UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended September 30, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the transition period from
to
Commission File Number: 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
(Former name, former address and former fiscal year, if changed
since last report)
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 21,000,000 shares of $25 par value common stock
outstanding at October 31, 1994.
GTE SOUTH INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Statements of Income. . . . . . .. . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . .
. . . 2
Condensed Balance Sheets - Assets. . . . . . . . . . . . . .
. . . . 6
Condensed Balance Sheets - Liabilities and
Shareholders' Equity. . . . . . . . . . . . . . . . . . . .
. . . 7
Condensed Statements of Cash Flows . . . . . . . . . . . . .
. . . . 8
Notes to Condensed Financial Statements . . . . . . . . . .
. . . . 9
PART II. OTHER INFORMATION
Items 1 through 6. . . . . . . . . . . . . . . . . . . . . .
. . . . 12
Signature. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 13
<TABLE>
PART I. FINANCIAL INFORMATION
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993 1994
1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 118,773 $ 141,684 $ 351,697 $ 414,736
Network access services 115,637 156,001 359,203 456,995
Long distance services 35,110 21,540 90,035 65,197
Equipment sales and services 19,949 23,439 56,276
69,247
Other 13,905 24,654 54,354 73,735
303,374 367,318 911,565 1,079,910
OPERATING EXPENSES:
Cost of sales and services 73,785 76,065 228,502
233,724
Depreciation and amortization 66,161 77,340 197,692
222,336
Marketing, selling, general
and administrative 100,505 106,307 283,160 326,278
240,451 259,712 709,354 782,338
Net operating income 62,923 107,606 202,211 297,572
OTHER DEDUCTIONS:
Interest expense 15,576 23,107 45,100 69,620
Other - net 4,628 444 12,496 100
INCOME BEFORE INCOME TAXES 42,719 84,055 144,615 227,852
INCOME TAXES 15,960 37,940 54,102 89,471
NET INCOME $ 26,759 $ 46,115 $ 90,513 $ 138,381
</TABLE>
Per share data is omitted since the Company's common stock is
100% owned by GTE Corporation (Parent Company).
See Notes to Condensed Financial Statements.
1
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
On December 31, 1993, GTE South Incorporated (the "Company")
entered into an Agreement of Merger with Contel of Kentucky,
Inc., a Kentucky corporation, Contel of North Carolina, Inc., a
North Carolina corporation, Contel of South Carolina, Inc., a
South Carolina corporation and Contel of Virginia, Inc., a
Virginia corporation (collectively, the "Contel Subsidiaries").
The agreement provided that the Contel Subsidiaries would merge
with and into the Company, with the Company to be the surviving
corporation (the "Merger"). Each of the Contel Subsidiaries is a
wholly-owned subsidiary of Contel Corporation, which is itself a
wholly-owned subsidiary of GTE Corporation. The Contel
Subsidiaries provide communication services in the states of
Kentucky, North Carolina, South Carolina and Virginia. The
Merger became effective on September 30, 1994 and has been
accounted for in a manner consistent with a transfer of entities
under common control which is similar to a "pooling of
interests." Accordingly, the condensed financial statements
include the combined historical results of operations and
financial position of the Company and the Contel Subsidiaries as
though the Merger had occurred at the beginning of each period
presented and reflect the elimination of intercompany
transactions.
Net income was $26.8 million for the three months and $90.5
million for the nine months ended September 30, 1994 as compared
to $46.1 million and $138.4 million for the same periods in 1993.
Net income for 1993 includes the results from non-strategic
properties sold in the fourth quarter of 1993 and a one-time
after-tax charge of $7.8 million for enhanced early retirement
and voluntary separation programs recorded in the second quarter
of 1993. Excluding these special items, net income decreased 26%
or $9.4 million for the three months and 31% or $40.9 million for
the nine months ended September 30, 1994 as compared to the same
periods in 1993. These decreases are primarily due to higher
software costs, increased depreciation costs and the final
resolution of certain settlement activities, partially offset by
increased revenues.
2
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Revenues
Operating revenues decreased $63.9 million for the three months
and $168.3 million for the nine months ended September 30, 1994
compared to the same periods in 1993. Excluding the impact of
non-strategic properties sold, revenues for the three months and
nine months ended September 30, 1994 increased 2% or $6.6 million
and 3% or $27.1 million, respectively, compared to the same
periods in 1993. The increases are primarily due to growth in
access lines, increased minutes of use, and an increase in
class/custom calling services. These increases are partially
offset by a decrease in rent revenue and the final phase-out of
transitional support payments received from the National Exchange
Carrier Association (NECA). As of April 1, 1993, the Company no
longer receives transitional support funds and has begun making
long-term support payments to NECA as required by the Federal
Communications Commission. The Company adopted Originating
Responsibility Plans (ORP) for interexchange revenues in North
Carolina and South Carolina, effective January 1, 1994, and in
Kentucky, effective March 1, 1994. The ORP was income neutral to
the Company since increases in toll revenues were offset by
decreased access revenues and increased access charges.
Operating Expenses
Operating expenses decreased $19.3 million for the three months
and $73.0 million for the nine months ended September 30, 1994
compared to the same periods in 1993. Excluding the impact of
non-strategic properties sold, and a one-time charge of $12.4
million for the enhanced early retirement and voluntary
separation programs recorded in the second quarter of 1993,
operating expenses for the three months and nine months ended
September 30, 1994 increased 13% or $26.9 million and 14% or
$85.1 million, respectively, compared to the same periods in
1993. These increases are primarily due to the payment of access
charges under the ORP to other local exchange carriers for
intralata toll calls that are originated by the Company and
terminated by another local exchange carrier, increased
depreciation due to rate orders in North Carolina and Kentucky
that were effective January 1, 1994, higher software costs and
the final resolution of certain settlement activities.
Restructuring
During the fourth quarter of 1993, the Company recorded a
restructuring charge of $163.0 million primarily for incremental
costs related to implementation of its three year re-engineering
plan. The re-engineering plan will redesign and streamline
processes to improve customer responsiveness and product quality,
reduce the time necessary to introduce new products and services
and reduce costs.
3
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In connection with the re-engineering plan, in the first nine
months of 1994 expenditures of $9.7 million were incurred and
charged to the restructuring reserve. These costs primarily
reflect costs associated with the consolidation of customer
contact, network operations and operator service centers,
separation benefits associated with employee reductions and
incremental expenditures to redesign and streamline processes.
The level of re-engineering activities and related expenditures
are expected to accelerate during the remainder of 1994 and
throughout 1995. There have been no significant changes made to
the overall re-engineering plan as originally reported.
Other Deductions
Interest expense decreased 33% or $7.5 million for the three
months and 35% or $24.5 million for the nine months ended
September 30, 1994. These decreases are primarily attributable
to lower long-term debt levels. During November and December
1993, the company called $394 million of high-coupon first
mortgage bonds with proceeds from the sale of non-strategic
properties.
Income tax expense decreased 58% or $22.0 million and 40% or
$35.4 million for the three months and nine months ended
September 30, 1994, respectively, compared to the same periods in
1993. These decreases are primarily due to decreases in pretax
income partially offset by a reduction in the amortization of
deferred investment tax credits. The third quarter decrease is
also due to a one-time adjustment made in the third quarter of
1993.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine
months of 1994 was cash flow from operating activities of $137.6
million compared to $334.1 million for the same period in 1993.
The year-to-year decrease in cash from operations is primarily
the result of tax payments of $170.7 million in the first quarter
of 1994 related to the disposition of properties sold in late
1993.
The Company's capital expenditures during the first nine months
of 1994 were $193.4 million compared to $211.5 million during the
same period in 1993, reflecting the Company's continued growth in
access lines, modernization of facilities and introduction of new
products and services. The Company's anticipated construction
costs for 1994 are approximately $272 million.
4
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash provided from financing activities was $47.5 million in 1994
compared to cash used in financing activities of $117.8 million
in 1993. During the first nine months of 1994, the Company
received $328.3 million due to the collection of an affiliate
note receivable and made dividend payments of $363.4 million to
its parent. Dividends of $96.4 million were paid during the
first nine months of 1993. In August 1994, the Company issued
$150 million of 7 1/4% Debentures, Series B, due 2002 for the
purpose of financing the Company's construction program.
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 $2.8 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.
OTHER MATTERS
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 Regulations"
("FAS 71"). In general, FAS 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 increases in
competition or specific regulatory, legislative or judicial
actions, continued application of FAS 71 would no longer be
appropriate. If the Company no longer qualifies for the
provisions of FAS 71, the financial effects of the required
accounting change (which would be non-cash) could be material.
5
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 12,985 $ 17,810
Receivables, less allowances of
$7,302 and $11,334, respectively 255,158 266,402
Note receivable from affiliate -- 328,328
Materials and supplies, at average cost 21,264 23,278
Deferred income tax benefits 58,973 47,935
Prepayments and other 24,707 19,309
Total current assets 373,087 703,062
PROPERTY, PLANT AND EQUIPMENT:
Original cost 3,772,001 3,736,745
Accumulated depreciation (1,398,933)
(1,357,706)
Net property, plant and equipment 2,373,068 2,379,039
OTHER ASSETS 104,032 92,541
TOTAL ASSETS $ 2,850,187 $ 3,174,642
See Notes to Condensed Financial Statements.
6
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 198,838 $
150,823
Accounts payable 110,948 126,473
Accrued taxes 50,137 195,871
Accrued payroll and vacations 26,648 33,661
Accrued dividends 25,309 219,920
Accrued interest 13,971 3,612
Accrued restructuring costs and other 185,481 198,209
Total current liabilities 611,332 928,569
LONG-TERM DEBT 598,952 563,480
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 644,850 609,048
PREFERRED STOCK, subject to
mandatory redemption 3,035 3,225
SHAREHOLDERS' EQUITY:
Preferred stock 412 412
Common stock 525,000 525,000
Other capital 58,308 58,308
Reinvested earnings 408,298 486,600
Total shareholders' equity 992,018 1,070,320
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,850,187 $
3,174,642
See Notes to Condensed Financial Statements.
7
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 90,513 $ 138,381
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 197,692 222,336
Deferred income taxes and investment
tax credits (29,517)
(13,938)
Provision for uncollectible accounts 15,123
16,105
Tax payments on disposition (170,684)
- --
Changes in current assets and
current liabilities 54,419 (52,454)
Other - net (19,920)
23,662
Net cash from operating activities 137,626 334,092
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (193,406)
(211,509)
Other - net 3,489 (4,136)
Net cash used in investing activities (189,917)
(215,645)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 147,679 --
Long-term debt and preferred stock retired (72,320)
(87,460)
Dividends paid to shareholders (363,426)
(96,356)
Net change in affiliate notes 276,821 77,805
Increase (decrease) in short-term debt 58,712 (11,800)
Net cash provided from (used in)
financing activities 47,466 (117,811)
Increase (decrease) in cash (4,825)
636
Cash at beginning of period 17,810 7,408
Cash at end of period $ 12,985 $ 8,044
See Notes to Condensed Financial Statements.
8
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The unaudited condensed financial statements included herein
have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion
of management of the Company, the condensed financial statements
include all adjustments, which consist only of normal recurring
accruals, necessary to present fairly the financial information
for such periods. These condensed financial statements should be
read in conjunction with the financial statements and the notes
thereto included in the Company's 1993 Annual Report to
Shareholders incorporated by reference in the Annual Report on
Form 10-K.
On December 31, 1993, GTE South Incorporated (the "Company")
entered into an Agreement of Merger with Contel of Kentucky,
Inc., a Kentucky corporation, Contel of North Carolina, Inc., a
North Carolina corporation , Contel of South Carolina, Inc., a
South Carolina corporation and Contel of Virginia, Inc., a
Virginia corporation (collectively, the "Contel Subsidiaries").
The agreement provided that the Contel Subsidiaries would merge
with and into the Company, with the Company to be the surviving
corporation (the "Merger"). Each of the Contel Subsidiaries is a
wholly-owned subsidiary of Contel Corporation, which is itself a
wholly-owned subsidiary of GTE Corporation. The Contel
Subsidiaries provide communication services in the states of
Kentucky, North Carolina, South Carolina and Virginia. The
Merger became effective on September 30, 1994 and has been
accounted for in a manner consistent with a transfer of entities
under common control which is similar to a "pooling of
interests." Accordingly, the condensed financial statements
include the combined historical results of operations and
financial position of the Company and the Contel Subsidiaries as
though the Merger had occurred at the beginning of each period
presented and reflect the elimination of intercompany
transactions.
Listed below are details of the results of operations of the
previously separate enterprises that are included in the current
combined net income:
For the Nine Months Ended September 30, 1994
(Thousands of Dollars)
Contel Contel
GTE South Contel North South Contel GTE
South
(Pre-Merger) Kentucky Carolina Carolina Virginia (Post-
Merger)
OPERATING REV $ 556,049 $ 42,402 $ 59,082 $ 9,732 $ 244,300
$ 911,565
OPERATING INC 122,137 5,261 16,197 2,994 55,622
202,211
NET INCOME 54,046 240 7,096 1,623 27,508
90,513
9
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended September 30, 1993
(Thousands of Dollars)
Contel Contel
GTE South Contel North South Contel GTE
South
(Pre-Merger) Kentucky Carolina Carolina Virginia (Post-
Merger)
OPERATING REV $ 732,485 $ 44,718 $ 57,806 $ 9,639 $ 235,262
$ 1,079,910
OPERATING INC 187,113 17,594 23,204 3,362 66,299
297,572
NET INCOME 78,110 10,183 12,974 1,916 35,198
138,381
(2) On November 1, 1993, in a series of transactions, the
Company 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 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 a pretax gain of $34 million was
recognized on the transaction.
The accompanying condensed statements of income include the
results of operations, through the date of sale, of the ALLTEL
and Citizens repositioned properties. For comparability, the
table below includes 1993 pro forma adjustments to remove the
operating results of these repositioned properties, to include
the operating results of property acquired and to reflect
interest savings resulting from applying the proceeds to the
repayment of debt, as if the ALLTEL and Citizens transactions
occurred as of the beginning of each period presented. Net
income and operating income for the nine months ended September
30, 1993 also exclude the one-time charge for enhanced early
retirement and voluntary separation programs recorded in the
second quarter of 1993.
Three Months Ended Nine Months
Ended
September 30, September
30,
1994 1993 1994
1993
(Thousands of Dollars)
OPERATING REVENUES $ 303,374 $ 296,762 $ 911,565 $
884,443
OPERATING INCOME 62,923 83,251 202,211
260,198
NET INCOME 26,759 36,176 90,513
131,448
10
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(3) On June 28, 1994, the Securities and Exchange Commission
declared the Company's registration of $300 million of debentures
effective. On August 10, 1994, the Company sold $150 million of
7 1/4% Debentures, Series B, due 2002. The net proceeds from the
sale were applied towards the repayment of short-term borrowings
incurred for the purpose of financing the Company's construction
program.
(4) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
11
GTE SOUTH INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
third
quarter of 1994.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
GTE SOUTH
INCORPORATED
(Registrant)
Date: November 10, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 12,985
<SECURITIES> 0
<RECEIVABLES> 262,460
<ALLOWANCES> 7,302
<INVENTORY> 21,264
<CURRENT-ASSETS> 373,087
<PP&E> 3,772,001
<DEPRECIATION> 1,398,933
<TOTAL-ASSETS> 2,850,187
<CURRENT-LIABILITIES> 611,332
<BONDS> 598,952
<COMMON> 525,000
3,035
412
<OTHER-SE> 466,606
<TOTAL-LIABILITY-AND-EQUITY> 2,850,187
<SALES> 911,565
<TOTAL-REVENUES> 911,565
<CGS> 228,502
<TOTAL-COSTS> 709,354
<OTHER-EXPENSES> 12,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,100
<INCOME-PRETAX> 144,615
<INCOME-TAX> 54,102
<INCOME-CONTINUING> 90,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,513
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
