<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 June 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 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 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
July 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 Six Months Ended
June 30, June 30,
---------------------------------------------------
1997 1996 1997 1996
--------- -------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 64,813 $ 57,174 $ 129,556 $115,247
Network access services 44,587 37,058 85,099 72,479
Toll services 13,383 23,544 33,083 46,246
Other services and sales 53,516 60,556 78,507 85,388
--------- -------- --------- --------
Total revenues and sales 176,299 178,322 326,245 319,360
--------- -------- --------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 64,806 63,205 126,290 131,304
Selling, general and administrative 32,877 32,962 63,471 56,492
Depreciation and amortization 32,213 30,856 62,574 61,647
--------- -------- --------- --------
Total operating costs and expenses 129,896 127,023 252,335 249,443
--------- -------- --------- --------
OPERATING INCOME 46,403 51,309 73,910 69,917
OTHER (INCOME) EXPENSE
Interest - net 9,238 9,996 18,541 20,204
Other - net (92) 244 (428) 610
--------- -------- --------- --------
INCOME BEFORE INCOME TAXES 37,257 41,069 55,797 49,103
Income taxes 13,572 14,002 20,450 16,548
--------- -------- --------- --------
NET INCOME $ 23,685 $ 27,067 $ 35,347 $ 32,555
========= ======== ========= ========
</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>
Six Months Ended
June 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 35.3 $ 32.6
</TABLE>
Net income increased 8% or $2.7 for the six months ended June 30, 1997,
compared to the same period in 1996. The increase is primarily the result of
higher local and network access service revenues, partially offset by lower
toll service revenues and higher operating expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Local services $ 129.5 $ 115.2
Network access services 85.1 72.5
Toll services 33.1 46.3
Other services and sales 78.5 85.4
-------------- --------------
Total revenues and sales $ 326.2 $ 319.4
</TABLE>
Total revenues and sales increased 2% or $6.8 for the six months ended June 30,
1997, compared to the same period in 1996.
Local service revenues increased 12% or $14.3 for the six months ended June 30,
1997, compared to the same period in 1996. This increase reflects the results
of the final award for the 1995 Rate Case earned during the first six months of
1997, which increased local service revenues by $11.3, and a $2.7 growth in
revenues from custom calling features, such as SmartCall(R) services. The
number of access lines increased 3.4% during the first six months of 1997,
generating $1.3 in additional revenues.
Network access service revenues increased 17% or $12.6 for the six months ended
June 30, 1997, compared to the same period in 1996. The increase is primarily a
result of a 13% growth in minutes of use, which generated $4.1 in additional
revenues, and a $5.1 growth in special access revenues related to customer
demand for increased bandwidth services.
Toll service revenues decreased 29% or $13.2 for the six months ended June 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 basis and a 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 decreased 8% or $6.9 for the six months ended June 30,
1997, compared to the same period in 1996. This decrease is primarily due to
lower equipment sales of $6.8 resulting from the completion of the Osan Base
System and other international service contracts in 1996.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cost of services and sales $ 126.3 $ 131.3
Selling, general and administrative 63.4 56.5
Depreciation and amortization 62.6 61.6
-------------- --------------
Total operating costs and expenses $ 252.3 $ 249.4
</TABLE>
Total operating costs and expenses increased 1% or $2.9 for the six months ended
June 30, 1997, compared to the same period in 1996. The increase is primarily
due to increased selling and marketing costs of $6.6, which includes $2.2 in
advertising costs. Selling and marketing costs stimulated additional revenues
through customer demand for products and services, such as second lines and
custom calling features. The increase is also due to depreciation costs of $1,
associated with additions to plant balances. These increases are partially
offset by reduced costs of services and sales of $4.5, which consist of a $6.7
reduction in costs associated with the completion of international service
contracts, partially offset by increases in labor and benefits of $2.2.
OTHER EXPENSES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Interest - net $ 18.5 $ 20.2
Income taxes 20.5 16.5
</TABLE>
Interest - net decreased 8% or $1.7 for the six months ended June 30, 1997,
compared to the same period in 1996. The decrease is primarily attributable to
lower average debt levels.
Income taxes increased 24% or $4 for the six months ended June 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.
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.
3
<PAGE> 5
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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 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 unbundled network
elements (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.
On the other hand, 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.
The time for parties to seek rehearing before the Eighth Circuit has not yet
expired. In addition, the FCC has announced that it intends to seek Supreme
Court review of the Eighth Circuit's ruling.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE Midwest Incorporated, a separate subsidiary of GTE and affiliate of
the Company, has filed petitions for review of each of these orders in Federal
Court, and GTE is currently assessing the effect of these orders.
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% retroactive to July 1996. 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 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.
In accordance with the Telecommumications 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.
Interim rates for interconnection and unbundled network elements 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.
4
<PAGE> 6
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
are expected to begin 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 on October 14 to 17, 1996, and
Decision No. 15229 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 unbundled network elements at a price based
on the Company's total element long run incremental cost (TELRIC) increased by
10% for joint and common costs, with both parties filing an interconnection
agreement within 30 days. On January 10, 1997, the Company filed 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 and on
February 26, 1997, both companies filed comments regarding this proposed
language with the PUC. On April 18, 1997, the PUC issued Decision No. 15528,
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. Hearings were held
on December 2 and 3, 1996, and on January 17, 1997, the PUC issued Decision
No. 15316 which reaffirmed decisions issued in the previous arbitration
proceedings. The Company filed, under protest, an interconnection agreement
with the PUC on February 24, 1997. Sprint is seeking to adopt the provisions of
the AT&T agreement in lieu of the negotiated agreement ordered by the PUC. The
Company filed its opposition on February 27, 1997 seeking approval of the
arbitrated agreement submitted in compliance with the PUC's decision. On March
7, 1997, the PUC issued Order No. 15428, which 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 of Order No. 15428 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 May 21, 1997,
both the Company and Sprint filed comments on the joint agreement. 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 October 16, 1996, GST Telecom Hawaii (GST) petitioned the PUC for
arbitration, which was ultimately withdrawn on November 8, 1996. On November
27, 1996, an interconnection agreement between the Company and GST was filed
with approval granted by the PUC in Decision and Order No. 15283. 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 March 24, 1997, GST filed a petition for
arbitration of unresolved issues, specifically relating to the rates, terms and
conditions of access and interconnection to dark fiber for the purpose of
mutual restoration of each company's interisland cable system. The Company
filed its response to this petition on April 14, 1997. 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. Hearings are
scheduled for August 18 and 19, 1997.
5
<PAGE> 7
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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; 8) undepreciated
plant balance; 9) rate rebalancing; and 10) universal service fund program. The
evidentiary hearings on these issues are expected to take place during the
fourth quarter of 1997.
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 50
carriers to provide for interexchange telecommunications services in Hawaii,
including Time Warner Communications and GST Pacwest.
Pay telephones in Hawaii have also opened up to competition. On January 31,
1997, the PUC issued an order granting certificates of authority to those who
previously filed to operate as pay telephone providers in Hawaii.
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 estimated remaining costs of up to $20.2 will be
recovered from general ratepayers statewide through a three-year monthly
surcharge. On February 24, 1995, the PUC approved the Company's Rural Service
Plan (RSP). On September 1, 1995, the Company began assessing a three-year
general ratepayer surcharge, while issuing its first offers to convert
customers to single-line service in those rural areas that were upgraded
6
<PAGE> 8
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
pursuant to the RSP 1995 construction schedule. Construction activities under
the RSP are expected to be completed by the end of 1997. Acting on the
Company's request, the PUC approved elimination of the monthly recurring charge
to rural customers and a restructuring of the RSP recovery for the $20.2
previously authorized. The monthly customer surcharge of sixty-two cents will
continue through August 1998, with any remaining portion of the RSP costs to be
recovered through the revenue requirement of the 1995 Rate Case.
The PUC opened a docket on December 12, 1994, and ordered the Company to show
cause why the PUC should not authorize an alternate telecommunications provider
for the rural areas of the state. 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 accepted bid proposals through May 15, 1996 from carriers, including the
Company, who were interested in serving the first rural area for which an
alternative telecommunications provider may be authorized. 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, effective May 31,
1997. The PUC 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. The Company intends to
continue offering a competitive alternative for Ka'u customers even after
TelHawaii begins providing alternative telecommunications services as a COLR.
On July 25, 1996, the Company filed a Motion for Reconsideration/Clarification
of the PUC's July 15, 1996 order selecting TelHawaii as the alternative
provider of telecommunications services and as the COLR in the Ka'u area of the
island of Hawaii. On August 16, 1996, the Company filed its Notice of Appeal of
the PUC's orders. The Company is appealing the PUC's order on the basis that
the Company opposes the effective taking of its property by forced sale of its
assets in Ka'u and 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.
On September 16, 1996, the PUC ordered the Company to show cause why it should
not pay a fine for not complying with the PUC's prior order to respond to
information requests issued by TelHawaii. A hearing was held on September 30,
1996, with an order from the PUC assessing a $0.3 fine on the Company. The
Company paid the fine under protest on October 3, 1996, 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 clarification order
and an order granting mitigation and abatement of fines and penalties levied.
On December 23, 1996, the PUC issued Order No. 15266 denying 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 22, 1997, the Company filed an appeal of this order with the Hawaii
Supreme Court. 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 is
scheduled to be filed August 18, 1997.
7
<PAGE> 9
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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 will be done 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 which the Company must first satisfy.
The safeguards include 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. As a nondominant international toll provider,
the Company will have the ability to effectively compete with other nondominant
carriers in the Hawaii international toll market.
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 unbundled network elements or exchange
services from its affiliated LEC as provided in agreements approved under
Section 252 of the Communications Act of 1934, as amended. The Order also gives
the Company and Micronesian Telecommunications Corporation (MTC), a subsidiary
of the Company, one year from the release date of the Order to comply with the
safeguards in the Order.
On April 18, 1997, AT&T issued its statement of position on the Company's
application that was filed on December 20, 1996. On April 25, 1997, the
Consumer Advocate issued its statement of position recommending approval of the
application. On June 17, 1997, the Company and the Consumer Advocate filed an
agreement which established the actions that the Company will take to address
the concerns presented by the Consumer Advocate. The PUC issued its Decision
and Order on July 28, 1997 approving the Company's application to transfer
assets to the newly formed international legal entity. The PUC also required
the Company to provide additional information regarding the transfer at a later
date, including financial exhibits. The Company can now effectively begin to
take advantage of the FCC's non-dominance order.
Other Developments
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications services, including the
acquisition of BBN Corporation, 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.
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 offered 25 channels of video programming to approximately 3,800
customers on the island of Oahu.
8
<PAGE> 10
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,438 $ 20,154
Receivables, less allowances of $8,049 and $6,066 190,033 144,710
Inventories and supplies 12,678 5,906
Deferred income tax benefits 4,554 6,202
Prepaid taxes and other 4,820 24,613
----------- -----------
Total current assets 216,523 201,585
----------- -----------
Property, plant and equipment, at cost 2,035,309 2,049,370
Accumulated depreciation (1,212,702) (1,226,897)
----------- -----------
Total property, plant and equipment, net 822,607 822,473
----------- -----------
Employee benefit plans and other assets 192,330 176,927
----------- -----------
Total assets $ 1,231,460 $ 1,200,985
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 42,196 $ 18,700
Notes payable to affiliates 58,311 30,900
Accounts payable 8,621 19,728
Affiliate payables and accruals 23,634 30,733
Taxes payable 6,035 1,797
Accrued interest 12,459 12,793
Accrued payroll costs 25,229 29,070
Other 46,670 47,053
----------- -----------
Total current liabilities 223,155 190,774
----------- -----------
Long-term debt 471,149 513,016
Deferred income taxes 101,387 98,687
Other liabilities 70,798 59,121
----------- -----------
Total liabilities 866,489 861,598
----------- -----------
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) 23,825 (1,759)
----------- -----------
Total shareholder's equity 364,971 339,387
----------- -----------
Total liabilities and shareholder's equity $ 1,231,460 $ 1,200,985
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
9
<PAGE> 11
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
-------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 35,347 $ 32,555
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 62,574 61,647
Deferred income taxes 5,188 9,801
Provision for uncollectible accounts 8,983 7,102
Changes in current assets and current liabilities (64,247) (34,160)
Other - net (6,831) (6,407)
-------- ---------
Net cash from operations 41,014 70,538
-------- ---------
INVESTING
Capital expenditures (60,642) (43,670)
Purchase of MTC stock -- (450)
-------- ---------
Cash used in investing (60,642) (44,120)
-------- ---------
FINANCING
Long-term debt retired (18,172) (146,238)
Increase in short-term obligations, excluding current maturities 27,411 141,289
Dividends (5,327) (20,029)
-------- ---------
Net cash from (used in) financing 3,912 (24,978)
-------- ---------
Increase (decrease) in cash and cash equivalents (15,716) 1,440
Cash and cash equivalents:
Beginning of period 20,154 4,515
-------- ---------
End of period $ 4,438 $ 5,955
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
10
<PAGE> 12
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 1996 Annual Report on Form 10-K.
(2) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1997 presentation.
11
<PAGE> 13
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 second quarter of
1997.
12
<PAGE> 14
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: August 13, 1997 William M. Edwards, III
--------------- -------------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
13
<PAGE> 15
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>
Six Months Ended
June 30, 1997
----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $35,347
Add - Income taxes 20,450
- Fixed charges 22,398
-------
Adjusted earnings $78,195
=======
Fixed charges:
Interest expense $20,358
Portion of rent expense
representing interest 2,040
-------
Adjusted fixed charges $22,398
=======
RATIO OF EARNINGS TO FIXED CHARGES 3.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,438
<SECURITIES> 0
<RECEIVABLES> 198,082
<ALLOWANCES> 8,049
<INVENTORY> 12,678
<CURRENT-ASSETS> 216,523
<PP&E> 2,035,309
<DEPRECIATION> 1,212,702
<TOTAL-ASSETS> 1,231,460
<CURRENT-LIABILITIES> 223,155
<BONDS> 471,149
0
0
<COMMON> 250,000
<OTHER-SE> 114,971
<TOTAL-LIABILITY-AND-EQUITY> 1,231,460
<SALES> 326,245
<TOTAL-REVENUES> 326,245
<CGS> 126,290
<TOTAL-COSTS> 252,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,541
<INCOME-PRETAX> 55,797
<INCOME-TAX> 20,450
<INCOME-CONTINUING> 35,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,347
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
