UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended March 31, 1994
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: 1-7077
GTE SOUTHWEST INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 75-0573444
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
500 East Carpenter Freeway, Irving, Texas
75062
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 214-717-
7900
(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 6,450,000 shares of $100 stated value common
stock outstanding at April 30, 1994.
GTE SOUTHWEST INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Statements of Income . . . . . . .. . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .
. . . . 2
Condensed Balance Sheets - Assets. . . . . . . . . . . . . .
. . . . 5
Condensed Balance Sheets - Liabilities and
Shareholders' Equity . . . . . . . . . . . . . . . . . . .
. . . . 6
Condensed Statements of Cash Flows. . . . . . . . . . . . . .
. . . . 7
Notes to Condensed Financial Statements. . . . . . . . . . .
. . . . 8
PART II. OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . .
. . . . 9
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
Three Months Ended
March 31,
1994 1993
(Thousands of
Dollars)
OPERATING REVENUES:
Local network services $ 107,479 $ 99,373
Network access services 111,068 106,451
Long distance services 48,905 47,325
Equipment sales and services 15,767 16,242
Other 12,796 13,348
296,015 282,739
OPERATING EXPENSES:
Cost of sales and services 80,722 72,141
Depreciation and amortization 63,966 60,362
Marketing, selling, general and
administrative 95,808 93,972
240,496 226,475
Net operating income 55,519 56,264
OTHER (INCOME) DEDUCTIONS:
Interest expense 14,594 19,016
Other - net (30)
(223)
INCOME BEFORE INCOME TAXES 40,955 37,471
INCOME TAXES 13,841 11,325
NET INCOME $ 27,114 $ 26,146
Per share data is omitted since the Company's common stock is
100% owned by
GTE Corporation (Parent Company).
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income increased 4% or $1.0 million for the quarter ended
March 31, 1994 compared to the same period in 1993. The increase
reflects higher operating revenues as a result of continued
growth in access lines and minutes of use offset by increased
expenses related to the Pooling Alternative Settlement Plan
established in 1994, higher amortization and depreciation and
higher interest expense.
Operating Revenues
Operating revenues increased 5% or $13.3 million for the three
months ended March 31, 1994 compared to the same period in 1993.
Local network service revenues increased 8% or $8.1 million for
the three months ended March 31, 1994 compared to the same period
in 1993. The increase is primarily the result of a 7% growth in
access lines.
Network access service revenues increased 4% or $4.6 million for
the three months ended March 31, 1994 compared to the same period
in 1993. The increase is primarily the result of increased
minutes of use and increased revenue related to the Texas Pooling
Alternative Settlement Plan (PASP) which the Company elected to
begin participating in effective January 1, 1994 after
withdrawing from the toll pool. These increases are partially
offset by a decrease in prices due to an access charge
restructuring plan approved by the Public Utility Commission of
Texas on April 1, 1992. The implementation of this plan resulted
in a $40.6 million annual reduction in revenues effective
September 1, 1992 and an additional $29.0 million effective
September 1, 1993.
Long distance service revenues increased 3% or $1.6 million for
the three months ended March 31, 1994 compared to the same period
in 1993 due to increased transitional support payments from
Southwestern Bell Telephone Company as a result of the Company's
exit from the toll pool partially offset by lower revenues
related to the Texas PASP.
Equipment sales and service revenues decreased 3% or $0.5 million
for the three months ended March 31, 1994 compared to the same
period in 1993. The decrease is primarily due to lower sales of
nonregulated equipment, such as key telephone systems, video
systems and large private branch exchange equipment. Partially
offsetting this decrease is an increase in sales of data base
listing services, voice messaging services and maintenance
agreements.
Other operating revenues decreased 4% or $0.5 million for the
three months ended March 31, 1994 compared to the same period in
1993. The decrease is due to lower rental revenue, higher
provisions for uncollectible accounts and lower directory
advertising revenue.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses
Operating expenses increased 6% or $14.0 million for the three
months ended March 31, 1994 compared to the same period in 1993.
The increase is primarily due to accruals established in 1994 for
the Texas PASP. The accruals represent access charges for calls
originated by the Company and terminated to another local
exchange carrier. The increase is also due to higher data
processing costs, higher depreciation and amortization expense
due to a rate change in Texas and an increase in the plant base.
These increases are partially offset by lower material and supply
expense and lower right-to-use software fees.
Other Expenses
Interest expense decreased 23% or $4.4 million for the three
months ended March 31, 1994 compared to the same period in 1993
primarily as a result of the refinancing of high-coupon long-term
debt in the fourth quarter of 1993. In November 1993, the
Company called $501 million of debt with rates ranging from
7.875% to 11.75% and refinanced the debt with 5.82% and 6.54%
Debentures.
Income taxes increased 22% or $2.5 million for the three months
ended March 31, 1994 compared to the same period in 1993
primarily due to an increase in pretax income and lower reversal
of tax rate differentials on deferred tax balances, adjustments
to prior years' tax provisions and the declining effects of the
amortization of deferred investment tax credits.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first three
months of 1994 was cash flow from operating activities of $88.2
million compared to $107.3 million for the same period in 1993
primarily due to reductions in deferred tax balances.
Capital expenditures represent a significant use of funds during
1994 and 1993, reflecting the Company's continued growth in
access lines, modernization of current facilities and
introduction of new products and services. The Company's capital
expenditures during the first three months of 1994 were $64.3
million compared to $68.9 million during the same period in 1993.
Cash used for financing activities was $15.9 million in 1994
compared to $33.4 million in 1993. External financing included
short-term borrowings of $23.7 million in 1994, compared to
$45.2 million in 1993. Dividend payments in 1994 were $0.3
million compared to $78.5 million in 1993 since no dividends were
declared on common stock for the fourth quarter of 1993 payable
in 1994. An advance of $39.2 million in 1994 was provided to the
Parent in the form of a note receivable.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of 1994 the Company began implementation
of its re-engineering plan. This plan will allow the Company to
continue to respond aggressively to competitive and regulatory
developments through reduced costs, improved service quality,
competitive prices and new product offerings. Moreover,
implementation of this program over the next three years will
position the Company to accelerate delivery of a full array of
voice, video and data services.
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 the
parent, GTE. In addition, a $3.9 billion line of credit is
available to the Company through shared lines of credit with GTE
and other affiliates to support short-term financing needs.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
March 31, December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 12,672 $ 2,888
Receivables, less allowances
4 of $15,584 and $18,144, respectively 163,450 166,896
Note receivable from affiliate 39,201 --
Materials and supplies, at average cost 27,292 24,426
Deferred income tax benefits 30,548 29,915
Prepayments and other 11,742 3,378
Total current assets 284,905 227,503
PROPERTY, PLANT AND EQUIPMENT:
Original cost 4,163,999 4,117,433
Accumulated depreciation (1,659,227)
(1,610,208)
Net property, plant and equipment 2,504,772 2,507,225
OTHER ASSETS 59,746 54,392
TOTAL ASSETS $ 2,849,423 $ 2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 77,637 $
53,965
Accounts payable 108,178 90,931
Accrued taxes 19,195 31,463
Accrued interest 16,632 6,311
Accrued payroll and vacations 36,598 43,830
Accrued dividends 23,906 262
Reserve for rate refunds 99,338 98,362
Accrued restructuring costs and other 126,374 126,191
Total current liabilities 507,858 451,315
LONG-TERM DEBT 703,130 703,137
DEFERRED CREDITS, primarily deferred
income taxes and investment tax credits 587,553 586,931
PREFERRED STOCK, subject to
mandatory redemption 12,270 12,270
SHAREHOLDERS' EQUITY:
Preferred stock 7,600 7,600
Common stock 645,000 645,000
Reinvested earnings 386,012 382,867
Total shareholders' equity 1,038,612 1,035,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,849,423 $
2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,114 $ 26,146
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 63,966 60,362
Deferred income taxes and investment
tax credits 4,366 (7,934)
Provision for uncollectible accounts 4,067
3,041
Changes in current assets and current
liabilities (2,354)
16,334
Other - net (8,961)
9,320
Net cash from operating activities 88,198 107,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64,287)
(68,943)
Other - net 1,749 (355)
Net cash used in investing activities (62,538)
(69,298)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (50)
(56)
Dividends paid to shareholders (325)
(78,544)
Net change in affiliate notes (39,201)
- - --
Increase in short-term debt 23,700 45,200
Net cash used in financing activities (15,876)
(33,400)
Increase in cash 9,784 4,571
Cash at beginning of period 2,888 2,967
Cash at end of period $ 12,672 $ 7,538
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The condensed financial statements included herein have been
prepared by the Company, without audit, 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 1993 Annual Report to
Shareholders incorporated by reference in the Annual Report on
Form 10-K.
(2) On June 19, 1991, the Texas Third District Court of Appeals
(Court of Appeals) affirmed in part and reversed, in part, a
decision by the District Court of Travis County (District Court)
regarding the Company's rate proceeding - Docket No. 5610. The
Court of Appeals remanded the case to the PUC for proceedings
consistent with the court's decision.
On April 15, 1992, the Company filed a Motion for Rehearing with
the Court of Appeals which was denied without comment on August
26, 1992. On October 2, 1992, the Company filed an application
for Writ of Error with the Texas Supreme Court. The Supreme
Court denied all Writs of Error on December 31, 1992. On January
15, 1993, the Company filed a Motion for Rehearing with the Texas
Supreme Court. On June 9, 1993, the Supreme Court granted all
Motions for Rehearing and the Company's application for Writ of
Error. On September 13, 1993, the Supreme Court heard oral
arguments of the issues. The Company filed additional briefs in
October 1993 and February 1994 with the Supreme Court. The Court
will review the issues and a decision is expected to be reached
sometime in 1994.
The Company, as a result of these decisions, established reserves
and, beginning in July 1991, the Company began recording monthly
additional pre-tax reserves. These reserves resulted in an after-
tax charge to 1993 net income of $14.3 million. The after-tax
charge to net income for the three months ended March 31, 1994 is
$3.9 million.
Management is of the opinion that the current reserves are
reasonable and prudent and it is unlikely that this issue will
have any further material adverse effect on the Company's
financial position or results of operations.
(3) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
GTE SOUTHWEST INCORPORATED
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
This item is herein incorporated by reference to Notes to
Condensed Financial Statements included in Part I - Financial
Information.
Items 2 through 5 are not applicable for the quarter ended March
31, 1994.
Item 6. Exhibits and Reports on Form 8-K
GTE Southwest Incorporated filed a report on Form 8-K dated
January 13, 1994 on January 14, 1994, under Item 5, "Other
Events." No financial statements were filed with this report.
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 SOUTHWEST INCORPORATED
(Registrant)
Date: May 12, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
