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 June 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.)
1177 Bishop Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 808-546-4511
(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 July 31, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 60,301 $ 57,043 $ 121,392 $ 111,270
Network access services 33,163 32,265 65,871 64,321
Long distance services 23,367 30,973 48,101 59,347
Equipment sales and services 19,527 22,054 35,190 40,023
Other 28,349 11,180 32,202 39,864
164,707 153,515 302,756 314,825
OPERATING EXPENSES:
Cost of sales and services 37,446 44,510 72,811 89,403
Depreciation and amortization 29,942 26,884 60,052 54,646
Marketing, selling, general
and administrative 56,306 58,807 107,414 111,326
123,694 130,201 240,277 255,375
Net operating income 41,013 23,314 62,479 59,450
OTHER (INCOME) DEDUCTIONS:
Interest expense 10,357 8,752 20,530 17,249
Other - net (660) (309) (1,038) 522
INCOME BEFORE INCOME TAXES 31,316 14,871 42,987 41,679
INCOME TAXES 8,343 4,640 12,359 14,783
NET INCOME $ 22,973 $ 10,231 $ 30,628 $ 26,896
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
</TABLE>
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 $30.6 and $26.9 for the six months ended June 30, 1995 and
1994, respectively, representing an increase of 14% or $3.7. This increase
is primarily the result of lower operating expenses, primarily cost of
sales and services, partially offset by lower operating revenues.
OPERATING REVENUES
Operating revenues were $302.8 and $314.8 for the six months ended
June 30, 1995 and 1994, respectively, reflecting a decrease of 4% or $12.0.
Local network services revenues were $121.4 and $111.3 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of 9% or
$10.1. This increase 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 expenses
in its rates, retroactive to January 1, 1995, resulting in $5.3 of
increased revenues in the first six months of 1995. Revenues in 1995 also
increased due to continued customer growth as reflected by a 3% increase in
access lines, which generated $1.9 in additional revenues, and a $1.6
increase in sales of custom calling features, such as SmartCall_ services.
Network access services revenues were $65.9 and $64.3 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of 2% or
$1.6. This increase is the result of an 8% increase in minutes of use,
which generated $3.6 in additional revenues, and a $0.7 increase in end
user access charge revenue resulting from continued line growth.
Offsetting these increases are declines in interstate access revenues
associated with price reductions of $1.4 and unfavorable pooling
settlements of $1.3.
Long distance services revenues were $48.1 and $59.3 for the six months
ended June 30, 1995 and 1994, respectively, reflecting a decrease of 19% or
$11.2. This decline is primarily due to lower international toll volumes
of $5.2 and lower domestic toll volumes of $3.3. 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 $1.7. See
page 5, Other Matters, for further discussion.
Equipment sales and services revenues were $35.2 and $40.0 for the six
months ended June 30, 1995 and 1994, respectively, reflecting a decrease of
12% or $4.8. This decrease is primarily due to a $6.4 decline in revenues
from international service contracts, which were not renewed in 1995,
partially offset by increased growth in Radio Paging services, which
generated $1.3 in additional revenues.
2
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other operating revenues were $32.2 and $39.9 for the six months ended
June 30, 1995 and 1994, respectively, reflecting a decrease of 19% or $7.7.
This decrease is primarily due to higher provisions for uncollectible
customer and long distance carrier receivables of $5.4. The decrease is
also due to a net reduction in directory revenues of $2.4. During 1995,
directory revenues increased $3.9 due to an extension in the life of 1994
directories; however, due to this extension, $6.3 of directory publications
billed in the second quarter of 1994 will be delayed until the third
quarter of 1995.
OPERATING EXPENSES
Operating expenses were $240.3 and $255.4 for the six months ended June
30, 1995 and 1994, respectively, reflecting a decrease of 6% or $15.1. The
decrease is primarily due to a $5.5 decrease in contractor costs and
software upgrades associated with projects completed in 1994, as well as a
$5.5 decrease in labor and benefits costs associated with the Company's
re-engineering plan initiated in 1994. The decrease is also due to higher
costs in 1994 of $5.3 relating to the resolution of certain amounts owed to
and from interexchange carriers. Partially offsetting these decreases is a
$5.4 increase in depreciation and amortization primarily resulting from
increased plant investments, including the installation of interisland
fiber optics in the third quarter of 1994.
OTHER DEDUCTIONS
Interest expense was $20.5 and $17.2 for the six months ended June 30, 1995
and 1994, respectively, reflecting an increase of 19% or $3.3. The
increase is primarily due to higher average short-term debt levels,
accompanied by higher short-term borrowing rates, for the first six months
of 1995 compared to the same period in 1994.
Income taxes were $12.4 and $14.8 for the six months ended June 30, 1995
and 1994, respectively, representing a decrease of 16% or $2.4. This
decrease is primarily due to a larger portion of income from nontaxable
foreign operations.
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):
3
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
December 31, 1994 December 31, 1995 June 30,
Component 1993 Activity 1994 Activity 1995
Separation benefits $ 35.4 $ (0.7) $ 34.7 $ (1.3) $ 33.4
Systems 31.3 (13.3) 18.0 (6.6) 11.4
Consolidation of
facilities 9.6 (1.5) 8.1 (1.3) 6.8
Other 2.0 (2.0) -- -- --
Total $ 78.3 $ (17.5) $ 60.8 $ (9.2) $ 51.6
There have been no significant changes made to the overall re-engineering
plan as originally reported. As of June 30, 1995, $22.1 of the
restructuring reserve is classified as a current liability. Management
believes the reserve is adequate to cover future expenditures.
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, totaling 2.8%. The Company
selected the following productivity factors and sharing thresholds for use
in the 1995-1996 tariff year:
Tariff Productivity Sharing Parameters
Entity Factor 50% 100%
Hawaii 4.0% 12.25-13.25% ROR Over 13.25% ROR
Micronesia 5.3% None None
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. The
FCC is continuing to consider how the price cap plan should be modified in
order to adapt the system to the emergence of competition.
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.
4
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
On May 30, 1995, the Company 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 has withdrawn its originally filed
application and expects to refile by September 30, 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.
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
Company from providing 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.
5
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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.
6
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 2,412 $ 7,709
Receivables, less allowances
of $12,786 and $9,010, respectively 154,544 137,478
Materials and supplies 13,696 7,998
Deferred income tax benefits 10,556 12,061
Prepayments and other 13,570 14,792
Total current assets 194,778 180,038
PROPERTY, PLANT AND EQUIPMENT:
Original cost 1,964,145 1,908,423
Accumulated depreciation (762,373) (702,596)
Net property, plant and equipment 1,201,772 1,205,827
PREPAID PENSION COSTS 128,788 114,804
OTHER ASSETS 25,185 26,580
TOTAL ASSETS $ 1,550,523 $ 1,527,249
See Notes to Condensed Consolidated Financial Statements.
7
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 226,569 $ 211,929
Accounts payable 30,245 42,660
Accrued taxes 13,439 15,310
Accrued interest 7,307 7,341
Accrued payroll and vacations 32,036 24,497
Accrued dividends 7,000 --
Accrued restructuring costs and other 53,786 55,181
Total current liabilities 370,382 356,918
LONG-TERM DEBT 371,244 371,840
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 221,560 214,548
Employee benefit obligations 20,989 12,709
Restructuring costs and other 35,918 47,798
Total reserves and deferred credits 278,467 275,055
SHAREHOLDER'S EQUITY:
Common stock 250,000 250,000
Other capital 42,002 41,943
Reinvested earnings 238,428 231,493
Total shareholder's equity 530,430 523,436
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,550,523 $ 1,527,249
See Notes to Condensed Consolidated Financial Statements.
8
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,628 $ 26,896
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 60,052 54,646
Deferred income taxes and investment
tax credits 8,931 10,022
Provision for uncollectible accounts 7,518 2,095
Changes in current assets and
current liabilities (44,611) (32,836)
Other - net (10,541) (850)
Net cash from operating activities 51,977 59,973
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (51,371) (80,317)
Cash used in investing activities (51,371) (80,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt retired (1,269) (1,228)
Dividends paid to shareholder (16,693) (10,000)
Net change in affiliate notes (3,133) 994
Increase in short-term debt 15,192 36,500
Net cash from (used in) financing
activities (5,903) 26,266
Increase (decrease) in cash (5,297) 5,922
Cash at beginning of period 7,709 808
Cash at end of period $ 2,412 $ 6,730
See Notes to Condensed Consolidated Financial Statements.
9
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) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
10
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.
(12) Statement of Consolidated Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the second
quarter of 1995.
11
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: July 31, 1995 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
12
Exhibit 12
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Six Months Ended
June 30, 1995
Net earnings available for fixed charges:
Net income (a) $ 30,628
Add - Income tax expense 12,359
- Fixed charges 22,967
Adjusted earnings: $ 65,954
Fixed charges:
Interest expense $ 20,530
Portion of rent expense
representing interest 2,437
Adjusted fixed charges: $ 22,967
CONSOLIDATED RATIO OF EARNINGS TO
FIXED CHARGES: 2.87
(a) Includes allowance for funds used during construction.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 2,412
<SECURITIES> 0
<RECEIVABLES> 167,330
<ALLOWANCES> 12,786
<INVENTORY> 13,696
<CURRENT-ASSETS> 194,778
<PP&E> 1,964,145
<DEPRECIATION> 762,373
<TOTAL-ASSETS> 1,550,523
<CURRENT-LIABILITIES> 370,382
<BONDS> 371,244
<COMMON> 250,000
0
0
<OTHER-SE> 238,428
<TOTAL-LIABILITY-AND-EQUITY> 1,550,523
<SALES> 302,756
<TOTAL-REVENUES> 302,756
<CGS> 72,811
<TOTAL-COSTS> 240,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,530
<INCOME-PRETAX> 42,987
<INCOME-TAX> 12,359
<INCOME-CONTINUING> 30,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,628
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
