<PAGE> 1
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, 1994
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[No 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 REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
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
----- -----
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
-----
THE COMPANY HAD 21,000,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE CORPORATION.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C> <C> <C>
PART I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
PART III
10. Directors and Executive Officers of the Registrant 37
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners
and Management 48
13. Certain Relationships and Related Transactions 49
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 50
</TABLE>
<PAGE> 3
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.
On December 31, 1993, 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."
The Company provides a wide variety of communications services ranging from
local telephone service for the home and office to highly complex voice and
data services for industry. The Company provides local telephone service
within its franchise area 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
carrier. 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 AT&T Corp. The number of access
lines served was 1,639,170 on January 1, 1990 and 1,712,582 on December 31,
1994.
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The number of access lines in the states in which the Company operates as of
December 31, 1994, was as follows:
<TABLE>
<CAPTION>
Access
State Lines Served
--------------- --------------
<S> <C>
Virginia 502,942
Kentucky 496,491
North Carolina 345,532
South Carolina 182,386
Alabama 145,949
Illinois 39,282
-----------
Total 1,712,582
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1994 1993 1992
--------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Local Network Services $ 474,502 $ 541,281 $ 533,678
% of Total Revenues 39% 38% 38%
Network Access Services $ 481,555 $ 599,776 $ 588,844
% of Total Revenues 39% 42% 42%
Long Distance Services $ 125,814 $ 82,889 $ 99,024
% of Total Revenues 10% 6% 7%
Equipment Sales and Services $ 81,550 $ 95,951 $ 96,241
% of Total Revenues 7% 7% 7%
Other $ 57,997 $ 99,523 $ 84,501
% of Total Revenues 5% 7% 6%
</TABLE>
At December 31, 1994, the Company had 5,374 employees. The Company has written
agreements with the Communications Workers of America (CWA) and International
Brotherhood of Electrical Workers (IBEW). In 1994, agreements were reached on
three contracts with the CWA and one contract with the IBEW. During 1995, one
contract with the CWA and one contract with the IBEW will expire.
TELEPHONE COMPETITION AND REGULATORY DEVELOPMENTS
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,
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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 13 of the Company's financial statements included in Item 8.
During 1994, the Company began implementation of a three-year $163 million
re-engineering plan. In the initial year of the plan, $35 million was expended
to implement this program. These expenditures were primarily associated with
the consolidation of certain customer service centers, separation benefits
associated with employee reductions and incremental expenditures to redesign
and streamline systems and processes. During 1995, the level of re-engineering
activities and related expenditures are expected to accelerate as pilot
programs are rolled out and other major initiatives are completed. The overall
re-engineering plan remains on schedule and is expected to be completed by the
end of 1996. Continued implementation of this program will position the
Company to accelerate delivery of a full array of voice, video and data
services and to reach its stated objective of being the easiest company to do
business with in the industry.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communication
Services (PCS). PCS will compete with the Company's traditional wireline
services.
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. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Raleigh/Durham, North Carolina, to provide advanced communications
for business customers. This program includes sophisticated high-speed,
digital fiber-optic rings, a high- capacity switching network (known as SONET),
and a new centralized operations center that monitors the entire network.
These SONET rings are an integral part of the high-speed information network
that enables GTE to provide advanced services such as high-speed data
transmission and video conferencing.
Federal and state regulatory 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.
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Many states are currently investigating whether to authorize local and toll
competition. Several have concluded that competition is in the public interest
and five states, including Kentucky, have authorized plans that would allow
customers to pre-subscribe to a specific carrier to handle intraLATA toll
calls. GTE is challenging these orders primarily based on the lack of equality
since the Company is prohibited from providing interLATA toll service.
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 prices that the
Company may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. The Company may,
within certain ranges, price individual services above or below the overall
cap.
Under its price cap regulatory plan, the FCC 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 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under negotiated terms and conditions.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint and GTE Spacenet (both since divested), prohibits
GTE's domestic telephone operating subsidiaries from providing long distance
service beyond the boundaries of the LATA. This prohibition restricts the
Company's 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.
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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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
ITEM 2. PROPERTIES
The Company's property consists of network facilities (84%), company facilities
(11%), customer premises equipment (1%) and other (4%). From January 1, 1990
to December 31, 1994, the Company made gross property additions of $1.6 billion
and property retirements of $0.9 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.
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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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for GTE South's common stock and preferred
stock is the First National Bank of Boston.
GTE Corporation
C/O Bank of Boston
P.O. Box 9191
Boston, MA 02205-9191
10-K REPORT
A copy of the 1994 annual report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by writing to:
GTE Telephone Operations
External Reporting
P.O. Box 407, MC: INAAACG
Westfield, IN 46074
(317) 896-6464
PARENT COMPANY ANNUAL REPORT
A copy of the 1994 annual report of our parent company may be obtained by
writing to:
GTE Corporation
Corporate Secretary's Office
One Stamford Forum
Stamford, CT 06904
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<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA (NOTE 3)
GTE South Incorporated
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------
1994 1993(b)(c) 1992 1991 1990
------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT ITEMS (a)
---------------------------------------
Operating revenues $1,221,418 $1,419,420 $1,402,288 $1,387,698 $1,358,056
Operating expenses 947,541 1,203,800 997,247 1,056,370 1,021,298
------------------------------------------------------------------
Net operating income 273,877 215,620 405,041 331,328 336,758
Interest expense 60,038 92,822 93,731 94,642 94,081
Gain on disposition of assets -- (63,112) -- -- --
Other - net 7,344 463 7,351 (2,889) (1,902)
Income tax provision 77,308 85,712 108,869 76,718 76,395
------------------------------------------------------------------
Net income $ 129,187 $ 99,735 $ 195,090 $ 162,857 $ 168,184
==================================================================
Dividends declared on common stock $ 168,660 $ 341,998 $ 119,500 $ 127,367 $ 106,691
Dividends declared on preferred
stock 171 177 186 197 199
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET ITEMS
---------------------------------
Investment in property, plant
and equipment - net $2,402,927 $2,379,039 $2,895,282 $2,811,400 $2,747,225
Total assets 2,762,128 3,174,642 3,293,635 3,147,550 3,035,396
Long-term debt and preferred stock,
subject to mandatory redemption 597,213 566,705 999,848 970,320 938,237
Common stock, reinvested
earnings and other capital 1,030,266 1,069,908 1,312,348 1,236,930 1,201,627
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATISTICS
----------------------
Access lines 1,712,582 1,614,170 1,822,224 1,734,791 1,678,900
Access line gain (loss) 98,412 (208,054) 87,433 55,891 39,730
Net investment in property, plant
and equipment per access line $ 1,403 $ 1,474 $ 1,589 $ 1,621 $ 1,636
Number of employees 5,374 6,202 7,954 8,273 9,027
Access lines per employee 319 260 229 210 186
Capital expenditures (thousands) $ 287,479 $ 287,634 $ 347,522 $ 341,155 $ 356,339
----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) In 1993, the Company sold 329,000 net access lines through property
repositioning.
(c) Net operating income in 1993 includes a $163.0 million pretax charge for
restructuring costs
which reduced net income by $100.4 million.
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ITEM 7. 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 (GTE), currently provides local exchange, access and long distance
services in the states of Alabama, Illinois, Kentucky, North Carolina, South
Carolina and Virginia. Prior to the sale of properties described in Note 4,
the Company also provided these services in Georgia, Tennessee and West
Virginia.
On December 31, 1993, the Company entered into an Agreement of Merger with
Contel of Kentucky, Inc., Contel of North Carolina, Inc., Contel of South
Carolina, Inc. and Contel of Virginia, Inc. (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 provided 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.
RESULTS OF OPERATIONS
Net income was $129 million for the year ended December 31, 1994 as compared to
$100 million for the same period in 1993. Net income for 1993 includes the
gain from the sale and results of non-strategic properties sold in the fourth
quarter of 1993, a one- time after-tax charge of $8 million for enhanced early
retirement and voluntary separation programs and the one-time restructuring
charge of $100 million, net of tax. Excluding these special items, net income
decreased 24% or $41 million in 1994 and decreased 2% or $3 million in 1993.
The 1994 decrease is primarily due to increased operating expenses, partially
offset by increased operating revenues and decreased interest costs. The 1993
decrease reflects the impact of the adoption of Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" effective January 1, 1993 partially offset by
higher operating revenues.
OPERATING REVENUES
Local network service revenues are comprised mainly of fees charged to
customers for providing local exchange service. Local network service revenues
were $475 million and $541 million for 1994 and 1993, respectively. Excluding
revenues from the repositioned properties, the local network service revenues
increased 4% or $20 million and 4% or $17 million in 1994 and 1993,
respectively. The 1994 increase is due to customer growth experienced through
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a 6% gain in access lines and increased revenues from CentraNet(R)
services, custom calling and other enhanced features. The 1993 increase was
primarily due to increased revenues from CentraNet(R) services, custom calling
and other enhanced services.
Network access service revenues are fees charged to interexchange carriers that
use the local telecommunication network to provide long-distance services to
their customers. In addition, end users pay access fees to connect to the
local network to obtain long- distance service. Network access service
revenues were $482 million and $600 million for 1994 and 1993, respectively.
Excluding revenues from the repositioned properties, network access service
revenues decreased 1% or $3 million in 1994 and increased 6% or $26 million in
1993. The 1994 decrease is primarily due to the Company's transition to
Originating Responsibility Plans (ORP). The Company adopted ORP for intraLATA
revenue settlements in North Carolina and South Carolina, effective January 1,
1994, and in Kentucky, effective March 1, 1994. The negative impact on access
revenues is partially offset by increases in toll revenue and transitional
support payments received by the Company for a portion of the net revenue loss
between ORP and the previous pooling arrangements. The support payments will
phase out over the next few years. The 1994 decrease is also due to 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
decrease is partially offset by a 10% increase in minutes of use. The 1993
increase was primarily due to increased minutes of use and a change to an
access based pooling arrangement in North Carolina, partially offset by
voluntary reductions in interstate rates in a ongoing effort to price services
more competitively.
The Company's revenues for long distance services are provided from customer
billings as well as settlement arrangements with various telephone companies.
Long distance service revenues were $126 million and $83 million in 1994 and
1993, respectively. Excluding revenues from the repositioned properties, long
distance service revenues increased 82% or $56 million in 1994 and decreased
27% or $26 million in 1993. The 1994 increase is primarily due to the
transition to ORP from the access based plans as discussed above. The 1993
decrease reflected the changes in pooling arrangements mentioned earlier.
Equipment sales and services revenues are $82 million and $96 million for 1994
and 1993, respectively. Excluding revenues from the repositioned properties,
equipment sales and services revenues were comparable in 1994 and decreased 2%
or $2 million in 1993. The 1993 decrease was due primarily to a decline in
sales and maintenance agreements associated with large PBX systems, partially
offset by higher sales of single-line telephones.
Other operating revenues are $58 million and $100 million for 1994 and 1993,
respectively. Excluding revenues from the repositioned properties, other
operating revenues decreased 34% or $28 million in 1994 and increased 27% or
$18 million in 1993. The 1994 decrease is primarily due to lower billing and
collection revenues and rent revenues. Also contributing to the decrease are
increased provisions for uncollectible accounts. The 1993 increase was
primarily due to the change in pooling arrangements mentioned above.
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OPERATING EXPENSES
Cost of sales and services is $297 million and $312 million for 1994 and 1993,
respectively. Excluding expenses from the repositioned properties, cost of
sales and services increased 16% or $39 million and 4% or $9 million in 1994
and 1993, respectively. The 1994 increase is primarily due to the payment of
access charges under the ORP, as mentioned above, to other local exchange
carriers for intralata toll calls that are originated by the Company and
terminated by another local exchange carrier. The 1993 increase reflected
costs associated with the adoption of SFAS No. 106 effective January 1, 1993,
partially offset by lower software right-to-use fees.
Depreciation and amortization expense is $263 million and $292 million for 1994
and 1993, respectively. Excluding expenses from the repositioned properties,
depreciation and amortization costs increased 11% or $26 million and 5% or $11
million in 1994 and 1993, respectively. The 1994 increase is primarily due to
higher depreciation costs associated with increased plant balances of central
office equipment and cable/wire facilities. The 1993 increase was primarily
due to a rate order increase received from the South Carolina commission,
partially offset by lower plant balances due to retirement of central office
and computer equipment.
Marketing, selling, general and administrative expenses are $388 million and
$437 million for 1994 and 1993, respectively. Excluding expenses from the
repositioned properties and the one-time charge for the enhanced early
retirement and voluntary separation programs, these expenses increased 13% or
$45 million and 3% or $10 million in 1994 and 1993, respectively. The 1994
increase is primarily due to increased billing and collection costs, increased
access payment expenses associated with the transition to ORP, increased data
processing costs and increased costs related to the resolution of certain
settlement activities. The 1993 increase reflected costs associated with the
adoption of SFAS No. 106 and expenses related to the recording of reserves for
credit card billings.
OTHER DEDUCTIONS
Interest costs are $60 million and $93 million for 1994 and 1993, respectively.
Interest expense decreased 35% or $33 million for 1994 and remained relatively
unchanged from 1992 to 1993. The 1994 decrease is 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. This decrease was partially offset by
increases in interest rates on short-term debt.
Other net expenses are $7 million and less than $1 million for 1994 and 1993,
respectively. Other net expenses increased $7 million for 1994 and decreased
$7 million for 1993. The 1994 increase and 1993 decrease are primarily
attributable to fees associated with the early retirement of debt and costs
related to the repositioning of properties.
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<PAGE> 13
Income tax expense was $77 million and $86 million for 1994 and 1993,
respectively. This reflects a decrease of 10% or $9 million for 1994 and 21%
or $23 million for 1993. The 1994 decrease is related primarily to the sale
and exchange of repositioned properties mentioned above partially offset by the
increase in pretax income. The 1993 decrease was primarily due to decreases in
pretax income partially offset by higher tax expense associated with the sale
and exchange of repositioned properties.
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 $2.8
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.
The Company's primary source of funds during 1994 was cash flow from operations
of $286 million compared to $497 million for the same period in 1993. The
year-to-year decrease in cash from operations is primarily the result of tax
payments of $171 million in the first quarter of 1994 related to the
disposition of properties sold in late 1993, a decrease in the results from
operations and changes in the timing of the collection of receivables and the
payment of payables and prepayments.
Capital expenditures represent a significant use of funds during 1994 and 1993
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. The
Company's capital expenditures during 1994 were $287 million compared to $288
million during the same period in 1993. In 1995, capital expenditures are
expected to increase slightly from the 1994 level.
Cash used in financing activities was $10 million in 1994 compared to $842
million in 1993. This included the retirement of $127 million of long-term
debt in 1994 compared to $388 million in 1993. The Company received $328
million in 1994 from the collection of an affiliate note receivable. The
Company made dividend payments of $388 million in 1994 compared to $143 million
in 1993. In August 1994, the Company issued $150 million of 7.25% Debentures,
Series B, due 2002 for the purpose of financing the Company's construction
program.
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, but was
subsequently withdrawn from consideration. Telecommunications legislation has
been introduced again in 1995.
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<PAGE> 14
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has also continued. Regulatory authorities have adopted
various alternative forms of regulation, which provide economic incentives to
telephone service providers to improve productivity and provide the foundation
for implementing pricing flexibility necessary to address competitive entry
into the markets the Company serves.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs, including the Company, to permit competitors to
connect directly to LEC central offices, and to connect to the LEC network
under negotiated terms and conditions. Competitors are thereby able to compete
more effectively than previously to replace LEC services between large users
and interexchange carriers (IXCs), or between large users and the LEC switch.
The FCC accompanied its Expanded Interconnection mandate with a slight
relaxation of the rigid pricing rules that govern how LECs price their access
services. In 1994, the FCC also reaffirmed the switched access rate structure
changes adopted in 1993 that allow LECs to better reflect the actual cost
characteristics of transport services and improve the LEC's ability to compete
with alternative access providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 13 of the Company's financial
statements included in Item 8.
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and cellular telephone
companies. Competition from IXCs, wireless and cable TV companies, as well as
more recent entry by media and computer companies, is expected to increase in
the rapidly changing telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
-12-
<PAGE> 15
INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company
has embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $163 million
re-engineering plan. During 1994, the initial year of the three-year plan, $35
million was expended as significant progress was made in implementing this
program. These expenditures were primarily 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 systems and processes. During 1995,
the level of re-engineering activities and related expenditures are expected to
accelerate as pilot programs are rolled out and other major initiatives are
completed. Continued implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services and to
reach its stated objective of being the easiest company to do business with in
the industry.
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. On January 13,
1995, the United States District Court for the Eastern District of Virginia
issued an injunction declaring that GTE has the right to provide video
programming to its in-franchise customers. The court's decision means that GTE
is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Raleigh/Durham, North Carolina, to provide advanced communications
for business customers. This program includes sophisticated high-speed,
digital fiber-optic rings, a high- capacity switching network (known as SONET),
and a new centralized operations center that monitors the entire network.
These SONET rings are an integral part of the high-speed information network
that enables GTE to provide advanced services such as high-speed data
transmission and video conferencing.
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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition.
-13-
<PAGE> 16
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, SFAS No. 71 requires companies to depreciate plant and equipment over
lives approved by regulators which may extend beyond the assets' actual
economic and technological lives. SFAS No. 71 also requires deferral of
certain costs and obligations based upon approvals received from regulators to
permit recovery in the future. Consequently, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, may be
greater than that which would otherwise be recorded by unregulated enterprises.
On an ongoing basis, the Company reviews the continued applicability of SFAS
No. 71 based on the current regulatory and competitive environment. Although
recent developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result, the
Company continues to believe that accounting under SFAS No 71 is appropriate.
If the Company were to determine that the use of SFAS No. 71 was no longer
appropriate, it would be required to write-off the deferred costs and
obligations referred to above. It may also be necessary for the Company to
reduce the carrying value of its plant and equipment to the extent that it
exceeds fair market value. At this time, it is not possible to estimate the
amount of the Company's plant and equipment, if any, that would be considered
unrecoverable in such circumstances. The financial impact of such a
determination, however, which would be non-cash, could be material.
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.
-14-
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF INCOME (Note 3)
GTE South Incorporated
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (a):
Local network services $ 474,502 $ 541,281 $ 533,678
Network access services 481,555 599,776 588,844
Long distance services 125,814 82,889 99,024
Equipment sales and services 81,550 95,951 96,241
Other 57,997 99,523 84,501
---------- ---------- ----------
1,221,418 1,419,420 1,402,288
---------- ---------- ----------
OPERATING EXPENSES (b):
Cost of sales and services 297,124 311,932 307,727
Depreciation and amortization 262,877 291,767 284,608
Marketing, selling, general and
administrative 387,540 437,108 404,912
Restructuring costs -- 162,993 --
---------- ---------- ----------
947,541 1,203,800 997,247
---------- ---------- ----------
NET OPERATING INCOME 273,877 215,620 405,041
---------- ---------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 60,038 92,822 93,731
Gain on disposition of assets -- (63,112) --
Other - net 7,344 463 7,351
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 206,495 185,447 303,959
---------- ---------- ----------
INCOME TAX PROVISION 77,308 85,712 108,869
---------- ---------- ----------
NET INCOME $ 129,187 $ 99,735 $ 195,090
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $39,883, $31,558 and $34,600 for the
years 1994-1992, respectively.
(b) Includes billings from affiliates of $55,823, $78,212 and $81,505 for the
years 1994-1992, respectively.
STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 486,600 $ 729,040 $ 653,636
ADD -
Net income 129,187 99,735 195,090
DEDUCT -
Cash dividends declared on common stock 168,660 341,998 119,500
Cash dividends declared on
preferred stock 171 177 186
---------- ---------- ----------
BALANCE AT END OF YEAR $ 446,956 $ 486,600 $ 729,040
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
-15-
<PAGE> 18
BALANCE SHEETS (Note 3)
GTE South Incorporated
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- ---------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 6,549 $ 17,810
Accounts receivable
Customers (including unbilled revenues) 198,654 181,219
Affiliated companies 6,401 22,873
Other 40,230 73,644
Allowance for uncollectible accounts (24,090) (11,334)
Note receivable from affiliate -- 328,328
Materials and supplies 14,461 23,278
Deferred income tax benefits 26,896 47,935
Prepayments and other 7,617 19,309
----------- -----------
276,718 703,062
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 3,821,365 3,736,745
Accumulated depreciation (1,418,438) (1,357,706)
----------- -----------
2,402,927 2,379,039
----------- -----------
OTHER ASSETS 82,483 92,541
----------- -----------
TOTAL ASSETS $ 2,762,128 $ 3,174,642
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 108,800 $ 79,647
Current maturities of long-term debt 62,222 71,176
Accounts payable 65,382 78,240
Affiliate payables and accruals 32,150 48,233
Advanced billings and customer deposits 27,022 29,103
Accrued taxes 53,351 195,871
Accrued interest 12,286 3,612
Accrued payroll and vacations 30,357 33,661
Accrued dividends 290 219,920
Accrued restructuring costs and other 143,100 169,106
----------- -----------
534,960 928,569
----------- -----------
LONG-TERM DEBT 594,187 563,480
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 370,217 389,177
Employee benefit obligations 109,609 90,627
Restructuring costs and other 119,451 129,244
----------- -----------
599,277 609,048
----------- -----------
PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION 3,026 3,225
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock 412 412
Common stock (21,000,000 shares outstanding) 525,000 525,000
Other capital 58,310 58,308
Reinvested earnings 446,956 486,600
----------- -----------
1,030,678 1,070,320
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,762,128 $ 3,174,642
=========== ===========
</TABLE>
See Notes to Financial Statements.
-16-
<PAGE> 19
STATEMENTS OF CASH FLOWS (Note 3)
GTE South Incorporated
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 129,187 $ 99,735 $ 195,090
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 262,877 291,767 284,608
Restructuring costs -- 162,993 --
Deferred income taxes and investment
tax credits (24,845) (178,197) 19,595
Provision for uncollectible accounts 31,364 20,302 23,500
Tax payments on disposition (170,684) -- --
Gain on disposition of assets,
net of tax -- (36,171) --
Change in current assets and current
liabilities 7,041 30,782 (67,675)
Other - net 51,162 105,949 (25,138)
---------- ---------- ----------
Net cash from operating activities 286,102 497,160 429,980
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (287,479) (287,634) (347,522)
Acquisition of assets -- (42,919) --
Proceeds from sale of assets -- 806,683 --
Other - net 375 (120,536) (2,130)
---------- ---------- ----------
Net cash provided from (used in)
investing activities (287,104) 355,594 (349,652)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 147,679 -- 74,190
Long-term debt and preferred stock
retired (126,958) (387,521) (47,911)
Dividends paid to shareholders (388,461) (142,736) (121,222)
Net change in affiliate notes 328,328 (319,595) 51,011
Increase (decrease) in short-term debt 29,153 7,500 (50,450)
---------- ---------- ----------
Net cash used in financing activities (10,259) (842,352) (94,382)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH (11,261) 10,402 (14,054)
CASH:
Beginning of year 17,810 7,408 21,462
---------- ---------- ----------
End of year $ 6,549 $ 17,810 $ 7,408
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
-17-
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
GTE South Incorporated
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
GTE South Incorporated (the Company) is a wholly-owned subsidiary of GTE
Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $73.1 million, $120.9
million and $117.3 million for the years 1994-1992, respectively. Such
purchases are recorded in the accounts of the Company at cost which includes a
normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
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
$55.8 million, $78.2 million and $81.5 million for the years 1994-1992,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation ("Directories")
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $39.9 million, $31.6 million and $34.6 million for the
years 1994-1992, 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 on a straight-line
basis over asset lives approved by regulators. Depreciation is 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 7.1%, 7.4% and 6.9% for the years
1994-1992, respectively.
-18-
<PAGE> 21
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. Accordingly, 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 to permit recovery of such amounts in future years.
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 services are rendered or products are
delivered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average 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 these 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 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
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
-19-
<PAGE> 22
As further explained in Note 9, 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.
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.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $16 million.
The estimated fair value of long-term debt as of December 31, 1993 exceeded the
carrying value by approximately $27 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1994 presentation.
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of $163.0
million, which reduced net income by $100.4 million, primarily for incremental
costs related to implementation of the Company's three-year re-engineering
plan. The re-engineering plan will redesign and streamline processes to
improve customer-responsiveness and product quality, reduce the time necessary
to introduce new products and services and further reduce costs. The
re-engineering plan included $65.2 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $73.8
million for employee separation benefits associated with workforce reductions
and $20.0 million primarily for the consolidation of facilities and operations
and other related costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $35.0 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
-20-
<PAGE> 23
During 1993, the Company offered various voluntary separation programs to its
employees. The programs resulted in a pretax charge of $12.4 million which
reduced net income by $7.8 million.
3. LEGAL ENTITY MERGER
On December 31, 1993, 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
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:
<TABLE>
<CAPTION>
Contel Contel
GTE South Contel North South Contel GTE South
(Pre-Merger) Kentucky Carolina Carolina Virginia (Post-Merger)
---------- -------- -------- -------- --------- -----------
(Thousands of Dollars)
Year Ended December 31, 1993
<S> <C> <C> <C> <C> <C> <C>
Operating Rev. $ 953,297 $ 60,111 $ 80,561 $ 12,598 $ 312,853 $ 1,419,420
Operating Inc. 132,852 17,157 22,493 2,673 40,445 215,620
Net Income 61,346 9,094 11,488 1,392 16,415 99,735
Year Ended December 31, 1992
Operating Rev. $ 974,968 $ 51,264 $ 76,971 $ 12,209 $ 286,876 $ 1,402,288
Operating Inc. 283,549 17,072 29,596 4,489 70,335 405,041
Net Income 137,254 8,967 15,995 2,495 30,379 195,090
</TABLE>
4. PROPERTY REPOSITIONING
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.
-21-
<PAGE> 24
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 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 and 1992 pro forma adjustments
to remove the gain from sale and operating results of these repositioned
properties, to include the operating results of properties 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
year ended December 31, 1993 exclude the one- time charges for restructuring
and the enhanced early retirement and voluntary separation programs. Net
income for 1993 also excludes after-tax gains of $36,171 related to the ALLTEL
and Citizens transactions.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------------------------
1994 1993 1992
------------ ------------ -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues $ 1,221,418 $ 1,181,562 $ 1,147,729
Operating Income 273,877 335,238 339,423
Net Income 129,187 169,768 172,300
</TABLE>
5. 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, 1994 and 1993. Cumulative preferred stock, subject to mandatory
redemption, exclusive of amounts held in treasury, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ------------------ -----------------
SHARES Shares
------- -------
<S> <C> <C> <C> <C>
AUTHORIZED 258,314 258,314
------- -------
OUTSTANDING SHARES AMOUNT* Shares Amount*
------- -------- ------- --------
$25 Par Value--
4.64% Series 75,400 $ 1,885 79,000 $ 1,975
$50 Par Value--
5.00% Series 11,035 552 12,428 622
5.16% Series 11,776 589 12,566 628
------- -------- ------- --------
Total 98,211 $ 3,026 103,994 $ 3,225
======= ======== ======= ========
</TABLE>
*Thousands of Dollars
-22-
<PAGE> 25
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 from 1992
through 1994.
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 1994, the Company met this requirement through the
purchase of 1,210 and 790 shares of 5.00% and 5.16% Series, respectively. In
addition, 200 shares of the 5.00% Series were purchased for treasury stock.
During 1993, the Company purchased 985 and 790 shares of the 5.00% and 5.16%
Series, respectively, and fulfilled the remainder of the requirement through
treasury stock. 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.
The aggregate redemption requirement of preferred stock subject to mandatory
redemption is $190,000 in each of the years 1995-1999.
Two hundred shares of 5.00% Series preferred stock were held as treasury shares
by the Company at December 31, 1994. No shares of preferred stock were held as
treasury shares at December 31, 1993. No shares of preferred stock were
reserved for officers or 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, 1994.
6. 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, 1994, $39.3 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.
-23-
<PAGE> 26
7. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS:
4.65 % Series, due 1995 $ -- $ 5,000
9.5 % Series I, due 1995 -- 550
4.65 % Series M, due 1995 -- 7,304
4.8 % Series Q, due 1995 -- 630
9.25 % Series J, due 1996 -- 495
10.25 % Series M, due 1996 -- 740
10 % Series Q, due 1996 -- 150
6 1/4 % Series, due 1997 6,500 6,500
5.875 % Series K, due 1997 740 750
8.25 % Series K, due 1997 -- 720
6 3/8 % Series N, due 1997 9,352 9,352
5.875 % Series EE, due 1997 1,925 1,950
8 % Series II, due 1998 2,380 2,590
8 % Series FF, due 1999 1,925 1,950
8 % Series T, due 2001 20,750 20,750
8.5 % Series U, due 2001 1,204 1,333
8.375 % Series GG, due 2001 1,560 1,560
8.625 % Series N, due 2002 -- 960
7 5/8 % Series U, due 2002 20,995 20,995
8.625 % Series OO, due 2002 2,800 3,200
7 3/4 % Series, due 2003 10,886 10,886
8 % Series V, due 2003 1,870 2,035
8.375 % Series JJ, due 2004 1,850 2,000
10.54 % Series VV, due 2008 22,941 24,706
9.875 % Series PP, due 2009 8,800 8,900
8.88 % Series WW, due 2009 32,941 35,294
9 % Series FF, due 2029 100,000 100,000
9 3/8 % Series GG, due 2030 125,000 125,000
----------- -----------
374,419 396,300
----------- -----------
DEBENTURES:
6 1/4 %, due 1997 75,000 75,000
7.250 %, due 2002 150,000 --
----------- -----------
225,000 75,000
----------- -----------
RURAL UTILITIES SERVICE (RUS):
2%, through 2009 -- 5,397
----------- -----------
RURAL TELEPHONE BANK (RTB):
7% to 9.5%, through 2023 -- 19,977
----------- -----------
FEDERAL FINANCING BANK (FFB):
7.391% to 12.201%, through 2022 -- 30,078
----------- -----------
UNSECURED NOTES PAYABLE:
8.25 %, due 1997 740 800
9.5 %, due 2010 2,648 2,824
----------- -----------
3,388 3,624
----------- -----------
UNSECURED PROMISSORY NOTE PAYABLE:
4.4925%, due 1995 -- 40,000
----------- -----------
CAPITALIZED LEASES 169 405
----------- -----------
Total principal amount 602,976 570,781
----------- -----------
DISCOUNT AND PREMIUM - NET (8,789) (7,301)
----------- -----------
Total long-term debt $ 594,187 $ 563,480
=========== ===========
</TABLE>
-24-
<PAGE> 27
During 1994, the Company retired all outstanding RUS, RTB and FFB debts,
several first mortgage bonds and a promissory note in connection with the legal
entity merger discussed in Note 3.
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, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 62,222
1996 5,688
1997 99,710
1998 7,284
1999 7,112
</TABLE>
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
-25-
<PAGE> 28
8. 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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial paper -
Maximum month-end balance $ 122,500 $ 34,400 $ 108,600
Average monthly balance $ 80,172 $ 15,115 $ 69,908
Weighted average interest rate 4.30% 3.14% 3.73%
AT DECEMBER 31 -
Balance outstanding -
Notes payable to GTE $ -- $ 55,447 $ 60,066
Average interest rate -- 3.38% 3.99%
Commercial paper $ 108,800 $ 24,200 $ 16,700
Average interest rate 5.90% 3.30% 3.45%
</TABLE>
Unused lines of credit of $2.8 billion are available to the Company to support
outstanding commercial paper and other short-term financing needs 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.
9. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -------------
(Thousands of Dollars)
<S> <C> <C> <C>
CURRENT
Federal $ 77,196 $ 236,172 $ 75,294
State 24,957 27,459 13,980
------------ ------------ -------------
Total 102,153 263,631 89,274
------------ ------------ -------------
DEFERRED
Federal (19,833) (153,521) 22,692
State 768 (11,237) 7,407
------------ ------------ -------------
Total (19,065) (164,758) 30,099
------------ ------------ -------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (5,780) (13,161) (10,504)
------------ ------------ -------------
Total $ 77,308 $ 85,712 $ 108,869
============ ============ =============
</TABLE>
-26-
<PAGE> 29
The components of deferred income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation and
amortization $ 2,277 $ (42,818) $ 10,907
Employee benefit obligations (15,693) (32,866) (4,463)
Prepaid pension costs 11,897 4,087 4,655
Restructuring costs 10,684 (61,084) --
Other (28,230) (32,077) 19,000
------------- ------------- -------------
Total $ (19,065) $ (164,758) $ 30,099
============= ============= =============
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pretax income and income taxes provided in the Statements of
Income is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
AMOUNTS COMPUTED AT
STATUTORY RATES $ 72,273 $ 64,906 $ 103,346
State income taxes, net
of federal income tax
benefits 16,721 10,544 14,115
Amortization of deferred
investment tax credits (5,780) (13,161) (10,504)
Depreciation of telephone
plant construction costs,
previously deducted for
tax purposes - net 4,183 5,097 4,455
Rate differentials applied
to reversing temporary
differences (2,450) (3,193) (4,030)
Other differences,
including impact of
repositioning (7,639) 21,519 1,487
------------- ------------- -------------
TOTAL PROVISION $ 77,308 $ 85,712 $ 108,869
============= ============= =============
</TABLE>
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,
1994 amounted to $13.4 million and $30.3 million, respectively, and the
unamortized regulatory asset and regulatory liability balances at December 31,
1993 amounted to $19.0 million and $26.7 million, respectively, and are
reflected as other assets and other deferred credits 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.
-27-
<PAGE> 30
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:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 407,138 $ 419,046
Employee benefit obligations (46,823) (31,130)
Prepaid pension costs 18,119 6,222
Restructuring costs (50,400) (61,084)
Investment tax credits 22,075 27,855
Other - net (6,788) (19,667)
--------- ---------
Total $ 343,321 $ 341,242
========= =========
</TABLE>
10. 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 components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year $ 13,533 $ 18,212 $ 18,082
Interest cost on projected
benefit obligations 32,267 39,602 39,179
Return on plan assets:
Actual 950 (107,568) (43,794)
Deferred (57,376) 47,581 (12,185)
Other - net (9,224) (11,897) (9,183)
--------- --------- ---------
Net pension credit $ (19,850) $ (14,070) $ (7,901)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for 1993 and 1992.
-28-
<PAGE> 31
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Plan assets at fair value $ 683,151 $ 707,774
Projected benefit obligations 406,476 439,108
--------- ---------
Excess of assets over projected benefit
obligations 276,675 268,666
Unrecognized net transition asset (38,849) (41,832)
Unrecognized net gain (179,659) (184,668)
--------- ---------
Prepaid pension costs $ 58,167 $ 42,166
========= =========
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $323.1 million and $329.6 million and vested
benefit obligations of $286.1 million and $295.6 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
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. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Benefits earned during the year $ 4,811 $ 8,089
Interest cost on accumulated postretirement
benefit obligations 23,393 25,756
Actual return on plan assets 381 (701)
Amortization of transition obligation 10,770 15,673
Other-net (4,257) --
--------- ---------
Postretirement benefit cost $ 35,098 $ 48,817
========= =========
</TABLE>
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $4.4 million.
-29-
<PAGE> 32
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations
attributable to:
Retirees $ 204,109 $ 213,441
Fully eligible active plan participants 19,893 18,662
Other active plan participants 80,984 82,473
--------- ---------
Total accumulated postretirement benefit
obligations 304,986 314,576
Fair value of plan assets 9,191 8,900
--------- ---------
Excess of accumulated obligations over
plan assets 295,795 305,676
Unrecognized transition obligation (189,693) (205,271)
Unrecognized net gain (loss) (2,849) (22,424)
--------- ---------
Accrued postretirement benefit obligations $ 103,253 $ 77,981
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and
13% for pre-65 participants and 9.0% 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 1994 costs by $2.9 million and the
accumulated postretirement benefit obligations at December 31, 1994 by $29.1
million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes, among others, include newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised cost sharing schedule based on a retiree's years of service. The net
effect of these changes reduced the accumulated postretirement benefit
obligations at December 31, 1993 by $61.4 million.
SAVINGS PLANS
The Company sponsors employee 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 $4.0 million, $3.9 million and $4.5 million in
1994-1992, respectively.
-30-
<PAGE> 33
11. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment that contain varying renewal options for terms up to 19 years.
Rental expense was $18.2 million, $20.7 million and $20.0 million in 1994-1992,
respectively. Minimum rental commitments for noncancelable leases through 1999
do not exceed $3.0 million annually and aggregate $0.5 million thereafter.
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 17,999 $ 18,392
Buildings 210,416 200,059
Central office equipment 1,404,144 1,318,429
Outside plant 1,840,584 1,797,711
Other 348,222 402,154
---------- ----------
Total property, plant and equipment 3,821,365 3,736,745
Accumulated depreciation 1,418,438 1,357,706
--------- ----------
Net property, plant and equipment $2,402,927 $2,379,039
========== ==========
</TABLE>
13. 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 intrastate operations. Prior to the sale of properties described in
Note 4, the state regulatory commissions in Georgia, Tennessee and West
Virginia also regulated the Company's intrastate operations.
INTRASTATE SERVICES
As of December 1994, the Company provides long distance services within
designated geographic areas called Local Access and Transport Areas (LATAs) in
conformity with state commission orders. The Company also provides long
distance access services directly to interexchange carriers and other customers
who provide service between LATAs. Provisioning of intrastate long distance
services within the Company during 1994 was accomplished by either (i)
arrangements whereby the Company acts or is a provider of long distance
services directly to the customers (Kentucky and Virginia), (ii) receiving
access revenues from the primary toll carrier within the LATA (Alabama and
Illinois), (iii) participation in an intraLATA compensation plan, called an
Originating Responsibility Plan (ORP) (North Carolina, South Carolina and
Kentucky). Under this plan, the toll rates billed to end users
-31-
<PAGE> 34
for intraLATA toll calls originating in the Company's service area are retained
by the Company. The Company, in turn, pays 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. The Company receives transitional support
payments from any revenue loss created by these changes in compensation
arrangements under the terms of various industry agreements.
On December 29, 1994, the Kentucky Commission issued an order requiring the
implementation of intraLATA 1+ presubscription. This order requires all
exchanges within Kentucky to be converted to intraLATA 1+ within a three year
period extending from July 1995 to June 1998.
In 1994, the Company received annual intrastate rate reductions in Kentucky
totaling $1.6 million. 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.
Effective January 1, 1992, the Company entered into an alternative regulatory
plan in the state of South Carolina. On August 9, 1993, the South Carolina
Supreme Court ruled that the South Carolina Public Service Commission (SCPSC)
lacked the authority to establish incentive regulation plans for the local
exchange telephone companies in the state. The Company was returned to
traditional rate of return regulation, and an earnings investigation ensued.
On March 22, 1994, the SCPSC approved a settlement agreement requiring the
Company to refund $4.4 million, and to reduce rates prospectively by $4.1
million. This order was effective on May 1, 1994. On May 10, 1994, the South
Carolina Legislature approved a bill allowing alternative regulatory plans if
certain conditions are met by local exchange telephone companies. At this
time, the Company has not filed such a plan.
In September and October 1993, the Company filed applications with the
respective state commissions to legally merge the Contel legal entities in
Kentucky, North Carolina, South Carolina and Virginia into GTE South. Due to
concerns over the earnings of Contel of North Carolina, the Company initiated
informal negotiations with the North Carolina Utilities Commission (NCUC)
staff. As part of its approval of the merger, on April 18, 1994, the NCUC
approved a settlement agreement requiring the Company to reduce rates
prospectively by $6.6 million, effective June 1, 1994. As discussed in Note 3,
the merger became effective September 30, 1994.
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.
-32-
<PAGE> 35
As a safeguard under its price cap regulatory plan, the FCC 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 the prospective prices. During
1995, 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 Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994-1992 under
various arrangements and amounted to $189.2 million, $234.8 million and $237.2
million, respectively.
14. 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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $ 13,843 $(10,227) $(92,267)
Materials and supplies 8,817 6,111 5,084
Prepayments and other current assets 11,692 (11,209) 4,716
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (12,858) (50,524) 40,072
Affiliate payables and accruals (16,083) 9,348 (11,561)
Advanced billings and customer deposits (2,081) (10,726) 4,464
Accrued liabilities 35,997 42,167 (1,447)
Other (32,286) 55,842 (16,736)
--------- -------- --------
Total $ 7,041 $ 30,782 $(67,675)
========= ======== ========
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $ 50,890 $106,933 $ 92,044
Income taxes 214,397 (20,404) 101,815
</TABLE>
-33-
<PAGE> 36
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, 1994 and 1993, and the related statements of income, reinvested
earnings and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule 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, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, 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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This supporting schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states 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 LLP
Dallas, Texas
January 25, 1995.
-34-
<PAGE> 37
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.
JOHN C. APPEL
President
GERALD K. DINSMORE
Senior Vice President-Finance and Planning
-35-
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-36-
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
The names, ages and positions of the directors of the Company as of March 27,
1995 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
------------------ --- -------- ------------------------------------------
<S> <C> <C> <C>
Kent B. Foster 51 1994 Vice Chairman of the Board of Directors, GTE Corporation, October 1993;
President, GTE Telephone Operations, 1989; Director, GTE Corporation, 1992;
Director, all GTE domestic telephone subsidiaries, 1993 and/or 1994; Director,
BC Telecom, Inc.; Director, Compania Anonima Nacional Telefonos de Venezuela;
Director, NationsBank of Texas; Director, Dallas Symphony Orchestra.
Richard M. Cahill 56 1994 Vice President - General Counsel, GTE Telephone Operations, 1988; Director, all
GTE domestic telephone subsidiaries, 1993 and/or 1994; former Director, GTE
Vantage Incorporated, 1991.
Gerald K. Dinsmore 45 1992 Senior Vice President - Finance and Planning, GTE Telephone Operations, 1994;
former Vice President - Finance, GTE Telephone Operations, 1993; former Vice
President - Intermediary Customer Markets, GTE Telephone Operations, 1988;
former President of all South Area companies, GTE Telephone Operations, 1992;
Director, GTE Florida Incorporated and GTE South Incorporated, 1992; Director,
all other GTE domestic telephone subsidiaries, 1993 and/or 1994.
</TABLE>
-37-
<PAGE> 40
<TABLE>
<CAPTION>
Director
Name Age Since Business Experience
---------------- --- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael B. Esstman 48 1994 Executive Vice President - Customer Segments, GTE Telephone Operations, 1994;
former Executive Vice President - Operations, GTE Telephone Operations, 1993;
former President and Director of all Central Area companies, GTE Telephone
Operations, 1991; former President, Contel Eastern Region, Telephone Operations
Sector, 1983; Director, AG Communications Systems; Director, all other GTE
domestic telephone subsidiaries, 1993 and/or 1994.
Thomas W. White 48 1994 Executive Vice President - Network Operations, GTE Telephone Operations, 1994;
former Executive Vice President - Telephone Operations, GTE Telephone
Operations, 1993; former Senior Vice President - General Office Staff, GTE
Telephone Operations, 1989; Director, all GTE domestic telephone subsidiaries,
1993 and/or 1994; Director, Quebec - Telephone.
</TABLE>
Directors are elected annually. The term of each director expires on the date
of the next annual meeting of shareholders, which is to be held on the fourth
Thursday in May.
There are no family relationships between any of the directors or executive
officers of the Company.
B. IDENTIFICATION OF EXECUTIVE OFFICERS
The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations.
Accordingly, the list below contains the names, ages and positions of the
executive officers of both the Company and GTE Telephone Operations (Telops) as
of March 27, 1995.
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- ----------------------------
<S> <C> <C> <C> <C>
Kent B. Foster 51 1989 -- President of GTE Telephone
Operations
John C. Appel (1) 46 1994 1995 President of the Company and
Senior Vice President -
Regional Operations of GTE
Telephone Operations
</TABLE>
-38-
<PAGE> 41
<TABLE>
<CAPTION>
Year Assumed
Present Position
-----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- -------------------------------
<S> <C> <C> <C> <C>
Mary Beth Bardin (2) 40 1994 1995 Vice President - Public Affairs
of GTE Telephone Operations
and the Company
Clarence F. Bercher 51 1994 1995 President - Consumer Markets of
GTE Telephone Operations and
Vice President - Consumer
Markets of the Company
Richard M. Cahill 56 1989 1995 Vice President - General
Counsel of GTE Telephone
Operations and the Company
Robert C. Calafell 53 1993 -- Vice President - Video Services
of GTE Telephone Operations
Gerald K. Dinsmore 45 1994 1994 Senior Vice President - Finance
and Planning of GTE Telephone
Operations and the Company
William M. Edwards, III 46 -- 1993 Controller of the Company
Michael B. Esstman 48 1994 -- Executive Vice President -
Customer Segments of GTE
Telephone Operations
Bruce E. Haddad 41 1994 -- Senior Vice President -
International of GTE
Telephone Operations
Donald A. Hayes 57 1992 -- Vice President - Information
Technology of GTE Telephone
Operations
Gregory D. Jacobson 43 -- 1994 Treasurer of the Company
Andrew T. Jones 54 1992 -- Vice President - International
of GTE Telephone Operations
Brad M. Krall 53 1993 1995 Vice President - Centralized
Operations of GTE Telephone
Operations and the Company
Michael J. McDonough 45 1994 1995 President - Business Markets of
GTE Telephone Operations and
Vice President - Business
Markets of the Company
Paul E. Miner 50 1993 1995 Vice President - Network
Operations Support of GTE
Telephone Operations and the
Company
Dennis F. Myers 51 -- 1994 Vice President - South Region
of the Company
Richard L. Schaulin 52 1989 1995 Vice President - Human
Resources of GTE Telephone
Operations and the Company
Leland W. Schmidt 61 1989 -- Vice President - Industry
Affairs of GTE Telephone
Operations
Charles J. Somes 49 -- 1994 Secretary of the Company
Larry J. Sparrow 51 1994 1995 President - Carrier Markets of
GTE Telephone Operations and
Vice President - Carrier
Markets of the Company
</TABLE>
-39-
<PAGE> 42
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------
the
Name Age Telops Company Position
-------------------- --- ------ ------- ------------------------------
<S> <C> <C> <C> <C>
Alex Stadler 44 1994 1995 Vice President - Strategy &
Technology Planning of GTE
Telephone Operations and the
Company
Edward J. Weise 50 -- 1991 Vice President - Virginia
Region of the Company
Thomas W. White 48 1994 -- Executive Vice President -
Network Operations of GTE
Telephone Operations
William A. Zielke 48 -- 1994 Vice President - North Region
of the Company
</TABLE>
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) John C. Appel was elected President replacing Earl A. Goode who was
appointed President, GTE Information Services.
(2) Mary Beth Bardin was elected Vice President - Public Affairs of GTE
Telephone Operations replacing G. Bruce Redditt who was appointed Vice
President - Public Affairs and Communications, GTE Corporation.
During 1994, the organizational structure of GTE Telephone Operations was
restructured to include 11 regions, eliminating the previous Area management
structure.
-40-
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of each of
the individuals who served as Chief Executive Officer during 1994 and each of
the other four most highly compensated executive officers (the named executive
officers) of the Company in 1994 for services in all capacities to the Company.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------------------
Annual Compensation(1) Awards Payouts
------------------------------------ ----------------------- --------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Compensation Stock Options/ Payouts Compensation
Position in Group Year ($) Bonus($) ($) Awards(#) SARs(#) ($)(2) ($)(3)
----------------------------- ---- -------- -------- ------------ --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore (4) 1994 43,272 40,722 -- -- 30,900 17,034 4,500
Senior Vice President- 1993 116,545 113,174 -- -- 14,500 8,096 3,395
Finance and Planning 1992 20,911 21,236 -- -- 16,200 -- 620
GTE Telephone Operations
M. L. Keith, Jr. (6) 1994 33,781 19,291 -- -- 5,500 -- 4,351
Area Vice President-Sales 1993 -- -- -- -- 4,000 -- --
1992 -- -- -- -- -- -- --
Earl A. Goode (5) 1994 21,761 20,541 -- -- 30,900 9,989 4,500
President- 1993 -- -- -- -- 14,500 -- --
GTE Information Services 1992 -- -- -- -- -- -- --
C. Sumpter Logan (7) 1994 199,800 50,900 -- -- 4,000 -- 4,213
Region Vice President - 1993 198,908 43,900 -- -- 2,700 -- 5,967
General Manager - South 1992 199,615 124,100 -- -- -- -- 5,988
(AL, KY, NC, SC)
Margaret B. Haight (8) 1994 148,969 50,600 -- -- 4,000 -- 4,438
State Vice President - 1993 74,249 24,560 -- -- 2,700 -- 2,227
General Manager - KY 1992 73,301 31,504 -- -- -- -- 2,199
Edward J. Weise (9) 1994 121,242 53,900 -- -- 4,000 -- 3,637
Region Vice President - 1993 60,587 23,138 -- -- 2,700 -- 1,818
General Manager - South 1992 108,791 56,700 -- -- -- -- 3,264
(VA)
Kent B. Foster 1994 65,844 83,036 -- -- 138,100 39,422 4,500
President 1993 59,968 55,084 -- -- 58,800 12,132 674
GTE Telephone Operations 1992 41,280 48,230 -- -- -- 15,014 526
</TABLE>
(1) Annual Compensation represents the Company's pro rata share, if
applicable, of salaries, bonuses and other compensation. Total annual
cash compensation for Messrs. Dinsmore, Keith, Goode, Logan, Weise,
Foster and Ms. Haight, for whom allocated amounts are shown above, is
$482,238; $316,657; $309,683; $250,700; $175,142; $1,525,508 and
$199,569, for 1994, respectively.
(2) 1994 Long-Term Incentive Plan (LTIP) Payouts include transition awards
for the 1994 period, which were established by the Committee as a special
grant to allow for the smooth transitioning from a single long-term
performance measure (return on equity) to a combined measure (return
on equity and operating cash flow margin).
(3) All other compensation includes Company contributions to defined
contribution plans.
(4) Mr. Dinsmore served as President until March 1994, when he was appointed
Senior Vice President-Finance and Planning, GTE Telephone Operations.
Mr. Goode replaced Mr. Dinsmore as President.
(5) Mr. Goode served as President until July 1994, when he resigned from the
Company to become President of GTE Information Services.
(6) Upon the resignation of Mr. Goode in July 1994, Mr. Keith, whose official
title remained as Area Vice President-Sales, assumed the additional
responsibilities of acting President. In February 1995, Mr. Appel was
elected President of the Company.
-41-
<PAGE> 44
(7) Mr. Logan served as Region Vice President - General Manager - South until
February 1995. In September 1994, he was also appointed General Manager
- Retail Operations, GTE Telephone Operations.
(8) Ms. Haight served as State Vice President - General Manager - Kentucky
until February 1995. In September 1994, she was also appointed General
Manager - Customer Operations - Kentucky Division, GTE Telephone
Operations.
(9) Mr. Weise served as Region Vice President - General Manager - Virginia
until February 1995. In September 1994, he was also appointed Regional
President - Virginia Region, GTE Telephone Operations.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1994, whether
or not specifically allocated to the Company. The options and SARs were
granted under the LTIP. 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.
<TABLE>
<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
Number of Total Options/
Securities SARs Granted Exercise
Underlying to All GTE Or Base
Option/SARs Employees in Price Expiration
Name Granted(1) Fiscal Year ($/SH) Date 0% 5% 10%
---- ---------- ------------- -------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore 30,900 0.75 32.44 02/16/04 -- 630,135 1,596,759
M. L. Keith, Jr. 5,500 0.13 32.44 02/16/04 -- 112,160 284,213
Earl A. Goode 30,900 0.75 32.44 02/16/04 -- 630,135 1,596,759
C. Sumpter Logan 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
Margaret B. Haight 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
Edward J. Weise 4,000 0.10 32.44 02/16/04 -- 81,571 206,700
Kent B. Foster 69,050 1.68 34.44 02/16/04 -- 1,270,016 3,430,063
69,050 1.68 32.44 02/16/04 -- 1,408,116 3,568,163
</TABLE>
(1) Each option was granted in tandem with a SAR, which will expire upon
exercise of the option. Under the LTIP, one-third of these grants vest
annually commencing one year after the date of grant.
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1994. The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) common stock on
December 30, 1994.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/SARs
Acquired Value Options/SARs at FY-End At FY-End($)
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Dinsmore -- $ -- 22,132 45,968 $ -- $ --
M. L. Keith, Jr. -- -- 8,566 9,634 -- --
Earl A. Goode -- -- 56,733 48,467 57,500 --
C. Sumpter Logan -- -- 18,600 5,800 67,375 --
Margaret B. Haight -- -- 3,900 5,800 -- --
Edward J. Weise -- -- 900 5,800 -- --
Kent B. Foster -- -- 152,374 210,626 -- --
</TABLE>
-42-
<PAGE> 45
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
The GTE 1991 LTIP provides for awards, currently in the form of stock options
with tandem SARs and cash bonuses, to participating employees. The primary
purpose of the LTIP is to offer participants an incentive to cause GTE to
achieve superior financial performance, thereby helping to assure superior
performance for the shareholders. The stock options and tandem SARs awarded
under the LTIP to the named executive officers in 1994 are shown in the table
on page 41.
The named executive officers are eligible to receive annual grants of
performance bonuses which are earned during a 36-month performance cycle. The
performance bonuses are paid in cash. Awards for the three-year performance
cycle ending in 1994 are based on GTE's financial performance during the
relevant cycle as measured by GTE's average return on equity (ROE) against
pre-established target levels. In 1994, the Executive Compensation and
Organizational Structure Committee of the Board of Directors of GTE (the
Committee) established an additional measure of corporate performance -
operating cash flow margin (OCFM). The Committee views OCFM as an excellent
complement to ROE due to its capacity to accurately measure profitable revenue
growth, a key determinant of financial strength, especially for high growth
businesses. To transition from awards based solely on performance against ROE
targets to awards based on a combination of ROE and OCFM performance, the
Committee established two performance periods - a one-year period to run
concurrently with the final year of the three-year ROE performance cycle ending
in 1994 and a two-year period to run concurrently with the final two years of
the three-year ROE performance cycle ending in 1995. The awards for the two
award periods will be based on GTE's performance against ROE and OCFM
performance for the one- and two-year periods. Awards for the three-year
performance cycle ending in 1996 will be based on GTE's performance against the
ROE and OCFM targets established for the full three- year cycle. Seventy-five
percent of the award is determined based on ROE performance and 25% of the
award is determined based on OCFM performance.
At the time performance targets for the current LTIP cycles are established, a
Common Stock Unit account is set up for each participant in the LTIP. An
initial dollar amount for each account (target award) is determined based on
the competitive performance bonus grant practices of other major companies in
the telecommunications industry and with practices of other major corporations
not involved in the telecommunications industry that have a reputation for
excellence, are comparable to GTE in terms of such quantitative measures as
revenues, market value and total shareholder return and are viewed as direct
competitors for executive talent in the overall labor market as well as GTE's
past and projected financial performance. 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 paid on
an equivalent number of shares of GTE Common Stock is added on each dividend
payment date. 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, Goode and Foster are the only individuals of the
-43-
<PAGE> 46
named executive officers eligible to receive a cash award under the LTIP. The
number of Common Stock Units initially allocated in 1994 to the named executive
officers' 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(4)
---------------- --------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Gerald K. Dinsmore 3.800 3 years 873 4,367
1,400 2 years 316 1,582
1,400 1 year 298 1,488
M. L. Keith, Jr. 0 N/A 0 0
Earl A. Goode 3,800 3 years 873 4,367
1,400 2 years 316 1,582
1,400 1 year 298 1,488
C. Sumpter Logan 0 N/A 0 0
Margaret B. Haight 0 N/A 0 0
Edward J. Weise 0 N/A 0 0
Kent B. Foster 15,400 3 years 3,701 18,507
5,400 2 years 1,221 6,103
5,400 1 year 1,148 5,739
</TABLE>
(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 30, 1994. 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 Threshold is the level of the average ROE and the average OCFM during
the relevant cycle which represents the minimum acceptable performance
level for both the ROE and OCFM performance measures. If the Threshold
is attained with respect to both performance measures, the award will be
equal to 20% of the combined target award for ROE and OCFM. Because ROE
and OCFM are separate performance measures, it is possible to receive an
award if the Threshold is achieved with respect to only one of the
performance measures. If the actual results for one, but not both,
performance measures is at the Threshold level, the portion of the award
determined by the measure performing at the Threshold level will be at
20% of the target award for that performance measure, and no award will
be made for the portion of the award determined by the measure performing
at less than the Threshold level. However, if the actual results for
both performance measures are below the minimum acceptable performance
level, no award will be earned.
(3) The Target is the level of the average ROE and the average OCFM during
the cycle which represents outstanding performance for both the ROE and
OCFM performance measures. If the Target is attained with respect to
both performance measures, the award will be equal to 100% of the target
award for ROE and OCFM. If the actual results for one, but not both,
performance measures is at the Target level, the portion of the award
determined by the measure performing at the Target level will be at 100%
of the target award for that performance measure, and the portion of the
award determined by the measure performing at less than 100% will be
determined accordingly.
-44-
<PAGE> 47
(4) 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
and the actual OCFM exceed the targeted ROE and the targeted OCFM. If
GTE's average ROE and OCFM during the cycle exceed their performance
targets, additional bonuses may be earned according to the following
schedule:
<TABLE>
<CAPTION>
Performance Increment Above Added Percentage
Maximum ROE and OCFM Performance Targets to Maximum Awards
--------------------------------------------------------------------
<S> <C> <C>
First and Second 0.1% +2%
Third and Fourth 0.1% +3%
Fifth and above 0.1% +4%
</TABLE>
For example, if average ROE and OCFM performance each exceed the ROE and
OCFM targets by 0.5%, respectively, the performance bonus will equal 114%
of the combined target award.
EXECUTIVE AGREEMENTS
GTE has entered into agreements (the Agreements) with Messrs. Dinsmore, Goode
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.
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
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<PAGE> 48
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, Goode 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 (SERP) 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. The
Agreement provides that 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
<TABLE>
<CAPTION>
Final Average Years of Service
-----------------------------------------------------------------------------
Earnings 15 20 25 30 35
------------ -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,532 $ 42,042 $ 52,553 $ 63,063 $ 73,574
200,000 42,407 56,542 70,678 84,813 99,949
300,000 64,157 85,542 106,928 128,313 149,699
400,000 85,907 114,542 143,178 171,813 200,449
500,000 107,657 143,542 179,428 215,313 251,199
600,000 129,407 172,542 215,678 258,813 301,949
700,000 151,157 201,542 251,928 302,313 352,699
800,000 172,907 230,542 288,178 345,813 403,449
900,000 194,657 259,542 324,428 389,313 454,199
1,000,000 216,407 288,542 360,678 432,813 509,949
1,200,000 259,907 346,542 433,178 519,813 606,449
1,500,000 325,157 433,542 541,928 650,313 758,699
2,000,000 433,907 578,542 723,178 867,813 1,012,449
</TABLE>
-46-
<PAGE> 49
GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains the GTE
Service Corporation Plan for Employees' Pensions (the Service Corporation
Plan), a noncontributory pension plan for the benefit of GTE employees based on
years of service. Pension benefits to be paid from the Service Corporation
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 the Service Corporation 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 February
15, 1995, the credited years of service under the plan for Messrs. Dinsmore,
Keith, Goode, Logan, Weise, Foster and Ms. Haight are 18, 28, 32, 34, 28, 24
and 20, 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 SERP, which supplements on an unfunded basis, the benefits of
any participant in an amount by which any participant's benefits under the
Service Corporation 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 Service Corporation Plan on remuneration
accrued under management incentive plans as determined by the Committee.
EXECUTIVE RETIRED LIFE INSURANCE PLAN
The Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Dinsmore,
Logan and Foster a postretirement life insurance benefit of three times final
base salary, Messrs. Keith and Weise a postretirement life insurance benefit of
one and one-half times final base salary and Ms. Haight a postretirement life
insurance benefit of one times final base salary. Upon retirement, ERLIP
benefits may be paid as life insurance, or optionally, an equivalent amount
equal to the present value of the life insurance amount (based on actuarial
factors and the interest rate then in effect), as a lump sum payment, as an
annuity or as installment payments.
DIRECTORS' COMPENSATION
The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for services on the Board.
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<PAGE> 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners as of February 28, 1994:
<TABLE>
<CAPTION>
Name and Shares of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership of Class
-------- ---------------- ---------- --------
<S> <C> <C> <C>
Common Stock of GTE Corporation 21,000,000 100%
GTE South One Stamford Forum shares of
Incorporated Stamford, Connecticut record
06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1994:
<TABLE>
<S> <C> <C>
Common Stock of Name of Director or Nominee (1)(2) No director
---------------------------------- or nominee or
GTE Corporation Kent B. Foster 268,305 executive
Richard M. Cahill 36,287 officer owns
Gerald K. Dinsmore 41,529 as much as
Michael E. Esstman 67,631 1/10 of
Thomas W. White 120,994 1 percent
---------
534,746
=========
Executive Officers(1)(2)
------------------------
Gerald K. Dinsmore 41,529
M. L. Keith, Jr. 16,541
Earl A. Goode 78,544
C. Sumpter Logan 38,919
Margaret B. Haight 10,073
Edward J. Weise 10,568
Kent B. Foster 268,305
---------
464,479
=========
All directors and executive Represents
officers as a group(1)(2) 1,349,528 less than 1/5
========= of 1 percent
of outstanding
common stock
</TABLE>
(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.
Foster, Cahill, Dinsmore, Esstman, White, Keith, Goode, Logan,
Weise, and Ms. Haight and all directors and executive officers as a
group are 214,539; 32,616; 39,499; 46,466; 109,299; 13,199; 71,866;
20,833; 3,133; 6,133 and 1,051,074 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 1994.
-48-
<PAGE> 51
The Federal securities laws require the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
any equity securities of the Company.
To the Company's knowledge, all persons subject to these reporting requirements
filed the required reports on a timely basis. All of the Company's common
stock is owned by GTE and, to the Company's knowledge, none of such directors
or executive officers currently owns, or has ever owned, any shares of the
Company's registered preferred stock (which is the only registered class of the
Company's equity securities).
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. None of the Company's directors were involved
in any business relationships with the Company.
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<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS - See GTE South Incorporated's financial
statements and report of independent accountants thereon in the
Financial Statements section included elsewhere herein.
(2) FINANCIAL STATEMENT SCHEDULES - Schedules supporting the
financial statements for the years ended December 31, 1994-1992
(as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
(3) EXHIBITS - Included in this report or incorporated by reference.
2-1* Agreement of Merger, dated December 31, 1993, between
GTE South Incorporated, Contel of Kentucky, Inc.,
Contel of North Carolina, Inc., Contel of South
Carolina, Inc. and Contel of Virginia, Inc. (Exhibit 2-1
of the June 10, 1994 Form 8-K, File No. 2-36292).
3-1* Restated Articles of Incorporation dated August 24,
1989. (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* Indenture dated as of May 1, 1994 between GTE South
Incorporated and NationsBank of Georgia, National
Association, as Trustee (Exhibit 4.1 of the Company's
Registration Statement on Form S-3, File No. 33-54167).
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K - GTE South Incorporated filed a report on Form
8-K/A dated October 26, 1994 related to the 1993 GTE South Incorporated
property repositioning and 1994 legal entity merger. The Company also
filed a report on Form 8-K dated October 27, 1994 related to the 1994
legal entity merger.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
-50-
<PAGE> 53
GTE SOUTH INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Thousands of Dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
--------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Deductions
Balance at Charged Charged from Balance at
Beginning to to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1994 $ 11,334 $ 31,364 $ 21,252(2) $ 39,860 $ 24,090
======================================================================
December 31, 1993 $ 13,531 $ 20,302 $ 5,358(2) $ 27,857 $ 11,334
======================================================================
December 31, 1992 $ 4,832 $ 23,500 $ 8,052(2) $ 22,853 $ 13,531
======================================================================
Accrued restructuring costs
for the year ended (Note 3):
December 31, 1994 $ 162,993 $ 0 $ 0 $ 35,043 $ 127,950
=======================================================================
December 31, 1993 $ 0 $ 162,993 $ 0 $ 0 $ 162,993
=======================================================================
December 31, 1992 $ 0 $ 0 $ 0 $ 0 $ 0
=======================================================================
</TABLE>
_____________________________________________________
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 2 to the Financial Statements included elsewhere herein.
-51-
<PAGE> 54
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 27, 1995 By JOHN C. APPEL
------------------------------
JOHN C. APPEL
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.
<TABLE>
<S> <C> <C>
JOHN C. APPEL President March 27, 1995
---------------------------------- (Principal Executive Officer)
JOHN C. APPEL
GERALD K. DINSMORE Senior Vice President - Finance March 27, 1995
---------------------------------- and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 27, 1995
---------------------------------- (Principal Accounting Officer)
WILLIAM M. EDWARDS, III
RICHARD M. CAHILL Director March 27, 1995
----------------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 27, 1995
----------------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 27, 1995
----------------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 27, 1995
----------------------------------
THOMAS W. WHITE
</TABLE>
-52-
<PAGE> 55
EXHIBIT INDEX
Exhibit No.
-----------
2-1* Agreement of Merger, dated December 31, 1993, between
GTE South Incorporated, Contel of Kentucky, Inc.,
Contel of North Carolina, Inc., Contel of South
Carolina, Inc. and Contel of Virginia, Inc. (Exhibit 2-1
of the June 10, 1994 Form 8-K, File No. 2-36292).
3-1* Restated Articles of Incorporation dated August 24,
1989. (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* Indenture dated as of May 1, 1994 between GTE South
Incorporated and Nationsbank of Georgia, National
Association, as Trustee (Exhibit 4.1 of the Company's
Registration Statement on Form S-3, File No. 33-54167).
27 Financial Data Schedule.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000040878
<NAME> GTE SOUTH INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 6,549
<SECURITIES> 0
<RECEIVABLES> 245,285
<ALLOWANCES> 24,090
<INVENTORY> 14,461
<CURRENT-ASSETS> 276,718
<PP&E> 3,821,365
<DEPRECIATION> 1,418,438
<TOTAL-ASSETS> 2,762,128
<CURRENT-LIABILITIES> 534,960
<BONDS> 594,187
<COMMON> 525,000
3,026
412
<OTHER-SE> 505,266
<TOTAL-LIABILITY-AND-EQUITY> 2,762,128
<SALES> 1,221,418
<TOTAL-REVENUES> 1,221,418
<CGS> 297,124
<TOTAL-COSTS> 947,541
<OTHER-EXPENSES> 7,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,038
<INCOME-PRETAX> 206,495
<INCOME-TAX> 77,308
<INCOME-CONTINUING> 129,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,187
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
