UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended September 30, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the transition period from
to
Commission File Number: 0-1245
CONTEL OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1789511
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
16071 Mojave Drive, Victorville, California
92392
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 619-245-
0511
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The Company had 2,503,667 shares of $5 par value common stock
outstanding at October 31, 1994.
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Statements of Income. . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . .
. . . 2
Condensed Consolidated Balance Sheets - Assets . . . . . . .
. . . . 5
Condensed Consolidated Balance Sheets - Liabilities and
Shareholders' Equity. . . . . . . . . . . . . . . . . . . .
. . . 6
Condensed Consolidated Statements of Cash Flows. . . . . . .
. . . . 7
Notes to Condensed Consolidated Financial Statements . . . .
. . . . 8
PART II. OTHER INFORMATION
Items 1 through 6. . . . . . . . . . . . . . . . . . . . . .
. . . . 9
Signature. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
PART I. FINANCIAL INFORMATION
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993
1994 1993
(Thousands of Dollars)
OPERATING REVENUES:
Local network services $ 24,888 $ 24,002 $ 72,282 $ 70,501
Network access services 33,738 35,301 104,097 105,345
Long distance services 25,851 31,563 73,848 93,653
Equipment sales and services 3,196 3,594 8,962
8,881
Other 3,751 4,884 7,553 9,441
91,424 99,344 266,742 287,821
OPERATING EXPENSES:
Cost of sales and services 17,548 16,459 54,189
55,094
Depreciation and amortization 16,240 14,221 48,363
41,791
Marketing, selling, general
and administrative 24,735 23,842 67,047 70,635
58,523 54,522 169,599 167,520
Net operating income 32,901 44,822 97,143 120,301
OTHER (INCOME) DEDUCTIONS:
Interest expense 2,946 2,835 9,072 9,259
Other - net (182) 6 (356)
(733)
INCOME BEFORE INCOME TAXES 30,137 41,981 88,427 111,775
INCOME TAXES 12,458 17,551 36,341 46,063
NET INCOME $ 17,679 $ 24,430 $ 52,086 $ 65,712
Per share data is omitted since the Company's common stock is
100% owned by Contel Corporation (a wholly-owned subsidiary of
GTE Corporation).
See Notes to Condensed Consolidated Financial Statements.
1
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income decreased 28% or $6.8 million and 21% or $13.6 million
for the three months and nine months ended September 30, 1994,
respectively, compared to the same periods in 1993. These
decreases are primarily due to lower operating revenues,
primarily long distance service revenues, and higher operating
expenses, primarily depreciation and amortization expense.
Operating Revenues
Operating revenues decreased 8% or $7.9 million and 7% or $21.1
million for the three months and nine months ended September 30,
1994, respectively, compared to the same periods in 1993.
Local network service revenues increased 4% or $0.9 million and
3% or $1.8 million for the three months and nine months ended
September 30, 1994, respectively, compared to the same periods in
1993 primarily due to continued customer growth, as experienced
through an increase in access lines.
Network access service revenues decreased 4% or $1.6 million and
1% or $1.2 million for the three months and nine months ended
September 30, 1994, respectively, compared to the same periods in
1993. The decreases are primarily due to rate reductions to
achieve competitive pricing.
Long distance service revenues decreased 18% or $5.7 million and
21% or $19.8 million for the three months and nine months ended
September 30, 1994, respectively, compared to the same periods in
1993 primarily due to lower settlements with Pacific Bell during
1994. The Company now records revenues on a bill and keep basis.
Equipment sales and service revenues decreased 11% or $0.4
million for the three months ended September 30, 1994 and
remained virtually unchanged for the nine months ended September
30, 1994 compared to the same periods in 1993. The quarter-to-
date decrease is primarily due to lower revenues from telephone
equipment sales and installations. These decreases were offset
in the nine month period, and partially in the three month
period, by increased revenue from billing and collection
services.
Other revenues decreased 23% or $1.1 million and 20% or $1.9
million for the three months and nine months ended September 30,
1994, respectively, compared to the same periods in 1993. The
quarter-to-date and year-to-date decreases reflect lower rent
revenue partially offset by lower provisions for uncollectible
accounts.
2
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses
Operating expenses increased 7% or $4.0 million and 1% or $2.1
million for the three months and nine months ended September 30,
1994, respectively, compared to the same periods in 1993. The
increases are primarily due to higher depreciation and
amortization expense due to a rate represcription in 1994 and
higher expenses for billing and collection services, partially
offset by a decrease in labor and benefit costs from headcount
reductions that occurred in 1993.
Restructuring
As previously reported, during the fourth quarter of 1993, the
Company recorded a one-time, pre-tax restructuring charge of
$49.0 million primarily for incremental costs related to
implementation of its three year re-engineering plan. The re-
engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the
time necessary to introduce new products and services and reduce
costs.
In connection with the re-engineering plan, in the first nine
months of 1994 minimal expenditures were incurred and charged to
the restructuring reserve. The level of re-engineering
activities and related expenditures are expected to accelerate
during the remainder of 1994 and throughout 1995. There have
been no significant changes made to the overall re-engineering
plan as originally reported.
Other Expenses
Income tax expense decreased 29% or $5.1 million and 21% or $9.7
million for the three months and nine months ended September 30,
1994, respectively, compared to the same periods in 1993. The
decreases are primarily due to decreases in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine
months of 1994 was cash from operating activities of $109.1
million compared to $108.7 million for the same period in 1993.
The Company's capital expenditures during the first nine months
of 1994 were $37.0 million compared to $48.3 million during the
same period in 1993. These expenditures reflect the Company's
growth in access lines, modernization of facilities and
introduction of new products and services. The Company's
anticipated construction costs for 1994 are approximately $54
million.
3
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash used in financing activities was $71.1 million compared to
$56.7 million in the same period last year. The largest use of
cash was dividend payments of $55.9 million in 1994 compared to
$60.2 million in 1993. The Company reacquired $5.3 million of
long-term debt and preferred stock in 1994, including the
retirement of 8.75% Debentures and all outstanding issues of
preferred stock.
Management believes that the Company has adequate internal and
external resources available to meet ongoing operating
requirements for construction of new plant, modernization of
facilities and payment of dividends. The Company generally funds
its construction programs from operations, although external
financing is available. Short-term borrowings can be obtained
through commercial paper borrowings or borrowings from GTE. In
addition, a $2.8 billion line of credit is available to the
Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs.
OTHER MATTERS
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 Regulations"
("FAS 71"). In general, FAS 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 increases in
competition or specific regulatory, legislative or judicial
actions, continued application of FAS 71 would no longer be
appropriate. If the Company no longer qualifies for the
provisions of FAS 71, the financial effects of the required
accounting change (which would be non-cash) could be material.
In September 1994, the California Public Utilities Commission
(CPUC) issued a final order in its Implementation Rate Design
proceeding. The decision authorizes intraLATA toll competition
(except 1+) in California, effective January 1, 1995. It also
permits rate rebalancing that would allow rate reductions for
intralata toll service and access charges while increasing basic
local exchange rates closer to the actual cost of providing this
service. Although the rate rebalancing is intended to be revenue
neutral, its ultimate effect on revenue will depend, in part, on
the extent to which rate reductions result in increased calling
volumes. The decision does not permit rate increases to
compensate for competitive losses. GTE believes that the CPUC
has over-estimated the calling volume that will be stimulated by
reduced toll rates. At present, however, it is not possible to
accurately quantify the potential effect.
4
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 1,280 $ 68
Accounts and notes receivable, less allowances
of $4,980 and $3,592, respectively 54,144 82,092
Materials and supplies, at average cost 3,311 2,566
Deferred income tax benefits 10,442 7,783
Prepayments and other 75 450
Total current assets 69,252 92,959
PROPERTY, PLANT AND EQUIPMENT:
Original cost 898,787 876,420
Accumulated depreciation (376,449)
(343,195)
Net property, plant and equipment 522,338 533,225
OTHER ASSETS 26,351 32,898
TOTAL ASSETS $ 617,941 $ 659,082
See Notes to Condensed Consolidated Financial Statements.
5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Notes payable to affiliates $ 58,933 $ 68,873
Current maturities of long-term debt 2,800 500
Accounts payable 22,833 59,317
Accrued taxes 32,623 34,726
Accrued dividends 6,000 42,152
Accrued payroll and vacations 7,723 8,177
Accrued restructuring costs and other 42,939 42,968
Total current liabilities 173,851 256,713
LONG-TERM DEBT 90,000 95,800
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 135,750 118,852
PREFERRED STOCK, subject to mandatory redemption --
1,710
SHAREHOLDER'S EQUITY:
Common stock 12,518 12,518
Other capital 78,917 78,917
Reinvested earnings 126,905 94,572
Total shareholder's equity 218,340 186,007
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 617,941 $
659,082
See Notes to Condensed Consolidated Financial Statements.
6
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,086 $ 65,712
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 48,363 41,791
Deferred income taxes and investment
tax credits 6,350 (330)
Provision for uncollectible accounts 4,297
4,882
Changes in current assets and
current liabilities (15,789)
(7,645)
Other - net 13,768 4,281
Net cash from operating activities 109,075 108,691
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (36,953)
(48,256)
Other - net 205 101
Net cash used in investing activities (36,748)
(48,155)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired (5,270)
(27,630)
Dividends paid to shareholders (55,905)
(60,234)
Net change in affiliate notes (9,940)
31,213
Net cash used in financing activities (71,115)
(56,651)
Increase in cash 1,212 3,885
Cash at beginning of period 68 1,477
Cash at end of period $ 1,280 $ 5,362
See Notes to Condensed Consolidated Financial Statements.
7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements
included herein have been prepared by the Company, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, in the
opinion of management of the Company, the condensed consolidated
financial statements include all adjustments, which consist only
of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Company's 1993 Annual Report to Shareholders incorporated by
reference in the Annual Report on Form 10-K.
(2) On April 20, 1994 the California Public Utilities Commission
(CPUC) issued a decision giving final approval to the merger of
the Company into GTE California Incorporated. The decision
requires the merging companies to flow through to their
ratepayers all of the estimated savings that will be produced
from the merger. This flow through requirement is based on the
CPUC's interpretation of certain statutory requirements. The
CPUC, however, provided the parties with the opportunity to
supplement the evidentiary record to show why the estimated
merger savings should be apportioned between ratepayers and
shareholders. That filing was made on April 29, 1994. By making
the filing, the effective date of the decision approving the
merger has been delayed. The Company and other interested
parties have filed reports and comments pursuant to this
proceeding. The Company expects that the Commission will make a
determination in late 1994 as to whether the merger proceeding
will be reopened.
(3) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
third
quarter of 1994.
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
CONTEL OF
CALIFORNIA, INC.
(Registrant)
Date: November 10, 1994 MICHAEL W. BOLLINGER
MICHAEL W. BOLLINGER
Assistant Vice President -
Controller
(Principal Financial and
Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 1,280
<SECURITIES> 0
<RECEIVABLES> 59,124
<ALLOWANCES> 4,980
<INVENTORY> 3,311
<CURRENT-ASSETS> 69,252
<PP&E> 898,787
<DEPRECIATION> 376,449
<TOTAL-ASSETS> 617,941
<CURRENT-LIABILITIES> 173,851
<BONDS> 90,000
<COMMON> 12,518
0
0
<OTHER-SE> 205,822
<TOTAL-LIABILITY-AND-EQUITY> 617,941
<SALES> 266,742
<TOTAL-REVENUES> 266,742
<CGS> 54,189
<TOTAL-COSTS> 169,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,072
<INCOME-PRETAX> 88,427
<INCOME-TAX> 36,341
<INCOME-CONTINUING> 52,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,086
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
