UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1994
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
Incorporation or organization) Identification No.)
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)
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, 1994.
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Statements of Income. . . . . . . . . . . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 2
Condensed Consolidated Balance Sheets - Assets . . . . . . . . . . . 5
Condensed Consolidated Balance Sheets - Liabilities and
Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows. . . . . . . . . . . 7
Notes to Condensed Consolidated Financial Statements . . . . . . . . 8
PART II. OTHER INFORMATION
Items 1 through 6. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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,
1994 1993 1994 1993
(Thousands of Dollars)
OPERATING REVENUES:
Local network services $ 23,217 $ 23,068 $ 47,394 $ 46,499
Network access services 35,270 32,648 70,359 70,044
Long distance services 23,805 31,346 47,997 62,090
Equipment sales and services 2,515 3,309 5,766 5,287
Other 1,910 2,671 3,802 4,557
86,717 93,042 175,318 188,477
OPERATING EXPENSES:
Cost of sales and services 15,641 19,572 36,641 38,635
Depreciation and amortization 16,005 13,887 32,123 27,570
Marketing, selling, general
and administrative 15,168 24,529 42,312 46,793
46,814 57,988 111,076 112,998
Net operating income 39,903 35,054 64,242 75,479
OTHER (INCOME) DEDUCTIONS:
Interest expense 3,109 3,188 6,126 6,424
Other - net (104) (294) (174) (739)
INCOME BEFORE INCOME TAXES 36,898 32,160 58,290 69,794
INCOME TAXES 15,135 13,281 23,883 28,512
NET INCOME $ 21,763 $ 18,879 $ 34,407 $ 41,282
Per share data is omitted since the Company's common stock is 100% owned by
Contel Corporation (a wholly-owned subsidiary of GTE Corporation).
See Notes to Condensed Consolidated Financial Statements.
1
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income increased 15% or $2.9 million for the three months ended June 30,
1994 and decreased 17% or $6.9 million for the six months ended June 30, 1994
compared to the same periods in 1993. The quarter-to-date increase is
primarily due to lower operating expenses. The year-to-date decrease is
primarily the result of lower operating revenues.
Operating Revenues
Operating revenues decreased 7% or $6.3 million and 7% or $13.2 million for
the three months and six months ended June 30, 1994, respectively, compared to
the same periods in 1993.
Local network service revenues increased 1% or $0.1 million and 2% or $0.9
million for the three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993 primarily due to continued customer
growth, as experienced through an increase in access lines.
Network access service revenues increased $2.6 million and $0.3 million for
the three months and six months ended June 30, 1994, respectively, compared to
the same periods in 1993. The increases are primarily due to favorable
settlements with AT&T.
Long distance service revenues decreased 24% or $7.5 million and 23% or $14.1
million for the three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993 primarily due to the Company's exit from
the California toll pool and reduced toll transitional support payments. The
Company is currently recording revenues on a bill and keep basis, which are
reflected as local network revenues in 1994.
Equipment sales and services revenues decreased 24% or $0.8 million for the
three months ended June 30, 1994 and increased 9% or $0.5 million for the six
months ended June 30, 1994 compared to the same periods in 1993. The
quarter-to-date decrease is primarily due to lower revenues from maintenance
agreements and billing and collection services. The year-to-date increase is
primarily due to increased revenue from billing and collection services.
Miscellaneous revenues decreased 28% or $0.8 million and 17% or $0.8 million
for the three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993. The quarter-to-date and year-to-date
changes reflect lower directory advertising revenue due to timing and lower
rental revenue partially offset by lower provisions for uncollectible
accounts.
2
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses
Operating expenses decreased 19% or $11.2 million and 2% or $1.9 million for
the three months and six months ended June 30, 1994, respectively, compared to
the same periods in 1993. The decreases are primarily due to reductions to
certain reserves and the one-time charge associated with the enhanced early
retirement and voluntary separation programs offered to eligible employees
during the second quarter of 1993. These reductions are partially offset by
higher depreciation and amortization expense due to a rate increase in 1994
and higher expenses for billing and collection services.
Other Expenses
Income taxes increased 14% or $1.9 million and decreased 16% or $4.6 million
for the three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993 primarily due to changes in pretax
income.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first six months of 1994 was
cash flow from operating activities of $73.1 million compared to $70.6 million
for the same period in 1993.
Capital expenditures represent a significant use of funds during 1994 and 1993
reflecting the Company's continued growth in access lines, modernization of
current facilities and introduction of new products and services. The
Company's capital expenditures during the first six months of 1994 were $24.9
million compared to $35.1 million during the same period in 1993. The
Company's anticipated construction costs for 1994 are approximately $60
million.
Cash used in financing activities was $45.9 million in 1994 compared to $35.8
million in 1993. This included dividend payments of $47.2 million in 1994
compared to $42.7 million in 1993. Financing activities included short-term
borrowings of $6.1 million in 1994 compared to $19.0 million in 1993. The
Company retired $4.8 million of long-term debt and preferred stock in 1994,
including the retirement of 8.75% Debentures and all outstanding issues of
preferred stock, compared to $12.1 million in 1993.
During the second quarter of 1994, the Company continued implementation of its
re-engineering plan. This plan will allow the Company to continue to respond
aggressively to competitive and regulatory developments through reduced costs,
improved service quality, competitive prices and new product offerings.
Moreover, implementation of this program over the next three years will
position the Company to accelerate delivery of a full array of voice, video
and data services. Cash requirements for the implementation of the
re-engineering plan during 1994 are expected to be largely offset by cost
savings.
3
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction programs from operations, although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. In addition, a $2.8
billion line of credit is available to the Company through shared lines of
credit with GTE and other affiliates to support short-term financing needs.
4
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 2,578 $ 68
Accounts and notes receivables, less allowances
of $4,469 and $3,592 respectively 57,186 82,092
Materials and supplies, at average cost 3,025 2,566
Deferred income tax benefits 8,510 7,783
Prepayments and other 395 450
Total current assets 71,694 92,959
PROPERTY, PLANT AND EQUIPMENT:
Original cost 894,301 876,420
Accumulated depreciation (368,024) (343,195)
Net property, plant and equipment 526,277 533,225
OTHER ASSETS 25,934 32,898
TOTAL ASSETS $ 623,905 $ 659,082
See Notes to Condensed Consolidated Financial Statements.
5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Notes payable to affiliates $ 74,985 $ 68,873
Accounts payable 17,380 59,317
Accrued taxes 45,880 34,726
Accrued dividends 8,688 42,152
Accrued payroll and vacations 6,726 8,177
Accrued restructuring costs and other 43,868 43,468
Total current liabilities 197,527 256,713
LONG-TERM DEBT 92,800 95,800
DEFERRED CREDITS, primarily deferred
income taxes and investment tax credits 126,918 118,852
PREFERRED STOCK, subject to mandatory redemption -- 1,710
SHAREHOLDER'S EQUITY:
Common stock 12,518 12,518
Other capital 78,917 78,917
Reinvested earnings 115,225 94,572
Total shareholder's equity 206,660 186,007
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 623,905 $ 659,082
See Notes to Condensed Consolidated Financial Statements.
6
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,407 $ 41,282
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 32,123 27,570
Deferred income taxes and investment
tax credits 2,918 (221)
Provision for uncollectible accounts 2,420 2,998
Changes in current assets and
current liabilities (9,652) (8,466)
Other - net 10,889 7,416
Net cash from operating activities 73,105 70,579
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,929) (35,118)
Other - net 250 (175)
Net cash used in investing activities (24,679) (35,293)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired (4,810) (12,100)
Dividends paid to shareholders (47,218) (42,669)
Net change in affiliate notes 6,112 18,996
Net cash used in financing activities (45,916) (35,773)
Increase(decrease) in cash 2,510 (487)
Cash at beginning of period 68 1,477
Cash at end of period $ 2,578 $ 990
See Notes to Condensed Consolidated Financial Statements.
7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, 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 1993
Annual Report to Shareholders incorporated by reference in the Annual Report
on Form 10-K.
(2) On April 20, 1994, the California Public Utilities Commission (CPUC)
issued a decision giving final approval to the merger of the Company into GTE
California Incorporated. The decision requires the merging companies to flow
through to their ratepayers all of the estimated savings that will be produced
from the merger. This flow through requirement is based on the CPUC's
interpretation of certain statutory requirements. The CPUC, however, provided
the parties with the opportunity to supplement the evidentiary record to show
why the estimated merger savings should be apportioned between ratepayers and
shareholders. That filing was made on April 29, 1994. By making the filing,
the effective date of the Decision approving the mergers has been delayed
until such time as the Commission has the opportunity to review and issue a
new decision based on the new evidence. On June 17, 1994, the CPUC issued a
ruling canceling all dates relative to the filing of testimony and evidentiary
hearings.
Applications were also filed with the Arizona Corporation Commission and the
Nevada Public Service Commission for approval of the merger of the Company and
GTE California Incorporated. During the second quarter 1994, the Nevada
Public Service Commission approved the merger, subject to final approval of
the merger by the CPUC. A decision from the Arizona Corporation Commission is
expected in the third quarter.
(3) In July 1994, the CPUC proposed an order aimed at rebalancing local phone
companies' rates and introducing new competition in the local toll market
beginning January 1, 1995. A final order is expected in September 1994.
While this order is intended to be revenue neutral, its ultimate effect will
depend, in part, on the extent to which toll and access rate reductions result
in increased calling volumes.
(4) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1994 presentation.
8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Items 1 through 6 are not applicable for the quarter ended June 30, 1994.
9SIGNATURE
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 12, 1994 MICHAEL W. BOLLINGER
MICHAEL W. BOLLINGER
Assistant Vice President - Controller
(Principal Financial and Accounting Officer)