<PAGE> 1
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, 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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
The registrant, a wholly-owned subsidiary of Contel Corporation, which is a
wholly-owned subsidiary of GTE Corporation, meets the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this
form with reduced disclosure format pursuant to General Instruction H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
The Company had 2,503,667 shares of $5 par value common stock outstanding at
September 30, 1995. The Company's common stock is 100% owned by Contel
Corporation, which is wholly-owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 28,760 $ 24,888 $ 84,978 $ 72,282
Network access services 23,277 33,738 78,074 104,097
Long distance services 15,636 25,851 47,966 73,848
Equipment sales and services 2,667 3,196 10,081 8,962
Other 6,184 3,751 9,603 7,553
---------- ---------- ---------- ----------
76,524 91,424 230,702 266,742
---------- ---------- ---------- ----------
Operating expenses:
Cost of sales and services 31,964 31,145 86,240 95,298
Depreciation and amortization 17,610 16,240 52,448 48,363
Selling, general and administrative 10,724 11,184 34,410 26,155
---------- ---------- ---------- ----------
60,298 58,569 173,098 169,816
---------- ---------- ---------- ----------
Net operating income 16,226 32,855 57,604 96,926
---------- ---------- ---------- ----------
Interest expense - net 2,585 2,718 8,266 8,499
---------- ---------- ---------- ----------
Income before income taxes 13,641 30,137 49,338 88,427
---------- ---------- ---------- ----------
Income taxes 6,013 12,458 21,587 36,341
---------- ---------- ---------- ----------
Net income $ 7,628 $ 17,679 $ 27,751 $ 52,086
========== ========== ========== ==========
</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
<PAGE> 3
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 $27.8 and $52.1 for the nine months ended September 30, 1995 and
1994, respectively, reflecting a decrease of 47% or $24.3. The decrease is
primarily due to the Implementation Rate Design (IRD) discussed below.
On January 1, 1995, pursuant to an order issued by the California Public
Utilities Commission (CPUC), competition in long distance services (without
customer pre-subscription) became effective in California. The order also
provided for rate rebalancing with significant rate reductions for long
distance services and network access services while increasing basic local
network services rates closer to the actual cost of providing such service.
Although the CPUC intended for the rate rebalancing to be revenue neutral, its
ultimate effect on total revenues is dependent, in part, on the extent to which
long distance services rate reductions result in increased calling volumes. In
the first nine months of 1995, total revenues decreased by approximately $29 as
a result of the implementation of this order.
OPERATING REVENUES
Operating revenues were $230.7 and $266.7 for the nine months ended September
30, 1995 and 1994, respectively, reflecting a decrease of 14% or $36.0.
Local network services revenues were $85.0 and $72.3 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting an increase of 18% or
$12.7. The increase is the result of $10.7 in rate increases associated with
the IRD and a 2% increase in access lines, which generated $1.2 of additional
revenues.
Network access services revenues were $78.1 and $104.1 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting a decrease of 25%
or $26.0. The decrease is primarily the result of $18.0 in rate reductions
associated with the previously mentioned IRD, $4.7 of lower revenues
attributable to the interstate sharing requirements of the FCC price cap plan
for the 1994-1995 tariff year and $2.7 of lower Universal Service Fund support
payments. These decreases were partially offset by an 8% increase in minutes
of use, which generated $1.8 of additional revenues.
Long distance services revenues were $48.0 and $73.8 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting a decrease of 35% or
$25.8. The decrease is primarily the result of $21.3 in rate reductions
associated with the previously mentioned IRD and $6.1 of lower transitional
support payments received from Pacific Bell as a result of the Company's exit
from the California state intraLATA toll pool in 1994.
Equipment sales and services revenues were $10.1 and $9.0 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting an increase of 12%
or $1.1. The increase is the result of a $0.6 growth in billing and collection
revenues and a $0.5 increase in radio paging revenues.
Other operating revenues were $9.6 and $7.6 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 26% or $2.0. The
increase is the result of lower provisions for uncollectible accounts.
2
<PAGE> 4
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses were $173.1 and $169.8 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 2% or $3.3. The
increase primarily relates to $8.1 in nonrecurring favorable carrier settlement
activities recorded in 1994 and a $4.0 increase in depreciation expenses
associated with additions to plant balances. These increases are partially
offset by $9.5 of lower labor and benefits costs associated with the Company's
re-engineering plan.
OTHER DEDUCTIONS
Income tax expense was $21.6 and $36.3 for the nine months ended September 30,
1995 and 1994, respectively, reflecting a decrease of 40% or $14.7. The
decrease is primarily due to a corresponding decrease in pretax income.
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 $28.0 have been made since
inception of the re-engineering plan, including $1.3 during the first nine
months of 1995. These expenditures were primarily associated with the
consolidation of customer contact, network operations and operator service
centers, separation benefits associated with workforce 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 September 30, 1995, $21.0 remains in the restructuring reserve
which management believes is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs), including the Company,
for their 1995 Annual Price Cap Filing. The interim rules allowed LECs to
select from three productivity/sharing options for each tariff entity. Each of
the three options reflected an increase to the 3.3% productivity factor used
since 1991. The Company selected a 5.3% productivity factor, with no sharing
required, in each of its tariff entities for use in the 1995-1996 tariff year.
Under the interim rules, the Company filed tariffs to reduce rates by $1.5
annually, effective August 1, 1995. On September 20, 1995, the FCC released
its proposed rulemaking proceeding on price caps which proposes specific
changes to reflect and encourage emerging competition in local and access
services markets and to establish the path towards decreased regulation of
LECs' services. On September 27, 1995, the FCC solicited comments on a number
of specific issues regarding methods for establishing the price caps, such as
productivity measurements, sharing, the common line formula and exogenous
costs. The Company anticipates the FCC will issue an order prior to the July
1996 annual filing.
Federal telecommunications legislation has been passed by both the Senate and
House of Representatives. The bills must now be reconciled by the joint
Senate/House conference committee.
In April 1995, GTE filed a motion with the U.S. District Court for the District
of Columbia to remove the 1984 Consent Decree, which restricts the manner in
which the Company can provide interLATA services. GTE believes that the
Consent Decree is no longer required since GTE has since divested its interests
in the entities whose purchase gave rise to the Consent Decree.
3
<PAGE> 5
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In December 1994, the CPUC issued a decision which adopts an initial procedural
plan to facilitate opening local exchange telecommunications markets to
competition by January 1, 1997. On April 26, 1995, the CPUC issued a formal
rulemaking proceeding and investigation as a procedural vehicle to develop and
adopt rules for local competition. The rulemaking document contained proposed
interim rules which authorized competitive LECs to seek authority to offer
local exchange services beginning in June 1995. The parties filed comments on
the proposed rules on May 24, 1995. The Company's comments asserted the need
for evidentiary hearings to address critical issues such as regulatory parity
and interconnection prior to the authorization of local competition. On July
19, 1995 the CPUC issued interim Universal Service rules and obligations as a
precursor to local competition. The CPUC concurrently commenced a proceeding
to examine, and revise as appropriate, the intrastate price cap regulation by
January 1, 1996. On July 24, 1995, the CPUC issued interim rules for local
competition which permit facilities-based local competition in Pacific Bell and
GTE California Incorporated franchised service areas effective January 1, 1996,
with resale authority granted two months later. The CPUC reiterated its goal
of opening the service areas of small and mid-sized LECs, including the
Company's service areas, to full competition, effective January 1, 1997. Local
competition in the Company's service areas could occur earlier depending on the
final effective date of the pending merger discussed below.
On April 20, 1994, the CPUC issued a decision giving final approval to the
merger of the Company into GTE California Incorporated. The decision required
the merging companies to flow through to their ratepayers all of the estimated
savings that would be produced from the merger. 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. On October 5, 1995, the
Governor of the State of California signed a law which clarifies the authority
of the CPUC to allocate utility merger benefits between ratepayers and
shareholders, with not less than 50% going to ratepayers. A final CPUC
decision on the allocation of merger benefits is expected in early 1996.
REGULATORY ACCOUNTING
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" (FAS 71). In general, FAS 71 requires
companies to depreciate plant and equipment over lives approved by regulators
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $100 and $150. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
4
<PAGE> 6
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 1,774 $ 2,244
Accounts receivable, less allowances of $2,519 and
$3,523, respectively 54,496 75,579
Materials and supplies 18 2,134
Deferred income tax benefits 5,490 6,793
Prepayments and other 1,113 228
---------- ----------
Total current assets 62,891 86,978
---------- ----------
Property , plant and equipment:
Original cost 914,857 909,226
Accumulated depreciation (408,567) (385,011)
---------- ----------
Net property, plant and equipment 506,290 524,215
---------- ----------
Other assets 14,985 39,883
---------- ----------
Total assets $ 584,166 $ 651,076
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Notes payable to affiliates $ 40,042 $ 67,703
Accounts payable 3,746 33,166
Accrued taxes 5,083 6,814
Accrued dividends 10,663 15,261
Accrued payroll and vacations 9,189 7,280
Accrued restructuring costs and other 47,276 33,005
---------- ----------
Total current liabilities 115,999 163,229
---------- ----------
Long-term debt 90,000 90,000
---------- ----------
Reserves and deferred credits:
Deferred income taxes 90,626 108,402
Employee benefit obligations 64,004 57,564
Restructuring costs and other 9,710 15,142
---------- ----------
Total reserves and deferred credits 164,340 181,108
---------- ----------
Shareholder's equity:
Common stock 12,518 12,518
Other capital 78,917 78,917
Reinvested earnings 122,392 125,304
---------- ----------
Total shareholder's equity 213,827 216,739
---------- ----------
Total liabilities and shareholder's equity $ 584,166 $ 651,076
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,751 $ 52,086
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 52,448 48,363
Deferred income taxes 6,827 6,433
Provision for uncollectible accounts 1,710 4,296
Changes in current assets and current liabilities (1,552) (13,987)
Other - net 8,596 9,478
---------- ----------
Net cash from operating activities 95,780 106,669
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (33,328) (34,342)
---------- ----------
Cash used in investing activities (33,328) (34,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired -- (5,270)
Dividends paid to shareholder (35,261) (55,905)
Net change in affiliate notes (27,661) (9,940)
---------- ----------
Cash used in financing activities (62,922) (71,115)
---------- ----------
Increase (decrease) in cash (470) 1,212
Cash at beginning of period 2,244 68
---------- ----------
Cash at end of period $ 1,774 $ 1,280
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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) 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" (FAS 71). In general, FAS 71 requires
companies to depreciate plant and equipment over lives approved by regulators
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $100 and $150. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
(3) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
8
<PAGE> 10
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) Contel of California, Inc. filed a report on Form 8-K dated
September 28, 1995 on October 2, 1995, under Item 5 "Other
Events". No financial statements were filed with this report.
9
<PAGE> 11
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: October 31, 1995 Michael W. Bollinger
---------------- --------------------------------------------
Michael W. Bollinger
Assistant Vice President - Controller
(Principal Financial and Accounting Officer)
10
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 1,774
<SECURITIES> 0
<RECEIVABLES> 57,015
<ALLOWANCES> 2,519
<INVENTORY> 18
<CURRENT-ASSETS> 62,891
<PP&E> 914,857
<DEPRECIATION> 408,567
<TOTAL-ASSETS> 584,166
<CURRENT-LIABILITIES> 115,999
<BONDS> 90,000
<COMMON> 12,518
0
0
<OTHER-SE> 201,309
<TOTAL-LIABILITY-AND-EQUITY> 584,166
<SALES> 230,702
<TOTAL-REVENUES> 230,702
<CGS> 86,240
<TOTAL-COSTS> 173,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,266
<INCOME-PRETAX> 49,338
<INCOME-TAX> 21,587
<INCOME-CONTINUING> 27,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,751
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
