<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1995
---------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to _____________________
Commission File Number: 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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
---------------------------
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
The registrant, a wholly owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and
is therefore filing this form with reduced disclosure format pursuant to
General Instruction H(2).
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
September 30, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1995 1994 1995 1994
-------- --------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 61,157 $ 56,564 $ 182,549 $ 167,834
Network access services 33,900 31,799 99,771 96,120
Long distance services 26,072 33,144 74,173 92,491
Equipment sales and services 23,035 19,422 58,225 59,445
Other 7,553 180 39,755 40,044
-------- --------- --------- ----------
151,717 141,109 454,473 455,934
-------- --------- --------- ----------
Operating expenses:
Cost of sales and services 71,723 70,610 199,173 215,983
Depreciation and amortization 30,339 28,267 90,391 82,913
Selling, general and administrative 24,019 29,952 77,151 86,054
-------- --------- --------- ----------
126,081 128,829 366,715 384,950
-------- --------- --------- ----------
Net operating income 25,636 12,280 87,758 70,984
-------- --------- --------- ----------
Other (income) deductions:
Interest expense - net 10,267 8,519 29,666 25,327
Other - net (523) 148 (787) 365
-------- --------- --------- ----------
Income before income taxes 15,892 3,613 58,879 45,292
Income taxes 2,935 545 15,294 15,328
-------- --------- --------- ----------
Net income $ 12,957 $ 3,068 $ 43,585 $ 29,964
======== ========= ========= ==========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 3
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Net income was $43.6 and $30.0 for the nine months ended September 30, 1995
and 1994, respectively, representing an increase of 45% or $13.6. This
increase is primarily the result of lower operating expenses, primarily cost of
sales and services, partially offset by increased depreciation and amortization
expenses.
OPERATING REVENUES
Operating revenues were $454.5 and $455.9 for the nine months ended September
30, 1995 and 1994, respectively, reflecting a decrease of $1.4.
Local network services revenues were $182.5 and $167.8 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting an increase of 9%
or $14.7. This increases is primarily a result of the Public Utility
Commission (PUC) of the State of Hawaii allowing recovery of the Company's
accrual for Postretirement Benefits Other Than Pensions (OPEB). The PUC
approved the Company's plan to reflect an additional $10.7 of OPEB expense in
its rates, retroactive to January 1, 1995, resulting in $8.0 of increased
revenues in the first nine months of 1995. Revenues in 1995 also increased due
to continued customer growth as reflected by a 3% increase in access lines,
which generated $3.4 in additional revenues, and a $2.3 increase in sales of
custom calling features, such as SmartCall(R) services.
Network access services revenues were $99.8 and $96.1 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting an increase of 4% or
$3.7. The nine month increase is primarily the result of a 7% increase in
minutes of use, which generated $5.0 in additional revenues, and a $0.9
increase in end user access charge revenue resulting from continued line
growth. Partially offsetting these increases are declines in interstate access
revenues associated with price reductions of $2.1 and unfavorable pooling
settlements of $1.2.
Long distance services revenues were $74.2 and $92.5 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting a decrease of 20% or
$18.3. This decline is primarily due to lower international toll volumes of
$7.6 and lower domestic toll volumes of $4.0. The lower domestic toll volumes
are a result of economic conditions and increased competition with long
distance carriers who became authorized to provide interisland toll service on
a 10XXX basis. In anticipation of this competition, the Company lowered its
toll rates by 11% which further reduced revenues by $3.3. See page 5, Other
Matters, for further discussion.
Equipment sales and services revenues were $58.2 and $59.4 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting a decrease of 2% or
$1.2. This decrease is primarily due to a $9.0 decline in revenues from
international service contracts, which were not renewed in 1995. This was
partially offset by a $4.0 increase in revenues from international service
contracts initiated in 1995, growth in Radio Paging services, which generated
$2.1 in additional revenues, and a $0.8 increase in sales of Personal Secretary
voice messaging services.
2
<PAGE> 4
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses were $366.7 and $385.0 for the nine months ended September
30, 1995 and 1994, respectively, reflecting a decrease of 5% or $18.3. This
decrease is primarily due to a $9.0 decrease in contractor costs and software
upgrades associated with projects completed in 1994, as well as a $6.0 decrease
in labor and benefits costs associated with the Company's re-engineering plan.
The decrease is also due to higher costs in 1994 of $9.6 relating to the
resolution of certain amounts owed to and from interexchange carriers.
Partially offsetting these decreases is a $7.4 increase in depreciation and
amortization primarily resulting from increased plant investments.
OTHER DEDUCTIONS
Interest expense - net was $29.7 and $25.3 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 17% or $4.4. The
increase is primarily due to higher average short-term levels, accompanied by
higher short-term borrowing rates for the first nine months of 1995 compared to
the same period in 1994.
Income taxes remained virtually the same for the nine months ended September
30, 1995 and 1994. Although pretax income was higher in 1995, this increase
was offset by higher reversal of tax rate differentials on deferred tax
balances in 1995.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $78.3, which reduced net income by $48.2, primarily
for incremental costs related to implementation of the Company's three year
re-engineering plan. 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 major components of the estimated cost to implement the re-engineering plan
and activity since inception are as follows (dollars in millions):
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 September 30,
Component 1993 Activity 1994 Activity 1995
- ----------------- ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Separation benefits $ 35.4 $ (0.7) $ 34.7 $ (1.5) $ 33.2
Systems 31.3 (13.3) 18.0 (12.1) 5.9
Consolidation of
facilities 9.6 (1.5) 8.1 (1.8) 6.3
Other 2.0 (2.0) -- -- --
------------ ------------- ------------ ------------ -------------
Total $ 78.3 $ (17.5) $ 60.8 $ (15.4) $ 45.4
============ ============= ============ ============ ============
</TABLE>
There have been no significant changes made to the overall re-engineering plan
as originally reported. As of September 30, 1995, $45.4 remains in the
restructuring reserve which management believes is adequate to cover future
expenditures.
3
<PAGE> 5
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs) for their 1995 Annual
Price Cap Filing. The interim rules allowed LECs to select from three
productivity/sharing options for each tariff entity. In addition, each of the
three options required an increase to the 3.3% productivity factor elected by
the Company since 1991. The Company selected the following productivity
factors and sharing thresholds for use in the 1995-1996 tariff year:
<TABLE>
<CAPTION>
Sharing Parameters
Tariff Productivity -----------------------------------------
Entity Factor 50% 100%
- ----------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Hawaii 4.0% 12.25 - 13.25% ROR Over 13.25% ROR
Micronesia 5.3% None None
</TABLE>
Since the Company's access fees have been priced below the FCC's maximum price
since 1991, the near-term impact of productivity increases are not expected to
be significant. Under the interim rules, the Company filed tariffs to reduce
rates by $5.0 annually, effective August 1, 1995. On September 20, 1995, the
FCC released its proposed rulemaking proceeding on price caps which proposes
specific changes to reflect and encourage emerging competition in local and
access service markets and to establish the path towards decreased regulation
of local exchange carriers' services. On September 27, 1995, the FCC solicited
comments on a number of specific issues regarding methods for establishing the
price caps, such as productivity measurements, sharing, the common line
formula, and exogenous costs. The Company anticipates the FCC will issue an
order prior to the July 1996 annual filing.
Federal telecommunications legislation has been passed by both the Senate and
House of Representatives. The bills must now be reconciled by the joint
Senate/House conference committee.
In April 1995, GTE filed a motion with the U.S. District Court for the District
of Columbia to remove the 1984 Consent Decree, which restricts the manner in
which the Company can provide interLATA services. GTE believes that the
Consent Decree is no longer required since GTE has since divested its interests
in the entities whose purchase gave rise to the Consent Decree.
In May 1995, the FCC approved GTE's applications to construct a new fiber optic
and coaxial-cable video network in four markets, including Honolulu, Hawaii.
GTE expects to submit tariffs that set the rates for use of its video network
to the FCC for approval at some future date.
On May 11, 1993, the Public Utilities Commission (PUC) of the State of Hawaii
initiated a communications infrastructure proceeding which was intended to
investigate such issues as: what markets should be opened to competition; who
should be allowed to compete in those markets; and what rules, if any, should
apply. Parties filed opening testimony on these matters on March 24, 1995 and
rebuttal testimony on April 28, 1995. Evidential hearings were held beginning
May 22, 1995 and concluded on June 7, 1995. The PUC is expected to issue
proposed rules within the next few months addressing the above mentioned
issues.
On June 9, 1995, the PUC issued a decision on the Company's 1993 Rate Case.
The PUC ordered that the Company's existing rate of return, rate base, rates
and rate restructure remain unchanged until the next rate case. The Company
notified the PUC on July 10, 1995, that it would appeal the decision to the
Supreme Court and the Intermediate Court of Appeals of the State of Hawaii. It
is anticipated that the PUC may take six to twelve months to prepare the record
for the court, from which time the Company will have forty days to file its
brief. Anticipated resolution will take approximately one to two years.
4
<PAGE> 6
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
On May 30, 1995, the Company initially filed its 1995 Rate Case. Due to the
PUC's June 9, 1995 decision on the 1993 Rate Case and the need to update the
1995 Rate Case for this decision, the Company withdrew its originally filed
application and refiled on September 29, 1995. A stipulation between the
Consumer Advocate and the Company was approved by the PUC on July 6, 1995,
which preserves the 1995 test year, preserves the bifurcation of the rate case
into Phase I for revenue requirement and Phase II for rate structure and rate
design, and extends the protective agreement for the exchange of confidential
information.
During the first quarter of 1995, the PUC authorized AT&T Corp. and Sprint
Corporation to provide interisland toll service on a 10XXX basis, effective
March 1, 1995. The PUC reserves the right to modify or rescind the authority
depending on the impact to the Company. On February 14, 1995, the PUC approved
the Company's request to lower its toll rates and make changes to its various
calling plans to keep them competitive with AT&T Corp.'s rates. MCI
Communications Corporation (MCI) is also seeking approval to provide
interisland toll service on a 10XXX basis.
REGULATORY ACCOUNTING
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" (FAS 71). In general, FAS 71 requires
companies to depreciate plant and equipment over lives approved by regulators
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $200 and $300. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
5
<PAGE> 7
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 3,863 $ 7,709
Receivables, less allowances
of $9,908 and $9,010, respectively 145,466 137,478
Materials and supplies 12,290 7,998
Deferred income tax benefits 6,175 12,061
Prepayments and other 12,711 14,792
------------- ------------
Total current assets 180,505 180,038
------------- ------------
Property, plant and equipment:
Original cost 1,956,346 1,908,423
Accumulated depreciation (750,810) (702,596)
------------- ------------
Net property, plant and equipment 1,205,536 1,205,827
------------- ------------
Prepaid pension costs 134,936 114,804
------------- ------------
Other assets 26,749 26,580
------------- ------------
Total assets $ 1,547,726 $ 1,527,249
============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Short-term debt, including current maturities $ 39,644 $ 211,929
Accounts payable 53,517 42,660
Accrued taxes 26,890 15,310
Accrued interest 8,374 7,341
Accrued payroll and vacations 29,889 24,497
Accrued restructuring costs and other 51,448 55,181
------------- ------------
Total current liabilities 209,762 356,918
------------- ------------
Long-term debt 519,674 371,840
------------- ------------
Reserves and deferred credits:
Deferred income taxes 220,192 214,548
Employee benefit obligations 24,855 12,709
Restructuring costs and other 29,994 47,798
------------- ------------
Total reserves and deferred credits 275,041 275,055
------------- ------------
Shareholder's equity:
Common stock 250,000 250,000
Other capital 41,864 41,943
Reinvested earnings 251,385 231,493
------------- ------------
Total shareholder's equity 543,249 523,436
------------- ------------
Total liabilities and shareholder's equity $ 1,547,726 $ 1,527,249
============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1995 1994
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,585 $ 29,964
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 90,391 82,913
Deferred income taxes 12,151 6,126
Provision for uncollectible accounts 8,701 3,919
Changes in current assets and current liabilities (6,105) (36,852)
Other-net (14,846) 1,389
------------- -------------
Net cash from operating activities 133,877 87,459
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (83,091) (126,944)
------------- -------------
Cash used in investing activities (83,091) (126,944)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 148,236 --
Long-term debt retired (6,914) (11,825)
Dividends paid to shareholders (23,693) (16,938)
Net change in affiliate notes 31,989 (3,003)
Increase (decrease) in short-term debt (204,250) 76,844
------------- -------------
Net cash from (used in) financing activities (54,632) 45,078
------------- -------------
Increase (decrease) in cash (3,846) 5,593
Cash at beginning of period 7,709 808
------------- -------------
Cash at end of period $ 3,863 $ 6,401
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 10
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
of the Company, the condensed consolidated financial statements include all
adjustments, which consist only of normal recurring accruals, necessary to
present fairly the financial information for such periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's 1994
Annual Report on Form 10-K.
(2) 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" (FAS 71). In general, FAS 71 requires
companies to depreciate plant and equipment over lives approved by regulators
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $200 and $300. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
(3) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
9
<PAGE> 11
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) GTE Hawaiian Telephone Company Incorporated filed a
report on Form 8-K dated September 28, 1995 on
October 2, 1995, under Item 5 "Other Events." No
financial statements were filed with this report.
10
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
-------------------------------------------
(Registrant)
Date: October 31, 1995 William M. Edwards, III
--------------------------- ------------------------------------
William M. Edwards, III
Controller
(Chief Accounting Officer)
11
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 3,863
<SECURITIES> 0
<RECEIVABLES> 155,374
<ALLOWANCES> 9,908
<INVENTORY> 12,290
<CURRENT-ASSETS> 180,505
<PP&E> 1,956,346
<DEPRECIATION> 750,810
<TOTAL-ASSETS> 1,547,726
<CURRENT-LIABILITIES> 209,762
<BONDS> 519,674
<COMMON> 250,000
0
0
<OTHER-SE> 293,249
<TOTAL-LIABILITY-AND-EQUITY> 1,547,726
<SALES> 454,473
<TOTAL-REVENUES> 454,473
<CGS> 199,173
<TOTAL-COSTS> 366,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,666
<INCOME-PRETAX> 58,879
<INCOME-TAX> 15,294
<INCOME-CONTINUING> 43,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,585
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
