UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange
Act of 1934 [Fee Required}
For the fiscal year ended December 31, 1993
--------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934 [Fee Required]
For the transition period from _________________________ to _________________
Commission File Number 2-33059
------------------------------------------------------
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
- -----------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0049500
- ---------------------------------------------- --------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1177 Bishop Street, Honolulu, Hawaii 96813
- ---------------------------------------------- --------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 808-546-4511
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH WAS REGISTERED
- ------------------------------------- -----------------------------------
NONE
- ------------------------------------- -----------------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(TITLE OF CLASS)
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE,
IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
___
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 10,000,000 SHARES OF $25 PAR VALUE COMMON STOCK
OUTSTANDING AT FEBRUARY 28, 1994.
DOCUMENT INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31,
1993 (INCORPORATED IN PARTS I AND II).
THE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT.
<PAGE>
TABLE OF CONTENTS
Item Page
- ----- -----
PART I
1. Business 1
2. Properties 3
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
8. Financial Statements and Supplementary Data 5
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
The following items have been omitted in accordance with the
relief provisions under General Instruction J of Form 10-K:
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and
Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 6
<PAGE>
PART I
Item 1. Business
GTE Hawaiian Telephone Company Incorporated (the Company) (formerly
Hawaiian Telephone Company) was incorporated under the laws of the Kingdom of
Hawaii in 1883. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE) and provides communications services in Hawaii and
throughout the Pacific and Asia.
The Company owns a majority interest in the Micronesian
Telecommunications Corporation (MTC). MTC, which is headquartered
on Saipan in the Commonwealth of the Northern Marianas, provides local
and international telecommunications services on the islands of Saipan, Tinian
and Rota. In addition, the Company has a wholly-owned subsidiary, Hawaiian Tel
Insurance Company, which provides auto liability, general liability and
workers' compensation insurance to the Company on a direct basis.
The Company provides local telephone service on each Island in Hawaii and
long distance service between the Islands. InterLATA services between Hawaii
and domestic points within the United States are provided by interexchange
(long distance) common carriers which connect to the Company's local
facilities for call origination and termination. The Company provides
interLATA service between Hawaii and international termination points in
competition with these carriers. These common carriers are charged fees
(access charges) for interconnection to the Company's local facilities.
End user business and residential customers are also charged access charges
for access to the facilities of the long distance carriers. The Company also
earns other revenues by leasing interexchange plant facilities and
interexchange carriers, primarily the American Telephone and Telegraph
Company (AT&T). The number of access lines served by the Company has grown
steadily from 525,808 on January 1, 1989 to 725,029 on December 31, 1993.
The Company's principal line of business is providing
telecommunication services. These services fall into five major classes:
local network, network access, long distance, equipment sales and services
and other. Revenues from each of these classes over the last three years
are as follows:
Years Ended December 31
---------------------------------------
1993 1992 1991
---- ---- ----
(Thousands of Dollars)
Local Network Services $214,627 $ 203,908 $ 194,973
% of Total Revenues 38% 37% 36%
Network Access Services $112,712 $ 107,347 $ 102,304
% of Total Revenues 20% 19% 19%
Long Distance Services $106,867 $ 111,254 $ 106,721
% of Total Revenues 19% 20% 20%
Equipment Sales and Services $ 95,653 $ 101,948 $ 106,430
% of Total Revenues 17% 18% 19%
Other $ 35,030 $ 34,565 $ 35,482
% of Total Revenues 6% 6% 6%
At December 31, 1993, the Company had 3,320 employees. The Company has
written agreements with the International Brotherhood of Electrical Workers
(IBEW) covering substantially all non-management employees. One of the
agreements with the IBEW unit expires April 30, 1994 and provides for
approximately a 5% general wage increase per annum. The agreement for MTC
employees expires July 1, 1995 and provides for general wage increases of 5%
per annum for 1994 and 1995.
Telephone Competition
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the Public Utilities Commission
(PUC) of the State of Hawaii as to its intrastate business operations and
by the Federal Communications Commission (FCC) as to its interstate and
international business operations. Information regarding the Company's
activities with the various regulatory agencies and revenue arrangements with
other telephone companies can be found in Note 9 of the Company's Annual
Report to Shareholder for the year ended December 31, 1993, incorporated herein
and filed as Exhibit 13.
The year was marked by important changes in the U.S.
telecommunications industry. Rapid advances in technology, together with
government and industry initiatives to eliminate certain legal and
regulatory barriers are accelerating and expanding the level of competition
and opportunities available to the Company. As a result, the Company
faces increasing competition in virtually all aspects of its
business. Specialized communications companies have constructed new systems in
certain markets to bypass the local-exchange network. Additional
competition from interexchange carriers as well as wireless companies
continues to evolve for both intrastate and interstate communications.
During 1994, the Company will begin implementation of a re-engineering
plan that will redesign and streamline processes. Implementation of its
re-engineering plan will allow the Company to continue to respond
aggressively to these competitive and regulatory developments through reduced
costs, improved service quality, competitive prices and new product offerings.
Moreover, implementation of this program will position the Company to
accelerate delivery of a full array of voice, video and data services.
The re-engineering program will be implemented over three years. During the
year, the Company continued to introduce new business and consumer services
utilizing advanced technology, offering new features and pricing options while
at the same time reducing costs and prices.
During 1993, the FCC announced its decision to auction licenses during 1994
in 51 major markets and 492 basic trading areas across the United States to
encourage the development of a new generation of wireless personal
communications services (PCS). These services will both complement and
compete with the Company's traditional wireline services. The Company
will be permitted to fully participate in the license auctions in areas
outside of GTE's existing cellular service areas. Limited participation
will be permitted in areas in which GTE has an existing cellular presence.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets the Company serves.
The GTE Consent Decree, which was issued in connection with the 1983
acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's
domestic telephone operating subsidiaries from providing long distance
service beyond the boundaries of the LATA. However, the Company is
permitted to provide services between Hawaii and international points.
This prohibition restricts their direct provision of long distance service
to relatively short distances. The degree of competition allowed in the
intraLATA market is subject to state regulation. However, regulatory
constraints on intraLATA competition are gradually being relaxed.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992.
The order encourages competition for the transport of telecommunications
traffic between local exchange carriers' (LECs) switching offices and
interexchange carrier locations. In addition, the order allows LECs
flexibility in pricing competitive services.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks.
The Company supports these initiatives to assure greater competition
in telecommunications, provided that overall the changes allow an
opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
Item 2. Properties
The Company's property consists of network facilities (75%), company
facilities (14%), customer premises equipment (2%) and other (9%). From
January 1, 1989 to December 31, 1993, the Company made gross property
additions of $0.7 billion and property retirements of $0.3 billion.
Substantially all of the Company's property is subject to liens securing
long-term debt. In the opinion of management, the Company's telephone plant
is substantially in good repair.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company,
which would have a material impact on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
Item 6. Selected Financial Data
Reference is made to the Registrant's Annual Report to Shareholder,
page 27, for the year ended December 31, 1993, incorporated herein and
filed as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the Registrant's Annual Report to Shareholder,
pages 23 to 26, for the year ended December 31, 1993, incorporated herein
and filed as Exhibit 13.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Registrant's Annual Report to Shareholder,
pages 5 to 21, for the year ended December 31, 1993, incorporated herein and
filed as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements - Reference is made to the Registrant's
Annual Report to Shareholder, pages 5 - 21, for the year ended
December 31, 1993, incorporated herein and filed as Exhibit 13.
Report of Independent Public Accountants.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income for the years ended December 31,
1993-1991.
Consolidated Statements of Reinvested Earnings for the years ended
December 31, 1993-1991.
Consolidated Statements of Cash Flows for the years ended December
31, 1993-1991.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules - Included in Part IV of this report
for the years ended December 31, 1993-1991:
Page(s)
-------
Report of Independent Public Accountants 8
Schedules:
V - Property, Plant and Equipment 9-11
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment 12
VIII - Valuation and Qualifying Accounts 13
X - Supplementary Income Statement Information 14
Note: Schedules other than those listed above are omitted as
not applicable, not required, or the information is
included in the financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
3.1* Amended Articles of Incorporation and By-laws (Exhibit 3.2
of the 1987 Form 10-K, File No. 2-33059).
4* First Mortgage Indenture dated January 15, 1941 amended to
and including amendments through September 27, 1962;
Supplemental Indenture File No. 33-57416.
13 Annual Report to Shareholder for the year ended December 31,
1993, filed herein as Exhibit 13.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1993.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Hawaiian Telephone Company Incorporated:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in GTE Hawaiian Telephone Company
Incorporated and subsidiaries' annual report to shareholder incorporated by
reference in this Form 10-K, and have issued our report thereon dated January
28, 1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the change in the method of accounting for
income taxes in 1992 as discussed in Note 1 to the consolidated financial
statements. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedules listed under Item 14 are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
<TABLE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ------------------------------ ---------- ---------- ----------- ------------ -----------
Balance at Additions Retirements Other Debits Balance at
Beginning at or Sales or (Credits) Close of
Classification of Year Cost (Note 1) (Note 2) Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT,
stated at original cost:
Land $ 10,254 $(3,408) $ -- $ (1,118) $ 5,728
Buildings 130,942 12,483 1,377 1,999 144,047
Central office equipment 689,464 81,405 15,618 231 755,482
Station apparatus 28,251 1,379 106 1,199 30,723
Cable/underground
conduit, etc. 555,668 75,745 12,678 479 619,214
Furniture and office
equipment 55,266 4,319 123 497 59,959
Vehicles and other
work equipment 40,186 3,282 2,241 2,177 43,404
Telephone plant
under construction 83,099 17,136 -- -- 100,235
Property held for
future telephone use 2,124 (1,688) -- (367) 69
Telephone plant
acquisition adjustment 33 -- -- (33) --
--------- ------- ------ ------- ---------
Total Telephone Plant 1,595,287 190,653 32,143 5,064 1,758,861
INTANGIBLES:
Organization 28 -- 33 5 -
--------- ------- ------ ------- ---------
Total Telephone Plant 1,595,315 190,653 32,176 5,069 1,758,861
NONREGULATED PLANT 65,079 1,184 50 (1,226) 64,987
--------- ------- ------ ------- ---------
Total Property,
Plant and Equipment $1,660,394 $191,837 $32,226 $ 3,843 $1,823,848
========== ======== ======= ======== ==========
- ------------
<FN>
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(2) Represents retirements not charged to reserve and transfers in
accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
------------------ ---------- ---------- ----------- ------------ -----------
Balance at Additions Retirements Other Debits Balance at
Beginning at or Sales or (Credits) Close of
Classification of Year Cost (Note 1) (Note 2) Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT,
stated at original cost:
Land $ 7,336 $ 853 $ -- $ 2,065 $ 10,254
Buildings 100,720 7,734 941 23,429 130,942
Central office equipment 623,323 69,184 9,081 6,038 689,464
Station apparatus 24,841 3,233 23 200 28,251
Cable/underground
conduit, etc. 501,176 61,316 9,239 2,415 555,668
Furniture and office
equipment 47,712 3,407 5 4,152 55,266
Vehicles and other
work equipment 33,669 3,523 636 3,630 40,186
Telephone plant
under construction 77,664 7,651 -- (2,216) 83,099
Property held for
future telephone use 2,488 (364) -- -- 2,124
Telephone plant
acquisition adjustment -- 25 -- 8 33
---------- --------- ------- ------- ----------
Total Telephone Plant 1,418,929 156,562 19,925 39,721 1,595,287
INTANGIBLES:
Organization 28 -- -- -- 28
---------- --------- ------- ------- ----------
Total Telephone Plant 1,418,957 156,562 19,925 39,721 1,595,315
NONREGULATED PLANT 152,645 1,557 58,439 (30,684) 65,079
---------- --------- ------- ------- ----------
Total Property,
Plant and Equipment $1,571,602 $158,119 $78,364 $ 9,037 $1,660,394
========== ======== ======= ======= ==========
- -------------
<FN>
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2).
(2) Represents adjustments in 1992 due to the adoption of SFAS No. 109,
and transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<PAGE>
<TABLE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
------------------ ---------- --------- ----------- ------------ -----------
Balance at Additions Retirements Other Debits Balance at
Beginning at or Sales or (Credits) Close of
Classification of Year Cost (Note 1) (Note 2) Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELEPHONE PLANT,
stated at original cost:
Land $ 8,726 $ 343 $ -- $ (1,733) $ 7,336
Buildings 104,661 12,996 741 (16,196) 100,720
Central office equipment 582,460 47,456 6,591 (2) 623,323
Station apparatus 23,520 1,327 6 -- 24,841
Station connections 94,700 -- 94,700 -- --
Cable/underground
conduit, etc. 459,024 51,084 8,932 -- 501,176
Furniture and office
equipment 45,474 5,793 12 (3,543) 47,712
Vehicles and other
work equipment 36,175 4,041 3,109 (3,438) 33,669
Telephone plant
under construction 72,950 4,831 -- (117) 77,664
Property held for
future telephone use -- 2,488 -- -- 2,488
---------- -------- -------- --------- -----------
Total Telephone Plant 1,427,690 130,359 114,091 (25,029) 1,418,929
INTANGIBLES:
Organization 33 -- -- (5) 28
---------- -------- -------- --------- -----------
Total Telephone Plant 1,427,723 130,359 114,091 (25,034) 1,418,957
NONREGULATED PLANT 126,516 7,080 5,985 25,034 152,645
---------- -------- -------- --------- -----------
Total Property,
Plant and Equipment $1,554,239 $137,439 $120,076 $ -- $1,571,602
========== ======== ======== ========= ===========
- ------------
<FN>
NOTES:
(1) All retirements or sales in Column D were charged to accumulated
depreciation (Schedule VI, Note 2). Retirements include write-off of
customer premises equipment due to deregulation by the FCC.
(2) Primarily represents prior-year adjustments to conform to the current
year presentation and transfers in accordance with FCC Docket No. 86-111.
</TABLE>
<TABLE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
------------------- ------------ ---------- ---------- ---------- ----------
Additions
Balance at Charged to Retirements Other Balance at
Beginning Income or Sales Changes Close of
Description of Year (Note 1) (Note 2) (Note 3) Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated depreciation
and amortization for
the year ended:
December 31, 1993 $607,267 $102,939 $ 32,329 $ 298 $678,175
======== ======== ======== ====== ========
December 31, 1992 $588,359 $ 95,461 $ 78,364 $1,811 $607,267
======== ======== ======== ====== ========
December 31, 1991 $610,144 $ 97,032 $119,559 $ 742 $588,359
======== ======== ======== ====== ========
- --------------
<FN>
NOTES:
(1) Reference is made to Note 1 of Notes to Financial
Statements with respect to depreciation policy: 1993 1992 1991
---------- ----------- -----------
Total as shown in Statements of Income $ 104,202 $ 97,318 $ 97,696
General office allocations (1,254) (1,149) (690)
Other (9) (708) 26
---------- ---------- ----------
Total as shown above $ 102,939 $ 95,461 $ 97,032
========== ========== ==========
(2) Represents: Retirements or sales credited to property,
plant and equipment (Schedule V) $ 32,226 $ 78,364 $ 120,076
Other 103 -- (517)
---------- ---------- ----------
Total as shown above $ 32,329 $ 78,364 $ 119,559
========== ========== ==========
(3) Represents: Salvage $ 4.856 $ 501 $ 1,645
Removal costs (4,987) (3,397) (3,920)
Other 429 4,707 3,017
---------- ---------- ----------
Total as shown above $ 298 $ 1,811 $ 742
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
---------------- ------------ ------------------------------- ---------- --------
Additions
-------------------------------
Charged Deductions
Balance at Charged to Other from Balance at
Beginning to Accounts Reserves Close of
Description of Year Income (Note 1) (Note 2) Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
for the year ended:
December 31, 1993 $ 8,368 $ 12,679 $ 22,600 $ 34,575 $ 9,072
========== ========== ========== ========== =========
December 31, 1992 $ 693 $ 19,810 $ 11,280 $ 23,415 $ 8,368
========== ========== ========== ========== =========
December 31, 1991 $ 2,571 $ 5,772 $ 2,019 $ 9,669 $ 693
========== ========== ========== ========== =========
- ----------
<FN>
NOTES:
(1) Recoveries of previously written-off amounts.
(2) Charges for purpose for which reserve was created.
Represents write-offs of receivable accounts.
</TABLE>
<PAGE>
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Thousands of Dollars)
- ---------------------------------------------------------------------------
Column A Column B
--------------- -----------------------------------------------
Item Charged to Operating Expenses
- ---------------------------------------------------------------------------
1993 1992 1991
----------- ----------- -----------
Maintenance and repairs $ 119,382 $ 113,031 $ 109,761
=========== =========== ===========
Taxes, other than payroll
And income, are as follows:
Real and personal property $ 917 $ 274 $ 335
State gross receipts 20,735 20,180 20,262
Other 4,883 6,109 6,384
Portion of above taxes charged
to plant and other accounts (2,392) (2,320) (1,544)
----------- ----------- ------------
Total $ 24,143 $ 24,243 $ 25,437
=========== =========== ============
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 HAWAIIAN TELEPHONE COMPANY INCORPORATED
-------------------------------------------
(Registrant)
LARRY J. SPARROW
Date March 21, 1994 By -------------------------------------
LARRY J. SPARROW
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
LARRY J. SPARROW Chairman of the Board, March 21, 1994
- ------------------------ Chief Executive Officer,
LARRY J. SPARROW and Director
(Principal Executive Officer)
WARREN H. HARUKI President and Director March 21, 1994
- ------------------------
WARREN H. HARUKI
GERALD K. DINSMORE Senior Vice President - Finance March 21, 1994
- ------------------------ and Planning and Director
GERALD K. DINSMORE (Principal Financial Officer)
WILLIAM M. EDWARDS Controller March 21, 1994
- ------------------------ (Principal Accounting Officer)
WILLIAM M. EDWARDS
RICHARD M. CAHILL Director March 21, 1994
- ------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 21, 1994
- ------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 21, 1994
- ------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 21, 1994
- ------------------------
THOMAS W. WHITE
Exhibit 13
ANNUAL REPORT TO SHAREHOLDER
of
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
For the year ended December 31, 1993
<PAGE>
PRESIDENT'S REPORT
- ------------------------------------------------------------------------------
As Hawaii searches for ways to improve its economy, telecommunications has
emerged as one of the state's best opportunities for diversification.
GTE Hawaiian Tel has long recognized that a state-of-the-art telecommunications
infrastructure is critical to attracting high-tech industry to Hawaii. And,
even though our revenues remained relatively flat in 1993, we made sure this
infrastructure was available by accelerating our $1.5 billion capital
improvement program to upgrade our network and improve our customer service.
A WORLD CLASS NETWORK
The Company invested over $190 million in 1993 to install advanced switching
equipment and fiber-optic cable throughout the state and internationally,
resulting in a world class network that boasts over 18,000 miles of fiber-optic
cable. This new information highway includes Synchronous Optical Network
(SONET) technology, the world standard for transmitting light signals over
fiber-optics. By July 1994, we expect to have installed an interisland fiber-
optic system linking Oahu, Maui, Kauai and the Big Island.
By the end of 1993, 74 percent of our customers were being served by digital
switching, and we are pushing ahead with our conversion program to become 100
percent digital. When compared to the largest providers in other states, Hawaii
ranks 10th in the nation for percentage of digitally switched lines, ahead of
California, New York and Illinois.
Much has been said about how Hawaii needs a technology called "Integrated
Services Digital Network," or "ISDN," which uses a single telephone line to
allow three activities simultaneously - such as voice, data and video.
GTE Hawaiian Tel's World Class Network not only offers ISDN, but it will enable
us to offer even more sophisticated network services this year, such as
Switched Multimegabit Data Service (SMDS), Frame Relay and Video Connect. We're
also prepared to roll out a cutting-edge technology called Asynchronous
Transfer Mode (ATM), which delivers a dazzling array of sophisticated services
better and faster than any other service platform available today.
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LARRY J. SPARROW WARREN H. HARUKI
Chairman of the Board President
<PAGE>
NEW INDUSTRY, NEW COMPETITION
It takes much more than a state-of-the-art network to survive in today's
marketplace, however. The telecommunications industry is undergoing rapid and
dramatic changes as industry giants line up to compete for who will build and
manage the new "Information Super Highway."
Asia and the Pacific Rim have suddenly been recognized around the world as
major new frontiers for information and communication opportunities, as has
Hawaii, and have attracted heavy investment from international
telecommunications providers. The Hawaii Public Utilities Commission has opened
a comprehensive infrastructure docket to decide how new competitors will enter
the market and be regulated in Hawaii.
GTE Hawaiian Tel has been aggressively restructuring itself so it can compete
effectively with these new market entrants.
The Company continued to streamline its operations to provide better customer
service. In addition to automating many of our service procedures, we opened a
Customer Care Center that has been able to solve repair problems while
customers are still on the line. The Company also introduced Express Dial Tone,
which allows customers moving into a new home to plug their phones in and
- -within minutes - have their service activated, a phone number assigned and
custom-calling features installed.
To further enhance our focus on service quality, we introduced a Service
Performance Guarantee last fall. This program credits a customer's telephone
bill if the Company misses a service commitment time.
Last year, GTE Hawaiian Tel made critical moves to improve its earnings. It has
been eight years since the Company increased its local telephone rates. In May,
we filed a request with the Public Utilities Commission for a rate increase
that, if approved, will enable the Company to attract capital at reasonable
rates and help us recover the substantial investment made to repair and rebuild
the network on Kauai after Hurricane Iniki. We also proposed significant
changes to our rates that will bring them closer to the cost of providing
service.
SALES PERFORMANCE
Even though GTE Hawaiian Tel has requested additional revenues to meet its
operating costs, it has continued to upgrade facilities and improve service. In
addition, the Company continued to generate healthy sales revenues from a
number of areas.
With help from the State Legislature, the Company is installing a statewide
enhanced 911 system to improve emergency response capabilities on each island.
In addition, GTE Hawaiian Tel has been involved in an extensive deployment of
CentraNet R lines throughout the state; and a contract was signed to provide
the Honolulu International Airport with its own PBX switching system.
Abroad, GTE Hawaiian Tel successfully completed the installation of a microwave
system in Taiwan and a digital switch upgrade for the U.S. Military in Japan.
The Company also won a $5.2 million contract to provide cable and satellite
services to Japan and Korea. The Company's subsidiary in Saipan, Micronesian
Telecommunications Corp., also performed well, successfully retaining a strong
share in the international long distance market and introducing an
international audiotext service in Saipan.
POSITIONING HAWAII
GTE Hawaiian Tel made great strides in 1993 toward providing Hawaii with the
best telecommunications technology available. But it did so with an eye on
Hawaii's future. Hawaii will be a major hub in what will soon be a global
information highway, and it needs the infrastructure in place to live up to
this unlimited potential.
One of the steps the Company took last year to enhance this infrastructure was
to bring a GTE SmartPark R to the Islands. We teamed with The Maui Economic
Development Board to establish the state's first SmartPark R at the Maui
Research and Technology Park, which will provide the planning, advisory
expertise and telecommunications technology needed by the park's new
Supercomputer and to help draw new businesses to the park. This is the first of
several SmartPark[R]s we plan to establish in Hawaii.
We also opened a national GTE Technology Development and Marketing Center in
Honolulu, which will create and develop new applications and integrate the
latest technology to meet specific needs for advanced services in Hawaii, the
Pacific and the mainland.
We have the network. We have the service and skilled employees to do the job.
Now it's time to take the next step. GTE Hawaiian Tel wants to partner with
business, government and regulators to continue offering the services our
customers demand. Together, we can transform Hawaii's World Class Network into
an international model for telecommunications excellence.
LARRY J. SPARROW WARREN H. HARUKI
Chairman of the Board President
<PAGE>
FOR A COPY OF THE 1993 ANNUAL REPORT OF OUR PARENT COMPANY, PLEASE WRITE TO:
GTE Corporation
One Stamford Forum
Stamford, Connecticut 06904
FOR A COPY OF THE 1993 ANNUAL FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, PLEASE WRITE TO:
GTE Telephone Operations
Financial Reporting
P.O. Box 407, MC INAAACG
Westfield, IN 46074
(317) 896-6464
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Executive Offices
1177 Bishop Street
Honolulu, Hawaii 96813
LEADERSHIP
- -----------------------------------------------------------------------------
Officers
Larry J. Sparrow
Chairman of the Board and
Chief Executive Officer
Warren H. Haruki
President
Clark Michael Crawford
Area Vice President-General Manager
Gerald K. Dinsmore
Senior Vice President-Finance and
Planning
Jorge Jackson
Area Vice President-Public Affairs
Timothy J. McCallion
Area Vice President-Regulatory and
Governmental Affairs
Robert G. McCoy
Area Vice President-Sales
Richard J. Nordman
Area Vice President-Finance
Kenneth K. Okel
Area Vice President-General Counsel
and Secretary
Ronald E. Pejsa
Area Vice President-Human Resources
Jenny M. Wong
Regional Vice President-
External Affairs
William M. Edwards, III
Controller
- -----------------------------------------------------------------------------
Board of Directors
Richard M. Cahill
Vice President-General Counsel
GTE Telephone Operations
Gerald K. Dinsmore
Senior Vice President-Finance
and Planning
GTE Telephone Operations
Michael B. Esstman
Executive Vice President-
Operations
GTE Telephone Operations
Kent B.Foster
President
GTE Telephone Operations
Warren H. Haruki
President
GTE Hawaiian Telephone Company
Incorporated
Larry J. Sparrow
Chairman of the Board and
Chief Executive Officer
GTE Hawaiian Telephone Company
Incorporated
Thomas W. White
Executive Vice President
GTE Telephone Operations
<PAGE>
FINANCIAL REPORT
- -------------------------------------------------------------------------------
Consolidated Statements of Income
Years ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Operating revenues (a):
Local network services $ 214,627 $ 203,908 $ 194,973
Network access services 112,712 107,347 102,304
Long distance services 106,867 111,254 106,721
Equipment sales and services 95,653 101,948 106,430
Other 35,030 34,565 35,482
- -------------------------------------------------------------------------------
564,889 559,022 545,910
- -------------------------------------------------------------------------------
Operating expenses (b):
Cost of sales and services 167,211 160,836 168,300
Depreciation and amortization 104,202 97,318 97,696
Marketing, selling, general and 199,203 203,486 183,704
administrative
Restructuring costs 78,275 _ _
- -------------------------------------------------------------------------------
548,891 461,640 449,700
- -------------------------------------------------------------------------------
Net operating income 15,998 97,382 96,210
- -------------------------------------------------------------------------------
Other (income) deductions:
Interest expense 31,660 29,214 33,843
Other - net (755) 350 (446)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (14,907) 67,818 62,813
- -------------------------------------------------------------------------------
Income tax expense (benefit) (9,865) 24,228 16,115
- -------------------------------------------------------------------------------
Net income (loss) $ (5,042) $ 43,590 $ 46,698
- -------------------------------------------------------------------------------
(a) Includes billings to affiliates of $38,198, $45,934 and $34,378 for the
years 1993-1991, respectively.
(b) Includes billings from affiliates of $80,624, $64,931 and $48,562 for the
years 1993-1991, respectively.
Consolidated Statements of Reinvested Earnings
- -------------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at beginning of year $ 252,135 $ 243,734 $ 235,620
Add -
Net income (loss) (5,042) 43,590 46,698
Deduct -
Cash dividends declared on common stock 29,768 35,189 38,584
- -------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 217,325 $ 252,135 $ 243,734
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Balance Sheets
December 31 1993 1992
- -------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
Current assets:
Cash $ 808 $ 4,246
Accounts receivable
Customers (including unbilled 101,319 82,844
revenues)
Affiliated companies 747 1,926
Other 26,473 26,331
Allowance for uncollectible accounts (9,072) (8,368)
Materials and supplies, at average cost 6,981 18,162
Deferred income tax benefits 14,203 3,951
Prepayments and other 10,515 1,101
- --------------------------------------------------------------------------------
151,974 130,193
- --------------------------------------------------------------------------------
Property, plant and equipment:
Original cost 1,823,848 1,660,394
Accumulated depreciation (678,175) (607,267)
- --------------------------------------------------------------------------------
1,145,673 1,053,127
- --------------------------------------------------------------------------------
Prepaid pension cost 96,209 69,503
- --------------------------------------------------------------------------------
Other assets 27,680 28,184
- --------------------------------------------------------------------------------
Total assets $1,421,536 $1,281,007
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt $ 101,909 $ 44,853
Current maturities of long-term debt 12,090 10,459
Accounts payable 27,288 27,580
Affiliate payables and accruals 22,939 18,632
Advanced billings and customer deposits 14,381 15,639
Accrued taxes 5,732 9,059
Accrued interest 7,285 4,388
Accrued payroll and vacations 19,251 15,651
Accrued dividends 5,000 _
Accrued restructuring costs and other 55,313 22,215
- --------------------------------------------------------------------------------
271,188 168,476
- --------------------------------------------------------------------------------
Long-term debt 379,901 401,475
- --------------------------------------------------------------------------------
Deferred credits:
Deferred income taxes 180,127 159,208
Deferred investment tax credits 26,773 20,065
Restructuring costs and other 54,712 28,235
- --------------------------------------------------------------------------------
261,612 207,508
- --------------------------------------------------------------------------------
Shareholder's equity:
Common stock (10,000,000 and 8,400,000
shares outstanding, respectively) 250,000 210,000
Other capital 41,510 41,413
Reinvested earnings 217,325 252,135
- --------------------------------------------------------------------------------
508,835 503,548
- --------------------------------------------------------------------------------
Total liabilities and shareholder's equity $1,421,536 $1,281,007
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
Years ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(Thousands of Dollars)
Cash flows from operating activities:
Net income (loss) $ (5,042) $ 43,590 $ 46,698
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 104,202 97,318 97,696
Restructuring costs 78,275 _ _
Deferred income taxes and investment
tax credits 4,264 6,995 4,271
Provision for uncollectible accounts 12,679 19,810 5,772
Change in current assets and current
liabilities (22,180) 13,031 (29,638)
Other - net (31,134) (35,989) (7,199)
- --------------------------------------------------------------------------------
Net cash from operating activities 141,064 144,755 117,600
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (191,837) (158,119) (137,440)
Other - net (4,396) (4,204) (3,171)
- --------------------------------------------------------------------------------
Net cash used in investing activities (196,233) (162,323) (140,611)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Common stock issued 40,000 _ 70,000
Long-term debt issued 123,466 4,883 44,388
Long-term debt retired (19,143) (74,316) (9,997)
Dividends paid to shareholder (24,648) (45,000) (39,956)
Increase (decrease) in short-term debt (67,944) 122,423 (32,047)
- --------------------------------------------------------------------------------
Net cash from financing activities 51,731 7,990 32,388
- --------------------------------------------------------------------------------
Increase (decrease) in cash (3,438) (9,578) 9,377
Cash:
Beginning of year 4,246 13,824 4,447
- --------------------------------------------------------------------------------
End of year $ 808 $ 4,246 $ 13,824
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
Notes To Consolidated Financial Statements
1. Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE Hawaiian
Telephone Company Incorporated (the Company) and subsidiaries. All significant
intercompany items have been eliminated. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
PURCHASES
Certain affiliated companies supply construction and maintenance materials,
supplies and equipment to the Company. These purchases amounted to $42.4
million, $38.9 million and $35.8 million for the years 1993-1991, respectively.
Such purchases are recorded in the accounts of the Company at cost including a
normal return realized by the affiliates.
The Company is billed for printing and other costs for the production of
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$80.6 million, $64.9 million and $48.6 million for the years 1993-1991,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method which reflects management's best
estimate.
REVENUES
The Company has an agreement with GTE Directories Corporation (100% owned by
GTE), whereby the Company provides its subscriber lists, billing and collection
and other services. Revenues from these services amounted to $38.2 million,
$45.9 million and $34.4 million for the years 1993-1991, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant
accounts. Property retirements are charged in total to the accumulated
depreciation account. No adjustment to depreciation is made at the time
properties are retired or otherwise disposed of, except in the case of
significant sales of property where profit or loss is recognized.
The Company provides for depreciation on telephone plant over the estimated
useful lives of the assets using the straight-line method, based upon rates
prescribed by the Federal Communications Commission (FCC) and the Public
Utilities Commission (PUC) of the State of Hawaii. The provisions for
depreciation and amortization were equivalent to composite annual rates of
6.2%, 6.4% and 6.6% for the years 1993-1991, respectively.
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and PUC and Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation." This
accounting recognizes the economic effects of rate regulation by recording
costs and a return on investment as such amounts are recovered through rates
authorized by regulatory authorities. The Company annually reviews the
continued applicability of SFAS No. 71 based upon the current regulatory and
competitive environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when products are delivered or services are
rendered to customers. Long-term contracts are generally accounted for using
the completed contract method based on completion of individual contract
milestones. Expected losses, if any, are charged to income currently.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company elected
to adopt this new accounting standard on the delayed recognition method and
commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense as
paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1993. SFAS No. 112 requires
employers to accrue the future cost of benefits provided to former or inactive
employees and their dependents after employment but before
retirement. Previously, the cost of these benefits was charged to expense as
paid. The impact of this change in accounting on the Company's results of
operations was immaterial.
INCOME TAXES
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
As further explained in Note 6, during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1,
1992. SFAS No. 109 changed the method by which companies account for income
taxes. Among other things, the Statement requires that deferred tax balances be
adjusted to reflect new tax rates when they are enacted into law. The impact of
this change in accounting on the Company's results of operations was
immaterial.
FINANCIAL INSTRUMENTS
The fair values of financial instruments other than long-term debt, closely
approximate their carrying value. The estimated fair value of long-term debt at
December 31, 1993 based on either reference to quoted market prices or an
option pricing model, exceeded the carrying value by approximately $27 million.
At December 31, 1992, the estimated fair value of long-term debt closely
approximated the carrying value.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
to conform to the 1993 presentation.
2. Restructuring and Merger Costs
Results for 1993 include a one-time pretax restructuring charge of $78.3
million related to the Company's re-engineering plan over the next three years.
The re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The re-
engineering plan includes $31.3 million to upgrade or replace existing customer
service and administrative systems and enhance network software, $35.4 million
for employee separation benefits associated with workforce reductions and $9.6
million primarily for the consolidation of facilities and operations and other
related costs.
In March 1991, the merger of the Company's parent, GTE, and Contel Corporation
(Contel) was consummated. GTE Telephone Operations is in the process of
integrating and restructuring the merged operations.
3. Shareholder's Equity
The authorized common stock of the Company consists of 18,000,000 shares with a
par value of $25 per share. The Company issued $40 million and $70 million in
common stock to GTE in 1993 and 1991, respectively. All outstanding shares of
common stock are held by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
Other capital includes additional paid-in capital in excess of par value and
the minority shareholders' interest in Micronesian Telecommunications
Corporation.
<PAGE>
4. Long-Term Debt
Long-term debt outstanding, exclusive of current maturities, is as follows:
December 31 1993 1992
- ------------------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds:
4-1/2% Series P, due 1994 $ _ $ 10,000
4-1/2% Series Q, due 1995 5,000 5,000
5-5/8% Series R, due 1997 16,000 16,000
6-3/4% Series S, due 1998 20,000 20,000
8-3/4% Series T, due 2000 35,000 35,000
8% Series U, due 2001 20,000 20,000
8-1/2% Series V, due 2006 35,000 35,000
9% Series AA, due 2000 75,000 75,000
6-3/4% Series BB, due 2005 (a) 125,000 _
- ------------------------------------------------------------------------------
331,000 216,000
- ------------------------------------------------------------------------------
Sinking Fund Debenture:
8% Series A, due 1994 _ 10,000
- ------------------------------------------------------------------------------
Other:
5% Rural Electrification Administration
First Mortgage Bond, due 2018 9,806 10,016
Rural Telephone Bank First Mortgage Bonds,
maturing 2010 through 2025, rates ranging
from 5.43% to 7.21% 28,919 29,075
7.5% RTB First Mortgage Bond, due 2021 3,975 4,005
GTE Leasing Corporation Financing Agreements-
maturing 1997 through 2001,
rates ranging from 8.8% to 10.32% 6,623 7,790
Other 1,712 923
Commercial paper refinanced in 1993 (a) _ 125,000
- ------------------------------------------------------------------------------
Total principal amount 382,035 402,809
- ------------------------------------------------------------------------------
Discount and premium - net (2,134) (1,334)
- ------------------------------------------------------------------------------
Total long-term debt $ 379,901 $ 401,475
- ------------------------------------------------------------------------------
(a) In 1993, the Company issued $125 million of 6-3/4% First Mortgage Bonds, due
2005 to refinance commercial paper.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures.
None of the securities shown above were held in sinking or other special funds
of the Company or pledged by the Company.
Debt discount and premium on the Company's outstanding long-term debt are
amortized over the lives of the respective issues.
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1994 are summarized below (in thousands of dollars):
------------------------------------
1994 $ 12,090
1995 7,572
1996 2,774
1997 18,639
1998 21,904
------------------------------------
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
5. Short-Term Debt
The Company finances part of its construction program through the use of
interim short-term loans, primarily commercial paper, which are generally
refinanced at a later date by issues of long-term debt or equity. Information
relating to short-term borrowings is as follows:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
During the year -
Commercial paper -
Maximum month-end balance $ 176,700 $ 145,351 $ 102,706
Average monthly balance $ 68,889 $ 103,446(a) $ 63,693
Weighted average interest rate (b) 3.14% 3.57% 6.66%
At December 31 -
Balance outstanding -
Note payable to GTE $ 3,009 $ 1,201 $ 11,800
Average interest rate 3.40% 4.32% 5.24%
Commercial paper and similar
obligations $ 98,900 $ 43,652(c) $ 35,630
Average interest rate 2.86% 3.45% 4.85%
- ------------------------------------------------------------------------------
(a) Includes $125 million of commercial paper refinanced in 1993 with 6-3/4%
First Mortgage Bonds.
(b) Calculated by dividing the annualized interest expense by the average of
the balances of the debt outstanding at the end of each month.
(c) Excludes $125 million of commercial paper refinanced in 1993 with 6-3/4%
First Mortgage Bonds, which has been included in long-term debt.
Unused lines of credit available to the Company to support outstanding
commercial paper and other short-term financing needs are $20 million. In
addition, a $2.3 billion line is available to the Company through shared lines
of credit with GTE and other affiliates. Most of these arrangements require
payment of annual commitment fees of .1% of the unused lines of credit.
<PAGE>
6. Income Taxes
The provision (benefit) for income taxes is as follows:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Current
Federal $ (6,730) $ 17,788 $ 19,891
State (7,399) (555) (8,047)
- ------------------------------------------------------------------------------
Total (14,129) 17,233 11,844
- ------------------------------------------------------------------------------
Deferred
Federal 88 3,846 (1,220)
State (2,532) 1,535 9,582
- ------------------------------------------------------------------------------
Total (2,444) 5,381 8,362
- ------------------------------------------------------------------------------
Deferred investment tax credits -
net 6,708 1,614 (4,091)
- ------------------------------------------------------------------------------
Total $ (9,865) $ 24,228 $ 16,115
- ------------------------------------------------------------------------------
The components of deferred income tax expense (benefit) are as follows:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation and amortization $ 12,236 $ (5,896) $ 6,135
Employee benefit obligations 2,084 (966) 1,098
Prepaid pension cost 7,218 5,097 3,705
Restructuring cost (29,303) _ _
Other - net 5,321 7,146 (2,576)
- ------------------------------------------------------------------------------
Total $ (2,444) $ 5,381 $ 8,362
- ------------------------------------------------------------------------------
<PAGE>
A reconciliation between taxes computed by applying the statutory Federal
income tax rate to pretax income and income taxes provided in the Consolidated
Statements of Income is as follows:
1993 1992 1991
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Amounts computed at statutory rates $ (5,217) $ 23,058 $ 21,356
State income taxes, net of
Federal income tax benefits (6,554) 647 1,013
Amortization of deferred investment
tax credits (1,071) (1,046) (4,081)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - net 1,728 1,741 2,854
Rate differentials applied to
reversing temporary differences (1,046) (1,820) (3,188)
Foreign loss, exempt
from taxes (2,424) (1,400) (1,969)
Other differences - net 4,719 3,048 130
- ------------------------------------------------------------------------------
Total provision (benefit) $ (9,865) $ 24,228 $ 16,115
- ------------------------------------------------------------------------------
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences
which had not previously been recognized in accordance with established rate-
making practices. Since the manner in which income taxes are treated for rate-
making has not changed, pursuant to SFAS No. 71 a corresponding regulatory
asset was also established. In addition, deferred income taxes were adjusted
and a regulatory liability established to give effect to the current statutory
Federal income tax rate and for unamortized investment tax credits. The net
unamortized regulatory asset balance at December 31, 1993 of $1.5 million and
the net unamortized regulatory liability balance at December 31, 1992 of $10.0
million are reflected as other assets and other deferred credits, respectively,
in the accompanying Consolidated Balance Sheets. These amounts are being
amortized over the lives of the related depreciable assets concurrent with
recovery in rates and in conformance with the provisions of the Internal
Revenue Code. The assets and liabilities established in accordance with SFAS
No. 71 have been increased for the tax effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
1993 1992
- --------------------------------------------------------------
(Thousands of Dollars)
Depreciation and
amortization $ 162,817 $ 37,468
Employee benefit
obligations (4,271) (6,355)
Prepaid pension cost 30,593 23,375
Restructuring
cost (29,303) _
Other - net 6,088 769
- --------------------------------------------------------------
Total $ 165,924 $ 155,257
- --------------------------------------------------------------
7. Employee Benefit Plans
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings.
The Company's funding policy, subject to the minimum funding requirements of
U.S. employee benefit and tax laws, is to contribute such amounts as are
determined on an actuarial basis to provide the plans with assets sufficient to
meet the benefit obligations of the plans. The assets of the plans consist
primarily of corporate equities, government securities and corporate debt
securities.
The net pension credits for 1993-1991 include the following components:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned during
the period $ 13,919 $ 13,186 $ 12,204
Interest cost on projected benefit
obligations 31,254 28,898 26,731
Actual return on plan assets (98,181) (35,180) (115,408)
Other - net 36,673 (20,939) 64,418
- ------------------------------------------------------------------------------
Net pension credit $ (16,335) $ (14,035) $ (12,055)
- ------------------------------------------------------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1993 and
1992 and 8.0% in 1991.
The funded status of the plans at December 31, 1993 and 1992 was as follows:
1993 1992
- ------------------------------------------------------------------------
(Thousands of Dollars)
Plan assets at fair value $ 624,171 $ 645,312
Projected benefit obligation 361,043 395,489
- ------------------------------------------------------------------------
Excess of assets over projected
obligation 263,128 249,823
Unrecognized net transition asset (44,414) (64,811)
Unrecognized net gain (122,505) (115,509)
- ------------------------------------------------------------------------
Prepaid pension cost $ 96,209 $ 69,503
- ------------------------------------------------------------------------
The projected benefit obligations at December 31, 1993 and 1992 include
accumulated benefit obligations of $276.6 million and $275.7 million and vested
benefit obligations of $268.1 million and $265.5 million, respectively.
Assumptions used to develop the projected benefit obligation at December 31,
1993 and 1992 were as follows:
1993 1992
- ---------------------------------------------------
Discount rate 7.5 % 8.0%
Rate of compensation
increase 5.25% 6.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits other Than
Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions, while the life insurance benefits are currently
based on annual earnings at the time of retirement. The Company funds amounts
for postretirement benefits as appropriate.
The postretirement benefit cost for 1993 includes the following components (in
thousands of dollars):
1993
- --------------------------------------------------------
Service cost-benefits earned
during the period $ 3,275
Interest cost on accumulated
postretirement benefit
obligation 15,320
Actual return on plan assets (925)
Amortization of transition
obligation and prior
service cost 11,466
- --------------------------------------------------------
Postretirement benefit
cost $ 29,136
- --------------------------------------------------------
During 1992 and 1991, the cost of postretirement health care and life insurance
benefits on a pay-as-you-go basis was $3.8 million and $2.9 million,
respectively.
The following table sets forth the plans' funded status and the accrued
obligation as of December 31, 1993 (in thousands of dollars):
1993
- --------------------------------------------------------
Accumulated postretire-
ment benefit obligation
attributable to:
Retirees $ 99,802
Fully eligible active
plan participants 92,007
Other active plan
participants 20,521
- --------------------------------------------------------
Total accumulated
postretirement benefit
obligation 212,330
Fair value of plan assets 23,890
- --------------------------------------------------------
Excess of accumulated
obligation over plan assets 188,440
Unrecognized transition
obligation (144,355)
Unrecognized prior
service cost (20,205)
Unrecognized net loss (21,602)
- --------------------------------------------------------
Accrued postretirement
benefit obligation $ 2,278
- --------------------------------------------------------
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.5% at December 31, 1993. The expected long-term rate
of return on plan assets was 8.25% for 1993. The assumed health care cost trend
rate in 1993 was 13% for pre-65 participants and 9.5% for post-65 retirees,
each rate declining on a graduated basis to an ultimate rate in the year 2004
of 6%. A one percentage point increase in the assumed health care cost trend
rate for each future year would have increased 1993 costs by $2.9 million and
the accumulated postretirement benefit obligation at December 31, 1993 by $31.4
million.
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees that are effective January
1, 1995. These changes include newly established limits to the Company's annual
contribution to postretirement medical costs and a revised sharing schedule
based on a retiree's years of service. The effect of these changes decreased
the accumulated benefit obligation at December 31, 1993 by $17.2 million.
SAVINGS PLANS
The Company sponsors savings plans under section 401(k) of the Internal Revenue
Code. The plans cover substantially all full-time employees. Under the plans,
the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$3.5 million, $3.1 million and $2.8 million in the years 1993-1991,
respectively.
8. Commitments and Contingencies
The Company's anticipated construction costs for 1994 are approximately $170
million, for which the Company had substantial purchase commitments as of
December 31, 1993.
The Company has noncancelable lease contracts covering certain buildings,
office space and equipment. The lease contracts contain varying renewal options
for terms up to 73 years.
Minimum rental commitments for noncancelable leases for periods subsequent to
December 31, 1993 are as follows (in thousands of dollars):
1994 $ 2,067
1995 1,530
1996 940
1997 805
1998 781
Thereafter 12,271
- --------------------------------------------------------
Total minimum rental
commitments $ 18,394
- --------------------------------------------------------
The total amount of rents charged to expense was $14.0 million, $15.0 million
and $13.2 million for the years 1993-1991, respectively.
<PAGE>
9. Regulatory Matters
The Company is subject to regulation by the FCC for its interstate and
international business operations, earth station ownership and the use of
authorized radio frequencies and by the PUC with respect to intrastate business
operations.
INTRASTATE RATE MATTERS
The 1992-1993 state budget bill, which was signed by the Governor of Hawaii on
June 30, 1992, contained a requirement that the PUC open a docket within six
months to conduct, among other things, an earnings review of the Company.
On October 23, 1992, the Company filed a proposal with the PUC to restructure
its intrastate rates by lowering interisland toll rates and increasing local
and private line rates over a three year period. The revenue neutral proposal,
if adopted, will over time reduce interisland toll service revenues by $4.8
million offset by increases in private line and local exchange revenues of $2.7
million and $2.1 million, respectively. This proposal is intended to more
closely align the prices of these services with their underlying costs. In
addition, this proposal would lower intrastate toll rates to be more
commensurate with interstate rates.
On November 6, 1992, the PUC issued an order suspending the Company's rate
restructure proposal, pending investigation, and also issued an order
initiating a proceeding to review the Company's earnings. This docket also
consolidated the rate restructure proposal into the earnings review.
On May 11, 1993, the Company filed a general rate increase application with the
PUC, requesting approval to increase intrastate revenues by $50.4 million. This
represents a 15.9% increase over intrastate revenues for 1993 at current rates,
and is the first rate increase application the Company has filed since 1985.
The Company's rate restructure proposal and earnings review investigation were
incorporated into the rate case docket. Hearings are scheduled for March 1994.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
local exchange carrier (LEC) may charge is increased or decreased each year by
a price index based upon inflation less a predetermined productivity target.
LECs may within certain ranges price individual services above or below the
overall cap.
As a safeguard under its new price cap regulatory plan, the FCC has also
adopted a productivity sharing feature. Because of this feature, under the
minimum productivity-gain option, the Company must share equally with its
ratepayers any realized interstate return above 12.25% up to 16.25%, and all
returns higher than 16.25%, by temporarily lowering prospective prices. During
1994, the FCC is scheduled to review the LEC price cap plan to determine
whether it should be continued or modified.
In 1992, the Company's rates were voluntarily reduced by $4.4 million effective
July 1, 1992 and $3.9 million effective October 2, 1992.
OTHER MATTERS
The Company is the primary telephone provider on the Hawaiian island of Kauai.
Portions of the Company's telephone equipment and facilities were severely
damaged on September 11, 1992, as a result of Hurricane Iniki. Capital
requirements to fully and permanently restore the plant necessary to provide
service to customers statewide were $28.2 million in 1992 and 1993. In addition
to restoration of plant, the Company incurred expenses of approximately $21.2
million during 1992 and 1993. On December 30, 1992, the PUC issued an order
approving a stipulation agreement between the Company and the Division of
Consumer Advocacy of the Hawaii Department of Commerce and Consumer Affairs
that will permit the Company to accrue an allowance for funds used during
construction on all restoration of plant and defer all associated depreciation
and non-capital expenses for potential recovery in the upcoming rate case. In
addition, the FCC permitted deferral of Hurricane Iniki costs with amortization
treatment to be determined at a later date. Deferral of these costs prevented
Hurricane Iniki from having a material effect on 1992 and 1993 results of
operations. The 1993 Hawaii State Legislature subsequently passed a bill and
the Governor of the State of Hawaii signed the act to provide a statewide
monthly surcharge assessment on ratepayers when a public utility sustains
damages to its facilities from a state-declared emergency and incurs
restoration and repair costs that may result in a rate increase of more than
15% of the average ratepayer on the affected island. On August 19, 1993, the
Company filed an application to establish a $1.20 monthly surcharge for five
years to recover costs incurred by the devastation of Hurricane Iniki. On
November 17, 1993, the PUC denied the Company's application, stating that the
Company has no immediate need for relief and that the rate increase that would
result would not meet the 15% threshold necessary for the surcharge to apply.
The PUC also stated that the Company may seek recovery of its Iniki restoration
costs in its pending rate case.
Recognizing the importance of enhanced 911 service capabilities on a statewide
basis, the 1993 Hawaii State Legislature passed a bill and the Governor of the
State of Hawaii approved the act to allow the Company to recover the costs of
providing statewide enhanced 911 emergency telephone service in the first year
through a telephone line surcharge, and thereafter, through the Company's local
telephone rates. On January 14, 1994, the Company filed an application to
establish a $.28 monthly surcharge for statewide enhanced 911 service. The
Company's application was approved by the PUC to become effective on March 14,
1994.
SIGNIFICANT CUSTOMER
Revenues received from AT&T include amounts for access, billing and collection
and interexchange leased facilities during the years 1993-1991 under various
arrangements and amounted to $44.0 million, $48.0 million and $50.4 million,
respectively.
<PAGE>
10. Supplemental Cash Flow Disclosures
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
1993 1992 1991
- ------------------------------------------------------------------------------
(Thousands of Dollars)
(Increase) decrease in current
assets:
Accounts receivable - net $ (29,413) $ 9,708 $ (41,186)
Materials and supplies 11,181 6,050 (3,930)
Other current assets (9,414) 2,063 (2,582)
Increase (decrease) in current
liabilities:
Accounts payable (292) (4,241) (6,586)
Affiliate payables and accruals 4,307 2,202 (240)
Advanced billings and customer
deposits (1,258) 2,422 11,301
Accrued liabilities 3,027 (7,991) 899
Other (318) 2,818 12,686
- ------------------------------------------------------------------------------
Total $ (22,180) $ 13,031 $ (29,638)
- ------------------------------------------------------------------------------
Cash paid (refunded) during
the year for:
Interest $ 28,459 $ 30,232 $ 32,930
Income taxes (11,086) 23,162 14,145
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
GTE Hawaiian Telephone Company Incorporated:
We have audited the accompanying consolidated balance sheets of GTE Hawaiian
Telephone Company Incorporated (a Hawaii corporation and wholly-owned
subsidiary of GTE Corporation) and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, reinvested earnings
and cash flows for each of the three years in the period ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Hawaiian Telephone Company
Incorporated and subsidiaries as of December 31, 1993 and 1992, and the results
of their operations and its cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions. Also as discussed in Note 1,
effective January 1, 1992, the Company changed its method of accounting for
income taxes.
ARTHUR ANDERSEN & CO.
Dallas, Texas
January 28, 1994.
<PAGE>
Management Report
To Our Shareholder:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are
based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
WARREN H. HARUKI
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OPERATIONS
GTE Hawaiian Telephone Company Incorporated (the Company), a wholly-owned
subsidiary of GTE Corporation, provides a full range of telecommunications
products and services in Hawaii and in the Pacific and Asia. The Company's
majority-owned subsidiary, Micronesian Telecommunications Corporation (MTC), is
headquartered in Saipan and provides local and international telecommunications
services to the islands of Saipan, Tinian and Rota. The Company serves over
725,000 access lines.
RESULTS OF OPERATIONS
Net income decreased $49 million for the year ended December 31, 1993. The 1993
results include a one-time restructuring charge of $48 million, net of tax,
related primarily to a re-engineering plan. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services and further reduce costs. Also included in the 1993 results is a one-
time gain of $5 million, net of tax, associated with the enhanced early
retirement and voluntary separation programs completed during the second
quarter.
Excluding the above charges, net income decreased 14% or $6 million in 1993.
This decrease reflects the impact of the adoption of SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" effective January 1,
1993. Net income decreased 7% or $3 million in 1992. Although income from
operations increased for 1992 due to customer growth, the increase was offset
by higher income tax expense.
Local network service revenues, which are comprised mainly of fees charged to
customers for providing local exchange service, increased 5% or $11 million and
5% or $9 million for the years ended December 31, 1993 and 1992, respectively.
The 1993 and 1992 increases reflect continued customer growth as reflected by a
6% and 3% increase, respectively, in access lines and increased revenues from
custom calling and other enhanced features.
Network access service revenues represent the local telephone companies' charge
to end users for access to the facilities of long distance carriers and the
charge to long distance carriers for interconnection to local facilities.
Network access service revenues increased 5% or $5 million in 1993 and 1992.
The increases primarily reflect increased minutes of use. In 1992, the
Company's interstate rates were voluntarily reduced by $4.4 million effective
July 1, 1992 and $3.9 million effective October 2, 1992 partially offsetting
these increases.
Long distance service revenues decreased 4% or $4 million in 1993 and increased
4% or $5 million in 1992. The 1993 decrease is primarily due to a decline in
international toll volumes. The 1992 increase was primarily the result of
growth in intrastate toll usage.
Equipment sales and services revenues consist primarily of the sale, lease,
installation and maintenance of customer premises equipment. These revenues
decreased 6% or $6 million in 1993 and 4% or $4 million in 1992. The 1993
decrease is primarily due to the settlement of a government contract in 1992,
partially offset by additional international contracts in 1993. The 1992
decrease was primarily due to the completion of a large contract in 1991.
Other revenues remained relatively unchanged in 1993 and 1992.
Cost of sales and services increased 4% or $6 million in 1993 and decreased 4%
or $7 million in 1992. The 1993 increase is due to costs associated with the
adoption of SFAS No. 106 effective January 1, 1993. As a result of the adoption
of the new standard, expenses increased $14 million. The 1993 increase is
partially offset by lower product sales costs and the result of benefits of
ongoing quality and cost control programs, modernization of facilities, and a
reduction in workforce. The 1992 decrease was due to lower expenses and
installation costs associated with a decrease in large nonregulated contracts.
Depreciation expense increased 7% or $7 million in 1993 and remained relatively
unchanged in 1992. The 1993 increase is primarily due to an increase in plant
balances and increased depreciation rates.
Marketing, selling, general and administrative expenses decreased 2% or $4
million in 1993 and increased 11% or $20 million in 1992. The 1993 decrease is
primarily due to a one-time settlement gain of $8 million associated with the
enhanced early retirement and voluntary separation programs offered to eligible
employees during the second quarter of 1993, lower advertising costs, ongoing
cost control programs, and a reduction in workforce. These decreases were
partially offset by $8 million of costs associated with the adoption of SFAS No.
106. The 1992 increase was primarily due to the cost of data processing system
enhancements, higher expenses for billing and collection and higher expenses
for building maintenance.
Restructuring costs reflect a one-time charge related to the Company's re-
engineering plan over the next three years. The re-engineering plan will
redesign and streamline processes in order to improve customer-responsiveness
and product quality, reduce the time necessary to introduce new products and
services, resulting in cumulative savings in excess of the one-time charge. The
re-engineering plan includes $31 million to upgrade or replace existing
customer service and administrative systems and enhance network software, $35
million for employee separation benefits associated with workforce reductions
and $10 million primarily for the consolidation of facilities and operations
and other related costs. The charge for employee separation benefits includes
$18 million related to the recognition of previously deferred postretirement
health and life insurance costs for separating employees.
Interest expense increased 8% or $2 million in 1993 and decreased 14% or $5
million in 1992. The 1993 increase is due to the issuance of $125 million of
first mortgage bonds in February 1993, partially offset by lower average
interest rates. The 1992 decrease was primarily due to lower average long-term
debt levels due to the early retirement of $50 million of first mortgage bonds
and lower short-term interest rates.
Income taxes decreased $34 million in 1993 and increased $8 million in 1992.
The decrease in 1993 is primarily due to decreases in pretax income. The
increase in 1992 was primarily due to higher pretax income, the declining
effects of amortization of deferred investment tax credits, the lower reversal
of tax rate differentials on deferred tax balances, and adjustments to 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, a $2.3 billion
line of credit is available to the Company through shared lines of credit with
GTE and other affiliates to support short-term financing needs.
The Company's primary source of funds was cash flow from operations of $141
million in 1993 compared to $145 million in 1992.
Capital expenditures represent the largest use of funds during 1993 and 1992
reflecting the Company's continued growth in access lines and modernization of
current facilities and introduction of new products and services. Cash
requirements to implement the re-engineering plan are expected to be largely
offset by cost savings. The Company's capital expenditures during 1993 were
$192 million compared to $158 million during 1992. The Company's anticipated
construction costs for 1994 are approximately $170 million.
Cash provided from financing activities was $52 million in 1993 compared to $8
million in 1992. The Company issued $125 million of 6.75% First Mortgage Bonds
in 1993 and $40 million of common stock. The proceeds were used to retire short-
term debt. The Company retired $19 million in long-term debt in 1993 compared
to $74 million in 1992 due to lower scheduled maturities in 1993. Dividends of
$25 million were paid to the shareholder in 1993 compared to $45 million in
1992.
COMPETITION AND REGULATORY TRENDS
The year was marked by important changes in the U.S. telecommunications
industry. Rapid advances in technology, together with government and industry
initiatives to eliminate certain legal and regulatory barriers are accelerating
and expanding the level of competition and opportunities available to the
Company. As a result, the Company faces increasing competition in virtually all
aspects of its business. Specialized communications companies have constructed
new systems in certain markets to bypass the local-exchange network. Additional
competition from interexchange carriers as well as wireless companies continues
to evolve for both intrastate and interstate communications.
Implementation of its re-engineering plan will allow the Company to continue to
respond aggressively to these competitive and regulatory developments through
reduced costs, improved service quality, competitive prices and new product
offerings. Moreover, implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services.
During the year, the Company continued to introduce new business and consumer
services utilizing advanced technology, offering new features and pricing
options while at the same time reducing costs and prices.
During 1993, the Federal Communications Commission (FCC) announced its decision
to auction licenses during 1994 in 51 major markets and 492 basic trading areas
across the United States to encourage the development of a new generation of
wireless personal communications services (PCS). These services will both
complement and compete with the Company's traditional wireline services. The
Company will be permitted to fully participate in the license auctions in areas
outside of GTE's existing cellular service areas. Limited participation will be
permitted in areas in which GTE has an existing cellular presence.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas.
Activity directed toward changing the traditional cost-based rate of return
regulatory framework for intrastate and interstate telephone services has
continued. Various forms of alternative regulation have been adopted, which
provide economic incentives to telephone service providers to improve
productivity and provide the foundation for the pricing flexibility necessary
to address competitive entry into the markets we serve.
In September 1993, the FCC released an order allowing competing carriers to
interconnect to the local-exchange network for the purpose of providing
switched access transport services. This ruling complements similar
interconnect arrangements for private line services ordered during 1992. The
order encourages competition for the transport of telecommunications traffic
between local exchange carriers' (LECs) switching offices and interexchange
carrier locations. In addition, the order allows LECs flexibility in pricing
competitive services.
These and other actions to eliminate the existing legal and regulatory
barriers, together with rapid advances in technology, are facilitating a
convergence of the computer, media and telecommunications industries. In
addition to allowing new forms of competition, these developments are also
creating new opportunities to develop interactive communications networks. The
Company supports these initiatives to assure greater competition in
telecommunications, provided that overall the changes allow an opportunity for
all service providers to participate equally in a competitive marketplace under
comparable conditions.
The Company follows the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 requires
companies to depreciate plant and equipment over lives approved by regulators.
It also requires deferral of certain costs and obligations based upon approvals
received from regulators. In the event that recoverability of these costs
becomes unlikely or uncertain, whether resulting from actual or anticipated
competition or specific regulatory, legislative or judicial actions, continued
application of SFAS No. 71 would no longer be appropriate. If the Company no
longer qualifies for the provision of SFAS No. 71, the financial effects of the
required accounting change (which would be non-cash) could be material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
<PAGE>
Selected Financial Data
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Selected Income
Statement Items (a)
Total operating
revenues $ 564,889 $ 559,022 $ 545,910 $ 539,283 $ 512,144
Total operating
expenses 548,891 461,640 449,700 443,089 426,562
- -------------------------------------------------------------------------------
Net operating income 15,998 97,382 96,210 96,194 85,582
Interest expense 31,660 29,214 33,843 30,811 29,085
Other - net (755) 350 (446) 1,405 (1,147)
Income tax expense
(benefit) (9,865) 24,228 16,115 12,015 9,304
- -------------------------------------------------------------------------------
Net income (loss) $ (5,042) $ 43,590 $ 46,698 $ 51,963 $ 48,340
- -------------------------------------------------------------------------------
Dividends declared on
common stock $ 29,768 $ 35,189 $ 38,584 $ 43,456 $ 33,656
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Selected Balance Sheet Items
Investment in
property, plant and
equipment - net $1,145,673 $1,053,127 $ 983,243 $ 944,095 $ 899,751
Total assets 1,421,536 1,281,007 1,224,682 1,121,529 1,070,670
Long-term debt 379,901 401,475 345,409 310,765 274,002
Common stock,
reinvested earnings
and other capital 508,835 503,548 495,549 418,652 409,401
- -------------------------------------------------------------------------------
Selected Statistics
Access lines 725,029 681,171 659,844 630,885 594,642
Access line gain 43,858 21,327 28,959 36,243 68,834
Net investment in
property, plant
and equipment per
access line $ 1,580 $ 1,546 $ 1,490 $ 1,496 $ 1,513
Number of employees 3,320 3,887 4,099 4,185 4,260
Access lines per
employee 218 175 161 151 140
Gross plant additions
(thousands) $ 191,837 $ 158,119 $ 137,440 $ 136,104 $ 103,530
- -------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
