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, 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.)
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, 1995. The Company's common stock is 100% owned by
GTE Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 117,413 $ 110,526 $ 229,679 $ 218,005
Network access services 114,654 112,969 225,789 224,037
Long distance services 40,393 48,630 83,891 97,535
Equipment sales and services 28,901 18,895 55,505 34,662
Other 18,476 18,562 26,550 31,358
319,837 309,582 621,414 605,597
OPERATING EXPENSES:
Cost of sales and services 76,230 84,105 155,345 164,827
Depreciation and amortization 73,292 64,310 144,582 128,276
Marketing, selling, general
and administrative 103,261 96,522 198,084 192,330
252,783 244,937 498,011 485,433
Net operating income 67,054 64,645 123,403 120,164
OTHER (INCOME) DEDUCTIONS:
Interest expense 13,755 14,420 29,179 29,014
Gain on disposition of assets (5,500) (9,297) (5,500) (9,297)
Other - net (215) 115 (1,533) 85
INCOME BEFORE INCOME TAXES 59,014 59,407 101,257 100,362
INCOME TAXES 19,661 20,377 34,027 34,218
NET INCOME $ 39,353 $ 39,030 $ 67,230 $ 66,144
</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
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Net income $ 39.4 $ 39.0 $ 67.2 $ 66.1
Net income increased 1% or $0.4 and 2% or $1.1 for the three and six months
ended June 30, 1995, respectively, compared to the same periods in 1994.
These increases are primarily the result of higher operating revenues,
primarily equipment sales and services and local network services revenues,
partially offset by higher depreciation and amortization costs.
OPERATING REVENUES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Local network services $ 117.4 $ 110.5 $ 229.7 $ 218.0
Network access services 114.6 113.0 225.8 224.0
Long distance services 40.4 48.6 83.9 97.5
Equipment sales & services 28.9 18.9 55.5 34.7
Other 18.5 18.6 26.5 31.4
Total operating revenues $ 319.8 $ 309.6 $ 621.4 $ 605.6
Operating revenues increased 3% or $10.2 and 3% or $15.8 for the three and
six months ended June 30, 1995, respectively, compared to the same periods
in 1994.
Local network services revenues increased 6% or $6.9 and 5% or $11.7 for
the three and six months ended June 30, 1995, respectively, compared to the
same periods in 1994. Access lines increased 4% for the three and six
months ended June 30, 1995, compared to the same periods in 1994. This
growth generated additional revenues of $4.7 and $7.2, respectively. The
three and six month increases are also attributable to additional revenues
of $1.1 and $2.3 associated with the continued expansion of local area
calling zones and $1.0 and $2.3 of growth in sales of CentraNet (Trademark)
and custom calling features, such as SmartCall (Trademark).
2
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access services revenues increased 1% or $1.6 and 1% or $1.8 for
the three and six months ended June 30, 1995, respectively, compared to the
same periods in 1994. Minutes of use increased 4% and 11% for the three
and six months ended June 30, 1995, respectively, compared to the same
periods in 1994. These increases generated additional revenues of $3.7 and
$17.3, respectively. The three and six month increases were offset by
declines in revenues of $5.0 and $17.9 due to the Company's exit from a
previous pooling arrangement, which is discussed below.
Long distance services revenues decreased 17% or $8.2 and 14% or $13.6 for
the three and six months ended June 30, 1995, respectively, compared to the
same periods in 1994. The three and six month decreases are primarily due
to the end of transitional support payments received from Southwestern Bell
Telephone Company of $2.9 and $7.1 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 $4.3
of long distance services revenue reductions and decreases of $0.7 and $1.0
due to lower toll volumes.
Equipment sales and services revenues increased 53% or $10.0 and 60% or
$20.8 for the three and six months ended June 30, 1995, respectively,
compared to the same periods in 1994. The three and six month increases
are primarily attributable to $4.7 and $11.8 in additional equipment sales
and $2.6 and $7.4 of revenues resulting from service bureau contracts.
Through its 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.
Other operating revenues remained virtually unchanged for the three months
and decreased 16% or $4.9 for the six months ended June 30, 1995,
respectively, compared to the same periods in 1994. During the second
quarter, the Company's higher provision for uncollectible accounts of $2.8
was offset by a $1.8 increase in collections of late payment fees, a $0.5
increase in directory advertising revenue and a $0.4 increase in billing
and collection revenues. The six month decrease is primarily attributable
to $4.7 of higher provisions for uncollectible accounts and a $1.2 decrease
in collections of late payment fees. This decrease is partially offset by
a $0.6 increase in directory advertising revenue and a $0.7 increase in
billing and collection revenues.
3
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Operating expenses $ 252.8 $ 244.9 $ 498.0 $ 485.4
Operating expenses increased 3% or $7.9 and 3% or $12.6 for the three and
six months ended June 30, 1995, respectively, compared to the same periods
in 1994. These increases are primarily attributable to higher depreciation
and amortization costs, partially offset by the favorable effects of
ongoing cost-reduction programs from process re-engineering activities.
The three month increase is primarily attributable to $3.9 of increased
digital software amortization, $4.0 of increased depreciation expenses
associated with additions to plant balances, $3.0 of increased expenses for
shared facilities, a $2.1 increase in charges related to unbillable calling
card calls, $1.5 of higher expenses related to material purchases, and $1.2
in higher employee business expenses. These increases are offset by $3.0
of lower software costs and a $5.8 settlement gain recorded in the second
quarter of 1995 which resulted from lump-sum payments from the Company's
pension plans.
The six month increase is primarily attributable to $7.8 of increased
digital software amortization, $7.9 of increased depreciation expenses
associated with additions to plant balances, $2.8 of increased expenses for
shared facilities, a $2.1 increase in charges related to unbillable calling
call cards, and $1.9 in higher employee business expenses. These increases
are offset by $3.1 of lower labor and benefit costs, a $5.8 settlement gain
mentioned above, and a decrease of $2.3 related to material purchases.
OTHER INCOME
The $5.5 pretax gain on disposition of assets reflects the Company's sale
of its unconsolidated investment in Metropolitan Houston Paging Service,
Inc. in May 1995 (see Note 2 to Condensed Financial Statements). As
previously reported, in May 1994 the Company recorded a $9.3 pretax gain on
disposition of certain assets and liabilities.
4
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 June 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 six months of 1995
was cash from operations of $196.4 compared to $144.7 for the same period
in 1994. The year-to-year increase in cash from operations is the result
of a decrease in working capital, primarily customer accounts receivable,
and improved results from operations.
The Company's capital expenditures during the first six months of 1995 were
$132.5 compared to $132.4 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. Capital expenditures for 1995 are expected to increase slightly
from capital expenditures of $302.0 incurred during 1994, reflecting the
Company's expanding network and replacement of outdated technologies with
digital switches and fiber optic networks.
In May 1995, the Company sold its unconsolidated investment in Metropolitan
Houston Paging Service, Inc. for $7.0. The proceeds were used primarily to
reduce borrowings of short-term debt. As previously reported, in May 1994
the Company sold certain assets and liabilities for $41.0. The proceeds
were used primarily to retire long-term debt.
Cash used in financing activities was $67.9 during the first six months of
1995 compared to $44.3 for the same period in 1994. This included dividend
payments of $71.1 during the first six months of 1995 compared to $24.3 for
the same period in 1994. External financing included increases in
short-term borrowings of $3.7 in the first six months of 1995, compared to
$10.2 for the same period in 1994. The Company retired $0.5 in long-term
debt during the first six months of 1995 compared to $30.2 for the same
period in 1994.
5
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $75.5 have been made
since inception of the re-engineering plan, including $38.1 during the
first six months of 1995. These expenditures were primarily associated
with the consolidation of customer contact, network operations and operator
service centers, separation benefits from employee 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 June 30, 1995, $96.5 remains in the
restructuring reserve, of which $43.4 is classified as a current liability.
Management believes the reserve 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:
Tariff Productivity Sharing Parameters
Entity Factor 50% 100%
Arkansas, Texas 4.0% 12.25-13.25% ROR Over 13.25% ROR
New Mexico, Oklahoma 5.3% None None
Since the Company's access fees are 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. The FCC is continuing to consider how the price cap plan
should be modified in order to adapt the system to the emergence of
competition.
6
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 order. 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 final issue, payments associated with
directory publications rendered by GTE Directories Corporation, also a
wholly-owned subsidiary of GTE, has been remanded to the Texas Public
Utilities Commission (TPUC) for further proceedings. It is not known when the
TPUC will render a decision on this matter.
The Texas Legislature passed a telecommunications reform bill which was
signed into law on May 26, 1995, and will become 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. The price regulation plan contained in the reform
bill requires all calls be digitally switched by year-end 1998. It also
requires the provision of broadband facilities to schools, libraries and
hospitals on customer demand. The Company is currently evaluating its
options under the new law.
On June 9, 1995, the Arkansas Public Service Commission (APSC) ordered the
Company to reduce rates by $12.8 annually based on excess earnings. 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 are
scheduled for September 6, 1995.
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 April 13,
1995. The second phase of the proceeding, which will consider rate design,
was filed on May 15, 1995. A final order is expected by November 15, 1995.
7
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
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
In general, SFAS No. 71 requires companies to depreciate plant and
equipment over lives approved by regulators which may extend beyond the
assets' actual economic and technological lives. SFAS No. 71 also requires
deferral of certain costs and obligations based upon approvals received
from regulators to permit recovery in the future. Consequently, the
recorded net book value of certain assets and liabilities, primarily
telephone plant and equipment, may be greater than that which would
otherwise be recorded by unregulated enterprises. On an ongoing basis, the
Company reviews the continued applicability of SFAS No. 71 based on the
current regulatory and competitive environment. Although recent
developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result,
the Company continues to believe that accounting under SFAS No. 71 is
appropriate. If the Company were to determine that the use of SFAS No. 71
was no longer appropriate, it would be required to write-off the deferred
costs and obligations referred to above. It may also be necessary for the
Company to reduce the carrying value of its plant and equipment to the
extent that it exceeds fair market value. At this time, it is not possible
to estimate the amount of the Company's plant and equipment, if any, that
would be considered unrecoverable in such circumstances. The financial
impact of such a determination, however, which would be non-cash, could be
material.
8
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 6,818 $ 9,333
Receivables, less allowances
of $15,350 and $17,215, respectively 181,532 201,827
Materials and supplies 25,898 18,449
Deferred income tax benefits 14,985 21,444
Net assets held for sale 18,921 --
Prepayments and other 31,937 17,141
Total current assets 280,091 268,194
PROPERTY, PLANT AND EQUIPMENT:
Original cost 4,091,412 4,017,714
Accumulated depreciation (1,617,902) (1,521,434)
Net property, plant and equipment 2,473,510 2,496,280
OTHER ASSETS 81,314 67,061
TOTAL ASSETS $ 2,834,915 $ 2,831,535
See Notes to Condensed Financial Statements.
9
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 80,276 $ 66,703
Accounts payable 130,493 133,152
Accrued taxes 24,842 27,361
Accrued interest 5,277 5,448
Accrued payroll and vacations 37,723 37,068
Accrued dividends 23,068 51,374
Accrued restructuring costs and other 232,040 223,352
Total current liabilities 533,719 544,458
LONG-TERM DEBT 664,759 673,346
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 383,468 375,388
Employee benefit obligations 106,873 76,638
Restructuring costs and other 96,628 136,584
Total reserves and deferred credits 586,969 588,610
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 386,678 362,191
Total shareholders' equity 1,039,278 1,014,791
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,834,915 $ 2,831,535
See Notes to Condensed Financial Statements.
10
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 67,230 $ 66,144
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 144,582 128,276
Deferred income taxes and investment
tax credits 12,588 2,175
Provision for uncollectible accounts 12,956 8,236
Gain on disposition of assets, net
of tax (3,642) (6,236)
Changes in current assets and current
liabilities (36,204) (57,795)
Other - net (1,094) 3,881
Net cash from operating activities 196,416 144,681
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (132,541) (132,430)
Proceeds from sale of assets 7,000 41,000
Other - net (5,469) 714
Net cash used in investing activities (131,010) (90,716)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (533) (30,248)
Dividends paid to shareholders (71,050) (24,295)
Increase in short-term debt 3,662 10,200
Net cash used in financing activities (67,921) (44,343)
Increase (decrease) in cash (2,515) 9,622
Cash at beginning of period 9,333 2,888
Cash at end of period $ 6,818 $ 12,510
See Notes to Condensed Financial Statements.
11
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.
(3) In June 1994, and March 1995, the Company entered into purchase
agreements whereby the Company will sell nonstrategic local exchange
properties in Texas to various parties. The parties intend to close on the
properties in late 1995 and early 1996, upon receiving all necessary
regulatory approvals from the FCC. The net assets held for sale of $18.9
represent primarily property, plant and equipment.
(4) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
12
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) The Company filed no reports on Form 8-K during the second
quarter of 1995.
13
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: August 11, 1995 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 6,818
<SECURITIES> 0
<RECEIVABLES> 196,882
<ALLOWANCES> 15,350
<INVENTORY> 25,898
<CURRENT-ASSETS> 280,091
<PP&E> 4,091,412
<DEPRECIATION> 1,617,902
<TOTAL-ASSETS> 2,834,915
<CURRENT-LIABILITIES> 533,719
<BONDS> 664,759
<COMMON> 645,000
10,190
7,600
<OTHER-SE> 386,678
<TOTAL-LIABILITY-AND-EQUITY> 2,834,915
<SALES> 621,414
<TOTAL-REVENUES> 621,414
<CGS> 155,345
<TOTAL-COSTS> 498,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,179
<INCOME-PRETAX> 101,257
<INCOME-TAX> 34,027
<INCOME-CONTINUING> 67,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,230
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
