UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended March 31, 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 April 30, 1995. The Company's common stock
is 100% owned by GTE Corporation.
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands
of Dollars)
<S> <C>
<C>
OPERATING REVENUES:
Local network services $ 112,266
$ 107,479
Network access services 111,135
111,068
Long distance services 43,498
48,905
Equipment sales and services 26,604
15,767
Other 8,074
12,796
301,577
296,015
OPERATING EXPENSES:
Cost of sales and services 79,115
80,722
Depreciation and amortization 71,290
63,966
Marketing, selling, general and
administrative 94,823
95,808
245,228
240,496
Net operating income 56,349
55,519
OTHER (INCOME) DEDUCTIONS:
Interest expense 15,424
14,594
Other - net (1,318)
(30)
INCOME BEFORE INCOME TAXES 42,243
40,955
INCOME TAXES 14,366
13,841
NET INCOME $ 27,877
$ 27,114
Per share data is omitted since the Company's common stock is 100%
owned by GTE Corporation (GTE).
See Notes to Condensed Financial Statements.
</TABLE>
- -1-
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Net income was $27.9 and $27.1 for the three months ended March
31, 1995 and 1994, respectively, reflecting an increase of 3% or
$0.8. The increase is primarily the result of higher equipment
sales and services revenues, partially offset by lower long
distance services revenues and higher depreciation and
amortization expenses.
OPERATING REVENUES
Operating revenues were $301.6 and $296.0 for the three months
ended March 31, 1995 and 1994, respectively, reflecting an
increase of 2% or $5.6.
Local network services revenues were $112.3 and $107.5 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 4% or $4.8. The increase is primarily
attributable to access line growth of 6%, which generated an
additional $2.5 in revenues, increased revenues of $1.3
associated with the continued expansion of local calling zones
and $1.3 of growth in enhanced features such as custom calling
and CentraNet(trademark).
Network access services revenues were $111.1 for the three months
ended March 31, 1995 and 1994. An 18% increase in minutes of
use, which generated an additional $13.0 in revenues, was
partially offset by an $11.7 decrease in revenues due to the
Company's exit from a previous pooling arrangement, which is
discussed below.
Long distance services revenues were $43.5 and $48.9 for the
three months ended March 31, 1995 and 1994, respectively,
reflecting a decrease of 11% or $5.4. The decrease is primarily
due to $2.9 of transitional support payments received from
Southwestern Bell Telephone Company in 1994 as a result of the
Company's exit from the toll pool. The decrease is also due to
the expansion of local area calling zones resulting in $1.9 of
revenue shifts from long distance services revenues to local
network services revenues.
Equipment sales and services revenues were $26.6 and $15.8 for
the three months ended March 31, 1995 and 1994, respectively,
reflecting an increase of 68% or $10.8. The increase is
primarily attributable to $6.8 of increased revenues due to
higher sales of non-regulated equipment and $3.6 of revenues
resulting from Service Bureau contracts. The Company provides
general, administrative and operational services (eg. invoice and
payroll processing, billing and collection services, human
resources services, etc.), on a contractual basis through Service
Bureau contracts.
Other operating revenues were $8.1 and $12.8 for the three months
ended March 31, 1995 and 1994, respectively, reflecting a
decrease of 37% or $4.7. The decrease is primarily attributable
to $2.4 of higher provisions for uncollectible accounts and a
$1.5 decline in revenues from shared facilities.
- -2-
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses were $245.2 and $240.5 for the three months
ended March 31, 1995 and 1994, respectively, reflecting an
increase of 2% or $4.7. The increase is primarily due to $3.9 of
increased digital software amortization, $2.8 of increased
depreciation expenses associated with additions to plant balances
and $1.8 of higher software costs. The increase is partially
offset by $1.3 of lower labor and benefits costs reflecting
reductions in workforce associated with the Company's re-
engineering plan initiated in 1994 and a decrease of $2.9 related
to material purchases.
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 March 31, 1995, a $3,500 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 three
months of 1995 was cash from operations of $104.3 compared to
$89.9 for the same period in 1994. This increase is primarily
due to the favorable timing of tax payments and collection of
receivables, partially offset by a decrease in payables.
The Company's capital expenditures during the first three months
of 1995 were $57.8 compared to $64.3 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. Construction
costs 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.
Cash used in financing activities was $33.7 during the first
three months of 1995 compared to $15.9 for the same period in
1994. This included dividend payments of $51.4 during the first
three months of 1995 compared to $0.3 for the same period in
1994. External financing included increases in short-term
borrowings of $17.9 in the first quarter of 1995, compared to
$23.7 for the same period in 1994. The Company retired $39.2 in
affiliated debt during the first quarter of 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
- -3-
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
$50.1 have been made since inception of the re-engineering plan,
including $12.7 during the first three 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.
The level of re-engineering activities and related expenditures
are expected to accelerate during the remainder of 1995. There
have been no significant changes made to the overall re-
engineering plan as originally reported. As of March 31, 1995,
$121.9 remains in the restructuring reserve, of which $44.7 is
classified as a current liability. Management believes the
reserve is adequate to cover future expenditures.
In March 1995, the Federal Communications Commission (FCC)
increased the local-exchange carrier (LEC) productivity factors
associated with its interstate price cap plan to provide three
different options, on an interim basis, regarding the
determination and use of productivity factors. These changes
will be reflected in the LECs' annual tariff filing, effective
August 1, 1995. The FCC is expected to continue to consider
permanent changes to its price cap plan in a future rulemaking
proceeding. GTE believes the impact of the interim rules will be
minimized in the near-term because GTE has reduced its access
fees in previous years to amounts below the FCC's maximum price.
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 Company from providing interLATA services.
GTE believes that the Consent Decree is no longer required since
GTE has since divested its interests in the entities whose
purchase gave rise to the Consent Decree.
Also in April 1995, the Supreme Court of Texas ruled in favor of
the Company in its rate case dating to 1989. The Supreme 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 make
a decision on this matter. While the ultimate outcome of this
matter is not presently determinable, it is not expected to have
a material effect on the Company's results of operations.
- -4-
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On April 13, 1995, the New Mexico Service Corporation Commission
issued an order requiring the Company to decrease its revenues by
$8.3 annually, effective April 13, 1995. The second phase of the
New Mexico rate proceeding will begin with the Company's rate
design filing on May 15, 1995. A final order is expected by the
end of 1995.
- -5-
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands
of Dollars)
<S> <C>
<C>
CURRENT ASSETS:
Cash $ 22,151
$ 9,333
Receivables, less allowances
of $18,922 and $17,215, respectively 173,688
201,827
Materials and supplies 20,733
18,449
Deferred income tax benefits 19,885
21,444
Prepayments and other 33,538
17,141
Total current assets 269,995
268,194
PROPERTY, PLANT AND EQUIPMENT:
Original cost 4,021,930
4,017,714
Accumulated depreciation (1,556,993)
(1,521,434)
Net property, plant and equipment 2,464,937
2,496,280
OTHER ASSETS 67,884
67,061
TOTAL ASSETS $ 2,802,816
$ 2,831,535
See Notes to Condensed Financial Statements.
</TABLE>
- -6-
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
December 31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 84,584
$ 66,703
Accounts payable 103,068
133,152
Accrued taxes 16,287
27,361
Accrued interest 15,583
5,448
Accrued payroll and vacations 53,140
37,068
Accrued dividends 19,551
51,374
Reserve for rate refunds 123,591
117,660
Accrued restructuring costs and other 89,777
105,692
Total current liabilities 505,581
544,458
LONG-TERM DEBT 673,255
673,346
DEFERRED CREDITS AND RESERVES, primarily
deferred income taxes, investment tax
credits and restructuring costs 590,594
588,610
PREFERRED STOCK, subject to
mandatory redemption 10,330
10,330
SHAREHOLDERS' EQUITY:
Preferred stock 7,600
7,600
Common stock 645,000
645,000
Reinvested earnings 370,456
362,191
Total shareholders' equity 1,023,056
1,014,791
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,802,816
$ 2,831,535
See Notes to Condensed Financial Statements.
</TABLE>
- -7-
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three
Months Ended
March
31,
1995
1994
(Thousands of
Dollars)
<S> <C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,877
$ 27,114
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 71,290
63,966
Deferred income taxes and investment
tax credits 6,293
2,043
Provision for uncollectible accounts 6,024
3,669
Changes in current assets and current
liabilities (15,973)
2,423
Other - net 8,751
(9,268)
Net cash from operating activities 104,262
89,947
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (57,788)
(64,287)
Cash used in investing activities (57,788)
(64,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (169)
(50)
Dividends paid to shareholders (51,436)
(325)
Net change in affiliate notes --
(39,201)
Increase in short-term debt 17,949
23,700
Net cash used in financing activities (33,656)
(15,876)
Increase in cash 12,818
9,784
Cash at beginning of period 9,333
2,888
Cash at end of period $ 22,151
$ 12,672
See Notes to Condensed Financial Statements.
</TABLE>
- -8-
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 1994 Annual Report on Form 10-
K.
(2) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1995
presentation.
- -9-
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
first quarter
of 1995.
- -10-
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: May 11, 1995 WILLIAM M. EDWARDS,
III
WILLIAM M. EDWARDS,
III
Controller
(Chief Accounting
Officer)
- -11-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 22,151
<SECURITIES> 0
<RECEIVABLES> 192,610
<ALLOWANCES> 18,922
<INVENTORY> 20,733
<CURRENT-ASSETS> 269,995
<PP&E> 4,021,930
<DEPRECIATION> 1,556,993
<TOTAL-ASSETS> 2,802,816
<CURRENT-LIABILITIES> 505,581
<BONDS> 673,255
<COMMON> 645,000
10,330
7,600
<OTHER-SE> 370,456
<TOTAL-LIABILITY-AND-EQUITY> 2,802,816
<SALES> 301,577
<TOTAL-REVENUES> 301,577
<CGS> 79,115
<TOTAL-COSTS> 245,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,424
<INCOME-PRETAX> 42,243
<INCOME-TAX> 14,366
<INCOME-CONTINUING> 27,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,877
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
