<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1996
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 formal 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
April 30, 1996. 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
March 31,
-------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $ 60,529 $ 61,091
Network access services 35,421 32,708
Toll services 22,702 24,734
Other services and sales 22,376 22,007
--------- ---------
Total revenues and sales 141,028 140,540
--------- ---------
Operating costs and expenses:
Cost of services and sales 68,099 61,562
Selling, general and administrative 23,530 27,553
Depreciation and amortization 30,791 30,110
--------- ---------
Total operating costs and expenses 122,420 119,225
--------- ---------
Operating income 18,608 21,315
Other (income) expense:
Interest - net 10,208 9,802
Other - net 366 (158)
--------- ---------
Income before income taxes 8,034 11,671
Income taxes 2,546 4,016
--------- ---------
Net income $ 5,488 $ 7,655
========= =========
</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
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net income $5.5 $7.7
</TABLE>
Net income decreased 29% or $2.2 for the three months ended March 31, 1996,
compared to same period in 1995. The decrease is primarily the result of
higher operating costs and expenses and lower toll service revenues, partially
offset by higher network access service revenues.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Local services $ 60.5 $ 61.1
Network access services 35.4 32.7
Toll services 22.7 24.7
Other services and sales 22.4 22.0
------ ------
Total revenues and sales $141.0 $140.5
</TABLE>
Total revenues and sales remained virtually unchanged for the three months
ended March 31, 1996, compared to the same period in 1995.
Network access service revenues increased 8% or $2.7 for the three months ended
March 31, 1996, compared to the same period in 1995. The increase is primarily
due to a 9% increase in minutes of use, which generated $2.9 in additional
revenues, partially offset by a $0.5 decline in revenues resulting from
unfavorable pooling settlements.
Toll service revenues decreased 8% or $2 for the three months ended March 31,
1996, compared to the same period in 1995, primarily due to lower international
and domestic toll volumes. The lower domestic toll volumes are a result of
continued competition with long distance carriers authorized to provide
interisland toll service on a 10XXX basis.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Total operating costs and expenses $122.4 $119.2
</TABLE>
Total operating costs and expenses increased 3% or $3.2 for the three months
ended March 31, 1996, compared to the same period in 1995. The increase is
primarily due to a $2 increase in contractor costs and application software
upgrades and $0.7 of higher depreciation expenses in 1996. These increases are
partially offset by $0.2 of settlement gains recorded in the first quarter of
1996 which resulted from lump-sum payments from the Company's pension plans.
2
<PAGE> 4
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Income taxes $2.5 $4.0
</TABLE>
Income taxes decreased $1.5 for the three months ended March 31, 1996, compared
to the same period in 1995, primarily due to a corresponding decrease in
pre-tax income.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pre-tax
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 and December 31, 1996 March 31,
Component 1993 1995 Activity 1995 Activity 1996
- ---------------- ------------ ------------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Customer service $52.8 $(28.5) $24.3 $(3.6) $20.7
Administrative 19.0 (3.9) 15.1 (1.0) 14.1
Other 6.5 (6.5) -- -- --
----- ------ ----- ----- -----
Total $78.3 $(38.9) $39.4 $(4.6) $34.8
===== ====== ===== ===== =====
</TABLE>
Implementation of the re-engineering plan began during 1994 and is expected to
be substantially completed by the end of 1996. Costs of $43.5 have been
incurred since the plan's inception. These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits related to employee reductions. As of
March 31, 1996, $34.8 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)
The Company submitted its 1996 annual interstate access filing on April 2, 1996,
utilizing the FCC's interim price cap rules. In doing so, the Company changed
its productivity factor from 5.3% to 4.0% for its subsidiary, Micronesian
Telecommunications Corporation (MTC). Overall, the proposed rates result in a
$1 price increase, effective July 1, 1996. The Company anticipates the FCC will
issue an order prior to the effective date, which may require changes to the
Company's annual filing.
On September 29, 1995, the Company filed an application to increase its
rates by $74 in its 1995 Rate Case. The Public Utilities Commission (PUC) of
the State of Hawaii approved bifurcation of the proceeding into a revenue
requirement phase (Phase I) and a rate design phase (Phase II). The PUC held
public hearings on Phase I in late 1995. The Department of Defense (DOD), AT&T
Communications of Hawaii (AT&T) and Pacwest Telecommunications Corporation
(Pacwest) filed motions to intervene in this proceeding. On January 12, 1996,
the PUC granted the DOD intervention in both phases but limited AT&T and
Pacwest to participating in the formulation of issues for Phase I. The PUC
indicated that after the issues are approved, AT&T and Pacwest may file motions
to intervene if it appears that the issues will significantly impact their
interests. On March 22, 1996, the PUC approved another request by AT&T for
participation in the Company's rate case. The PUC, however, limited the scope
of AT&T's participation only to issues relating to cost allocations,
jurisdictional separations, and competitive impacts. The PUC denied a similar
second request by Pacwest to participate in the Company's rate case. On April
16, 1996, the PUC approved a procedural schedule which calls for evidentiary
hearings to begin on July 29, 1996. The Company anticipates that it will file
its Phase II proposal in the second half of 1996.
On March 1, 1996, the PUC ordered the Company to implement 1+ and 0+ equal
access within the State by May 1, 1996. On March 11, 1996, the Company filed a
motion for stay of proceedings and for reconsideration of the PUC's order. On
March 18, 1996, memoranda opposing the Company's motions were filed by AT&T,
Time Warner Communications of Hawaii, L.P., d.b.a. Oceanic Communications
(Oceanic), and Sprint Communications Company, L.P., d.b.a. Long Distance/USA
(Sprint). On March 20, 1996, the Division of Consumer Advocacy and the
Department of Commerce and Consumer Affairs filed a statement of position
opposing the Company's motions and supporting the arguments provided by AT&T,
Oceanic, and Sprint. The Company filed a reply to the opposing memoranda on
March 27, 1996. On April 19, 1996, the PUC denied the Company's motion for stay
of the order, but granted the Company's motion for reconsideration with respect
to the implementation date of equal access and extended the implementation date
of 1+ and 0+ equal access until July 10, 1996.
On March 20, 1995, the PUC authorized the expansion of the operating authority
of Pacwest to allow Pacwest to provide both data and voice digital transmission
services on a point-to-point basis. Pacwest is now seeking approval to provide
intrastate telecommunications services within the state. On March 28, 1996,
Pacwest filed a motion for summary approval of its application to amend its
certification to provide interstate services. On April 3, 1996, the Company
filed a memorandum in opposition to Pacwest's motion.
During the first quarter of 1996, the Company purchased the remaining shares of
common stock outstanding in its subsidiary, MTC.
On April 1, 1996, the Company redeemed prior to stated maturity its $35 Series V
8.5% first mortgage bond. On May 1, 1996, the Company called its $75 Series
AA 9.0% first mortgage bond which it expects to redeem on June 1, 1996.
4
<PAGE> 6
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 4,908 $ 4,515
Receivables, less allowances of $4,284 and $6,338 134,420 150,560
Inventories and supplies 9,282 8,829
Deferred income tax benefits 15,556 18,157
Prepaid taxes and other 7,535 15,327
----------- -----------
Total current assets 171,701 197,388
----------- -----------
Property, plant and equipment, at cost 1,973,672 1,967,801
Accumulated depreciation (1,171,385) (1,158,356)
----------- -----------
Total property, plant and equipment, net 802,287 809,445
----------- -----------
Other assets, primarily employee benefit plans 153,108 147,982
----------- -----------
Total assets $ 1,127,096 $ 1,154,815
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 215,219 $ 123,764
Accounts payable 27,245 37,531
Taxes payable 18,952 15,927
Accrued interest 8,779 11,786
Accrued payroll costs 27,847 31,351
Accrued dividends 20,029 --
Accrued restructuring costs 34,827 39,353
Other 28,714 30,771
----------- -----------
Total current liabilities 381,612 290,483
----------- -----------
Non-current liabilities:
Long-term debt 372,316 482,412
Deferred income taxes 80,189 78,114
Other liabilities 34,092 30,378
----------- -----------
Total non-current liabilities 486,597 590,904
----------- -----------
Shareholder's equity:
Common stock (10,000,000 shares issued) 250,000 250,000
Additional paid-in capital 41,146 41,146
Retained earnings (deficit) (32,259) (17,718)
----------- -----------
Total shareholder's equity 258,887 273,428
----------- -----------
Total liabilities and shareholder's equity $ 1,127,096 $ 1,154,815
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 5,488 $ 7,655
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 30,791 30,110
Deferred income taxes 1,086 3,539
Provision for uncollectible accounts 2,253 2,493
Changes in current assets and current liabilities 15,162 1,876
Other - net (6,264) 3,143
-------- --------
Net cash from operations 48,516 48,816
-------- --------
Investing:
Capital expenditures (18,480) (32,119)
Purchase of MTC stock (450) --
-------- --------
Cash used in investing (18,930) (32,119)
-------- --------
Financing:
Long-term debt retired (35,551) (635)
Increase (decrease) in short-term obligations,
excluding current maturities 6,358 (19,310)
-------- --------
Net cash used in financing (29,193) (19,945)
-------- --------
Increase (decrease) in cash and temporary investments 393 (3,248)
Cash and temporary investments:
Beginning of period 4,515 7,709
-------- --------
End of period $ 4,908 $ 4,461
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
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 1995
Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
7
<PAGE> 9
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 re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the first quarter
of 1996.
8
<PAGE> 10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE Hawaiian Telephone Company Incorporated
-------------------------------------------
(Registrant)
Date: May 13, 1996 William M. Edwards, III
-------------- -------------------------------------------
William M. Edwards, III
Controller
(Principal Accounting Officer)
9
<PAGE> 11
EXHIBIT INDEX
Exhibit
Number Description
------- ---------------------------------------------------
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
-----------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 5,488
Add - Income taxes 2,546
- Fixed charges 12,042
-------
Adjusted earnings $20,076
=======
Fixed charges:
Interest expense $10,846
Portion of rent expense
representing interest 1,196
-------
Adjusted fixed charges $12,042
=======
RATIO OF EARNINGS TO FIXED CHARGES 1.67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,908
<SECURITIES> 0
<RECEIVABLES> 138,704
<ALLOWANCES> 4,284
<INVENTORY> 9,282
<CURRENT-ASSETS> 171,701
<PP&E> 1,973,672
<DEPRECIATION> 1,171,385
<TOTAL-ASSETS> 1,127,096
<CURRENT-LIABILITIES> 381,612
<BONDS> 372,316
<COMMON> 250,000
0
0
<OTHER-SE> 8,887
<TOTAL-LIABILITY-AND-EQUITY> 1,127,096
<SALES> 141,028
<TOTAL-REVENUES> 141,028
<CGS> 68,099
<TOTAL-COSTS> 122,420
<OTHER-EXPENSES> 366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,208
<INCOME-PRETAX> 8,034
<INCOME-TAX> 2,546
<INCOME-CONTINUING> 5,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,488
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
