<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 September 30, 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 October 31, 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------------
1997 1996 1997 1996
-------- -------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $167,412 $143,864 $ 480,776 $ 426,143
Network access services 168,389 160,377 498,253 467,188
Toll services 37,169 46,722 113,326 139,576
Other services and sales 72,605 59,724 182,266 173,546
-------- -------- ---------- -----------
Total revenues and sales 445,575 410,687 1,274,621 1,206,453
-------- -------- ---------- -----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 149,768 154,925 423,132 435,082
Selling, general and administrative 66,669 67,958 181,670 198,622
Depreciation and amortization 93,010 87,035 277,172 254,240
-------- -------- ---------- -----------
Total operating costs and expenses 309,447 309,918 881,974 887,944
-------- -------- ---------- -----------
OPERATING INCOME 136,128 100,769 392,647 318,509
OTHER (INCOME) EXPENSE
Interest - net 15,711 13,465 43,334 40,244
Gain on disposition of assets -- -- -- (4,322)
-------- -------- ---------- -----------
INCOME BEFORE INCOME TAXES 120,417 87,304 349,313 282,587
Income taxes 41,051 28,217 118,717 93,098
-------- -------- ---------- -----------
NET INCOME $ 79,366 $ 59,087 $ 230,596 $ 189,489
======== ======== ========== ===========
</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,
------------------------ --------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 79.4 $ 59.1 $ 230.6 $ 189.5
</TABLE>
Net income grew 34% or $20.3 in the third quarter of 1997 and 22% or $41.1 for
the nine months ended September 30, 1997, respectively, compared to the same
periods in 1996. These increases are largely the result of strong growth in
revenues from local and network access services combined with a slight decrease
in operating costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Local services $ 167.4 $ 143.9 $ 480.8 $ 426.2
Network access services 168.4 160.4 498.2 467.2
Toll services 37.2 46.7 113.3 139.6
Other services and sales 72.6 59.7 182.3 173.5
---------- ---------- ---------- -----------
Total revenues and sales $ 445.6 $ 410.7 $ 1,274.6 $ 1,206.5
</TABLE>
Total revenues and sales increased 9% or $34.9 and 6% or $68.1 for the three and
nine months ended September 30, 1997, respectively, compared to the same periods
in 1996.
Local service revenues increased 16% or $23.5 and 13% or $54.6 for the three and
nine months ended September 30, 1997, respectively, compared to the same periods
in 1996. These increases were driven primarily by continued access line growth
and demand for custom calling features and other enhanced services. Access lines
increased 7% in both periods, which generated additional revenues of $4.1 in the
third quarter and $12.7 year-to-date. Growth in SmartCall(R) and CLASS services,
driven primarily by the popularity of Caller ID and pay-per-use services such as
auto call return/redial, contributed $5.6 and $13.7 to the third quarter and
year-to-date increases, respectively. Combined revenues from CentraNet(R)
services, Integrated Services Digital Network (ISDN), and Digital Channel
Services (DCS) grew by $5.2 in the third quarter and $13.8 through the first
nine months of 1997. The Expanded Local Calling (ELC) surcharge in Texas, which
is discussed in Other Matters, produced increases of $2.4 and $8.2 for the three
and nine month periods, respectively.
Network access service revenues increased 5% or $8 and 7% or $31 for the three
and nine months ended September 30, 1997, respectively, compared to the same
periods in 1996. This growth is largely due to increased demand for access
services by interexchange carriers and growing demand for increased bandwidth
services. Minutes of use increased 10% in the third quarter and 9% year-to-date,
which resulted in higher revenues of $9.2 and $22.4, respectively. Special
access revenues grew $4.5 and $10.5 for the three and nine month periods,
respectively, due to greater demand for increased bandwidth services by Internet
Service Providers (ISPs) and other high-capacity users. These increases are
partially offset by a $7.5 decline in revenues associated with interstate rate
changes related to the Federal Communications Commission's (FCC) 1996 and 1997
price caps. The year-to-date increase also includes a $6.9 increase in revenues
from meet-point billing arrangements, offset by an $8.5 decline in payments
2
<PAGE> 4
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
received from the National Exchange Carrier Association (NECA).
Toll service revenues declined 20% or $9.5 and 19% or $26.3 for the three and
nine months ended September 30, 1997, respectively, compared to the same periods
in 1996. The decreases are largely driven by revenue reductions of $7.5 and $20
in the third quarter and year-to-date, respectively, resulting from the
termination, at the end of 1996, of transitional support payments originating
from the Company's exit from the Texas intraLATA (local access transport area)
toll pool. The results also reflect lower toll revenues resulting from intraLATA
toll competition, including 10XXX and 1+ presubscription, and the impact of
optional discount calling plans, which effectively lowered intrastate long
distance rates.
Other services and sales increased 22% or $12.9 and 5% or $8.8 for the three and
nine months ended September 30, 1997, respectively, compared to the same periods
in 1996. The third quarter variance reflects an $11.9 increase in directory
advertising revenues resulting from the timing of publications. Factors
contributing to the year-to-date increase include $3.5 of higher revenues from
voice messaging, paging, and TeleGo(R) services and a $2.4 increase in billing
and collection services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Total operating costs and expenses $ 309.4 $ 309.9 $ 882.0 $ 887.9
</TABLE>
Total operating costs and expenses remained essentially unchanged in the third
quarter of 1997 and decreased 1% or $5.9 year-to-date, compared to the same
periods in 1996.
The third quarter results reflect decreases in expenses associated with a $15.8
reserve recorded in the third quarter of 1996 for right-of-way settlement costs
in Texas, lower operating taxes of $7.5, and administrative productivity gains
of $3.5. These decreases were partially offset by $7.2 in higher labor and
benefits costs required to support access line growth and customer demand for
products and services and increased right-to-use fees of $6.9. Increased selling
and marketing efforts, aimed at stimulating sales of enhanced services and
preserving market share in an increasingly competitive environment, resulted in
higher selling expenses of $4.2. The three month results also reflect an
increase in depreciation expense of $6 associated with additions to plant.
The slight decline in total operating costs and expenses for the nine month
period ended September 30, 1997 reflect the $15.8 reserve for right-of-way
settlement costs in Texas, mentioned above, lower operating taxes of $15.1, and
administrative productivity gains of $12.8. The results also reflect pension
settlement gains of $16.8 recorded during the first nine months of 1997
resulting from lump-sum payments from the Company's benefit plans, partially
offset by pension settlement gains of $3.3 recorded in first quarter of 1996,
and higher uncollectibles expense of $4.3. These decreases were partially offset
by $11.1 in higher labor and benefits costs required to support access line
growth and customer demand for products and services and increased right-to-use
fees of $8.5. Increased selling and marketing efforts, aimed at stimulating
sales of enhanced services and preserving market share in an increasingly
competitive environment, resulted in higher selling expenses of $14.8. In
addition, year-to-date depreciation expense increased $22.9 as a result of
additions to plant and the impact of prospective rate changes reflecting revised
salvage values.
3
<PAGE> 5
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest - net $ 15.7 $ 13.5 $ 43.3 $ 40.2
Gain on disposition of assets -- -- -- (4.3)
Income taxes 41.1 28.2 118.7 93.1
</TABLE>
Interest - net increased 16% or $2.2 and 8% or $3.1 for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996, primarily due to higher average short-term debt levels.
In the second quarter of 1996, the Company recorded $4.3 of pre-tax gains on the
sale of sixteen telephone exchanges in Texas (representing 6,196 access lines).
Income taxes increased 46% or $12.9 and 27% or $25.6 for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996, primarily due to corresponding increases 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 the Company's parent, 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's primary source of funds during the first nine months of 1997 was
cash from operations of $360.6 compared to $360.9 for the same period in 1996.
Cash from operations remained essentially unchanged from the same period a year
ago as improved results from operations were offset by increased working capital
requirements.
The Company's capital expenditures during the first nine months of 1997 were
$361.1 compared to $265.1 for the same period in 1996. The 1997 expenditures
reflect the Company's continued growth in primary and secondary access lines and
the modernization of interoffice facilities to mitigate Internet congestion. 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).
For the nine months ended September 30, 1996, proceeds totaling $12.3 were
received from the sale of sixteen telephone exchanges in Texas (representing
6,196 access lines) and certain other fixed assets. The Company recorded a
pre-tax gain of $4.3 from this sale.
Cash used in financing activities was $6.6 during the first nine months of 1997
compared to $107.9 for the same period in 1996. Dividend payments totaled $204.4
in the first nine months of 1997 compared to $29.5 in 1996. Short-term
financings, including the net change in affiliate notes, increased $236.3
compared to a decrease of $214.7 in 1996. In January 1996, the Company issued
$150 of 6% debentures to refinance $105.8 of commercial paper.
4
<PAGE> 6
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On October 15, 1997, the Company's parent, GTE, proposed a merger with MCI
Communications Corporation (MCI) valued at approximately $28 billion. As a
result of the proposed merger, the rating agencies have placed GTE, the Company
and its affiliates on "Credit Watch" for possible rating reductions. On November
10, 1997, MCI announced that it had reached an agreement to merge with WorldCom,
Inc. (WorldCom).
OTHER MATTERS
Federal Regulatory Developments
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the FCC's rules
purporting to implement the local competition provisions of the
Telecommunications Act of 1996 (the Telecommunications Act). The Company's
parent, GTE, together with other incumbent local-exchange carriers (ILECs) and a
number of state commissions, had challenged various portions of the FCC rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements (UNEs) and services for resale. In
addition, the Eighth Circuit made a number of other rulings favorable to GTE,
including that the FCC's rule allowing requesting carriers to pick and choose
among individual provisions of other interconnection agreements, rather than to
adopt the terms and conditions of a single agreement in its entirety, was
unlawful; that the FCC does not have the authority to review interconnection
agreements approved by state commissions or to enforce the terms of such
agreements; that the FCC rule requiring ILECs to provide interconnection and
UNEs at levels of quality that are superior to those levels at which the ILECs
provide them to themselves was unlawful; and that it is the requesting carriers,
not the ILECs, that must combine UNEs.
In addition, the Eighth Circuit rejected certain arguments advanced by GTE. For
example, it ruled that a requesting carrier may gain access to all of the UNEs
that, when combined by the requesting carrier, are sufficient to enable the
requesting carrier to provide a finished service, and it upheld most of the
standards applied by the FCC in determining which network elements an ILEC must
make available.
In October 1997, the Eighth Circuit, granting a petition for rehearing filed by
GTE and others, further ruled that the Telecommunications Act "does not permit a
new entrant to purchase the ILEC's assembled platform(s) of combined network
elements (or any lesser existing combination of two or more elements) in order
to offer competitive telecommunications services." The FCC has announced plans
to seek Supreme Court review of the Eighth Circuit's rulings; it has until
January 12, 1998 to file a petition for certiorari.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE has filed petitions for review of these FCC orders with the U.S.
Court of Appeals for the Tenth Circuit. GTE anticipates that those petitions
will be decided in 1998.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5%. The order also eliminated the
sharing requirements of the price cap rules. In June 1997, in accordance with
the order, the Company submitted its 1997 annual price cap filing. The 1997
interstate access filing resulted in an annual price reduction of $51.2,
effective July 1, 1997. Prior to this order, the Company had submitted a rate
change filing in May 1997, as the Company's access rates were priced
significantly below the FCC's maximum allowable price. This rate change filing
resulted in an annual price increase of $24.6, effective June 3, 1997. Overall,
the net effect of these access filings resulted in an annual price reduction of
$25.5.
5
<PAGE> 7
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On June 4, 1996, the FCC issued the first Report and Order implementing Section
276 of the Telecommunications Act. As part of the overall goal of promoting
competition among payphone service providers (PSPs), this order mandated
compensation to all PSPs for all calls originating from payphones, including
"dial-around" access calls and toll-free subscriber calls for which PSPs were
not previously compensated. This compensation was to occur in two separate
phases. During phase one, from April 15, 1997 through October 6, 1997, PSPs were
to be paid a monthly, flat-rate compensation from interexchange carriers (IXCs).
During phase two, beginning October 7, 1997, PSPs were to be compensated on a
per-call basis, with the prevailing local coin rate of 35 cents established as
the default rate.
On July 19, 1997, the U.S. Court of Appeals in Washington, D.C. vacated the
FCC's directive concerning per-call compensation, stating that the FCC had not
shown that the 35 cent rate was a reasonable surrogate for fair compensation.
The court also set aside the FCC's flat-rate compensation mandate. Subsequently,
on October 9, 1997, the FCC issued a second Report and Order to address those
issues vacated by the court. In this second order, the FCC established a new
per-call rate of 28.4 cents for phase two compensation. The FCC also tentatively
concluded that this per-call rate should also be used to calculate phase one
compensation obligations. It is likely, however, that the entire phase one
compensation directive will be revisited in a subsequent order.
In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs 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 the remainder of 1997 and 1998.
The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors. The Company has filed lawsuits in
federal district courts in New Mexico, Oklahoma, and Texas. In certain
instances, these complaints have been dismissed without prejudice on the grounds
that they were filed before the arbitrated agreements had received final
approval from the state commissions. In such cases, the Company is refiling
complaints after final approval has occurred.
Additionally, the Company has made appropriate filings with the states and
Federal District Courts requesting that the Eighth Circuit's favorable rulings
be taken into consideration in connection with any future arbitration rulings or
complaint actions.
Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. Cost studies have been filed in Texas, and
additional studies are expected to be filed during the remainder of 1997 and
throughout 1998.
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
have begun in Arkansas, Oklahoma and Texas and decisions are expected to take
place throughout the remainder of 1997 and the first quarter of 1998. Separate
USF proceedings to address discount rates for intrastate telecommunication
services to elementary schools, secondary schools and public libraries have also
begun in Texas and Arkansas, and decisions are expected in these proceedings by
the end of the first quarter of 1998.
6
<PAGE> 8
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
State Regulatory Developments
Oklahoma
On March 7, 1996, the Oklahoma Corporation Commission (OCC) approved a
comprehensive set of rules designed to implement competition according to the
provisions of the Telecommunications Act. These rules outline the certification
process for new entrants and substantially mirror the interconnection
requirements of the Telecommunications Act. Subsequently, in May 1996, AT&T
received approval for certification to provide local telephone service in
Oklahoma. On December 12, 1996, the OCC issued its decision in the Company's
arbitration with AT&T to determine interconnection, resale, and unbundling terms
and conditions. The interim discount rate for the Company's resold services was
set at 16.1%. Interim rates based on the FCC proxy rates will be used for
interconnection and UNE's until permanent discounts are established upon further
investigation into cost methodology, which is expected to take place in the
first quarter of 1998. The Company has filed a lawsuit in the U.S. District
Court challenging portions of the OCC's arbitration determinations.
Texas
On August 2, 1996, the Public Utility Commission of Texas (TPUC) approved an
interim Expanded Local Calling (ELC) surcharge of 92 cents per line to be
assessed on customers in non-ELC exchanges consistent with the Public Utility
Regulatory Act (PURA). The Company began billing the interim rate on September
16, 1996. On November 21, 1996, the Company filed a Stipulation and Settlement
Agreement. A final order, approved in February 1997, stipulated a surcharge of
73 cents per line which will generate approximately $11.6 annually. The
difference in the interim surcharge and the stipulated surcharge was refunded to
the ratepayers in April 1997.
On December 12, 1996, the 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 filed revised cost studies on June 10, 1997. Interim
rates were ordered and negotiated permanent rates are expected to be established
during the second quarter of 1998. 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 to refiling because
approval of an arbitrated agreement had not been received from the TPUC. The
Company refiled its lawsuit in the MCI arbitration determinations on March 27,
1997 after the MCI contract was approved by the TPUC on March 26, 1997. The AT&T
contract was approved on May 21, 1997 and the Company refiled its lawsuit in
this arbitration on the same day.
On February 10, 1997, the TPUC ordered implementation of intraLATA 1+
pre-subscription which allows customers to choose their primary carrier for
intraLATA toll calls. The Company converted all capable offices to 1+ pre-
subscription on August 6, 1997. As a result of this conversion, customers in
Texas will be able to choose the ILEC or an alternative local-exchange company
(ALEC) to carry all intraLATA toll calls when the customer dials one plus the
called number.
New Mexico
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.
7
<PAGE> 9
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other Developments
The Company has reviewed and estimated its current and planned expenditures to
become Year 2000 compliant. These costs are currently estimated to be $25.4 over
the next three years.
On October 15, 1997, the Company's parent, GTE, announced its proposal to
acquire MCI in a transaction valued at approximately $28 billion in cash or 40
dollars per share. On November 10, 1997, MCI announced that it had reached an
agreement to merge with WorldCom. GTE is continuing to monitor the situation
and may reevaluate its position depending on a number of factors, including the
relative stock performance of both WorldCom and MCI, the financial and
operating results of MCI and the ongoing status of the regulatory approval
process, as well as other pertinent information.
In May 1997, GTE announced initiatives to become a leading national provider of
telecommunications service, including the acquisition of BBN Corporation (BBN),
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. As of September
30, 1997, GTE had completed the acquisition of BBN.
8
<PAGE> 10
GTE Southwest Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------ ------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,031 $ 23,134
Receivables, less allowances of $23,144 and $23,633 417,956 312,047
Notes receivable from affiliates -- 79,727
Inventories and supplies 32,992 20,310
Deferred income tax benefits 2,339 12,684
Prepaid taxes and other 10,551 11,940
------------------ ------------------
Total current assets 479,869 459,842
------------------ ------------------
Property, plant and equipment, at cost 5,320,702 5,043,830
Accumulated depreciation (3,289,436) (3,058,086)
------------------ ------------------
Total property, plant and equipment, net 2,031,266 1,985,744
------------------ ------------------
Employee benefit plans 137,956 105,276
Other assets 16,802 17,994
------------------ ------------------
Total assets $ 2,665,893 $ 2,568,856
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 308 $ 1,669
Notes payable to affiliates 169,672 --
Accounts payable 149,029 168,125
Taxes payable 37,832 35,059
Accrued interest 19,048 10,785
Accrued payroll costs 39,235 43,732
Dividends payable 67,809 49,752
Other 123,646 137,507
------------------ ------------------
Total current liabilities 606,579 446,629
------------------ ------------------
Long-term debt 834,913 866,894
Deferred income taxes 139,016 169,383
Employee benefit plans 209,377 192,362
Other liabilities 34,037 54,687
------------------ ------------------
Total liabilities 1,823,922 1,729,955
------------------ ------------------
Preferred stock, subject to mandatory redemption 1,510 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 134,110 126,100
------------------ ------------------
Total shareholders' equity 840,461 832,451
------------------ ------------------
Total liabilities and shareholders' equity $ 2,665,893 $ 2,568,856
================== ==================
</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,
-----------------------------------------
1997 1996
------------------ ------------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 230,596 $ 189,489
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 277,172 254,240
Deferred income taxes (5,657) 11,144
Gain on disposition of assets -- (4,322)
Provision for uncollectible accounts 23,101 27,428
Change in current assets and current liabilities (153,637) (116,457)
Other - net (10,930) (635)
------------------ ------------------
Net cash from operations 360,645 360,887
------------------ ------------------
INVESTING
Capital expenditures (361,106) (265,079)
Proceeds from disposition of assets -- 12,344
------------------ ------------------
Net cash used in investing (361,106) (252,735)
------------------ ------------------
FINANCING
Long-term debt issued -- 147,884
Long-term debt and preferred stock retired, including premiums paid
on early retirement (38,518) (11,596)
Dividends (204,439) (29,508)
Net change in affiliate notes 236,315 (108,895)
Decrease in short-term obligations, excluding current maturities -- (105,800)
------------------ ------------------
Net cash used in financing (6,642) (107,915)
------------------ ------------------
Increase (decrease) in cash and cash equivalents (7,103) 237
Cash and cash equivalents:
Beginning of period 23,134 17,825
------------------ ------------------
End of period $ 16,031 $ 18,062
================== ==================
</TABLE>
See Notes to Condensed Financial Statements.
10
<PAGE> 12
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) In the second quarter of 1996, the Company sold sixteen telephone exchanges
in the state of Texas (representing 6,196 access lines) to various parties
for $11 million in cash. A pre-tax gain of $4.3 million was recorded on the
sale.
(3) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1997 presentation.
11
<PAGE> 13
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 third quarter of
1997.
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, thereunto duly authorized.
GTE Southwest Incorporated
---------------------------------------
(Registrant)
Date: November 14, 1997 William M. Edwards, III
-------------------- ---------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------ ----------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE Southwest Incorporated
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
---------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 230,596
Add - Income taxes 118,717
- Fixed charges 49,334
---------------------
Adjusted earnings $ 398,647
=====================
Fixed charges:
Interest expense $ 46,046
Portion of rent expense
representing interest 3,288
---------------------
Adjusted fixed charges $ 49,334
=====================
RATIO OF EARNINGS TO FIXED CHARGES 8.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,031
<SECURITIES> 0
<RECEIVABLES> 441,100
<ALLOWANCES> 23,144
<INVENTORY> 32,992
<CURRENT-ASSETS> 479,869
<PP&E> 5,320,702
<DEPRECIATION> 3,289,436
<TOTAL-ASSETS> 2,665,893
<CURRENT-LIABILITIES> 606,579
<BONDS> 834,913
1,510
7,600
<COMMON> 650,000
<OTHER-SE> 182,861
<TOTAL-LIABILITY-AND-EQUITY> 2,665,893
<SALES> 1,274,621
<TOTAL-REVENUES> 1,274,621
<CGS> 423,132
<TOTAL-COSTS> 881,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,334
<INCOME-PRETAX> 349,313
<INCOME-TAX> 118,717
<INCOME-CONTINUING> 230,596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,596
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
