<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
-----------------------
(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, 1994
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or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period from to
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Commission File Number 2-33059
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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 REGISTERED
- -------------------------------- ---------------------------
NONE
- -------------------------------- ---------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(TITLE OF CLASS)
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
----- -----
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
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THE COMPANY HAD 10,000,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.
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> 2
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
FORM 10-K/A
GTE Hawaiian Telephone Company Incorporated (the Registrant) is filing this
Annual Report on Form 10-K/A to amend Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and Item 8,
"Financial Statements and Supplementary Data", of the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
<PAGE> 3
Item 7. 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 (GTE), provides telecommunications products and
services in Hawaii. The Company's majority-owned subsidiary, Micronesian
Telecommunications Corporation (MTC), is headquartered on Saipan and provides
local and international telecommunications services on the islands of Saipan,
Tinian and Rota. The Company also has a wholly-owned subsidiary, Hawaiian Tel
Insurance Company, which provides auto liability, general liability and
workers' compensation insurance to the Company.
RESULTS OF OPERATIONS
Net income was $30 million in 1994 compared to a net loss of $5 million in
1993. The 1993 net loss included a one-time, after-tax charge of $48 million
to restructure operations and a one-time, after-tax gain of $5 million
associated with the settlement of certain pension liabilities in connection
with the enhanced early retirement and voluntary separation programs completed
during the second quarter of 1993.
Excluding these special items, net income decreased 21% or $8 million in 1994
and 14% or $6 million in 1993. The 1994 decrease is primarily the result of a
decrease in equipment sales and service revenues, and higher depreciation and
amortization and marketing, selling, general and administrative expenses,
partially offset by increased local network, network access and long distance
service revenues. The 1993 decrease was primarily the result of the adoption
of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" effective January
1, 1993.
OPERATING REVENUES
Operating revenues were $599 million in 1994 and $565 million in 1993.
Operating revenues increased 6% or $34 million in 1994 and increased 1% or $6
million in 1993.
Local network services revenues are comprised mainly of fees charged to
customers for providing local exchange service. Local network service revenues
were $226 million and $215 million in 1994 and 1993, respectively. This
reflects increases of 5% or $11 million in both 1994 and 1993. These increases
are primarily due to continued customer growth as reflected by access line
increases of approximately 3% or $5 million in 1994 and 6% or $6 million in
1993 and increased revenues of $6 million and $5 million in 1994 and 1993,
respectively, from enhanced features such as custom calling and voice messaging
services.
Network access service revenues are fees charged to interexchange carriers that
use the local telecommunication network to provide long-distance services to
their customers. In addition, business and residential customers pay access
fees to connect to the local network to obtain long-distance service. Network
access revenues were $129 million and $113 million in 1994 and 1993,
respectively, representing increases of $16 million or 14% in 1994 and $5
million or 5% in 1993. In 1994 and 1993, revenues from long-distance
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carriers increased $14 million and $4 million, respectively. The increase in
network access revenues in both 1994 and 1993 is the result of an increase in
the minutes of use of the Company's network, as access fees have remained
relatively unchanged over the past two years.
The Company's revenues for long distance services from designated geographical
areas are provided under revenue sharing arrangements with various telephone
companies. Long distance service revenues were $122 million and $107 million
in 1994 and 1993, respectively, representing an increase of 14% or $15 million
in 1994 and a decrease of 4% or $4 million in 1993. The 1994 increase is
primarily attributable to increased customer usage of both domestic and
international toll services of $4 million and $6 million, respectively. The
1993 decrease was primarily due to a decline in international toll volumes of
$2 million.
Equipment sales and services revenues consist of the sale, lease, installation
and maintenance of customer premises equipment. These revenues were $81
million and $96 million in 1994 and 1993, respectively. This reflects
decreases of 16% or $15 million in 1994 and 6% or $6 million in 1993. The 1994
decrease is primarily due to a $7 million decline in revenues from sales of
large private branch exchanges, a $2 million decline in sales of network
equipment, a $1 million decline in sales of radio paging equipment and a $1
million decline in sales of key systems. The 1993 decrease was primarily due
to a $7 million settlement of a large government contract completed in 1992,
partially offset by $1 million in additional international contracts.
Other operating revenues were $41 million and $35 million in 1994 and 1993,
respectively. This represents an increase of 17% or $6 million in 1994 and
virtually no change in 1993. The 1994 increase is primarily due to a $6
million decrease in the provision for uncollectible accounts.
OPERATING EXPENSES
Cost of sales and services were $172 million in 1994 and $167 million in 1993.
This reflects increases of 3% or $5 million in 1994 and 4% or $6 million in
1993. The 1994 increase is primarily due to a $7 million increase in
installation and maintenance expenses. The 1993 increase was due to a $14
million increase in costs associated with the adoption of SFAS No. 106
effective January 1, 1993, partially offset by a $4 million decrease in product
sales costs and approximately $4 million of benefits resulting from ongoing
quality and cost control programs, modernization of facilities, and reductions
in workforce.
Depreciation and amortization expenses were $116 million and $104 million in
1994 and 1993, respectively. This reflects increases of 12% or $12 million in
1994 and 7% or $7 million in 1993. These increases are primarily due to an
increase in plant investments resulting, in part, from the installation of an
interisland fiber optic network.
Marketing, selling, general and administrative expenses were $231 million and
$199 million in 1994 and 1993, respectively. In 1993, marketing, selling,
general and administrative expenses were reduced by a gain of $8 million
associated with the settlement of certain pension liabilities in connection
with enhanced early retirement and voluntary separation programs completed in
the second quarter of 1993. Excluding this gain, marketing, selling, general
and administrative expenses increased 12% or $24 million in 1994 and 2% or
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$4 million in 1993. The 1994 increase is primarily the result of higher
general and administrative costs, including higher expenses associated with
taxes and insurance and $15 million of one-time adjustments primarily relating
to the resolution of certain matters related to amounts owed to and from
interexchange carriers. The 1993 increase was primarily due to $9 million of
costs associated with the adoption of SFAS No. 106, partially offset by a $2
million decrease in advertising costs.
OTHER (INCOME) DEDUCTIONS
Interest expense was $36 million and $32 million in 1994 and 1993,
respectively. This reflects increases of 14% or $4 million in 1994 and 8% or
$2 million in 1993. These increases were due primarily to higher average debt
levels.
Income tax expense was $12.6 million in 1994 compared to an income tax benefit
of $9.9 million in 1993. This reflects an increase of $22.5 million in 1994
compared to a decrease of $34.1 million in 1993. The changes are primarily due
to corresponding changes in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet operating requirements for construction of new
plant, modernization of facilities, payment of dividends and funding of its
re-engineering plan. 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 $2.8 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 $110
million in 1994 and $141 million in 1993. The decrease of 22% or $31 million
in 1994 is primarily due to the timing of tax payments and a decrease in
results from operations.
Capital expenditures represented the largest use of funds during 1994 and 1993
reflecting the Company's continued growth in access lines and modernization of
current facilities and provisioning of new products and services, including
VideoConnect, broadband digital services and switched digital services. The
Company's capital expenditures during 1994 were $174 million compared to $192
million in 1993. In 1995, capital expenditures are expected to increase
slightly from the 1994 level reflecting the Company's expanding network and the
replacement of outdated technologies with digital switches and fiber optic
networks.
Cash provided from financing activities was $69 million in 1994 compared to $52
million in 1993. 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 $13 million in long-term debt in 1994
compared to $19 million in 1993. Net short-term debt borrowings were $102
million in 1994 compared to net reductions of $68 million in 1993.
During the fourth quarter of 1994, the Company's long-term debt rating was
reduced to "A-" from "A" by one of its rating agencies. During the third
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quarter of 1994, the Company's long-term debt rating was reduced to "A" from
"A+" by another one of its rating agencies. These remain strong investment
grade ratings. The Company's long-term debt ratings were not changed by other
rating agencies. The Company believes that its present ratings provide it the
financial flexibility necessary to fund its operations and construction
program.
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, was
subsequently withdrawn from consideration. Telecommunications legislation is
expected to be introduced again in 1995.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has also continued. Regulatory authorities have adopted
various alternative forms of regulation, which provide economic incentives to
telephone service providers to improve productivity and provide the foundation
for implementing pricing flexibility necessary to address competitive entry
into the markets the Company serves.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing
switched access transport services and private line services. Expanded
Interconnection requires LECs to permit competitors to connect directly to LEC
central offices and the LEC network under negotiated terms and conditions.
Competitors are thereby able to compete more effectively than previously to
replace LEC services between large users and interexchange carriers (IXCs), or
between large users and the LEC switch. The FCC accompanied its Expanded
Interconnection mandate with a slight relaxation of the rigid pricing rules
that govern how LECs price their access services. In 1994, the FCC also
reaffirmed the switched access rate structure changes adopted in 1993 that
allow LECs to better reflect the actual cost characteristics of transport
services and improve the LEC's ability to compete with alternative access
providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 10 of the Company's consolidated
financial statements included in Item 8.
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the
Company's operations face increasing competition in virtually all aspects of
its business. Today, the Company is subject to competition from numerous
sources, including competitive access providers for network access services,
specialized communications companies that have constructed new systems in
certain markets to bypass the local exchange network and cellular telephone
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<PAGE> 7
companies. Competition from IXCs, wireless and cable TV companies, as well as
more recent entry by media and computer companies, is expected to increase in
the rapidly changing telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States, including
Hawaii, to encourage the development of a new generation of wireless voice,
data and messaging services which are generally referred to as broadband
Personal Communications Services (PCS). PCS will compete with the Company's
traditional wireline services.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company
has embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $78 million
re-engineering plan. During 1994, the initial year of the three-year plan,
$18 million was expended as significant progress was made in implementing this
program. These expenditures were primarily associated with the consolidation
of customer contact, network operations and operator service centers,
separation benefits associated with employee reductions and incremental
expenditures to redesign and streamline systems and processes. During 1995,
the level of re-engineering activities and related expenditures are expected to
accelerate as pilot programs are rolled out and other major initiatives are
completed. The overall re-engineering plan remains on schedule and is expected
to result in annual savings of approximately $45 million by 1997, due primarily
to reduced employee related expenses. The major components of the cost of the
re-engineering plan as well as the current year's activity are summarized in
Note 2 of the Company's consolidated financial statements included in Item 8.
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. In 1994, GTE
announced plans to build a new video network over the next 10 years which will
pass seven million homes in 66 key GTE markets. GTE has requested FCC approval
to construct facilities in the initial three markets, including Honolulu,
Hawaii, and expects to begin construction in 1995.
On January 13, 1995, the United States District Court for the Eastern District
of Virginia issued an injunction declaring that GTE has the right to provide
video programming to its in-franchise customers. The court's decision means
that GTE is now permitted to offer video programming over its own video
dialtone networks, as well as to compete as a franchised cable operator in the
Company's telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Honolulu, Hawaii, to provide advanced communications for business
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customers. This program includes sophisticated high-speed, digital fiber-optic
rings, a high-capacity switching network (known as SONET), and a new
centralized operations center that monitors the entire network. These SONET
rings are an integral part of the high-speed information network that enables
GTE to provide advanced services such as high-speed data transmission and video
conferencing.
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 intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its networks. However, it is likely that such improvements
will be offset, in part, by continued strategic pricing reductions and the
effects of increased competition as discussed above.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, SFAS No. 71 requires companies to depreciate plant and equipment over
lives approved by regulators which may extend beyond the assets' actual
economic and technological lives. SFAS No. 71 also requires deferral of
certain costs and obligations based upon approvals received from regulators to
permit recovery in the future. Consequently, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, may be
greater than that which would otherwise be recorded by unregulated enterprises.
On an ongoing basis, the Company reviews the continued applicability of SFAS
No. 71 based on the current regulatory and competitive environment. Although
recent developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result, the
Company continues to believe that accounting under SFAS No. 71 is appropriate.
If the Company were to determine that the use of SFAS No. 71 was no longer
appropriate, it would be required to write-off the deferred costs and
obligations referred to above. It may also be necessary for the Company to
reduce the carrying value of its plant and equipment to the extent that it
exceeds fair market value. At this time, it is not possible to estimate the
amount of the Company's plant and equipment, if any, that would be considered
unrecoverable in such circumstances. The financial impact of such a
determination, however, which would be non-cash, could be material.
Additional information regarding the effects of regulation on the Company is
included in Note 1 of the Company's consolidated financial statements included
in Item 8.
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.
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Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
- ----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (A):
Local network services $ 225,913 $ 214,627 $ 203,908
Network access services 128,840 112,712 107,347
Long distance services 121,871 106,867 111,254
Equipment sales and services 81,484 95,653 101,948
Other 40,819 35,030 34,565
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598,927 564,889 559,022
---------- ---------- ----------
OPERATING EXPENSES (B):
Cost of sales and services 171,646 167,211 160,836
Depreciation and amortization 116,478 104,202 97,318
Marketing, selling, general and
administrative 230,733 199,203 203,486
Restructuring costs -- 78,275 --
---------- ---------- ----------
518,857 548,891 461,640
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NET OPERATING INCOME 80,070 15,998 97,382
---------- ---------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 36,104 31,660 29,214
Other - net 1,554 (755) 350
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 42,412 (14,907) 67,818
---------- ---------- ----------
INCOME TAX PROVISION (BENEFIT) 12,613 (9,865) 24,228
---------- ---------- ----------
NET INCOME (LOSS) $ 29,799 $ (5,042) $ 43,590
========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $38,420, $38,198 and $45,934 for the
years 1994-1992, respectively.
(b) Includes billings from affiliates of $37,322, $33,174 and $24,911 for the
years 1994-1992, respectively.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
- ----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 217,325 $ 252,135 $ 243,734
ADD -
Net income (loss) 29,799 (5,042) 43,590
DEDUCT -
Cash dividends declared on common stock 15,631 29,768 35,189
---------- ---------- ----------
BALANCE AT END OF YEAR $ 231,493 $ 217,325 $ 252,135
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
<TABLE>
<CAPTION>
December 31 1994 1993
- ----------- ----------- ----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 7,709 $ 808
Accounts receivable
Customers (including unbilled revenues) 118,508 101,319
Affiliated companies 5,244 747
Other 22,736 26,473
Allowance for uncollectible accounts (9,010) (9,072)
Materials and supplies 7,998 6,981
Deferred income tax benefits 12,061 14,203
Prepayments and other 14,792 14,924
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180,038 156,383
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PROPERTY, PLANT AND EQUIPMENT:
Original cost 1,908,423 1,823,848
Accumulated depreciation (702,596) (678,175)
----------- -----------
1,205,827 1,145,673
----------- -----------
PREPAID PENSION COSTS 114,804 96,209
----------- -----------
OTHER ASSETS 26,580 27,680
----------- -----------
TOTAL ASSETS $ 1,527,249 $ 1,425,945
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt $ 204,250 $ 101,909
Current maturities of long-term debt 7,679 12,090
Accounts payable 25,785 27,288
Affiliate payables and accruals 16,875 22,939
Advanced billings and customer deposits 16,764 14,381
Accrued taxes 15,310 10,141
Accrued interest 7,341 7,285
Accrued payroll and vacations 24,497 19,251
Accrued dividends -- 5,000
Accrued restructuring costs and other 38,417 55,313
----------- -----------
356,918 275,597
----------- -----------
LONG-TERM DEBT 371,840 379,901
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 214,548 206,900
Restructuring costs and other 60,507 54,712
----------- -----------
275,055 261,612
----------- -----------
SHAREHOLDER'S EQUITY:
Common stock (10,000,000 shares outstanding) 250,000 250,000
Other capital 41,943 41,510
Reinvested earnings 231,493 217,325
----------- -----------
523,436 508,835
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,527,249 $ 1,425,945
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
- ----------------------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 29,799 $ (5,042) $ 43,590
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 116,478 104,202 97,318
Restructuring costs -- 78,275 --
Deferred income taxes and investment
tax credits 13,405 4,264 6,995
Provision for uncollectible accounts 5,673 12,679 19,810
Change in current assets and current
liabilities (39,752) (22,180) 13,031
Other - net (15,782) (31,134) (35,989)
---------- ---------- ----------
Net cash from operating activities 109,821 141,064 144,755
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (174,271) (191,837) (158,119)
Other - net 2,343 (4,396) (4,204)
---------- ---------- ----------
Net cash used in investing activities (171,928) (196,233) (162,323)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued -- 40,000 --
Long-term debt issued -- 123,466 4,883
Long-term debt retired (12,702) (19,143) (74,316)
Dividends paid to shareholder (20,631) (24,648) (45,000)
Increase (decrease) in short-term debt 102,341 (67,944) 122,423
---------- ---------- ----------
Net cash from financing activities 69,008 51,731 7,990
---------- ---------- ----------
INCREASE (DECREASE) IN CASH 6,901 (3,438) (9,578)
CASH:
Beginning of year 808 4,246 13,824
---------- ---------- ----------
End of year $ 7,709 $ 808 $ 4,246
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
1. SUMMARY OF SIGNIFICANT 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
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $27.1 million, $42.4
million and $38.9 million for the years 1994-1992, respectively. Such
purchases are recorded in the accounts of the Company at cost which includes a
normal return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
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
$37.3 million, $33.2 million and $24.9 million for the years 1994-1992,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $38.4 million, $38.2 million and $45.9 million for the
years 1994-1992, 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. Regulators allow the Company to
capitalize an allowance for funds used during construction as a cost of
constructing certain plant.
The Company provides for depreciation on telephone plant on a straight-line
basis over asset lives approved by regulators. Depreciation is 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
6.5%, 6.2% and 6.4% for the years 1994-1992, respectively.
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REGULATORY ACCOUNTING
The Company accounts for the economic effects of regulation under Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." SFAS No. 71 requires the Company to account for
certain costs and obligations based on the approval of regulators. The Company
is regulated by the FCC and PUC. Regulators sometimes permit deferral of costs
to a future period other than the period in which those costs and revenues
would be recognized by an unregulated enterprise by creating "regulatory
assets" or "regulatory liabilities." The Company's Consolidated Balance Sheet
as of December 31, 1994 included regulatory assets of $18.7 million and
regulatory liabilities of $3.1 million.
In addition, SFAS No. 71 requires companies to depreciate plant and equipment
over lives approved by regulators. The FCC and PUC have currently prescribed
the following depreciable lives for the Company's property, plant and
equipment:
Buildings 35 to 45 years
Central office equipment 12 to 18 years
Outside plant 16 to 24 years
Furniture, equipment and other 10 to 16 years
An unregulated enterprise may have selected shorter depreciable lives for
similar assets. At this time, the Company cannot determine what depreciable
lives it might have otherwise selected or what the cumulative effect on its
financial statements would have been had shorter lives been used.
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 services are rendered or products are
delivered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average 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.
-11-
<PAGE> 14
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
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount
of assets and liabilities recognized for financial reporting purposes and for
tax purposes.
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.
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.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $26 million.
The estimated fair value of long-term debt as of December 31, 1993 exceeded the
carrying value by approximately $27 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
where appropriate to conform to the 1994 presentation.
-12-
<PAGE> 15
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of $78.3
million, which reduced net income by $48.2 million, 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 during 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1994 December 31,
Component 1993 Activity 1994
- --------- -------- -------- --------
<S> <C> <C> <C>
Separation benefits $ 35,430 $ (717) $ 34,713
Systems 31,300 (13,279) 18,021
Consolidation of facilities 9,580 (1,498) 8,082
Other 1,965 (1,965) --
-------- -------- --------
Total $ 78,275 $(17,459) $ 60,816
======== ======== ========
</TABLE>
Approximately $20 million of the restructuring reserve as of December 31, 1994
is classified as a current liability. Cash to fund the remainder of the
Company's re-engineering plan during 1995 and 1996 will be largely obtained
from operations. The actual 1994 savings associated with the re-engineering
plan were not significant.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $17.5 million
were made in connection with the implementation of the re-engineering plan.
These expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and
streamline processes. The level of re-engineering activities and related
expenditures are expected to accelerate in 1995.
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 in common stock to
GTE in 1993. 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.
-13-
<PAGE> 16
4. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
FIRST MORTGAGE BONDS:
4 1/2 % Series Q, due 1995 $ -- $ 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 125,000 125,000
----------- -----------
326,000 331,000
OTHER:
5% Rural Utilities Services
First Mortgage Bond, due 2018 9,585 9,806
Rural Telephone Bank (RTB) First Mortgage
Bonds, maturing 2010 through 2025, rates
ranging from 5.43% to 7.21% 27,979 28,919
7.5% RTB First Mortgage Bond, due 2021 3,927 3,975
GTE Leasing Corporation Financing Agreements-
maturing 1997 through 2001,
rates ranging from 8.8% to 10.32% 4,831 6,623
Other 1,422 1,712
----------- -----------
Total principal amount 373,744 382,035
DISCOUNT AND PREMIUM - NET (1,904) (2,134)
----------- -----------
Total long-term debt $ 371,840 $ 379,901
=========== ===========
</TABLE>
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, 1995 are summarized below (in thousands of dollars):
<TABLE>
<S> <C>
1995 $ 7,679
1996 2,783
1997 18,558
1998 21,977
1999 2,108
</TABLE>
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
-14-
<PAGE> 17
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:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
DURING THE YEAR -
Commercial Paper -
Maximum month-end balance $204,250 $176,700 $145,351
Average monthly balance $149,342 $ 68,889 $103,446
Weighted average interest rate 4.4% 3.14% 3.57%
AT DECEMBER 31 -
Balance outstanding -
Note payable to GTE $ -- $ 3,009 $ 1,201
Average interest rate -- 3.40% 4.32%
Commercial paper and similar
obligations $204,250 $ 98,900 $ 43,652
Average interest rate 5.92% 2.86% 3.45%
</TABLE>
A $2.8 billion credit 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.
-15-
<PAGE> 18
6. INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
CURRENT
Federal $ 3,195 $ (6,730) $ 17,788
State (3,987) (7,399) (555)
-------------- -------------- --------------
Total (792) (14,129) 17,233
-------------- -------------- --------------
DEFERRED
Federal 8,253 88 3,846
State 5,970 5,247 4,195
-------------- -------------- --------------
Total 14,223 5,335 8,041
-------------- -------------- --------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (818) (1,071) (1,046)
-------------- -------------- --------------
Total $ 12,613 $ (9,865) $ 24,228
============== ============== ==============
</TABLE>
The components of deferred income tax provision are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation and
amortization $ 4,253 $ 12,236 $ (5,896)
Employee benefit obligations (5,007) 2,084 (966)
Prepaid pension costs 11,205 7,218 5,097
Restructuring costs 5,639 (29,303) --
Capital goods excise tax
credits 3,761 7,779 2,660
Other - net (5,628) 5,321 7,146
-------------- -------------- --------------
Total $ 14,223 $ 5,335 $ 8,041
============== ============== ==============
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C>
AMOUNTS COMPUTED AT STATUTORY
RATES $ 14,844 $ (5,217) $ 23,058
State income taxes,
net of federal
income tax benefits 1,288 (6,554) 647
Amortization of deferred
investment tax credits (818) (1,071) (1,046)
Depreciation of telephone
plant construction costs
previously deducted for
tax purposes - net 1,516 1,728 1,741
Rate differentials applied
to reversing temporary
differences (1,267) (1,046) (1,820)
Rate differential on
foreign results (4,154) (2,424) (1,400)
Other differences - net 1,204 4,719 3,048
-------------- -------------- --------------
TOTAL PROVISION (BENEFIT) $ 12,613 $ (9,865) $ 24,228
============== ============== ==============
</TABLE>
-16-
<PAGE> 19
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 liability balance at December 31, 1994 of $3.1 million
and the net unamortized regulatory asset balance at December 31, 1993 of $1.5
million are reflected as other deferred credits and other assets, 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:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 160,418 $ 162,817
Employee benefit obligations (9,278) (4,271)
Prepaid pension costs 42,390 31,185
Restructuring costs (23,664) (29,303)
Investment tax credits 5,193 6,011
Capital goods excise tax credits 24,523 20,762
Other - net 2,905 5,496
--------- ---------
Total $ 202,487 $ 192,697
========= =========
</TABLE>
-17-
<PAGE> 20
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 components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year $ 11,988 $ 13,919 $ 13,186
Interest cost on projected benefit
obligations 26,565 31,254 28,898
Return on plan assets:
Actual 1,168 (98,181) (35,180)
Deferred (49,374) 48,102 (10,226)
Other - net (9,087) (11,429) (10,713)
--------- --------- ---------
Net pension credit $ (18,740) $ (16,335) $ (14,035)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for 1993 and 1992.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Plan assets at fair value $ 607,449 $ 624,171
Projected benefit obligations 346,595 361,043
--------- ---------
Excess of assets over projected
benefit obligations 260,854 263,128
Unrecognized net transition asset (36,322) (44,414)
Unrecognized net gain (109,728) (122,505)
--------- ---------
Prepaid pension costs $ 114,804 $ 96,209
========= =========
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $264.4 million and $276.6 million and vested
benefit obligations of $254.7 million and $268.1 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
</TABLE>
-18-
<PAGE> 21
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. The Company funds amounts for postretirement
benefits as appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Benefits earned during the year $ 2,595 $ 3,275
Interest cost on accumulated postretirement
benefit obligations 16,374 15,320
Actual return on plan assets 1,086 (925)
Amortization of transition obligation 7,598 11,466
Other - net (722) --
--------- ---------
Postretirement benefit cost $ 26,931 $ 29,136
========= =========
</TABLE>
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $3.8 million.
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations
attributable to:
Retirees $ 105,544 $ 99,802
Fully eligible active plan participants 86,350 92,007
Other active plan participants 23,485 20,521
--------- ---------
Total accumulated postretirement benefit obligations 215,379 212,330
Fair value of plan assets 35,193 23,890
--------- ---------
Excess of accumulated obligations over plan assets 180,186 188,440
Unrecognized transition obligation (135,971) (144,355)
Unrecognized prior service cost (13,629) (20,205)
Unrecognized net loss (19,161) (21,602)
--------- ---------
Accrued postretirement benefit obligations $ 11,425 $ 2,278
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and
13% for pre-65 participants and 9.0% 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 1994 costs by $3.1 million and the
accumulated postretirement benefit obligations at December 31, 1994 by $32.5
million.
-19-
<PAGE> 22
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes include newly established limits to the
Company's annual contribution to postretirement medical costs and a revised
cost sharing schedule based on a retiree's years of service. The net effect of
these changes reduced the accumulated postretirement benefit obligations at
December 31, 1993 by $17.2 million.
SAVINGS PLANS
The Company sponsors employee 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 $3.0 million, $3.5 million and $3.1 million in
1994-1992, respectively.
8. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment that contain renewal options for terms up to 72 years. Rental
expense was $15.7 million, $14.0 million and $15.0 million in 1994-1992,
respectively. Minimum rental commitments under noncancelable leases through
1999 do not exceed $1.6 million annually and aggregate $12.9 million
thereafter.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 10,782 $ 5,728
Buildings 150,120 134,168
Central office equipment 821,543 755,428
Outside plant 710,686 649,937
Other 215,292 278,587
---------- ----------
Total property, plant and equipment 1,908,423 1,823,848
Accumulated depreciation (702,596) (678,175)
---------- ----------
Net property, plant and equipment $1,205,827 $1,145,673
========== ==========
</TABLE>
-20-
<PAGE> 23
10. 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 Hawaii state budget bill, which was signed by the Governor of the
State 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, would have over time reduced 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 was 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 represented a 15.9% increase over intrastate revenues for 1993 at current
rates, and was the first rate increase application the Company has filed since
1985. The Company's rate restructure proposal and earnings investigation which
were in progress were incorporated into the rate case docket. Hearings took
place in March and April 1994. On June 14, 1994, the PUC issued an interim
decision indicating that it had not yet completed its review of the record.
The PUC ordered that the Company continue its rates at existing levels and
denied the Consumer Advocate's (CA) recommendation for an interim revenue
decrease. A final order is pending.
On October 14, 1994, the Company filed a Notice of Intent to file another rate
case with the PUC. The Company also filed a Motion for Waiver of Commission
Rules and for approval of 1995 to be the test year. The waiver requested that
the Company be allowed the option to file its rate case application in early
1995 without having to use a split 1995/1996 test year. On November 29, 1994,
the PUC approved the Company's request for the waiver of its test year rules.
On November 29, 1994, the PUC issued an order approving the adoption of accrual
accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) for
ratemaking purposes. The PUC'S order directed the Company to file plans for
reflecting the full impact of SFAS No. 106 in rates to be effective January 1,
1995. The PUC approved on January 19, 1995, the Company's plan to reflect an
additional $10.7 million of Postretirement Benefits Other Than Pensions in its
rates, retroactive to January 1, 1995.
-21-
<PAGE> 24
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 price cap regulatory plan, the FCC 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 the prospective prices. During
1995, 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 additional hurricane
related expenses of $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 had 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.
-22-
<PAGE> 25
On May 11, 1993, the PUC 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. Following the initiation of the docket, the PUC
allowed parties to seek intervenor or participant status. To date, over 35
parties representing a wide range of interests have been granted either
intervenor or participant status. The majority of the effort in the proceeding
has been directed toward developing a list of issues to be addressed. Two
reports were submitted to the PUC on June 9, 1994 and January 11, 1995
identifying the issues to be addressed and recommending that the proceeding be
divided into phases. The PUC directed parties to file opening testimony on
these matters on March 24, 1995.
On February 10, 1995, the PUC authorized AT&T to provide interisland toll on a
10XXX basis, effective March 1, 1995. AT&T will be required to report on the
impact of its service on the interisland toll business. The Commission
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's rates.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994-1992 under
various arrangements and amounted to $46.0 million, $44.0 million and $48.0
million, respectively.
-23-
<PAGE> 26
11. 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:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $(23,684) $(29,413) $ 9,708
Materials and supplies (1,017) 11,181 6,050
Prepayments and other current assets 132 (9,414) 2,063
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (1,503) (292) (4,241)
Affiliate payables and accruals (6,064) 4,307 2,202
Advanced billings and customer deposits 2,383 (1,258) 2,422
Accrued liabilities 10,471 3,027 (7,991)
Other (20,470) (318) 2,818
-------- -------- --------
Total $(39,752) $(22,180) $ 13,031
======== ======== ========
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $ 35,737 $ 28,459 $ 30,232
Income taxes 4,960 (11,086) 23,162
</TABLE>
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<PAGE> 27
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, 1994 and
1993, and the related consolidated statements of income, reinvested earnings
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the schedule 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, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, 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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This supporting schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states 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 LLP
Dallas, Texas
January 25, 1995.
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<PAGE> 28
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
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<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
(Registrant)
Date June 1, 1995 By WILLIAM M. EDWARDS, III
------------------------------------
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
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