<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, 1995
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 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
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 29, 1996. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
<PAGE> 2
TABLE OF CONTENTS
Item
Part I Page
1. Business 1
2. Properties 4
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 39
Part III
10. Directors and Executive Officers of the Registrant 40
11. Executive Compensation 43
12. Security Ownership of Certain Beneficial Owners and Management 51
13. Certain Relationships and Related Transactions 52
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
<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
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 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). 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 similar to a "pooling
of interests."
Additional information related to the above transactions can be found in Note 4
and Note 5 of the Company's financial statements included in Item 8. All
previously issued financial data included herein has been restated to reflect
the combined historical results of the Company and the Contel Subsidiaries as
though the Merger had occurred at the beginning of each period presented.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for various industries. The Company provides local
telephone service within its franchise area and intraLATA (Local Access
Transport Area) toll 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. Business and residential
customers also pay access charges to connect to the local network to obtain
long distance service. The Company earns other revenues by leasing
interexchange plant facilities and providing such services as billing and
collection and operator services to interexchange carriers.
The number of access lines in the states in which the Company operates as of
December 31, 1995, was as follows:
<TABLE>
<CAPTION>
State Access Lines Served
---------------- ---------------------
<S> <C>
Virginia 551,361
Kentucky 536,094
North Carolina 395,963
South Carolina 192,424
Alabama 151,838
Illinois 40,772
---------------------
Total 1,868,452
</TABLE> =====================
1
<PAGE> 4
At December 31, 1995, the Company had 5,131 employees.
The Company has written agreements with the Communications Workers of America
(CWA) and International Brotherhood of Electrical Workers (IBEW). In 1995,
agreements were reached on one contract with the CWA and one contract with the
IBEW. During 1996, four contracts with the CWA and one contract with the IBEW
will expire.
REGULATORY AND COMPETITIVE TRENDS
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 intrastate business operations and by the Federal Communications Commission
(FCC) as to its interstate operations. Prior to the sale of properties
described above, the state regulatory commissions in Georgia, Tennessee and
West Virginia also regulated the Company's intrastate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the
local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (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.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
2
<PAGE> 5
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Illinois, North Carolina and Virginia.
In addition, eight states, including Illinois and Kentucky, have concluded that
intraLATA 1+ competition is in the public interest. These states have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. The Telecommunications Act requires GTE to negotiate intraLATA dialing
parity provisions with its competitors. In subsequent negotiations, GTE will
address implementation of 1+ in those states which have not previously ordered
implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative 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 GTE markets.
For the provision of interstate access 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
local-exchange carrier (LEC) may charge are increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs have limited pricing flexibility provided they do not exceed the allowed
price cap. The FCC is considering how the price cap plan should be modified in
the future in order to adapt the system to the emergence of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 14 of the Company's financial statements included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
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 telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $163 million
re-engineering program. Since the program began in 1994, costs of $88.7
million have been charged to the restructuring reserve -- $64.2 million related
to customer service processes, $11.1 million related to administrative
processes and $13.4 million related to
3
<PAGE> 6
the consolidation of facilities and operations and other related costs. These
costs were primarily associated with the closure and relocation of various
centers, software enhancements and separation benefits associated with workforce
reductions. The continued implementation of this program positions 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.
World Class Network
During 1995, the Company deployed its ISDN-based World Class Network in
Raleigh/Durham, North Carolina; Lexington, Kentucky; and Virginia (Manassas,
Virginia Beach, Harrisonburg) 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
the Company to provide advanced services such as high-speed data transmission
and video conferencing.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of the
aforementioned properties, located in the states of Alabama, Illinois,
Kentucky, North Carolina, South Carolina and Virginia, are generally in good
operating condition and adequate to satisfy the needs of the business.
Substantially all of the Company's property is subject to the liens of its
respective mortgages securing funded debt. From January 1, 1991 to December
31, 1995, the Company made capital expenditures of $1.5 billion for new plant
and facilities required to meet telecommunication service needs and to
modernize plant and facilities. The additions were equal to 39% of gross plant
of $3.9 billion at December 31, 1995.
In response to recently enacted and pending legislation and the increasingly
competitive environment, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71) in the fourth quarter of 1995.
4
<PAGE> 7
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 to the Company's financial
statements included elsewhere herein for further detail.
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.
5
<PAGE> 8
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 (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock and preferred stock, should be contacted with any
questions relating to shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call 1-
617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Mail Stop 45-02-60
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1995 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE Corporation through
the following universal resource:
http://www.gte.com
6
<PAGE> 9
Item 6. Selected Financial Data
GTE South Incorporated
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
Selected Income Statement Items (a) 1995 1994 1993(b) (c) 1992 1991
- ----------------------------------- -------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Revenues and sales $1,319,110 $1,250,404 $1,438,063 $1,426,107 $1,404,274
Operating costs and expenses 956,958 982,056 1,225,452 1,030,994 1,072,929
-------------------------------------------------------------
Operating income 362,152 268,348 212,611 395,113 331,345
Interest - net 57,656 57,653 90,276 91,154 91,770
Gain on disposition of assets -- -- (63,112) -- --
Other - net (20,000) 4,200 -- -- --
Income taxes 121,897 77,308 85,712 108,869 76,718
-------------------------------------------------------------
Income before extraordinary charges 202,599 129,187 99,735 195,090 162,857
Extraordinary charges (d) (509,880) -- -- -- --
-------------------------------------------------------------
Net income (loss) $(307,281) $129,187 $99,735 $195,090 $162,857
=============================================================
Dividends declared on common stock $117,892 $168,660 $341,998 $119,500 $127,367
Dividends declared on preferred stock 157 171 177 186 197
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
As of December 31,
-------------------------------------------------------------
Selected Balance Sheet Items 1995 1994 1993 (b) 1992 1991
- ---------------------------- -------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Property, plant and equipment, net (d) $1,566,183 $2,402,927 $2,379,039 $2,895,282 $2,811,400
Total assets 1,902,748 2,762,128 3,174,642 3,293,635 3,147,550
Long-term debt and preferred stock,
subject to mandatory redemption 726,060 597,213 566,705 999,848 970,320
Shareholders' equity 605,358 1,030,678 1,070,320 1,312,760 1,237,342
- -----------------------------------------------------------------------------------------------------------
</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) Operating income in 1993 included a $163 million pre-tax charge for
restructuring costs which reduced net income by $100.4 million.
(d) See Note 2 to the financial statements included in Item 8.
7
<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE South Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services in
the states of Alabama, Illinois, Kentucky, North Carolina, South Carolina and
Virginia. Prior to the sale of properties described in Note 5 of the financial
statements included in Item 8, the Company also provided these services in
Georgia, Tennessee and West Virginia. At December 31, 1995, the Company served
1,868,452 access lines in its service territories.
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). The Merger became effective on September 30, 1994 and has been
accounted for in a manner similar to a "pooling of interests." Accordingly,
the financial statements include the combined historical results of operations
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
significant intercompany transactions.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1994 1993
---------- ----------- -------------
<S> <C> <C> <C>
Net income (loss) $ (307.3) $ 129.2 $ 99.7
</TABLE>
The net loss for 1995 includes an extraordinary charge of $497.5 for the
discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FAS 71) in the
fourth quarter of 1995 and an extraordinary after-tax charge of $12.4 related
to the early retirement of debt. Excluding these charges, net income increased
57% or $73.4 in 1995. The 1995 increase is primarily due to continued customer
growth, lower operating costs and expenses, the reversal of $20 of reserves
related to expired warranties on properties sold during 1993 and $4.2 of fees
associated with the early retirement of debt recorded in 1994, partially offset
by higher depreciation costs.
Net income for 1993 includes the gain from the sale of and results of operations
of non-strategic properties sold in the fourth quarter of 1993 and one-time
charges to restructure operations and complete enhanced early retirement and
voluntary separation programs. Excluding these special items, net income
decreased 24% or $40.6 in 1994. The 1994 decrease is primarily due to increased
operating costs and expenses, partially offset by increased revenues and sales
and decreased interest costs.
8
<PAGE> 11
REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Local services $ 503.0 $ 474.5 $ 541.3
Network access services 494.9 481.6 599.8
Toll services 144.1 125.8 82.9
Other services and sales 177.1 168.5 214.1
--------- --------- ---------
Total revenues and sales $ 1,319.1 $ 1,250.4 $ 1,438.1
========= ========= =========
</TABLE>
Total revenues and sales increased 5% or $68.7 and decreased 13% or $187.7
during 1995 and 1994, respectively.
Local service revenues are comprised mainly of fees charged to customers for
providing local-exchange service. Local service revenues increased 6% or $28.5
in 1995 and decreased 12% or $66.8 in 1994. The number of access lines
increased 5% in 1995, generating $12.7 of additional revenues. The 1995
increase is also due to a $5.9 increase in revenues from new services,
including Integrated Services Digital Network (ISDN), a $3.9 growth in sales
of Centranet(R) services and a $3 growth in revenues from enhanced custom
calling features.
Excluding revenues from the repositioned properties, local service revenues
increased 4% or $19.6 in 1994. The 1994 increase is due to customer growth
experienced through a 6% gain in access lines and increased revenues from sales
of Centranet(R) services and enhanced custom calling features.
Network access service revenues are fees charged to interexchange carriers that
use the local telecommunication network to provide long distance services. In
addition, business and residential customers pay access fees to connect to the
local network to obtain long distance service. Network access service revenues
increased 3% or $13.3 in 1995 and decreased 20% or $118.2 in 1994. The 1995
increase is primarily due to a 9% increase in minutes of use, which generated
additional revenues of $11.5. The 1995 increase is also due to a $2.6 increase
in end user access charge revenues, a $2.5 increase in Universal Service Fund
support and $2.7 of favorable carrier settlements recorded in 1995. These
increases are partially offset by a $4.8 reduction in interstate access
revenues associated with affiliate audit price changes and a $4.7 decrease in
revenues related to a revised estimate of shareable earnings recorded in the
second quarter of 1995.
Excluding revenues from the repositioned properties, network access service
revenues decreased 1% or $2.6 in 1994. The 1994 decrease is primarily due to
the Company's transition to an Originating Responsibility Plan (ORP). The
Company adopted the ORP for intraLATA settlements 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 partially offset by increases
in toll revenue, increases in access charge payments 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 phase out
through 1997. 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 began 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 Company's revenues for toll services are provided from customer billings as
well as settlement arrangements with various telephone companies. Toll service
revenues increased 15% or $18.3 and 52% or $42.9 in 1995 and 1994,
respectively. The 1995 increase is primarily due to $19.2 of favorable toll
settlements, partially offset by a $0.9 decline in toll activity resulting from
competition.
9
<PAGE> 12
Excluding revenues from the repositioned properties, toll service revenues
increased 82% or $56.3 in 1994. The 1994 increase is primarily due to the
transition to ORP from the access-based plans as discussed above.
Other services and sales revenues increased 5% or $8.6 in 1995 and decreased
21% or $45.6 in 1994. The 1995 increase is due to a $12 increase in voice and
data equipment sales, primarily Lineskeeper(R) service, a protection service
for inside wiring. The 1995 increase is also due to a $7.8 increase in
DataBase 800 service. These increases are partially offset by a $6.9 decrease
in billing and collection revenues, a $2.8 decrease in directory advertising
revenue due to lower directory sales and timing of directory publications and a
$2.4 decrease in rent revenues related to the transition to the ORP mentioned
above.
Excluding revenues from the repositioned properties, other services and sales
revenues decreased 7% or $13.2 in 1994. The 1994 decrease is primarily due to
lower billing and collection revenues and rent revenues.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Cost of services and sales $ 479.1 $ 506.5 $ 523.3
Selling, general and administrative 203.5 212.7 247.4
Depreciation and amortization 274.4 262.9 291.8
Restructuring costs -- -- 163.0
--------- --------- --------
Total operating costs and expenses $ 957.0 $ 982.1 $1,225.5
========= ========= ========
</TABLE>
Total operating costs and expenses decreased 3% or $25.1 and 20% or $243.4
during 1995 and 1994, respectively. The 1995 decrease is primarily the result
of lower cost of services and sales and selling, general and administrative
costs, reflecting the favorable effects of ongoing cost-reduction programs from
process re-engineering activities, partially offset by higher depreciation
costs. These decreases are primarily due to an $8.7 decrease in the provision
for uncollectible accounts, an $8 decrease in material costs, a $7.5 decrease in
charges related to unbillable calling card calls and $12.9 of nonrecurring
unfavorable settlement activities recorded in the third quarter of 1994. The
1995 decrease is also due to $5.1 of lower labor and benefit costs. These
decreases are partially offset by an $11.5 increase in depreciation costs,
primarily related to higher gross plant balances and rate changes in Kentucky
and North Carolina effective in June 1994, and a $7.1 increase in access charges
under the ORP, as mentioned above, to other local exchange companys (LECs) for
intraLATA toll calls that are originated by the Company and terminated by
another LEC.
Excluding the one-time re-engineering charge, operating costs and expenses
decreased 8% or $80.4 in 1994. This decrease is primarily due to the operating
costs of the repositioned properties recorded prior to the sale on November 1,
1993. The 1994 decrease was partially offset by increased payments of access
charges under the ORP, as mentioned above, to other LECs for intraLATA toll
calls that are originated by the Company and terminated by another LEC. The
1994 decrease is also offset by higher depreciation costs associated with
increased plant balances, increased billing and collection costs and
nonrecurring unfavorable settlement activities recorded in the third quarter of
1994.
10
<PAGE> 13
OTHER (INCOME) EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Interest - net $ 57.7 $ 57.7 $ 90.3
Gain on disposition of assets -- -- (63.1)
Other - net (20.0) 4.2 --
Income taxes 121.9 77.3 85.7
</TABLE>
Interest - net remained virtually unchanged for 1995. Interest - net decreased
36% or $32.6 in 1994. 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 was $20 income and $4.2 expense for 1995 and 1994, respectively.
The 1995 income represents the reversal of $20 of representation and warranty
reserves related to certain 1993 property dispositions for which the period of
exposure has expired. The 1994 expense is $4.2 of fees associated with the
early retirement of debt recorded in the second and third quarters of 1994.
Income taxes increased 58% or $44.6 in 1995 and decreased 10% or $8.4 in 1994.
The 1995 increase is primarily due to the increase in pre-tax income and
adjustments in prior years' tax liabilities. The 1994 decrease is related
primarily to the sale and exchange of repositioned properties mentioned above
partially offset by the increase in pre-tax income.
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. A $3,490 line of credit is
available to the Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs. In February and March 1996,
the Company issued $125 of 6.0% debentures and $250 of 7.5% debentures,
respectively, to refinance commercial paper outstanding at December 31, 1995
(see Note 16 to the financial statements included in Item 8). Subsequent to
these financings, the Company currently has an existing shelf registration
statement for an additional $225 of debentures.
The Company's primary source of funds during 1995 was cash from operations of
$437 compared to $278.1 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 made
in the first quarter of 1994, related to the disposition of nonstrategic
properties in late 1993, as well as improved results from operations. These
increases are partially offset by an increase in working capital. Cash from
operations is also being utilized to fund the Company's re-engineering plan.
The Company's capital expenditures during 1995 were $248.5 compared to $279.8
during the same period in 1994. The declining requirements for modernization
of current facilities offset the expenditures associated with continued growth
in access lines and introduction of new products and services, including
broadband digital services. The Company anticipates construction costs for
1996 to be slightly lower than capital expenditures incurred during 1995.
11
<PAGE> 14
Cash used in financing activities was $163.8 in 1995 compared to $9.5 in 1994.
Financing included short-term borrowings of $277.9 in 1995 compared to $357.5 in
1994, including the collection of $366.1 of an affiliate note receivable related
to the 1993 disposition of nonstrategic properties. In December 1995, the
Company called $248.2 of long-term debt prior to stated maturity with proceeds
from the short-term borrowings. The cost of calling this debt is reflected as
an after-tax charge of $12.4 in the statements of income (as discussed in Note 2
of the financial statements included in Item 8). The Company retired an
additional $62.5 of long-term debt and preferred stock in 1995 compared to total
retirements of $126.3 in 1994. 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. The Company made dividend payments of $118.3 in
1995 compared to $388.5 in 1994, partially funded by the proceeds from the
collection of the affiliate note receivable discussed above.
REGULATORY AND COMPETITIVE TRENDS
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 intrastate business operations and by the Federal Communications Commission
(FCC) as to its interstate operations. Prior to the sale of properties
described above, the state regulatory commissions in Georgia, Tennessee and
West Virginia also regulated the Company's intrastate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services and specialized communications companies
that have constructed new systems in certain markets to bypass the
local-exchange network. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (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.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as the
chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
12
<PAGE> 15
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. Through 1995, local competition has been
authorized in fifteen states, including Illinois, North Carolina and Virginia.
In addition, eight states, including Illinois and Kentucky, have concluded that
intraLATA 1+ competition is in the public interest. These states have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. The Telecommunications Act requires GTE to negotiate intraLATA dialing
parity provisions with its competitors. In subsequent negotiations, GTE will
address implementation of 1+ in those states which have not previously ordered
implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative 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 GTE markets.
For the provision of interstate access 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 LEC may charge are increased or decreased each year by a price index
based upon inflation less a predetermined productivity target. LECs have
limited pricing flexibility provided they do not exceed the allowed price cap.
The FCC is considering how the price cap plan should be modified in the future
in order to adapt the system to the emergence of competition.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 14 of the Company's financial statements included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
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 telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1995, the Company continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
Restructuring and Cost Control
During 1995, the Company continued the implementation of its $163
re-engineering program. Since the program began in 1994, costs of $88.7
have been charged to the restructuring reserve -- $64.2
13
<PAGE> 16
related to customer service processes, $11.1 related to administrative processes
and $13.4 related to the consolidation of facilities and operations and other
related costs. These costs were primarily associated with the closure and
relocation of various centers, software enhancements and separation benefits
associated with workforce reductions. The continued implementation of this
program positions 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.
World Class Network
During 1995, the Company deployed its ISDN-based World Class Network in
Raleigh/Durham, North Carolina; Lexington, Kentucky; and Virginia (Manassas,
Virginia Beach, Harrisonburg) 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
the Company to provide advanced services such as high-speed data transmission
and video conferencing.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. The Company's annual expenditures for environmental compliance have
not been and are not expected to be material. Costs incurred include outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss be
recognized when circumstances indicate that the carrying amount of an asset may
not be recoverable. In discontinuing the application of FAS 71, the Company
used a methodology similar to FAS 121 in determining the amount of asset
impairments. Accordingly, the issuance of FAS 121 will not have a significant
impact on the Company's financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
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
GTE South Incorporated
STATEMENTS OF INCOME (Note 4)
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
- ----------------------- ---------- --------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales (a):
Local services $ 502,975 $ 474,502 $ 541,281
Network access services 494,892 481,555 599,776
Toll services 144,079 125,814 82,889
Other services and sales 177,164 168,533 214,117
---------- --------- -----------
Total revenues and sales 1,319,110 1,250,404 1,438,063
---------- --------- -----------
Operating costs and expenses (b):
Cost of services and sales 479,060 506,485 523,303
Selling, general and administrative 203,532 212,694 247,389
Depreciation and amortization 274,366 262,877 291,767
Restructuring -- -- 162,993
---------- --------- -----------
Total operating costs and expenses 956,958 982,056 1,225,452
---------- --------- -----------
Operating income 362,152 268,348 212,611
Other (income) expense:
Interest - net 57,656 57,653 90,276
Gain on disposition of assets -- -- (63,112)
Other - net (20,000) 4,200 --
---------- --------- -----------
Income before income taxes 324,496 206,495 185,447
Income taxes 121,897 77,308 85,712
---------- --------- -----------
Income before extraordinary charges 202,599 129,187 99,735
Extraordinary charges (509,880) -- --
---------- --------- -----------
Net income (loss) $(307,281) $ 129,187 $ 99,735
========== ========= ===========
</TABLE>
(a) Includes billings to affiliates of $37,247, $39,883 and $31,558 for the
years 1995-1993, respectively.
(b) Includes billings from affiliates of $85,069, $55,823 and $78,212 for the
years 1995-1993, respectively.
See Notes to Financial Statements.
15
<PAGE> 18
GTE South Incorporated
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------- ----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 31,271 $ 6,549
Receivables, less allowances of $17,081 and $24,090 171,593 221,195
Inventories and supplies 17,510 14,461
Deferred income tax benefits 13,361 26,896
Other 12,288 7,617
----------- -----------
Total current assets 246,023 276,718
----------- -----------
Property, plant and equipment, net 1,566,183 2,402,927
Other assets 90,542 82,483
----------- -----------
Total assets $ 1,902,748 $ 2,762,128
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $16,140 $ 171,022
Accounts payable 68,060 65,382
Affiliate payables and accruals 24,230 44,060
Advanced billings and customer deposits 30,258 27,022
Taxes payable 35,711 53,351
Accrued interest 8,213 12,286
Accrued payroll costs 35,621 34,036
Dividends payable 18 290
Accrued restructuring costs 74,254 41,460
Repositioning reserves and other 60,471 86,051
----------- -----------
Total current liabilities 352,976 534,960
----------- -----------
Non-current liabilities:
Long-term debt 723,304 594,187
Deferred income taxes 78,722 370,217
Employee benefit obligations 135,327 106,779
Restructuring costs -- 86,490
Other liabilities 4,305 35,791
----------- -----------
Total non-current liabilities 941,658 1,193,464
----------- -----------
Preferred stock, subject to mandatory redemption 2,756 3,026
----------- -----------
Shareholders' equity:
Preferred stock 412 412
Common stock (21,000,000 shares issued) 525,000 525,000
Additional paid-in capital 58,320 58,310
Retained earnings 21,626 446,956
----------- -----------
Total shareholders' equity 605,358 1,030,678
----------- -----------
Total liabilities and shareholders' equity $ 1,902,748 $ 2,762,128
=========== ===========
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 19
GTE South Incorporated
STATEMENTS OF CASH FLOWS (Note 4)
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
- ----------------------- ---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Operations:
Income before extraordinary charges $ 202,599 $ 129,187 $ 99,735
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 274,366 262,877 291,767
Deferred income taxes 31,719 (24,846) (178,197)
Restructuring costs -- -- 162,993
Gain on disposition of assets, net of tax -- -- (36,171)
Tax payments on disposition -- (170,684) --
Provision for uncollectible accounts 22,229 31,364 20,302
Change in current assets and current liabilities:
Receivables - net 27,373 (21,805) (10,227)
Other current assets (7,720) 13,626 (5,098)
Accrued taxes and interest (16,954) 80,604 136,318
Other current liabilities (60,521) (32,882) (90,211)
Other - net (36,056) 10,619 105,949
--------- --------- ---------
Net cash from operations 437,035 278,060 497,160
--------- --------- ---------
Investing:
Capital expenditures (248,469) (279,791) (301,334)
Acquisition of assets -- -- (42,919)
Proceeds from sale of assets -- -- 806,683
Other - net -- -- (106,836)
--------- --------- ---------
Net cash provided from (used in) investing (248,469) (279,791) 355,594
--------- --------- ---------
Financing:
Long-term debt issued -- 147,792 --
Long-term debt and preferred stock retired (310,652) (126,343) (387,521)
Dividends (118,321) (388,460) (142,736)
Increase (decrease) in short-term obligations, excluding
current maturities 277,900 357,481 (312,095)
Other - net (12,771) -- --
--------- --------- ---------
Net cash used in financing (163,844) (9,530) (842,352)
--------- --------- ---------
Increase (decrease) in cash and temporary investments 24,722 (11,261) 10,402
Cash and temporary investments:
Beginning of year 6,549 17,810 7,408
--------- --------- ---------
End of year $ 31,271 $ 6,549 $ 17,810
========= ========= =========
Cash paid (refunded) during the year for:
Interest $ 62,625 $ 50,890 $ 106,933
Income taxes 95,850 214,397 (20,404)
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 20
GTE South Incorporated
STATEMENTS OF SHAREHOLDERS' EQUITY (Note 4)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
--------- --------- ---------- --------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1992 $ 412 $ 525,000 $ 58,308 $ 729,040 $ 1,312,760
Net income 99,735 99,735
Dividends declared (342,175) (342,175)
--------- --------- ---------- --------- -----------
Shareholders' equity, December 31, 1993 412 525,000 58,308 486,600 1,070,320
Net income 129,187 129,187
Dividends declared (168,831) (168,831)
Redemption of preferred stock below
stated par 2 -- 2
--------- --------- ---------- --------- -----------
Shareholders' equity, December 31, 1994 412 525,000 58,310 446,956 1,030,678
Net loss (307,281) (307,281)
Dividends declared (118,049) (118,049)
Redemption of preferred stock below
stated par 10 -- 10
--------- --------- ---------- --------- -----------
Shareholders' equity, December 31, 1995 $ 412 $ 525,000 $ 58,320 $ 21,626 $ 605,358
========= ========= ========== ========= ===========
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 21
GTE South Incorporated
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE South Incorporated (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 various industries. At December 31, 1995,
the Company served 1,868,452 access lines in the states of Alabama, Illinois,
Kentucky, North Carolina, South Carolina and Virginia. Prior to the sale of
properties described in Note 5, the Company also provided these services in
Georgia, Tennessee and West Virginia. The Company is a wholly-owned subsidiary
of GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its financial statements in accordance with generally
accepted accounting principles which require that management make estimates and
assumptions that affect reported amounts. Actual results could differ from
those estimates.
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2). The 1995
financial presentation reflects account classifications consistent with
unregulated enterprises operating in a competitive environment. Specifically,
uncollectible revenue accounts have been reclassified from revenues and sales
to selling, general and administrative expenses. Reclassifications of
prior-year data have been made, where appropriate, to conform to the 1995
presentation.
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies, which are not subsidiaries of the Company, supply
construction and maintenance equipment, supplies and electronic repair services
to the Company. These purchases and services amounted to $56.8 million, $73.1
million and $120.9 million for the years 1995-1993, respectively. Such
purchases and services 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
$85.1 million, $55.8 million and $78.2 million for the years 1995-1993,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's financial statements include allocated expenses based on sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering and other support services being performed at
consolidated work centers among the domestic GTE Telephone Operating Companies.
The amounts charged for these affiliated transactions are based on a
proportional cost allocation method as filed with the Federal Communications
Commission (FCC).
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 $37.2 million, $39.9 million and $31.6 million for the
years 1995-1993, respectively.
TELEPHONE PLANT
The Company has historically provided for depreciation on a straight-line basis
over asset lives approved by regulators. Beginning in 1996, the Company will
provide for depreciation on a straight-line basis over the estimated economic
lives of its assets (see Note 2). 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 or extraordinary retirements of
property where profit or loss is recognized.
19
<PAGE> 22
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, revenues are generally recognized when services are rendered or
products are delivered to customers.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112), effective
January 1, 1993. FAS 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
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and remits
tax payments to GTE based on its tax liability on a separate company basis.
Deferred tax assets and liabilities are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely.
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.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include investments in short-term, highly
liquid securities, which have maturities when purchased of three months or
less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121) in March 1995,
which is effective January 1, 1996. FAS 121 requires that an impairment loss
be recognized when circumstances indicate that the carrying amount of an asset
may not be recoverable. In discontinuing the application of FAS 71, the
Company used a methodology similar to FAS 121 in determining the amount of
asset impairments. Accordingly, the issuance of FAS 121 will not have a
significant impact on the Company's financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As permitted by
FAS 123, the Company will continue to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of FAS 123 beginning
in 1996. Accordingly, the issuance of FAS 123 will not impact the Company's
financial position or results of operations.
20
<PAGE> 23
2. EXTRAORDINARY CHARGES
In response to recently enacted and pending legislation (see Note 14) and the
increasingly competitive environment, the Company discontinued the use of FAS
71 in the fourth quarter of 1995.
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future. As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $497.5 million (net of tax benefits
of $323.3 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. The amount of the charge was
based on an analysis of the discounted cash flows expected to be generated by
the embedded telephone plant and equipment over their remaining economic lives.
In addition to the one-time charge, the Company, beginning in 1996, will
shorten the depreciable lives of its telephone plant and equipment as follows
as a result of the discontinuance of FAS 71:
<TABLE>
<CAPTION>
Depreciable Lives
----------------------------------
Average
Asset Category Before After
--------------- --------------- ---------------
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
In addition, during 1995, the Company redeemed prior to stated maturity,
approximately $248.2 million of long-term debt. These redemptions resulted in
an after-tax extraordinary charge of $12.4 million (net of tax benefits of $8.1
million).
3. RESTRUCTURING COSTS
Results for 1993 include one-time pre-tax restructuring costs of $163 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
implementation of the plan is expected to result in costs of $110 million to
re-engineer customer service processes and $39.6 million to re-engineer
administrative processes. The restructuring costs also include $13.4 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 substantially completed by the end of 1996.
Costs of $88.7 million have been incurred since the plan's inception including
$64.2 million related to customer service processes, $11.1 million related to
administrative processes and $13.4 million related to the consolidation of
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 related to employee
reductions.
During 1993, the Company offered various voluntary separation programs to its
employees. These programs resulted in a pre-tax charge of $12.4 million which
reduced 1993 net income by $7.8 million.
21
<PAGE> 24
4. 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). The Merger became effective on
September 30, 1994 and has been accounted for similar to a "pooling of
interests." Accordingly, the financial statements include the combined
historical results of operations 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 significant intercompany transactions.
Listed below are details of the results of operations of the previously
separate enterprises that are included in the current combined net income for
the year ended December 31, 1993:
<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>
Revenues and sales $ 970,247 $ 60,442 $ 81,482 $ 12,790 $ 313,102 $ 1,438,063
Operating income 130,881 17,025 22,188 2,631 39,886 212,611
Net income 61,346 9,094 11,488 1,392 16,415 99,735
</TABLE>
22
<PAGE> 25
5. 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 pre-tax
gain of $29 million was recognized on the transaction.
On December 31, 1993, the Company sold its telephone plant in service,
materials and supplies and customers (representing 123,000 access lines) in the
states of West Virginia and Tennessee to Citizens Utilities Company for $291
million in cash. This transaction was accounted for as a sale. The net sales
proceeds exceeded book value and a pre-tax 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 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 1993. Income before extraordinary charges 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. Income before extraordinary charges for 1993 also excludes after-tax
gains of $36.2 million related to the ALLTEL and Citizens transactions.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1994 1993
------------ ------------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues and sales $ 1,319,110 $ 1,250,404 $1,200,205
Operating income 362,152 268,348 332,229
Income before extraordinary charges 202,599 129,187 169,768
</TABLE>
23
<PAGE> 26
6. 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, 1995 and 1994. Cumulative preferred stock, subject to mandatory
redemption, exclusive of amounts held in treasury, is as follows:
Shares
---------
Authorized 258,314
---------
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1995 1994
--------------------------- ----------------------------
Outstanding Shares Amount Shares Amount
--------- ---------- ---------- ------------
$25 Par Value -- (Thousands of Dollars) (Thousands of Dollars)
<S> <C> <C> <C> <C>
4.64% Series 68,200 $ 1,705 75,400 $ 1,885
$50 Par Value --
5.00% Series 10,025 501 11,035 552
5.16% Series 10,986 550 11,776 589
--------- ---------- ---------- ------------
Total 89,211 $ 2,756 98,211 $ 3,026
========= ========== ========== ============
</TABLE>
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 a
minimum of 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 1993 through 1995. In addition, 3,600 shares of the 4.64% Series were
purchased for treasury stock during 1995.
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 1995, the Company purchased 1,010 and 790 shares of the
5.00% and 5.16% Series, respectively, and fulfilled the remainder of the
requirement through treasury stock. 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.
The aggregate redemption requirement of preferred stock subject to mandatory
redemption is $190,000 in each of the years 1996-2000.
The Company held as treasury shares, 3,600 shares of 4.64% Series preferred
stock at December 31, 1995 and 200 shares of 5.00% Series preferred stock at
December 31, 1994. No shares of preferred stock were reserved for officers or
employees, or for options, warrants, conversions or other rights.
The preferred shareholders 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, 1995.
24
<PAGE> 27
7. 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, 1995, $20.2 million of retained earnings were restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Company's Articles of Incorporation. In addition, as a result of the
discontinuance of FAS 71 discussed in Note 2, the Company is currently
restricted from making a full payment of cash dividends on common stock.
25
<PAGE> 28
8. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
4.65 % Series, due 1995 $ -- $ 5,000
4.65 % Series M, due 1995 -- 7,304
4.8 % Series Q, due 1995 -- 630
12.5 % Series TT, due 1994 (a) -- 3,500
6 1/4 % Series, due 1997 6,500 6,500
5.875 % Series K, maturing through 1997 740 750
6 3/8 % Series N, due 1997 9,352 9,352
5.875 % Series EE, maturing through 1997 1,925 1,950
8.0 % Series II, due 1998 -- 2,590
8.0 % Series FF, due 1999 -- 1,950
8.0 % Series T, due 2001 20,750 20,750
8.5 % Series U, due 2001 -- 1,333
8.375 % Series GG, due 2001 -- 1,560
7 5/8 % Series U, due 2002 20,995 20,995
8.625 % Series OO, due 2002 -- 3,200
7 3/4 % Series, due 2003 10,886 10,886
8.0 % Series V, maturing through 2003 1,870 2,035
8.375 % Series JJ, due 2004 -- 2,000
10.54 % Series VV, maturing through 2008 22,941 24,706
9.875 % Series PP, due 2009 -- 8,900
8.88 % Series WW, maturing through 2009 32,941 35,294
9.0 % Series FF, due 2029 -- 100,000
9 3/8 % Series GG, due 2030 -- 125,000
Debentures:
6 1/4 %, due 1997 75,000 75,000
7.250 %Series B, due 2002 150,000 150,000
Unsecured notes payable:
8.25 %, maturing through 1997 740 800
9.5 %, due 2010 -- 2,824
Other:
4.4925 % GTE Finance Corporation promissory note, due 1995 -- 40,000
Commercial paper refinanced on a long-term basis 375,000 --
Capitalized leases 163 389
---------- ----------
Total principal amount 729,803 665,198
Less: discount and premium - net (2,059) (8,789)
---------- ----------
Total 727,744 656,409
Less: current maturities (4,440) (62,222)
---------- ----------
Total long-term debt $ 723,304 $ 594,187
========== ==========
</TABLE>
(a)This Series of debt matured on December 31, 1994. Due to timing, the actual
payment was not processed until January 3, 1995.
26
<PAGE> 29
Long-term debt as of December 31, 1995 includes $125 million of commercial paper
which was refinanced by the issuance of $125 million of 6.0% debentures in
February 1996. Long-term debt as of December 31, 1995 also includes $250
million of commercial paper which was refinanced in March 1996. These financings
are further discussed in Note 16.
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. Substantially all of the Company's telephone plant is
subject to the liens of the indentures under which the bonds listed above were
issued.
Estimated payments of long-term debt during the next five years are: $4.4
million in 1996; $98.5 million in 1997; $4.3 million in 1998; $4.3 million in
1999; and $4.3 million in 2000.
Total short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rates 5.7% and 5.9% $ 11,700 $ 108,800
Current maturities of long-term debt 4,440 62,222
------------- ------------
Total $ 16,140 $ 171,022
============= ============
</TABLE>
A $3.5 billion credit line is available to the Company 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.
27
<PAGE> 30
9. FINANCIAL INSTRUMENTS
During 1995, the Company entered into forward contracts to sell $250 million of
U.S. Treasury bonds in order to hedge against future changes in market interest
rates related to the debt the Company has called and subsequently refinanced on
March 22, 1996, as further discussed in Note 16.
The risk associated with these off-balance sheet financial instruments arises
from the possible inability of counterparties to meet the contract terms and
from movements in interest rates. The Company carefully evaluates and
continually monitors the creditworthiness of its counterparties and believes
the risk of non-performance is remote.
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1995, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, exceeded the carrying value by approximately $23 million.
The estimated fair value of long-term debt as of December 31, 1994, was lower
than the carrying value by approximately $16 million.
28
<PAGE> 31
10. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $ 75,796 $ 77,196 $ 236,172
State 14,382 24,957 27,459
---------- --------- ----------
90,178 102,153 263,631
---------- --------- ----------
Deferred:
Federal 30,498 (19,833) (153,521)
State 6,121 768 (11,237)
---------- --------- ----------
36,619 (19,065) (164,758)
---------- --------- ----------
Amortization of deferred investment tax credits (4,900) (5,780) (13,161)
---------- --------- ----------
Total $ 121,897 $ 77,308 $ 85,712
========== ========= ==========
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the statements
of income is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $113,519 $72,273 $64,906
State income taxes, net of federal income tax benefits 13,327 16,721 10,544
Amortization of deferred investment tax credits (4,900) (5,780) (13,161)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net 3,212 4,183 5,097
Rate differentials applied to reversing temporary differences (4,242) (2,450) (3,193)
Other differences, including impact of repositioning 981 (7,639) 21,519
-------- ------- -------
Total provision $121,897 $77,308 $85,712
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $111,190 $407,138
Employee benefit obligations (62,786) (46,823)
Prepaid pension costs 20,595 18,119
Restructuring costs (29,248) (50,400)
Investment tax credits 14,186 22,075
Other - net 11,424 (6,788)
-------- --------
Total $ 65,361 $343,321
======== ========
</TABLE>
29
<PAGE> 32
11. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors noncontributory defined benefit 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 1995-1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 10,170 $ 13,533 $ 18,212
Interest cost on projected benefit obligations 32,702 32,267 39,602
Return on plan assets:
Actual (136,846) 950 (107,568)
Deferred 81,932 (57,376) 47,581
Other - net (11,162) (9,224) (11,897)
---------- ---------- ----------
Total - net $ (23,204) $ (19,850) $ (14,070)
========== ========== ==========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1995 and 1994
and 8.25% for 1993.
The funded status of the plans and the net prepaid pension cost at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 324,482 $ 286,083
========= =========
Accumulated benefit obligations $ 365,376 $ 323,128
========= =========
Plan assets at fair value $ 749,916 $ 683,151
Less: projected benefit obligations 449,488 406,476
--------- ---------
Excess of assets over projected obligations 300,428 276,675
Unrecognized net transition asset (31,172) (38,849)
Unrecognized net gain (185,656) (179,659)
--------- ---------
Total - net $ 83,600 $ 58,167
========= =========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Discount rate 7.50% 8.25%
Rate of compensation increase 5.25% 5.50%
</TABLE>
30
<PAGE> 33
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). FAS 106 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 FAS 106, the cost of
these benefits was charged to expense as paid.
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 1995-1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 3,632 $ 4,811 $ 8,089
Interest cost on accumulated postretirement benefit
obligations 22,822 23,393 25,756
Actual return on plan assets (1,873) 381 (701)
Amortization of transition obligation 9,879 10,770 15,673
Other - net 1,081 (4,257) --
----------- ----------- ------------
Total - net $ 35,541 $ 35,098 $ 48,817
=========== =========== ============
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $ 214,614 $ 204,109
Fully eligible active plan participants 19,587 19,893
Other active plan participants 81,590 80,984
---------- -----------
Total accumulated postretirement benefit obligations 315,791 304,986
Less: fair value of plan assets 18,634 9,191
---------- -----------
Excess of accumulated obligations over plan assets 297,157 295,795
Unrecognized transition obligation (163,990) (189,693)
Unrecognized net loss (2,045) (1,658)
---------- -----------
Total $ 131,122 $ 104,444
========== ===========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1995 and 8.25% at December 31,
1994. The assumed health care cost trend rates in 1995 and 1994 were 11% and
12%, respectively, for pre-65 participants and 8.5% and 9.0%, respectively, 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 rates for each future year would have increased 1995 costs by $3
million and the accumulated postretirement benefit obligations at December 31,
1995 by $32.1 million.
31
<PAGE> 34
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.
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 $3.8 million, $4 million and $3.9 million in
1995-1993, respectively.
12. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is summarized as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 17,794 $ 17,999
Buildings 208,362 210,416
Plant and equipment 3,381,721 3,228,863
Other 319,972 364,087
----------- -----------
Total 3,927,849 3,821,365
Accumulated depreciation (see Note 2) 2,361,666 1,418,438
----------- -----------
Total property, plant and equipment - net $ 1,566,183 $ 2,402,927
=========== ===========
</TABLE>
Depreciation provisions were equivalent to a composite average percentage of
7.1% in 1995-1994 and 7.4% in 1993.
13. OTHER - NET
The components of other - net for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
Income from the reversal of expired representation
and warranty reserves $ (20,000) $ -- $ --
Expense associated with the early retirement of debt -- 4,200 --
----------- ----------- -----------
Total $ (20,000) $ 4,200 $ --
=========== =========== ===========
</TABLE>
32
<PAGE> 35
14. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the state regulatory
commissions in Alabama, Illinois, Kentucky, North Carolina, South Carolina and
Virginia. Prior to the sale of properties described in Note 5, the state
regulatory commissions in Georgia, Tennessee and West Virginia also regulated
the Company's intrastate operations. The Company is subject to regulation by
the Federal Communications Commission (FCC) for its interstate business
operations.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company provides toll 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 is accomplished by either (i) arrangements whereby the
Company acts or is a provider of long distance services directly to the
customers (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 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 February 23, 1995, new legislation was enacted in Virginia which allows
local-exchange competition, effective January 1, 1996. This statute requires
that firms desiring to compete in the local marketplace must be certified by
the Virginia State Corporation Commission (VSCC). Upon granting a certificate
to a new entrant, the VSCC must develop a new methodology for the incumbent
and new entrant which does not regulate the earnings of either party. On June
9, 1995, the Company filed a rate case application with the VSCC seeking to
restructure and rebalance its prices in Virginia in anticipation of this local
competition and the VSCC's impending approval of intraLATA toll competition.
In this filing, the Company has proposed a revenue neutral rate design. The
proposed rate design reduces toll and access charges and includes a
restructuring of the basic local-exchange pricing. The Company has also
proposed bringing the business and residential prices closer together. In
addition, the separate GTE and Contel tariffs will be merged, eliminating the
VSCC's current requirement that GTE's and Contel's earnings be regulated
separately. Evidentiary hearings regarding this application will be held in
June 1996 and a final VSCC decision is expected in the fourth quarter of 1996.
Several alternative local-exchange companies (ALECs), including AT&T Corp.,
MCImetro and Jones Intercable, have filed for certification since January 1,
1996, however no applications have been approved.
On July 24, 1995, the VSCC issued an order allowing intraLATA toll competition,
on a 10XXX basis only, effective October 1, 1995. All interexchange carriers
with existing interLATA toll certificates were authorized to provide intraLATA
10XXX service as of that date. This order also determines that intraLATA 1+
calling should remain exclusively with the local-exchange carriers (LECs),
primarily based on the fact that the Company and Bell Atlantic continue to be
prohibited from entering the interLATA market. The ultimate effect on total
revenue is dependent, in part, on the extent that 10XXX is utilized. The
potential negative impact on toll revenues will be partially offset by
increased network access service revenues. IntraLATA 10XXX had an immaterial
impact on revenues in the fourth quarter of 1995.
33
<PAGE> 36
On April 6, 1995, similar local competition and regulatory reform legislation
was enacted in North Carolina. The North Carolina Utilities Commission (NCUC)
can authorize local-exchange competition, effective July 1, 1996 or sooner if a
price regulation plan has been approved for the Company. The revenue impact is
dependent upon the specific price regulation plan expected to be approved by
the NCUC for the Company in the second quarter of 1996 and the extent to which
local-exchange competition develops in the Company's service territory.
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 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 4, the merger became effective September 30, 1994.
On September 20, 1995, the Alabama Public Service Commission (APSC) adopted a
mandatory price regulation plan for South Central Bell (SCB), and an optional
price regulation plan for the other LECs, including the Company. The Company,
via a letter dated December 19, 1995, indicated its intention to participate in
the optional plan. This plan includes no earnings limitations. Basic
local-exchange rates are capped at their present level for five years, and
thereafter are adjusted in accordance with a formula utilizing an inflation
factor (measured by GDP-PI) less 1.0%. Intrastate access prices must be
reduced by the plan participants. The Company must reduce access charges by
$3.3 million over the 1996-1998 time period. This order also authorizes the
introduction of local-exchange competition in Alabama. The APSC can allow new
competitors in SCB's service territory beginning immediately. The Company and
other LECs will have a three year grace period from competition in their
service territories.
On December 29, 1994, the Kentucky Public Service 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.
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.
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
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. LECs have limited pricing
flexibility provided they do not exceed the allowed price cap.
34
<PAGE> 37
In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing. The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options reflected an increase to the 3.3% productivity factor
used since 1991. The Company selected a 5.3% productivity factor, with no
sharing required, in each of its tariff entities for use in the 1995-1996
tariff year. Under the interim rules, the Company filed tariffs to reduce
rates by $10.2 million annually, effective August 1, 1995. On September 20,
1995, the FCC released its proposed rulemaking proceeding on price caps which
proposes specific changes to reflect and encourage emerging competition in
local and access services markets and to establish the path towards decreased
regulation of LECs' services. On September 27, 1995, the FCC solicited
comments on a number of specific issues regarding methods for establishing the
price caps, such as productivity measurements, sharing, the common line
formula, and exogenous costs. The Company anticipates the FCC will issue an
order prior to the July 1996 annual filing.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The Telecommunications Act overhauls 62 years of
telecommunications law, replacing government regulation with competition as
the chief way of assuring that telecommunications services are delivered to
customers. The new law removes many of the statutory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to set new
guidelines to open local-exchange markets and to set new guidelines for
interconnection, loosens restrictions barring local telephone companies from
entering the cable television market, and preserves Universal Service while
equalizing the responsibility for contribution among all carriers.
A key provision of the Telecommunications Act also eliminates the legal
restraints of the GTE Consent Decree which has kept the Company from providing
interLATA services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE plans to offer the service, marketed under
the name GTE Easy Savings Plan(SM), in all 28 states where it currently offers
local telephone service by December 1996.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1995-1993 under
various arrangements and amounted to $196.7 million, $189.2 million and $234.8
million, respectively.
35
<PAGE> 38
15. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $16.8 million, $18.2 million and $20.7
million in 1995-1993, respectively. Minimum rental commitments for
noncancelable leases through 2000 do not exceed $3.5 million annually and
aggregate $3 million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
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. 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.
16. SUBSEQUENT EVENTS (UNAUDITED)
On February 16, 1996, the Company issued $125 million of 6.0%, Series C
debentures, due 2008. On March 22, 1996, the Company issued $250 million of
7 1/2%, Series D debentures, due 2026. The net proceeds from the offerings and
sales of these new debentures, exclusive of accrued interest, will be applied
toward the repayment of short-term borrowings incurred in connection with the
redemption of long-term debt in December 1995 prior to stated maturity (see Note
2) and for the purpose of financing the Company's construction program. The net
proceeds will also be used for general corporate purposes.
During 1995, the Company entered into forward contracts to sell $250 million of
U.S. Treasury bonds in order to hedge against future changes in market interest
rates related to the debt the Company has called and subsequently refinanced on
March 22, 1996 (discussed above). A gain of approximately $15 million 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.
36
<PAGE> 39
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, 1995 and 1994, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements and the schedule and exhibit 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 and
exhibit 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, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1995, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation".
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state 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 24, 1996
37
<PAGE> 40
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 on
Form 10-K, 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
38
<PAGE> 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
39
<PAGE> 42
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 1,
1996 are listed below along with their business experience during the past five
years.
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
- ----------------------- ------- ----------------- -------------------------------------------------------
<S> <C> <C> <C>
John C. Appel 47 1996 Executive Vice President - Network Operations, GTE
Telephone Operations, 1996; Executive Vice President-
Network Operations, all GTE domestic telephone
subsidiaries of which he is not the President, 1996;
Director, all GTE domestic telephone subsidiaries, 1996;
President - GTE South Incorporated and GTE North
Incorporated, 1995; Senior Vice President - Regulatory
Operations, GTE Telephone Operations, 1994; President-
GTE Southwest Incorporated, 1994; State President -
Texas/New Mexico, 1993; Vice President and General
Manager - California, GTE Telephone Operations West
Area, 1992; Assistant Vice President - Business Services,
GTE Telephone Operations, 1991.
Richard M. Cahill 57 1993 Vice President - General Counsel, GTE Telephone
Operations, 1988; Director, all GTE domestic telephone
subsidiaries, 1993 and/or 1994; Director, GTE Vantage
Incorporated, 1991; Vice President - General Counsel,
all GTE domestic telephone subsidiaries, 1995.
Gerald K. Dinsmore 46 1993 Senior Vice President - Finance and Planning, GTE
Telephone Operations, 1994; Senior Vice President-
Finance and Planning, all GTE subsidiaries, 1994;
Vice President - Finance, GTE Telephone Operations,
1993; Vice President - Intermediary Customer Markets,
GTE Telephone Operations, 1988; 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.
Michael B. Esstman 49 1993 Executive Vice President - Customer Segments, GTE
Telephone Operations, 1994; Executive Vice President -
Operations, GTE Telephone Operations, 1993; President
of all Central Area Companies, GTE Telephone
Operations, 1991; President, Contel Eastern Region,
Telephone Operations Sector, 1983; Director, AG
Communications Systems; Director, all Central Area
Companies, 1991; Director, all other GTE domestic
telephone subsidiaries, 1993 and/or 1994.
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
- ----------------------- ------- ----------------- -------------------------------------------------------
<S> <C> <C> <C>
Thomas W. White 49 1993 President, GTE Telephone Operations, 1995; Executive
Vice President - Network Operations, GTE Telephone
Operations, 1994; Executive Vice President - GTE
Telephone Operations, 1993; 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. There are no family relationships between any
of the directors or executive officers of the Company.
41
<PAGE> 44
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 1, 1996.
<TABLE>
<CAPTION>
Year Assumed
Present Position
----------------------------
the
Name Age Telops Company Position
- -------------------------- ------- -------------- ------------ -------------------------------------------
<S> <C> <C> <C> <C>
Thomas W. White (1) 49 1995 -- President of GTE Telephone Operations
John C. Appel (2) 47 1996 1995 President of the Company and Executive
Vice President - Network Operations of GTE
Telephone Operations
Mary Beth Bardin 41 1994 1995 Vice President - Public Affairs of GTE
Telephone Operations and the Company
C. F. Bercher 52 1994 1995 Vice President - Consumer Markets of GTE
Telephone Operations and the Company
Richard M. Cahill 57 1988 1995 Vice President - General Counsel of GTE
Telephone Operations and the Company
Gerald K. Dinsmore 46 1994 1994 Senior Vice President - Finance and
Planning of GTE Telephone Operations and
the Company
William M. Edwards, III 47 -- 1993 Controller of the Company
Michael B. Esstman 49 1994 -- Executive Vice President - Customer
Segments of GTE Telephone Operations
Gregory D. Jacobson 44 -- 1994 Treasurer of the Company
Brad M. Krall 54 1993 1995 Vice President - Centralized Operations of
GTE Telephone Operations and the Company
Michael J. McDonough 46 1994 1995 Vice President - Business Markets of GTE
Telephone Operations and the Company
Dennis F. Myers 52 -- 1994 Vice President - South Region of the
Company
Richard L. Schaulin 53 1989 1995 Vice President - Human Resources of GTE
Telephone Operations and the Company
Charles J. Somes 49 -- 1994 Secretary of the Company
Larry J. Sparrow 52 1994 1995 Vice President - Carrier Markets of GTE
Telephone Operations and the Company
Alex Stadler 45 1994 1995 Vice President - Strategy and Technology
Planning of GTE Telephone Operations and
the Company
Edward J. Weise 51 -- 1991 Vice President - Virginia Region of the
Company
William A. Zielke 49 -- 1994 Vice President - North Region of the
Company
</TABLE>
(1) Thomas W. White was appointed President of GTE Telephone Operations
replacing Kent W. Foster, who was appointed President of GTE
Corporation.
(2) John C. Appel was appointed Executive Vice President - Network
Operations of GTE Telephone Operations, replacing Thomas W. White, who
was appointed President of GTE Telephone Operations.
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.
42
<PAGE> 45
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 the 1995
Principal Executive Officers of the Company and each of the other four most
highly compensated executive officers (the named executive officers) of GTE
Telephone Operations in 1995. The information in this table under the caption
"Annual Compensation" sets forth all compensation paid to the named executive
officers by GTE Telephone Operations. The caption "Long-Term Compensation" in
this table sets forth all long-term compensation paid to the named executive
officers under employee benefit plans administered by GTE Corporation or GTE
Service Corporation. Footnote 1 to this table sets forth the actual 1995
annual compensation for each of the named executive officers that was allocated
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 Bonus Compensation Stock Options/ Payouts Compensation
Position in Group Year ($) (2) ($) ($) Awards(#) SARs (#) ($) (3) ($)(4)
- -------------------------- ---- ------- ------- ------------ --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John C. Appel 1995 239,600 258,100 -- -- 63,500 162,800 10,194
President 1994 193,023 182,400 -- -- 24,800 34,700 6,230
M. L. Keith, Jr. (5) 1995 204,308 104,000 -- -- 12,500 -- 9,111
Area Vice President - 1994 201,558 115,100 -- -- 5,500 -- 5,384
Sales 1993 172,346 55,400 -- -- 4,000 -- 5,170
Kent B. Foster (6) 1995 381,302 476,600 -- -- 187,900 848,300 10,613
President - 1994 687,608 837,900 -- -- 138,100 397,800 7,075
GTE Telephone 1993 603,659 531,700 -- -- 58,800 117,100 6,502
Operations
Thomas W. White 1995 418,884 443,800 -- -- 98,800 331,800 10,613
President - 1994 353,508 368,200 -- -- 53,700 164,100 7,075
GTE Telephone 1993 328,696 282,600 -- -- 22,600 52,700 7,067
Operations
Michael B. Esstman 1995 350,731 349,400 -- -- 63,500 305,900 7,238
Executive Vice President- 1994 327,546 358,200 -- -- 53,700 158,300 4,998
Customer Segments 1993 287,830 268,400 -- -- 22,600 46,200 7,056
GTE Telephone Operations
Gerald K. Dinsmore 1995 265,125 255,600 -- -- 36,400 211,300 10,613
Senior Vice President - 1994 248,438 233,800 -- -- 30,900 97,800 7,075
Finance and Planning 1993 213,061 206,900 -- -- 14,500 14,800 6,207
GTE Telephone
Operations
</TABLE>
(1) Annual Compensation represents the total annual cash compensation of
salaries, bonuses and other compensation. The Company's allocated
share for Messrs. Appel, Keith, Foster, White, Esstman and Dinsmore,
for whom total annual amounts are shown above, is $33,281; $5,156;
$54,891; $54,792; $45,340 and $33,722, respectively.
43
<PAGE> 46
(2) The data in the table includes fees of $20,604, $22,896 and $21,944,
respectively, received by Mr. Foster when he served as a director of
BC TEL during 1995, 1994 and 1993, and fees of $289 and $2,869,
respectively, for serving as a director of CANTV during 1994 and 1993.
Mr. White received fees of $16,607 for serving as director of BC TEL
during 1995. Both BC TEL and CANTV are indirectly-owned subsidiaries
of GTE Corporation.
(3) 1995 Long-Term Incentive Plan (LTIP) Payouts include transition awards
for the 1994-1995 performance period, which were established by the
Committee as a special grant to allow for the smooth transitioning
from a single measure of long-term performance (return on equity) to a
combined measure (return on equity and operating cash flow margin).
(4) All other compensation for 1995 includes company contributions to the
GTE Savings Plan of $6,750 for each of Messrs. Appel, Keith, Foster,
White and Dinsmore and $3,375 for Mr. Esstman. Also included are
company contributions to the GTE Executive Salary Deferral Plan of
$3,444 for Mr. Appel, $2,361 for Mr. Keith and $3,863 for each of
Messrs. Foster, White, Esstman and Dinsmore.
(5) Mr. Keith, whose official title remained as Area Vice President -
Sales, assumed the additional responsibilities of acting President in
July 1994. In February 1995, Mr. Appel was elected President of the
Company.
(6) Mr. Foster served as President of GTE Telephone Operations through
June 1995 at which time he was elected President of GTE Corporation.
Mr. White replaced Mr. Foster as President of GTE Telephone
Operations.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1995, whether
or not specifically allocated to the Company. The options and SARs were
granted under the Long-Term Incentive Plan (LTIP). Pursuant to Securities and
Exchange Commission (the SEC) rules, the table also shows the value of the
options granted at the end of the option terms (ten years) if the stock price
were to appreciate annually by 5% and 10%, respectively. There is no assurance
that the stock price will appreciate at the rates shown in the table. The
table also indicates that if the stock price does not appreciate, there will be
no increase in the potential realizable value of the options granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of Stock
Price Appreciation For
Individual Grants (1) Option Term
-----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Number of Total Options/
Securities SARs Granted Exercise
Underlying to All GTE Or Base
Options / SARs Employees in Price Expiration
Name Granted (1) Fiscal Year ($/SH) Date 0% 5% 10%
- --------------------- -------------- -------------- --------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John C. Appel 29,300 0.51% $ 33.38 02/14/05 $ -- $ 614,988 $ 1,558,501
34,200 0.60% 35.81 08/12/05 -- 769,996 1,951,166
M. L. Keith, Jr. 6,500 0.11% 33.38 02/13/05 -- 136,431 345,743
6,000 0.11% 34.06 03/26/05 -- 128,486 325,583
Kent B. Foster 163,100 2.89% 33.38 02/13/05 -- 3,423,364 8,675,477
24,800 0.44% 34.44 07/02/05 -- 536,922 1,360,557
Thomas W. White 63,500 1.12% 33.38 02/13/05 -- 1,332,824 3,377,638
35,300 0.62% 35.75 07/30/05 -- 793,375 2,010,409
Michael B. Esstman 63,500 1.11% 33.38 02/14/05 -- 1,332,824 3,377,638
Gerald K. Dinsmore 36,400 0.64% 33.38 02/14/05 -- 764,013 1,936,158
</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.
44
<PAGE> 47
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 1995. 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 29, 1995.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs at FY-End at FY-End ($)
Acquired Value ---------------------------- -----------------------------
Name On Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------------- -------------- ----------- -------------- ------------ --------------
(#)
<S> <C> <C> <C> <C> <C>
John C. Appel 15,132 $55,354 -- 82,468 $ -- $799,764
M. L. Keith, Jr. -- -- 13,199 17,501 148,303 180,822
Kent B. Foster -- -- 251,331 299,569 2,836,272 3,071,409
Thomas W. White 19,800 227,700 105,566 142,134 1,227,717 1,428,689
Michael B. Esstman -- -- 49,166 106,834 526,500 1,141,425
Gerald K. Dinsmore 29,833 142,354 12,833 61,834 117,248 660,412
</TABLE>
Long-Term Incentive Plan - Awards in Last Fiscal Year
The LTIP provides for awards, currently in the form of stock options with
tandem SARs, other stock-based awards and dollar denominated awards, to
participating employees. The stock options and tandem SARs awarded under the
LTIP to the named executive officers are shown in the table on page 44.
The named executive officers are eligible to receive annual grants of
performance bonuses which are earned during a 36-month performance cycle.
Awards for the three-year performance cycle ending in 1995 were 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). To transition from awards
based solely on performance against ROE targets to awards based on a
combination of ROE and OCFM performance and to bring opportunities to company
levels, the Committee established a special performance period of two-years to
run concurrently with the final two years of the three-year ROE performance
cycle ending in 1995. The awards for the additional period were based on GTE's
performance against ROE and OCFM goals for the two-year period. The Committee
authorized grants for the three-year performance cycle ending in 1997. The
payments under this cycle will be based on GTE's performance against the ROE
and OCFM targets established for the full three-year cycle. 75% of the award is
determined based on ROE performance and 25% of the award will be determined
based on OCFM performance.
The Committee established minimum and target award opportunities for each cycle
based upon competitive practices. In establishing the targeted performance
objectives for ROE and OCFM, the Committee considered past performance, the
strategic goals of GTE and the plans for implementing those goals. The
established targets are designed to facilitate implementing strategic plans and
improving performance.
At the time performance targets for the current LTIP cycles were established, a
Common Stock Unit account was set up for each participant in the LTIP. An
initial dollar amount for each account (target award) was determined based on
the competitive performance bonus grant practices of the market comparator
group. That amount was then divided by the average market price for GTE Common
Stock for the calendar week preceding the day the account was established to
determine the number of Common Stock Units in the account. The value of the
account increased or decreased 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 was added on each dividend payment date. This
45
<PAGE> 48
amount was then converted into a 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. Appel, Keith,
Foster, White, Esstman and Dinsmore are each eligible to receive a cash award
under the LTIP. The number of Common Stock Units initially allocated in 1995
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
Or Other Period
Number of Until
Shares, Units Maturation
Name Or Other Rights Or Payout Threshold (2) Target (3) Maximum (4)
- ------------------------- --------------- --------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
John C. Appel 2,256 29 Months 462 2,308
4,700 3 Years 988 4,942
1,322 17 Months 270 1,352
1,865 24 Months 392 1,961
225 12 Months 47 237
M. L. Keith, Jr. 875 21 Months 184 920
1,375 21 Months 289 1,446
Kent B. Foster 15,400 3 Years 3,527 17,633
2,415 30 Months 538 2,690
1,450 18 Months 310 1,548
610 6 Months 125 624
Thomas W. White 5,900 3 Years 1,351 6,755
2,495 29 Months 556 2,779
1,465 17 Months 313 1,564
370 5 Months 76 378
Michael B. Esstman 5,900 3 Years 1,241 6,204
Gerald K. Dinsmore 3,800 3 Years 799 3,996
</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 29,
1995. 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.
46
<PAGE> 49
(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.
(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 respective performance targets, additional bonuses may be earned
according to the following schedule:
<TABLE>
<CAPTION>
Performance Increment Above
Maximum Performance Target Added Percentage to Maximum Awards
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
First and Second .1% +2%
Third and Fourth .1% +3%
Fifth and above .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. Foster, White,
Esstman and Dinsmore 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 these individuals
separate from service and have a "good reason" for leaving or are terminated
without "cause" within two years after a Change in Control of GTE.
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.
47
<PAGE> 50
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
average of his or her other percentage awards under the Executive Incentive
Plan (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. Foster, White, Esstman and Dinsmore
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 GTE Corporation
Executive Retired Life Insurance Plan (ERLIP). In addition, each executive
covered under an Agreement 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 Agreements provide that there
will be no duplication of benefits.
Each of the agreements remain in effect until July 1, 1999 unless 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 his
respective 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.
48
<PAGE> 51
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 (integrated with social security as
described below) and years of service, is illustrated in the following table:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Final Average Years of Service
------------------------------------------------------------------------------
Earnings 15 20 25 30 35
- -------------------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,460 $ 41,946 $ 52,433 $ 62,919 $ 73,406
200,000 42,335 56,446 70,558 84,669 98,781
300,000 64,085 85,446 106,808 128,169 149,531
400,000 85,835 114,446 143,058 171,669 200,281
500,000 107,585 143,446 179,308 215,169 251,031
600,000 129,335 172,446 215,558 258,669 301,781
700,000 151,085 201,446 251,808 302,169 352,531
800,000 172,835 230,446 288,058 345,669 403,281
900,000 194,585 259,446 324,308 389,169 454,031
1,000,000 216,335 288,446 360,558 432,669 504,781
1,200,000 259,835 346,446 433,058 519,669 606,281
1,500,000 325,085 433,446 541,808 650,169 758,531
2,000,000 433,835 578,446 723,058 867,669 1,012,281
</TABLE>
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 all GTE employees
based on years of service. Pension benefits to be paid from the Service
Corporation Plan and contributions to the Service Corporation 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 December 31, 1995, the credited years of service
under the plan for Messrs. Appel, Keith, Foster, White, Esstman and Dinsmore
are 20, 30, 25, 28, 26 and 20, respectively.
Under Federal law, an employee's benefits under a qualified pension plan, such
as the Service Corporation Plan are limited to certain maximum amounts. GTE
maintains a SERP, which supplements the benefits of any participant in the
Service Corporation Plan 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. SERP benefits are payable in a lump sum or an annuity.
49
<PAGE> 52
Executive Retired Life Insurance Plan
The ERLIP provides Messrs. Appel, Foster, White, Esstman and Dinsmore a
postretirement life insurance benefit of three times final base salary and
provides Mr. Keith a postretirement life insurance benefit of two and one-half
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 service on the Board.
50
<PAGE> 53
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners as of February 29, 1996:
<TABLE>
<CAPTION>
Name and Address of Shares of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
----------------------- ---------------------------- --------------------- ----------------
<S> <C> <C> <C>
Common Stock of GTE GTE Corporation 21,000,000 100%
South Incorporated One Stamford Forum shares of record
Stamford, Connecticut 06904
</TABLE>
(b) Security Ownership of Management as of December 31, 1995:
<TABLE>
<CAPTION>
Title of Class Name of Director or Nominee (1) (2) (3)
----------------------- ------------------------------------------------------
<S> <C> <C>
Common Stock of GTE Richard M. Cahill 54,481
Corporation Gerald K. Dinsmore 29,667
Michael B. Esstman 107,586
Thomas W. White 119,761
------------------
311,495
==================
Executive Officers (1) (2) (3)
------------------------------------------------------
John C. Appel 9,412
M. L. Keith, Jr. 24,383
Kent B. Foster 432,173
Thomas W. White 119,761
Michael B. Esstman 107,586
Gerald K. Dinsmore 29,667
------------------
722,982
==================
All directors and executive
officers as a group (1)(2)(3) 1,496,219
==================
</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. Cahill,
Dinsmore, Esstman, White, Appel, Keith, and Foster and all directors
and executive officers as a group are 49,733; 27,267; 93,066; 106,699;
6,101; 20,532; 367,865; and 1,229,880 shares, respectively, which such
persons have the right to acquire within 60 days pursuant to stock
options.
(3) No director, nominee for director or executive officer owns as much as
one-tenth of one percent of the total outstanding shares of GTE Common
Stock, and all directors and executive officers as a group own less
than one- fifth of one percent of the total outstanding shares of GTE
Common Stock.
(c) There were no changes in control of the Company during 1995.
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.
51
<PAGE> 54
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required, 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.
52
<PAGE> 55
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,
1995-1993 (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 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 September 20, 1995.
(Exhibit 3.1 of the September 30, 1995 Form 10- Q,
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)
10 Material Contracts - Agreements Between GTE and
Certain Executive Officers
12 Statements re: Calculation of the Ratio of Earnings
to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1995, the Company filed a report on Form 8-K dated
November 9, 1995, under Item 5 "Other Events". Financial information
was filed with this report.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
53
<PAGE> 56
GTE SOUTH INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Deductions
Balance at from
Beginning Charged to Charged to Reserves Balance at
Description of Year Income Other Accounts (Note 1) Close of Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the years ended:
December 31, 1995 $ 24,090 $ 22,229 $ 19,954 (2) $ 49,192 $ 17,081
==============================================================================
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
==============================================================================
Accrued restructuring costs for the
years ended (Note 3):
December 31, 1995 $ 127,950 $ -- $ -- $ 53,696 $ 74,254
==============================================================================
December 31, 1994 $ 162,993 $ -- $ -- $ 35,043 $ 127,950
==============================================================================
December 31, 1993 $ -- $ 162,993 $ -- $ -- $ 162,993
==============================================================================
</TABLE>
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 3 to the financial statements included elsewhere herein.
54
<PAGE> 57
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, 1996 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 and Director March 27, 1996
- ------------------------ (Principal Executive Officer)
John C. Appel
Gerald K. Dinsmore Senior Vice President - Finance and March 27, 1996
- ------------------------ Planning and Director
Gerald K. Dinsmore (Principal Financial officer)
William M. Edwards, III Controller March 27, 1996
- ------------------------ (Principal Accounting Officer)
William M. Edwards, III
Richard M. Cahill Director March 27, 1996
- ------------------------
Richard M. Cahill
Michael B. Esstman Director March 27, 1996
- ------------------------
Michael B. Esstman
Thomas W. White Director March 27, 1996
- ------------------------
Thomas W. White
</TABLE>
55
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------ ----------------------------------------------------------------------------------
<S> <C>
10 Material Contracts - Agreements Between GTE and Certain Executive Officers
12 Statements re: Calculation of the Ratio of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated as of January 8, 1996, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
the "Executive".
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the Company,
but desires assurance that he will not be materially disadvantaged by a change
in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued service
to the Company and the mutual agreements herein contained, the Company and the
Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. The Company shall not be
required to provide any benefits to the Executive pursuant to this Agreement
unless a Qualifying Termination occurs before the Agreement expires in
accordance with Section 6.1 hereof. For purposes of this Agreement, a
Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good
Reason arises, and (B) the Executive terminates employment
with the Company within (I) six months after the Good Reason
arises or (II) two years after the Change in Control,
whichever occurs later;
provided, that a Qualifying Termination shall not occur if the Executive's
employment with the Company terminates by reason of the Executive's Retirement,
Disability, or death. A Qualifying Termination may occur even though the
Executive retires from employment with the Company other than by reason of
Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of securities of
GTE by any Person, immediately after which such Person,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE
representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time,
would cause the Person to constitute an "Acquiring Person" (as
such term is defined in the Rights Plan); provided that, in
determining whether a Change in Control has occurred, the
acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change
in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the
"Incumbent Board" (as defined below) then serving as members
of the Board, are elected within any single 12-month period to
serve on the Board; provided that an individual whose election
or nomination for election is approved as a result of either
an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the Securities Exchange Act of
1934, as amended from time to time) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest"),
including by
<PAGE> 2
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have
been approved by a majority of the Incumbent Board for
purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board"
shall mean individuals who, as of the close of business on
April 19, 1995, are members of the Board; provided that, if
the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at
least three-quarters of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further that no
individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other
actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving
unless
(A) the shareholders of GTE, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation,
or reorganization, at least 50 percent of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger, consolidation, or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation, or reorganization
constitute at least a majority of the board of directors of
the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary
of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any
subsidiary of GTE, or any Person who, immediately prior to
such merger, consolidation, or reorganization, had Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of
"Change in Control") or more of the Voting Power) has
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition
of "Change in Control") or more of the combined Voting Power
of the Surviving Corporation's then outstanding voting
securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of GTE to any Person (other
than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether
such right or obligation is exercisable or effective
immediately or only after the passage of time) pursuant to any
agreement, arrangement, or understanding (whether or not in
<PAGE> 3
writing) or upon the exercise of conversion rights, exchange
rights, rights (other than the rights granted pursuant to the
Rights Plan), warrants or options, or otherwise; provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," securities tendered pursuant to a tender
or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement, or understanding
(whether or not in writing); provided that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (ii) if the agreement,
arrangement, or understanding to vote such security (A) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations of the
Securities Exchange Act of 1934, as amended from time to time,
and (B) is not also then reported by such person on Schedule
13D under the Securities Exchange Act of 1934, as amended from
time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement, or understanding
(whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise
formed a group for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and State Street Bank and Trust Company (now administered by
the First National Bank of Boston), as it may be amended from time to time, or
any successor thereto.
"Voting Power" means the voting power of all securities of GTE then
outstanding generally entitled to vote for the election of directors of GTE.
Section 1.3. Termination for Cause. The Company shall have Cause
to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a notice, consisting of a copy of a resolution duly
adopted by the affirmative vote of not less than three quarters of the entire
membership of GTE's Board of Directors at a duly held meeting of the Board of
Directors (with reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board of Directors)
("Notice of Termination"), finding that the Executive has engaged in the
conduct set forth above in this Section 1.3 and specifying the particulars
thereof in detail. GTE's Board of Directors may not delegate or assign its
duties under this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment,
represents a demotion from the Executive's status or
position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment,
are inconsistent with the Executive's status or position(s) in
effect immediately before the Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the
Executive's employment for Cause or as a result of the
Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be
equal to his base salary plus the greater of (i) the most
recent award that he has earned under the GTE Corporation
Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs)). For
<PAGE> 4
purposes of this paragraph (d), the Executive's "Average
Percentage" means the average of the Executive's Annual
Percentages for the Determination Years. For purposes of this
paragraph (d), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a
percentage), the numerator of which is the EIP award earned by
the Executive for such Determination Year, and the denominator
of which is the annual value of the normal payment under the
EIP for the Executive's salary level (such annual value and
normal payment being those that were in effect under the EIP
for such Determination Year for the Executive's salary level
for such Determination Year). For purposes of this paragraph
(d), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Change in
Control occurs (or, if less, the number of those three plan
years during which the Executive was a participant in the
EIP);
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan in
which the Executive is participating at the time of the Change
in Control (or plans or arrangements providing the Executive
with substantially equivalent benefits) other than as a result
of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on
at least as favorable a basis as was the case on the date of
the Change in Control, or that would materially reduce the
Executive's benefits in the future under the Plan or deprive
him of any material benefits that he enjoyed at the time of
the Change in Control, except to the extent that such action
or inaction by the Company is required by the terms of the
Plan as in effect immediately before the Change in Control, or
is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal
Revenue Code, and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
(h) the Company's failure to provide and credit the Executive with
the number of days of paid vacation, holiday, or leave to
which he is then entitled in accordance with the Company's
normal vacation, holiday, or leave policy in effect
immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 25 miles of where his principal
office was located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company as provided by
Section 6.3 hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 1.3 hereof
or that does not afford the Executive the procedural
protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including this
Agreement) between it and the Executive.
Notwithstanding the foregoing, no action by the Company shall give rise to a
Good Reason if it results from the Executive's termination for Cause,
Retirement, or death, and no action by the Company specified in paragraphs (a)
through (d) of the preceding sentence shall give rise to a Good Reason if it
results from the Executive's Disability. A Good Reason shall not be deemed to
be waived by reason of the Executive's continued employment as long as the
termination of the Executive's employment occurs within the time prescribed by
Section 1.1(b)(ii)(B) hereof. For purposes of this Section 1.4, "Plan" means
any compensation plan, such as an incentive, stock option, or restricted stock
plan, or any employee benefit plan, such as a thrift, pension, profit-sharing,
stock bonus, long-term performance award, medical, disability, accident, or
life insurance plan, or a relocation plan or policy, or any other plan, program
or policy of the Company that is intended to benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or
injury) on a full- time basis for six consecutive months.
Section 1.7. Notice. If a Change in Control occurs, the Company
shall notify the Executive of the
<PAGE> 5
occurrence of the Change in Control within two weeks after the Change in
Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the
Base Amount. The Base Amount shall be an amount equal to the
greater of:
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the
Executive's Average Percentage of the annual value (i.e., the
dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment
being those that are in effect under the EIP immediately
before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which
the Change in Control occurs). For purposes of this paragraph
(A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination
Years. For purposes of this paragraph (A), the Executive's
"Annual Percentage" for each Determination Year means a
fraction (expressed as a percentage), the numerator of which
is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual
value of the normal payment under the EIP for the Executive's
salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year
for the Executive's salary level for such Determination Year).
For purposes of this paragraph (A), a "Determination Year"
means each of the last three EIP plan years ending before the
date on which the Change in Control occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II)
the Executive's Average Percentage of the annual value (i.e.,
the dollar amount) of the normal payment under the EIP for the
Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP
immediately before the date on which the Qualifying
Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying
Termination occurs). For purposes of this paragraph (B), the
Executive's "Average Percentage" means the average of the
Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual
Percentage" for each Determination Year means a fraction
(expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and
the denominator of which is the annual value of the normal
payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in
effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For
purposes of this paragraph (B), a "Determination Year" means
each of the last three EIP plan years ending before the date
on which the Qualifying Termination occurs (or, if less, the
number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant
to subsection (a) of this Section 2.1 in a lump sum within 30
days of the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs); such coverage shall end upon the earlier of
(a) the expiration of 24 months after the Qualifying Termination or (b)(i) with
respect to medical insurance coverage, the date on which the Executive first
becomes eligible for medical insurance coverage provided by a firm that employs
him following the Qualifying Termination, or (ii) with respect to life
insurance coverage, the date on which the Executive first becomes eligible for
life insurance coverage provided by such firm.
<PAGE> 6
Section 2.3. Outplacement Counseling. If the Executive incurs a
Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during 1995. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the
outplacement counseling that this Section 2.3 otherwise requires the Company to
provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility,
benefit accrual, and all other purposes, under all employee
benefit plans sponsored by the Company (including, but not
limited to, health, life insurance, pension, savings, stock,
and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he
participated immediately before the Change in Control, for 24
months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company,
including the GTE Service Corporation Supplemental Executive
Retirement Plan ("SERP"), the Executive's compensation shall
include the amount payable to the Executive pursuant to
Section 2.1 hereof, and for purposes of this subsection (b),
the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount
payable to the Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of
determining his eligibility for early retirement benefits
under the Company's defined benefit pension plans (including,
but not limited to, the SERP) and for purposes of determining
his eligibility for benefits under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this
Section 2.5 and the compensation recognized under subsection (b) of this
Section 2.5, nothing in this Section 2.5 shall prevent the Executive from
receiving any benefits to which the Executive is entitled under any defined
benefit or defined contribution pension plan maintained by the Company,
including the SERP (as such benefits are modified by this Agreement) in any
form permitted by such plans (including but not limited to a lump-sum
distribution) immediately following the Executive's Qualifying Termination. To
the extent that the Company's tax-qualified retirement plans cannot provide the
benefits specified by this Section 2.5 without jeopardizing the tax
qualification of such plans, the Company shall provide such benefits under the
SERP.
Section 2.6. Nonduplication.
(a) Nothing in this Agreement shall require the Company to make
any payment or to provide any benefit or service credit that
GTE or the Company is otherwise required to provide under any
other contract, agreement, policy, plan, or arrangement.
Section 2.7. Prior Agreement. This Agreement supersedes any prior
Executive Severance Agreement entered into between the Company and the
Executive ("Prior Agreement"). On and after the date of this Agreement, such
Prior Agreement shall have no force or effect.
<PAGE> 7
ARTICLE III
EFFECT ON HUMAN RESOURCES POLICY 104
Section 3.1. Effect on Policy 104. If the Executive becomes
entitled to receive benefits hereunder, the Executive shall not be entitled to
any benefits under GTE Human Resources Policy 104, as amended from time to
time, or any successor policy, or under any other Company severance or salary
continuation policy (including but not limited to any benefits pursuant to an
involuntary separation program or similar program maintained under a pension
plan sponsored by the Company).
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of
his continued service to the Company or severance payments in consideration of
his past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal fees
and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal
fees and expenses.
Section 5.3. Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. The amount of any payment provided for
herein shall not be reduced by any remuneration that the Executive may earn
from employment with another employer or otherwise following his Qualifying
Termination.
Section 5.4. Interest. If the Company fails to make, or cause to
be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest
rate shall be equal to 120 percent of the prime rate as reported by The Wall
Street Journal for the first business day of each month, effective for the
ensuing month. The interest rate shall be adjusted at the beginning of each
month.
Section 5.5. Authority. The execution of this Agreement has been
authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 1999, if no Change in Control has occurred before that date; (b)
the termination of the Executive's employment with the Company for any reason
prior to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good
<PAGE> 8
Reason, following a Change in Control and the Company's and the Executive's
fulfillment of all of their obligations hereunder; and (d) the expiration
following a Change in Control of two years and six months and the fulfillment
by the Company and the Executive of all of their obligations hereunder.
Notwithstanding the foregoing, commencing on July 1, 1999, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall supersede the
terms of any plan or arrangement (other than this Agreement) that is affected
by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to
setoff against any obligations or to assignment by operation of law. Any
attempt, voluntary or involuntary, to effect any action specified in the
immediately preceding sentence shall be void. However, this Section 6.6 shall
not prohibit the Executive from designating one or more persons, on a form
satisfactory to the Company, to receive amounts payable to him under this
Agreement in the event that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this Agreement
shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, One Stamford Forum, Stamford,
Connecticut 06904, Attention: Corporate Secretary. Notices to the Executive
shall be deemed given when personally delivered or sent by certified or
registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall be
effective unless in writing and signed by both the Company and the Executive.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this
Agreement or any subsequent breach. No failure on the part of either the
Company or the Executive to exercise, and no delay in exercising, any right or
remedy
<PAGE> 9
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain
in full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to cause
any agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Definitions. All upper case terms used herein shall
have the meaning set forth in this Agreement.
Section 6.13. Captions. The captions to the respective articles
and sections of this Agreement are intended for convenience of reference only
and have no substantive significance.
Section 6.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: J. Randall MacDonald
----------------------
J. Randall MacDonald
Senior VP-Human Resources
and Administration
By: Marianne Drost
----------------------
Marianne Drost
VP and Associate General
Counsel-Finance & Corporate
Secretary
<PAGE> 1
Exhibit 12
GTE SOUTH INCORPORATED
STATEMENTS OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1995 1994 1993(a) 1993 1992 1991
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed
charges:
Income before extraordinary charges $ 202,599 $ 129,187 $ 205,898 $ 99,735 $ 195,090 $ 162,857
Add - Income taxes 121,897 77,308 151,757 85,712 108,869 76,718
- Fixed charges 64,164 66,105 99,716 99,716 100,382 101,997
--------- --------- --------- ---------- --------- ---------
Adjusted earnings: $ 388,660 $ 272,600 $ 457,371 $ 285,163 $ 404,341 $341,572
========= ========= ========= ========= ========= ========
Fixed charges:
Interest expense $ 58,553 $ 60,038 $ 92,822 $ 92,822 $ 93,731 $ 94,642
Portion of rent expense
representing interest 5,611 6,067 6,894 6,894 6,651 7,355
--------- --------- --------- ---------- --------- ---------
Adjusted fixed charges: $ 64,164 $ 66,105 $ 99,716 $ 99,716 $ 100,382 $101,997
========= ========= ========= ========= ========= ========
RATIO OF EARNINGS TO FIXED
CHARGES: 6.06 4.12 4.59 2.86 4.03 3.35
</TABLE>
(a) Results for 1993 exclude an after-tax restructuring charge of approximately
$100 million for the implementation of a re-engineering plan and a one-time
after-tax charge of approximately $6 million related to the enhanced early
retirement and voluntary separation programs offered to eligible employees in
1993.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report, dated January 24, 1996, on the financial
statements and supporting schedule and exhibit of GTE South Incorporated
included in this Form 10-K, into the following previously filed Registration
Statements:
1. Form S-3 of GTE South Incorporated (File No. 33-54167)
2. Form S-3 of GTE South Incorporated (File No. 33-65011)
ARTHUR ANDERSEN LLP
Dallas, Texas
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 31,271
<SECURITIES> 0
<RECEIVABLES> 188,674
<ALLOWANCES> 17,081
<INVENTORY> 17,510
<CURRENT-ASSETS> 246,023
<PP&E> 3,927,849
<DEPRECIATION> 2,361,666
<TOTAL-ASSETS> 1,902,748
<CURRENT-LIABILITIES> 352,976
<BONDS> 723,304
<COMMON> 525,000
2,756
412
<OTHER-SE> 79,946
<TOTAL-LIABILITY-AND-EQUITY> 1,902,748
<SALES> 1,319,110
<TOTAL-REVENUES> 1,319,110
<CGS> 479,060
<TOTAL-COSTS> 956,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,656
<INCOME-PRETAX> 324,496
<INCOME-TAX> 121,897
<INCOME-CONTINUING> 202,599
<DISCONTINUED> 0
<EXTRAORDINARY> 509,880
<CHANGES> 0
<NET-INCOME> (307,281)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
