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 March 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-1245
CONTEL OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-
1789511
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
16071 Mojave Drive, Victorville, California
92392
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 619-245-
0511
(Former name, former address and former fiscal year, if changed
since last report)
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 April 30, 1995. The Company's common stock is
100% owned by Contel Corporation, which is wholly-owned by GTE
Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
OPERATING REVENUES:
Local network services $ 28,931 $
24,177
Network access services 27,652
35,089
Long distance services 16,174
24,192
Equipment sales and services 3,846
3,251
Other 1,869
1,892
78,472
88,601
OPERATING EXPENSES:
Cost of sales and services 14,260
21,000
Depreciation and amortization 16,998
16,118
Marketing, selling, general
and administrative 25,514
27,144
56,772
64,262
Net operating income 21,700
24,339
OTHER (INCOME) DEDUCTIONS:
Interest expense 3,138
3,017
Other - net (113)
(70)
INCOME BEFORE INCOME TAXES 18,675
21,392
INCOME TAXES 6,951
8,748
NET INCOME $ 11,724 $
12,644
</TABLE>
Per share data is omitted since the Company's common stock is
100% owned by Contel Corporation (a wholly-owned subsidiary of
GTE Corporation, GTE).
See Notes to Condensed Consolidated Financial Statements.
1
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Net income was $11.7 and $12.6 for the three months ended March
31, 1995 and 1994, respectively, reflecting a decrease of 7% or
$0.9. The decrease is primarily due to the Implementation Rate
Design (IRD), as discussed below, partially offset by cost
savings generated from the re-engineering plan.
On January 1, 1995, pursuant to an order issued by the California
Public Utilities Commission (CPUC) toll competition (without pre-
subscription) became effective in California. The order also
provided for rate rebalancing with significant rate reductions
for toll service and access charges while increasing basic local
exchange rates closer to the actual cost of providing such
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. In the first quarter of 1995, revenues decreased by
approximately $10 as a result of the implementation of this
order.
OPERATING REVENUES
Operating revenues were $78.5 and $88.6 for the three months
ended March 31, 1995 and 1994, respectively, reflecting a
decrease of 11% or $10.1.
Local network services revenues were $28.9 and $24.2 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 19% or $4.7. The increase is the result
of $4.3 in rate increases associated with the IRD and a 3.1%
increase in access lines, which generated $0.5 of additional
revenues.
Network access services revenues were $27.7 and $35.1 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting a decrease of 21% or $7.4. The decrease is primarily
the result of $6.0 in rate reductions associated with the
previously mentioned IRD. Partially offsetting this decrease are
additional revenues of $1.8 generated from a 10% increase in
minutes of use.
Long distance services revenues were $16.2 and $24.2 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting a decrease of 33% or $8.0. The decrease is primarily
the result of $7.9 in rate reductions associated with the
previously mentioned IRD.
Equipment sales and services revenues were $3.8 and $3.3 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 15% or $0.5. This increase is
primarily the result of a $0.4 growth in billing and collection
revenues.
2
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses were $56.8 and $64.3 for the three months
ended March 31, 1995 and 1994, respectively, reflecting a
decrease of 12% or $7.5. The decrease primarily relates to $5.4
of lower labor and benefits costs reflecting reductions in
workforce associated with the Company's re-engineering plan
initiated in 1994.
OTHER DEDUCTIONS
Income tax expense was $7.0 and $8.7 for the three months ended
March 31, 1995 and 1994, respectively, reflecting a decrease of
20% or $1.7. The decrease is primarily due to a corresponding
decrease 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.
The Company's primary source of funds during the first three
months of 1995 was cash from operations of $54.8 compared to
$37.1 for the same period in 1994. The increase is primarily the
result of accounts receivable collection timing differences.
The Company's capital expenditures during the first three months
of 1995 were $9.8 compared to $12.6 during the same period in
1994. The 1995 expenditures reflect the Company's continued
growth in access lines and modernization of current facilities
and introduction of new products and services. In 1995, the
Company's construction costs are expected to be lower than
capital expenditures of $55.1 incurred during 1994. Construction
costs in 1995 are associated with the Company's expanding network
and replacement of outdated technologies with digital switches
and fiber optic networks.
Cash used in financing activities was $45.3 during the first
three months of 1995 compared to $24.1 for the same period in
1994. This included dividend payments of $15.3 during the first
three months of 1995 compared to $42.1 for the same period in
1994. Net affiliated short term debt repayments totaled $30.0 in
the first quarter of 1995, compared to net borrowings of $22.9
for the same period in 1994. The Company also retired $4.8 of
long-term debt and preferred stock in the first quarter of 1994.
3
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
As previously reported, results for 1993 included a one-time
pretax restructuring charge of $49.0, which reduced net income by
$30.2, primarily for incremental costs related to implementation
of the Company's three-year re-engineering plan. The re-
engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the
time necessary to introduce new products and services and further
reduce costs.
Implementation of the re-engineering plan began during 1994 and
is expected to be completed by the end of 1996. Expenditures of
$27.0 have been made since inception of the re-engineering plan,
including $0.3 during the first three months of 1995. These
expenditures were primarily associated with the consolidation of
customer contact, network operations and operator service
centers, separation benefits from employee reductions and
incremental expenditures to redesign and streamline processes.
There have been no significant changes made to the overall re-
engineering plan as originally reported. As of March 31, 1995,
$22.0 remains in the restructuring reserve, of which $14.8 is
classified as a current liability. Management believes the
reserve is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC)
increased the local-exchange carrier (LEC) productivity factors
associated with its interstate price cap plan to provide three
different options, on an interim basis, regarding the
determination and use of productivity factors. These changes
will be reflected in the LECs' annual tariff filing, effective
August 1, 1995. The FCC is expected to continue to consider
permanent changes to its price cap plan in a future rulemaking
proceeding. GTE believes the impact of the interim rules will be
minimized in the near-term because GTE has reduced its access
fees in previous years to amounts below the FCC's maximum price.
In April 1995, GTE filed a motion with the U.S. District Court
for the District of Columbia to remove the 1984 Consent Decree,
which restricts the Company from providing interLATA services.
GTE believes that the Consent Decree is no longer required since
GTE has since divested its interests in the entities whose
purchase gave rise to the Consent Decree.
In May 1995, the FCC approved GTE's applications to construct a
new fiber optic and coaxial-cable video network in four markets,
including Ventura County, California. GTE expects to submit
tariffs that set the rates for use of its video network to the
FCC for approval and to commence the initial deployment of the
network in late 1995 and early 1996.
4
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands of
Dollars)
<C> <S>
<S>
CURRENT ASSETS:
Cash $ 1,921 $
2,244
Accounts and notes receivable, less allowances
of $4,419 and $3,523, respectively 53,359
75,579
Materials and supplies 1,335
2,134
Deferred income tax benefits 6,359
6,793
Prepayments and other 3,770
228
Total current assets 66,744
86,978
PROPERTY, PLANT AND EQUIPMENT:
Original cost 917,608
909,226
Accumulated depreciation (400,155)
(385,011)
Net property, plant and equipment 517,453
524,215
OTHER ASSETS 16,291
39,883
TOTAL ASSETS $ 600,488 $
651,076
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands of
Dollars)
<C> <S>
<S>
CURRENT LIABILITIES:
Notes payable to affiliates $ 37,672 $
67,703
Accounts payable 19,945
33,166
Accrued taxes 15,190
6,814
Accrued dividends 5,000
15,261
Accrued payroll and vacations 12,208
7,280
Accrued restructuring costs and other 33,842
33,005
Total current liabilities 123,857
163,229
LONG-TERM DEBT 90,000
90,000
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 163,166
181,108
SHAREHOLDER'S EQUITY:
Common stock 12,518
12,518
Other capital 78,917
78,917
Reinvested earnings 132,030
125,304
Total shareholder's equity 223,465
216,739
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 600,488 $
651,076
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<TABLE>
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands of
Dollars)
<C> <S>
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,724 $
12,644
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 16,998
16,118
Deferred income taxes and investment
tax credits 2,275
1,472
Provision for uncollectible accounts 1,162
2,167
Changes in current assets and
current liabilities 17,126
1,441
Other - net 5,471
3,252
Net cash from operating activities 54,756
37,094
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,787)
(12,632)
Cash used in investing activities (9,787)
(12,632)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired --
(4,810)
Dividends paid to shareholders (15,261)
(42,217)
Net change in affiliate notes (30,031)
22,910
Net cash used in financing activities (45,292)
(24,117)
Increase (decrease) in cash (323)
345
Cash at beginning of period 2,244
68
Cash at end of period $ 1,921 $
413
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements
included herein have been prepared by the Company, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, in the
opinion of management of the Company, the condensed consolidated
financial statements include all adjustments, which consist only
of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Company's 1994 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1995
presentation.
8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
first
quarter of 1995.
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
CONTEL OF
CALIFORNIA, INC.
(Registrant)
Date: May 12, 1995 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 1,921
<SECURITIES> 0
<RECEIVABLES> 57,778
<ALLOWANCES> 4,419
<INVENTORY> 1,335
<CURRENT-ASSETS> 66,744
<PP&E> 917,608
<DEPRECIATION> 400,155
<TOTAL-ASSETS> 600,488
<CURRENT-LIABILITIES> 123,857
<BONDS> 90,000
<COMMON> 12,518
0
0
<OTHER-SE> 210,947
<TOTAL-LIABILITY-AND-EQUITY> 600,488
<SALES> 78,472
<TOTAL-REVENUES> 78,472
<CGS> 14,260
<TOTAL-COSTS> 56,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,138
<INCOME-PRETAX> 18,675
<INCOME-TAX> 6,951
<INCOME-CONTINUING> 11,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,724
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
