<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1996
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 formal 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 6,500,000 shares of $100 stated value common stock outstanding
at April 30, 1996. 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
March 31,
------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $144,372 $123,334
Network access services 151,286 136,577
Toll services 46,638 55,904
Other services and sales 55,928 43,589
-------- --------
Total revenues and sales 398,224 359,404
-------- --------
Operating costs and expenses:
Cost of services and sales 143,937 143,263
Selling, general and administrative 57,504 54,362
Depreciation and amortization 81,375 83,274
-------- --------
Total operating costs and expenses 282,816 280,899
-------- --------
Operating income 115,408 78,505
Interest - net 13,609 16,930
-------- --------
Income before income taxes 101,799 61,575
Income taxes 33,479 21,001
-------- --------
Net income $ 68,320 $ 40,574
======== ========
</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
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Net income $68.3 $40.6
</TABLE>
Net income increased 68% or $27.7 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to higher
revenues and sales, partially offset by a slight increase in operating costs
and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Local services $144.4 $123.3
Network access services 151.3 136.6
Toll services 46.6 55.9
Other services and sales 55.9 43.6
------ ------
Total revenues and sales $398.2 $359.4
</TABLE>
Total revenues and sales increased 11% or $38.8 for the three months ended
March 31, 1996, compared to the same period in 1995.
Local service revenues increased 17% or $21.1 for the three months ended March
31, 1996, compared to the same period in 1995. The number of switched access
lines increased 5% for the three months ended March 31, 1996, which generated
$3.6 of additional revenues. The increase also reflects a $3.4 increase in sales
of CentraNet(R) and custom calling features, such as SmartCall(R), and a
favorable impact on local service revenues of $8.7 resulting from the
discontinuance of the monthly provision related to the Company's 1989 Texas rate
case and the monthly amortization of the associated reserve previously
established. In addition to these items, the increase reflects a slight growth
in revenues associated with the continued expansion of local area calling zones.
Network access service revenues increased 11% or $14.7 for the three months
ended March 31, 1996, compared to the same period in 1995. Minutes of use
increased 10% for the three months ended March 31, 1996, which generated $7.8
of additional revenues. The increase also reflects $2 of higher end user access
charge revenues associated with access line growth, a $4.7 increase in private
line revenues and a favorable impact on network access service revenues of $2.9
resulting from the discontinuance of the monthly provision related to the
Company's 1989 Texas rate case and the monthly amortization of the associated
reserve previously established.
Toll service revenues decreased 17% or $9.3 for the three months ended March 31,
1996, compared to the same period in 1995. The decrease is primarily due to an
$8 decrease in revenues resulting from lower toll volumes, of which $5.8 relates
to 10XXX intraLATA toll competition. The decrease also reflects a slight decline
in toll revenues due to the expansion of local area calling zones.
2
<PAGE> 4
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other services and sales revenues increased 28% or $12.3 for the three months
ended March 31, 1996, compared to the same period in 1995. The increase is
primarily due to $3 of additional equipment sales, $5.5 growth in Tele-Go(R)
personal phone service revenues and $3.1 of additional 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.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Total operating costs and expenses $282.8 $280.9
</TABLE>
Total operating costs and expenses increased less than 1% or $1.9 for the three
months ended March 31, 1996, compared to the same period in 1995. The increase
is primarily due to purchases of digital network software of $3.6, an increase
in contractor charges of $2.4 and $2.3 of investments in the Infrastructure Fund
Assessment for the provision of broadband facilities to schools, libraries and
hospitals. The increase also reflects $1.3 of additional access charges incurred
by the Company to terminate its customers' intraLATA toll calls outside of the
Company's service territory. These increases are partially offset by lower labor
and benefit costs of $4.4 associated with ongoing cost-reduction programs from
process re-engineering activities and settlement gains of $3.3 recorded in the
first quarter of 1996 which resulted from lump-sum payments from the Company's
pension plans.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Interest - net $13.6 $16.9
Income taxes 33.5 21.0
</TABLE>
Interest - net decreased 20% or $3.3 for the three months ended March 31, 1996,
compared to the same period in 1995, which reflects lower interest rates
associated with the high-coupon refinancing program initiated during the fourth
quarter of 1995. The decrease also reflects an increase in interest income
which corresponds to the change in affiliate note receivable.
Income taxes increased 60% or $12.5 for the three months ended March 31, 1996,
compared to the same period in 1995, primarily due to a corresponding increase
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 March 31,
1996, 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.
3
<PAGE> 5
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's primary source of funds during the first three months of 1996 was
cash from operations of $138.2 compared to $110 for the same period in 1995.
The year-to-year increase in cash from operations reflects improved results
from operations and a decrease in working capital requirements. Cash from
operations is also being utilized to fund the Company's re-engineering plan.
The Company's capital expenditures during the first three months of 1996 were
$87 compared to $66.9 for the same period in 1995. The 1996 expenditures
reflect the Company's continued access line growth and modernization of current
facilities and introduction of new products and services, including broadband
digital services and switched digital services. The Company anticipates capital
expenditures for 1996 to increase slightly from the 1995 level, reflecting the
continued modernization of facilities and anticipated growth.
Cash used in financing activities was $42.1 during the first three months of
1996 compared to $31 for the same period in 1995. Financing activities included
dividend payments of $0.3 in the first three months of 1996 compared to $61.4
for the same period in 1995. Short-term financing, including the net change in
affiliate notes, decreased $189.5 for the first three months of 1996, compared
to an increase of $40.4 for the same period in 1995. In January 1996, the
Company issued $150 of 6% debentures to refinance $105.8 of commercial paper.
OTHER MATTERS
In connection with the re-engineering plan, during the first three months of
1996, costs of approximately $9.9 have been incurred, including $7.7 to
re-engineer customer service processes and $2.2 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $126 have been incurred, including $90.1 to re-engineer customer
service processes and $20.1 to re-engineer administrative processes. The
restructuring costs also include $15.8 to consolidate facilities and operations
and other related costs. These expenditures were primarily associated with the
closure and relocation of various service centers, software enhancements and
separation benefits associated with employee reductions. Implementation of the
re-engineering plan is expected to be substantially completed by the end of
1996. As of March 31, 1996, $73 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 5.3% to 4.0% for its Oklahoma tariff
entity. Overall, the proposed rates result in a $5.1 price reduction, effective
July 1, 1996. The Company anticipates the FCC will issue an order prior to the
effective date, which may require changes to the Company's annual filing.
On March 7, 1996, the Oklahoma Communications Commission approved a
comprehensive set of rules designed to implement competition according to the
provisions of the Telecommunications Act of 1996 (the Telecommunications Act).
These rules outline the certification process for new entrants and substantially
mirror the interconnection requirements of the Telecommunications Act.
Subsequently, AT&T has filed for certification to provide local telephone
service in Oklahoma and is expected to receive approval in June, 1996.
4
<PAGE> 6
GTE Southwest Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 26,827 $ 17,825
Receivables, less allowances of $22,579 and $21,182 248,718 274,838
Notes receivable from affiliate 51,010 3,000
Inventories and supplies 22,463 20,452
Deferred income tax benefits 27,643 32,033
Prepaid taxes and other 19,865 45,630
----------- -----------
Total current assets 396,526 393,778
----------- -----------
Property, plant and equipment, at cost 4,911,443 4,854,212
Accumulated depreciation (2,943,429) (2,887,706)
----------- -----------
Total property, plant and equipment, net 1,968,014 1,966,506
----------- -----------
Other assets, primarily employee benefit plans 101,599 86,276
----------- -----------
Total assets $ 2,466,139 $ 2,446,560
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 15,332 $ 49,862
Accounts payable 102,923 145,518
Taxes payable 26,870 36,940
Accrued interest 18,156 6,657
Accrued payroll costs 44,031 46,038
Dividends payable 198 198
Accrued restructuring costs 73,018 82,872
Other 118,207 121,078
----------- -----------
Total current liabilities 398,735 489,163
----------- -----------
Non-current liabilities:
Long-term debt 868,434 827,082
Deferred income taxes 172,875 178,003
Employee benefit plans 156,307 145,799
Other liabilities 79,644 84,404
----------- -----------
Total non-current liabilities 1,277,260 1,235,288
----------- -----------
Preferred stock, subject to mandatory redemption 8,390 8,390
----------- -----------
Shareholders' equity:
Preferred stock 7,600 7,600
Common stock (6,500,000 shares issued) 650,000 650,000
Additional paid-in capital 48,751 48,751
Retained earnings 75,403 7,368
----------- -----------
Total shareholders' equity 781,754 713,719
----------- -----------
Total liabilities and shareholders' equity $ 2,466,139 $ 2,446,560
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
5
<PAGE> 7
GTE Southwest Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 68,320 $ 40,574
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 81,375 83,274
Deferred income taxes (738) 6,445
Provision for uncollectible accounts 8,323 7,841
Changes in current assets and current liabilities (16,012) (35,205)
Other - net (3,112) 7,041
--------- ---------
Net cash from operations 138,156 109,970
--------- ---------
Investing:
Capital expenditures (87,044) (66,858)
--------- ---------
Cash used in investing (87,044) (66,858)
--------- ---------
Financing:
Long-term debt issued 147,884 --
Long-term debt retired (250) (9,913)
Dividends (285) (61,436)
Net change in affiliate notes (83,659) 20,974
Increase (decrease) in short-term obligations, excluding
current maturities (105,800) 19,412
--------- ---------
Net cash used in financing (42,110) (30,963)
--------- ---------
Increase in cash and temporary investments 9,002 12,149
Cash and temporary investments:
Beginning of period 17,825 10,462
--------- ---------
End of period $ 26,827 $ 22,611
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
6
<PAGE> 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 period. These condensed financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's 1995 Annual Report on Form 10- K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
7
<PAGE> 9
GTE Southwest Incorporated
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
12 Statement re: Calculation of the Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the first quarter of
1996.
8
<PAGE> 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, thereunto duly authorized.
GTE Southwest Incorporated
------------------------------
(Registrant)
Date: May 14, 1996 William M. Edwards, III
-------------- ------------------------------
William M. Edwards, III
Controller
(Principal Accounting Officer)
9
<PAGE> 11
EXHIBIT INDEX
Exhibit
Number Description
------- -----------------------------------------------------
12 Statement re: Calculation of the Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
GTE Southwest Incorporated
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 68,320
Add - Income taxes 33,479
- Fixed charges 16,586
--------
Adjusted earnings $118,385
========
Fixed charges:
Interest expense $ 15,255
Portion of rent expense
representing interest 1,331
--------
Adjusted fixed charges $ 16,586
========
RATIO OF EARNINGS TO FIXED CHARGES 7.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 26,827
<SECURITIES> 0
<RECEIVABLES> 271,297
<ALLOWANCES> 22,579
<INVENTORY> 22,463
<CURRENT-ASSETS> 396,526
<PP&E> 4,911,443
<DEPRECIATION> 2,943,429
<TOTAL-ASSETS> 2,466,139
<CURRENT-LIABILITIES> 398,735
<BONDS> 868,434
<COMMON> 650,000
8,390
7,600
<OTHER-SE> 124,154
<TOTAL-LIABILITY-AND-EQUITY> 2,466,139
<SALES> 398,224
<TOTAL-REVENUES> 398,224
<CGS> 143,937
<TOTAL-COSTS> 282,816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,609
<INCOME-PRETAX> 101,799
<INCOME-TAX> 33,479
<INCOME-CONTINUING> 68,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,320
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
