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 June 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 July 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. . . . . . . . . . . . . .
. . . . 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
<TABLE>
<CAPTION>
Three Months Ended Six
Months Ended
June 30, June 30,
1994 1993 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 110,526 $ 103,052 $ 218,005 $ 202,425
Network access services 112,969 104,764 224,037 211,215
Long distance services 48,630 39,776 97,535 87,101
Equipment sales and services 18,895 16,133 34,662
32,375
Other 18,562 15,398 31,358 28,746
309,582 279,123 605,597 561,862
OPERATING EXPENSES:
Cost of sales and services 84,105 72,058 164,827 144,199
Depreciation and amortization 64,310 60,579 128,276
120,941
Marketing, selling, general and
administrative 96,522 106,741 192,330 200,713
244,937 239,378 485,433 465,853
Net operating income 64,645 39,745 120,164 96,009
OTHER (INCOME) DEDUCTIONS:
Interest expense 14,420 19,203 29,014 38,219
Gain on disposition of assets (9,297) -- (9,297)
- - --
Other - net 115 1,201 85 978
INCOME BEFORE INCOME TAXES 59,407 19,341 100,362 56,812
INCOME TAXES 20,377 5,726 34,218 17,051
NET INCOME $ 39,030 $ 13,615 $ 66,144 $ 39,761
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 increased $25.4 million and $26.4 million for the
three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993. The increase reflects
higher operating revenues as a result of continued growth in
access lines and minutes of use, lower interest expense, a $6.2
million gain from the sale of Oklahoma properties to Eaglenet,
Inc. in May 1994 and a one-time charge of $6.3 million, net of
tax, associated with the enhanced early retirement and voluntary
separation programs offered to all eligible employees during the
second quarter of 1993. These increases are partially offset by
increased expenses related to the Texas Pooling Alternative
Settlement Plan established in 1994 and higher amortization and
depreciation.
Operating Revenues
Operating revenues increased 11% or $30.5 million and 8% or $43.7
million for the three months and six months ended June 30, 1994,
respectively, compared to the same periods in 1993.
Local network service revenues increased 7% or $7.5 million and
8% or $15.6 million for the three months and six months ended
June 30, 1994, respectively, compared to the same periods in
1993. The increases are primarily the result of customer growth
as experienced in access line gain and increased revenue from
custom calling and other enhanced features.
Network access service revenues increased 8% or $8.2 million and
6% or $12.8 million for the three months and six months ended
June 30, 1994, respectively, 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 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 (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 an additional $29.0 million
effective September 1, 1993. The final phase of this plan will
be effective September 1, 1994 with an additional annual rate
reduction of $33.0 million.
Long distance service revenues increased 22% or $8.9 million and
12% or $10.4 million for the three months and six months ended
June 30, 1994, respectively, compared to the same periods 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 and unfavorable prior period settlements reflected in
the second quarter of 1993.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and service revenues increased 17% or $2.8
million and 7% or $2.3 million for the three months and six
months ended June 30, 1994, respectively, compared to the same
periods in 1993. The increases are primarily due to higher sales
of data base listing services, voice messaging services and
maintenance agreements. Partially offsetting these increases are
lower sales of nonregulated equipment and lower rental revenue.
Other operating revenues increased 21% or $3.2 million and 9% or
$2.6 million for the three months and six months ended June 30,
1994, respectively, compared to the same periods in 1993. The
increases are due to higher operator service revenues, lower
provisions for uncollectible accounts resulting from a change in
the method of estimating the allowance and higher billing and
collection revenue partially offset by lower directory and rental
revenue.
Operating Expenses
Operating expenses increased 2% or $5.6 million and 4% or $19.6
million for the three months and six months ended June 30, 1994,
respectively, compared to the same periods 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 and
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 occupational and management labor costs
and the absence of a one-time charge of $9.0 million associated
with the enhanced early retirement and voluntary separation
programs offered to all eligible employees that was recorded
during the second quarter of 1993.
Other Expenses
Interest expense decreased 25% or $4.8 million and 24% or $9.2
million for the three months and six months ended June 30, 1994,
respectively, compared to the same periods 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 in the fourth
quarter of 1993.
The $9.3 million gain on disposition of assets represents the
excess cash proceeds over book value of assets and liabilities
sold to Eaglenet, Inc. in May 1994 (see Notes to Condensed
Financial Statements).
Income taxes increased $14.7 million and $17.2 million for the
three months and six months ended June 30, 1994, respectively,
compared to the same periods in 1993 primarily due to increases
in pretax income. The effective tax rate changed from 30% in
1993 to 34% in 1994 due to a change in the tax rate, investment
tax credits and excess rate differentials.
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first six months
of 1994 was cash flow from operating activities of $144.7 million
compared to $176.2 million for the same period in 1993. The year-
to-year decrease in cash flow from operations is the result of an
increase in working capital, primarily customer receivables,
partially offset by improved operating results.
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 six months of 1994 were
$132.4 million compared to $130.8 million during the same period
in 1993. 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 retire long-term debt.
Cash used in financing activities was $44.3 million in 1994
compared to $47.6 million in 1993. External financing included
short-term borrowings of $10.2 million in 1994, compared to
$69.5 million in 1993. Dividend payments in 1994 were $24.3
million compared to $106.6 million in 1993. A dividend of $41.2
million is payable in the third quarter of 1994.
During the second quarter of 1994 the Company continued
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. Cash requirements for
the implementation of the re-engineering plan during 1994 are
expected to be largely offset by cost savings.
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 the issuance of commercial paper 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.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 12,510 $ 2,888
Receivables, less allowances
of $7,620 and $18,144, respectively 208,193 166,896
Materials and supplies, at average cost 29,349 24,426
Deferred income tax benefits 31,438 29,915
Prepayments and other 11,782 3,378
Total current assets 293,272 227,503
PROPERTY, PLANT AND EQUIPMENT:
Original cost 4,154,230 4,117,433
Accumulated depreciation (1,666,264)
(1,610,208)
Net property, plant and equipment 2,487,966 2,507,225
OTHER ASSETS 60,492 54,392
TOTAL ASSETS $ 2,841,730 $ 2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 64,100 $
53,965
Accounts payable 113,884 90,931
Accrued taxes 25,458 31,463
Accrued interest 5,370 6,311
Accrued payroll and vacations 34,577 43,830
Accrued dividends 41,248 262
Reserve for rate refunds 109,759 98,362
Accrued restructuring costs and other 126,509 126,191
Total current liabilities 520,905 451,315
LONG-TERM DEBT 673,296 703,137
DEFERRED CREDITS, primarily deferred
income taxes and investment tax credits 599,069 586,931
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 383,730 382,867
Total shareholders' equity 1,036,330 1,035,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,841,730 $
2,789,120
See Notes to Condensed Financial Statements.
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 66,144 $ 39,761
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 128,276 120,941
Deferred income taxes and investment
tax credits 2,175 (15,867)
Provision for uncollectible accounts 8,236
11,362
Gain on disposition of assets, net of tax (6,236)
- - --
Changes in current assets and current
liabilities (57,795)
(3,891)
Other - net 3,881 23,856
Net cash from operating activities 144,681 176,162
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (132,430)
(130,778)
Proceeds from sale of assets 41,000 --
Other - net 714 (382)
Net cash used in investing activities (90,716)
(131,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (30,248)
(10,462)
Dividends paid to shareholders (24,295)
(106,630)
Increase in short-term debt 10,200 69,500
Net cash used in financing activities (44,343)
(47,592)
Increase (decrease) in cash 9,622 (2,590)
Cash at beginning of period 2,888 2,967
Cash at end of period $ 12,510 $ 377
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. The Company has appealed
the Court of Appeals ruling and a final decision is expected to
be reached sometime in 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. The net sales proceeds exceeded the book value and
therefore, a pretax gain of $9.3 million was recognized on the
transaction. The proceeds from this transaction were used
primarily to pay down long-term debt.
(4) 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 6 are not applicable for the quarter ended June
30, 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 thereunto duly authorized.
GTE SOUTHWEST INCORPORATED
(Registrant)
Date: August 12, 1994 WILLIAM M. EDWARDS, III
. . . . . . . . . . . . . . . . . . .
. .
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
