-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EzxbLgMpYTKaRkONNzSdFHWzTiYfPkePD/R7SAEIfpa/PLC/MG3xrQUoLVYQuQx6 XbQ56ck98axtaRDFmhLQ7A== 0000950005-94-000026.txt : 19940404 0000950005-94-000026.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950005-94-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTEL OF CALIFORNIA INC CENTRAL INDEX KEY: 0000024186 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 951789511 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-01245 FILM NUMBER: 94519614 BUSINESS ADDRESS: STREET 1: 16071 MOJAVE DR CITY: VICTORVILLE STATE: CA ZIP: 92392 BUSINESS PHONE: 6192450511 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL TELEPHONE CO OF CALIFORNIA DATE OF NAME CHANGE: 19880519 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA INTERSTATE TELEPHONE CO DATE OF NAME CHANGE: 19750501 10-K 1 FORM 10-K 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 -------------------------------------------------------- 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). 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 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. 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. 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. 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.
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) - --------------------------- ----- --------- --------- --------------- --------- ------- ----------- ------------------- 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 - ---------- (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.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(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 - -------------------- -------------- ----------- ----------- ------------- ----------- ------------- 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 --
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. 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. 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. CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------ 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 ========== ========== ========== ========== ========== - ---------------------------------- NOTE: (1) All retirements or sales in Column D were charged to accumulated depreciation (Schedule VI, Note 2).
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------- 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 ========== ========== ========== ========== ========== - ---------------------------------- 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.
CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1991 (Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------- 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 ========== ========== ========== ========== ========== - ------------------------------ 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.
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)
- --------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------- 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 ========== ========== ========== ========== ========== - --------------------------------- 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 ========== ========= ==========
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)
- --------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------- 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 ========== ========== ========== ========== ========== - ------------------------------ NOTES: (1) Recoveries of previously written-off amounts. (2) Charges for purpose for which reserve was created. Represents write-offs of receivable accounts.
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)
- ----------------------------------------------------------------------------------------- Column A Column B - -------------------------------------------- ------------------------------------------- Item Charged to Operating Expenses - ----------------------------------------------------------------------------------------- 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 ========== ========== ========== 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
EX-2.1 2 AGREEMENT OF MERGER Exhibit 2.1 AGREEMENT OF MERGER of CONTEL OF CALIFORNIA, INC. September 10, 1992 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 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. EX-13 3 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 ANNUAL REPORT TO SHAREHOLDERS of CONTEL OF CALIFORNIA, INC. For the year ended December 31, 1993 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 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. 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. 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. 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. 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. 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. 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 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. SELECTED FINANCIAL DATA
1993 1992 1991 1990 1989 ----------- ------------ ---------- ----------- ----------- (Thousands of Dollars) 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.
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