<PAGE> 1
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, 1995
----------------------------------------------------------
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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
- ------------------------------------------------------------------------------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
---------------------------
- ------------------------------------------------------------------------------
(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 September 30, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
--------- ---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 123,142 $ 109,929 $ 352,821 $ 327,934
Network access services 122,675 114,758 348,464 338,795
Long distance services 43,446 50,682 127,337 148,217
Equipment sales and services 32,275 20,503 87,780 55,165
Other 11,448 7,420 37,998 38,778
--------- ---------- --------- ---------
332,986 303,292 954,400 908,889
--------- ---------- --------- ---------
Operating expenses:
Cost of sales and services 127,879 140,999 389,458 415,901
Depreciation and amortization 72,157 65,154 216,739 193,430
Selling, general and administrative 50,287 46,400 142,643 129,422
--------- ---------- --------- ---------
250,323 252,553 748,840 738,753
--------- ---------- --------- ---------
Net operating income 82,663 50,739 205,560 170,136
--------- ---------- --------- ---------
Other (income) deductions:
Interest expense - net 12,476 13,006 40,689 41,338
Gain on disposition of assets (16,263) -- (21,763) (9,297)
Other - net (3,428) -- (4,501) --
--------- ---------- --------- ---------
Income before income taxes 89,878 37,733 191,135 138,095
Income taxes 30,153 12,766 64,180 46,984
--------- ---------- --------- ---------
Net income $ 59,725 $ 24,967 $ 126,955 $ 91,111
========= ========== ========= =========
</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 SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 59.7 $ 25.0 $ 127.0 $ 91.1
</TABLE>
Net income for 1995 includes one-time gains (net of tax) of $3.6 and $10.8
associated with the sale of non-strategic properties in the state of Texas
during the second and third quarter of 1995, respectively, and a $3.8
settlement gain (net of tax) recorded in the second quarter of 1995 which
resulted from lump-sum payments from the Company's pension plans. Net income
for 1994 includes a one-time gain (net of tax) of $6.0 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 increased 96% or $23.9
and 28% or $23.7 for the three and nine months ended September 30, 1995,
respectively, compared to the same periods in 1994. These increases are
primarily due to higher operating revenues resulting from continued customer
growth, partially offset by increased depreciation expense. The increases are
also due to lower operating expenses related to decreased labor and benefit
costs and data processing charges.
OPERATING REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Local network services $ 123.1 $ 109.9 $ 352.8 $ 327.9
Network access services 122.7 114.8 348.5 338.8
Long distance services 43.4 50.7 127.3 148.2
Equipment sales & services 32.3 20.5 87.8 55.2
Other 11.5 7.4 38.0 38.8
--------- ---------- --------- ---------
Total operating revenues $ 333.0 $ 303.3 $ 954.4 $ 908.9
</TABLE>
Operating revenues increased 10% or $29.7 and 5% or $45.5 for the three and
nine months ended September 30, 1995, respectively, compared to the same
periods in 1994.
Local network services revenues increased 12% or $13.2 and 8% or $24.9 for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in 1994. The number of access lines increased 5% for the three
and nine months ended September 30, 1995, compared to the same periods in 1994.
This growth generated additional revenues of $4.6 and $9.8, respectively. The
three and nine month increases are also due to additional revenues of $1.3 and
$3.6 associated with the continued expansion of local area calling zones, $1.6
and $3.9 of growth in revenues related to sales of Centranet (trademark) and
custom calling features, such as Smartcall (trademark) and $3.1 and $5.1 of
favorable impacts on local network services revenues resulting from the
discontinuance of the monthly provision related to the Company's 1989 Texas
rate case discussed in the Other Matters section .
2
<PAGE> 4
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access services revenues increased 7% or $7.9 and 3% or $9.7 for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in 1994. Minutes of use increased 12% and 11% for the three and
nine months ended September 30, 1995, respectively, compared to the same
periods in 1994. These increases generated additional revenues of $11.2 and
$26.0, respectively. The three and nine month increases are also due to $2.5
and $3.9 of higher end user access charge revenues associated with growth in
access lines and a $1.0 and $2.1 growth in private line revenues. The three
and nine month increases were partially offset by declines in revenues of $6.9
and $24.8 due to the Company's exit from the pooling arrangement discussed
below.
Long distance services revenues decreased 14% or $7.3 and 14% or $20.9 for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in 1994. The three and nine month decreases are primarily due to
the end of transitional support payments received from Southwestern Bell
Telephone Company of $0.5 and $7.6 in 1994 as a result of the Company's exit
from the Texas state intraLATA toll pool. These decreases are also due to the
expansion of local area calling zones resulting in $2.2 and $6.5 of long
distance services revenue reductions and decreases of $3.1 and $4.1 due to
lower toll volumes.
Equipment sales and services revenues increased 58% or $11.8 and 59% or $32.6
for the three and nine months ended September 30, 1995, respectively, compared
to the same periods in 1994. The three and nine month increases are primarily
due to additional equipment sales and revenues resulting from service bureau
contracts. Through service bureau contracts, the Company provides general,
administrative and operational services (e.g. invoice and payroll processing,
billing and collection services, human resources services, etc.) on a
contractual basis to other local exchange carriers and certain affiliates.
Other operating revenues increased 55% or $4.1 and decreased 2% or $0.8 for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in 1994. The third quarter increase is due to the Company's
lower provision for uncollectible accounts. The nine month decrease is
primarily attributable to a decrease in collections of late payment fees and
higher provisions for uncollectible accounts, partially offset by an increase
in directory advertising revenue and an increase in billing and collection
revenues.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Operating expenses $ 250.3 $ 252.6 $ 748.8 $ 738.8
</TABLE>
Operating expenses decreased 1% or $2.3 and increased 1% or $10.0 for the three
and nine months ended September 30, 1995, respectively, compared to the same
periods in 1994.
The three month decrease in operating expenses is primarily attributable to
$4.0 of lower labor and benefit costs associated with ongoing cost-reduction
programs from process re-engineering activities, $2.0 of lower end-user
uncollectibles and $1.3 of lower data processing costs. These decreases are
offset by $5.7 of increased depreciation expenses, primarily associated with
additions to plant balances, and $1.3 of increased digital software
amortization.
3
<PAGE> 5
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The nine month increase in operating expenses is primarily attributable to
$9.1 of increased digital software amortization, $14.2 of increased
depreciation expenses, primarily associated with additions to plant balances,
and $6.1 of higher contractor costs. These increases are partially offset by
$7.1 of lower labor and benefit costs associated with ongoing cost-reduction
programs from process re-engineering activities, a $5.8 settlement gain
recorded in the second quarter of 1995 which resulted from lump-sum payments
from the Company's pension plans, $3.0 of lower data processing costs and $2.0
of lower end-user uncollectibles.
OTHER (INCOME) DEDUCTIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Gain on disposition of assets $ (16.3) $ -- $ (21.8) $ (9.3)
Other - net (3.4) -- (4.5) --
Income taxes 30.2 12.8 64.2 47.0
</TABLE>
On September 30, 1995, the Company recorded a $16.3 pretax gain on the sale of
a portion of its telephone plant-in- service, materials and supplies and
customers (representing 10,517 access lines) in the state of Texas to various
parties. On May 4, 1995, the Company recorded a $5.5 pretax gain on the sale
of its unconsolidated investment in Metropolitan Houston Paging Service, Inc.
As previously reported, in May 1994 the Company recorded a $9.3 pretax gain on
the disposition of certain assets and liabilities.
Other - net income increased $3.4 and $4.5 for the three and nine months ended
September 30, 1995, respectively, compared to the same periods in 1994. These
increases are primarily due to the reversal of expired representation and
warranty reserves related to certain 1994 property dispositions.
Income taxes increased $17.4 and 37% or $17.2 for the three and nine months
ended September 30, 1995, respectively, compared to the same periods in 1994.
These increases are primarily due to corresponding increases in pretax income,
partially offset by adjustments in prior years' tax liabilities.
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. In addition, at September
30, 1995, a $3,490 line of credit was available to the Company through shared
lines of credit with GTE and other affiliates to support short-term financing
needs.
The Company's primary source of funds during the first nine months of 1995 was
cash from operations of $303.4 compared to $266.3 for the same period in 1994.
The year-to-year increase in cash from operations is primarily the result of
improved results from operations, partially offset by an increase in working
capital. Cash from operations is also being utilized to fund the Company's
re-engineering plan.
4
<PAGE> 6
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's capital expenditures during the first nine months of 1995 were
$209.6 compared to $203.2 for the same period in 1994. The 1995 expenditures
reflect the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services, including
broadband digital services and switched digital services. The Company
anticipates construction costs for 1995 to approximate capital expenditures of
$302.0 incurred during 1994.
In September 1995, the Company sold a portion of its telephone
plant-in-service, materials and supplies and access lines in the state of Texas
to various parties for $29.6 in cash. In May 1995, the Company sold its
unconsolidated investment in Metropolitan Houston Paging Service, Inc. for $7.0
in cash. The proceeds from these sales were used primarily to reduce
borrowings of short-term debt and to pay $18.7 of dividends to GTE in October
1995. As previously reported, in May 1994 the Company sold certain assets and
liabilities for $41.0 in cash. These proceeds were used primarily to retire
long-term debt.
Cash used in financing activities was $109.6 during the first nine months of
1995 compared to $90.8 for the same period in 1994. This included dividend
payments of $94.2 in the first nine months of 1995 compared to $65.6 for the
same period in 1994. External financing included a decrease in short-term debt
of $14.6 for the first nine months of 1995, compared to an increase of $5.0
for the same period in 1994. The Company retired $0.8 of long-term debt during
the first nine months of 1995 compared to $30.2 for the same period in 1994.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $172.0, which reduced net income by $105.9, 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.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. Expenditures of $88.3 have been made since
inception of the re-engineering plan, including $50.8 during the first nine
months of 1995. These expenditures were primarily associated with the
consolidation of customer contact, network operations and operator service
centers, separation benefits associated with workforce reductions and
incremental expenditures to redesign and streamline processes. There have been
no significant changes made to the overall re-engineering plan as originally
reported. As of September 30, 1995, $83.7 remains in the restructuring reserve
which management believes is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (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 the following productivity factors and
sharing thresholds for use in the 1995-1996 tariff year:
<TABLE>
<CAPTION>
Sharing Parameters
Tariff Productivity -------------------------------------
Entity Factor 50% 100%
------ ------------ ---------------- ---------------
<S> <C> <C> <C>
Arkansas, Texas 4.0% 12.25-13.25% ROR Over 13.25% ROR
New Mexico, Oklahoma 5.3% None None
</TABLE>
5
<PAGE> 7
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Since the Company's access fees were priced significantly below the FCC's
maximum price, the Company was permitted to file tariffs effective May 24, 1995
to increase rates $9.6 annually. In addition, the Company filed tariffs
effective August 1, 1995 under the interim rules to reduce rates $0.9,
annually. 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 local exchange carriers's
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.
Federal telecommunications legislation has been passed by both the Senate and
House of Representatives. The bills must now be reconciled by the joint
Senate/House committee.
In April 1995, GTE filed a motion with the U.S. District Court for the District
of Columbia to remove the 1984 Consent Decree, which restricts the manner in
which the Company can provide interLATA services. GTE believes that the
Consent Decree is no longer required since GTE has since divested its interest
in the entities whose purchase gave rise to the Consent Decree.
Also in April 1995, the Supreme Court of Texas ruled on an appeal of the
Company's 1989 rate case. The Court agreed with the Company's position
concerning retroactive ratemaking, the ratemaking treatment of federal income
tax expense and the payment for services from GTE Service Corporation, a
wholly-owned subsidiary of GTE. The issue of payments associated with
directory publications rendered by GTE Directories Corporation, also a
wholly-owned subsidiary of GTE, was remanded to the Texas Public Utilities
Commission (TPUC). Subsequent to the Supreme Court's decision, the state of
Texas passed a telecommunications reform bill which was signed into law on May
26, 1995, and became effective September 1, 1995. This new legislation opens
the local exchange to competition and permits existing LECs to elect a form of
price regulation rather than rate of return regulation. On September 20, 1995,
the Company notified the TPUC of its election of price regulation and, in doing
so, resolved the 1989 rate case. The incentive form of price regulation
requires LECs to cap basic service rates for four years, after which indexed,
TPUC-approved rate adjustments will be permitted. The price regulation plan
contained in the reform bill also requires all calls be digitally switched by
year-end 1998 and for the provision of broadband facilities to schools,
libraries and hospitals on customer demand.
On June 9, 1995, the Arkansas Public Service Commission (APSC) ordered the
Company to reduce rates by $12.8 annually. The Company filed a motion for
reconsideration on July 7, 1995 which was approved by the APSC on July 10,
1995. Public hearings on the motion were held on September 6, 1995. It is not
known when the APSC will issue a decision on this matter.
On April 13, 1995, the New Mexico Service Corporation Commission issued an
order in the first phase of the New Mexico rate proceeding requiring the
Company to decrease its revenues by $8.3 annually, effective immediately.
Hearings were held on the second phase of the proceeding, which considered rate
design. A final order is expected by November 15, 1995.
In March 1995, the Company entered into purchase agreements whereby the Company
will sell other nonstrategic local exchange properties in Texas to various
parties. The parties intend to close on the properties in early 1996, upon
receiving all necessary regulatory approvals from the FCC. The net assets held
for sale of $7.1 represent primarily property, plant and equipment.
6
<PAGE> 8
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REGULATORY ACCOUNTING
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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $400 and $550. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
7
<PAGE> 9
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---------------- ----------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 24,500 $ 9,333
Receivables, less allowances of
$20,003 and $17,215, respectively 213,079 201,827
Materials and supplies 28,235 18,449
Deferred income tax benefits 13,429 21,444
Net assets held for sale 7,096 --
Prepayments and other 15,860 17,141
---------------- ----------------
Total current assets 302,199 268,194
---------------- ----------------
Property, plant and equipment:
Original cost 4,148,384 4,017,714
Accumulated depreciation (1,668,288) (1,521,434)
---------------- ----------------
Net property, plant and equipment 2,480,096 2,496,280
---------------- ----------------
Prepaid pension costs 62,822 41,870
---------------- ----------------
Other assets 23,283 25,191
---------------- ----------------
Total assets $ 2,868,400 $ 2,831,535
================ ================
</TABLE>
See Notes to Condensed Financial Statements.
8
<PAGE> 10
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------------ -----------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Short-term debt, including current maturities $ 62,028 $ 66,703
Accounts payable 114,108 133,152
Accrued taxes 32,066 27,361
Accrued interest 15,665 5,448
Accrued payroll and vacations 48,686 37,068
Accrued dividends 6,242 51,374
Accrued restructuring costs and other 237,462 223,352
------------------ -----------------
Total current liabilities 516,257 544,458
------------------ -----------------
Long-term debt 664,505 673,346
------------------ -----------------
Reserves and deferred credits:
Deferred income taxes 365,174 375,388
Employee benefit obligations 113,808 76,638
Restructuring costs and other 105,771 136,584
------------------ -----------------
Total reserves and deferred credits 584,753 588,610
------------------ -----------------
Preferred stock, subject to mandatory redemption 10,190 10,330
------------------ -----------------
Shareholders' equity:
Preferred stock 7,600 7,600
Common stock 645,000 645,000
Reinvested earnings 440,095 362,191
------------------ -----------------
Total shareholders' equity 1,092,695 1,014,791
------------------ -----------------
Total liabilities and shareholders' equity $ 2,868,400 $ 2,831,535
================== =================
</TABLE>
See Notes to Condensed Financial Statements.
9
<PAGE> 11
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1995 1994
------------ --------------
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 126,955 $ 91,111
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 216,739 193,430
Deferred income taxes 18,883 4,307
Provision for uncollectible accounts 20,577 18,485
Gain on disposition of assets, net of tax (14,419) (5,990)
Changes in current assets and current liabilities (61,168) (47,591)
Other - net (4,193) 12,504
------------ --------------
Net cash from operating activities 303,374 266,256
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (209,560) (203,172)
Proceeds from sale of assets 36,576 41,000
Other - net (5,659) (199)
------------ --------------
Net cash used in investing activities (178,643) (162,371)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (786) (30,221)
Dividends paid to shareholders (94,183) (65,618)
Increase (decrease) in short-term debt (14,595) 5,000
------------ --------------
Net cash used in financing activities (109,564) (90,839)
------------ --------------
Increase in cash 15,167 13,046
Cash at beginning of period 9,333 2,888
------------ --------------
Cash at end of period $ 24,500 $ 15,934
============ ==============
</TABLE>
See Notes to Condensed Financial Statements.
10
<PAGE> 12
GTE SOUTHWEST INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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 1994 Annual Report on Form 10-K.
(2) On May 4, 1995, the Company sold its unconsolidated investment in
Metropolitan Houston Paging Service, Inc. (a Texas Corporation) for $7.0 in
cash. This sale is part of GTE's effort to reorganize its paging business
nationally. A pretax gain of $5.5 was recorded on the sale. The proceeds from
this transaction were used primarily to reduce borrowings of short-term debt.
On September 30, 1995, the Company sold a portion of its telephone
plant-in-service, materials and supplies and customers (representing 10,517
access lines) in the state of Texas to various parties for $29.6 in cash. This
represents less than 1% of the Company's total access lines. A pretax gain of
$16.3 was recorded on the sale. The proceeds from this transaction were used
primarily to reduce borrowings of short-term debt and to pay $18.7 of dividends
to GTE in the fourth quarter of 1995.
In March 1995, the Company entered into purchase agreements whereby the Company
will sell other nonstrategic local exchange properties in Texas to various
parties. The parties intend to close on the properties in early 1996, upon
receiving all necessary regulatory approvals from the FCC. The net assets held
for sale of $7.1 represent primarily property, plant and equipment.
(3) 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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $400 and $550. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
(4) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
11
<PAGE> 13
GTE SOUTHWEST INCORPORATED
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
This item is herein incorporated by reference in Management's Discussion
and Analysis of Financial Condition and Results of Operations 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) GTE Southwest Incorporated filed a report on Form 8-K dated
September 28, 1995 on October 2, 1995, under Item 5 "Other
Events." No financial statements were filed with this report.
12
<PAGE> 14
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: October 31, 1995 William M. Edwards, III
----------------------- ---------------------------------
William M. Edwards, III
Controller
(Chief Accounting Officer)
13
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 24,500
<SECURITIES> 0
<RECEIVABLES> 233,082
<ALLOWANCES> 20,003
<INVENTORY> 28,235
<CURRENT-ASSETS> 302,199
<PP&E> 4,148,384
<DEPRECIATION> 1,668,288
<TOTAL-ASSETS> 2,868,400
<CURRENT-LIABILITIES> 516,257
<BONDS> 664,505
<COMMON> 645,000
10,190
7,600
<OTHER-SE> 440,095
<TOTAL-LIABILITY-AND-EQUITY> 2,868,400
<SALES> 954,400
<TOTAL-REVENUES> 954,400
<CGS> 389,458
<TOTAL-COSTS> 748,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,689
<INCOME-PRETAX> 191,135
<INCOME-TAX> 64,180
<INCOME-CONTINUING> 126,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,955
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
