-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AE8ZscO44VGKfyPxKRf16wFSS0VI+kMVz7yHkuXu4MK0/+5K05haJRNAthdqinZm 2pHvOQQF1Rj6lQGUPaAZ2Q== 0000950134-95-002621.txt : 19951101 0000950134-95-002621.hdr.sgml : 19951101 ACCESSION NUMBER: 0000950134-95-002621 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951031 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTEL OF CALIFORNIA INC CENTRAL INDEX KEY: 0000024186 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 951789511 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-01245 FILM NUMBER: 95585741 BUSINESS ADDRESS: STREET 1: 600 HIDDEN RIDGE STREET 2: HQE04B12 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2147185600 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-Q 1 FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1995 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1995 ------------------------------------------------------------ or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------------- ------------------------ Commission File Number: 0-1245 --------------------------------------------------------- CONTEL OF CALIFORNIA, INC - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-1789511 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I. R. S. Employer Incorporation or organization) Identification No.) 600 Hidden Ridge, HQE04B12 - Irving, Texas 75038 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 214-718-5600 ----------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) The registrant, a wholly-owned subsidiary of Contel Corporation, which is a wholly-owned subsidiary of GTE Corporation, meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with reduced disclosure format pursuant to General Instruction H(2). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The Company had 2,503,667 shares of $5 par value common stock outstanding at September 30, 1995. The Company's common stock is 100% owned by Contel Corporation, which is wholly-owned by GTE Corporation. 2 PART I. FINANCIAL INFORMATION CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- (Thousands of Dollars) Operating revenues: Local network services $ 28,760 $ 24,888 $ 84,978 $ 72,282 Network access services 23,277 33,738 78,074 104,097 Long distance services 15,636 25,851 47,966 73,848 Equipment sales and services 2,667 3,196 10,081 8,962 Other 6,184 3,751 9,603 7,553 ---------- ---------- ---------- ---------- 76,524 91,424 230,702 266,742 ---------- ---------- ---------- ---------- Operating expenses: Cost of sales and services 31,964 31,145 86,240 95,298 Depreciation and amortization 17,610 16,240 52,448 48,363 Selling, general and administrative 10,724 11,184 34,410 26,155 ---------- ---------- ---------- ---------- 60,298 58,569 173,098 169,816 ---------- ---------- ---------- ---------- Net operating income 16,226 32,855 57,604 96,926 ---------- ---------- ---------- ---------- Interest expense - net 2,585 2,718 8,266 8,499 ---------- ---------- ---------- ---------- Income before income taxes 13,641 30,137 49,338 88,427 ---------- ---------- ---------- ---------- Income taxes 6,013 12,458 21,587 36,341 ---------- ---------- ---------- ---------- Net income $ 7,628 $ 17,679 $ 27,751 $ 52,086 ========== ========== ========== ==========
Per share data is omitted since the Company's common stock is 100% owned by Contel Corporation (a wholly-owned subsidiary of GTE Corporation, GTE). See Notes to Condensed Consolidated Financial Statements. 1 3 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS) RESULTS OF OPERATIONS Net income was $27.8 and $52.1 for the nine months ended September 30, 1995 and 1994, respectively, reflecting a decrease of 47% or $24.3. The decrease is primarily due to the Implementation Rate Design (IRD) discussed below. On January 1, 1995, pursuant to an order issued by the California Public Utilities Commission (CPUC), competition in long distance services (without customer pre-subscription) became effective in California. The order also provided for rate rebalancing with significant rate reductions for long distance services and network access services while increasing basic local network services rates closer to the actual cost of providing such service. Although the CPUC intended for the rate rebalancing to be revenue neutral, its ultimate effect on total revenues is dependent, in part, on the extent to which long distance services rate reductions result in increased calling volumes. In the first nine months of 1995, total revenues decreased by approximately $29 as a result of the implementation of this order. OPERATING REVENUES Operating revenues were $230.7 and $266.7 for the nine months ended September 30, 1995 and 1994, respectively, reflecting a decrease of 14% or $36.0. Local network services revenues were $85.0 and $72.3 for the nine months ended September 30, 1995 and 1994, respectively, reflecting an increase of 18% or $12.7. The increase is the result of $10.7 in rate increases associated with the IRD and a 2% increase in access lines, which generated $1.2 of additional revenues. Network access services revenues were $78.1 and $104.1 for the nine months ended September 30, 1995 and 1994, respectively, reflecting a decrease of 25% or $26.0. The decrease is primarily the result of $18.0 in rate reductions associated with the previously mentioned IRD, $4.7 of lower revenues attributable to the interstate sharing requirements of the FCC price cap plan for the 1994-1995 tariff year and $2.7 of lower Universal Service Fund support payments. These decreases were partially offset by an 8% increase in minutes of use, which generated $1.8 of additional revenues. Long distance services revenues were $48.0 and $73.8 for the nine months ended September 30, 1995 and 1994, respectively, reflecting a decrease of 35% or $25.8. The decrease is primarily the result of $21.3 in rate reductions associated with the previously mentioned IRD and $6.1 of lower transitional support payments received from Pacific Bell as a result of the Company's exit from the California state intraLATA toll pool in 1994. Equipment sales and services revenues were $10.1 and $9.0 for the nine months ended September 30, 1995 and 1994, respectively, reflecting an increase of 12% or $1.1. The increase is the result of a $0.6 growth in billing and collection revenues and a $0.5 increase in radio paging revenues. Other operating revenues were $9.6 and $7.6 for the nine months ended September 30, 1995 and 1994, respectively, reflecting an increase of 26% or $2.0. The increase is the result of lower provisions for uncollectible accounts. 2 4 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING EXPENSES Operating expenses were $173.1 and $169.8 for the nine months ended September 30, 1995 and 1994, respectively, reflecting an increase of 2% or $3.3. The increase primarily relates to $8.1 in nonrecurring favorable carrier settlement activities recorded in 1994 and a $4.0 increase in depreciation expenses associated with additions to plant balances. These increases are partially offset by $9.5 of lower labor and benefits costs associated with the Company's re-engineering plan. OTHER DEDUCTIONS Income tax expense was $21.6 and $36.3 for the nine months ended September 30, 1995 and 1994, respectively, reflecting a decrease of 40% or $14.7. The decrease is primarily due to a corresponding decrease in pretax income. OTHER MATTERS As previously reported, results for 1993 included a one-time pretax restructuring charge of $49.0, which reduced net income by $30.2, primarily for incremental costs related to implementation of the Company's three year re-engineering plan. The re-engineering plan will redesign and streamline processes to improve customer-responsiveness and product quality, reduce the time necessary to introduce new products and services and further reduce costs. Implementation of the re-engineering plan began during 1994 and is expected to be completed by the end of 1996. Expenditures of $28.0 have been made since inception of the re-engineering plan, including $1.3 during the first nine months of 1995. These expenditures were primarily associated with the consolidation of customer contact, network operations and operator service centers, separation benefits associated with workforce reductions and incremental expenditures to redesign and streamline processes. There have been no significant changes made to the overall re- engineering plan as originally reported. As of September 30, 1995, $21.0 remains in the restructuring reserve which management believes is adequate to cover future expenditures. In March 1995, the Federal Communications Commission (FCC) adopted interim rules to be utilized by local exchange carriers (LECs), including the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed LECs to select from three productivity/sharing options for each tariff entity. Each of the three options reflected an increase to the 3.3% productivity factor used since 1991. The Company selected a 5.3% productivity factor, with no sharing required, in each of its tariff entities for use in the 1995-1996 tariff year. Under the interim rules, the Company filed tariffs to reduce rates by $1.5 annually, effective August 1, 1995. On September 20, 1995, the FCC released its proposed rulemaking proceeding on price caps which proposes specific changes to reflect and encourage emerging competition in local and access services markets and to establish the path towards decreased regulation of LECs' services. On September 27, 1995, the FCC solicited comments on a number of specific issues regarding methods for establishing the price caps, such as productivity measurements, sharing, the common line formula and exogenous costs. The Company anticipates the FCC will issue an order prior to the July 1996 annual filing. Federal telecommunications legislation has been passed by both the Senate and House of Representatives. The bills must now be reconciled by the joint Senate/House conference committee. In April 1995, GTE filed a motion with the U.S. District Court for the District of Columbia to remove the 1984 Consent Decree, which restricts the manner in which the Company can provide interLATA services. GTE believes that the Consent Decree is no longer required since GTE has since divested its interests in the entities whose purchase gave rise to the Consent Decree. 3 5 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In December 1994, the CPUC issued a decision which adopts an initial procedural plan to facilitate opening local exchange telecommunications markets to competition by January 1, 1997. On April 26, 1995, the CPUC issued a formal rulemaking proceeding and investigation as a procedural vehicle to develop and adopt rules for local competition. The rulemaking document contained proposed interim rules which authorized competitive LECs to seek authority to offer local exchange services beginning in June 1995. The parties filed comments on the proposed rules on May 24, 1995. The Company's comments asserted the need for evidentiary hearings to address critical issues such as regulatory parity and interconnection prior to the authorization of local competition. On July 19, 1995 the CPUC issued interim Universal Service rules and obligations as a precursor to local competition. The CPUC concurrently commenced a proceeding to examine, and revise as appropriate, the intrastate price cap regulation by January 1, 1996. On July 24, 1995, the CPUC issued interim rules for local competition which permit facilities-based local competition in Pacific Bell and GTE California Incorporated franchised service areas effective January 1, 1996, with resale authority granted two months later. The CPUC reiterated its goal of opening the service areas of small and mid-sized LECs, including the Company's service areas, to full competition, effective January 1, 1997. Local competition in the Company's service areas could occur earlier depending on the final effective date of the pending merger discussed below. On April 20, 1994, the CPUC issued a decision giving final approval to the merger of the Company into GTE California Incorporated. The decision required the merging companies to flow through to their ratepayers all of the estimated savings that would be produced from the merger. The CPUC, however, provided the parties with the opportunity to supplement the evidentiary record to show why the estimated merger savings should be apportioned between ratepayers and shareholders. That filing was made on April 29, 1994. On October 5, 1995, the Governor of the State of California signed a law which clarifies the authority of the CPUC to allocate utility merger benefits between ratepayers and shareholders, with not less than 50% going to ratepayers. A final CPUC decision on the allocation of merger benefits is expected in early 1996. REGULATORY ACCOUNTING The Company follows the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). In general, FAS 71 requires companies to depreciate plant and equipment over lives approved by regulators which may extend beyond the assets' actual economic life. FAS 71 also requires deferral of certain costs based upon approvals received from regulators to recover such costs in the future. Consequently, the carrying value of certain assets and liabilities, primarily telephone plant and equipment, may be greater than that which would otherwise be recorded by unregulated enterprises. In connection with an ongoing review of the continued applicability of FAS 71, the Company has commenced a study of the economic lives of its telephone plant and equipment. The study is expected to be completed by the end of the fourth quarter of 1995. If the Company were to discontinue the application of FAS 71 and compute the effect on its telephone plant and equipment in a manner similar to the seven Regional Bell Operating Companies which have discontinued FAS 71, the after-tax charge resulting from the reduction in carrying value of the Company's property, plant and equipment, which would be non-cash in nature, is estimated to be between $100 and $150. This potential accounting charge will have no effect on the Company's customers or its liquidity and capital resources. Management expects that such a charge, which would be recorded primarily as a reduction of the net book value of the fixed assets of the Company, would not significantly affect depreciation expense on existing plant and equipment in the near future. 4 6 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
September 30, December 31, 1995 1994 ------------- ------------ (Thousands of Dollars) Current assets: Cash $ 1,774 $ 2,244 Accounts receivable, less allowances of $2,519 and $3,523, respectively 54,496 75,579 Materials and supplies 18 2,134 Deferred income tax benefits 5,490 6,793 Prepayments and other 1,113 228 ---------- ---------- Total current assets 62,891 86,978 ---------- ---------- Property , plant and equipment: Original cost 914,857 909,226 Accumulated depreciation (408,567) (385,011) ---------- ---------- Net property, plant and equipment 506,290 524,215 ---------- ---------- Other assets 14,985 39,883 ---------- ---------- Total assets $ 584,166 $ 651,076 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 5 7 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, December 31, 1995 1994 ------------- ------------ (Thousands of Dollars) Current liabilities: Notes payable to affiliates $ 40,042 $ 67,703 Accounts payable 3,746 33,166 Accrued taxes 5,083 6,814 Accrued dividends 10,663 15,261 Accrued payroll and vacations 9,189 7,280 Accrued restructuring costs and other 47,276 33,005 ---------- ---------- Total current liabilities 115,999 163,229 ---------- ---------- Long-term debt 90,000 90,000 ---------- ---------- Reserves and deferred credits: Deferred income taxes 90,626 108,402 Employee benefit obligations 64,004 57,564 Restructuring costs and other 9,710 15,142 ---------- ---------- Total reserves and deferred credits 164,340 181,108 ---------- ---------- Shareholder's equity: Common stock 12,518 12,518 Other capital 78,917 78,917 Reinvested earnings 122,392 125,304 ---------- ---------- Total shareholder's equity 213,827 216,739 ---------- ---------- Total liabilities and shareholder's equity $ 584,166 $ 651,076 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 6 8 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, --------------------------------- 1995 1994 ---------- ---------- (Thousands of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,751 $ 52,086 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 52,448 48,363 Deferred income taxes 6,827 6,433 Provision for uncollectible accounts 1,710 4,296 Changes in current assets and current liabilities (1,552) (13,987) Other - net 8,596 9,478 ---------- ---------- Net cash from operating activities 95,780 106,669 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (33,328) (34,342) ---------- ---------- Cash used in investing activities (33,328) (34,342) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt and preferred stock retired -- (5,270) Dividends paid to shareholder (35,261) (55,905) Net change in affiliate notes (27,661) (9,940) ---------- ---------- Cash used in financing activities (62,922) (71,115) ---------- ---------- Increase (decrease) in cash (470) 1,212 Cash at beginning of period 2,244 68 ---------- ---------- Cash at end of period $ 1,774 $ 1,280 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 7 9 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) (1) The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management of the Company, the condensed consolidated financial statements include all adjustments, which consist only of normal recurring accruals, necessary to present fairly the financial information for such periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's 1994 Annual Report on Form 10-K. (2) The Company follows the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). In general, FAS 71 requires companies to depreciate plant and equipment over lives approved by regulators which may extend beyond the assets' actual economic life. FAS 71 also requires deferral of certain costs based upon approvals received from regulators to recover such costs in the future. Consequently, the carrying value of certain assets and liabilities, primarily telephone plant and equipment, may be greater than that which would otherwise be recorded by unregulated enterprises. In connection with an ongoing review of the continued applicability of FAS 71, the Company has commenced a study of the economic lives of its telephone plant and equipment. The study is expected to be completed by the end of the fourth quarter of 1995. If the Company were to discontinue the application of FAS 71 and compute the effect on its telephone plant and equipment in a manner similar to the seven Regional Bell Operating Companies which have discontinued FAS 71, the after-tax charge resulting from the reduction in carrying value of the Company's property, plant and equipment, which would be non-cash in nature, is estimated to be between $100 and $150. This potential accounting charge will have no effect on the Company's customers or its liquidity and capital resources. Management expects that such a charge, which would be recorded primarily as a reduction of the net book value of the fixed assets of the Company, would not significantly affect depreciation expense on existing plant and equipment in the near future. (3) Reclassifications of prior year data have been made in the financial statements where appropriate to conform to the 1995 presentation. 8 10 CONTEL OF CALIFORNIA, INC. AND SUBSIDIARY PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K. (27) Financial Data Schedule. (b) Contel of California, Inc. filed a report on Form 8-K dated September 28, 1995 on October 2, 1995, under Item 5 "Other Events". No financial statements were filed with this report. 9 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CONTEL OF CALIFORNIA, INC. -------------------------- (Registrant) Date: October 31, 1995 Michael W. Bollinger ---------------- -------------------------------------------- Michael W. Bollinger Assistant Vice President - Controller (Principal Financial and Accounting Officer) 10 12 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1994 SEP-30-1995 1,774 0 57,015 2,519 18 62,891 914,857 408,567 584,166 115,999 90,000 12,518 0 0 201,309 584,166 230,702 230,702 86,240 173,098 0 0 8,266 49,338 21,587 27,751 0 0 0 27,751 0 0
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