<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 quarterly period ended March 31, 1997
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 972-718-5600
(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 6,500,000 shares of $100 stated value common stock outstanding
at April 30, 1997. 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,
-------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
REVENUES AND SALES
Local services $ 160,854 $ 144,372
Network access services 158,421 151,286
Toll services 40,624 46,638
Other services and sales 57,805 50,138
----------- -----------
Total revenues and sales 417,704 392,434
----------- -----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 129,012 142,078
Selling, general and administrative 50,451 53,729
Depreciation and amortization 93,054 81,219
----------- -----------
Total operating costs and expenses 272,517 277,026
----------- -----------
OPERATING INCOME 145,187 115,408
Interest - net 14,504 13,609
----------- -----------
INCOME BEFORE INCOME TAXES 130,683 101,799
Income taxes 44,254 33,479
----------- -----------
NET INCOME $ 86,429 $ 68,320
=========== ===========
</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,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income $ 86.4 $ 68.3
</TABLE>
Net income increased 27% or $18.1 for the three months ended March 31, 1997,
compared to the same period in 1996. This increase is primarily due to higher
revenues and sales and lower operating costs, partially offset by an increase
in depreciation expense and income taxes.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Local services $ 160.9 $ 144.4
Network access services 158.4 151.3
Toll services 40.6 46.6
Other services and sales 57.8 50.1
---------- ----------
Total revenues and sales $ 417.7 $ 392.4
</TABLE>
Total revenues and sales increased 6% or $25.3 for the three months ended March
31, 1997, compared to the same period in 1996.
Local service revenues increased 11% or $16.5 for the three months ended March
31, 1997, compared to the same period in 1996. The number of access lines
increased 6% for the three months ended March 31, 1997, which generated $4.9 of
additional revenues. The increase also reflects a $2.7 increase in revenues from
CentraNet(R) services and a $5.8 increase in revenues from custom calling
features, such as SmartCall(R) and CLASS services, driven primarily by caller ID
growth and the introduction of pay-per-use services such as automatic call
return/busy redial. In addition to these items, the increase reflects a $2.9
growth in revenues associated with the continued expansion of local area calling
zones in Texas.
Network access service revenues increased 5% or $7.1 for the three months ended
March 31, 1997, compared to the same period in 1996. Minutes of use increased
6.5% for the three months ended March 31, 1997, which generated $5.8 of
additional revenues. The increase also reflects $1.4 of higher end user access
charge revenues associated with access line growth and a $2.2 increase in
special access revenues reflecting growth in dedicated lines. These increases
are partially offset by a $2.3 decline in interstate revenues associated with
the Federal Communications Commission's (FCC's) 1995 and 1996 price caps.
Toll service revenues decreased 13% or $6 for the three months ended March 31,
1997, compared to the same period in 1996. The decrease is primarily due to a
$5 decline in revenues from transitional support payments, received through the
end of 1996, resulting from the Company's exit from the Texas state intraLATA
(local access transport area) toll pool in 1994. The decrease is also due to
lower toll volumes, primarily a result of intraLATA toll competition and 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 15% or $7.7 for the three months
ended March 31, 1997, compared to the same period in 1996. The increase is
primarily due to $2.5 of higher equipment sales and a $1 growth in sales of
paging and voice messaging services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Total operating costs and expenses $ 272.5 $ 277.0
</TABLE>
Total operating costs and expenses decreased 2% or $4.5 for the three months
ended March 31, 1997, compared to the same period in 1996. The decrease is
primarily due to a $13.7 settlement gain recorded in the first quarter of 1997,
which is offset by a $3.3 settlement gain recorded for the same period in 1996,
both of which resulted from lump sum payments from the Company's pension plans.
The decrease is also the result of a decline of $4 in employee benefit costs.
These decreases are partially offset by an $11.8 increase in depreciation
expense associated with additions to plant balances.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Income taxes $ 44.3 $ 33.5
</TABLE>
Income taxes increased 32% or $10.8 for the three months ended March 31, 1997,
compared to the same period in 1996, primarily due to a corresponding increase
in pre-tax income.
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 financings can be obtained through
borrowings from GTE or GTE Funding Incorporated, an affiliate of the Company.
On July 1, 1996, the Company began participating with other affiliates in a
$1,500 syndicated line of credit. The Company has an existing shelf
registration statement outstanding for an additional $150 of debentures.
The Company's primary source of funds during the first three months of 1997 was
cash from operations of $190.8 compared to $138.2 for the same period in 1996.
The year-to-year increase in cash from operations reflects a decrease in
working capital requirements and improved results from operations.
3
<PAGE> 5
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's capital expenditures during the first three months of 1997 were
$80.6 compared to $87 for the same period in 1996. The 1997 expenditures
reflect the Company's continued access line growth and modernization of current
facilities to support new products and expanded services. The Company
anticipates capital expenditures to increase for the remainder of 1997 compared
to 1996, reflecting the continued expansion of existing networks, upgrades
associated with the support of expanded services and compliance with the local
number portability requirements of the Telecommunications Act of 1996 (the
Telecommunications Act).
Cash used in financing activities was $92.2 during the first three months of
1997 compared to $42.1 for the same period in 1996. Financing activities
included dividend payments of $49.8 in the first three months of 1997 compared
to $0.3 for the same period in 1996. Short-term financing, including the net
change in affiliate notes, decreased $42.4 for the first three months of 1997,
compared to a decrease of $189.5 for the same period in 1996. In January 1996,
the Company issued $150 of 6% debentures to refinance $105.8 of commercial
paper.
OTHER MATTERS
On May 7, 1997, in accordance with the Telecommunications Act, the FCC
announced its decisions concerning price caps, access charge reform and
universal service. The text of the universal service order was released on May
8, 1997. The FCC price cap and access reform orders are expected to
be released by May 20, 1997. GTE is currently assessing the effect of these
recent decisions.
The Company is continuing to negotiate with requesting carriers over the terms
of interconnection, unbundled network elements and resale rates. In some
cases, the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions. Since December 1996, state commission decisions determining the
prices and terms of unresolved issues have been released in Texas, Oklahoma and
New Mexico. Subsequent decisions are expected to be issued throughout 1997.
On December 12, 1996, the Public Utility Commission of Texas (TPUC) issued its
decision in the Company's arbitration with AT&T and MCI to determine
interconnection, resale and unbundling terms and conditions. The interim
discount rate for the Company's resold services was set at 22.99%. The
Company must file revised cost studies by June 2, 1997. Interim rates were
ordered and negotiated permanent rates must be established by September 15,
1997. The Company filed a lawsuit in the U.S. District Court challenging
portions of the TPUC's arbitration determinations. On March 13, 1997, the case
was dismissed without prejudice, and the Company refiled its lawsuit on March
27, 1997, after the MCI contract was approved by the TPUC on March 26, 1997.
On January 2, 1997, the New Mexico Corporation Commission (NMCC) issued an
order on Western Wireless' petition for arbitration. In this order, the
Company was required to set wholesale local switching rates at incremental cost
plus a 15% general services allocator. On February 18, 1997, the Company filed
a Complaint for Declaratory and Injunctive Relief in the U.S. District Court
challenging portions of the NMCC's arbitration order including the wholesale
rate calculation.
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications services, including the
acquisition of BBN Corporation, a leading provider of end-to-end Internet
solutions. In addition, GTE announced a strategic alliance with Cisco Systems,
Inc. to jointly develop enhanced data and Internet services for customers; and,
the purchase of a national, state-of-the-art fiber-optic network from Qwest
Communications.
4
<PAGE> 6
GTE Southwest Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,151 $ 23,134
Receivables, less allowances of $25,950 and $23,633 325,899 312,047
Notes receivable from affiliate 39,043 79,727
Inventories and supplies 24,612 20,310
Deferred income tax benefits 10,665 12,684
Prepaid taxes and other 21,214 11,940
----------- -----------
Total current assets 462,584 459,842
----------- -----------
Property, plant and equipment, at cost 5,097,195 5,043,830
Accumulated depreciation (3,164,991) (3,058,086)
----------- -----------
Total property, plant and equipment, net 1,932,204 1,985,744
----------- -----------
Employee benefits and other assets 141,246 123,270
----------- -----------
Total assets $ 2,536,034 $ 2,568,856
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 26,577 $ 1,669
Accounts payable 128,343 168,125
Taxes payable 27,126 35,059
Accrued interest 18,102 10,785
Accrued payroll costs 42,454 43,732
Dividends payable 75,172 49,752
Other 127,016 137,507
----------- -----------
Total current liabilities 444,790 446,629
----------- -----------
Long-term debt 841,937 866,894
Deferred income taxes 154,459 169,383
Employee benefit plans 198,392 192,362
Other liabilities 46,336 54,687
----------- -----------
Total liabilities 1,685,914 1,729,955
----------- -----------
Preferred stock, subject to mandatory redemption 6,450 6,450
----------- -----------
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 137,319 126,100
----------- -----------
Total shareholders' equity 843,670 832,451
----------- -----------
Total liabilities and shareholders' equity $ 2,536,034 $ 2,568,856
=========== ===========
</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,
----------------------
1997 1996
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 86,429 $ 68,320
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 93,054 81,375
Deferred income taxes 1,459 (738)
Provision for uncollectible accounts 7,534 8,323
Changes in current assets and current liabilities 23,666 (16,012)
Other - net (21,316) (3,112)
--------- ---------
Net cash from operations 190,826 138,156
--------- ---------
INVESTING
Capital expenditures (80,571) (87,044)
--------- ---------
Cash used in investing (80,571) (87,044)
--------- ---------
FINANCING
Long-term debt issued -- 147,884
Long-term debt retired (95) (250)
Dividends (49,790) (285)
Net change in affiliate notes (42,353) (83,659)
Decrease in short-term obligations, excluding current maturities -- (105,800)
--------- ---------
Net cash used in financing (92,238) (42,110)
Increase in cash and cash equivalents 18,017 9,002
Cash and cash equivalents:
Beginning of period 23,134 17,825
--------- ---------
End of period $ 41,151 $ 26,827
========= =========
</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 1996 Annual Report on Form 10- K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1997 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
1997.
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 15, 1997 William M. Edwards, III
------------------------------ ------------------------------
William M. Edwards, III
Vice President - 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,
1997
----------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 86,429
Add - Income taxes 44,254
- Fixed charges 16,254
----------
Adjusted earnings $ 146,937
==========
Fixed charges:
Interest expense $ 14,991
Portion of rent expense
representing interest 1,263
----------
Adjusted fixed charges $ 16,254
==========
RATIO OF EARNINGS TO FIXED CHARGES 9.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 41,151
<SECURITIES> 0
<RECEIVABLES> 390,892
<ALLOWANCES> 25,950
<INVENTORY> 24,612
<CURRENT-ASSETS> 462,584
<PP&E> 5,097,195
<DEPRECIATION> 3,164,991
<TOTAL-ASSETS> 2,536,034
<CURRENT-LIABILITIES> 444,790
<BONDS> 835,121
6,450
7,600
<COMMON> 650,000
<OTHER-SE> 186,070
<TOTAL-LIABILITY-AND-EQUITY> 2,536,034
<SALES> 417,704
<TOTAL-REVENUES> 417,704
<CGS> 129,012
<TOTAL-COSTS> 272,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,504
<INCOME-PRETAX> 130,683
<INCOME-TAX> 44,254
<INCOME-CONTINUING> 86,429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,429
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
