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 2-36292
---------------------------------------------------------
GTE SOUTH INCORPORATED
- ------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 56-0656680
- ------------------------------------ ---------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19845 N. U.S. 31, P.O. BOX 407, Westfield, Indiana 46074
- ------------------------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 317-896-6464
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH WAS REGISTERED
- ----------------------------------- --------------------------------------
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 18,936,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1994.
DOCUMENT INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1993
(INCORPORATED IN PARTS I AND II).
<PAGE>
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 11
12. Security Ownership of Certain Beneficial Owners and
Management 17
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
<PAGE>
PART I
Item 1. Business
GTE South Incorporated (the Company), was incorporated in Virginia on July 29,
1947. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
currently provides communications services in the states of Alabama, Illinois,
Kentucky, North Carolina, South Carolina and Virginia. Prior to the sale of
properties described below, the Company provided communications services in
Georgia, Tennessee and West Virginia.
On November 1, 1993, the Company in a series of transactions exchanged its
telephone plant in service, materials and supplies and customers (representing
244,000 access lines) in the state of Georgia for similar assets (including
38,000 access lines) in ALLTEL Corporation's (ALLTEL) Illinois operations and
$446 million in cash.
On December 31, 1993, the Company sold its telephone plant in service, materials
and supplies and customers (representing 123,000 access lines) in the states of
West Virginia and Tennessee to Citizens Utilities Company for $291 million in
cash.
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 served was 1,051,872 on January 1, 1989 and 968,951 December 31,
1993.
The following table denotes the access lines in the states in which the Company
operates as of December 31, 1993:
Access
State Lines Served
--------------- ------------
Kentucky 384,450
North Carolina 214,211
South Carolina 155,686
Alabama 143,542
Illinois 38,214
Virginia 32,848
------------
Total 968,951
============
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 $ 379,533 $ 371,535 $ 359,419
% of Total Revenues 40% 38% 37%
Network Access Services $ 395,480 $ 412,604 $ 340,539
% of Total Revenues 41% 42% 36%
Long Distance Services $ 28,783 $ 47,947 $ 138,249
% of Total Revenues 3% 5% 14%
Equipment Sales and Services $ 75,141 $ 79,431 $ 79,857
% of Total Revenues 8% 8% 8%
Other $ 74,360 $ 63,451 $ 45,359
% of Total Revenues 8% 7% 5%
At December 31, 1993, the Company had 4,729 employees. The Company has written
agreements with the Communications Workers of America (CWA) and International
Brotherhood of Electrical Workers (IBEW) covering approximately 3,200 of the
Company's employees. In 1993, agreements were reached on four contracts with
the CWA and two contracts with the IBEW. During 1994, three contracts with CWA
and two contracts with IBEW will expire.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the regulatory bodies of the states of
Alabama, Illinois, Kentucky, North Carolina, South Carolina and Virginia as to
its current intrastate business operations and by the Federal Communications
Commission (FCC) as to its interstate business operations. Prior to the sale of
properties described above, the state regulatory commissions in Georgia,
Tennessee and West Virginia also regulated the Company's intrastate operations.
Information regarding the Company's activities with the various regulatory
agencies and revenue arrangements with other telephone companies can be found in
Note 11 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 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.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary to
address competitive entry into the markets the Company serves.
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 (79%), company facilities
(13%), customer premises equipment (1%) and other (7%). From January 1, 1989 to
December 31, 1993, the Company made gross property additions of $1.2 billion and
property retirements of $1.5 billion. 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.
<PAGE>
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 GTE Corporation.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholders, page 32,
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 27 to
31, 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 5 to
25, 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.
<PAGE>
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 7, 1994 are listed below along with their business
experience during the past five years.
a. Identification of Directors
Director
Name Age Since Business Experience
- -------------- --- --------- -------------------------------------------
Earl A. Goode 53 1994 President, GTE South Incorporated and GTE
North Incorporated; various positions with
GTE including President - GTE Southwest
and Vice President - General
Manager/Wisconsin; Director, Legacy Fund;
Director, COMMIT; Executive Committee, GTE
North Classic; Director, Indiana State
Symphony Society; Director, INB Financial
Corporation; Director, United Way of
Central Indiana; Director, Goodwill
Industries of Central Indiana; Director,
Indianapolis Chamber of Commerce;
President's Advisory Council of Purdue
University; Dean's Advisory Council for
the Purdue University Krannert School of
Management.
Kent B. Foster 50 1994 Vice Chairman of the Board of Directors of
GTE Corporation, October 1993. President,
GTE Telephone Operations, 1989; Director,
GTE Corporation, 1992; Director, all GTE
domestic telephone subsidiaries, 1993;
Director, BC Telecom, Inc.; Director,
Compania Anonima Nacional Telefonos de
Venezuela; Director, National Bank of
Texas.
Richard M. Cahill 55 1994 Vice President - General Counsel of GTE
Telephone Operations, 1988; Director, all
GTE domestic telephone subsidiaries, 1993;
Director, GTE Vantage Incorporated, 1991;
Director, GTE Intelligent Network Services
Incorporated, 1993.
Gerald K. Dinsmore 44 1992 Senior Vice President - Finance and
Planning for GTE Telephone Operations,
1994. Vice President - Finance, GTE
Telephone Operations, 1993; Vice President
- Intermediary Customer Markets, GTE
Telephone Operations, 1991. President,
South Area, GTE Telephone Operations,
1992; Director, all GTE domestic telephone
subsidiaries, 1993.
Michael B. Esstman 47 1994 Executive Vice President-Operations, GTE
Telephone Operations, 1993; President,
Central Area, GTE Telephone Operations,
1991. President, Contel Eastern Region,
Telephone Operations Sector, 1983;
Director, AG Communications System;
Director, all GTE domestic telephone
subsidiaries, 1993.
Thomas W. White 47 1994 Executive Vice President of GTE Telephone
Operations, 1993; Senior Vice President -
General Office Staff, GTE Telephone
Operations, 1989; Director, all GTE
domestic telephone subsidiaries, 1993;
Director, Quebec-Telephone.
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.
All of the directors, with the exception of Mr. Dinsmore, were elected January
1, 1994, following the resignations from the Board of John L. Atkins, III,
Archie S. Dargan, K.v.R. Dey, Jr., Durward R. Everett, Jr., Robert H.
Hillenmeyer, John Hopkins, Mary W. Walker, Richard W. Wilkinson and John W.
Woods, III.
b. Identification of Executive Officers
Year Assumed
Current
Name Age Position Position with Company
- ----------------- --- ------------ -------------------------------
Earl A. Goode (1) 53 1994 President
James D. Blanchard (1) 53 1994 Region Vice President -
General Manager-North
(Illinois, Wisconsin)
Clare D. Coxey (1) 55 1994 Area Vice President - Public
Affairs
Margaret B. Haight (1) 45 1994 State Vice President - General
Manager - Kentucky
James T. Jeske (1) 48 1994 Area Vice President - Human
Resources
M. L. Keith, Jr. (1) 51 1994 Area Vice President - Sales
C. Sumpter Logan (2) 56 1994 Region Vice President -
General Manager - South
(Alabama, Kentucky, North
Carolina, South Carolina)
Jeffrey L. Schmitt (1) 48 1994 Area Vice President -
Regulatory and Government
Affairs
Dale E. Sporleder (1) 53 1994 Area Vice President - General
Counsel
Roger L. Utzinger (1) 47 1994 Area Vice President - Finance
Edward J. Weise (3) 49 1994 Region Vice President -
General Manager - South
(Virginia)
William D. Wilson (1) 46 1994 Area Vice President - General
Manager - East
Charles J. Somes (1) 48 1994 Secretary
Position with
GTE Telephone Operations (4)
------------------------------
Kent B. Foster 50 1989 President
Michael B. Esstman (5) 47 1993 Executive Vice President -
Operations
Thomas W. White 47 1989 Executive Vice President
Guillermo Amore 55 1990 Senior Vice President -
International
Gerald K. Dinsmore (6) 44 1993 Senior Vice President -
Finance and Planning
Robert C. Calafell (7) 52 1993 Vice President - Video
Services
A. T. Jones 54 1992 Vice President - International
Brad M. Krall (8) 52 1993 Vice President - Centralized
Services
Donald A. Hayes 56 1992 Vice President - Information
Technology
Richard L. Schaulin 51 1989 Vice President - Human
Resources
Clarence F. Bercher 50 1991 Vice President - Sales
Mark S. Feighner 45 1991 Vice President - Product
Management
Geoff C. Gould 41 1989 Vice President - Regulatory
and Governmental Affairs
G. Bruce Redditt 43 1991 Vice President - Public
Affairs
Richard M. Cahill 55 1989 Vice President and General
Counsel
Leland W. Schmidt 60 1989 Vice President - Industry
Affairs
Paul E. Miner 49 1990 Vice President - Regional
Operations Support
Katherine J. Harless 43 1992 Vice President - Intermediary
Markets
William M. Edwards, III (9) 45 1993 Controller
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.
- -----------
NOTES:
(1) Effective March 7, 1994 the following individuals became executive
officers for both GTE South Incorporated and GTE North Incorporated:
Earl A. Goode was appointed President replacing Gerald K. Dinsmore who
was appointed Senior Vice President - Finance and Planning for GTE
Telephone Operations.
James D. Blanchard was appointed Region Vice President - General Manager
- North (Illinois, Wisconsin).
Clare D. Coxey was appointed Area Vice President - Public Affairs
replacing Jorge Jackson who was appointed Area Vice President - Public
Affairs - West.
James T. Jeske was appointed Area Vice President - Human Resources
replacing Margaret B. Haight who was appointed State Vice President -
General Manager - Kentucky.
M. L. Keith, Jr. was appointed Area Vice President - Sales replacing
James D. Bennett who was appointed State Vice President - Sales for GTE
Florida Incorporated.
Jeffrey L. Schmitt was appointed Area Vice President - Regulatory and
Government Affairs replacing Bruce M. Holmberg who retired.
Dale E. Sporleder was appointed Area Vice President - General Counsel
replacing James V. Carideo who retired.
Roger L. Utzinger was appointed Area Vice President - Finance replacing
Fassil Gabremariam who was appointed State Vice President - Finance for
GTE Florida Incorporated.
William D. Wilson, previously Vice President - Business Planning for GTE
Telephone Operations, was appointed Area Vice President - General
Manager - East replacing Stephen A. Inkrott who was appointed Assistant
Vice President - Network Planning for GTE Telephone Operations.
Charles J. Somes was appointed Secretary replacing Jerry L. Austin who
retired.
Charles C. Merritt previously Regional Vice President - General
Manager/Southeast was appointed General Manager - North Carolina/South
Carolina.
(2) C. Sumpter Logan, previously Regional Vice President - General
Manager/North, was appointed Region Vice President General Manager -
South (Alabama, Kentucky, North Carolina, South Carolina) effective
March 7, 1994.
(3) Edward J. Weise, previously Regional Vice President - General
Manager/Virginia, was appointed Region Vice President - General Manager
- South (Virginia) effective March 7, 1994.
(4) Position is with, and duties are performed at, the GTE Telephone
Operations Headquarters in Irving, Texas.
(5) Michael B. Esstman was appointed Executive Vice President - Operations
effective April 25, 1993 replacing Charles A. Crain who retired on
April 1, 1993.
(6) Gerald K. Dinsmore, previously South Area President, was appointed
Senior Vice President - Finance and Planning replacing John L. Hume who
retired.
(7) Robert C. Calafell was appointed Vice President - Video Services
effective March 28, 1993.
(8) Brad M. Krall was appointed Vice President - Centralized Services
effective November 7, 1993.
(9) William M. Edwards, III, was appointed Controller effective November 21,
1993 replacing John D. Utzinger.
William E. Starkey retired November 21, 1993, George N. King retired May 21,
1993 and Clark W. Barlow retired August 21, 1993.
Item 11. Executive Compensation
Executive Compensation Tables
The following tables provide information about executive compensation.
<TABLE>
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.
<CAPTION> Long-Term Compensation
----------------------------------------------
Annual Compensation(2) Awards Payments
-------------------------------------- ------------------ ------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Annual Reserved LTIP All Other
Name and Principal Compensation Stock Options Payments Compensations
Position in Group(1) Year Salary($)(1) Bonus($) ($) Awards(#) SARs(#) ($) ($)(5)
- ---------------------- ---- ----------- -------- ------------ --------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore 1993 68,286 66,312 39,973 -- 14,500 4,743 1,989
President (3) 1992 22,998 22,128 241 -- 16,200 -- 620
C. Sumpter Logan 1993 116,540 25,721 3,530 -- 2,700 -- 3,496
Regional Vice President 1992 146,517 91,089 12,579 -- -- -- 4,395
General Manager/North 1991 173,033 124,300 18,520 -- 7,900 -- --
Charles C. Merritt 1993 76,753 22,850 2,398 -- 2,700 -- 2,303
Regional Vice President - 1992 96,151 40,443 1,178 -- -- -- --
General Manager/Southeast 1991 119,549 51,900 2,132 -- 3,000 -- --
Stephen A. Inkrott 1993 50,279 23,653 1,747 -- 4,900 -- 1,508
Area Vice President - 1992 52,806 31,579 7,797 -- 5,500 -- 1,584
General Manager (4) 1991 30,551 16,583 8,786 -- 3,300 -- 836
Kent B. Foster 1993 35,136 32,274 1,707 -- 58,800 7,108 395
President 1992 41,280 48,230 808 -- -- 15,014 526
GTE Telephone Operations 1991 36,111 48,813 2,796 -- 133,300 20,368 528
<FN>
- ----------
(1) Individual was an officer for GTE South Incorporated at December 31,
1993.
(2) Annual Compensation represents the Company's pro rata share of salaries,
bonuses and other annual compensation. Total annual cash compensation
for Messrs. Dinsmore, Logan, Merritt, Inkrott and Foster, for whom
allocated amounts are shown above is $544,684, $248,833, $174,093,
$236,127 and $1,129,356 for 1993, respectively.
(3) Mr. Dinsmore became president in October 1992. Mr. Dinsmore was
appointed Senior Vice President - Finance and Planning for GTE Telephone
Operations effective March 1994. Earl Goode replaced Mr. Dinsmore as
President.
(4) Mr. Inkrott was elected Area Vice President - General Manger in June
1991.
(5) All other compensation includes Company contributions to defined
contribution plans.
</TABLE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the named executive officers
of the Company in 1993. Pursuant to Securities and Exchange Commission (the
SEC) rules, the table also shows the value of the options granted at the end of
the option terms (ten years) if the stock price were to appreciate annually by
5% and 10%, respectively. There is no assurance that the stock price will
appreciate at the rates shown in the table. The table also indicates that if
the stock price does not appreciate, there will be no increase in the potential
realizable value of the options granted.
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants(1) Option Term
-------------------------------------------------- --------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Total
Options/
SARs Granted Exercise
to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/SH) Date 0% 5% 10%
- ------------------ ----------- ------------ -------- ---------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore 14,500 0.73% $35.0625 2/15/03 $0 $ 319,734 $ 810,269
C. Sumpter Logan 2,700 0.14 35.0625 2/15/03 0 59,537 150,878
Charles C. Merritt 2,700 0.14 35.0625 2/15/03 0 59,537 150,878
Stephen A. Inkrott 4,900 0.25 35.0625 2/15/03 0 108,048 273,815
Kent B. Foster 48,400 2.42 35.0625 2/15/03 0 1,067,249 2,704,621
10,400 0.52 37.6250 10/12/03 0 246,087 623,632
<FN>
- ----------
(1) Under the Long-Term Incentive Plan, options are presently granted with
tandem stock appreciation rights ("SARs"). One-third of these grants vest
annually commencing one year after the date of grant.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
The following table provides information as to options and stock appreciation
rights exercised by each of the named executive officers of the Company during
1993 and the value of options and stock appreciation rights held by such
officers at year-end measured in terms of the closing price of GTE Common Stock
on December 31, 1993.
<CAPTION>
(a) (b) (c) (d) (e)
Value of Unexercised
Shares Number of Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at YE-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore 0 $ 0 9,732 27,468 $ 24,328 $ 27,947
C. Sumpter Logan 0 0 15,066 5,334 129,485 8,396
Charles C. Merritt 0 0 6,400 3,700 58,975 3,188
Stephen A. Inkrott 0 0 9,788 10,334 85,426 15,403
Kent B. Foster 70,517 1,447,800 99,450 125,450 341,551 212,447
</TABLE>
Long-Term Incentive Plan - Awards in Last Fiscal Year
The GTE Long-Term Incentive Plan (LTIP) provides for awards, currently in the
form of stock options with tandem stock appreciation rights and cash bonuses,
to participating employees. The stock options and stock appreciation rights
awarded under the LTIP to the five most highly compensated individuals in 1993
are shown in the table on page 11.
Under the LTIP, performance bonuses are paid in cash based on the achievement
of pre-established goals for GTE's return on equity (ROE) over a three-year
award cycle. Performance bonuses are denominated in units of GTE Common Stock
("Common Stock Units") and are maintained in a Common Stock Unit Account.
At the time performance targets are established for the three-year cycle, a
Common Stock Unit Account is set up for each participant who is eligible to
receive a cash award under the LTIP. An initial dollar amount for each account
is determined based on the competitive performance bonus grant practices of
other major companies in the telecommunications industry and with other
selected corporations that are comparable to GTE in terms of revenue, market
value and other quantitative measures. That amount is then divided by the
average market price of GTE Common Stock for the calendar week preceding the
day the account is established to determine the number of Common Stock Units in
the account. The value of the account increases or decreases based on the
market price of the GTE Common Stock. An amount equal to the dividends
declared on an equivalent number of shares of GTE Common Stock is added each
time a dividend is paid. This amount is then converted into the number of
Common Stock Units obtained by dividing the amount of the dividend by the
average price of the GTE Common Stock on the composite tape of the New York
Stock Exchange on the dividend payment date and added to the Common Stock Unit
Account. Messrs. Dinsmore and Foster are the only individuals of the five most
highly compensated individuals eligible to receive a cash award under the LTIP.
The number of Common Stock Units initially allocated in 1993 to their accounts
and estimated future payouts under the LTIP are shown in the following table.
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans(1)
--------------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of Or Other
Shares, Units Period Until
Or Other Maturation
Name Rights Or Payout Threshold(2) Target(3) Maximum(5)
- ------------------ ------------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Gerald K. Dinsmore 2,000 3 Years 468 2,341
C. Sumpter Logan 0 N/A 0 0
Charles C. Merritt 0 N/A 0 0
Stephen A. Inkrott 0 N/A 0 0
Kent B. Foster (4) 6,100 3 Years 1,428 7,139
670 2 Years 149 743
326 1 Year 69 343
1,620 26 Months 365 1,827
854 14 Months 183 913
119 2 Months 24 121
<FN>
- ----------
(1) It is not possible to predict future dividends and, accordingly,
estimated Common Stock Unit accruals in this table are calculated for
illustrative purposes only and are based upon the dividend rate and
price of GTE Common Stock at the close of business on December 31, 1993.
The target award is the dollar amount derived by multiplying the Common
Stock Unit balance at the end of the award cycle by the price of GTE
Common Stock.
(2) The level of average ROE during the cycle which represents minimum
acceptable performance and which, if attained, results in payment of 20%
of the target award. Below the minimum acceptable performance level, no
award is earned.
(3) The average ROE target during the cycle which represents outstanding GTE
performance and which, if attained, results in payment of 100% of the
target award.
(4) The award of 6,100 units to Mr. Foster represents the grant for the 1993-
95 performance period made while he was President - GTE Telephone
Operations. The other grants shown are incremental, prorated awards
made when his position was reclassified and when he was promoted to Vice
Chairman - GTE Corporation, as well as President - GTE Telephone
Operations and apply to the original targets under the 1993-95, 1992-94
and 1991-93 performance periods.
(5) This column has intentionally been left blank because it is not possible
to determine the maximum award until the award cycle has been completed.
The maximum amount of the award is limited by the amount the actual ROE
exceeds the targeted ROE. If GTE's average ROE during the cycle exceeds
the performance target, additional bonuses may be earned according to
the following schedule:
Performance Increment Above Added Percentage
Maximum ROE Performance Target to Maximum Awards
---------------------------------------------------------------
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
For example, if average ROE performance exceeds the ROE target by 0.5%, the
performance bonus will equal 114% of the target award.
</TABLE>
Executive Agreements
GTE has entered into agreements (the Agreements) with Messrs. Dinsmore and
Foster regarding benefits to be paid in the event of a change in control of GTE
(a "Change in Control").
A Change in Control is deemed to have occurred if a majority of the members of
the Board do not consist of members of the incumbent Board (as defined in the
Agreements) or if, in any 12-month period, three or more directors are elected
without the approval of the incumbent Board. An individual whose initial
assumption of office occurred pursuant to an agreement to avoid or settle a
proxy or other election contest is not considered a member of the incumbent
Board. In addition, a director who is elected pursuant to such a settlement
agreement will not be deemed a director who is elected or nominated by the
incumbent Board for purposes of determining whether a Change in Control has
occurred. A Change in Control will not occur in the following situations: (1)
certain merger transactions in which there is at least 50% GTE shareholder
continuity in the surviving corporation, at least a majority of the members of
the board of directors of the surviving corporation consists of members of the
Board of GTE and no person owns more than 20% (or under certain circumstances,
a lower percentage, not less than 10%) of the voting power of the surviving
corporation following the transaction, and (2) transactions in which GTE's
securities are acquired directly from GTE.
The Agreements provide for benefits to be paid in the event this individual
separates from service and has a "good reason" for leaving or is terminated
without "cause" within two years after a Change in Control of GTE.
Good reason for leaving includes but is not limited to the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.
An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his or her other percentage awards under the EIP for the previous
three years. The executive will also continue to receive medical and life
insurance coverage for up to two years and will be provided with financial and
outplacement counseling.
In addition, the Agreements with Messrs. Dinsmore and Foster provide that in
the event of a separation from service, they will receive service credit in the
following amounts: two times years of service otherwise credited if the
executive has five or fewer years of credited service; 10 years if credited
service is more than five and not more than 10 years; and, if the executive's
credited service exceeds 10 years, the actual number of credited years of
service. These additional years of service will apply towards vesting,
retirement eligibility, benefit accrual and all other purposes under the
Supplemental Executive Retirement Plan and the Executive Retired Life Insurance
Plan. In addition, each executive will be considered to have not less than 76
points and 15 years of accredited service for the purpose of determining his or
her eligibility for early retirement benefits. However, there will be no
duplication of benefits.
The Agreements remain in effect until the earlier of July 1 of each successive
year or the date on which the executive reaches age 65, unless the Agreement is
terminated earlier pursuant to its terms. The Agreements will be automatically
renewed on each successive July 1 unless, not later than December 31 of the
preceding year, one of the parties notifies the other that he does not wish to
extend the Agreement. If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.
Retirement Programs
Pension Plans
The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings and years of employment, are illustrated
in the table below:
PENSION PLAN TABLE
Years of Service
Final Average ------------------------------------------------------------
Earnings 15 20 25 30 35
- -----------------------------------------------------------------------------
$ 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
400,000 85,979 114,638 143,298 172,957 200,617
500,000 107,729 143,638 179,548 215,457 251,367
600,000 129,479 172,638 215,798 258,957 302,117
700,000 151,229 201,638 252,048 302,457 352,867
800,000 172,979 230,638 288,298 345,957 403,617
900,000 194,729 259,638 324,548 389,457 454,367
1,000,000 216,479 288,638 360,798 432,957 505,117
1,200,000 259,979 346,638 433,298 519,957 606,617
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains a
noncontributory pension plan for the benefit of GTE employees based on years of
service. Pension benefits to be paid from this plan and contributions to this
plan are related to basic salary exclusive of overtime, differentials,
incentive compensation (except as otherwise described) and other similar types
of payment. Under this plan, pensions are computed on a two-rate formula basis
of 1.15% and 1.45% for each year of service, with the 1.15% service credit
being applied to that portion of the average annual salary for the five highest
consecutive years that does not exceed the Social Security Integration Level
(the portion of salary subject to the Federal Security Act), and the 1.45%
service credit being applied to that portion of the average annual salary that
exceeds said level. As of March 7, 1993, the credited years of service under
the plan for Messrs. Dinsmore, Logan, Merritt, Inkrott and Foster are 18, 33,
30, 28 and 23, respectively.
Under Federal law, an employee's benefits under a qualified pension plan such
as the GTE Service Corporation plan are limited to certain maximum amounts.
GTE maintains a Supplemental Executive Retirement Plan (SERP), which
supplements the benefits of any participant in the qualified pension plan by
direct payment of a lump sum or by an annuity, on an unfunded basis, of the
amount by which any participant's benefits under the GTE Service Corporation
pension plan are limited by law. In addition, the SERP includes a provision
permitting the payment of additional retirement benefits determined in a
similar manner as under the qualified pension plan on remuneration accrued
under management incentive plans as determined by the Executive Compensation
and Organizational Structure Committee.
Executive Retired Life Insurance Plan
The Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Dinsmore,
Logan, Merritt, Inkrott and Foster 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.
Directors' Compensation
The current directors, all of whom are employees of GTE, are not paid any fees
or renumeration, as such, for services on the Board.
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 of GTE Corporation 18,936,000 100%
GTE South One Stamford Forum shares of
Incorporated Stamford, record
Connecticut 06904
(b) Security Ownership of Management as of December 31, 1993:
Common Stock of Name of Director or Nominee No director
GTE Corporation Kent B. Foster 168,299 or nominee or
Thomas W. White 83,071 executive
Michael B. Esstman 54,051 officer owns
Gerald K. Dinsmore 18,503 as much as
Richard M. Cahill 37,188 1/10 of
------- 1 percent
361,112
=======
Executive Officers(1)(2)
Gerald K. Dinsmore 18,503
C. Sumpter Logan 33,072
Charles C. Merritt 8,032
Stephen A. Inkrott 21,102
Kent B. Foster 168,299
-------
249,008
=======
All directors and executive Represents
officers as a group(1)(2) 782,371 less than 1/10
======= of 1 percent
of outstanding
common stock.
- ----------
(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.
Dinsmore, Logan, Merritt, Inkrott and Foster and all directors and
executive officers as a group are 16,798; 15,966; 7,300; 13,232;
115,583; and 528,655 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 5 - 25 for the year ended December
31, 1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Balance Sheets - December 31, 1993 and 1992.
Statements of Income for the years ended December 31, 1993-1991.
Statements of Reinvested Earnings for the years ended December 31,
1993-1991.
Statements of Cash Flows for the years ended December 31,
1993-1991.
Notes to 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 21
Schedules:
V - Property, Plant and Equipment 22-24
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 25
VIII - Valuation and Qualifying Accounts 26
X - Supplementary Income Statement Information 27
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.
3-1* Restated Articles of Incorporation dated August 24,
1990.(Exhibit 3-1 of the 1989 Form 10-K, File No. 2-36292).
3-2* Amended By-Laws, effective January 1, 1988, File No. 2-36292.
4-1* Indenture of Mortgage and Deed of Trust dated November 1,
1947, as supplemented by the Thirty-First Supplemental
Indenture dated September 15, 1989, File No. 33-17141 and the
Thirty-Second Supplemental Indenture dated June 15, 1990, File
No. 33-35027.
4-2* Indenture dated as of October 1, 1992 between GTE South
Incorporated and Chemical Bank Trustee as supplemented by the
First Supplemental Indenture dated as of November 15, 1992,
File No. 33-53348.
10* Salary Continuation Arrangements in the Event of a Change in
Control, File No. 2-36292.
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.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE South Incorporated:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in GTE South Incorporated'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 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 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.
<PAGE>
<TABLE>
GTE SOUTH INCORPORATED
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- --------------------------------------- ---------- --------- ----------- ------------ ----------
Balance at Additions Retirements Other Debits Balance at
Beginning at Cost or Sales or (Credits) Close of
Classification of Year (Note 1) (Note 2) (Note 3) Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 15,296 $ 57 $ 1,661 $ (607) $ 13,085
Buildings 187,545 6,482 55,025 9,172 148,174
Central office equipment 1,125,944 108,340 390,925 25,560 868,919
Station apparatus 45,468 2,458 15,311 (1,076) 31,539
Cable/underground conduit, etc. 1,352,223 86,173 479,077 35,172 994,491
Furniture and office equipment 126,948 7,096 45,072 4,097 93,069
Vehicles and other work equipment 77,379 5,815 33,918 7,846 57,122
Telephone plant under construction 46,457 (3,271) -- -- 43,186
Property held for future telephone use -- -- -- 67 67
Telephone plant acquisition adjustment -- -- -- 28,930 28,930
---------- ---------- ---------- ---------- ----------
Total Telephone Plant 2,977,260 213,150 1,020,989 109,161 2,278,582
NONREGULATED PLANT 124,792 5,969 36,625 (3,317) 90,819
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $3,102,052 $ 219,119 $1,057,614 $ 105,844 $2,369,401
========== ========== ========== ========== ==========
<FN>
- -------------------------------------------
NOTES:
(1) Reconciliation of additions at cost:
Additions at cost per Schedule V $ 219,119
Acquisition of assets in Illinois (42,919)
Other (481)
----------
Total $ 175,719
==========
(2) All retirements or sales in Column D were charged to
accumulated depreciation (Schedule VI, Note 2), including
costs associated with the disposition of Georgia, Tennessee
and West Virginia.
(3) Primarily represents costs associated with the disposition of
Georgia, Tennessee and West Virginia, adjustments to the reserve
in 1993 due to the adoption of SFAS No. 109 and
transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE SOUTH INCORPORATED
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
---------- ---------- ----------- ------------- ----------
Balance at Retirements Other Debits Balance at
Beginning Additions or Sales or (Credits) Close of
Classification of Year at Cost (Note 1) (Note 2) Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 14,433 $ 1,334 $ -- $ (471) $ 15,296
Buildings 181,213 9,480 2,336 (812) 187,545
Central office equipment 1,029,189 153,606 66,847 9,996 1,125,944
Station apparatus 43,775 2,231 924 386 45,468
Cable/underground conduit, etc. 1,271,487 129,598 59,654 10,792 1,352,223
Furniture and office equipment 125,063 11,119 854 (8,380) 126,948
Vehicles and other work equipment 76,095 9,135 6,857 (994) 77,379
Telephone plant under construction 130,662 (80,552) -- (3,653) 46,457
Property held for future telephone use 247 (257) -- 10 --
Telephone plant acquisition adjustment -- (37) -- 37 --
---------- ---------- ---------- ---------- ----------
Total Telephone Plant 2,872,164 235,657 137,472 6,911 2,977,260
NONREGULATED PLANT 106,524 5,085 2,782 15,965 124,792
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $2,978,688 $ 240,742 $ 140,254 $ 22,876 $3,102,052
========== ========== ========== ========== ===========
<FN>
- -----------------------------------------
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(2) Represents adjustments in 1992 due to adoption of SFAS No. 109 and
transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE SOUTH INCORPORATED
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------------- ---------- ---------- ----------- ----------- -----------
Balance at Retirements Other Debits Balance at
Beginning Additions or Sales or (Credits) Close of
Classification of Year at Cost (Note 1) (Note 2) Year
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT, stated at original cost:
Land $ 15,888 $ 213 $ -- $ (1,668) $ 14,433
Buildings 185,773 8,986 1,273 (12,273) 181,213
Central office equipment 998,877 97,199 66,887 -- 1,029,189
Station apparatus 42,498 1,420 143 -- 43,775
Cable/underground conduit, etc. 1,258,674 65,611 52,798 -- 1,271,487
Furniture and office equipment 106,583 11,672 250 7,058 125,063
Vehicles and other work equipment 71,950 9,576 7,691 2,260 76,095
Telephone plant under construction 84,357 46,247 -- 58 130,662
Property held for future telephone use 340 -- -- (93) 247
---------- ----------- ---------- ---------- -----------
Total Telephone Plant 2,764,940 240,924 129,042 (4,658) 2,872,164
NONREGULATED PLANT 96,935 6,701 1,770 4,658 106,524
---------- ---------- ---------- ---------- ----------
Total Property, Plant and Equipment $2,861,875 $ 247,625 $ 130,812 $ -- $2,978,688
========== ========== ========== ========== ==========
<FN>
- ------------------------------------------
NOTES:
(1) Reconciliation of retirements or sales charged to
accumulated depreciation:
Retirement or sales per Schedule VI, Note 2 $ 130,529
Other 283
----------
Total retirements or sales per Column D above $ 130,812
==========
Retirements include write-offs of customer premises
equipment due to deregulation by the FCC.
(2) Primarily represents prior-year adjustments to conform to
the current year presentation and transfers in accordance
with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE SOUTH INCORPORATED
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- --------------------------------- ------------ --------- ----------- ---------- -----------
Additions
Balance at Charged to Retirements Other Balance at
Beginning of Income or Sales Charges Close of
Description Year (Note 1) (Note 2) (Note 3) Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated depreciation and
amortization for the year ended:
December 31, 1993 $1,057,456 $ 208,153 $1,054,277 $ 663,232 $ 874,564
========== ========== ========== ========== ==========
December 31, 1992 $ 985,172 $ 205,670 $ 140,191 $ 6,805 $1,057,456
========== ========== ========== ========== ==========
December 31, 1991 $ 916,224 $ 203,150 $ 130,529 $ (3,673) $ 985,172
========== ========== ========== ========== ==========
<FN>
- -----------------------------------
NOTES:
(1) Reference is made to Note 1 of Notes to Financial
Statements with respect to depreciation policy: 1993 1992 1991
---------- ---------- ----------
Total as shown in Statements of Income $ 207,324 $ 206,905 $ 203,108
Other 829 (1,235) 42
---------- ---------- ----------
Total as shown above $ 208,153 $ 205,670 $ 203,150
========== ========== ==========
(2) Represents: Retirements or sales credited to property,
plant and equipment (Schedule V) $1,057,614 $ 140,254 $ 130,812
Other (3,337) (63) (283)
---------- ---------- ----------
Total as shown above $1,054,277 $ 140,191 $ 130,529
========== ========== ==========
(3) Represents: Salvage (including amounts related to
properties sold in 1993) $ 621,720 $ 7,357 $ 5,268
Removal costs (8,078) (10,118) (10,269)
Other 49,590 9,566 1,328
---------- ---------- ----------
Total as shown above $ 663,232 $ 6,805 $ (3,673)
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
GTE SOUTH INCORPORATED
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------ ---------- ---------------------- ---------- ----------
Additions
----------------------
Charged Deductions
Balance at Charged to Other from Balance at
Beginning to Accounts Reserves Close of
Description of Year Income (Note 1) (Note 2) Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1993 $ 7,743 $ 18,250 $ 17,497 $ 33,808 $ 9,682
========== ========== ========== ========== ==========
December 31, 1992 $ 2,273 $ 16,165 $ 16,059 $ 26,754 $ 7,743
========== ========== ========== ========== ==========
December 31, 1991 $ 3,948 $ 10,056 $ 10,743 $ 22,474 $ 2,273
========== ========== ========== ========== ==========
<FN>
- ------------------------------------
NOTES:
(1) Recoveries of previously written off amounts.
(2) Charges for purpose for which reserve was created.
Represents write-offs of receivable accounts.
</TABLE>
<PAGE>
GTE SOUTH INCORPORATED
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 $ 149,645 $ 145,448 $ 160,163
========== ========== ==========
Taxes, other than payroll and
income, are as follows:
Real and personal property $ 24,353 $ 23,879 $ 22,870
State gross receipts 4,425 4,240 3,691
Other 3,969 4,167 4,265
Portion of above taxes charged
to plant and other accounts (2,977) (3,258) (2,901)
---------- ---------- ----------
Total $ 29,770 $ 29,028 $ 27,925
========== ========== ==========
<PAGE>
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.
GTE SOUTH INCORPORATED
-----------------------------
(Registrant)
Date March 21, 1994 By EARL A. GOODE
--------------------- --------------------------
EARL A. GOODE
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.
EARL A. GOODE President and Director March 21, 1994
- ------------------------ (Principal Executive Officer)
EARL A. GOODE
GERALD K. DINSMORE Senior Vice President - Finance March 21, 1994
- ------------------------ and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 21, 1994
- ------------------------ (Principal Accounting Officer)
WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 21, 1994
- ------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 21, 1994
- ------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 21, 1994
- ------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 21, 1994
- ------------------------
THOMAS W. WHITE
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
of
GTE SOUTH INCORPORATED
For the year ended December 31, 1993
<PAGE>
PRESIDENT'S REPORT
- ------------------------------------------------------------------------------
ACQUISITIONS AND DIVESTITURES WERE PART OF AN ACTIVE REPOSITIONING
EFFORT
Two definitive agreements were reached and consummated during 1993 as part of
the Company's aggressive repositioning activities. Through an agreement with
ALLTEL, we traded GTE South access lines in Georgia for ALLTEL properties in
Illinois (38,000 access lines) and $446 million in cash. On November 1, more
than 244,000 customer access lines in Georgia were transferred to ALLTEL.
A definitive agreement was announced May 19 for GTE South to sell
56,000 access lines in Tennessee and 67,000 access lines in West
Virginia to Citizens Utilities of Stamford, Connecticut. Following
receipt of all necessary approvals, this sale was closed December 31.
GTE received $291 million in this transaction. All of these changes
were carefully planned with our firm commitment to customer needs and
our ongoing efforts to achieve market leadership in voice, video and
data communications.
PARTNERSHIPS STRENGTHEN OUR EXPANSION OF TECHNOLOGY
In a unique public-private partnership, GTE South joined the State of
North Carolina and two other telcos in announcing the North Carolina
Information Highway in May 1993. The Highway's ATM/SONET-based
broadband technology will bring advanced communications capabilities
via the public-switched network to education, health care and criminal
justice sites statewide during third quarter 1994. Private users are
slated for access by early 1995.
In South Carolina, GTE South was a partner in the first full-fledged
use of telemedicine when a rural hospital in Winnsboro was connected
with the University of South Carolina School of Medicine and Richland
Memorial Hospital in Columbia. The Research Triangle Park, North
Carolina area was the site of GTE South's successful Tele-Go PCS trial
and an advanced medical imaging cancer research project - VISTA net -
carried out with Microelectronics Center of North Carolina, the
University of North Carolina Medical Center and Southern Bell.
There was a strong focus on education for many GTE South states in
1993. We took a big step in 1993 in encouraging the use of
telecommunications in the classroom by establishing "GTE School
Connections," a pilot program which awarded several $5,000 grants to
classroom teachers.
------------------------------
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------------------------------
EARL A. GOODE
President
Classroom Communication Service, a discounted telephone rate for
classroom instruction, was introduced in Alabama in 1993. Distance
Learning opportunities are enhanced as a result of the greater
affordability of this service. And, in three Kentucky counties, we
launched the GTE Reading Challenge program reaching more than 600
students.
A SLUGGISH ECONOMY AND ONE-TIME WRITE-OFFS IMPACTED GTE SOUTH'S NET
INCOME
Sluggish economic conditions and interexchange carrier price
reductions contributed to a decrease in revenues from $975 million in
1992 to $953 million in 1993. Net income for 1993 was $61 million
which included the net of tax impact from adopting SFAS No. 106 of $13
million and a one-time restructuring charge of $61 million.
SALES AND SERVICE PURSUES DATA AND BROADBAND MARKETS
Our Sales and Service organization placed a top priority on data
competency since the transfer of data makes up a large part of
customers' needs. An extensive training program was held for
employees. GTE South continues to aggressively pursue the broadband
video market by promoting solutions in education, health care and
business.
NETWORK ENHANCEMENTS AND CHANGE ALLOW GTE SOUTH TO MEET CUSTOMER NEEDS
During 1993, we invested $176 million to upgrade our technology
platforms and enhance the quality of the products and services we
deliver to our customers. Two of our significant network improvements
were the installation of more than 1,200 miles of fiber-optic cable
and our continued deployment of the latest digital technology. Nearly
95 percent of our access lines are now served by digital switching.
In October, a new Operator Services Mega Center opened in Lexington,
Kentucky, to provide toll and directory service for several South Area
states with additional ones being transitioned during 1994. A Branch
Sales Office serving strategic business customers in GTE South's
territory was established in Durham, North Carolina, during 1993. GTE
South was a pioneer in offering Express Dialtone SM, a service that
leaves restricted dialtone on vacant residential and one-party
business lines and allows customers to call GTE South from their new
residence or business to order new service or check on previously
ordered service. To underscore our firm commitment to quality customer
service, we began offering our customers a Service Performance
Guarantee during 1993.
We accomplished many significant achievements in 1993 through the
dedication of our employees. And it is because of that employee
commitment that I'm confident we will further enhance GTE's market
leadership in 1994.
Earl A. Goode
President
TRANSFER AGENT AND REGISTRAR
GTE Corporation
c/o Bank of Boston
P.O. Box 9191
Boston, Massachusetts 02205-9191
FOR A COPY OF THE 1993 ANNUAL REPORT OF OUR PARENT COMPANY, PLEASE
WRITE TO:
GTE Corporation
One Stamford Forum
Stamford,Connecticut 06904
FOR A COPY OF THE 1993 ANNUAL FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, PLEASE WRITE TO:
GTE Telephone Operations
Financial Reporting
P.O.Box 407, MC INAAACG
Westfield, IN 46074
(317) 896-6464
LEADERSHIP
- ------------------------------------------------------------------------------
Officers
EARL A. GOODE
President
JAMES D. BLANCHARD
Region Vice President-General Manager-
North (Illinois, Wisconsin)
CLARE D. COXEY
Area Vice President-Public Affairs
GERALD K. DINSMORE
Senior Vice President-
Finance and Planning
MARGARET B. HAIGHT
State Vice President-
General Manager-Kentucky
JAMES T. JESKE
Area Vice President-Human Resources
M. L. KEITH, JR.
Area Vice President-Sales
C. SUMPTER LOGAN
Region Vice President-General Manager-
South (Alabama, Kentucky,
North Carolina, South Carolina)
JEFFREY L. SCHMITT
Area Vice President-Regulatory
and Government Affairs
DALE E. SPORLEDER
Area Vice President-General Counsel
ROGER L. UTZINGER
Area Vice President-Finance
EDWARD J. WEISE
Region Vice President-General Manager-
South (Virginia)
WILLIAM D. WILSON
Area Vice President-General Manager-
East
WILLIAM M. EDWARDS, III
Controller
CHARLES J. SOMES
Secretary
- ------------------------------------------------------------------------------
Board of Directors
RICHARD M. CAHILL
Vice President-General Counsel
GTE Telephone Operations
GERALD K. DINSMORE
Senior Vice President-Finance
and Planning
GTE Telephone Operations
MICHAEL B. ESSTMAN
Executive Vice President-
Operations
GTE Telephone Operations
KENT B.FOSTER
President
GTE Telephone Operations
EARL A. GOODE
President
GTE South Incorporated
THOMAS W. WHITE
Executive Vice President
GTE Telephone Operations
FINANCIAL REPORT
- ------------------------------------------------------------------------------
Statements of Income
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
OPERATING REVENUES (a):
Local network services $379,533 $371,535 $359,419
Network access services 395,480 412,604 340,539
Long distance services 28,783 47,947 138,249
Equipment sales and services 75,141 79,431 79,857
Other 74,360 63,451 45,359
- ------------------------------------------------------------------------------
953,297 974,968 963,423
- ------------------------------------------------------------------------------
OPERATING EXPENSES (b):
Cost of sales and services 207,570 204,825 220,457
Depreciation and amortization 207,324 206,905 203,108
Marketing, selling, general and
administrative 305,968 279,689 301,943
Restructuring costs 99,583 _ _
- ------------------------------------------------------------------------------
820,445 691,419 725,508
- ------------------------------------------------------------------------------
NET OPERATING INCOME 132,852 283,549 237,915
- ------------------------------------------------------------------------------
Other (income) deductions:
Interest expense 69,519 67,778 69,648
Gain on disposition of assets (63,112) _ _
Other - net (414) (1,174) (2,293)
- ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 126,859 216,945 170,560
- ------------------------------------------------------------------------------
INCOME TAXES 65,513 79,691 56,388
- ------------------------------------------------------------------------------
NET INCOME $ 61,346 $137,254 $114,172
- ------------------------------------------------------------------------------
(a) Includes billings to affiliates of $31,558, $34,600 and $32,800
for the years 1993-1991, respectively.
(b) Includes billings from affiliates of $63,743, $88,805 and $115,572
for the years 1993-1991, respectively.
Statements of Reinvested Earnings
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
BALANCE AT BEGINNING OF YEAR $464,427 $409,259 $384,851
ADD -
Net income 61,346 137,254 114,172
DEDUCT -
Cash dividends declared on common 281,498 81,900 89,567
stock
Cash dividends declared on preferred 177 186 197
stock
- ------------------------------------------------------------------------------
BALANCE AT END OF YEAR $244,098 $464,427 $409,259
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
Balance Sheets
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash $ 7,937 $ 4,863
Accounts receivable
Customers (including unbilled 76,839 145,576
revenues)
Affiliated companies 23,016 15,749
Other 55,552 41,210
Allowance for uncollectible accounts (9,682) (7,743)
Note receivable from affiliate 328,328 _
Materials and supplies, at average 21,040 32,373
cost
Deferred income tax benefits 47,935 _
Prepayments and other 7,895 5,888
- ------------------------------------------------------------------------------
558,860 237,916
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 2,369,401 3,102,052
Accumulated depreciation (874,564) (1,057,456)
- ------------------------------------------------------------------------------
1,494,837 2,044,596
- ------------------------------------------------------------------------------
Other assets 109,403 43,879
- ------------------------------------------------------------------------------
Total assets $2,163,100 $2,326,391
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 24,200 $ 16,700
Current maturities of long-term debt 452 7,345
Accounts payable 32,925 84,252
Affiliate payables and accruals 17,500 22,031
Advanced billings and customer 18,514 27,593
deposits
Accrued taxes 184,560 33,334
Accrued interest 241 15,400
Accrued payroll and vacations 25,584 26,376
Accrued dividends 204,020 3,881
Accrued restructuring costs and other 130,465 11,810
- ------------------------------------------------------------------------------
638,461 248,722
- ------------------------------------------------------------------------------
LONG-TERM DEBT 373,700 764,050
- ------------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 264,851 334,244
Deferred investment tax credits 13,911 23,791
Restructuring costs and other 149,855 12,755
- ------------------------------------------------------------------------------
428,617 370,790
- ------------------------------------------------------------------------------
PREFERRED STOCK, SUBJECT TO MANDATORY 3,225 3,403
REDEMPTION
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 412 412
Common stock (18,936,000 shares 473,400 473,400
outstanding)
Other capital 1,187 1,187
Reinvested earnings 244,098 464,427
- ------------------------------------------------------------------------------
719,097 939,426
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,163,100 $2,326,391
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
Statements of Cash Flows
- ------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,346 $ 137,254 $ 114,172
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 207,324 206,905 203,108
Restructuring costs 99,583 _ _
Deferred income taxes and investment
tax credits (154,963) 16,695 (827)
Provision for uncollectible accounts 18,250 16,165 10,056
Gain on disposition of assets, net
of tax (25,095) _ _
Change in current assets and current
liabilities 64,614 (51,534) 2,250
Other - net 68,379 (13,592) (11,129)
- ------------------------------------------------------------------------------
Net cash from operating activities 339,438 311,893 317,630
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (175,719) (240,742) (247,625)
Acquisition of assets (42,919) _ _
Proceeds from sale of assets 806,683 _ _
Note receivable from affiliate (328,328) _ _
Other - net (118,816) (2,544) (4,552)
- ------------------------------------------------------------------------------
Net cash provided from (used in) 140,901 (243,286) (252,177)
investing activities
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued _ 74,264 _
Long-term debt and preferred stock (403,229) (6,079) (7,059)
retired
Dividends paid to shareholders (81,536) (100,221) (87,292)
Increase (decrease) in short-term debt 7,500 (50,450) 38,250
- ------------------------------------------------------------------------------
Net cash used in financing (477,265) (82,486) (56,101)
activities
- ------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH: 3,074 (13,879) 9,352
Beginning of year 4,863 18,742 9,390
- ------------------------------------------------------------------------------
End of year $ 7,937 $ 4,863 $ 18,742
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
Notes To Financial Statements
1. Summary of Accounting Policies
GTE South Incorporated (the Company) is
a wholly-owned subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
PURCHASES
Certain affiliated companies supply construction and maintenance
materials, supplies and equipment to the Company.These purchases
amounted to $88.1 million, $82.9 million and $74.6 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 also billed for printing and other costs for the
production of telephone directories, data processing services and
equipment rentals, and receives management, consulting, research and
development and pension management services from other affiliated
companies. These charges amounted to $63.7 million, $88.8 million and
$115.6 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.
REVENUES
The Company has an agreement with GTE Directories Corporation (100%
owned by GTE), whereby the Company provides its subscriber lists,
billing and collection and other services. Revenues from these
services amounted to $31.6 million, $34.6 million and $32.8 million
for the years 1993-1991, respectively.
TELEPHONE PLANT
Maintenance and repairs of property 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 7.8%, 7.0% and 7.3% 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.
MATERIALS AND SUPPLIES
Materials 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
postretirement 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 8, 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, exceeds
the carrying value by approximately $27 million and $32 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
$99.6 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 $39.2 million
to upgrade or replace existing customer service and administrative
systems and enhance network software, $44.4 million for employee
separation benefits associated with workforce reductions and $12.0
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 $8.1
million which reduced net income by $5.1 million.
In March 1991, the merger of the Company's parent, GTE, and Contel
Corporation (Contel) was consummated. GTE Telephone Operations is in
the process of integrating and restructuring the merged operations.
3. Property Repositioning
On November 1, 1993, the Company in a series of transactions exchanged
its telephone plant in service, materials and supplies and customers
(representing 244,000 access lines) in the state of Georgia for
similar assets (including 38,000 access lines) in ALLTEL Corporation's
Illinois operations and $446 million in cash. This transaction was
accounted for as a sale. The net sales proceeds exceeded the book
value of assets and liabilities sold and therefore, a pretax gain of
$29 million was recognized on the transaction.
On December 31, 1993, the Company sold its telephone plant in service, materials
and supplies and customers (representing 123,000 access lines) in the states of
West Virginia and Tennessee to Citizens Utilities Company for $291 million in
cash. This transaction was accounted for as a sale. The net sales proceeds
exceeded book value and therefore, a pretax gain of $34 million was recognized
on the transaction.
The proceeds from these transactions were used to pay down $402
million of debt and pay $281 million of dividends to GTE Corporation
(GTE), the Company's parent, in early 1994. The remainder was advanced
to GTE and will bear interest until repaid.
4. Preferred Stock
Cumulative preferred stock, not subject to mandatory redemption,
consists of 4,119 authorized and outstanding shares of the 5.20%, $100
par value Series, at December 31, 1993 and 1992. Cumulative preferred
stock, subject to mandatory redemption, exclusive of amounts held in
treasury, is as follows:
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
SHARES AMOUNT* Shares Amount*
- ------------------------------------------------------------------------------
AUTHORIZED 258,314 258,314
- ------------------------------------------------------------------------------
OUTSTANDING
$25 Par Value -
4.64% Series 79,000 $1,975 82,600 $2,065
$50 Par Value -
5.00% Series 12,428 622 13,413 670
5.16% Series 12,566 628 13,356 668
- ------------------------------------------------------------------------------
Total 103,994 $3,225 109,369 $3,403
- ------------------------------------------------------------------------------
*Thousands of Dollars
The outstanding preferred stock is redeemable at any time, in whole or
in part, on thirty days notice. The 4.64% Series requires the Company
to redeem 3,600 shares annually at a price not in excess of $25 per
share. The Company purchased 3,600 shares of the 4.64% Series in each
of the years 1991 through 1993.
The Company is also required to redeem each year at not more than $50
per share, a minimum of 1,210 and 790 shares of the 5.00% and 5.16%
Series, respectively. During 1993, the Company met this requirement
through treasury stock and the purchase of 985 and 790 shares of the
5.00% and 5.16% Series, respectively. During 1992, the Company
purchased 1,210 and 790 shares of the 5.00% and 5.16% Series,
respectively. In addition, 183 shares of the 5.00% Series were
purchased for treasury stock. This requirement was satisfied with
treasury stock during 1991 and therefore, no additional shares were
required to be purchased during this period.
The aggregate redemption requirements of preferred stock subject to
mandatory redemption are $190,000 in each of the years 1994-1998.
No shares of preferred stock were held as treasury shares at December
31, 1993. Preferred stock held as treasury shares by the Company at
December 31, 1992 was 277 and 6,068 shares of the 5.00% and 5.16%
Series, respectively. No shares of preferred stock were reserved for
officers and employees, or for options, warrants, conversions or other
rights.
The preferred stockholders are entitled to voting rights (on an equal
basis with the common shareholder) in the event that dividends in
arrears are equal to or exceed the amount of annual dividends.
Otherwise, the preferred shareholders have no voting rights. The
Company is not in arrears in its dividend payments at December 31,
1993.
5. Common Stock
The authorized common stock of the Company consists of 25,000,000
shares with a par value of $25 per share. All outstanding shares of
common stock are held by GTE.
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, $0.1 million of reinvested earnings was
restricted as to the payment of cash dividends on common stock under
the most restrictive terms of the Company's Articles of Incorporation.
6. Long-Term Debt
Long-term debt outstanding, exclusive of current maturities, is as
follows:
- ------------------------------------------------------------------------------
December 31 1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
FIRST MORTGAGE BONDS:
4.65 % Series, due 1995 $ 5,000 $ 5,000
6-1/4 % Series, due 1997 6,500 6,500
9.95 % Series, due 1999 _ 5,200
7-3/4 % Series, due 2001 _ 14,000
7-3/4 % Series, due 2003 10,886 14,000
8-3/8 % Series, due 2007 _ 40,000
4.65 % Series M, due 1995 7,304 7,304
6-3/8 % Series N, due 1997 9,352 9,352
7-1/8 % Series O, due 1998 _ 12,000
8-3/4 % Series S, due 2001 _ 20,713
8 % Series T, due 2001 20,750 20,750
7-5/8 % Series U, due 2002 20,995 20,995
7-3/4 % Series V, due 2003 _ 21,250
8-1/4 % Series W, due 2004 _ 25,700
9-3/8 % Series X, due 2005 _ 21,744
8-3/8 % Series Y, due 2007 _ 11,760
8-3/4 % Series CC, due 2016 _ 120,790
9-1/2 % Series DD, due 2027 _ 49,500
11 % Series EE, due 2017 _ 50,000
9 % Series FF, due 2029 100,000 100,000
9-3/8 % Series GG, due 2030 125,000 125,000
- ------------------------------------------------------------------------------
305,787 701,558
- ------------------------------------------------------------------------------
DEBENTURES:
6-1/4%, due 1997 75,000 75,000
- ------------------------------------------------------------------------------
CAPITALIZED LEASES 214 1,055
- ------------------------------------------------------------------------------
Total principal amount 381,001 777,613
- ------------------------------------------------------------------------------
DISCOUNT AND PREMIUM - NET (7,301) (13,563)
Total long-term $373,700 $764,050
- ------------------------------------------------------------------------------
During November and December 1993, the Company called $394 million of
high-coupon first mortgage bonds with proceeds from the sale of
property in Georgia, Tennessee and West Virginia.
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.
Debt discount and premium on the Company's outstanding long-term debt
are amortized over the lives of the respective issues.
Maturities, installments and sinking fund requirements for the five-
year period from January 1, 1994 are summarized below (in thousands of
dollars):
-----------------------------------
1994 $ 452
1995 12,504
1996 14
1997 90,852
1998 _
-----------------------------------
Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were
issued.
7. Short-Term Debt
The Company finances part of its construction program through the use
of interim short-term loans, primarily commercial paper, which are
generally refinanced at a later date by issues of long-term debt or
equity. Information relating to short-term borrowings is as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
DURING THE YEAR -
Maximum month-end balance $34,400 $108,600 $69,700
Average monthly balance $15,115 $ 69,908 $52,688
Weighted average interest rate (a) 3.14% 3.73% 5.88%
AT DECEMBER 31 -
Balance outstanding -
Commercial paper $24,200 $ 16,700 $67,150
Average interest rate 3.30% 3.45% 4.90%
- ------------------------------------------------------------------------------
(a) Calculated by dividing the annualized interest expense by the
average of the balances of the debt outstanding at the end of
each month.
Unused lines of credit available to the Company to support outstanding
commercial paper and other short-term financing needs are $13 million.
In addition, a $2.3 billion line is 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 the
unused lines of credit.
8. Income Taxes
The provision for income taxes is as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
CURRENT
Federal $ 199,944 $53,800 $47,788
State and local 20,532 9,196 9,427
- ------------------------------------------------------------------------------
Total 220,476 62,996 57,215
- ------------------------------------------------------------------------------
DEFERRED
Federal (136,616) 17,339 4,488
State and local (8,467) 6,053 1,878
- ------------------------------------------------------------------------------
Total (145,083) 23,392 6,366
- ------------------------------------------------------------------------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (9,880) (6,697) (7,193)
- ------------------------------------------------------------------------------
Total $ 65,513 $79,691 $56,388
- ------------------------------------------------------------------------------
The components of deferred income tax expense (benefit) are as follows:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ (60,864) $ 7,865 $ 4,296
Employee benefit obligations (14,470) (3,216) 2,901
Prepaid pension cost 4,087 4,655 1,751
Restructuring cost (36,733) _ _
Other (37,103) 14,088 (2,582)
- ------------------------------------------------------------------------------
Total $(145,083) $23,392 $ 6,366
- ------------------------------------------------------------------------------
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 6.3 4.6 4.4
Amortization of deferred investment
tax credits (4.1) (3.1) (4.1)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - net 3.6 1.7 3.2
Rate differentials applied to reversing
temporary differences (1.6) (1.2) (3.3)
Other differences, including impact
of repositioning 12.4 0.7 (1.1)
- ------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 51.6% 36.7% 33.1%
- ------------------------------------------------------------------------------
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 $47.0 million and $26.1
million, respectively, and the unamortized regulatory asset and
regulatory liability balances at December 31, 1992 amounted to $1.3
million and $6.4 million, respectively, and are reflected as other
assets and other deferred credits, respectively, in the accompanying
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 $291,626 $321,724
Employee benefit obligations (18,085) (3,615)
Prepaid pension cost 8,686 4,599
Restructuring cost (36,733) _
Other - net (28,578) 14,924
- ------------------------------------------------------------------------------
Total $216,916 $337,632
- ------------------------------------------------------------------------------
9. Employee Benefit Plans
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The net pension credits for 1993-1991 include the following components:
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned during
the period $ 17,437 $ 13,451 $ 14,154
Interest cost on projected
benefit obligations 35,616 28,509 26,587
Actual return on plan assets (96,664) (32,904) (106,268)
Other - net 31,472 (19,747) 60,123
- ------------------------------------------------------------------------------
Net pension credit $ (12,139) $ (10,691) $ (5,404)
- ------------------------------------------------------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1993 and 1992
and 8.0% in 1991.
The funded status of the plans at December 31, 1993 and 1992 was as follows:
- ------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Plan assets at fair value $ 626,978 $ 598,554
Projected benefit obligation 373,787 372,658
- ------------------------------------------------------------------------------
Excess of assets over projected
obligation 253,191 225,896
Unrecognized net transition as set (42,284) (57,286)
Unrecognized net gain (167,313) (149,287)
- ------------------------------------------------------------------------------
Prepaid pension cost $ 43,594 $ 19,323
- ------------------------------------------------------------------------------
The projected benefit obligations at December 31, 1993 and 1992
include accumulated benefit obligations of $281.7 million and $255.6
million and vested benefit obligations of $249.6 million and $219.2
million, respectively.
Assumptions used to develop the projected benefit obligations at
December 31, 1993 and 1992 were as follows:
- ------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------
Discount rate 7.5 % 8.0%
Rate of compensation increase 5.25% 6.0%
- ------------------------------------------------------------------------------
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 $ 4,537
Interest cost on accumulated postretirement
benefit obligation 13,939
Actual return on plan assets (538)
Amortization of transition obligation 8,588
- ------------------------------------------------------------------------------
Postretirement benefit cost $26,526
- ------------------------------------------------------------------------------
In each of the years 1992 and 1991, the cost of postretirement health
care and life insurance benefits on a pay-as-you-go basis was $4.4
million.
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 $ 112,498
Fully eligible active plan participants 12,510
Other active plan participants 56,141
- ------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 181,149
Fair value of plan assets 6,178
- ------------------------------------------------------------------------------
Excess of accumulated obligation over plan assets 174,971
Unrecognized transition obligation (132,857)
Unrecognized net loss (23,289)
- ------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 18,825
- ------------------------------------------------------------------------------
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 $3.1 million
and the accumulated postretirement benefit obligation at December 31,
1993 by $22.1 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 annual 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 $38.9
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 $2.9
million, $3.8 million and $2.6 million in the years 1993-1991,
respectively.
10. Commitments and Contingencies
The Company's anticipated construction costs for 1994 are
approximately $190 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 21 years.
Minimum rental commitments for noncancelable leases for periods
subsequent to December 31, 1993 are as follows (in thousands of
dollars):
-----------------------------------------------
1994 $1,270
1995 747
1996 355
1997 305
1998 282
Thereafter 343
-----------------------------------------------
Total minimum rental
commitments $3,302
-----------------------------------------------
The total amount of rents charged to expense was $15.1 million, $13.2
million and $16.0 million for the years 1993-1991, respectively.
11. Regulatory Matters
The Company is subject to regulation by the FCC for its interstate
business operations. The state regulatory commissions governing the
states of Alabama, Illinois, Kentucky, North Carolina, South Carolina
and Virginia regulate the Company's current intrastate operations.
Prior to the sale of properties described in Note 3, the state
regulatory commissions in Georgia, Tennessee and West Virginia also
regulated the Company's intrastate operations.
INTRASTATE SERVICES
The Company provides long distance services within designated
geographic areas called Local Access and Transport Areas (LATAs) or as
a provider of long distance services directly to the customers in
their exchanges in conformity with state commission
orders. Provisioning of intrastate long distance services within the
Company during 1993 was accomplished by either (i) participation with
other exchange carriers in pools in which intrastate long distance
compensation is primarily driven by access rates which are billed to
the pool (Tennessee and North Carolina), (ii) arrangements whereby the
Company acts or is a provider of long distance services directly to
the customers (West Virginia and Virginia), (iii) participation with
other exchange carriers in cost pools (South Carolina) or (iv)
receiving access revenues from the primary toll carrier within the
LATA (Alabama, Illinois, Kentucky and Georgia). Effective January 1,
1994 in North and South Carolina, the Company will implement and
receive intraLATA compensation through an Originating Responsibility
Plan (ORP). Under this plan, the toll rates billed to end users for
intraLATA toll calls originating in the Company's service area will be
retained by the Company. The Company, in turn, will pay access charges
to the Company hauling and terminating the call based on that
company's approved access charge tariff. Likewise, the Company will
receive access charges for terminating any intraLATA toll call that
originates outside of its service area based on its approved access
charge tariff. On December 15, 1993, the Kentucky Public Service
Commission approved the Company's request to become a primary toll
carrier under an ORP arrangement, effective March 1, 1994. The Company
will record this revenue on a bill-and-keep basis. The Company will
receive transitional support payments for any revenue loss created by
these changes in compensation arrangements under the terms of various
industry agreements.
In 1993, the Company received annual intrastate rate reductions in
Alabama and Kentucky totaling $0.8 million and $4.3 million,
respectively. In 1992, the Company received annual intrastate rate
reductions in Alabama and Kentucky totaling $5.6 million and $9.0
million, respectively.
In 1991, the Company received annual intrastate rate awards from the
West Virginia and South Carolina Public Service Commissions totaling
$3.3 million and $4.4 million, respectively. In September 1991, the
Tennessee Public Service Commission (TPSC) issued an order reducing
rates by $2.1 million annually effective October 1, 1991 in
conjunction with the implementation of an alternative regulation plan.
In early 1993, the TPSC also approved an order requiring the Company
to refund $1.6 million effective January 1, 1992, and to reduce
rates prospectively by $2.0 million, effective April 1, 1993.
During 1991, the Company entered into an alternative regulatory plan
in the state of South Carolina. This plan was effective January 1,
1992. On August 9, 1993, the South Carolina Supreme Court ruled that
the South Carolina PSC lacked the authority to establish incentive
regulation plans for the local exchange telephone companies in the
state. The Company has been returned to operating under traditional
rate of return regulation in South Carolina.
In September and October 1993, the Company filed applications to
legally merge the Contel legal entities in Kentucky, North Carolina,
South Carolina and Virginia into GTE South. The Company has requested
an effective date of July 1, 1994 or later.
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.
In 1992, the Company's rates were voluntarily reduced by $4.9 million
effective July 1, 1992 and $8.6 million effective October 2, 1992.
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 $144.1 million, $153.9
million and $152.5 million, respectively.
12. 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 $ 30,817 $(73,980) $(18,531)
Materials and supplies 3,772 6,446 8,960
Deferred income tax benefits 1,515 _ _
Other current assets (2,007) 4,613 (1,735)
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (51,327) 23,476 (11,124)
Affiliate payables and accruals (4,531) (3,604) 18,431
Advanced billings and customer deposits (9,079) 1,790 19
Accrued liabilities 97,024 (5,848) (2,548)
Other (1,570) (4,427) 8,778
- ------------------------------------------------------------------------------
Total $ 64,614 $(51,534) $ 2,250
- ------------------------------------------------------------------------------
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $ 83,837 $ 66,829 $ 68,791
Income taxes (64,534) 78,339 60,005
- ------------------------------------------------------------------------------
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
GTE South Incorporated:
We have audited the accompanying balance sheets of GTE South
Incorporated (a Virginia corporation and wholly-owned subsidiary of
GTE Corporation) as of December 31, 1993 and 1992, and the related
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 GTE South
Incorporated as of December 31, 1993 and 1992, and the results of
their operations and its 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 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.
<PAGE>
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 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.
EARL A. GOODE
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OPERATIONS
GTE South Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation, currently provides local exchange, access and long
distance services to approximately 970,000 customers throughout the
states of Alabama, Illinois, Kentucky, North Carolina, South Carolina
and Virginia. Prior to the sale of properties described in Note 3, the
Company provided these services in Georgia, Tennessee and West
Virginia.
RESULTS OF OPERATIONS
Net income decreased $76 million for the year ended December 31, 1993
and increased $23 million for the year ended December 31, 1992. The
1993 results include a one-time restructuring charge of $61 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. The results also include a gain on the repositioning of GTE
South properties. On November 1, 1993, the Company exchanged its
Georgia properties for ALLTEL Corporation's Illinois properties and on
December 31, 1993 the Company sold its West Virginia and Tennessee
properties to Citizens Utilities Company. The decrease reflects the
impact of the adoption of SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions"effective January 1, 1993
and lower operating revenues due to voluntary rate reductions in an
ongoing effort to price services more competitively. The increase in
1992 reflected continued growth in revenues and reduced operating
expenses due to aggressive cost control efforts and the benefits of
ongoing quality programs.
Local network service revenues, which are comprised mainly of fees
charged to customers for providing local exchange service, increased
2% or $8 million for 1993 and 3% or $12 million for 1992. Local
revenues increased both years due to customer growth experienced
through access line gain and increased revenues from CentraNet(R)
Services, custom calling and other enhanced features. The 1993
increase is partially offset by a $2 million annual rate reduction
effective in April 1993 and customer refunds of approximately $2
million ordered by the Tennessee Public Service Commission in early
1993. Also offsetting the 1993 increase is a decrease in local
revenues due to property repositioning in late 1993 as mentioned
above.
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. Revenues derived from network
access services decreased 4% or $17 million for 1993 and increased 21%
or $72 million during 1992. The 1993 decrease is primarily the result
of voluntary reductions in interstate rates in an ongoing effort to
price services more competitively. In 1992, Alabama's intrastate rates
were voluntarily reduced by $4 million effective June 1992 and $2
million effective October 1992. Kentucky's intrastate rates were
voluntarily reduced by $9 million effective August 1992 and $4 million
effective August 1, 1993. Contributing to the 1993 decrease was a
decline due to property repositioning as mentioned above. A reduction
in revenues received from pooling arrangements with the National
Exchange Carrier Association also contributed to the decline in 1993.
Offsetting the decline in 1993 and contributing to the 1992 increase
were increased network usage, access line growth and a change in
recognition of pooling arrangements. In several jurisdictions,
revenues were recorded as network access, long distance and other
revenues, whereas under previous arrangements these revenues were
reflected only in long distance service revenues. Also in mid-1992,
the Company began recording private line toll usage revenues as
network access revenues, where previously these
revenues were reflected as long distance
revenues.
The Company's revenues for long distance services from designated
geographical areas are provided from customer billings as well as
settlement arrangements with various telephone companies. Long
distance service revenues decreased 40% or $19 million in 1993 and
decreased 65% or $90 million in 1992. These decreases reflect the
changes in pooling arrangements and private line toll mentioned above.
The 1993 decline also reflects a slight decrease due to property
repositioning mentioned previously.
Equipment sales and services revenues decreased 5% or $4 million for
1993 and decreased less than 1% in 1992. The 1993 decrease is due
primarily to lower sales of large PBX systems and maintenance
agreements associated with large PBX systems, partially offset by
higher sales of single line telephones. The 1992 decrease was due to a
reduction in billing and collection revenues due to lower contract
rates with AT&T substantially offset by higher equipment sales and
rentals of single line telephones.
Other operating revenues increased 17% or $11 million for 1993 and 40%
or $18 million in 1992. The increases are primarily due to the change
in pooling arrangements, mentioned above. The 1992 increase was also
due to higher rental income from facilities shared with other GTE
telephone operating companies and the reduction of a revenue reserve.
The 1992 increase was partially offset by increased write-offs of
uncollectible revenues.
Cost of sales and services increased 1% or $3 million for 1993 and
decreased 7% or $16 million in 1992. The 1993 increase reflects costs
associated with the adoption of SFAS No. 106 effective January 1,
1993. As a result of the adoption of the new standard, cost of sales
and services increased $16 million. Partially offsetting this increase
is lower software right-to-use fees. The 1992 decrease reflected
aggressive cost control efforts, lower maintenance costs due to the
benefits of ongoing quality programs, modernization of local network
and increased efficiencies in labor.
Depreciation and amortization expense remained relatively unchanged in
1993 compared to a 2% or $4 million increase in 1992. The 1992
increase was the result of increased plant activity.
Expenses for marketing, selling, general and administrative costs
increased 9% or $26 million in 1993 compared to a 7% or $22 million
decrease in 1992. The 1993 increase reflects costs of $5 million
associated with the adoption of SFAS No. 106. In addition, costs
increased due to a one-time charge of $8 million associated with the
enhanced early retirement and voluntary separation programs offered to
employees during the second quarter of 1993. During the fourth quarter
of 1993, a reserve was booked for "Article 31," an agreement with AT&T
for the mutual recognition of credit cards. The 1992 decrease was
partially due to reduced labor and benefit costs associated with the
reduction in headcount and cost control efforts. In addition, lower
data processing costs contributed to this reduction.
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 $39
million to upgrade or replace existing customer service and
administrative systems and enhance network software,
$44 million for employee separation benefits associated with workforce
reductions and $12 million primarily for the consolidation of
facilities and operations and other related costs. The charge for
employee separation benefits includes $22 million related to the
recognition of previously deferred postretirement health and life
insurance costs for separating employees.
Interest expense increased 3% or $2 million in 1993 and decreased 3% or
$2 million in 1992. The 1993 increase is due to increased interest on
long-term debt, primarily due to the issuance of $75 million of 6-1/4%
Debentures in November 1992. The 1992 decrease was primarily
attributable to a decline in the average rates on short-term debt.
The gain on disposition of assets represents the excess of cash
proceeds over book value of assets and liabilities sold to ALLTEL
Corporation and Citizens Utilities Company of $29 million and $34
million, respectively (see Note 3).
Income taxes decreased $14 million in 1993 and increased $23 million
in 1992. The decrease in 1993 is primarily due to decreases in pretax
income partially offset by higher tax expense due to the sale and
exchange of assets. The increase in 1992 was primarily due to
increases in pretax income, lower reversal of tax rate differentials
on deferred tax liabilities, and adjustments to prior years' tax
liabilities, partially offset by lower depreciation of telephone plant
construction costs previously deducted for tax purposes.
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 proceeds from
the sale of assets of $807 million, including $70 million of property
received from ALLTEL Corporation, and cash flow from operations of
$339 million compared to $312 million for the same period in 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 $176 million compared to $241
million during the same period in 1992. The Company's anticipated
construction costs for 1994 are approximately $190 million.
Cash used for financing activities was $477 million in 1993 compared
to $82 million in 1992. This included the retirement of $403 million
of long-term debt in 1993 compared to $6 million in 1992 and dividend
payments of $82 million in 1993 compared to $100 million in 1992. The
Company issued $75 million of 6-1/4% debentures in 1992 to pay down
short-term borrowings.
During November and December 1993, the Company called $394 million of
high-coupon first mortgage bonds with the proceeds from the sale of
property in Georgia, Tennessee and West Virginia.
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 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.
Activity directed toward changing the traditional cost-based rate of
return regulatory framework for intrastate and interstate telephone
services has continued. Various forms of alternative regulation have
been adopted, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for the
pricing flexibility necessary to address competitive entry into the
markets we serve.
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.
<TABLE>
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
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
Total operating revenues $ 953,297 $ 974,968 $ 963,423 $ 942,029 $ 920,078
Total operating expenses 820,445 691,419 725,508 725,108 721,860
- -------------------------------------------------------------------------------------------------------------
Net operating income 132,852 283,549 237,915 216,921 198,218
Interest expense 69,519 67,778 69,648 68,055 65,112
Gain on disposition of assets (63,112) _ _ _ _
Other - net (414) (1,174) (2,293) (599) 269
Income taxes 65,513 79,691 56,388 44,791 37,769
- -------------------------------------------------------------------------------------------------------------
Net income $ 61,346 $ 137,254 $ 114,172 $ 104,674 $ 95,068
- -------------------------------------------------------------------------------------------------------------
Dividends declared on common stock $ 281,498 $ 81,900 $ 89,567 $ 67,791 $ 62,300
Dividends declared on preferred stock 177 186 197 199 210
- -------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
SELECTED BALANCE SHEET ITEMS
Investment in property, plant and
equipment--net $1,494,837 $2,044,596 $1,993,516 $1,945,651 $1,901,400
Total assets 2,163,100 2,326,391 2,226,450 2,158,945 2,098,914
Long-term debt and preferred stock,
subject to mandatory redemption 376,925 767,453 702,282 705,355 664,016
Common stock, reinvested earnings
and other capital 718,685 939,014 883,832 859,414 822,726
- -------------------------------------------------------------------------------------------------------------
SELECTED STATISTICS
Access lines 968,951 1,212,832 1,161,226 1,126,122 1,108,011
Access line gain (loss) (b) (243,881) 51,606 35,104 18,111 56,139
Net investment in property, plant
and equipment per access line $ 1,543 $ 1,686 $ 1,717 $ 1,728 $ 1,716
Number of employees 4,729 6,238 6,313 6,636 6,985
Access lines per employee 205 194 184 170 159
Gross plant additions (thousands) $ 218,638 $ 240,742 $ 247,625 $ 247,384 $ 261,684
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<FN>
(a) Per share data is omitted since the Company's common stock is 100%
owned by GTE Corporation.
(b) In 1993, the Company sold 367,000 net access lines through
property repositioning.
</TABLE>
