sales $ 257.3 $ 232.3
</TABLE>
Total revenues and sales increased 11% or $25 for the nine months ended
September 30, 1996, compared to the same period in 1995. The Company
consolidated its special access tariffs during the first quarter of 1996 which
resulted in an increase in local service and network access service revenues.
The total revenue impact of the tariff consolidation is offset by reductions in
toll service revenues.
Local service revenues increased 25% or $21.4 for the nine months ended
September 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 4% growth in switched access lines, which generated $2.4 of
additional revenues, and a $1.9 growth in the sales of CentraNet(trademark) and
data services such as Integrated Services Digital Network (ISDN) services which
permit the rapid transmission of voice, data, image and text.
Network access service revenues increased 13% or $10 for the nine months ended
September 30, 1996, compared to the same period in 1995. This increase
partially reflects a 15% increase in minutes of use, which generated $4.5 of
additional revenues. In addition, revenues increased by $3.7 reflecting the
net effect of the changes in interstate access revenues associated with the
Federal Communications Commission's (FCC) 1995 and 1996 price caps.
Toll service revenues decreased 18% or $8.6 for the nine months ended September
30, 1996, compared to the same period in 1995, primarily reflecting the
consolidation of special access tariffs mentioned above and $6.3 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)
Other services and sales revenues increased 10% or $2.2 for the nine months
ended September 30, 1996, compared to the same period in 1995. The increase
primarily reflects a $2.2 increase in directory advertising revenues related to
timing of directory publications.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Total operating costs and $ 152.1 $ 174.7
expenses
</TABLE>
Total operating costs and expenses decreased 13% or $22.6 for the nine months
ended September 30, 1996, compared to the same period in 1995. This decrease
is primarily due to a $5.4 reduction in labor and benefit costs associated with
productivity gains from process re-engineering and other cost containment
programs and a $7 decrease in depreciation expense.
Other Expense
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Interest - net $ 5.8 $ 8.3
Income taxes 43.7 21.6
</TABLE>
Interest - net decreased 30% or $2.5 for the nine months ended September 30,
1996, compared to the same period in 1995. This decrease is primarily due to
favorable affiliate financing activities.
Income taxes increased $22.1 for the nine months ended September 30, 1996,
compared to the same period in 1995. This increase is primarily due to a
corresponding increase in pre-tax income and adjustments to prior years' tax
provision.
OTHER MATTERS
In connection with the re-engineering plan, during the first nine months of
1996, costs of approximately $12.7 have been incurred, including $9.1 to
re-engineer customer service processes and $3.6 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $41.2 have been incurred, including $26.4 to re-engineer customer
service processes and $11.7 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 September 30, 1996, $7.8 remains in the restructuring reserve
which management believes is adequate to cover future expenditures.
On August 8, 1996, the FCC published its Report and Order (Order) containing
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). On August 9, 1996, the FCC
released its Second Report and Order implementing the provision of number
portability and dialing parity in accord with the Telecommunications Act.
3
<PAGE> 5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
GTE believes that if the Order were implemented as drafted, it would cause
irreparable harm to local-exchange carriers (LECs) by providing unfair
advantages to other carriers who will compete with the LECs in providing local
service in the LEC's local territory.
On September 16, 1996, GTE filed an appeal and motion for stay of the Order
with the United States Court of Appeals for the District of Columbia. This
appeal argued that the FCC had no jurisdiction to impose national pricing rules
for what is essentially local service. This appeal was subsequently transferred
to the Court of Appeals for the Eighth Circuit together with appeals by other
LECs and state regulatory commissions. On October 15, 1996, the Eighth Circuit
granted a partial stay. The stay delays implementation of the Order's pricing
provisions and associated rules, as well as the rules requiring GTE and other
LECs to permit requesting carriers to select terms and conditions from various
agreements between them and other carriers for purposes of interconnection.
Additionally, the Court scheduled oral argument on the merits for the week of
January 13, 1997. On November 12, 1996, the Supreme Court denied applications
to vacate the stay filed by the FCC and various companies seeking to enter the
local-exchange business.
While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.
GTE is continuing to negotiate with requesting carriers over the terms of
interconnection, unbundled network elements and resale rates. In some cases,
the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions, including California. It is expected that in late November 1996,
the first state commission decision to determine prices and terms of unresolved
issues will be released. Subsequent decisions are expected to be issued over a
period extending through the first quarter of 1997.
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 December 31, 1996.
As a part of this order, the CPUC ordered $69.7 of merger savings to be
returned to the local, access and toll customers of the merged company over a
five year period. GTE California Incorporated has 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 permanent rates could be effective as early as March 1997.
If full evidentiary hearings are required, then a Phase III decision may be
delayed until the second half of 1997.
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 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 1996 interstate access
filing resulted in an annual price decrease of $2.4, effective July 1, 1996.
4
<PAGE> 6
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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(service mark). GTE plans to offer this service by December
31, 1996 in all 50 states, including the 28 states where it currently offers
local telephone service.
5
<PAGE> 7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 41 $ 2,139
Receivables, less allowances of $3,325 and $4,895 68,987 120,872
Note receivable from affiliate 22,145 --
Inventories and supplies 769 652
Deferred income tax benefits 2,458 18,432
Other 1,285 841
---------- ----------
Total current assets 95,685 142,936
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost 941,340 915,291
Accumulated depreciation (661,019) (635,134)
---------- ----------
Total property, plant and equipment, net 280,321 280,157
---------- ----------
OTHER ASSETS, primarily deferred income tax benefits 20,963 16,331
---------- ----------
Total assets $ 396,969 $ 439,424
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 10,000 $ --
Notes payable to affiliates -- 51,838
Accounts payable 15,508 35,491
Taxes payable 5,792 21,943
Accrued interest 3,582 2,389
Accrued payroll costs 8,020 9,369
Accrued restructuring costs 7,792 20,455
Other 16,743 27,619
--------- ----------
Total current liabilities 67,437 169,104
--------- ----------
Long-term debt 80,000 90,000
Deferred income taxes 4,795 5,781
Employee benefit plans 71,403 60,516
Other liabilities 9,508 5,828
--------- ----------
Total liabilities 233,143 331,229
--------- ----------
SHAREHOLDER'S EQUITY:
Common stock (2,503,667 shares issued) 12,518 12,518
Additional paid-in capital 78,917 78,917
Retained earnings 72,391 16,760
--------- ----------
Total shareholder's equity 163,826 108,195
--------- ----------
Total liabilities and shareholder's equity $ 396,969 $ 439,424
========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C>
OPERATIONS
Net income $ 55,631 $ 27,751
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 45,437 52,448
Deferred income taxes 14,365 6,827
Provision for uncollectible accounts 4,109 1,710
Change in current assets and current liabilities (12,248) (1,552)
Other - net 2,535 8,596
-------- --------
Net cash from operations 109,829 95,780
-------- --------
INVESTING
Capital expenditures (37,944) (33,328)
-------- --------
Cash used in investing (37,944) (33,328)
-------- --------
FINANCING
Dividends -- (35,261)
Net change in affiliate notes (73,983) (27,661)
-------- --------
Net cash used in financing (73,983) (62,922)
-------- --------
Decrease in cash and temporary investments (2,098) (470)
Cash and temporary investments:
Beginning of period 2,139 2,244
-------- --------
End of period $ 41 $ 1,774
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
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.
8
<PAGE> 10
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 third
quarter of 1996.
9
<PAGE> 11
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: November 13, 1996 William M. Edwards, III
----------------- ------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
10
<PAGE> 12
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 94,457
<ALLOWANCES> 3,325
<INVENTORY> 769
<CURRENT-ASSETS> 95,685
<PP&E> 941,340
<DEPRECIATION> 661,019
<TOTAL-ASSETS> 396,969
<CURRENT-LIABILITIES> 67,437
<BONDS> 80,000
0
0
<COMMON> 12,518
<OTHER-SE> 151,308
<TOTAL-LIABILITY-AND-EQUITY> 396,969
<SALES> 257,313
<TOTAL-REVENUES> 257,313
<CGS> 81,368
<TOTAL-COSTS> 152,144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,834
<INCOME-PRETAX> 99,335
<INCOME-TAX> 43,704
<INCOME-CONTINUING> 55,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,631
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
