UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended March 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 2-36292
GTE SOUTH INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 56-
0656680
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
19845 N. U.S. 31, P.O. BOX 407, Westfield, Indiana
46074
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 317-896-
6464
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X
NO
The Company had 21,000,000 shares of $25 par value common stock
outstanding at April 30, 1995. The Company's common stock is
100% owned by GTE Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
OPERATING REVENUES:
Local network services $ 121,111 $
115,164
Network access services 119,455
124,432
Long distance services 37,512
22,855
Equipment sales and services 20,191
17,596
Other 19,615
31,114
317,884
311,161
OPERATING EXPENSES:
Cost of sales and services 67,564
75,444
Depreciation and amortization 68,254
65,328
Marketing, selling, general
and administrative 81,860
88,220
217,678
228,992
Net operating income 100,206
82,169
OTHER DEDUCTIONS:
Interest expense 14,897
14,450
Other - net 631
3,687
INCOME BEFORE INCOME TAXES 84,678
64,032
INCOME TAXES 31,865
24,049
NET INCOME $ 52,813 $
39,983
</TABLE>
Per share data is omitted since the Company's common stock is
100% owned by GTE Corporation (GTE).
See Notes to Condensed Financial Statements.
1
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
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 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.
Net income was $52.8 and $40.0 for the three months ended March
31, 1995 and 1994, respectively, reflecting an increase of 32% or
$12.8. This increase is primarily resulting from continued
customer growth in local network services and lower operating
expenses related to reductions in workforce, partially offset by
higher depreciation costs.
OPERATING REVENUES
Operating revenues were $317.9 and $311.2 for the three months
ended March 31, 1995 and 1994, respectively, reflecting an
increase of 2% or $6.7.
Local network services revenues were $121.1 and $115.2 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 5% or $5.9. This increase is primarily
due to customer growth as reflected by a 5% increase in access
lines, which generated an additional $3.1 in revenues, a $1.5
increase in revenues from enhanced features such as custom
calling and voice messaging services and a $0.6 increase in
revenues from CentraNet (Trademark) services.
Network access services revenues were $119.5 and $124.4 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting a decrease of 4% or $4.9. The decrease is primarily
due to a $6.6 decrease in intraLATA activity related to the
Company's transition to an Originating Responsibility Plan (ORP)
in North Carolina and South Carolina, effective January 1, 1994,
and in Kentucky, effective March 1, 1994. The negative impact on
network access revenues is offset by increases in long distance
revenues, increases in access
2
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
charge payments and a transitional support payment received by
the Company for a portion of the net revenue loss between the ORP
and the access-based pooling arrangement. The support payments
will phase out over the next few years. The decrease is also due
to $3.6 of unfavorable interstate access settlements. The
decrease is partially offset by a $5.3 revenue increase due to an
8% increase in minutes of use.
Long distance services revenues were $37.5 and $22.9 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 64% or $14.6. The 1995 increase is
primarily due to the transition to an ORP as mentioned above,
which caused a $15.4 increase in toll revenues. This increase is
partially offset by $1.0 of unfavorable toll settlements.
Equipment sales and services revenues were $20.2 and $17.6 for
the three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 15% or $2.6. This increase is
primarily due to a $2.4 increase in sales of Lineskeeper
(Trademark) service, a protection service for inside wiring.
Other operating revenues were $19.6 and $31.1 for the three
months ended March 31, 1995 and 1994, respectively, reflecting a
decrease of 37% or $11.5. This decrease is primarily due to a
$3.7 decrease in rent revenues and a $2.1 decrease in billing and
collection revenues, both of which are related to the transition
to the ORP as mentioned above. Also contributing to the decrease
is a $3.2 decrease in directory advertising revenue due to lower
directory sales and timing of directory publications.
OPERATING EXPENSES
Operating expenses were $217.7 and $229.0 for the three months
ended March 31, 1995 and 1994, respectively, reflecting a
decrease of 5% or $11.3. This decrease is primarily due to a
$12.8 decrease in labor and benefit costs reflecting reductions
in workforce associated with the Company's re-engineering plan
initiated in 1994, a $4.5 decrease related to material purchases
and a $1.7 decrease in charges related to unbillable calling card
calls. The decrease is partially offset by a $7.5 increase for
payments of access charges under the ORP, as mentioned above, to
other local exchange carriers (LECs) for intraLATA toll calls
that are originated by the Company and terminated by another LEC
and a $3.0 increase in depreciation costs related to rate changes
in Kentucky and North Carolina effective in June 1994.
OTHER DEDUCTIONS
Income tax expenses were $31.9 and $24.0 for the three months
ended March 31, 1995 and 1994, respectively, reflecting an
increase of 33% or $7.9. This increase is primarily due to a
corresponding increase in pretax income.
3
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, at March 31, 1995 a $3,500 line of credit was 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 the first three
months of 1995 was cash from operating activities of $83.7
compared to a use of $49.1 for the same period in 1994. The year-
to-year increase in cash from operations is primarily the result
of tax payments of $170.7 that were made in the first quarter of
1994, related to the disposition of nonstrategic properties in
late 1993, as well as an increase in results of operations. This
increase is partially offset by unfavorable timing of payments of
payables.
The Company's capital expenditures during the first three months
of 1995 were $50.8 compared to $55.7 during the same period in
1994. The 1995 expenditures reflect the Company's continued
growth in access lines and modernization of facilities and
provisioning of new products and services, including broadband
digital services and switched digital services. In 1995,
construction costs are expected to increase slightly from $287.1
of capital expenditures incurred during 1994, reflecting the
Company's expanding network and replacement of outdated
technologies with digital switches and fiber optic networks.
Cash used in financing activities was $26.9 for the first three
months of 1995 compared to a source of $124.0 for the same period
in 1994. The Company received $339.0 in 1994 from the collection
of affiliate notes receivables and used the proceeds to fund
dividend payments of $297.3 to GTE. The Company retired $51.3 of
debt in the first quarter of 1995 compared to $2.0 for the same
period in 1994. The Company increased its borrowings of
commercial paper by $24.8 in the first quarter of 1995 compared
to an increase of $84.3 for the same period in 1994.
OTHER MATTERS
As previously reported, results for 1993 included a one-time
pretax restructuring charge of $163.0, which reduced net income
by $100.4, 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.
4
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Implementation of the re-engineering plan began during 1994 and
is expected to be completed by the end of 1996. Expenditures of
$44.8 have been made since inception of the re-engineering plan,
including $9.8 during the first three months of 1995. 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 during the remainder of 1995. There
have been no significant changes made to the overall re-
engineering plan as originally reported. As of March 31, 1995,
$118.2 remains in the restructuring reserve, of which $44.8 is
classified as a current liability. Management believes the
reserve is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC)
increased the local-exchange carrier (LEC) productivity factors
associated with its interstate price cap plan to provide three
different options, on an interim basis, regarding the
determination and use of productivity factors. These changes
will be reflected in the LECs' annual tariff filing, effective
August 1, 1995. The FCC is expected to continue to consider
permanent changes to its price cap plan in a future rulemaking
proceeding. GTE believes the impact of the interim rules will be
minimized in the near-term because GTE has reduced its access
fees in previous years to amounts below the FCC's maximum price.
In April 1995, GTE filed a motion with the U.S. District Court
for the District of Columbia to remove the 1984 Consent Decree,
which restricts the Company from providing interLATA services.
GTE believes that the Consent Decree is no longer required since
GTE has since divested its interests in the entities whose
purchase gave rise to the Consent Decree.
In May 1995, the FCC approved GTE's applications to construct a
new fiber-optic and coaxial-cable video network in four markets,
including Manassas, Virginia. GTE expects to submit tariffs that
set the rates for use of its video network to the FCC for
approval and to commence the initial deployment of the network in
late 1995 and early 1996.
The Company has operated under the Virginia State Corporation
Commission's (VSCC) experimental incentive regulation plan, since
January 1, 1989. On December 17, 1993, the VSCC ordered several
modifications to this plan, effective January 1, 1994. These
modifications include a lowering of the Company's authorized
return on equity (ROE) from the current 12-14% range to 10.55-
12.55% for 1994, with provisions for annual adjustments beginning
January 1, 1995. The VSCC also ordered that 25% of the Company's
Yellow Page advertising income should be used to calculate its
regulated earnings under the plan and that the Company may file
to restructure its rates on a revenue neutral basis without
filing a full rate case. On October 18, 1994, the VSCC issued an
order in its 1994 incentive regulation plan review which reset
the Company's authorized ROE range for 1995 to 10.96-13.96%.
5
GTE SOUTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On February 23, 1995, new legislation was enacted in Virginia
which will allow local exchange competition, effective January 1,
1996. This statute requires that firms desiring to compete in
the local marketplace must be certified by the VSCC. Upon
granting a certificate to a new entrant, the VSCC must adopt a
form of regulation for the incumbent and new entrant which does
not regulate the earnings of either party. On April 6, 1995, the
Company advised the VSCC of its intent to file a rate
restructuring request in June 1995 in preparation for increased
competition in the toll and local markets.
On April 6, 1995, similar local competition and regulatory reform
legislation was enacted in North Carolina. The North Carolina
Utilities Commission can authorize local exchange competition,
effective July 1, 1996 or sooner if a price regulation plan has
been approved for the Company.
6
<TABLE>
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
CURRENT ASSETS:
Cash $ 12,498 $
6,549
Receivables, less allowances of
$24,012 and $24,090, respectively 241,331
221,195
Materials and supplies 18,031
14,461
Deferred income tax benefits 24,784
26,896
Prepayments and other 14,868
7,617
Total current assets 311,512
276,718
PROPERTY, PLANT AND EQUIPMENT:
Original cost 3,861,866
3,821,365
Accumulated depreciation (1,473,693)
(1,418,438)
Net property, plant and equipment 2,388,173
2,402,927
OTHER ASSETS 82,073
82,483
TOTAL ASSETS $ 2,781,758 $
2,762,128
</TABLE>
See Notes to Condensed Financial Statements.
7
<TABLE>
GTE SOUTH INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 144,984 $
171,022
Accounts payable 102,089
109,442
Accrued taxes 63,873
53,351
Accrued payroll and vacations 37,029
34,036
Accrued dividends 33,310
290
Accrued interest 11,652
12,286
Accrued restructuring costs and other 147,691
154,533
Total current liabilities 540,628
534,960
LONG-TERM DEBT 593,856
594,187
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 594,181
599,277
PREFERRED STOCK, subject to
mandatory redemption 2,936
3,026
SHAREHOLDERS' EQUITY:
Preferred stock 412
412
Common stock 525,000
525,000
Other capital 58,310
58,310
Reinvested earnings 466,435
446,956
Total shareholders' equity 1,050,157
1,030,678
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,781,758 $
2,762,128
</TABLE>
See Notes to Condensed Financial Statements.
8
<TABLE>
GTE SOUTH INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,813 $
39,983
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 68,254
65,328
Deferred income taxes and investment
tax credits 3,954
(51,386)
Provision for uncollectible accounts 6,623
4,328
Tax payments on disposition --
(170,684)
Changes in current assets and
current liabilities (52,596)
4,542
Other - net 4,621
58,758
Net cash from (used in) operating
activities 83,669
(49,131)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,846)
(55,747)
Cash used in investing activities (50,846)
(55,747)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and preferred stock retired (51,337)
(1,965)
Dividends paid to shareholders (313)
(297,325)
Net change in affiliate notes --
339,025
Increase in short-term debt 24,776
84,300
Net cash from (used in) financing
activities (26,874)
124,035
Increase in cash 5,949
19,157
Cash at beginning of period 6,549
17,810
Cash at end of period $ 12,498 $
36,967
</TABLE>
See Notes to Condensed Financial Statements.
9
GTE SOUTH INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The unaudited condensed financial statements included herein
have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion
of management of the Company, the condensed financial statements
include all adjustments, which consist only of normal recurring
accruals, necessary to present fairly the financial information
for such periods. These condensed financial statements should be
read in conjunction with the financial statements and the notes
thereto included in the Company's 1994 Annual Report on Form 10-
K.
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 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 financial statements
include the combined historical results of operations and
financial position of the Company and the Contel Subsidiaries for
all periods.
Listed below are details of the results of operations for the
three months ended March 31, 1994 of the previously separate
enterprises:
<TABLE>
<CAPTION>
Contel Contel
GTE South Contel North South Contel GTE
South
(Pre-Merger) Kentucky Carolina Carolina Virginia (Post-
Merger)
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
<C>
Operating Rev. $ 190,959 $ 13,460 $ 18,908 $ 2,773 $ 85,061
$ 311,161
Operating Inc. 42,310 3,666 6,943 367 28,883
82,169
Net Income 18,629 1,826 3,688 140 15,700
39,983
</TABLE>
(2) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1995
presentation.
10
GTE SOUTH INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
first
quarter of 1995.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
GTE SOUTH
INCORPORATED
(Registrant)
Date: May 11, 1995 WILLIAM M. EDWARDS,
III
WILLIAM M. EDWARDS,
III
Controller
(Chief Accounting
Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 12,498
<SECURITIES> 0
<RECEIVABLES> 265,343
<ALLOWANCES> 24,012
<INVENTORY> 18,031
<CURRENT-ASSETS> 311,512
<PP&E> 3,861,866
<DEPRECIATION> 1,473,693
<TOTAL-ASSETS> 2,781,758
<CURRENT-LIABILITIES> 540,628
<BONDS> 593,856
<COMMON> 525,000
2,936
412
<OTHER-SE> 524,745
<TOTAL-LIABILITY-AND-EQUITY> 2,781,758
<SALES> 317,884
<TOTAL-REVENUES> 317,884
<CGS> 67,564
<TOTAL-COSTS> 217,678
<OTHER-EXPENSES> 631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,897
<INCOME-PRETAX> 84,678
<INCOME-TAX> 31,865
<INCOME-CONTINUING> 52,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,813
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
