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.


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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
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.
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.

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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.


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.
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
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.
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
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.
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.
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.