<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 quarterly period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 2-33059
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0049500
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-718-5600
(Former name, former address and former fiscal year, if
changed since last report)
The registrant, a wholly-owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
is therefore filing this form with reduced disclosure format pursuant to
General Instruction H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--------- --------
The Company had 10,000,000 shares of $25 par value common stock outstanding at
October 31, 1997. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 66,615 $ 58,120 $ 196,171 $ 173,367
Network access services 38,751 37,226 123,850 109,705
Toll services 13,784 23,252 46,867 69,498
Other services and sales 36,826 34,943 115,333 120,331
---------- ---------- ---------- ----------
Total revenues and sales 155,976 153,541 482,221 472,901
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 63,895 63,350 190,185 194,654
Selling, general and administrative 27,587 26,906 91,058 83,398
Depreciation and amortization 28,712 31,788 91,286 93,435
---------- ---------- ---------- ----------
Total operating costs and expenses 120,194 122,044 372,529 371,487
---------- ---------- ---------- ----------
OPERATING INCOME 35,782 31,497 109,692 101,414
OTHER (INCOME) EXPENSE
Interest - net 9,334 8,932 27,875 29,136
Other - net (242) (613) (670) (3)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 26,690 23,178 82,487 72,281
Income taxes 16,511 7,697 36,961 24,245
---------- ---------- ---------- ----------
NET INCOME $ 10,179 $ 15,481 $ 45,526 $ 48,036
========== ========== ========== ==========
</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>
Nine Months Ended
September 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 45.5 $ 48.0
</TABLE>
Net income decreased 5% or $2.5 for the nine months ended September 30, 1997,
compared to the same period in 1996. This decrease is primarily the result of
adjustments to prior years' tax liabilities, offsetting strong operating income
growth.
REVENUES AND SALES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Local services $ 196.2 $ 173.4
Network access services 123.8 109.7
Toll services 46.9 69.5
Other services and sales 115.3 120.3
-------------- --------------
Total revenues and sales $ 482.2 $ 472.9
</TABLE>
Total revenues and sales increased 2% or $9.3 for the nine months ended
September 30, 1997, compared to the same period in 1996.
Local service revenues increased 13% or $22.8 for the nine months ended
September 30, 1997, compared to the same period in 1996. This increase reflects
$15.7 associated with the final award for the 1995 Rate Case earned during the
first nine months of 1997, and a $4.7 growth in revenues from custom calling
features, such as SmartCall(R) services. The number of access lines increased
3% for the nine months ended September 30, 1997, which generated additional
revenues of $1.2.
Network access service revenues increased 13% or $14.1 for the nine months
ended September 30, 1997, compared to the same period in 1996. This growth is
primarily due to increased demand for access services by interexchange carriers
and growing demand for increased bandwidth services. Minutes of use increased
13%, which resulted in higher revenues of $6.2. Special access revenues grew
$6.5 due to greater demand for increased bandwidth services by Internet Service
Providers (ISPs) and other high-capacity users.
Toll service revenues decreased 33% or $22.6 for the nine months ended
September 30, 1997, compared to the same period in 1996, primarily due to lower
domestic toll volumes resulting from continued competition with long distance
carriers authorized to provide interisland toll service on a 10XXX and 1+
presubscription basis. The decrease in revenues is also due to the impact of
optional discount calling plans, which effectively lowered intrastate long
distance rates.
2
<PAGE> 4
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Other services and sales revenues decreased 4% or $5 for the nine months ended
September 30, 1997, compared to the same period in 1996. This decrease is
primarily due to lower equipment sales of $8.9 resulting from the completion of
the Osan Base System and other international service contracts in 1996. This
decrease is partially offset by increases of $1.4 from directory advertising,
$1.3 in wireless activation commissions and related accessory sales and $1 in
voice messaging and paging services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cost of services and sales $ 190.2 $ 194.7
Selling, general and administrative 91.0 83.4
Depreciation and amortization 91.3 93.4
-------------- --------------
Total operating costs and expenses $ 372.5 $ 371.5
</TABLE>
Total operating costs and expenses remained essentially the same for the nine
months ended September 30, 1997, compared to the same period in 1996. Selling
and marketing costs increased $7.7, which includes $3.4 in advertising costs.
These selling and marketing costs stimulated additional revenues through
customer demand for products and services, including second lines and custom
calling features. These increases are offset by lower depreciation expense of
$2.1, primarily due to the change in the estimated salvage values of certain
assets (as discussed in the Notes to Condensed Consolidated Financial
Statements) as well as reduced costs of services and sales of $4.5. The
reduction in costs of services and sales primarily consists of an $8.5
reduction in costs associated with the completion of international service
contracts and pension settlement gains of $3.8 recorded in the third quarter
of 1997, offset by an $8.5 increase in labor and benefits costs required to
support revenue generation associated with access line growth and increased
demand for enhanced services.
OTHER EXPENSES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Interest - net $ 27.9 $ 29.1
Income taxes 37.0 24.2
</TABLE>
Interest - net decreased 4% or $1.2 for the nine months ended September 30,
1997, compared to the same period in 1996. The decrease is primarily
attributable to lower average debt levels.
Income taxes increased 53% or $12.8 for the nine months ended September 30,
1997, compared to the same period in 1996. This increase is primarily due to a
corresponding increase in pre-tax income and adjustments to prior years' tax
liabilities.
3
<PAGE> 5
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
OTHER MATTERS
Federal Regulatory Developments
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the Federal
Communication Commission's (FCC) rules purporting to implement the local
competition provisions of the Telecommunications Act of 1996 (the
Telecommunications Act). The Company's parent, GTE, together with other
incumbent local-exchange carriers (ILECs) and a number of state commissions,
had challenged various portions of the FCC rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements (UNEs) and services for resale. In
addition, the Eighth Circuit made a number of other rulings favorable to GTE,
including that the FCC's rule allowing requesting carriers to pick and choose
among individual provisions of other interconnection agreements, rather than to
adopt the terms and conditions of a single agreement in its entirety, was
unlawful; that the FCC does not have the authority to review interconnection
agreements approved by state commissions or to enforce the terms of such
agreements; that the FCC rule requiring ILECs to provide interconnection and
UNEs at levels of quality that are superior to those levels at which the ILECs
provide them to themselves was unlawful; and that it is the requesting
carriers, not the ILECs, that must combine UNEs.
In addition, the Eighth Circuit rejected certain arguments advanced by GTE. For
example, it ruled that a requesting carrier may gain access to all of the UNEs
that, when combined by the requesting carrier, are sufficient to enable the
requesting carrier to provide a finished service, and it upheld most of the
standards applied by the FCC in determining which network elements an ILEC must
make available.
In October 1997, the Eighth Circuit, granting a petition for rehearing filed by
GTE and others, further ruled that the Telecommunications Act "does not permit
a new entrant to purchase the ILEC's assembled platform(s) of combined network
elements (or any lesser existing combination of two or more elements) in order
to offer competitive telecommunications services." The FCC has announced plans
to seek Supreme Court review of the Eighth Circuit's rulings; it has until
January 12, 1998 to file a petition for certiorari.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE has filed petitions for review of these FCC orders with the U.S.
Court of Appeals for the Tenth Circuit. GTE anticipates that those petitions
will be decided in 1998.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5%. The order also eliminated the
sharing requirements of the price cap rules. In June 1997, in accordance with
the order, the Company submitted its 1997 annual price cap filing. The 1997
interstate access filing resulted in an annual price reduction of $20,
effective July 1, 1997. Prior to this order, the Company had submitted a rate
change filing in May 1997, as the Company's access rates were priced
significantly below the FCC's maximum allowable price. This rate change filing
resulted in an annual price increase of $12.6, effective June 3, 1997. Overall,
the net effect of these access filings resulted in an annual price reduction of
$7.4.
4
<PAGE> 6
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
On June 4, 1996, the FCC issued the first Report and Order implementing Section
276 of the Telecommunications Act. As part of the overall goal of promoting
competition among payphone service providers (PSPs), this order mandated
compensation to all PSPs for all calls originating from payphones, including
"dial-around" access calls and toll-free subscriber calls for which PSPs were
not previously compensated. This compensation was to occur in two separate
phases. During phase one, from April 15, 1997 through October 6, 1997, PSPs
were to be paid a monthly, flat-rate compensation from interexchange carriers
(IXCs). During phase two, beginning October 7, 1997, PSPs were to be
compensated on a per-call basis, with the prevailing local coin rate of 35
cents established as the default rate.
On July 19, 1997, the U.S. Court of Appeals in Washington, D.C. vacated the
FCC's directive concerning per-call compensation, stating that the FCC had not
shown that the 35 cent rate was a reasonable surrogate for fair compensation.
The court also set aside the FCC's flat-rate compensation mandate.
Subsequently, on October 9, 1997, the FCC issued a second Report and Order to
address those issues vacated by the court. In this second order, the FCC
established a new per-call rate of 28.4 cents for phase two compensation. The
FCC also tentatively concluded that this per-call rate should also be used to
calculate phase one compensation obligations. It is likely, however, that the
entire phase one compensation directive will be revisited in a subsequent
order.
In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs and
resale rates. In some cases, the parties have been unable to agree within the
statutory period for negotiation and have gone to arbitration before various
state regulatory commissions. Since December 1996, state commission decisions
determining the prices and terms of unresolved issues have been released in
Hawaii. Subsequent decisions are expected to be issued throughout 1997 and 1998.
The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors. The Company has filed lawsuits in
federal district court in Hawaii.
Additionally, the Company has made appropriate filings with the state and
Federal District Court requesting that the Eighth Circuit's favorable rulings
be taken into consideration in connection with any future arbitration rulings
or complaint actions.
Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. The Company is expecting to begin filing cost
studies in Hawaii during the fourth quarter of 1997 as part of its
Infrastructure filing, as discussed below.
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
are expected to occur in Hawaii during the fourth quarter of 1997 as part of
the Infrastructure filing, and a decision is expected during the second quarter
of 1998.
State Regulatory Developments
In August 1996, pursuant to the Telecommunications Act, AT&T filed a petition
with the Public Utilities Commission (PUC) of the State of Hawaii requesting
arbitration of remaining interconnection, resale and unbundling issues between
AT&T and the Company. Hearings were held in October 1996, and a decision was
issued by the PUC on December 12, 1996. In its decision, the PUC ordered the
Company, among many other things, to discount all retail services at a rate of
15% and offer UNEs at a price based on the Company's total element long run
incremental cost (TELRIC) increased by 10% for joint and common costs. On
January 10, 1997, the Company filed
5
<PAGE> 7
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
a complaint for declaratory and injunctive relief in the U.S. District Court.
On February 13, 1997, the Company and AT&T jointly filed a draft
interconnection agreement which reflected areas of dispute and proposed
language by each company. On April 18, 1997, the PUC issued its decision, which
resolved the differences between the parties. An executed agreement was filed
on May 8, 1997, in accordance with this decision. The PUC approved the
arbitrated agreement on June 6, 1997. A U.S. District Court decision is
expected in the near future.
Sprint Corporation (Sprint) petitioned the PUC for arbitration in September
1996 on many of the same issues that were submitted by AT&T. Based on hearings
held in December 1996, the PUC issued a decision on January 17, 1997, which
reaffirmed the AT&T arbitration rulings. On March 7, 1997, the PUC ordered that
an interconnection agreement be filed with the PUC in the same format as the
Company's interconnection agreement with AT&T along with each parties'
proposals on disputed issues. On April 3, 1997, the PUC denied the Company's
motion for reconsideration and ordered both parties to file their own version
of the interconnection agreement if a joint agreement could not be filed. Both
companies filed their individually proposed agreements on April 11, 1997. On
April 25, 1997, the Company and Sprint filed a revised interconnection
agreement with the PUC, which contained unresolved language. On July 28, 1997,
Sprint filed a motion to elect the AT&T arbitrated agreement under Section 252
(I) of the Telecommunications Act. The Company filed an opposition to the
motion on August 6, 1997. On August 21, 1997, the PUC approved Sprint's
adoption of the AT&T agreement and on September 17, 1997, Sprint filed the
executed agreement as ordered.
On November 27, 1996, an interconnection agreement between the Company and GST
Telecom Hawaii (GST) was filed with approval granted by the PUC. A revised
interconnection agreement was filed with the PUC on January 16, 1997, with the
E911 and Telecommunications Relay Service (TRS) agreements filed on January 16
and January 24, 1997, respectively. On May 5, 1997, GST petitioned the PUC for
arbitration on two issues, the establishment of performance standards and
remedies and the prices for unbundled loops. On May 30, 1997, the Company filed
its response to this petition. On August 11, 1997, GST and the Company jointly
informed the PUC that a negotiated agreement had resolved the outstanding
arbitration issues and on August 22, 1997, an amendment to the original
interconnection agreement was filed with the PUC for approval. On October 9,
1997, the PUC approved the amendment.
Communications Infrastructure
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. As part of this proceeding, on May 17, 1996, the
PUC formally adopted administrative rules governing telecommunications
competition and establishing a universal service fund in Hawaii. Since June 3,
1996, the effective date of the new rules, the PUC has granted certificates of
authority to numerous applicants to operate as resellers of telecommunications
services and has others pending.
On December 12, 1996, the PUC issued a decision on the petition of AT&T for
arbitration with the Company concerning interconnection of AT&T's facilities
and equipment with the Company's network. Pursuant to this ruling, many of the
issues contained in this AT&T arbitration proceeding were deferred to the
communications infrastructure docket for resolution of final rates.
On April 2, 1997, the PUC issued a prehearing order to resolve all remaining
issues in the communications infrastructure proceeding on an accelerated time
frame. These issues are: 1) total service resale and wholesale pricing; 2)
unbundled network elements; 3) transport and termination; 4) physical and
virtual collocation; 5) access to poles, ducts, conduits and rights-of-way; 6)
"most favored nation clause"; 7) intrastate access tariff;
6
<PAGE> 8
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
8) undepreciated plant balance; 9) rate rebalancing; and 10) universal service
fund program. In October 1997, the PUC held evidentiary hearings on the issues
of the current phase of the communications infrastructure docket. The active
participants included AT&T, Sprint, Oceanic Communications, GST, Western
Wireless Corporation, the State Consumer Advocate and others. A decision and
order is expected in early 1998.
Competition
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
April 19, 1996, the PUC denied the Company's motion for stay of the order.
Effective July 10, 1996, the Company implemented 1+ and 0+ equal access.
During the first quarter of 1995, the PUC authorized AT&T, Sprint and MCI to
provide interisland toll service on a 10XXX basis, and reserved the right to
modify or rescind the authority depending on the impact to the Company. Since
then, the PUC has granted certificates of authority to approximately 130
carriers to provide for interexchange telecommunications services in Hawaii,
including Time Warner Communications and GST Pacwest.
Rural Service Plans
In September 1992, the PUC initiated an investigation of the Company's provision
of telephone service in the rural areas in the state. On November 2, 1994, the
PUC issued its ruling in this proceeding, requesting the Company to convert all
existing rural multi-party lines to single-party over a three-year period. The
ruling further allowed the Company to collect one-half of the cost of conversion
from existing multi-party customers choosing to convert to single-party service.
The remaining costs, estimated up to $20.2, will be recovered from general
ratepayers through a three-year monthly surcharge that began September 1, 1995.
Acting on the Company's request, the PUC approved elimination of the monthly
recurring charge to rural customers and a restructuring of the recovery of the
$20.2 previously authorized. The monthly customer surcharge of sixty-two cents
will continue through August 1998, with any remaining portion of the costs to be
recovered through the revenue requirement of the 1995 Rate Case. On October 6,
1997, the PUC approved the Company's proposal for a $1.3 adjustment to the
revenue requirement in the rate case, allowing an increase in the current rate
case surcharge from 10.63% to 11.23%, effective October 13, 1997.
On December 13, 1995, the PUC issued a decision allowing a telecommunications
carrier other than the Company to seek authorization to provide service in the
Ka'u area on the island of Hawaii. The PUC selected TelHawaii Incorporated
(TelHawaii) as the alternative provider and carrier of last resort (COLR) in
the Ka'u area of the island of Hawaii, requiring service delivery by May 31,
1997. The PUC's order further required the Company and TelHawaii to negotiate
all necessary agreements including, as required or appropriate, an agreement
for the transfer to, or use by, TelHawaii of the Company's assets and
agreements for extended area service, directory assistance and publications,
interconnection, enhanced 911 and telecommunications relay services. In the
summer of 1996, the Company appealed the PUC's selection of TelHawaii as the
alternative provider of telecommunications services and as the COLR in the Ka'u
area of the island of Hawaii. The Company opposes the effective taking of its
property by forced sale of its assets in Ka'u and objects on the basis that the
order is contrary to the Telecommunications Act. On September 5, 1996, the
Company filed an Expedited Motion for Stay Pending Appeal and an Emergency
Motion for Temporary Stay Pending Supreme Court Review of the Expedited Motion.
In September 1996, the Company was fined for noncompliance with the PUC's
order, and filed a Motion for Reconsideration of the PUC's order on October 3,
1996 due to the legal grounds for noncompliance with the PUC's order. On
November 8, 1996, the Company also filed a motion requesting the PUC to
consider issuing a
7
<PAGE> 9
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
clarification order and an order granting mitigation and abatement of fines and
penalties levied. On December 23, 1996, the PUC denied the Company's motion for
reconsideration and motion for clarification and directed the parties to
continue negotiation of "sale or use" of the Ka'u facilities. On January 27,
1997, TelHawaii filed an application requesting the PUC exercise its power of
eminent domain for the acquisition of the Company's assets in the Ka'u area. On
May 23, 1997, the PUC issued its decision stating that TelHawaii's proposal to
initiate a court condemnation proceeding is necessary and in the public
interest. On June 16, 1997, the Company appealed the PUC's ruling with the
Supreme Court. On October 16, 1997, TelHawaii filed and was granted a motion to
dismiss the Company's appeal on the grounds that the Court lacks jurisdiction.
The Company is appealing this decision with the First Circuit Court.
On May 13, 1997, the PUC approved TelHawaii's request that it be excused from
complying with the May 31, 1997 deadline for providing service in the Ka'u
area. On May 27, 1997, the Company filed a motion for reconsideration of the
extension of time granted to TelHawaii, which was denied on June 10, 1997.
On July 16, 1997, the FCC issued an order allowing TelHawaii to establish a new
study area, allowing TelHawaii to operate under rate-of-return regulation, and
denying TelHawaii's request to receive immediate USF support. In August 1997,
TelHawaii filed a Petition for Reconsideration requesting the FCC to allow
TelHawaii to receive immediate USF support effective with the transfer of the
Company's assets to TelHawaii. The Company filed an opposition to TelHawaii's
petition on August 25, 1997. On September 18, 1997, TelHawaii filed a motion
requesting the PUC identify any subsidies that the Company should transfer to
TelHawaii. On September 30, 1997, the PUC issued an order deferring TelHawaii's
motion until after the PUC issues a decision and order in the infrastructure
proceeding.
On January 31, 1997, the PUC instituted investigations, as a result of
petitions filed by rural area communities, to determine whether the
telecommunications service provided by the Company in the South Kona and Puna
districts of the island of Hawaii is adequate. In April and May, the Company
and other parties filed direct testimonies, respectively. Rebuttal testimony
was filed on August 18, 1997. The parties are to negotiate the hearing dates.
Interstate and International Services
On December 20, 1996, the Company filed an application requesting approval to
transfer certain property to the newly established GTE Hawaiian Tel
International entity. The transfer of property was completed in accordance with
an FCC Order released on October 22, 1996, which allows the Company to be
reclassified as a nondominant provider of international toll, subject to
certain safeguards.
The safeguards included the establishment of a separate legal entity with
separate books of account, no sharing of transmission or switching facilities
with an affiliated LEC, the acquiring of services from the LEC on a tariffed
basis, and the treatment as a nonregulated affiliate under the FCC's joint cost
and affiliate transaction rules.
On April 18, 1997, the FCC published its Second Report and Order (the Order)
containing rules for the provision of interexchange services originating in the
LEC's local-exchange area. The Order modified the safeguards required for the
Company to be classified as nondominant for international toll by allowing the
separate legal entity to acquire UNEs or exchange services from its affiliated
LEC as provided in agreements approved under Section 252 of the Communications
Act of 1934, as amended.
8
<PAGE> 10
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
The PUC issued its approval on July 28, 1997 of the Company's application to
transfer assets to the newly formed international legal entity. The Company can
now take advantage of the FCC's non-dominance order. As a nondominant
international toll provider, the Company has the ability to effectively compete
with other nondominant carriers in the Hawaii international toll market.
Other Developments
The Company has reviewed and estimated its current and planned expenditures to
become Year 2000 compliant. These costs are currently estimated to be $10.6
over the next three years.
On October 15, 1997, the Company's parent, GTE, announced its proposal to
acquire MCI Communications Corporation (MCI) in a transaction valued at
approximately $28 billion in cash or 40 dollars per share. On November 10,
1997, MCI announced that it had reached an agreement to merge with WorldCom,
Inc. (WorldCom). GTE is continuing to monitor the situation and may reevaluate
its position depending on a number of factors, including the relative stock
performance of both WorldCom and MCI, the financial and operating results of
MCI and the ongoing status of the regulatory approval process, as well as other
pertinent information.
In May 1997, GTE announced initiatives to become a leading national provider of
telecommunications service, including the acquisition of BBN Corporation (BBN),
a leading provider of end-to-end Internet solutions. In addition, GTE announced
a strategic alliance with Cisco Systems, Inc. to jointly develop enhanced data
and Internet services for customers; and, the purchase of a national,
state-of-the-art fiber-optic network from Qwest Communications. As of September
30, 1997, GTE had completed the acquisition of BBN.
In May 1997, GTE Media Ventures Incorporated, a separate subsidiary of GTE,
purchased substantially all of the assets of O'ahu Wireless Cable, Inc. O'ahu
Wireless offers 25 channels of video programming to approximately 3,800
customers on the island of Oahu.
9
<PAGE> 11
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,344 $ 20,154
Receivables, less allowances of $9,562 and $6,066 232,564 144,710
Inventories and supplies 13,666 5,906
Deferred income tax benefits 378 6,202
Prepaid taxes and other 7,564 24,613
----------- -----------
Total current assets 256,516 201,585
----------- -----------
Property, plant and equipment, at cost 2,024,596 2,049,370
Accumulated depreciation (1,194,615) (1,226,897)
----------- -----------
Total property, plant and equipment, net 829,981 822,473
----------- -----------
Employee benefit plans 194,824 171,118
Other assets 9,204 5,809
----------- -----------
Total assets $ 1,290,525 $ 1,200,985
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 22,170 $ 18,700
Notes payable to affiliates 124,774 30,900
Accounts payable 13,343 19,728
Affiliate payable and accruals 31,164 30,733
Taxes payable 9,919 1,797
Accrued interest 4,900 12,793
Accrued payroll costs 25,802 29,070
Other 54,665 47,053
----------- -----------
Total current liabilities 286,737 190,774
----------- -----------
Long-term debt 470,459 513,016
Deferred income taxes 106,299 98,687
Other liabilities 65,935 59,121
----------- -----------
Total liabilities 929,430 861,598
----------- -----------
Shareholder's equity:
Common stock (10,000,000 shares issued) 250,000 250,000
Additional paid-in capital 91,146 91,146
Retained earnings (deficit) 19,949 (1,759)
----------- -----------
Total shareholder's equity 361,095 339,387
----------- -----------
Total liabilities and shareholder's equity $ 1,290,525 $ 1,200,985
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 45,526 $ 48,036
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 91,286 93,435
Deferred income taxes 14,276 33,074
Provision for uncollectible accounts 11,333 7,325
Change in current assets and current liabilities (78,926) (58,441)
Other - net (22,099) (14,351)
----------- -----------
Net cash from operations 61,396 109,078
----------- -----------
INVESTING
Capital expenditures (98,130) (70,227)
Purchase of MTC stock -- (450)
----------- -----------
Net cash used in investing (98,130) (70,677)
----------- -----------
FINANCING
Long-term debt issued -- 148,353
Long-term debt retired (38,779) (147,173)
Dividends (15,090) (29,322)
Capital contribution from GTE -- 50,000
Change in short-term obligations, excluding current maturities 72,793 (53,155)
Other - net -- 9,743
----------- -----------
Net cash from (used in) financing 18,924 (21,554)
----------- -----------
Increase (decrease) in cash and cash equivalents (17,810) 16,847
Cash and cash equivalents:
Beginning of period 20,154 4,515
----------- -----------
End of period $ 2,344 $ 21,362
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
11
<PAGE> 13
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 (SEC). 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 1996 Annual Report on Form 10-K.
(2) Effective July 1, 1997, the Company revised its estimate of the salvage
values related to certain telephone plant and equipment. This change had
the effect of reducing depreciation expense by approximately $3.7 million
during the third quarter of 1997. The estimated impact for the second half
of 1997 is a reduction in depreciation expense of approximately $7.4
million.
(3) In January 1997, the SEC issued amendments to its rules which clarify and
expand disclosure requirements for derivative financial instruments. As of
September 30, 1997, there has been no significant change in the market
risk, or accounting policy associated with derivative financial instruments
as stated in the Company's 1996 Annual Report on Form 10-K.
(4) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1997 presentation.
12
<PAGE> 14
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 third quarter of
1997.
13
<PAGE> 15
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: November 13, 1997 William M. Edwards, III
----------------- -------------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
14
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- ---------------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
</TABLE>
<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>
Nine Months Ended
September 30, 1997
---------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 45,526
Add - Income taxes 36,961
- Fixed charges 33,796
---------------------
Adjusted earnings $ 116,283
=====================
Fixed charges:
Interest expense $ 30,573
Portion of rent expense
representing interest 3,223
---------------------
Adjusted fixed charges $ 33,796
=====================
RATIO OF EARNINGS TO FIXED CHARGES 3.44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,344
<SECURITIES> 0
<RECEIVABLES> 242,126
<ALLOWANCES> 9,562
<INVENTORY> 13,666
<CURRENT-ASSETS> 256,516
<PP&E> 2,024,596
<DEPRECIATION> 1,194,615
<TOTAL-ASSETS> 1,290,525
<CURRENT-LIABILITIES> 286,737
<BONDS> 470,459
0
0
<COMMON> 250,000
<OTHER-SE> 111,095
<TOTAL-LIABILITY-AND-EQUITY> 1,290,525
<SALES> 482,221
<TOTAL-REVENUES> 482,221
<CGS> 190,185
<TOTAL-COSTS> 372,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,875
<INCOME-PRETAX> 82,487
<INCOME-TAX> 36,961
<INCOME-CONTINUING> 45,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,526
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
