<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 2-36292
GTE SOUTH INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 56-0656680
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, 75038
Irving, Texas
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's telephone number, 972-718-5600
including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
The Company had 21,000,000 shares of $25 par value common stock outstanding at
July 31, 1998. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE South Incorporated
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 156,763 $ 145,565 $ 309,201 $ 277,302
Network access services 160,521 150,787 322,032 292,728
Toll services 14,783 26,607 34,810 66,832
Other services and sales 48,300 42,760 109,267 95,364
--------- --------- --------- ---------
Total revenues and sales 380,367 365,719 775,310 732,226
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of services and sales 129,365 123,181 262,690 239,721
Selling, general and administrative 52,132 52,708 104,584 102,622
Depreciation and amortization 73,219 72,078 143,948 142,411
--------- --------- --------- ---------
Total operating costs and expenses 254,716 247,967 511,222 484,754
--------- --------- --------- ---------
OPERATING INCOME 125,651 117,752 264,088 247,472
OTHER (INCOME) EXPENSE
Interest - net 14,444 12,221 28,856 24,807
Other - net (21) 289 (21) 289
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 111,228 105,242 235,253 222,376
Income taxes 43,111 40,074 91,279 84,569
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE 68,117 65,168 143,974 137,807
Extraordinary charge -- -- (243) --
--------- --------- --------- ---------
NET INCOME $ 68,117 $ 65,168 $ 143,731 $ 137,807
========= ========= ========= =========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Financial Statements.
1
<PAGE> 3
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 68.1 $ 65.2 $ 143.7 $ 137.8
</TABLE>
Net income for the six months ended June 30, 1998 includes an after-tax
extraordinary charge of $0.2. Excluding this charge, net income increased 4% or
$2.9 and 4% or $6.1 for the three and six months ended June 30, 1998,
respectively, compared to the same periods in 1997. The increases are primarily
due to higher local and network access service revenues, partially offset by
lower toll service revenues and higher operating costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Local services $ 156.8 $ 145.6 $ 309.2 $ 277.3
Network access services 160.5 150.8 322.0 292.7
Toll services 14.8 26.6 34.8 66.8
Other services and sales 48.3 42.7 109.3 95.4
-------- -------- -------- --------
Total revenues and sales $ 380.4 $ 365.7 $ 775.3 $ 732.2
</TABLE>
Total revenues and sales increased 4% or $14.7 and 6% or $43.1 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997.
Local service revenues increased 8% or $11.2 and 12% or $31.9 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. Growth in access lines increased 6% for both the three and six months
ended June 30, 1998, generating $6.2 and $13.5 of additional revenues from basic
local services, CentraNet(R) services, Integrated Service Digital Network (ISDN)
and Digital Channel Services (DCS). Demand for enhanced custom calling features,
such as SmartCall(R) services, contributed $4.5 and $9.0 to the increase for the
three and six month periods ended June 30, 1998.
Network access service revenues increased 6% or $9.7 for the three months and
10% or $29.3 for the six months ended June 30, 1998, compared to the same
periods in 1997. Minutes of use increased 11% for both the three and six
2
<PAGE> 4
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
months ended June 30, 1998, which generated $9.6 and $19 of revenues,
respectively. The increases are also due to special access revenue growth of
$7.2 and $15.2 related to greater demand for increased bandwidth by Internet
Service Providers (ISPs) and other high-capacity users. These increases are
partially offset by a decrease of $7.1 and $14.3 for the three and six month
periods, respectively, resulting from intrastate access price reductions in
Alabama, Kentucky, North Carolina, South Carolina and Virginia. In addition, the
impact of interstate access rate changes from the 1997 Federal Communications
Commission (FCC) price cap increased revenues by $3.3 and $6.6 for the three and
six month periods, respectively. In 1997, the FCC also ordered significant
changes that altered the structure of access charges collected by the Company.
These changes, effective January 1, 1998, resulted in a decrease of $2.4 and $4
in network access service revenues during the three and six month periods ended
June 30, 1998.
Toll service revenues decreased 44% or $11.8 for the three months ended June 30,
1998 and decreased 48% or $32.0 for the six months ended therein, compared to
the same periods in 1997. These decreases are attributable to lower toll
volumes, primarily related to intraLATA (local access transport area) toll
competition, including 10XXX and 1+ presubscription, and the impact from
optional discount calling plans, which effectively lowered intrastate toll
rates.
Other services and sales revenues increased 13% or $5.6 and 15% or $13.9 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997. The three month increase is primarily due to a $4.5 increase in
billing and collection services. The six month increase is primarily
attributable to additional revenues of $5.8 from billing and collection
services, $3.4 resulting from the FCC's order increasing payphone compensation
from interexchange carriers, $1 from directory advertising and $0.3 from
equipment sales.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of services and sales $ 129.4 $ 123.2 $ 262.7 $ 239.7
Selling, general and administrative 52.1 52.7 104.6 102.6
Depreciation and amortization 73.2 72.1 143.9 142.4
-------- -------- -------- --------
Total operating costs and $ 254.7 $ 248.0 $ 511.2 $ 484.7
expenses
</TABLE>
Total operating costs and expenses increased 3% or $6.7 and 5% or $26.5 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997. The three and six month increases are primarily
3
<PAGE> 5
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
attributable to higher labor costs of $3.7 and $8 associated with increased line
growth and expansion of daily operating hours of the customer care centers,
storm damage costs of $1.3 and $5.5 associated with higher labor and contractor
expenses, and higher depreciation of $1.1 and $1.5 also related to the increased
line growth. The six months ended June 30, 1998 also reflects higher advertising
and promotional costs of $4.2 incurred primarily during the first quarter of
1998 to stimulate sales of enhanced services and preserve market share in an
increasingly competitive environment.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest - net $ 14.4 $ 12.2 $ 28.9 $ 24.8
Income taxes 43.1 40.1 91.3 84.6
Extraordinary charge -- -- 0.2 --
</TABLE>
Interest - net increased 18% or $2.2 and 17% or $4.1 for the three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
The increases are primarily attributable to higher average short-term debt
levels.
Income taxes increased 7% or $3 for the three months and 8% or $6.7 for the six
months ended June 30, 1998, compared to the same periods in 1997, primarily due
to corresponding increases in pre-tax income and other tax adjustments.
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.2 reflecting premiums paid on the redemption of
high-coupon debt prior to stated maturity.
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 financing can be obtained through borrowings
from the Company's parent, GTE, or GTE Funding Incorporated, an affiliate of the
Company. The Company participates with other affiliates in a $1,500, 364-day
syndicated line of credit.
The Company's primary source of funds during the first six months of 1998 was
cash from operations of $251.1 compared to $240.4 for the same period in 1997.
4
<PAGE> 6
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
The year-to-year increase in cash from operations primarily reflects the
improved results from operations.
The Company's capital expenditures during the first six months of 1998 were
$160.6 compared to $120.3 for the same period in 1997. The 1998 expenditures
reflect the Company's continued growth in primary and secondary access lines and
modernization of interoffice facilities to mitigate Internet congestion. The
Company anticipates capital expenditures for 1998 to increase slightly from the
1997 level, reflecting the continued expansion of existing networks.
Net cash used in financing activities was $98 during the first six months of
1998 compared to $69.8 for the same period in 1997. This included dividend
payments of $143.3 during the first six months of 1998, compared to $126 for the
same period of 1997. Short-term financing, including the net change in affiliate
notes, decreased $140.8 for the first six months of 1998, compared to an
increase of $91.2 for the same period of 1997. During the first six months of
1998, the Company paid a total of $34.9 for the retirement of debt and preferred
stock compared to $35 in 1997. Retirements for the first six months of 1998
included $0.4 paid in premiums on the retirement of long-term debt and preferred
stock redeemed prior to stated maturity. The Company issued $225 of debentures
in June of 1998. The proceeds were used to repay short-term borrowings and
finance a portion of the Company's construction program.
In its April 2, 1998 filing on Form 8-K, GTE stated that because the MCI
shareholders had accepted a competing offer, GTE's offer for MCI was no longer
outstanding. As a result, the Company and GTE were removed from "Credit Watch"
by all rating agencies. The Company believes that its present investment grade
credit rating provides ready access to the capital markets at reasonable rates
and provides the Company with the financial flexibility necessary to pursue
growth opportunities as they arise.
OTHER MATTERS
Federal Regulatory Developments
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price increase of $12.1. On December 1, 1997, the FCC issued an order to file
revised access rates effective January 1, 1998, which resulted in interstate
access charge reductions of approximately $2.8 annually. In 1997, the FCC also
ordered significant changes that altered the structure of access charges
collected by the Company, effective January 1, 1998. Generally, the FCC reduced
and restructured the per minute charges paid by long distance carriers and
implemented new per line charges. The FCC also created an access
5
<PAGE> 7
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
charge structure that resulted in different access charges for residential
primary and secondary lines and single line and multi-line business access
lines. In aggregate, the annual reductions in usage sensitive access charges of
$11.7 paid by long distance carriers were offset by $10.2 of new per line
charges and the charges paid by end-users. Effective July 1, 1998, access
charges were further reduced by $14.6 annually in compliance with FCC
requirements to restate the impacts of access charge reform.
In May 1997, the FCC released a major decision relating to implementation of the
Telecommunications Act's provision on universal service. GTE and numerous other
parties have challenged the FCC's decision before the U.S. Court of Appeals for
the Fifth Circuit on the grounds that the FCC did not follow the requirements of
the Telecommunications Act to develop a sufficient, explicit and competitively
neutral universal service program. Oral argument is not expected until
mid-September 1998 at the earliest, with a final decision to be issued by
mid-1999.
On March 9, 1998, the FCC adopted a Memorandum Opinion and Order (MO&O)
clarifying the payphone-specific coding digit requirements set forth in the
previous payphone orders and granting limited waivers of the requirement that
local exchange carriers (LECs) provide payphone-specific coding digits to
payphone service providers (PSPs), and that PSPs provide payphone-specific
coding digits from their payphones to interexchange carriers (IXCs), before PSPs
can receive per-call compensation from IXCs for subscriber 800 and access code
calls. GTE was granted waivers through 1998 in this order for Flex-ANI (Flexible
Automatic Number Identification) implementation due to technical problems
associated with switch conversions.
On April 3, 1998, the FCC issued another MO&O which granted the IXCs a waiver of
the per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted technology
waivers. GTE will receive per-phone compensation under this waiver until the
Flex-ANI capable offices are activated. Qualifying payphone calls from Flex-ANI
capable switches will then be eligible for per-call compensation rather than
per-phone.
In a related court case between MCI and the FCC, the U.S. Court of Appeals,
District of Columbia Circuit, upheld the fundamental premise underlying the
FCC's approach to setting the per-call compensation rate for uncompensated
payphone calls, thereby supporting the ordered per-call compensation rate noted
in the March 9th order. At the same time, however, the Court held that the FCC
had failed to clearly explain its methodology on the development of that same
per-call compensation rate. The Court remanded this portion back to the FCC.
6
<PAGE> 8
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
State Regulatory Developments
Alabama
On February 12, 1997, the Alabama Public Service Commission (APSC) issued its
decision in the Company's arbitration with AT&T Corp. (AT&T) to determine
interconnection, resale and unbundling terms and conditions. The interim
wholesale discount rate for retail services was set at 23%. The Company filed
for reconsideration of this order. On May 14, 1997, the APSC issued its final
decision, in which no material changes were made to its original order. On June
4, 1997, the Company and AT&T filed a composite agreement pursuant to the APSC's
directive. Both parties have filed letters with the APSC objecting to certain
language contained in the composite agreement. The APSC is expected to issue a
final order on the composite agreement in the near future. In December 1997, the
APSC changed the discount rate to 21.1%. In January 1998, the Company filed a
petition asking the APSC to modify the discount rate using updated toll revenue
data. The Company has requested the APSC to modify the discount rate to 13.3% if
1995 data is used or to 11.4% if 1996 data is used. On July 13, 1998, APSC
issued an order granting the Company's motion for rehearing, which is set for
August 21, 1998.
On February 10, 1998, the APSC held a hearing to set the Company's permanent
unbundled network element (UNE) rates based on total element long run
incremental costs (TELRIC) studies. The Company's position is virtually
uncontested as a result of AT&T withdrawing from the proceeding in January 1998.
The APSC is expected to issue a final decision by year end 1998.
In February 1998, the APSC held hearings to determine the appropriate cost model
and revenue benchmark for purposes of developing an intrastate universal service
fund (USF) mechanism. The APSC is expected to issue its decision in the near
future. The APSC issued an order on July 17, 1998 deferring the decision to the
FCC for the interstate portion of USF. A second order will be forthcoming which
will detail how the intrastate portion will be addressed.
Illinois
On October 6, 1996, the Illinois Commerce Commission (ICC) initiated its
investigation into the Company's TELRIC studies to establish rates for
interconnection, UNEs and transportation and termination of traffic. The
proceeding will address wholesale rates separately from UNEs, with each issue
having a separate procedural schedule. The determination of wholesale rates is
expected to conclude in mid-1998. Cost studies for UNEs were filed during the
first quarter of 1998 and were refiled during June of 1998. Hearings are
scheduled to begin during the fourth quarter of 1998.
7
<PAGE> 9
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Kentucky
The Kentucky Public Service Commission (KPSC) has established a competitively
neutral, portable intrastate USF, funded by all telecommunications providers in
Kentucky, to cover the incumbent local-exchange carrier's (LEC's) non-traffic
sensitive (NTS) costs and the cost of a new statewide Lifeline service offering.
As a result, the Company would reduce access and toll rates and recover its NTS
costs from the USF. The details of implementation of the USF were to be
determined during a formal proceeding which began in November 1997. The KPSC
announced that its decision to transfer the LEC's NTS costs to the USF will be
reconsidered during the formal proceeding. Updated cost data and accompanying
testimony were filed in February 1998 and hearings were held in March 1998. On
May 22, 1998, the KPSC issued a final order selecting the cost model for
calculating the USF high cost support. The order assigns $36 of intrastate
support to the Company, but intrastate rates must be reduced by a like amount.
The Company filed a Petition for Rehearing with the KPSC on June 12, 1998. On
July 2, 1998, the KPSC granted the Company's motion to rehear all issues except
which model to select. The KPSC is expected to act on comments filed in the
petition during August 1998.
North Carolina
The North Carolina Utilities Commission (NCUC) held hearings during February
1998 to determine the appropriate forward-looking economic cost studies to be
submitted to the FCC for use in the determination of USF funding levels and to
resolve other USF issues. On April 20, 1998, the NCUC issued an order adopting
its preferred forward-looking economic cost model. The model was subsequently
filed with the FCC as the NCUC's preferred model used to calculate USF funding
levels. Because of the inputs recommended in the NCUC's Order, the Company filed
for reconsideration in May 1998. Its request was denied.
South Carolina
The South Carolina Public Service Commission (SCPSC) held hearings in August
1997 to determine guidelines for an intrastate USF. An order adopting the
guidelines was issued on September 3, 1997. Hearings to finalize other issues,
including the size of the USF and the model to be used and recommended to the
FCC, were held in March 1998. In its Order on May 6, 1998, the SCPSC adopted
its cost model for calculating universal service support and filed this
model with the FCC. The Company has not filed any opposition to the SCPSC's
Order.
8
<PAGE> 10
GTE South Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Virginia
On December 16, 1996, the Virginia State Corporation Commission (VSCC) issued
its decision in the Company's arbitration with Cox Fibernet Commercial Services,
Inc. On January 3, 1997, VSCC issued its decision in the Company's arbitration
with MCI and on January 21, 1997, the VSCC issued its decision in the Company's
arbitration with Sprint Corporation on many of the same issues that were
submitted by AT&T. These decisions reaffirmed the rate issued in the previous
arbitration proceedings. The Company has filed a lawsuit in the U.S. District
Court challenging portions of the VSCC's arbitration determinations. On May 19,
1998, the Court ruled against the Company in this case. The Company filed a
Notice of Intent to Appeal within United States Court of Appeals on June 16,
1998. Also, on July 17, 1998, the Company was ordered to submit to the VSCC an
interconnection agreement with MCI in 30 days.
RECENT DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies in a merger of equals
transaction. Under the terms of the definitive agreement, which was unanimously
approved by the board of directors of both companies, GTE shareholders will
receive 1.22 shares of Bell Atlantic stock for each GTE share they own. The
merger is expected to be accounted for as a pooling of interests, is subject to
shareholder and regulatory approval, and is expected to be completed during the
second half of 1999. For additional information regarding the merger, refer to
the Form 8-K filed by GTE dated July 27, 1998.
In April 1998, GTE announced a series of actions designed to further sharpen its
strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate after-tax
proceeds of $2,000 to $3,000 by selling non-strategic or under-performing
operations and plans to reduce annual costs by more than $500 through improved
efficiencies and productivity while it continues to invest in new high-growth
opportunities. The impact of this announcement on the Company is unknown at this
time. GTE's management is currently assessing its options and, as decisions are
finalized regarding the sale of non-strategic operations and cost reductions,
the Company could be affected.
9
<PAGE> 11
GTE South Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,640 $ 13,104
Receivables, less allowances of $19,527
and $18,638 315,078 261,545
Inventories and supplies 21,243 24,366
Prepaid insurance 8,298 649
Other 10,176 10,556
----------- -----------
Total current assets 360,435 310,220
----------- -----------
Property, plant and equipment, at cost 4,418,751 4,285,696
Accumulated depreciation (2,772,562) (2,663,988)
----------- -----------
Total property, plant and equipment, net 1,646,189 1,621,708
----------- -----------
Prepaid pension costs and other assets 180,016 162,675
----------- -----------
Total assets $ 2,186,640 $ 2,094,603
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 4,501 $ 155,413
Accounts payable 40,376 46,431
Affiliate payables and accruals 94,931 71,793
Taxes payable 47,579 31,219
Accrued interest 13,533 14,536
Accrued payroll costs 36,787 27,824
Dividends payable 76,083 85,126
Deferred income tax liabilities 44,978 43,419
Other 57,310 61,602
----------- -----------
Total current liabilities 416,078 537,363
----------- -----------
Long-term debt 800,542 609,868
Deferred income taxes 68,815 52,369
Other liabilities, primarily employee benefit plans 223,991 224,540
----------- -----------
Total liabilities 1,509,426 1,424,140
----------- -----------
Preferred stock, subject to mandatory redemption -- 2,678
----------- -----------
Shareholders' equity:
Preferred stock 412 412
Common stock (21,000,000 shares issued) 525,000 525,000
Additional paid-in capital 58,338 58,338
Retained earnings 93,464 84,035
----------- -----------
Total shareholders' equity 677,214 667,785
----------- -----------
Total liabilities and shareholders' equity $ 2,186,640 $ 2,094,603
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements
10
<PAGE> 12
GTE South Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
(Thousands of dollars)
<S> <C> <C>
OPERATIONS
Income before extraordinary charge $ 143,974 $ 137,807
Adjustments to reconcile income before extraordinary
charge to net cash from operations:
Depreciation and amortization 143,948 142,411
Deferred income taxes 18,005 5,179
Provision for uncollectible accounts 13,472 10,424
Changes in current assets and current liabilities (48,012) (52,353)
Other - net (20,327) (3,074)
--------- ---------
Net cash from operations 251,060 240,394
--------- ---------
INVESTING
Capital expenditures (160,640) (120,276)
Other - net 61 26
--------- ---------
Cash used in investing (160,579) (120,250)
--------- ---------
FINANCING
Long-term debt issued 221,076 --
Long-term debt and preferred stock retired,
including premiums paid on early retirement (34,891) (34,958)
Dividends (143,288) (126,023)
Increase (decrease) in short-term obligations,
excluding current maturities (140,842) 91,183
--------- ---------
Net cash used in financing (97,945) (69,798)
--------- ---------
Increase (decrease) in cash and cash equivalents (7,464) 50,346
Cash and cash equivalents:
Beginning of period 13,104 16,491
--------- ---------
End of period $ 5,640 $ 66,837
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
11
<PAGE> 13
GTE South Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The unaudited condensed financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of
management of the Company, the condensed financial statements include all
adjustments, which consist only of normal recurring accruals, necessary to
present fairly the financial information for such periods. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 1997 Annual
Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1998 presentation.
(2) EXTRAORDINARY CHARGE:
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.2 million, reflecting premiums paid on the
redemption of high-coupon debt prior to stated maturity.
(3) DEBT:
In June 1998, the Company issued $225 million of 6.125% Series E Debentures,
due 2007. The net proceeds were applied toward the repayment of short-term
borrowings, financing the Company's construction program and for general
corporate purposes.
(4) RECENT ACCOUNTING PRONOUNCEMENTS:
Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 defines
internal-use software and establishes accounting standards for the costs of
such software. The Company is currently assessing the impact of adopting SOP
98-1, and intends to implement as of January 1, 1999.
12
<PAGE> 14
GTE South Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The Company has not yet assessed the impact of adopting FAS 133.
13
<PAGE> 15
GTE South Incorporated
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
12 Statement re: Calculation of the Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K, dated June 11, 1998,
under Item 7 "Financial Statements and Exhibits." No
financial statements were filed with this report.
14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE South Incorporated
----------------------------------------
(Registrant)
Date: August 13, 1998 /s/ Stephen L. Shore
---------------------- ----------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
12 Statement re: Calculation of the Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
GTE South Incorporated
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
----------------
<S> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $143,974
Add - Income taxes 91,279
- Fixed charges 34,988
--------
Adjusted earnings $270,241
========
Fixed charges:
Interest expense $ 30,081
Portion of rent expense
representing interest 4,907
--------
Adjusted fixed charges $ 34,988
========
RATIO OF EARNINGS TO FIXED CHARGES 7.72
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,640
<SECURITIES> 0
<RECEIVABLES> 334,605
<ALLOWANCES> 19,527
<INVENTORY> 21,243
<CURRENT-ASSETS> 360,435
<PP&E> 4,418,751
<DEPRECIATION> 2,772,562
<TOTAL-ASSETS> 2,186,640
<CURRENT-LIABILITIES> 416,078
<BONDS> 800,542
0
412
<COMMON> 525,000
<OTHER-SE> 151,802
<TOTAL-LIABILITY-AND-EQUITY> 2,186,640
<SALES> 775,310
<TOTAL-REVENUES> 775,310
<CGS> 262,690
<TOTAL-COSTS> 511,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,856
<INCOME-PRETAX> 235,253
<INCOME-TAX> 91,279
<INCOME-CONTINUING> 143,974
<DISCONTINUED> 0
<EXTRAORDINARY> 243
<CHANGES> 0
<NET-INCOME> 143,731
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
