UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1993
---------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 19334 [Fee Required]
For the transition period from to
------------------------ ---------------------
Commission File Number 0-1245
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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
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
- -------------------------------------------------------------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
-----
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
FEBRUARY 28, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1993
(INCORPORATED IN PARTS I AND II).
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
8. Financial Statements and Supplementary Data 5
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
10. Directors and Executive Officers of the Registrant 6
11. Executive Compensation 8
12. Security Ownership of Certain Beneficial Owners and
Management 10
13. Certain Relationships and Related Transactions 11
PART IV
14. Exhibits, Financial Statement Schedules and Reports 12
on Form 8-K
<PAGE>
PART I
Item 1. Business
Contel of California, Inc. (the Company) is a wholly-owned subsidiary of Contel
Corporation (the Parent Company), a wholly-owned subsidiary of GTE Corporation
(GTE), and provides communications services in California, Nevada and Arizona.
The Company was incorporated in California in 1954. Since its incorporation,
twenty-three independent telephone companies have been merged into the Company
to form the present entity.
The Company provides local telephone service within its franchise areas and
intraLATA (Local Access Transport Area) long distance service between the
Company's facilities and the facilities of other telephone companies within the
Company's LATAs. InterLATA service to other points in and out of the states in
which the Company operates is provided through connection with interexchange
(long distance) common carriers. These common carriers are charged fees
(access charges) for interconnection to the Company's local facilities. End
user business and residential customers are also charged access charges for
access to the facilities of the long distance carriers. The Company also earns
other revenues by leasing interexchange plant facilities and providing such
services as billing and collection and operator services to interexchange
carriers, primarily the American Telephone and Telegraph Company (AT&T). The
number of access lines has grown steadily from 292,103 on January 1, 1989 to
362,905 on December 31, 1993.
The Company's principal line of business is providing telecommunication
services. These services fall into five major classes: local network, network
access, long distance, equipment sales and services and other. Revenues from
each of these classes over the last three years are as follows:
Years Ended December 31
--------------------------------------
1993 1992 1991
---- ---- ----
(Thousands of Dollars)
Local Network Services $ 94,586 $ 93,752 $ 88,631
% of Total Revenues 25% 23% 23%
Network Access Services $ 139,822 $ 139,171 $ 146,577
% of Total Revenues 36% 34% 38%
Long Distance Services $ 124,780 $ 133,926 $ 126,746
% of Total Revenues 33% 32% 32%
Equipment Sales and Services $ 13,134 $ 37,220 $ 12,468
% of Total Revenues 3% 9% 3%
Other $ 12,315 $ 9,893 $ 16,282
% of Total Revenues 3% 2% 4%
At December 31, 1993, the Company had 1,592 employees. The Company has written
agreements with the Communications Workers of America (CWA) and International
Brotherhood of Electrical Workers (IBEW) covering approximately 794 of the
Company's employees. The current agreements with CWA and IBEW units expire on
September 6, 1995.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territory which it serves.
The Company is subject to regulation by the California Public Utilities
Commission (CPUC), the Public Service Commission of Nevada, and the Arizona
Corporation Commission as to its intrastate business operations and by the
Federal Communications Commission (FCC) as to its interstate business
operations. Information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies can
be found in Note 10 of the Company's Annual Report to Shareholders for the year
ended December 31, 1993, incorporated herein and filed as Exhibit 13.
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually
all aspects of its business. Specialized communications companies have
constructed new systems in certain markets to bypass the local-exchange
network. Additional competition from interexchange carriers as well as
wireless companies continues to evolve for both intrastate and interstate
communications.
During 1994, the Company will begin implementation of a re-engineering plan
that will redesign and streamline processes. Implementation of its re-
engineering plan will allow the Company to continue to respond aggressively to
these competitive and regulatory developments through reduced costs, improved
service quality, competitive prices and new product offerings. Moreover,
implementation of this program will position the Company to accelerate delivery
of a full array of voice, video and data services. The re-engineering program
will be implemented over three years. During the year, the Company continued
to introduce new business and consumer services utilizing advanced technology,
offering new features and pricing options while at the same time reducing costs
and prices.
During 1993, the FCC announced its decision to auction licenses during 1994 in
51 major markets and 492 basic trading areas across the United States to
encourage the development of a new generation of wireless personal
communications services (PCS). These services will both complement and compete
with the Company's traditional wireline services. The Company will be
permitted to fully participate in the license auctions in areas outside of
GTE's existing cellular service areas. Limited participation will be permitted
in areas in which GTE has an existing cellular presence.
In Cerritos, California, GTE is testing and comparing the capabilities of
copper wire, coaxial cable and fiber optics. The Cerritos test has enhanced
GTE's expertise in the areas of pay-per-view video service, video-on demand and
local video conferencing, and led to a new interactive video service, GTE Main
Street, which allows customers to shop, bank and access various other
information services from their homes. In 1992, the FCC issued a "video
dialtone" ruling that allows telephone companies to transmit video signals over
their networks. The FCC also recommended that Congress amend the Cable Act of
1984 to permit telephone companies to supply video programming in their service
areas.
During 1993, the CPUC approved a New Regulatory Framework (NRF) settlement
agreement allowing GTE California to retain 100% of any earnings above 15.5%
beginning in 1994. Under its prior agreement, GTE California was required to
share 50% of any earnings over a 13% rate of return and refund 100% of any
earnings over 16.5%. The Company has requested that it be allowed to adopt
GTE California's NRF concurrent with the approval of the legal entity merger of
the Company and GTE California Incorporated. Additionally, the CPUC is
expected to issue a final decision in early 1994 generally authorizing
intralata toll competition and ordering significant rate restructuring in
California. Although intended to be revenue neutral, the ultimate effect on
revenue will depend, in part, on the extent to which toll and access rate
reductions result in increased calling volumes.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's
domestic telephone operating subsidiaries from providing long distance service
beyond the boundaries of the LATA. This prohibition restricts their direct
provision of long distance service to relatively short distances. The degree
of competition allowed in the intraLATA market is subject to state regulation.
However, regulatory constraints on intraLATA competition are gradually being
relaxed. In fact, some form of intraLATA competition is authorized in many of
the states in which the Company provides service.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company supports these initiatives to assure greater competition in
telecommunications, provided that overall the changes allow an opportunity for
all service providers to participate equally in a competitive marketplace under
comparable conditions.
Item 2. Properties
The Company's property consists of network facilities (85%), company facilities
(12%), customer premises equipment (1%) and other (2%). From January 1, 1989
to December 31, 1993, the Company made gross property additions of $334.9
million and property retirements of $155.6 million. Substantially all of the
Company's property is subject to liens securing long-term debt. In the opinion
of management, the Company's telephone plant is substantially in good repair.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by Contel Corporation.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholders, page 30,
for the year ended December 31, 1993, incorporated herein and filed as Exhibit
13.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the Registrant's Annual Report to Shareholders, pages 25
to 29 for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Registrant's Annual Report to Shareholders, pages 2 to
23, for the year ended December 31, 1993, incorporated herein and filed as
Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The names, ages and positions of all the directors and executive officers of
the Company as of March 1, 1994 are listed below along with their business
experience during the past five years.
a. Identification of Directors
Director
Name Age Since Business Experience
- -------------------- --- -------- ----------------------------------------
James F. Miles 51 1984 President of Contel of California, Inc.
since 1984; Board of Directors, Desert
Community Bank, Victorville, California;
Former President, Contel of Texas, Inc.;
Former Assistant Vice President -
Finance, Contel Western Region.
Geoffrey C. Gould 41 1990 Vice President - Regulatory and
Governmental Affairs, GTE Telephone
Operations; Former Vice President -
Merger Integration, GTE Telephone
Operations; Former President, Contel
Western Region; Former Vice President -
Quality, Contel Headquarters; Former Vice
President - Customer Services, Contel
Eastern Division Headquarters; Former
Director of Public Affairs, Contel of
Illinois.
Thomas W. White 47 1991 Executive Vice President, GTE Telephone
Operations; Director, Contel of
California, Inc.; Board Member, GTE Data
Services; Former Senior Executive Vice
President - Headquarters Staff, GTE
Telephone Operations; Former Vice
President - Products Management, GTE
Telephone Operations; and Former Vice
President - Business Development, GTE
Telephone Operations.
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which may be held on any day during
May, as specified in the notice of the meeting.
There are no family relationships between any of the directors or executive
officers of the Company.
b. Identification of Executive Officers
Year
Assumed
Current
Name Age Position Position with Company
- ------------------------ --- -------- -----------------------------------
James F. Miles 51 1984 President
Michael W. Bollinger 43 1991 Assistant Vice President -
Controller
Michael E. Burke 49 1991 Vice President - Network Design
Jeffrey B. Cutherell 44 1991 Vice President - Regulatory and
Governmental Affairs and
Treasurer
John A. Ferrell 43 1991 Vice President - Customer Services
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years.
Except for duly elected officers and directors, no other employees had a
significant role in decision making.
All officers are appointed for a term of one year.
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
<TABLE>
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company for services in all capacities to the Company and its
subsidiary.
<CAPTION>
Long-Term Compensation
----------------------------------------------------
Annual Compensation Awards Payments
------------------------------------ ------------------- -------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Reserved
Name and Principal Other Annual Stock Options LTIP All Other
Position in Group Year Salary($) Bonus($) Compensation($) Awards(#) SARs(#) Payments($) Compensations($)(5)
- --------------------------- ----- --------- --------- --------------- --------- ------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James F. Miles 1993 146,492 53,400 1,853 -- -- -- 4,387
President 1992 147,832 57,100 276 -- -- -- 7,086
1991 121,995 42,000 2,721 -- -- -- 5,089
Jeffrey B. Cutherell 1993 109,596 33,200 -- -- -- -- 3,288
Vice President - 1992 110,044 34,400 -- -- -- -- 3,301
Regulatory and 1991 98,398 24,400 957 -- -- -- 2,942
Governmental Affairs
and Treasurer (1)
John A. Ferrell 1993 105,973 33,800 8,511 -- -- -- 3,179
Vice President - 1992 105,422 31,500 283 -- -- -- 3,163
Customer Services (2) 1991 91,230 25,800 32,659 -- -- -- 2,758
Michael E. Burke 1993 108,586 11,200 201 -- -- -- 3,207
Vice President - 1992 108,897 30,000 179 -- -- -- 3,221
Network Design (3) 1991 94,675 24,500 1,694 -- -- -- 2,854
Michael W. Bollinger 1993 94,164 22,400 -- -- -- -- 621
Assistant Vice 1992 93,226 22,500 -- -- -- -- 1,857
President-Controller (4) 1991 81,396 19,000 1,053 -- -- -- 121
<FN>
- ----------
(1) Mr. Cutherell became Vice President - Regulatory and Governmental Affairs and Treasurer in May 1991.
(2) Mr. Ferrell became Vice President - Customer Services in May 1991.
(3) Mr. Burke became Vice President - Network Design in May 1991.
(4) Mr. Bollinger became Assistant Vice President - Controller in August 1991.
(5) All other compensation included Company contributions to defined contribution plans.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<CAPTION>
(a) (b) (c) (d) (e)
Value of Unexercised
Shares Number of Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James F. Miles 2,500 $ 42,208 4,739 1,186 $ 60,265 $ 8,883
Jeffrey B. Cutherell 1,381 13,414 532 -- 4,485 --
John A. Ferrell 931 9,012 466 -- 3,928 --
Michael E. Burke 1,086 24,220 1,270 -- 10,706 --
Michael W. Bollinger 592 5,879 297 -- 2,504 --
</TABLE>
Executive Agreement
Mr. Miles is covered by a Contel Executive Severance Agreement until
December 31, 1994. In order to receive a benefit, this agreement requires the
termination of the executive following a change in control of Contel
Corporation. Termination is defined as an actual or constructive termination
within twelve months following a change in control. Constructive termination
includes a reduction in pay or benefits, a demotion or a reduction in
responsibilities. The amount of severance to which he is entitled in the event
of termination following a change in control is generally equal to three times
his final average earnings as defined in Contel's Senior Executive Supplemental
Income Plan, plus all fringe benefits that were available to him immediately
prior to the change in control. There will be no deduction from the severance
payments as a result of any subsequent employment activity.
Retirement Programs
Pension Plans
The Company maintains for its full-time employees, without cost to its
employees, a trusteed defined benefit pension plan that complies with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). An
employee's normal retirement date is the first day of the month coinciding with
or next following his or her sixty-fifth birthday. Pension payments under this
defined benefit plan are based on attained age, years of credited service and
average annual earnings (regular rates of pay excluding bonuses and fringe
benefits) for the five highest consecutive years out of the last ten
consecutive years preceding retirement; however, such pension payments may not
exceed the "maximum benefit" on an annual basis under the provisions of ERISA.
The plan provides that up to $235,840 of an employee's earnings in 1993 and up
to $245,274 of an employee's earnings in 1994 may be taken into account for
purposes of determining an employee's retirement benefits under the plan.
Compensation received by current executive officers for services rendered
during 1992 that would be used in calculating future pension payments appears
in the Summary Compensation Table under the caption "Annual Compensation -
Salary". As of December 31, 1993, Messrs. Miles, Cutherell, Burke, Ferrell and
Bollinger were credited with 28, 22, 27, 21 and 20 years of service,
respectively. The following table illustrates the approximate amount of annual
pension payments that would accrue to an employee retiring in 1993 at age 65
under the provisions of the plans (such amounts are not subject to any offsets,
such as social security benefits):
Average Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Earnings of Svc. of Svc. of Svc. of Svc. of Svc.
- -------------- ---------- --------- ----------- ------------ ----------
$ 50,000 $ 10,125 $ 13,500 $ 16,875 $ 20,250 $ 23,625
100,000 20,729 27,638 34,548 41,457 48,367
150,000 31,604 42,138 52,672 63,207 73,742
200,000 42,479 56,638 70,797 84,957 99,117
300,000 64,229 85,638 107,048 128,457 149,867
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Miles,
Cutherell, Burke, Ferrell and Bollinger a maximum postretirement life insurance
benefit of three times final base salary. Upon retirement, ERLIP benefits may
be paid as life insurance or optionally, an equivalent amount may be paid as a
lump sum payment equal to the present value of the life insurance amount (based
on actuarial factors and the interest rate then in effect), as an annuity or as
installment payments. If an optional payment method is selected, the ERLIP
benefit will be based on the actuarial equivalent of the present value of the
insurance amount.
There are no other compensation arrangements for directors of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1994:
Name and Shares of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership of Class
-------- -------------------- ----------- --------
Common Stock Contel Corporation 2,503,667 100%
$5 Par value One Stamford Forum shares of
Stamford, Connecticut record
06904
Cumulative Alsta & Co. 13,000 100%
Preferred c/o Continental Bank shares of
$20 par value 231 S. La Salle Street record
(1) Chicago, IL 60693
- ----------
(1) The 5.25% Series of cumulative preferred stock has full
voting rights. The number of shares of cumulative preferred
stock shown or owned includes only shares of series having
full voting rights. According to the Company's records at the
time of issuance of the fully voting preferred shares, sole
voting and investment power with respect to such shares is held by
the beneficial owner listed in the table.
(b) Security Ownership of Management as of December 31, 1993:
Common Stock of Name of Director or Nominee
GTE Corporation --------------------------- All less
James F. Miles (1) 15,178 than 1%
Geoffrey C. Gould 24,250
Thomas W. White 83,071
-------
122,499
=======
Executive Officers(1)(2)
James F. Miles 15,178
Jeffrey B. Cutherell 5,234
John A. Ferrell 2,573
Michael E. Burke 2,776
Michael W. Bollinger 586
-------
26,347
=======
All directors and executive
officers as a group(1)(2) 133,668
=======
(1) Includes shares acquired through participation in
GTE's Consolidated Employee Stock Ownership Plan and/or
the GTE Savings Plan.
(2) Included in the number of shares beneficially owned by
Messrs. Miles, Cutherell, Ferrell, Burke and Bollinger and
all directors and executive officers as a group are 5,925;
532; 466; 1,270; 297 and 9,287 shares, respectively,
which such persons have the right to acquire within 60
days pursuant to stock options.
(c) There were no changes in control of the Company during 1993.
Item 13. Certain Relationships and Related Transactions
The Company`s executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements - Reference is made to the Registrant's
Annual Report to Shareholders, pages 2 - 23, for the year ended
December 31, 1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income for the years ended December 31,
1993-1991.
Consolidated Statements of Reinvested Earnings for the years ended
December 31, 1993-1991.
Consolidated Statements of Cash Flows for the years ended December
31, 1993-1991.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules - Included in Part IV of this report for
the years ended December 31, 1993-1991:
Page(s)
-------
Report of Independent Public Accountants 14
Schedules:
V - Property, Plant and Equipment 15-17
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 18
VIII - Valuation and Qualifying Accounts 19
X - Supplementary Income Statement Information 20
- ----------
Note: Schedules other than those listed above are omitted as not applicable,
not required, or the information is included in the financial statements
or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1 Agreement of Merger, dated September 10, 1992 between GTE
California Incorporated and Contel of California, Inc.
3* Articles of Incorporation and Bylaws (incorporated by reference
from the Registration Statement of the Company, File No. 2-52487,
effective January 14, 1975).
4* Instruments defining the rights of security holders, including
indentures (incorporated by reference from the Registration
Statement of the Company, File No. 2-52487, effective January 14,
1975).
13 Annual Report to Shareholders for the year ended December 31,
1993, filed herein as Exhibit 13.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth
quarter of 1993.
- ----------
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commission as designated.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Contel of California, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Contel of California, Inc. and
subsidiary's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 28, 1994. Our
report on the consolidated financial statements includes an explanatory
paragraph with respect to the change in the method of accounting for income
taxes in 1992 as discussed in Note 1 to the consolidated financial statements.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedules listed under Item 14 are the responsibility of
the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------- -------- -------- -------- -------- --------
Balance at Retirements Other Balance at
Beginning of Additions or Sales Debits or Close of
Classification Year at Cost (Note 1) (Credits) Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 4,034 $ 49 $ -- $ (39) $ 4,044
Buildings 48,704 848 129 (99) 49,324
Central office equipment 291,127 42,315 25,429 61 308,074
Station connections 10,131 985 -- 18 11,134
Cable/underground conduit, etc. 420,841 21,689 3,190 (87) 439,253
Furniture and office equipment 29,329 2,244 146 1,167 32,594
Vehicles and other work equipment 17,387 1,722 2,456 338 16,991
Telephone plant under construction 17,263 (10,185) -- 59 7,137
---------- --------- --------- ---------- ----------
Total Telephone Plant 838,816 59,667 31,350 1,418 868,551
NONREGULATED PLANT 8,664 1,227 12 (2,010) 7,869
---------- --------- --------- ---------- ----------
Total Property, Plant and Equipment $ 847,480 $ 60,894 $ 31,362 $ (592) $ 876,420
========== ========== ========== ========== ==========
<FN>
- ----------------------------------
NOTE:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
</TABLE>
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------- -------- -------- -------- -------- --------
Balance at Retirements Balance at
Beginning of Additions at or Sales Other Debits Close of
Classification Year Cost (Note 1) or (Credits) Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 3,890 $ 215 $ -- $ (71) $ 4,034
Buildings 47,102 3,535 795 (1,138) 48,704
Central office equipment 278,479 29,614 16,966 -- 291,127
Station connections 8,611 1,520 -- -- 10,131
Cable/underground conduit, etc. 389,494 33,756 2,409 -- 420,841
Furniture and office equipment 26,950 3,934 -- (1,555) 29,329
Vehicles and other work equipment 15,409 2,328 (1,433) (1,783) 17,387
Telephone plant under construction 29,436 (12,154) -- (19) 17,263
---------- ---------- ---------- ---------- ----------
Total Telephone Plant 799,371 62,748 18,737 (4,566) 838,816
NONREGULATED PLANT 3,189 909 -- 4,566 8,664
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $ 802,560 $ 63,657 $ 18,737 $ -- $ 847,480
========== ========== ========== ========== ==========
<FN>
- ----------------------------------
NOTE:
(1) All retirements or sales in Column D were charged to accumulated depreciation
(Schedule VI). Retirements include write-offs of customer premises equipment
due to deregulation by the FCC.
</TABLE>
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------- -------- -------- -------- -------- --------
Balance at Retirements Balance at
Beginning of Additions at or Sales Other Debits Close of
Classification Year Cost (Note 1) or (Credits) Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 3,773 $ 117 $ -- $ -- $ 3,890
Buildings 45,992 1,204 94 -- 47,102
Central office equipment 266,012 28,786 16,318 (1) 278,479
Station connections 26,869 546 18,804 -- 8,611
Cable/underground conduit, etc. 370,535 23,508 4,550 1 389,494
Furniture and office equipment 25,561 1,649 260 -- 26,950
Vehicles and other work equipment 14,341 1,702 634 -- 15,409
Telephone plant under construction 19,832 9,604 -- -- 29,436
---------- ---------- ---------- ---------- ----------
Total Telephone Plant 772,915 67,116 40,660 -- 799,371
NONREGULATED PLANT 2,556 540 -- 93 3,189
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $ 775,471 $ 67,656 $ 40,660 $ 93 $ 802,560
========== ========== ========== ========== ==========
<FN>
- ------------------------------
NOTES:
(1) All retirements or sales in Column D were charged to accumulated depreciation
(Schedule VI). Retirements include write-offs of customer premises equipment
due to deregulation by the FCC.
(2) Schedule has been restated to conform to the 1992 presentation.
</TABLE>
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------- -------- -------- -------- -------- --------
Additions
Charged to Other
Balance at Costs and Charges Add Balance at
Beginning of Expenses Retirements (Deduct) Close of
Classification Year (Note 1) (Note 2) (Note 3) Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated depreciation and amortization
for the year ended:
December 31, 1993 $ 318,170 $ 57,776 $ 31,360 $ (1,391) $ 343,195
========== ========== ========== ========== ==========
December 31, 1992 $ 282,685 $ 52,956 $ 18,737 $ 1,266 $ 318,170
========== ========== ========== ========== ==========
December 31, 1991 $ 267,848 $ 50,762 $ 40,660 $ 4,735 $ 282,685
========== ========== ========== ========== ==========
<FN>
- ---------------------------------
NOTES:
(1) Reference is made to Note 1 of Notes to Consolidated Financial
Statements with respect to depreciation policy: 1993 1992 1991
----------- ----------- -----------
Total as shown in Consolidated Statements of Income $ 58,431 $ 53,440 $ 50,762
General office allocations (545) (312) --
Other (110) (172) --
---------- ---------- ----------
Total as shown above $ 57,776 $ 52,956 $ 50,762
========== ========== ==========
(2) Represents: Retirements or sales credited to property,
plant and equipment (Schedule V) $ 31,362 $ 18,737 $ 40,660
Other (2) -- --
---------- --------- ---------
Total as shown above $ 31,360 $ 18,737 $ 40,660
========== ========= =========
(3) Represents: Salvage $ 125 $ 2,752 $ 4,477
Removal costs (1,551) (1,486) (1,236)
Other 35 -- 1,494
---------- --------- ----------
Total as shown above $ (1,391) $ 1,266 $ 4,735
========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
--------- -------- ------------------------- -------- --------
Additions
-------------------------
Charged to Deductions
Balance at Other from Balance at
Beginning of Charged to Accounts Reserves Close of
Description Year Income (Note 1) (Note 2) Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts for
the year ended:
December 31, 1993 $ 3,321 $ 6,478 $ 6,196 $ 12,403 $ 3,592
========== ========== ========== ========== ==========
December 31, 1992 $ 2,654 $ 8,083 $ 2,035 $ 9,451 $ 3,321
========== ========== ========== ========== ==========
December 31, 1991 $ 2,952 $ 5,871 $ 3,644 $ 9,813 $ 2,654
========== ========== ========== ========== ==========
<FN>
- ------------------------------
NOTES:
(1) Recoveries of previously written-off amounts.
(2) Charges for purpose for which reserve was created.
Represents write-offs of receivable accounts.
</TABLE>
<PAGE>
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- -----------------------------------------------------------------------------------------
Column A Column B
- -------------------------------------------- -------------------------------------------
Item Charged to Operating Expenses
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1993 1992 1991
---------- ---------- ----------
Maintenance and repairs $ 59,794 $ 80,996 $ 64,178
========== ========== ==========
Taxes, other than payroll and income taxes,
are as follows:
Real and personal property $ 6,902 $ 7,182 $ 7,376
State gross receipts 15 12 13
Other 236 (195) 734
Portion of above taxes charged to plant
and other accounts (617) (654) (4,687)
---------- ---------- ----------
Total $ 6,536 $ 6,345 $ 3,436
========== ========== ==========
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 21, 1994 By JAMES F. MILES
- ---------------------- -----------------------------------------
JAMES F. MILES
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
JAMES F. MILES President and Director March 21, 1994
- ---------------------- (Principal Executive Officer)
JAMES F. MILES
MICHAEL W. BOLLINGER Assistant Vice President- March 21, 1994
- ---------------------- Controller
MICHAEL W. BOLLINGER (Principal Financial and
Accounting Officer)
GEOFFREY C. GOULD Director March 21, 1994
- ----------------------
GEOFFREY C. GOULD
THOMAS W. WHITE Director March 21, 1994
- ----------------------
THOMAS W. WHITE
</TABLE>
Exhibit 2.1
AGREEMENT OF MERGER
of
CONTEL OF CALIFORNIA, INC.
September 10, 1992
<PAGE>
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER, dated this 10th day of September, 1992, between
GTE CALIFORNIA INCORPORATED, a California corporation ("GTE California"), and
CONTEL OF CALIFORNIA, INC., a California corporation ("Contel California"),
provides as follows:
I.
RECITALS
1. GTE Corporation, a New York corporation ("GTE"), now owns or will own
at all times pertinent hereto, including the Effective Date of the merger, all
of the common stock of GTE California and Contel California.
2. GTE California and Contel California desire that GTE California and
Contel California be merged into GTE California and that GTE California will be
the surviving corporation. The laws of the state of California permit this
merger.
3. The outstanding capital stock of Contel California consists of
2,503,667 shares of common stock and 98,500 shares of preferred stock, which
preferred stock shall be redeemed prior to the Effective Date as defined in
Article II, paragraph 3.
II.
MERGER
1. The manner of converting the shares of each of the constituent
corporations into shares of the surviving corporation and such other provisions
as are deemed necessary or desirable to accomplish the merger are appended
hereto as Exhibit 1 as the Plan of Merger.
2. On the Effective Date, the assets and liabilities of GTE California
and Contel California shall be carried on the books of the surviving
corporation at the amounts at which they are respectively carried on such date
on the books of GTE California and Contel California, and the capital surplus
and earned surplus of the surviving corporation shall be the sum of the
respective capital surpluses and earned surpluses of GTE California and Contel
California, subject in each case to such adjustment, eliminations or transfers
as may be required to give effect to the merger. Except as from time to time
restricted by contract or by statute, the aggregate amount of the net assets of
GTE California and Contel California, which was legally available for the
payment of dividends immediately prior to the merger, shall continue to be
legally available for the payment of dividends by the surviving corporation.
3. Subject to approval prior to the Effective Date of all regulatory
agencies that may have jurisdiction and authority over GTE California and
Contel California for the approval of the merger, and the transfer of such
franchises, certificates of public convenience and necessity, or permits to
engage in a telephone utilities business as may be held by Contel California,
this merger shall become effective upon the date of filing of a Certificate of
Merger with the Secretary of the State of California, where the surviving
corporation will be then domiciled, which date is herein called the "Effective
Date."
4. The merger may be abandoned or terminated at any time by mutual
agreement of the Boards of Directors of the merging companies.
5. This Agreement embodies the entire agreement and the understanding of
the parties relating to its subject matter and supersedes any prior agreements
and understandings relating thereto.
6. For the convenience of the parties, this Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
IN WITNESS WHEREOF, this Agreement of Merger has been signed by the
President or a Vice President and the Secretary or an Assistant Secretary of
each of the corporations has caused the corporate seal to be hereunto affixed,
all as of the date first above written, pursuant to the approval and authority
duly given by resolutions adopted by the respective Boards of Directors.
GTE CALIFORNIA INCORPORATED,
ATTEST: a California corporation
Kenneth K. Okel By: Larry J. Sparrow
- -------------------------- -----------------
Secretary President
CONTEL OF CALIFORNIA, INC.,
ATTEST: a California corporation
R. S. Oerman By: James F. Miles
- -------------------------- ---------------
Secretary President
<PAGE>
EXHIBIT 1
PLAN OF MERGER
OF
CONTEL OF CALIFORNIA
INTO
GTE CALIFORNIA INCORPORATED
I.
The Corporations Proposing to Merge
Contel of California, Inc. (hereinafter referred to as "Contel Cal"), a
California corporation, will be merged into GTE California Incorporated
(hereinafter sometimes referred to as "GTEC"), a California corporation, the
matter being the surviving corporation, which is qualified to transact business
as a foreign corporation in the states of Arizona and Nevada.
Contel Cal and GTEC are hereinafter sometimes referred to collectively as
the "constituent corporations."
II.
Terms and Conditions of the Merger
The terms and conditions of the merger are as follows:
(a) GTEC will issue 561,810 shares of $20 par common stock valued at
$228,925,818 ($11,236,200 of common stock (par value), $35,847,739 of
additional paid-in capital, $44,352,552 of other capital, and $137,489,327 of
retained earnings) in exchange for Contel Cal's 2,503,667 shares of $5 par
common stock also valued at $228,925,818 ($12,518,335 of common stock (par
value), $34,565,604 of additional paid-in capital, $44,352,552 of other
capital, and $137,489,327 of retained earnings).
(b) The following Contel Cal preferred stock issues will be redeemed prior
to the merger:
Par
Series Value Shares Amount
---------------- ----- ------ ----------
5.25% Cumulative 20 14,000 280,000
4.75% Cumulative 20 19,500 390,000
5.95% Cumulative 20 65,000 1,300,000
---------
Total 1,970,000
=========
(c) GTEC will assume $39,144,880 of short-term debt (including $1,970,000
issued to redeem the preferred stock described in C above) and $144,720,000 of
long-term debt (including current maturities) of Contel Cal.
III.
Articles of Incorporation and Surviving Corporation
The Articles of Incorporation of the surviving corporation will not be
affected by the merger.
IV.
Bylaws of Surviving Corporation
The Bylaws of GTEC will be the Bylaws of the surviving corporation.
V.
Directors of Surviving Corporation
On the Effective Date, the directors of GTEC shall become the directors of
the surviving corporation.
VI.
Approval of the Plan
This Plan will be submitted for consideration to the Board of Directors of
each of the constituent corporations for approval. If the Plan is duly
approved by resolution of the Board of Directors of each of the constituent
corporations, then the Plan will then be submitted for approval to the
shareholders of Contel Cal in the manner required by the laws of the State of
California. The Plan will not be submitted to GTEC's shareholders for approval
since, under 1201 of the California Corporations Code, shareholder approval is
not required because the shareholders of the surviving corporation will possess
more than five-sixths of the voting power of the surviving corporation. In the
event the Plan is duly approved by the stockholders, Contel Cal and applicable
regulatory agencies, the Plan, together with other appropriate documentation,
will be filed, and the merger shall be made effective, in accordance with the
laws of the State of California.
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
of
CONTEL OF CALIFORNIA, INC.
For the year ended December 31, 1993
<PAGE>
BOARD OF DIRECTORS EXECUTIVE OFFICES
16071 Mojave Drive
JAMES F. MILES Victorville, California 92392-3699
President
Contel of California, Inc. TRANSFER AGENT AND REGISTRAR
GEOFFREY C. GOULD GTE Corporation
Vice President - Regulatory and C/O Bank of Boston
Governmental Affairs P.O. Box 9191
GTE Telephone Operations Boston, Massachusetts 02205-9191
THOMAS W. WHITE FOR A COPY OF THE 1993 ANNUAL REPORT
Executive Vice President OF GTE, PLEASE WRITE TO:
GTE Telephone Operations
GTE Service Corporation
One Stamford Forum
OFFICERS Stamford, Connecticut 06904
JAMES F. MILES FOR A COPY OF THE 1993 ANNUAL FORM
President 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, PLEASE WRITE
MICHAEL W. BOLLINGER TO:
Assistant Vice President -
Controller GTE Telephone Operations
Financial Reporting
MICHAEL E. BURKE P.O. Box 407, MC INAAACG
Vice President - Network Design Westfield, Indiana 46074
(317) 896-6464
JEFFREY B. CUTHERELL
Vice President - Regulatory and
Governmental Affairs and
Treasurer
JOHN A. FERRELL
Vice President - Customer Services
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 1993 1992 1991
- ----------------------- ----------- ---------- ----------
(Thousands of Dollars)
OPERATING REVENUES:
Local network services $ 94,586 $ 93,752 $ 88,631
Network access services 139,822 139,171 146,577
Long distance services 124,780 133,926 126,746
Equipment sales and services 13,134 37,220 12,468
Other 12,315 9,893 16,282
--------- --------- ----------
384,637 413,962 390,704
--------- --------- ----------
OPERATING EXPENSES (a):
Cost of sales and services 72,300 92,485 76,451
Depreciation and amortization 58,431 53,440 50,762
Marketing, selling, general and
administrative 100,863 101,786 100,435
Restructuring costs 48,987 -- --
--------- --------- ----------
280,581 247,711 227,648
--------- --------- ----------
NET OPERATING INCOME 104,056 166,251 163,056
--------- --------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 12,097 13,419 14,596
Other - net (507) (1,599) (2,027)
--------- --------- ----------
INCOME BEFORE INCOME TAXES 92,466 154,431 150,487
INCOME TAXES 37,397 60,733 59,855
--------- --------- ----------
NET INCOME $ 55,069 $ 93,698 $ 90,632
========= ========== ==========
(a) Includes billings from affiliates of $31,215, $22,663 and $42,995 for the
years 1993-1991, respectively.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
Years ended December 31 1993 1992 1991
- ----------------------- ----------- ---------- ----------
(Thousands of Dollars)
BALANCE AT BEGINNING OF YEAR $ 146,075 $ 137,489 $ 139,972
ADD -
Net income 55,069 93,698 90,632
DEDUCT -
Cash dividends declared
on common stock 106,471 85,000 93,000
Cash dividends declared
on preferred stock 101 112 115
--------- --------- ----------
BALANCE AT END OF YEAR $ 94,572 $ 146,075 $ 137,489
========= ========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31 1993 1992
----------- ----------- -----------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash $ 68 $ 1,477
Accounts receivable
Customers (including
unbilled revenues) 55,462 44,946
Affiliated companies 288 1,280
Other 29,934 24,547
Allowance for uncollectible accounts (3,592) (3,321)
Materials and supplies, at average cost 2,566 2,400
Deferred income tax benefits 7,783 1,320
Prepayments and other 450 261
----------- -----------
92,959 72,910
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 876,420 847,480
Accumulated depreciation (343,195) (318,170)
----------- -----------
533,225 529,310
----------- -----------
OTHER ASSETS 32,898 26,356
----------- -----------
TOTAL ASSETS $ 659,082 $ 628,576
=========== ===========
See Notes to Consolidated Financial Statements.
<PAGE>
December 31 1993 1992
------------ --------- ------------
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to affiliates $ 68,873 $ 28,369
Current maturities of long-term debt 500 500
Accounts payable 51,269 32,177
Due to affiliated companies 8,048 6,462
Advanced billings and customer deposits 4,013 3,841
Accrued taxes 34,726 46,977
Accrued interest 2,656 3,005
Accrued payroll and vacations 8,177 5,171
Accrued dividends 42,152 27,099
Accrued restructuring costs and other 36,299 14,631
----------- -----------
256,713 168,232
----------- -----------
LONG-TERM DEBT 95,800 123,300
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 51,620 65,646
Deferred investment tax credits 10,459 12,310
Restructuring costs and other 56,773 19,738
----------- -----------
118,852 97,694
----------- -----------
PREFERRED STOCK, SUBJECT TO MANDATORY
REDEMPTION 1,710 1,840
----------- -----------
SHAREHOLDER'S EQUITY:
Common stock (2,503,667 shares
outstanding) 12,518 12,518
Other capital 78,917 78,917
Reinvested earnings 94,572 146,075
----------- -----------
186,007 237,510
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' ----------- -----------
EQUITY $ 659,082 $ 628,576
=========== ===========
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1993 1992 1991
- ----------------------- ---------- ---------- ----------
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,069 $ 93,698 $ 90,632
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 58,431 53,440 50,762
Restructuring costs 48,987 -- --
Deferred income taxes and investment
tax credits (21,413) 2,474 7,551
Provision for uncollectible accounts 6,478 8,083 5,871
Change in current assets and current
liabilities (8,198) (2,854) (32,632)
Other - net (1,718) (2,821) 1,110
---------- ---------- ----------
Net cash from operating activities 137,636 152,020 123,294
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60,894) (63,657) (67,656)
Other - net 494 715 3,848
---------- ---------- ----------
Net cash used in investing
activities (60,400) (62,942) (63,808)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock
retired (27,630) (21,050) (12,298)
Dividends paid to shareholders (91,519) (58,036) (93,116)
Increase (decrease) in notes payable
to affiliates 40,504 (8,806) 35,375
---------- ---------- ----------
Net cash used in financing
activities (78,645) (87,892) (70,039)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH (1,409) 1,186 (10,553)
CASH:
Beginning of year 1,477 291 10,844
---------- ---------- ----------
End of year $ 68 $ 1,477 $ 291
========== ========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Contel of
California, Inc. (the Company) and its wholly-owned subsidiary, Contel Advanced
Systems, Inc. All significant intercompany transactions have been eliminated.
The Company is a wholly-owned subsidiary of Contel Corporation (the Parent
Company), a wholly-owned subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies, including GTE and Contel affiliated companies,
supply construction and maintenance materials, supplies and equipment to the
Company. These purchases amounted to $11.7 million, $15.4 million and $27.4
million for the years 1993-1991, respectively. Such purchases are recorded in
the accounts of the Company at cost including a normal return realized by the
affiliates.
The Company is billed for costs for data processing and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$31.2 million, $22.7 million and $43.0 million for the years 1993-1991,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method which reflects management's best
estimate.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant over the estimated
useful lives of the assets using the straight-line method, based upon rates
prescribed by the Federal Communications Commission (FCC) and the state
regulatory commissions. The provisions for depreciation and amortization were
equivalent to composite annual rates of 6.9%, 6.7% and 7.0% for the years 1993-
1991, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and the regulatory commissions in each of the Company's operating
jurisdictions and Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. The Company annually reviews the continued
applicability of SFAS No. 71 based upon the current regulatory and competitive
environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers. Long-term contracts are generally accounted for using
the completed contract method.
MATERIAL AND SUPPLIES
Material and supplies are stated at the lower of cost or market value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company
elected to adopt this new accounting standard on the delayed recognition method
and commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated post-retirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before retirement.
Previously, the cost of these benefits was charged to expense as paid. The
impact of this change in accounting on the Company's results of operations was
immaterial.
INCOME TAXES
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
As further explained in Note 7, during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to
January 1, 1992. SFAS No. 109 changed the method by which companies account
for income taxes. Among other things, the Statement requires that deferred tax
balances be adjusted to reflect new tax rates when they are enacted into law.
The impact of this change in accounting on the Company's results of operations
was immaterial.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. The estimated fair value of long-term debt
at December 31, 1993 and 1992, based on either reference to quoted market
prices or an option pricing model, exceeded the carrying value by approximately
$19 million and $14 million, respectively.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1993 presentation.
2. RESTRUCTURING AND MERGER COSTS
Results for 1993 include a one-time pretax restructuring charge of $49.0
million related to the Company's re-engineering plan over the next three years.
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. The re-
engineering plan includes $20.0 million to upgrade or replace existing customer
service and administrative systems and enhance network software, $22.6 million
for employee separation benefits associated with workforce reductions and $6.1
million primarily for the consolidation of facilities and operations and other
related costs.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pretax charge of $3.0 million which
reduced net income by $1.8 million.
In March 1991, the merger of the Company's parent and GTE was consummated. In
a decision issued on March 13, 1991, the California Public Utilities Commission
(CPUC) issued a decision that approved a stipulation agreement which
tentatively approved the merger of GTE and Contel. The decision also
established a second phase of the proceeding in which GTE was directed to file
a complete showing that the merger meets certain California statutory
requirements. GTE was also ordered to submit a plan for the merger of any of
the Contel and GTE regulated California subsidiaries. On September 14, 1992,
the Company and GTE California Incorporated joined with GTE and Contel and
filed a comprehensive plan with the CPUC to merge the Company into GTE
California Incorporated. The filing also contained detailed information to
demonstrate that the parent company merger should be approved.
On December 23, 1993, an Administrative Law Judge issued a proposed Phase II
order allowing the merger of the Company and GTE California Incorporated. The
order is expected to be finalized in the first quarter of 1994. The proposed
order would add a third phase to the merger proceeding in which the issues of a
start-up revenue requirement for Contel's pre-merger operations and rate
integration of the respective company tariffs will be considered.
In addition, merger applications were filed with the Arizona Corporation
Commission on October 4, 1993 and the Nevada Public Service Commission on April
2, 1993. Final orders in these merger proceedings are also expected to be
issued in 1994.
3. PREFERRED STOCK
Cumulative preferred stock, subject to mandatory redemption, is as follows:
December 31 1993 1992
- ----------- ------------------ ------------------
SHARES AMOUNT* Shares Amount*
--------- ------- -------- --------
AUTHORIZED 1,500,000 1,500,000
========= =========
OUTSTANDING
$20 Par Value--
5.250% Series 12,000 $ 240 13,000 $ 260
4.750% Series A 13,500 270 16,500 330
5.950% Series B 60,000 1,200 62,500 1,250
--------- ------- --------- -------
Total 85,500 $ 1,710 92,000 $ 1,840
========= ======= ========= =======
* Thousands of Dollars
The Company is required to make cash deposits to purchase at specified prices a
portion of its outstanding preferred stock each year. The specified price is
generally par value. In each of the years 1993 through 1991, the Company
purchased $0.1 million of preferred stock. The redemption requirements are
$0.1 million for each of the five years subsequent to December 31, 1993
representing 1,000 shares of the 5.25% Series, 3,000 shares of 4.75% Series
(1,500 shares in 1998) and 2,500 shares of the 5.95% Series.
In the event of failure to pay certain preferred dividends and redemption
requirements, the holders of the Company's redeemable preferred stock are
entitled to elect a certain number of directors until all preferred dividend
and redemption requirement amounts in arrears have been paid. The Company is
not in arrears in its dividend payments at December 31, 1993.
Holders of the 5.25% Series are entitled to one vote per share with the right
to vote cumulatively in the election of directors. Otherwise, the preferred
shareholders have no voting rights.
No shares of preferred stock were reserved for officers and employees, or for
options, warrants, conversions or other rights.
4. COMMON STOCK
The authorized common stock of the Company at December 31, 1993 and 1992
consisted of 3,000,000 shares with a par value of $5 per share. All
outstanding shares of common stock are held by the Parent Company.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1993, $80.7 million of reinvested earnings were restricted as
to the payment of cash dividends on common stock under the most restrictive
terms of the Company's indentures.
5. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
December 31 1993 1992
- ----------- ----------- -----------
(Thousands of Dollars)
FIRST MORTGAGE BONDS:
7.625%, due 1997 $ 10,000 $ 10,000
8.0% to 9.450%, through 2015 82,800 95,200
10.83%, due 1995 -- 15,000
----------- -----------
92,800 120,200
SINKING FUND DEBENTURES:
8.75%, due 1999 3,000 3,100
----------- -----------
Total long-term debt $ 95,800 $ 123,300
=========== ===========
During 1993, the Company retired $12 million of 8% First Mortgage Bonds due
1996 and $15 million of 10.83% First Mortgage Bonds due 1995.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures.
None of the securities shown above were held in sinking or other special funds
of the Company or pledged by the Company.
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1994 are summarized below (in thousands of dollars):
1994 $ 500
1995 500
1996 500
1997 20,500
1998 500
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
6. NOTES PAYABLE TO AFFILIATES
The Company finances part of its construction program through the use of short-
term notes payable to affiliates which are generally refinanced at a later date
by issues of long-term debt or equity. During 1993, the Company supplemented
its internal generation of cash with funds borrowed from GTE. These
arrangements require payment of interest based on prevailing commercial paper
rates. In addition, lines of credit of $2.3 billion are available to the
Company through shared lines of credit with GTE and other affiliates. Most of
these arrangements require payment of annual commitment fees of .1% of unused
lines of credit.
7. INCOME TAXES
The provision for income taxes is as follows:
1993 1992 1991
---------- --------- ---------
(Thousands of Dollars)
CURRENT
Federal $ 46,368 $ 45,669 $ 37,284
State 12,442 12,590 15,020
---------- --------- ---------
Total 58,810 58,259 52,304
---------- --------- ---------
DEFERRED
Federal (14,218) 3,910 9,236
State (5,343) 498 247
---------- --------- ---------
Total (19,561) 4,408 9,483
---------- --------- ---------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (1,852) (1,934) (1,932)
---------- --------- ---------
Total $ 37,397 $ 60,733 $ 59,855
========== ========= =========
The components of deferred income tax expense (benefit) are as follows:
1993 1992 1991
---------- --------- ---------
(Thousands of Dollars)
Depreciation and amortization $ 1,122 $ 10,175 $ 9,629
Employee benefit obligations (2,634) (219) (904)
Prepaid pension cost (1,669) (949) --
Restructuring cost (18,727) -- --
Other - net 2,347 (4,599) 758
---------- --------- ---------
Total $ (19,561) $ 4,408 $ 9,483
========== ========= =========
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate is as follows:
1993 1992 1991
------ ------ ------
STATUTORY FEDERAL INCOME TAX RATE 35.0% 34.0% 34.0%
State and local income taxes, net
of Federal income tax benefits 5.0 5.6 6.7
Amortization of deferred investment
tax credits (2.0) (1.3) (1.3)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - net 1.9 1.9 1.9
Rate differentials applied to
reversing temporary differences (0.5) (0.6) (0.3)
Other differences - net 1.0 (0.3) (1.2)
----- ----- -----
EFFECTIVE INCOME TAX RATE 40.4% 39.3% 39.8%
===== ===== =====
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established rate-
making practices. Since the manner in which income taxes are treated for rate-
making has not changed, pursuant to SFAS No. 71 a corresponding regulatory
asset was also established. In addition, deferred income taxes were adjusted
and a regulatory liability established to give effect to the current statutory
Federal income tax rate and for unamortized investment tax credits. The
unamortized regulatory asset and regulatory liability balances at December 31,
1993 amounted to $16.6 million and $0.1 million, respectively. The unamortized
regulatory asset and regulatory liability balances at December 31, 1992
amounted to $19.4 million and $0.3 million, respectively. The regulatory
assets and liabilities are reflected as other assets and other deferred
credits, respectively, in the accompanying Consolidated Balance Sheets. These
amounts are being amortized over the lives of the related depreciable assets
concurrent with recovery in rates and in conformance with the provisions of the
Internal Revenue Code. The assets and liabilities established in accordance
with SFAS No. 71 have been increased for the tax effect of future revenue
requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
1993 1992
--------- ----------
(Thousands of Dollars)
Depreciation and amortization $ 105,896 $ 72,114
Employee benefit obligations (10,817) (6,560)
Prepaid pension cost (2,539) (1,044)
Restructuring cost (18,727) --
Other reserves (22,806) --
Other - net (7,170) (184)
--------- ---------
Total $ 43,837 $ 64,326
========= =========
8. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company participates in the Parent Company's trusteed pension plan (the
Plan), which covers substantially all employees. The benefits paid under this
plan are based on an employee's years of service and average earnings for the
five highest consecutive calendar years preceding retirement. Effective
January 1, 1987, the Company adopted SFAS No. 87, "Employers' Accounting for
Pensions", for its pension plans and for financial reporting purposes. In a
1988 order, the CPUC disallowed SFAS No. 87 for ratemaking purposes.
Consequently, the Company has recorded an additional $1.4 million, $1.5 million
and $1.5 million to reflect pension expense in accordance with Accounting
Principles Board Opinion No. 8 for the years ended December 31, 1993-1991,
respectively. This additional expense represents a liability to the ratepayers
of $4.8 million and $6.3 million at December 31, 1993 and 1992, respectively,
and is reflected in other deferred credits in the accompanying Consolidated
Balance Sheets. The Company's policy is to fund pension cost in accordance
with applicable regulations. Total pension costs for 1993-1991 were $0.4
million, $2.1 million and $3.1 million, respectively.
The net assets available for benefits are maintained for the total Plan, but
not by subsidiary. The Plan's net assets available for benefits exceeded
projected benefit obligations as computed under SFAS No. 87 as of the last
actuarial valuation.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds amounts
for postretirement benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1993 includes the following components (in
thousands of dollars):
1993
---------
Service cost-benefits earned during the period $ 2,153
Interest cost on accumulated postretirement benefit
obligation 8,372
Amortization of transition obligation 4,622
---------
Postretirement benefit cost $ 15,147
=========
During 1992 and 1991, the cost of postretirement health care and life insurance
benefits on a pay-as-you-go basis was $3.7 million and $3.2 million,
respectively.
The following table sets forth the plans' funded status and the accrued
obligation as of December 31, 1993 (in thousands of dollars):
1993
---------
Accumulated postretirement benefit obligation
attributable to:
Retirees $ 66,965
Fully eligible active plan participants 6,851
Other active plan participants 25,459
---------
Total accumulated postretirement benefit obligation 99,275
Fair value of plan assets 12,880
---------
Excess of accumulated obligation over plan assets 86,395
Unrecognized transition obligation (70,689)
Unrecognized net loss (2,824)
---------
Accrued postretirement benefit obligation $ 12,882
=========
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.5% at December 31, 1993. The expected long-term rate
of return on plan assets was 8.25% for 1993. The assumed health care cost
trend rate in 1993 was 13% for pre-65 participants and 9.5% for post-65
retirees, each rate declining on a graduated basis to an ultimate rate in the
year 2004 of 6%. A one percentage point increase in the assumed health care
cost trend rate for each future year would have increased 1993 costs by $1.7
million and the accumulated postretirement benefit obligation at December 31,
1993 by $11.2 million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees that are effective January
1, 1995. These changes include, among others, newly established limits to the
Company's contribution to postretirement medical costs and a revised sharing
schedule based on a retiree's years of service. The net effect of these
changes reduced the accumulated benefit obligation at December 31, 1993 by
$21.2 million.
SAVINGS PLANS
The Company sponsors savings plans under section 401(k) of the Internal Revenue
Code. The plans cover substantially all full-time employees. Under the plans,
the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income
were $0.7 million, $0.7 million and $0.6 million in the years 1993-1991,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company's anticipated construction costs for 1994 are approximately $60
million, for which the Company had substantial purchase commitments as of
December 31, 1993.
The Company has noncancelable lease contracts covering certain buildings,
office space and equipment. The lease contracts contain varying renewal
options for terms up to three years.
The total amount of rents charged to expense was $3.2 million, $3.2 million and
$2.9 million for the years 1993-1991, respectively.
10. REGULATORY MATTERS
The Company is subject to regulation by the FCC for its interstate business.
Intrastate operations are regulated by the NPSC and Arizona Corporation
Commission (ACC).
INTRASTATE SERVICES
Effective January 1, 1990 the CPUC adopted a new regulatory framework (NRF) for
GTE and Pacific Bell in Phase II of the Alternative Regulatory Proceeding. The
new framework replaced the traditional "rate case" process with a framework
that is based on a Price Cap Index mechanism with "sharing" of earnings above a
benchmark rate of return. The new plan is designed to stimulate productivity
and efficiencies with a portion of those gains flowing directly to the
customer. A policy order issued by the CPUC on July 24, 1991, urged the
Company to adopt the NRF for the Company's operations to be effective no later
than January 1, 1994. The Company has requested to adopt the NRF concurrent
with the approval of the legal entity merger of the Company and GTE California
Incorporated.
Under the new plan, rates for services essential to basic communication would
be subject to a revenue cap, set annually, based on inflation minus a
productivity improvement factor. Rates for partially competitive services
(e.g. Centrex and custom calling features) are subject to the flexibility
within a price floor and ceiling as set by the CPUC. In addition, fully
competitive services (e.g. directory advertising and inside wire installation)
are not subject to pricing limits set by the CPUC. Rates are also adjusted for
exogenous events that are beyond the control of management as defined in the
new plan.
A final CPUC decision was approved for the Company's 1991 financial attrition.
The decision authorized an overall rate of return of 10.75% The Company was
not required to file a financial attrition application for 1992.
On November 21, 1990, the CPUC issued a final order in the proceeding
evaluating the elimination of charges for touchtone service, effective February
1, 1991, and expansion of the local calling area, effective June 1, 1991. The
annual impact of these items reduces revenue by approximately $3 million and
$10 million, respectively.
A proceeding is currently underway to change the price structure of intraLATA
services to reduce cross-subsidies and to align the Company's prices closer to
their underlying costs. This proceeding, which should be concluded in 1994, is
expected to lower the Company's toll and access prices and raise local rates,
thereby placing the Company in a better position for future competition in the
intraLATA market.
During 1991, the Company participated in pooling arrangements, retroactive to
January 1, 1991, for certain access services and was reimbursed for costs of
service incurred, including a return on investment for providing these services
to subscribers and long distance carriers. These arrangements were based on
the Company's estimated cost of providing these services and a rate of return
on the telephone plant utilized for this network access traffic. During 1992,
the Company withdrew from these pooling arrangements and is recording revenues
on a bill and keep basis.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
local exchange carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCC has also
adopted a productivity sharing feature. Because of this feature, under the
minimum productivity-gain option, the Company must share equally with its
ratepayers any realized interstate return above 12.25% up to 16.25%, and all
returns higher than 16.25%, by temporarily lowering prospective prices. During
1994, the FCC is scheduled to review the LEC price cap plan to determine
whether it should be continued or modified.
On December 30, 1993, Contel implemented FCC order 91-213 which restructured
local transport access rates. The order unbundled the interstate local
transport switched access rates into the following elements: 1.) Flat Rate
Entrance Facility charge; 2.) Flat Rate Direct Trunked Transport charge; 3.)
Usage Sensitive Tandem Switched Transport charges (2) and; 4.) Usage Sensitive
Interconnect charge.
SIGNIFICANT CUSTOMER
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities during the years 1993-1991 under various
arrangements and amounted to $33.0 million, $62.2 million and $112.9 million,
respectively.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
1993 1992 1991
---------- --------- -----------
(Thousands of Dollars)
(INCREASE) DECREASE IN CURRENT
ASSETS:
Accounts receivable - net $ (21,118) $ (20,605) $ (8,367)
Materials and supplies (166) 17,433 (17,005)
Other current assets (189) 9,859 (11,311)
INCREASE (DECREASE) IN CURRENT
LIABILITIES:
Accounts payable 19,092 (9,630) (29,715)
Due to affiliated companies 1,586 (2,559) 1,322
Advanced billings and customer
deposits 172 183 (964)
Accrued liabilities (9,683) 5,162 18,743
Other 2,108 (2,697) 14,665
---------- --------- -----------
Total $ (8,198) $ (2,854) $ (32,632)
========== ========== ==========
CASH PAID DURING THE YEAR FOR:
Interest $ 12,370 $ 13,997 $ 13,889
Income taxes 70,895 52,414 35,377
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1993 and 1992 quarterly financial data is as follows:
Operating Net Operating
Revenues Income Net Income
----------- ------------- ------------
(Thousands of Dollars)
1993
FIRST QUARTER $ 95,435 $ 40,425 $ 22,403
SECOND QUARTER 93,042 35,054 18,879
THIRD QUARTER 99,344 44,822 24,430
FOURTH QUARTER (a) 96,816 (16,245) (10,643)
----------- ---------- ----------
TOTAL $ 384,637 $ 104,056 $ 55,069
=========== ========== ==========
1992
First Quarter $ 88,687 $ 31,561 $ 16,597
Second Quarter 118,284 36,940 19,904
Third Quarter 104,319 50,378 27,484
Fourth Quarter 102,672 47,372 29,713
----------- ---------- ----------
Total $ 413,962 $ 166,251 $ 93,698
=========== ========== ==========
(a) Net operating income includes a $49.0 million pretax charge for
restructuring costs which reduces net income by $30.2 million.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Contel of California, Inc.:
We have audited the accompanying consolidated balance sheets of Contel of
California, Inc. (a California corporation) and subsidiary as of December 31,
1993 and 1992, and the related consolidated statements of income, reinvested
earnings and cash flows for each of the three years in the period ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Contel of California, Inc. and
subsidiary as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions. Also as discussed in Note 1,
effective January 1, 1992, the Company changed its method of accounting for
income taxes.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
MANAGEMENT REPORT
To Our Shareholders:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
JAMES F. MILES
President
MICHAEL W. BOLLINGER
Asst. Vice President - Controller
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
Contel of California, Inc. (the Company) provides local exchange, network
access and long distance telecommunications services throughout California,
Nevada and Arizona. The Company serves over 360,000 access lines.
RESULTS OF OPERATIONS
Net income decreased 41% or $38.6 million for the year ended December 31, 1993
and increased 3% or $3.1 million for the year ended December 31, 1992. The
1993 results include a one-time restructuring charge of $30.2 million, net of
tax, related primarily to a re-engineering plan. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services and further reduce costs. Excluding this charge, net income decreased
9% or $8.4 million. The 1993 decrease reflects higher expenses associated with
the implementation of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" effective January 1, 1993. These increases are
partially offset by lower data processing costs, lower operating expenses as a
result of the completion of a large contract in 1992 partially offset by lower
revenues related to the contract. The 1992 increase reflects higher operating
revenues from the large contract partially offset by higher operating expenses
related to the contract. A restructuring charge of $13.4 million in 1991
associated with the merger of the Company's parent, Contel Corporation, and GTE
also contributed to the 1992 increase.
Local network service revenues which are comprised mainly of fees charged to
customers for providing local exchange service, increased 1% or $0.8 million
for the year ended December 31, 1993 and 6% or $5.1 million for the year ended
December 31, 1992. Both increases are primarily the result of continued
customer growth, as experienced through an increase in access lines.
Network access service revenues represent the local telephone companies' charge
to end users for access to the facilities of long distance carriers and the
charge to long distance carriers for interconnection to local facilities.
Network access service revenues increased less than 1% or $0.7 million during
1993 and decreased 5% or $7.4 million during 1992. The 1993 increase is
primarily due to a growth in network minutes of use. The 1992 decrease is
primarily attributable to lower revenues from various pooling arrangements,
partially offset by the growth in network minutes of use.
The Company's revenues for long distance services from designated geographical
areas are provided under settlement arrangements with various telephone
companies. Long distance service revenues decreased 7% or $9.1 million in 1993
and increased 6% or $7.2 million in 1992. The 1993 decrease is due to
adjustments made to reserves in 1992. The 1992 increase was due to the growth
in toll message revenue from the bill and keep arrangement with Pacific Bell.
Equipment sales and services revenues decreased $24.1 million in 1993 and
increased $24.8 million in 1992. Both variances are the result of revenues
recorded in 1992 related to a completed government contract. The related work-
in-process account decreased in 1992 accordingly to reflect the completed
contract.
Other revenues increased 24% or $2.4 million in 1993 and decreased 39% or $6.4
million in 1992. The 1993 increase is due to higher directory revenues and
lower provisioning for uncollectible accounts. The 1992 decrease was a result
of lower revenues for billing and collection services to interexchange
carriers, lower directory revenues and higher provisioning for uncollectible
accounts.
Cost of sales and services decreased 22% or $20.2 million in 1993 and increased
21% or $16.0 million in 1992. Both variances are due to expenses related to
the completed government contract mentioned above. The 1993 results also
include lower software fees offset by higher expenses associated with the
adoption of SFAS No. 106.
Depreciation and amortization expense increased 9% or $5.0 million in 1993 and
5% or $2.7 million in 1992. The 1993 increase is primarily due to higher plant
investments in addition to a rate order effective July 1, 1993. The 1992
increase was primarily due to higher plant investments.
Marketing, selling and general and administrative expenses decreased 1% or $0.9
million in 1993 and increased 1% or $1.4 million in 1992. The 1993 decrease is
due to lower data system and programming costs as many merger related processes
were completed, lower contractor costs and internal telecommunication expenses.
This decrease was offset by higher expenses related to SFAS No. 106. The 1992
increase was primarily due to higher data system and programming costs
reflecting greater utilization of general purpose computer and operating
systems. During the fourth quarter of 1992, updates to the actuarial valuation
on the early retirement plan portion of the restructuring costs recorded in
1991 associated with the merger of Contel Corporation and GTE resulted in an
additional $6.4 million charge.
Restructuring costs reflect a one-time charge related to the Company's re-
engineering plan over the next three years. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services, resulting in cumulative savings in excess of the one-time charge.
The re-engineering plan includes $20 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $23
million for employee separation benefits associated with workforce reductions
and $6 million primarily for the consolidation of facilities and operations and
other related costs. The charge for employee separation benefits includes $11
million related to the recognition of previously deferred postretirement health
and life insurance costs for separating employees.
Income tax expense decreased $23.3 million in 1993 and increased $0.9 million
in 1992. The changes in income tax expense are primarily due to corresponding
changes in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
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 program from operations, although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. In addition, a $2.3
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.
The Company's primary source of funds during 1993 was cash flow from operations
of $137.6 million compared to $152.0 million for 1992. The decrease is
primarily due to higher income tax payments made in 1993 compared to 1992.
Capital expenditures represent a significant use of funds during 1993 and 1992,
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. Cash
requirements to implement the re-engineering plan are expected to be largely
offset by cost savings. The Company's capital expenditures during 1993 were
$60.9 million compared to $63.7 million during 1992. The Company's anticipated
construction costs for 1994 are approximately $60 million.
Cash used for financing activities was $78.6 million in 1993 compared to $87.9
million in 1992. This included dividend payments of $91.5 million in 1993
compared to $58.0 million in 1992. External financing included short-term
borrowings of $40.5 million in 1993 to supplement funds from operations whereas
in 1992 the Company paid down $8.8 million in short-term debt. The Company
retired $27.6 million of long-term debt in 1993, including the early retirement
of 8.0% and 10.83% First Mortgage Bonds, compared to $21.1 million in 1992.
COMPETITION AND REGULATORY TRENDS
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually
all aspects of its business. Specialized communications companies have
constructed new systems in certain markets to bypass the local-exchange
network. Additional competition from interexchange carriers as well as
wireless companies continues to evolve for both intrastate and interstate
communications.
Implementation of its re-engineering plan will allow the Company to continue to
respond aggressively to these competitive and regulatory developments through
reduced costs, improved service quality, competitive prices and new product
offerings. Moreover, implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services.
During the year, the Company continued to introduce new business and consumer
services utilizing advanced technology, offering new features and pricing
options while at the same time reducing costs and prices.
During 1993, the Federal Communications Commission (FCC) announced its decision
to auction licenses during 1994 in 51 major markets and 492 basic trading areas
across the United States to encourage the development of a new generation of
wireless personal communications services (PCS). These services will both
complement and compete with the Company's traditional wireline services. The
Company will be permitted to fully participate in the license auctions in areas
outside of GTE's existing cellular service areas. Limited participation will be
permitted in areas in which GTE has an existing cellular presence.
In Cerritos, California, GTE is testing and comparing the capabilities of
copper wire, coaxial cable and fiber optics. The Cerritos test has enhanced
GTE's expertise in the areas of pay-per-view video service, video-on demand and
local video conferencing, and led to a new interactive video service, GTE Main
Street, which allows customers to shop, bank and access various other
information services from their homes. In 1992, the FCC issued a "video
dialtone" ruling that allows telephone companies to transmit video signals over
their networks. The FCC also recommended that Congress amend the Cable Act of
1984 to permit telephone companies to supply video programming in their service
areas.
During 1993, the California Public Utilities Commission (CPUC) approved a New
Regulatory Framework (NRF) settlement agreement allowing GTE California to
retain 100% of any earnings up to a 15.5% rate of return on investment and
refund 100% of any earnings above 15.5% beginning in 1994. Under its prior
agreement, GTE California was required to share 50% of any earnings over a 13%
rate of return and refund 100% of any earnings over 16.5%. The Company has
requested that it be allowed to adopt GTE California's NRF concurrent with the
approval of the legal entity merger of the Company and GTE California
Incorporated. Additionally, the CPUC is expected to issue a final decision in
early 1994 generally authorizing intralata toll competition and ordering
significant rate restructuring in California. Although intended to be revenue
neutral, the ultimate effect on revenue will depend, in part, on the extent to
which toll and access rate reductions result in increased calling volumes.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company supports these initiatives to assure greater competition in
telecommunications, provided that overall the changes allow an opportunity for
all service providers to participate equally in a competitive marketplace under
comparable conditions.
The Company follows the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71
requires companies to depreciate plant and equipment over lives approved by
regulators. It also requires deferral of certain costs and obligations based
upon approvals received from regulators. In the event that recoverability of
these costs becomes unlikely or uncertain, whether resulting from actual or
anticipated competition or specific regulatory, legislative or judicial
actions, continued application of SFAS No. 71 would no longer be appropriate.
If the Company no longer qualifies for the provisions of SFAS No. 71, the
financial effects of the required accounting change (which would be non-cash)
could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
1993 1992 1991 1990 1989
----------- ------------ ---------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
Total operating revenues $ 384,637 $ 413,962 $ 390,704 $ 372,128 $ 367,572
Total operating expenses 280,581 247,711 227,648 219,973 224,184
----------- ---------- ---------- ----------- ----------
Net operating income 104,056 166,251 163,056 152,155 143,388
Interest expense 12,097 13,419 14,596 15,279 16,293
Other - net (507) (1,599) (2,027) (3,304) (2,928)
Income taxes 37,397 60,733 59,855 62,229 56,736
----------- ---------- ---------- ----------- ----------
Net income $ 55,069 $ 93,698 $ 90,632 $ 77,951 $ 73,287
=========== ========== ========== ========== ==========
Dividends declared on common
stock $ 106,471 $ 85,000 $ 93,000 $ 83,000 $ 69,906
Dividends declared on
preferred stock 101 112 115 130 137
- ----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
SELECTED BALANCE SHEET ITEMS
Investment in property, plant
and equipment - net $ 533,225 $ 529,310 $ 519,875 $ 513,685 $ 483,159
Total assets 659,082 628,576 624,198 581,992 593,490
Long-term debt and preferred
stock, subject to mandatory
redemption 97,510 125,140 139,087 146,825 141,115
Common stock, reinvested earnings
and other capital 186,007 237,510 228,924 231,407 236,583
- ----------------------------------------------------------------------------------------------------------
SELECTED STATISTICS
Access lines 362,905 355,014 344,186 332,054 313,340
Access line gain 7,891 10,828 12,132 18,714 21,237
Net investment in property,
plant and equipment per
access line $ 1,469 $ 1,491 $ 1,510 $ 1,547 $ 1,542
Number of employees 1,592 1,578 1,624 1,730 1,853
Access lines per employee 228 225 212 192 169
Gross plant additions
(thousands) $ 60,894 $ 63,657 $ 67,656 $ 67,835 $ 74,838
- ----------------------------------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by Contel Corporation.
</TABLE>
