-----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, Re2u+MXmM+MbVj5e/TD0IlX/u3wgSUV4oggvP4UAZqYLpib4Vnd7N6jXiSyGzvgx /aLVhwN10YsNPZDrlpG6lQ== 0000950134-96-006062.txt : 19961115 0000950134-96-006062.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950134-96-006062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96661531 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 SEPTEMBER 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 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. 2 PART I. FINANCIAL INFORMATION CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1996 1995 1996 1995 --------- --------- --------- --------- (Thousands of Dollars) 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 ======== ======== ========= ========
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
Nine Months Ended September 30, ---------------------- 1996 1995 -------- -------- Net income $ 55.6 $ 27.8
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
Nine Months Ended September 30, ---------------------- 1996 1995 -------- -------- 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
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 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
Nine Months Ended September 30, ---------------------- 1996 1995 -------- -------- Total operating costs and $ 152.1 $ 174.7 expenses
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
Nine Months Ended September 30, ---------------------- 1996 1995 ------- ------- Interest - net $ 5.8 $ 8.3 Income taxes 43.7 21.6
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 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 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 7 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 ------------- ------------ (Thousands of Dollars) 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 ========= ==========
See Notes to Condensed Consolidated Financial Statements. 6 8 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, ------------------------------ 1996 1995 -------- -------- (Thousands of Dollars) 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 ======== ========
See Notes to Condensed Consolidated Financial Statements. 7 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 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 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 12 EXHIBIT INDEX
Exhibit Number Description ------- ------------------------------------------------------------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1995 JAN-01-1996 SEP-30-1996 41 0 94,457 3,325 769 95,685 941,340 661,019 396,969 67,437 80,000 0 0 12,518 151,308 396,969 257,313 257,313 81,368 152,144 0 0 5,834 99,335 43,704 55,631 0 0 0 55,631 0 0
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