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 September 30, 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 October 31, 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. . . . . . . . . . . . . .
. . . . 6
Condensed Balance Sheets - Liabilities and
Shareholders' Equity . . . . . . . . . . . . . . . . . . .
. . . . 7
Condensed Statements of Cash Flows. . . . . . . . . . . . . .
. . . . 8
Notes to Condensed Financial Statements. . . . . . . . . . .
. . . . 9
PART II. OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 11
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 109,929 $ 100,681 $ 327,934 $ 303,106
Network access services 114,758 110,113 338,795 321,328
Long distance services 50,682 52,016 148,217 139,117
Equipment sales and services 20,503 17,718 55,165
50,093
Other 7,420 14,866 38,778 43,612
303,292 295,394 908,889 857,256
OPERATING EXPENSES:
Cost of sales and services 86,302 64,455 251,129 208,654
Depreciation and amortization 65,154 70,838 193,430
191,779
Marketing, selling, general and
administrative 100,755 91,875 293,085 292,588
252,211 227,168 737,644 693,021
Net operating income 51,081 68,226 171,245 164,235
OTHER (INCOME) DEDUCTIONS:
Interest expense 13,413 18,864 42,427 57,083
Gain on disposition of assets -- -- (9,297)
- --
Other - net (65) 350 20
1,328
INCOME BEFORE INCOME TAXES 37,733 49,012 138,095 105,824
INCOME TAXES 12,766 14,076 46,984 31,127
INCOME BEFORE EXTRAORDINARY
CHARGE 24,967 34,936 91,111 74,697
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF DEBT (net of
income taxes of $16,098) -- 31,250 -- 31,250
NET INCOME $ 24,967 $ 3,686 $ 91,111 $ 43,447
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.
</TABLE>
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income was $25.0 million for the three months and $91.1
million for the nine months ended September 30, 1994 as compared
to $3.7 million and $43.4 million for the same periods in 1993.
Net income for 1993 includes a one-time charge associated with
the enhanced early retirement and voluntary separation programs
recorded in the second quarter of 1993, the extraordinary charge
(net of tax) related to the early retirement of debt during the
third quarter of 1993 and the gain (net of tax) associated with
the sale of non-strategic properties in the state of Oklahoma
during the second quarter of 1994. Excluding these special
items, net income decreased 29% or $10.0 million for the three
months and increased 5% or $4.1 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
third quarter decrease is primarily the result of a decrease in
operating income, partially offset by a decrease in interest
expense. The year-to-date increase is primarily the result of a
decrease in interest expense, partially offset by an increase in
income taxes and a decrease in operating income.
Operating Revenues
Operating revenues increased 3% or $7.9 million and 6% or $51.6
million for the three months and nine months ended September 30,
1994 compared to the same periods in 1993.
Local network service revenues increased 9% or $9.2 million and
8% or $24.8 million for the three months and nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are primarily the result of a growth in access lines
and increased revenue from custom calling and other enhanced
features.
Network access service revenues increased 4% or $4.6 million and
5% or $17.5 million for the three months and nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are 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. The increased
revenue from the PASP does not increase operating income as there
is a corresponding increase in operating expenses. These
increases were partially offset by a decrease in prices due to an
access charge restructuring plan approved by the Public Utility
Commission of Texas (PUC) on April 1, 1992. The implementation
of this plan resulted in a $40.6 million annual reduction in
revenues effective September 1, 1992 and $29.0 million effective
September 1, 1993. The final phase, effective September 1, 1994,
will reduce revenues by an additional $33.0 million.
Long distance service revenues decreased 3% or $1.3 million and
increased 7% or $9.1 million for the three months and nine months
ended September 30, 1994, compared to the same periods in 1993.
The decrease is due to favorable intrastate settlements in the
third quarter of 1993. The year-to-date increase is primarily
the result of revenues related to the previously mentioned Texas
PASP, and an increase in the volume of toll calls for the year.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and service revenues increased 16% or $2.8
million and 10% or $5.1 million for the three months and nine
months ended September 30, 1994 compared to the same periods in
1993. The increases are primarily due to an increase in sales of
telephone systems, maintenance agreements and voice messaging
services, partially offset by a decrease in non-regulated
equipment rental revenues.
Other operating revenues decreased 50% or $7.4 million and 11% or
$4.8 million for the three months and nine months ended September
30, 1994 compared to the same periods in 1993. The decreases are
primarily due to lower directory advertising revenue as a result
of lower directory sales, lower regulated equipment rental
revenue and higher provisions for uncollectible accounts,
partially offset by increased database 800 services.
Operating Expenses
Operating expenses increased 11% or $25.0 million and 6% or $44.6
million for the three months and nine months ended September 30,
1994 compared to the same periods in 1993. Excluding the $9.0
million one-time charge associated with the enhanced early
retirement and voluntary separation programs recorded in the
second quarter of 1993, operating expenses increased 8% or $53.6
million for the nine months ended September 30, 1994 compared to
the same period in 1993. The increases are primarily due to
increases in costs associated with the previously mentioned Texas
PASP and increases in billing and collection costs, partially
offset by decreases in labor and benefit costs from the headcount
reductions that occurred in 1993.
Restructuring
As previously reported, during the fourth quarter of 1993, the
Company recorded a one-time, pretax restructuring charge of
$171.9 million primarily for incremental costs related to
implementation of its 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 reduce
costs.
In connection with the re-engineering plan, in the first nine
months of 1994, expenditures of $12.7 million were incurred and
charged to the restructuring reserve. These costs primarily
reflect costs associated with the consolidation of customer
contact, network operations and operator service centers, and
separation benefits associated with employee reductions and
incremental expenditures to redesign and streamline processes.
The level of re-engineering activities and related expenditures
are expected to accelerate during the remainder of 1994 and
throughout 1995. There have been no significant changes made to
the overall re-engineering plan as originally reported.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other (Income) Deductions
Interest expense decreased 29% or $5.5 million and 26% or $14.7
million for the three months and nine months ended September 30,
1994 compared to the same periods in 1993 primarily due to the
refinancing of high-coupon debt in the fourth quarter of 1993.
On May 1, 1994 the Company sold a portion of its telephone plant-
in-service, materials and supplies and customers (12,798 access
lines) in the state of Oklahoma to Eaglenet, Inc. for $41.0
million. This represents less than 1% of the Company's access
lines. The transaction was accounted for as a sale and a $9.3
million pretax gain was recorded.
Income tax expense decreased 9% or $1.3 million and increased 51%
or $15.9 million for the three months and nine months ended
September 30, 1994 compared to the same periods in 1993. The
changes are primarily due to the changes in pretax income.
Adjustments to prior years' tax provisions in 1993 partially
offset the third quarter's decrease and contributed to the year-
to-date increase.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine
months of 1994 was cash flow from operating activities of $261.0
million compared to $315.9 million in 1993. The year-to-date
decrease in cash flow from operating activities is the result of
an increase in working capital, primarily customer receivables
and prepaid income taxes, partially offset by an increase in
accounts payable and improved operating results.
The Company's capital expenditures during the first nine months
of 1994 were $203.7 million compared to $196.6 million during the
same period in 1993, reflecting the Company's continued growth in
access lines, modernization of facilities and introduction of new
products and services. The Company's anticipated construction
costs for 1994 are approximately $300 million.
In May 1994, the Company sold a portion of its telephone plant-in-
service, materials and supplies and access lines in the state of
Oklahoma to Eaglenet, Inc. for $41 million. The proceeds were
used primarily to reduce long-term debt.
Cash used in financing activities was $90.8 million in 1994
compared to $117.8 million in 1993, including dividend payments
of $65.6 million in 1994 compared to $131.9 million in 1993.
External financing included short-term borrowings of $5.0 million
in 1994, compared to $24.8 million in 1993, and the repayment of
$30.2 million of long-term debt in 1994 with the proceeds from
the sale of non-strategic properties, compared to $10.7 million
in 1993.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $2.8 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.
OTHER MATTERS
The Company follows the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("FAS
71"). In general, FAS 71 requires companies to depreciate plant
and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon
approvals received from regulators. In the event that
recoverability of these costs becomes unlikely or uncertain,
whether resulting from actual or anticipated increases in
competition or specific regulatory, legislative or judicial
actions, continued application of FAS 71 would no longer be
appropriate. If the Company no longer qualifies for the
provisions of FAS 71, the financial effects of the required
accounting change (which would be non-cash) could be material.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 15,934 $ 2,888
Receivables, less allowances
of $13,486 and $18,144, respectively 203,772 166,896
Materials and supplies, at average cost 29,404 24,426
Deferred income tax benefits 33,081 29,915
Prepayments and other 27,820 3,378
Total current assets 310,011 227,503
PROPERTY, PLANT AND EQUIPMENT:
Original cost 4,201,713 4,117,433
Accumulated depreciation (1,713,511)
(1,610,208)
Net property, plant and equipment 2,488,202 2,507,225
OTHER ASSETS 59,919 54,392
TOTAL ASSETS $ 2,858,132 $ 2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 58,905 $
53,965
Accounts payable 121,968 90,931
Accrued taxes 30,157 31,463
Accrued interest 15,803 6,311
Accrued payroll and vacations 37,767 43,830
Accrued dividends 27,257 262
Reserve for rate refunds 114,057 98,362
Accrued restructuring costs and other 124,688 126,191
Total current liabilities 530,602 451,315
LONG-TERM DEBT 673,328 703,137
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 608,107 586,931
PREFERRED STOCK, subject to
mandatory redemption 12,130 12,270
SHAREHOLDERS' EQUITY:
Preferred stock 7,600 7,600
Common stock 645,000 645,000
Reinvested earnings 381,365 382,867
Total shareholders' equity 1,033,965 1,035,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,858,132 $
2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 91,111 $ 74,697
Adjustments to reconcile income before
extraordinary charge to net cash from
operating activities:
Depreciation and amortization 193,430 191,779
Deferred income taxes and investment
tax credits 6,631 (23,684)
Provision for uncollectible accounts 18,485
16,799
Gain on disposition of assets, net of tax (5,990)
- --
Changes in current assets and current
liabilities (50,834)
31,034
Other - net 8,171 25,316
Net cash from operating activities 261,004 315,941
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (203,716)
(196,587)
Proceeds from sale of assets 41,000 --
Other - net 5,597 (452)
Net cash used in investing activities (157,119)
(197,039)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (30,221)
(10,665)
Dividends paid to shareholders (65,618)
(131,906)
Increase in short-term debt 5,000 24,800
Net cash used in financing activities (90,839)
(117,771)
Increase in cash 13,046 1,131
Cash at beginning of period 2,888 2,967
Cash at end of period $ 15,934 $ 4,098
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The unaudited condensed financial statements included herein
have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion
of management of the Company, the condensed financial statements
include all adjustments, which consist only of normal recurring
accruals, necessary to present fairly the financial information
for such periods. These condensed financial statements should be
read in conjunction with the financial statements and the notes
thereto included in the Company's 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. The Company has appealed
the Court of Appeals ruling and a final decision is expected to
be reached in the fourth quarter of 1994.
Management is of the opinion that the current reserves that have
been established for this issue 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) On May 1, 1994, the Company sold a portion of its telephone
plant-in-service, materials and supplies and customers (12,798
access lines) in the state of Oklahoma to Eaglenet, Inc. for
$41.0 million in cash. This represents less than 1% of the
Company's access lines. The transaction was accounted for as a
sale and a pretax gain of $9.3 million was recorded. The
proceeds from this transaction were used primarily to pay down
long-term debt.
(4) During the third quarter of 1993, the Company called $501
million of high-coupon first-mortgage bonds. As a result, a
pretax extraordinary charge of $47.3 million was recorded to
reflect the expenses of calling these bonds. The after-tax
extraordinary charge amounted to $31.3 million.
(5) 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
third quarter
of 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
GTE SOUTHWEST INCORPORATED
(Registrant)
Date: November 10, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 15,934
<SECURITIES> 0
<RECEIVABLES> 217,258
<ALLOWANCES> 13,486
<INVENTORY> 29,404
<CURRENT-ASSETS> 310,011
<PP&E> 4,201,713
<DEPRECIATION> 1,713,511
<TOTAL-ASSETS> 2,858,132
<CURRENT-LIABILITIES> 530,602
<BONDS> 673,328
<COMMON> 645,000
12,130
7,600
<OTHER-SE> 381,365
<TOTAL-LIABILITY-AND-EQUITY> 2,858,132
<SALES> 908,889
<TOTAL-REVENUES> 908,889
<CGS> 251,129
<TOTAL-COSTS> 737,644
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,427
<INCOME-PRETAX> 138,095
<INCOME-TAX> 46,984
<INCOME-CONTINUING> 91,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,111
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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