<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1996
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)
<TABLE>
<S> <C>
VIRGINIA 56-0656680
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 214-718-5600
</TABLE>
(Former name, former address and formal 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, 1996. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE South Incorporated
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1996 1995
-------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $ 134,000 $ 121,111
Network access services 134,221 119,455
Toll services 34,231 37,512
Other services and sales 49,626 45,543
-------------- --------------
Total revenues and sales 352,078 323,621
-------------- --------------
Operating costs and expenses:
Cost of services and sales 122,030 110,102
Selling, general and administrative 47,643 45,814
Depreciation and amortization 69,532 68,254
-------------- --------------
Total operating costs and expenses 239,205 224,170
-------------- --------------
Operating income 112,873 99,451
Interest - net 10,213 14,773
-------------- --------------
Income before income taxes 102,660 84,678
Income taxes 38,900 31,865
-------------- --------------
Net income $ 63,760 $ 52,813
============== ==============
</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
<PAGE> 3
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net income $ 63.8 $ 52.8
</TABLE>
Net income increased 21% or $11 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to higher
revenues and sales, primarily local and network access services, partially
offset by corresponding higher operating costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Local services $ 134.0 $ 121.1
Network access services 134.2 119.5
Toll services 34.3 37.5
Other services and sales 49.6 45.5
----------- -----------
Total revenues and sales $ 352.1 $ 323.6
</TABLE>
Total revenues and sales increased 9% or $28.5 for the three months ended March
31, 1996, compared to the same period in 1995.
Local service revenues increased 11% or $12.9 for the three months ended March
31, 1996, compared to the same period in 1995. The number of switched access
lines increased 4% for the three months ended March 31, 1996, which generated
$3.7 of additional revenue. The increase is also due to a $2.4 growth in
revenues from enhanced custom calling features, such as SmartCall(R), an
increase in measured usage service revenue of $2.1 and higher sales of
CentraNet(R) of $1.7.
Network access service revenues increased 12% or $14.7 for the three months
ended March 31, 1996, compared to the same period in 1995. Minutes of use
increased 9% for the three months ended March 31, 1996, which generated $6.6 of
additional revenue. The increase is also due to a $2.3 increase in special
access revenue associated with growth in special access lines, favorable
carrier settlements of $2.2 and an increase in revenue of $1.2 associated with
access fees charged to cellular service providers.
Toll service revenues decreased 9% or $3.2 for the three months ended March 31,
1996, compared to the same period in 1995. The decrease is primarily due to a
decline in revenue of approximately $1.4 related to lower toll volumes
resulting from 10XXX intraLATA toll competition and unfavorable settlement
activity of $1.4.
Other services and sales revenues increased 9% or $4.1 for the three months
ended March 31, 1996, compared to the same period in 1995. The increase is
primarily due to a $1.9 increase in directory advertising revenue, a $1.1
increase in directory services and a $0.8 increase in equipment sales and
services including voice messaging.
2
<PAGE> 4
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Total operating costs and expenses $ 239.2 $ 224.2
</TABLE>
Total operating costs and expenses increased 7% or $15 for the three months
ended March 31, 1996, compared to the same period in 1995. The increase is
primarily attributable to higher digital software costs of $5.2 and increased
expenses including contractor costs of $1.5 and operating taxes of $1.2. In
addition, the increase in operating costs and expenses reflects an increase in
the provision for uncollectible accounts of $2.3, higher labor costs of $2.1
and an increase in depreciation expense of $1.3. These increases are partially
offset by the effect of settlement gains recorded in the first quarter of 1996
associated with lump sum payments from the Company's pension plans of $3.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Interest - net $ 10.2 $ 14.8
Income taxes 38.9 31.9
</TABLE>
Interest - net decreased 31% or $4.6 for the three months ended March 31, 1996,
compared to the same period in 1995. This decrease is primarily due to lower
interest expense reflecting lower interest rates associated with the
high-coupon refinancing program initiated during the fourth quarter of 1995.
Income taxes increased 22% or $7 for the three months ended March 31, 1996,
compared to the same period in 1995, primarily due to a corresponding increase
in pretax income.
3
<PAGE> 5
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,
1996, a $3,490 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 1996 was
cash from operations of $221 compared to $83.7 for the same period in 1995.
The year-to-year increase in cash flow from operations is primarily the result
of improved results from operations and a decrease in working capital, primarily
reflecting improved collection of receivables. Cash from operations is also
being utilized to fund the Company's re-engineering plan.
The Company's capital expenditures during the first three months of 1996 were
$61.9 compared to $50.8 for the same period in 1995. The 1996 expenditures
reflect the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services, including
broadband digital services and switched digital services. The Company
anticipates capital expenditures for 1996 to be slightly lower than 1995
levels.
Cash used in financing activities was $167.6 during the first three months of
1996 compared to $26.9 for the same period in 1995. The Company issued $125 of
6% debentures in February 1996 and $250 of 7.5% debentures in March 1996 to
refinance commercial paper. In addition, the Company has invested funds with
GTE, pending cash requirements under its 1996 capital program.
During 1995, the Company entered into forward contracts to sell $250 of
U.S.Treasury bonds in order to hedge against future changes in market interest
rates related to the debt the Company called and redeemed in the fourth quarter
of 1995, and subsequently refinanced in March 1996 (discussed above). A gain
of approximately $15 occurred upon settlement of the forward contracts and will
be amortized over the life of the associated refinanced debt as an offset to
interest expense.
OTHER MATTERS
In connection with the re-engineering plan, during the first three months of
1996, costs of approximately $9.3 have been incurred, including $7.4 to
re-engineer customer service processes and $1.9 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $98 have been incurred, including $71.6 to re-engineer customer
service processes and $13 to re-engineer administrative processes. The
restructuring costs also include $13.4 to consolidate facilities and operations
and other related costs. These expenditures were primarily associated with the
closure and relocation of various service centers, software enhancements and
separation benefits associated with employee reductions. Implementation of the
re-engineering plan is expected to be substantially completed by the end of
1996. As of March 31, 1996, $65 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
4
<PAGE> 6
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In 1996, GTE, through a separate subsidiary, began offering long distance
service to its customers in selected states, including Kentucky and Illinois,
marketed under the name GTE Easy Savings Plan(SM). GTE plans to offer this
service in all 28 states where it currently offers local telephone service by
December 1996.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 5.3% to 4.0% for its Kentucky (Contel) and
Virginia (GTE) tariff entities. Overall, the proposed rates result in a $1.5
price reduction, effective July 1, 1996. The Company anticipates the FCC will
issue an order prior to the effective date, which may require changes to the
Company's annual filing.
The Company's intrastate business is regulated by the state regulatory
commissions in Alabama, Illinois, Kentucky, North Carolina, South Carolina and
Virginia.
The Telecommunications Act of 1996 (the Telecommunications Act) forbids states
from imposing any barriers to entry into local and toll competition. Local
competition has been authorized in North Carolina, Virginia and Illinois. In
addition, Kentucky and Illinois have concluded that intraLATA 1+ competition is
in the public interest. The Company plans to convert all capable offices in
Kentucky and Illinois to 1+ by March 1997 and November 1996, respectively.
On April 2, 1996, the Public Service Commission of South Carolina ordered that
local-exchange carriers (LECs), except BellSouth, implement 1+ and 0+
presubscription for intrastate intraLATA long distance service by July 1, 1997.
BellSouth was exempt from implementation because the Telecommunications Act
does not allow a state to require a Bell Operating Company (BOC) to implement
intraLATA toll dialing parity before the BOC has been granted the ability to
provide interLATA services. Also, members of the South Carolina Telephone
Coalition (small LECs) are required to implement this order only after
receiving a bona fide request for intraLATA service.
5
<PAGE> 7
GTE South Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 22,784 $ 31,271
Accounts receivable, less allowances of $20,159 and $17,081 114,218 171,593
Note receivable from affiliate 164,516 --
Inventories and supplies 18,618 17,510
Deferred income tax benefits 8,863 13,361
Other 10,101 12,288
------------- -------------
Total current assets 339,100 246,023
------------- -------------
Property, plant and equipment, at cost 3,970,434 3,927,849
Accumulated depreciation (2,410,921) (2,361,666)
------------- -------------
Total property, plant and equipment, net 1,559,513 1,566,183
Other assets, primarily employee benefit plans 100,595 90,542
------------- -------------
Total assets $ 1,999,208 $ 1,902,748
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 14,405 $ 16,140
Accounts payable 101,311 92,290
Taxes payable 76,377 35,711
Accrued interest 9,012 8,213
Accrued payroll costs 31,508 35,621
Dividends payable 50,017 18
Accrued restructuring costs 65,023 74,254
Other 82,241 90,729
------------- -------------
Total current liabilities 429,894 352,976
------------- -------------
Non-current liabilities:
Long-term debt 724,131 723,304
Deferred income taxes 73,610 78,722
Employee benefit plans 144,195 135,327
Other liabilities 5,539 4,305
------------- -------------
Total non-current liabilities 947,475 941,658
------------- -------------
Preferred stock, subject to mandatory redemption 2,760 2,756
------------- -------------
Shareholders' equity:
Preferred stock 412 412
Common stock (21,000,000 shares issued) 525,000 525,000
Additional paid-in capital 58,320 58,320
Retained earnings 35,347 21,626
------------- -------------
Total shareholders' equity 619,079 605,358
------------- -------------
Total liabilities and shareholders' equity $ 1,999,208 $ 1,902,748
============= =============
</TABLE>
See Notes to Condensed Financial Statements.
6
<PAGE> 8
GTE South Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1996 1995
-------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 63,760 $ 52,813
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 69,532 68,254
Deferred income taxes (614) 3,954
Provision for uncollectible accounts 7,600 6,623
Changes in current assets and current liabilities 82,857 (52,596)
Other - net (2,140) 4,621
------------- -------------
Net cash from operations 220,995 83,669
------------- -------------
Investing:
Capital expenditures (61,921) (50,846)
------------- -------------
Cash used in investing (61,921) (50,846)
------------- -------------
Financing:
Long-term debt issued 369,126 --
Long-term debt and preferred stock retired (75) (51,337)
Dividends (40) (313)
Net change in affiliate note (164,516) --
Increase (decrease) in short-term obligations,
excluding current maturities (386,700) 24,776
Other - net 14,644 --
------------- -------------
Net cash used in financing (167,561) (26,874)
------------- -------------
Increase (decrease) in cash and temporary investments (8,487) 5,949
Cash and temporary investments:
Beginning of period 31,271 6,549
------------- -------------
End of period $ 22,784 $ 12,498
============= =============
</TABLE>
See Notes to Condensed Financial Statements.
7
<PAGE> 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 1995 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
8
<PAGE> 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
12 Statement re: Calculation of the Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K dated March 14, 1996, under
Item 7, "Financial Statements and Exhibits." No financial information
was included with this report. The Company also filed a report on
Form 8-K dated March 15, 1996, under Item 5, "Other Events" and Item
7, "Financial Statements and Exhibits." Financial information was
included with this report.
9
<PAGE> 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 thereunto duly authorized.
GTE South Incorporated
------------------------------
(Registrant)
Date: May 13, 1996 William M. Edwards, III
--------------------------- ------------------------------
William M. Edwards, III
Controller
(Principal Accounting Officer)
10
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
----------- ------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE South Incorporated
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
--------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 63,760
Add - Income taxes 38,900
- Fixed charges 12,614
--------------
Adjusted earnings $ 115,274
==============
Fixed charges:
Interest expense $ 11,297
Portion of rent expense
representing interest 1,317
--------------
Adjusted fixed charges $ 12,614
==============
RATIO OF EARNINGS TO FIXED CHARGES 9.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,784
<SECURITIES> 0
<RECEIVABLES> 298,893
<ALLOWANCES> 20,159
<INVENTORY> 18,618
<CURRENT-ASSETS> 339,100
<PP&E> 3,970,434
<DEPRECIATION> 2,410,921
<TOTAL-ASSETS> 1,999,208
<CURRENT-LIABILITIES> 429,894
<BONDS> 724,131
<COMMON> 525,000
2,760
412
<OTHER-SE> 93,667
<TOTAL-LIABILITY-AND-EQUITY> 1,999,208
<SALES> 352,078
<TOTAL-REVENUES> 352,078
<CGS> 122,030
<TOTAL-COSTS> 239,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,213
<INCOME-PRETAX> 102,660
<INCOME-TAX> 38,900
<INCOME-CONTINUING> 63,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,760
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
