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 June 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 18,936,000 shares of $25 par value common stock
outstanding at July 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. . . . . . . . . . . . . .
. . . . 5
Condensed Balance Sheets - Liabilities and
Shareholders' Equity. . . . . . . . . . . . . . . . . . . .
. . . 6
Condensed Statements of Cash Flows . . . . . . . . . . . . .
. . . . 7
Notes to Condensed Financial Statements . . . . . . . . . .
. . . . 8
PART II. OTHER INFORMATION
Items 1 through 6. . . . . . . . . . . . . . . . . . . . . .
. . . . 10
Signature. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 11
<TABLE>
PART I. FINANCIAL INFORMATION
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months
Ended
June 30, June 30,
1994 1993 1994
1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 74,832 $ 96,694 $ 146,885 $ 191,349
Network access services 68,966 98,429 142,172 199,020
Long distance services 14,060 6,969 20,486 15,365
Equipment sales and services 13,195 18,784 25,562
35,741
Other 7,553 17,915 34,460 43,249
178,606 238,791 369,565 484,724
OPERATING EXPENSES:
Cost of sales and services 46,989 55,653 94,652
106,660
Depreciation and amortization 43,182 52,770 85,772
105,581
Marketing, selling, general
and administrative 55,223 83,016 113,619 155,605
145,394 191,439 294,043 367,846
Net operating income 33,212 47,352 75,522 116,878
OTHER (INCOME) DEDUCTIONS:
Interest expense 9,064 17,333 17,689 34,830
Other - net 389 457 4,207
(150)
INCOME BEFORE INCOME TAXES 23,759 29,562 53,626 82,198
INCOME TAXES 8,825 10,752 20,063 30,242
NET INCOME $ 14,934 $ 18,810 $ 33,563 $ 51,956
</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
Net income was $14.9 million for the three months and $33.6
million for the six months ended June 30, 1994 as compared to
$18.8 million and $52.0 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 $5.1 million for voluntary separation
programs. Excluding these special items, net income decreased
47% or $13.5 million for the three months and 44% or $26.0
million for the six months ended June 30, 1994 as compared to the
same periods in 1993. These decreases are due to increased
inventory, software and depreciation costs partially offset by an
increase in revenues.
Operating Revenues
Operating revenues decreased $60.2 million for the three months
and $115.2 million for the six months ended June 30, 1994 as
compared to the same periods in 1993. Excluding the impact of
non-strategic properties sold, revenues for the second quarter
and first six months of 1994 increased 1% or $1.2 million and 2%
or $8.2 million, respectively, compared to last year. The
increases are primarily due to increased minutes of use and an
increase in class/custom calling services. This was partially
offset by 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.
Effective March 1, 1994, the Company adopted Originating
Responsibility Plans (ORP) for interexchange revenues in North
Carolina, South Carolina and Kentucky resulting in a shift of
approximately $9.0 million of Network Access Services Revenues to
Long Distance Services Revenues for the six months ended June 30,
1994.
Operating Expenses
Operating expenses decreased $46.0 million for the three months
and $73.8 million for the six months ended June 30, 1994.
Excluding the impact of non-strategic properties sold and the one-
time charge of $8.0 million for voluntary separation programs,
operating expenses for the second quarter and first six months of
1994 increased 12% or $15.3 million and 13% or $33.7 million,
respectively, compared to last year. These increases are
primarily from increases in inventory costs, right-to-use
software fees and depreciation due to rate orders in North
Carolina and Kentucky that were effective January 1, 1994.
2
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other Expenses
Interest expense decreased 48% or $8.3 million for the three
months and 49% or $17.1 million for the six months ended June 30,
1994. These decreases are primarily attributable to lower long-
term debt levels. During November and December 1993, the Company
called $394.0 million of high-coupon first mortgage bonds with
proceeds from the sale of non-strategic properties.
Income tax expense decreased 18% or $1.9 million and 34% or $10.2
million for the three months and six months ended June 30, 1994,
respectively, compared to the same periods in 1993. The
decreases are primarily due to decreases in pretax income
partially offset by a reduction in the amortization of deferred
investment tax credits.
CAPITAL RESOURCES AND LIQUIDITY
Cash used in operations was $22.9 million during the six months
ended June 30, 1994 compared to cash provided from operations of
$131.4 million for the six months ended June 30, 1993. The
decrease in cash for operations was from paying taxes of $170.7
million in the first quarter of 1994 related to the disposition
of properties sold in late 1993.
Capital expenditures represent a significant use of funds during
1994 and 1993 reflecting the Company's continued growth in access
lines, modernization of current facilities and introduction of
new products and services. The Company's capital expenditures
during 1994 were $62.5 million compared to $85.7 million during
the same period in 1993. The Company's anticipated construction
costs for 1994 are approximately $155 million.
Cash provided from financing activities was $89.2 million in 1994
compared to cash used in financing of $41.0 million in 1993. The
Company received $328.3 million due to the repayment of an
affiliate note receivable and made dividend payments of $305.0
million to its parent. Dividends of $32.6 million were paid in
1993.
During the second quarter of 1994, the Company continued
implementation of its re-engineering plan. This plan will allow
the Company to continue to respond aggressively to competitive
and regulatory developments through reduced costs, improved
service quality, competitive prices and new product offerings.
Moreover, implementation of this program over the next three
years will position the Company to accelerate delivery of a full
array of voice, video and data services. Cash requirements for
the implementation of the re-engineering plan during 1994 are
expected to be largely offset by cost savings.
3
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
4
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 10,490 $ 7,937
Receivables, less allowances of
$12,513 and $9,682, respectively 137,231 145,725
Note receivable from affiliate -- 328,328
Materials and supplies, at average cost 19,274 21,040
Deferred income tax benefits 50,909 47,935
Prepayments and other 12,266 7,895
Total current assets 230,170 558,860
PROPERTY, PLANT AND EQUIPMENT:
Original cost 2,339,119 2,369,401
Accumulated depreciation (867,146)
(874,564)
Net property, plant and equipment 1,471,973 1,494,837
OTHER ASSETS 90,374 82,800
TOTAL ASSETS $ 1,792,517 $ 2,136,497
See Notes to Condensed Financial Statements.
5
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 103,217 $
24,652
Accounts payable 44,857 50,425
Accrued taxes 43,449 184,560
Accrued payroll and vacations 19,953 25,584
Accrued dividends 25,019 204,020
Accrued interest 5,499 241
Accrued restructuring costs and other 137,025 148,979
Total current liabilities 379,019 638,461
LONG-TERM DEBT 361,397 373,700
DEFERRED CREDITS, primarily deferred
income taxes and investment tax credits 422,445 402,014
PREFERRED STOCK, subject to
mandatory redemption 3,035 3,225
SHAREHOLDERS' EQUITY:
Preferred stock 412 412
Common stock 473,400 473,400
Other capital 1,187 1,187
Reinvested earnings 151,622 244,098
Total shareholders' equity 626,621 719,097
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,792,517 $
2,136,497
See Notes to Condensed Financial Statements.
6
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,563 $ 51,956
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 85,772 105,581
Deferred income taxes and investment
tax credits (40,903)
(7,174)
Provision for uncollectible accounts 8,143
9,115
Tax payments on disposition (170,684)
- - --
Changes in current assets and
current liabilities 51,533 (35,503)
Other - net 9,668 7,433
Net cash (used in) from operating
activities (22,908)
131,408
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (62,537)
(85,649)
Other - net (1,251)
(2,765)
Net cash used in investing activities (63,788)
(88,414)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired (440)
(5,033)
Dividends paid to shareholders (305,039)
(32,623)
Net change in affiliate notes 328,328 --
Increase (decrease) in short-term debt 66,400 (3,300)
Net cash provided from (used in)
financing activities 89,249 (40,956)
Increase in cash 2,553 2,038
Cash at beginning of period 7,937 4,863
Cash at end of period $ 10,490 $ 6,901
See Notes to Condensed Financial Statements.
7
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The condensed financial statements included herein have been
prepared by the Company, without audit, 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.
(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
repositioned properties. For comparability, the table below
includes 1993 pro forma adjustments to remove the operating
results of these properties, including interest, as if the ALLTEL
and Citizens' transactions occurred as of the beginning of each
period presented. Net income and operating income in 1993 also
exclude the one-time charge for enhanced early retirement and
voluntary separation programs.
Three Months Ended Six Months
Ended
June 30, June 30,
1994 1993 1994
1993
(Thousands of Dollars)
OPERATING REVENUES $ 178,606 $ 177,374 $ 369,565 $
361,413
OPERATING INCOME 33,212 47,265 75,522
101,060
NET INCOME 14,934 28,389 33,563
59,563
8
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(3) 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 provides that the Contel subsidiaries would merge
with and into the Company, with the Company to be the surviving
corporation in the merger (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 communications services in the
states of Kentucky, North Carolina, South Carolina and Virginia.
The Merger, which is expected to occur in late 1994, will be
accounted for in a manner consistent with a transfer of entities
under common control which is similar to a "pooling of
interests."
(4) On June 28, 1994, the Securities and Exchange Commission
declared the Company's registration of $300,000,000 of debentures
effective. On August 10, 1994, the Company sold $150,000,000 of
7 1/4% Debentures, Series B, due 2002. The net proceeds from the
sale will be applied towards the repayment of short-term
borrowings incurred for the purpose of financing the Company's
construction program, including the construction programs of the
Contel Subsidiaries following the Merger.
(5) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
9
GTE SOUTH INCORPORATED
PART II. OTHER INFORMATION
Items 1 through 5 are not applicable for the quarter ended June
30, 1994.
Item 6. Exhibits and Reports on Form 8-K.
GTE South Incorporated filed a report on Form 8-K dated June 10,
1994 under Item 5, "Other Events." Pro forma financial
statements were filed with this report.
10
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 thereunto duly authorized.
GTE SOUTH
INCORPORATED
(Registrant)
Date: August 12, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
11
