<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 June 30, 1998
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 75038
Irving, Texas
(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 July 31, 1998. 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 Six Months Ended
June 30, June 30,
--------------------- -----------------------
1998 1997 1998 1997
-------- -------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $179,484 $154,633 $ 353,683 $313,364
Network access services 183,794 171,443 349,836 329,864
Toll services 22,001 35,533 46,773 76,157
Other services and sales 68,905 49,733 127,890 109,661
-------- -------- --------- --------
Total revenues and sales 454,184 411,342 878,182 829,046
-------- -------- --------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 168,168 144,352 329,835 273,364
Selling, general and administrative 77,016 64,550 144,567 115,001
Depreciation and amortization 90,978 91,108 183,506 184,162
-------- -------- --------- --------
Total operating costs and expenses 336,162 300,010 657,908 572,527
-------- -------- --------- --------
OPERATING INCOME 118,022 111,332 220,274 256,519
OTHER EXPENSE
Interest - net 17,573 13,119 34,128 27,623
Other - net 3 -- 3 --
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 100,446 98,213 186,143 228,896
Income taxes 34,241 33,412 63,899 77,666
-------- -------- --------- --------
INCOME BEFORE EXTRAORDINARY CHARGE 66,205 64,801 122,244 151,230
Extraordinary charge -- -- (462) --
-------- -------- --------- --------
NET INCOME $ 66,205 $ 64,801 $ 121,782 $151,230
======== ======== ========= ========
</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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 66.2 $ 64.8 $ 121.8 $ 151.2
</TABLE>
Net income for the six months ended June 30, 1998 included an after-tax
extraordinary charge of $0.5. Excluding this charge, net income grew by 2% or
$1.4 during the three months ended June 30, 1998, compared to the same period in
1997, and year-to-date net income declined 19% or $29 below the first six months
of 1997. Second quarter net income increased primarily due to growth in revenues
from local services, network access services, and other services and sales,
partially offset by lower toll service revenues and higher operating costs and
expenses. Year-to-date net income decreased due to higher operating costs and
expenses, partially offset by an increase in revenues.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Local services $ 179.5 $ 154.6 $ 353.7 $ 313.4
Network access services 183.8 171.5 349.8 329.8
Toll services 22.0 35.5 46.8 76.1
Other services and sales 68.9 49.7 127.9 109.7
------- ------- ------- -------
Total revenues and sales $ 454.2 $ 411.3 $ 878.2 $ 829.0
</TABLE>
Total revenues and sales increased 10% or $42.9 and 6% or $49.2 for the three
and six months ended June 30, 1998, respectively, compared to the same periods
in 1997.
Local service revenues increased 16% or $24.9 and 13% or $40.3 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. Growth in access lines of 6% during both the three months ended June 30,
1998, and on a year-to-date basis, generated additional revenues of $2.8 and
$6.8 from basic local services, and $5.7 and $7.8 from CentraNet(R) services
compared to the same periods for 1997, respectively. Growth in revenues from
enhanced services, such as caller ID, automatic call return/redial and other
SmartCall(R) and CLASS services, contributed $6.6 and $9.8, respectively, for
the three and six month periods ended June 30, 1998, as compared to the same
periods in 1997. Additionally, amortization of the reserve previously
established for potential refunds related to the 1989 Texas rate case resulted
in increases for the three and six month periods of $3.8 and $7.6, respectively.
2
<PAGE> 4
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Network access service revenues grew 7% or $12.3 and 6% or $20 for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. A 10% increase in minutes of use for both the three and six months ended
June 30, 1998 generated additional access revenues of $10.6 and $20.7,
respectively. Special access revenues, driven by growing demand for increased
bandwidth by Internet Service Providers (ISPs) and other high capacity users,
increased by $6.9 and $12.7 for the three and six month periods, respectively.
Offsetting these increases were decreases of $7.3 and $14.6 for the three and
six month periods, respectively, resulting from the impact of interstate access
rate reductions from the 1997 Federal Communications Commission (FCC) price cap.
Toll service revenues decreased 38% or $13.5 and 39% or $29.3 for the three and
six months ended June 30, 1998, compared to the same periods in 1997. These
decreases were primarily due to a decline in domestic toll volumes, resulting
from the effects of intraLATA (local access transport area) toll competition,
including 10XXX and 1+ presubscription.
Other services and sales revenues increased 39% or $19.2 and 17% or $18.2 for
the three and six months ended June 30, 1998 compared to the same periods in
1997. For the three month and six month periods ended June 30, 1998, revenues
increased by $1.9 and $3.3 resulting from the FCC's order increasing payphone
compensation from interexchange carriers, and $2.5 and $3.5 in billing and
collection services, respectively. Additionally, for both the three and six
month periods ended June 30, 1998, compared to the same periods in 1997, voice
messaging increased $1.1, database 800 services increased $3.6 and Tele-Go(R)
revenue grew by $2.6.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cost of services and sales $ 168.2 $ 144.4 $ 329.8 $ 273.4
Selling, general and administrative 77.0 64.5 144.6 115.0
Depreciation and amortization 91.0 91.1 183.5 184.1
------- ------- ------- -------
Total operating costs and expenses $ 336.2 $ 300.0 $ 657.9 $ 572.5
</TABLE>
Total operating costs and expenses increased 12% or $36.2 and 15% or $85.4 for
the three and six month periods ended June 30, 1998, respectively, compared to
the same periods in 1997. These increases were due in part to increases in
switch software right-to-use fees of $9.6 and $13.2, and increases in operating
taxes of $8.6 and $6.8, respectively. Selling and marketing expenses increased
$5.4 and $10.3 as a result of continued efforts to stimulate sales of enhanced
services and in response to the increasingly competitive environment. Labor and
benefit costs increased $4.7 and $21.6 for the three and six months ended June
30, 1998, respectively, compared to the same periods in 1997, to support access
line
3
<PAGE> 5
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
growth and customer demand for products and services. Customer care expenses
increased $3.6 and $16.7 for the three and six month periods as a result of
growth in access lines and expansion of daily operating hours of the customer
care centers.
OTHER EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest - net $ 17.6 $ 13.1 $ 34.1 $ 27.6
Income taxes 34.2 33.4 63.9 77.7
Extraordinary charge -- -- 0.5 --
</TABLE>
Interest-net increased 34% or $4.5 for the three months and 24% or $6.5 for the
six months ended June 30, 1998, compared to the same periods in 1997. These
increases were primarily due to higher average short-term debt levels.
Income taxes increased 2% or $0.8 in the second quarter of 1998 and decreased
18% or $13.8 during the six months ended June 30, 1998, compared to the same
periods in 1997. The second quarter increase was primarily due to an increase
in pre-tax income. The year-to-date decrease was primarily due to a decrease in
pre-tax income partially offset by other tax adjustments.
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.5, reflecting premiums paid on the redemption of
high-coupon debt prior to stated maturity.
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. The Company participates with other affiliates in a $1,500, 364-day
syndicated line of credit.
The Company's principal source of funds during the first six months of 1998 was
cash from operations of $260.4 compared to $229.8 for the same period in 1997.
The year-to-year increase in cash from operations primarily reflects a decrease
in working capital requirements, partially offset by a decline in results from
operations.
The Company's capital expenditures during the first six months of 1998 were
$248.3 compared to $209.4 for the same period in 1997. The 1998 expenditures
4
<PAGE> 6
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
reflect the Company's continued access line growth and the modernization of
current facilities to mitigate Internet congestion. Although the capital
expenditures during the first six months of 1998 were higher than the same
period in 1997, the overall anticipated capital expenditures for 1998 are
expected to be comparable to the total capital expenditures incurred during
1997.
Net cash used in financing activities was $6.6 during the first half of 1998
compared to $19.2 for the same period in 1997. This included dividend payments
of $80.3 in the first six months of 1998 compared to $125 for the same period in
1997. Short-term financings, including the net change in affiliate notes,
decreased $30.3 compared to an increase of $136.2 for the same period in 1997.
In January 1998, the Company issued $150 of 6.23% debentures to repay short-term
borrowings incurred to finance the Company's construction program and for
general corporate purposes. Additionally, during the first six months of 1998,
the Company paid a total of $42.3 for the retirement of debt and preferred stock
compared to $30.3 for the same period in 1997. Additionally, the Company
recognized an interest rate hedge loss of approximately $2.6 on the settlement
of forward contracts related to the January 1998 debt issuances. The loss is
being amortized over the life of the associated refinanced debt.
In its April 2, 1998 filing on Form 8-K, GTE stated that because the MCI
shareholders had accepted a competing offer, GTE's offer for MCI was no longer
outstanding. As a result, the Company and GTE were removed from "Credit Watch"
by all rating agencies. The Company believes that its present investment grade
credit rating provides ready access to the capital markets at reasonable rates
and provides the Company with the financial flexibility necessary to pursue
growth opportunities as they arise.
OTHER MATTERS
Federal Regulatory Developments
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price reduction of $25.5. On December 1, 1997, the FCC issued an order to file
revised access rates effective January 1, 1998, which resulted in additional
interstate access charge reductions of $3.1 annually. In 1997, the FCC also
ordered significant changes that altered the structure of access charges
collected by the Company, effective January 1, 1998. Generally, the FCC reduced
and restructured the per minute charges paid by long distance carriers and
implemented new per line charges. The FCC also created an access charge
structure that resulted in different access charges for residential primary and
secondary lines and single line and multi-line business access lines. In
5
<PAGE> 7
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
aggregate, the annual reductions in usage sensitive access charges of $10.8
paid by long distance carriers were offset by $10.8 of new per line charges
and the charges paid by end-users. Effective July 1, 1998, access charges
were further reduced by $25.8 annually in compliance with FCC requirements
to restate the impacts of access charge reform.
In May 1997, the FCC released a major decision relating to implementation of the
Telecommunications Act's provision on universal service. GTE and numerous
other parties have challenged the FCC's decision before the U.S. Court of
Appeals for the Fifth Circuit on the grounds that the FCC did not follow the
requirements of the Telecommunications Act to develop a sufficient, explicit and
competitively neutral universal service program. Oral argument is not expected
until mid-September 1998 at the earliest, with a final decision to be issued by
mid-1999.
On March 9, 1998, the FCC adopted a Memorandum Opinion and Order (MO&O)
clarifying the payphone-specific coding digit requirements set forth in the
previous payphone orders and granting limited waivers of the requirement that
local exchange carriers (LECs) provide payphone-specific coding digits to
payphone service providers (PSPs), and that PSPs provide payphone-specific
coding digits from their payphones to interexchange carriers (IXCs), before PSPs
can receive per-call compensation from IXCs for subscriber 800 and access code
calls. GTE was granted waivers through 1998 in this order for Flex-ANI (Flexible
Automatic Number Identification) implementation due to technical problems
associated with switch conversions.
On April 3, 1998, the FCC issued another MO&O which granted the IXCs a waiver of
the per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted technology
waivers. GTE will receive per-phone compensation under this waiver until the
Flex-ANI capable offices are activated. Qualifying payphone calls from Flex-ANI
switches will then be eligible for per-call compensation rather than per-phone.
In a related court case between MCI and the FCC, the U.S. Court of Appeals,
District of Columbia Circuit, upheld the fundamental premise underlying the
FCC's approach to setting the per-call compensation rate for uncompensated
payphone calls, thereby supporting the ordered per-call compensation rate noted
in the March 9th order. At the same time, however, the Court held that the FCC
had failed to clearly explain its methodology on the development of that same
per-call compensation rate. The Court remanded this portion back to the FCC.
6
<PAGE> 8
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
State Regulatory Developments
A lawsuit was filed previously against the Company for allegedly violating the
Texas Debt Collection Practices Act (the Act) by failing to include a "street
address" on the Company's disconnection notices. The Company's disconnection
notices provide a post office box for remittance of payment and a toll-free
number for inquiries, but do not provide a physical street address. On September
1, 1995, an amendment to the Act became effective which provides that a post
office box, street address or telephone number on delinquency notices meets the
requirements of the Act. The Court granted the Company's motion to defer the
case to the Texas Public Utilities Commission (TPUC); however, the plaintiff's
counsel challenged the constitutionality of the legislative amendment.
On June 10, 1998, the case was dismissed.
RECENT DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies in a merger of equals
transaction. Under terms of the definitive agreement, which was unanimously
approved by the board of directors of both companies, GTE shareholders will
receive 1.22 shares of Bell Atlantic stock for each GTE share they own. The
merger is expected to be accounted for as a pooling of interests, is subject to
shareholder and regulatory approval, and is expected to be completed during the
second half of 1999. For additional information regarding the merger, refer to
the Form 8-K filed by GTE dated July 27, 1998.
In April 1998, GTE announced a series of actions designed to further sharpen
its strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs. GTE expects to generate after-tax
proceeds of $2,000 to $3,000 by selling non-strategic or under-performing
operations and plans to reduce annual costs by more that $500 through improved
efficiencies and productivity while it continues to invest in new high-growth
opportunities. The impact of this announcement on the Company is unknown at
this time. GTE's management is currently assessing its options, and as
decisions are finalized regarding the sale of non-strategic operations and cost
reductions, the Company could be affected.
7
<PAGE> 9
GTE Southwest Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,725 $ 24,282
Receivables, less allowances of $22,812 and $21,203 364,311 359,879
Inventories and supplies 29,358 24,032
Prepaid insurance 14,662 1,587
Prepaid taxes and other 19,552 58,379
----------- -----------
Total current assets 457,608 468,159
----------- -----------
Property, plant and equipment, at cost 5,639,199 5,418,247
Accumulated depreciation (3,462,025) (3,317,186)
----------- -----------
Total property, plant and equipment, net 2,177,174 2,101,061
----------- -----------
Prepaid pension costs and other assets 186,556 162,995
----------- -----------
Total assets $ 2,821,338 $ 2,732,215
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 8 $ 313
Notes payable to affiliates 173,189 42,826
Accounts payable 153,005 204,648
Taxes payable 39,792 37,027
Accrued interest 13,645 10,103
Accrued payroll costs 40,934 33,252
Dividends payable 56,763 45,458
Other 123,743 106,267
----------- -----------
Total current liabilities 601,079 479,894
----------- -----------
Long-term debt 942,740 984,955
Deferred income taxes 181,361 174,745
Employee pension plans and other liabilities 213,417 238,556
----------- -----------
Total liabilities 1,938,597 1,878,150
----------- -----------
Preferred stock, subject to mandatory redemption -- 1,510
----------- -----------
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 176,390 146,204
----------- -----------
Total shareholders' equity 882,741 852,555
----------- -----------
Total liabilities and shareholders' equity $ 2,821,338 $ 2,732,215
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
8
<PAGE> 10
GTE Southwest Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Income before extraordinary charge $ 122,244 $ 151,230
Adjustments to reconcile income before extraordinary charge to net cash
from operations:
Depreciation and amortization 183,506 184,162
Deferred income taxes 11,535 2,925
Provision for uncollectible accounts 19,124 15,290
Changes in current assets and current liabilities (32,082) (125,789)
Other - net (43,964) 1,961
--------- ---------
Net cash from operations 260,363 229,779
--------- ---------
INVESTING
Capital expenditures (248,299) (209,439)
--------- ---------
Net cash used in investing (248,299) (209,439)
--------- ---------
FINANCING
Long-term debt issued 148,868 --
Long-term debt and preferred stock retired,
including premiums paid on early retirement (42,318) (30,336)
Dividends (80,253) (125,000)
Increase (decrease) in short-term obligations, excluding
current maturities (30,282) 136,150
Other - net (2,636) --
--------- ---------
Net cash used in financing (6,621) (19,186)
--------- ---------
Increase in cash and cash equivalents 5,443 1,154
Cash and cash equivalents:
Beginning of period 24,282 23,134
--------- ---------
End of period $ 29,725 $ 24,288
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
9
<PAGE> 11
GTE Southwest Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
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 (SEC). 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 1997 Annual Report on Form
10-K.
Reclassifications of prior year data have been made, where appropriate,
to conform to the 1998 presentation.
(2) EXTRAORDINARY CHARGE:
During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.5 million, reflecting premiums paid on the
redemption of high-coupon debt prior to stated maturity.
(3) DEBT:
In January 1998, the Company issued $150 million of 6.23% Series D
Debentures, due 2007. The net proceeds were applied toward the
repayment of short-term borrowings incurred for the purpose of
financing the Company's construction program and for general corporate
purposes.
(4) RECENT ACCOUNTING PRONOUNCEMENTS:
Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 defines internal-use software and establishes accounting
standards for the costs of such software. The Company is currently
assessing the impact of adopting SOP 98-1, and intends to implement as
of January 1, 1999.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
10
<PAGE> 12
GTE Southwest Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Instruments and Hedging Activities"(FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. The Company has not yet assessed the impact
of adopting FAS 133.
11
<PAGE> 13
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 second quarter of
1998.
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: August 14, 1998 /s/ Stephen L. Shore
--------------------- ------------------------------------
Stephen L. Shore
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>
Six Months Ended
June 30, 1998
----------------
<S> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $ 122,244
Add - Income taxes 63,899
- Fixed charges 40,874
------------
Adjusted earnings $ 227,017
============
Fixed charges:
Interest expense $ 36,292
Portion of rent expense
representing interest 4,582
------------
Adjusted fixed charges $ 40,874
============
RATIO OF EARNINGS TO FIXED CHARGES 5.55
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,725
<SECURITIES> 0
<RECEIVABLES> 387,123
<ALLOWANCES> 22,812
<INVENTORY> 29,358
<CURRENT-ASSETS> 457,608
<PP&E> 5,639,199
<DEPRECIATION> 3,462,025
<TOTAL-ASSETS> 2,821,338
<CURRENT-LIABILITIES> 601,079
<BONDS> 942,740
0
7,600
<COMMON> 650,000
<OTHER-SE> 225,141
<TOTAL-LIABILITY-AND-EQUITY> 2,821,338
<SALES> 878,182
<TOTAL-REVENUES> 878,182
<CGS> 329,835
<TOTAL-COSTS> 657,908
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,292
<INCOME-PRETAX> 186,143
<INCOME-TAX> 63,899
<INCOME-CONTINUING> 122,244
<DISCONTINUED> 0
<EXTRAORDINARY> 462
<CHANGES> 0
<NET-INCOME> 121,782
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
