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, 1995
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)
The registrant, a wholly owned subsidiary of Contel Corporation, which is 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, 1995. The Company's common stock is 100% owned by Contel
Corporation, which is wholly-owned by GTE Corporation.
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,
1995 1994 1995 1994
(Thousands of Dollars)
OPERATING REVENUES:
Local network services $ 27,287 $ 23,217 $ 56,218 $ 47,394
Network access services 27,145 35,270 54,797 70,359
Long distance services 16,156 23,805 32,330 47,997
Equipment sales and services 3,568 2,515 7,414 5,766
Other 1,550 1,910 3,419 3,802
75,706 86,717 154,178 175,318
OPERATING EXPENSES:
Cost of sales and services 15,216 15,641 29,476 36,641
Depreciation and amortization 17,840 16,005 34,838 32,123
Marketing, selling, general
and administrative 22,917 15,168 48,431 42,312
55,973 46,814 112,745 111,076
Net operating income 19,733 39,903 41,433 64,242
OTHER (INCOME) DEDUCTIONS:
Interest expense 2,865 3,109 6,003 6,126
Other - net (154) (104) (267) (174)
INCOME BEFORE INCOME TAXES 17,022 36,898 35,697 58,290
INCOME TAXES 8,623 15,135 15,574 23,883
NET INCOME $ 8,399 $ 21,763 $ 20,123 $ 34,407
Per share data is omitted since the Company's common stock is 100% owned by
Contel Corporation (a wholly-owned subsidiary of GTE Corporation, GTE).
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
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Net income was $20.1 and $34.4 for the six months ended June 30, 1995 and
1994, respectively, reflecting a decrease of 42% or $14.3. The decrease is
primarily due to the Implementation Rate Design (IRD) discussed below.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in long distance services (without
customer pre-subscription) became effective in California. The order also
provided for rate rebalancing with significant rate reductions for long
distance services and network access services while increasing basic local
network services rates closer to the actual cost of providing such service.
Although the CPUC intended for the rate rebalancing to be revenue neutral,
its ultimate effect on total revenues is dependent, in part, on the extent
to which long distance services rate reductions result in increased calling
volumes. In the first six months of 1995, total revenues decreased by
approximately $19 as a result of the implementation of this order.
OPERATING REVENUES
Operating revenues were $154.2 and $175.3 for the six months ended June 30,
1995 and 1994, respectively, reflecting a decrease of 12% or $21.1.
Local network services revenues were $56.2 and $47.4 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of 19%
or $8.8. The increase is the result of $8.6 in rate increases associated
with the IRD and a 4% increase in access lines, which generated $1.4 of
additional revenues. These increases are offset by a $1.2 reduction in
revenues, primarily due to more customers electing measured usage rate
plans, which yield less revenue, and non-recurring installation revenues
received in 1994.
Network access services revenues were $54.8 and $70.4 for the six months
ended June 30, 1995 and 1994, respectively, reflecting a decrease of 22% or
$15.6. The decrease is primarily the result of $12.0 in rate reductions
associated with the previously mentioned IRD and $1.9 of lower Universal
Service Fund support payments. These decreases are partially offset by a
7% increase in minutes of use, which generated $2.1 of additional revenues.
Long distance services revenues were $32.3 and $48.0 for the six months
ended June 30, 1995 and 1994, respectively, reflecting a decrease of 33% or
$15.7. The decrease is the result of rate reductions associated with the
previously mentioned IRD.
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CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and services revenues were $7.4 and $5.8 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of 28%
or $1.6. The increase is primarily the result of a $0.7 growth in billing
and collection revenues and a $0.5 increase in radio paging revenues.
OPERATING EXPENSES
Operating expenses were $112.7 and $111.1 for the six months ended June 30,
1995 and 1994, respectively, reflecting an increase of 1% or $1.6. The
increase primarily relates to $5.8 in nonrecurring favorable carrier
settlement activities recorded in the second quarter of 1994 and a $2.6
increase in depreciation expenses associated with additions to plant
balances. These increases are partially offset by $7.5 of lower labor and
benefits costs associated with the Company's re-engineering plan initiated
in 1994.
OTHER DEDUCTIONS
Income tax expense was $15.6 and $23.9 for the six months ended June 30,
1995 and 1994, respectively, reflecting a decrease of 35% or $8.3. The
decrease is primarily due to a corresponding decrease in pretax income
partially offset by an increase in temporary differences that flow through
to income in accordance with CPUC requirements.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $49.0, which reduced net income by $30.2, primarily
for incremental costs related to implementation of the Company's three-year
re-engineering plan. The re-engineering plan will redesign and streamline
processes to improve customer-responsiveness and product quality, reduce
the time necessary to introduce new products and services and further
reduce costs.
Implementation of the re-engineering plan began during 1994 and is expected
to be completed by the end of 1996. Expenditures of $27.4 have been made
since inception of the re-engineering plan, including $0.8 during the first
six months of 1995. These expenditures were primarily associated with the
consolidation of customer contact, network operations and operator service
centers, separation benefits from employee reductions and incremental
expenditures to redesign and streamline processes. There have been no
significant changes made to the overall re-engineering plan as originally
reported. As of June 30, 1995, $21.6 remains in the restructuring
reserve, of which $16.8 is classified as a current liability. Management
believes the reserve is adequate to cover future expenditures.
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CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs), including the
Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff
entity. Each of the three options reflected an increase to the 3.3%
productivity factor used since 1991. The Company selected a 5.3%
productivity factor, with no sharing required, in each of its tariff
entities for use in the 1995-1996 tariff year. Under the interim rules,
the Company filed tariffs to reduce rates by $1.5 annually, effective
August 1, 1995. The FCC is continuing to consider how the price cap plan
should be modified in order to adapt the system to the emergence of
competition.
In April 1995, GTE filed a motion with the U.S. District Court for the
District of Columbia to remove the 1984 Consent Decree, which restricts the
manner in which the Company can provide interLATA services. GTE believes
that the Consent Decree is no longer required since GTE has since divested
its interests in the entities whose purchase gave rise to the Consent
Decree.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
In general, SFAS No. 71 requires companies to depreciate plant and
equipment over lives approved by regulators which may extend beyond the
assets' actual economic and technological lives. SFAS No. 71 also requires
deferral of certain costs and obligations based upon approvals received
from regulators to permit recovery in the future. Consequently, the
recorded net book value of certain assets and liabilities, primarily
telephone plant and equipment, may be greater than that which would
otherwise be recorded by unregulated enterprises. On an ongoing basis, the
Company reviews the continued applicability of SFAS No. 71 based on the
current regulatory and competitive environment. Although recent
developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result,
the Company continues to believe that accounting under SFAS No. 71 is
appropriate. If the Company were to determine that the use of SFAS No. 71
was no longer appropriate, it would be required to write-off the deferred
costs and obligations referred to above. It may also be necessary for the
Company to reduce the carrying value of its plant and equipment to the
extent that it exceeds fair market value. At this time, it is not possible
to estimate the amount of the Company's plant and equipment, if any, that
would be considered unrecoverable in such circumstances. The financial
impact of such a determination, however, which would be non-cash, could be
material.
4
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 1,508 $ 2,244
Accounts receivable, less allowances
of $3,873 and $3,523, respectively 43,152 75,579
Materials and supplies 224 2,134
Deferred income tax benefits 5,922 6,793
Prepayments and other 3,275 228
Total current assets 54,081 86,978
PROPERTY, PLANT AND EQUIPMENT:
Original cost 923,293 909,226
Accumulated depreciation (410,016) (385,011)
Net property, plant and equipment 513,277 524,215
OTHER ASSETS 17,701 39,883
TOTAL ASSETS $ 585,059 $ 651,076
See Notes to Condensed Consolidated Financial Statements.
5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT LIABILITIES:
Notes payable to affiliates $ 30,544 $ 67,703
Accounts payable 13,079 33,166
Accrued taxes 10,751 6,814
Accrued dividends 15,000 15,261
Accrued payroll and vacations 11,002 7,280
Accrued restructuring costs and other 34,089 33,005
Total current liabilities 114,465 163,229
LONG-TERM DEBT 90,000 90,000
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 90,257 108,402
Employee benefit obligations 62,089 57,564
Restructuring costs and other 11,383 15,142
Total reserves and deferred credits 163,729 181,108
SHAREHOLDER'S EQUITY:
Common stock 12,518 12,518
Other capital 78,917 78,917
Reinvested earnings 125,430 125,304
Total shareholder's equity 216,865 216,739
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 585,059 $ 651,076
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,
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,123 $ 34,407
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 34,838 32,123
Deferred income taxes and investment
tax credits 4,551 3,002
Provision for uncollectible accounts 2,457 2,420
Changes in current assets and
current liabilities 12,699 (7,629)
Other - net 5,124 8,252
Net cash from operating activities 79,792 72,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (23,108) (24,149)
Cash used in investing activities (23,108) (24,149)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired -- (4,810)
Dividends paid to shareholder (20,261) (47,218)
Net change in affiliate notes (37,159) 6,112
Net cash used in financing activities (57,420) (45,916)
Increase (decrease) in cash (736) 2,510
Cash at beginning of period 2,244 68
Cash at end of period $ 1,508 $ 2,578
See Notes to Condensed Consolidated Financial Statements.
7
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 1994 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
8
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 second
quarter of 1995.
9
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 hereunto duly authorized.
CONTEL OF CALIFORNIA, INC.
(Registrant)
Date: August 10, 1995 MICHAEL W. BOLLINGER
MICHAEL W. BOLLINGER
Assistant Vice President - Controller
(Principal Financial and Accounting Officer)
10