-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KhxBMfTpVL7WexFS+cZjNc6J5q7B8X4eOeF2n1GunZUwLCjxCXevq0SUySB/4i/v kfgyvShgEf5I3WUBvtmkng== 0000950134-96-004298.txt : 19960816 0000950134-96-004298.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950134-96-004298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTEL OF CALIFORNIA INC CENTRAL INDEX KEY: 0000024186 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 951789511 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-01245 FILM NUMBER: 96612759 BUSINESS ADDRESS: STREET 1: 600 HIDDEN RIDGE STREET 2: HQE04B12 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2147185600 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL TELEPHONE CO OF CALIFORNIA DATE OF NAME CHANGE: 19880519 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA INTERSTATE TELEPHONE CO DATE OF NAME CHANGE: 19750501 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1996 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. 2 PART I. FINANCIAL INFORMATION CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (Thousands of Dollars) 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 ======== ======== ======== ========
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 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
Six Months Ended June 30, ------------------------ 1996 1995 ----- ----- Net income $33.5 $20.1
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
Six Months Ended June 30, ------------------------- 1996 1995 ------ ------ 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
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 4 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Operating Costs and Expenses
Six Months Ended June 30, ------------------------- 1996 1995 ------ ------ Total operating costs and $103.1 $115.2 expenses
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
Six Months Ended June 30, ------------------------ 1996 1995 ----- ----- Income taxes $28.9 $15.6
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 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 6 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1996 1995 ---------- ------------ (Thousands of Dollars) 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 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 5 7 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ------------------------------- 1996 1995 --------- --------- (Thousands of Dollars) 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 ========= =========
See Notes to Condensed Consolidated Financial Statements. 6 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 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 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 11 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 1,347 0 78,365 2,246 641 92,664 930,186 651,049 388,438 75,612 90,000 12,518 0 0 129,197 388,438 169,676 169,676 54,955 103,066 0 0 4,152 62,458 28,938 33,520 0 0 0 33,520 0 0
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