<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 March 31, 1998
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
April 30, 1998. 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,
---------------------------
1998 1997
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
REVENUES AND SALES
Local services $ 68,402 $ 64,743
Network access services 49,047 40,512
Toll services 15,730 19,700
Other services and sales 27,136 24,991
--------- ---------
Total revenues and sales 160,315 149,946
--------- ---------
OPERATING COSTS AND EXPENSES
Cost of services and sales 70,821 61,484
Selling, general and administrative 28,601 30,594
Depreciation and amortization 29,111 30,361
--------- ---------
Total operating costs and expenses 128,533 122,439
--------- ---------
OPERATING INCOME 31,782 27,507
OTHER (INCOME) EXPENSE
Interest - net 9,613 9,303
Other - net (909) (336)
--------- ---------
INCOME BEFORE INCOME TAXES 23,078 18,540
Income taxes 7,857 6,878
--------- ---------
NET INCOME $ 15,221 $ 11,662
========= =========
</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,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net income $ 15.2 $ 11.7
</TABLE>
Net income increased 30% or $3.5 for the three months ended March 31, 1998,
compared to same period in 1997. The increase is primarily the result of higher
network access service revenues, partially offset by increased operating costs
and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Local services $ 68.4 $ 64.7
Network access services 49.1 40.5
Toll services 15.7 19.7
Other services and sales 27.1 25.0
--------------- ---------------
Total revenues and sales $ 160.3 $ 149.9
</TABLE>
Total revenues and sales increased 7% or $10.4 for the three months ended March
31, 1998, compared to the same period in 1997.
Local service revenues increased 6% or $3.7 for the three months ended March 31,
1998, compared to the same period in 1997. This increase reflects a $1.5 growth
in revenues from custom calling features, such as SmartCall(R) services and a 3%
increase in access lines, which generated $1.2 in additional revenues.
Network access service revenues increased 21% or $8.6 for the three months ended
March 31, 1998, compared to the same period in 1997. Minutes of use increased 5%
generating $0.8 of additional revenue. Special access revenues grew $1.4 due to
greater demand for increased bandwidth by Internet Service Providers (ISPs) and
other high-capacity users. Increased access rates for dedicated private lines
contributed an additional $7 to the increase. Offsetting these increases was a
decrease of $2.5 resulting from the impact of interstate access rate reductions
from the 1997 Federal Communications Commission (FCC) price cap.
Toll service revenues decreased 20% or $4 for the three months ended March 31,
1998, compared to the same period in 1997, primarily due to a decline in
domestic toll volumes, resulting from continued competition with long distance
carriers authorized to provide interisland toll service on a 10XXX and 1+
presubscription basis. Additionally, the impacts of interisland toll price
reductions which were effective May 7, 1997 contributed to the decline in toll
service revenues.
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 increased 8% or $2.1 for the three months
ended March 31, 1998, compared to the same period in 1997. The increase is
primarily attributable to a $1 increase related to the FCC's order on payphone
compensation and a $0.2 increase in billing and collection services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cost of services and sales $ 70.8 $ 61.5
Selling, general and administrative 28.6 30.6
Depreciation and amortization 29.1 30.3
-------------- --------------
Total operating costs and expenses $ 128.5 $ 122.4
</TABLE>
Total operating costs and expenses increased 5% or $6.1 for the three months
ended March 31, 1998, compared to the same period in 1997. The increase is
primarily due to $3.4 in costs related to the implementation of the FCC's local
number portability requirements and a $2.8 increase in operating taxes. A $2.1
increase in advertising costs aimed at stimulating sales of enhanced services
and preserving market share in an increasingly competitive environment also
contributed to the change. These increases were partially offset by a $1.9
decrease in depreciation expense, primarily due to a change in the estimated net
salvage values related to certain telephone plant and equipment which became
effective in the third quarter of 1997.
INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Income taxes $ 7.9 $ 6.9
</TABLE>
Income taxes increased 14% or $1 for the three months ended March 31, 1998,
compared to the same period in 1997. This increase is primarily due to a
corresponding increase in pre-tax income partially offset by other tax
adjustments.
OTHER MATTERS
Communications Infrastructure
In April 1998, the Public Utilities Commission (PUC) of the state of Hawaii
adopted an AT&T model as the state's cost study for calculating federal
universal service high cost support. The PUC ordered AT&T to modify this model
to comply with the FCC guidelines. The Company filed a motion with the PUC on
April 9, 1998 requesting that the Company be allowed to provide the input values
to any model submitted to the FCC for calculating federal universal service
support and requesting an opportunity to review and comment on AT&T's model
which had been previously submitted. The PUC's ruling on the Company's motion is
pending.
3
<PAGE> 5
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Arbitration Activity
In November 1997, Western Wireless Corporation (WWC) filed a motion to compel
the Company to implement arbitrated interconnection rates, to provide sanctions
of $6.8 for failure to comply with the orders issued by the PUC in its
arbitration docket, and to suspend the Standard Billing Agreement. On January
23, 1998, the PUC denied WWC's motion. On March 13, 1998, the PUC denied WWC's
motion for reconsideration of the January 1998 decision.
Rural Service Plans
Briefs were filed on April 14, 1998 related to the petitions filed by rural area
communities to determine the adequacy of the telecommunications services
provided by the Company in the South Kona and Puna districts of the island of
Hawaii.
Interstate and International Services
On July 1, 1997, the Commonwealth of the Northern Mariana Islands (CNMI) served
by Micronesia Telephone Company (MTC), a subsidiary of the Company, was
incorporated into the North American Numbering Plan under the 670 area code.
This area code was CNMI's former country code. With this change, MTC's customers
for the first time are able to dial anywhere within the United States on a 1+
basis instead of the 011+ international access. In addition, customers were able
to dial on a toll-free basis 800 numbers nationwide. On August 1, 1997, the CNMI
was rate integrated into the U.S. domestic rate structure.
RECENT DEVELOPMENTS
In April 1998, the Company's parent, GTE, announced a series of actions designed
to further sharpen its strategic focus and improve its competitive position by
repositioning non-strategic properties and reducing costs. GTE expects to
generate after-tax proceeds of $2,000 - $3,000 by selling non-strategic or
under-performing operations and plans to reduce annual costs by more than $500
through improved efficiencies and productivity while it continues to invest in
new high-growth opportunities. The impact of this announcement on the Company is
unknown at this time. GTE's management is currently assessing its options and,
as decisions are finalized regarding the sale of non-strategic operations and
cost reductions, the Company could be affected.
In its April 2, 1998 filing on Form 8-K, GTE, the Company's parent, stated that
because the MCI shareholders had accepted a competing offer, GTE's offer for MCI
was no longer outstanding. As a result, the Company and GTE were removed from
"Credit Watch" by all rating agencies. The Company believes that its present
investment grade credit rating provides ready access to the capital markets at
reasonable rates and provides the Company with the financial flexibility
necessary to pursue growth opportunities as they arise.
4
<PAGE> 6
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,152 $ 672
Receivables, less allowances of $5,340 and $8,596 181,573 215,928
Inventories and supplies 14,956 15,030
Prepaid taxes 16,850 16,264
Other 11,028 3,775
----------- -----------
Total current assets 227,559 251,669
----------- -----------
Property, plant and equipment, at cost 2,035,091 2,019,252
Accumulated depreciation (1,185,546) (1,173,900)
----------- -----------
Total property, plant and equipment, net 849,545 845,352
----------- -----------
Prepaid pension costs 209,187 202,473
Other assets 8,153 6,619
----------- -----------
Total assets $ 1,294,444 $ 1,306,113
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 60,284 $ 99,702
Accounts payable 60,056 57,221
Taxes payable 3,272 1,818
Accrued interest 4,054 10,375
Accrued payroll costs 26,870 26,434
Accrued dividends 5,641 10,803
Other 40,774 35,251
----------- -----------
Total current liabilities 200,951 241,604
----------- -----------
Long-term debt 509,523 510,184
Deferred income taxes 151,178 130,065
Other liabilities, primarily employee benefit plans 57,448 58,496
----------- -----------
Total liabilities 919,100 940,349
----------- -----------
Shareholder's equity:
Common stock (10,000,000 shares issued) 250,000 250,000
Additional paid-in capital 91,146 91,146
Retained earnings 34,198 24,618
----------- -----------
Total shareholder's equity 375,344 365,764
----------- -----------
Total liabilities and shareholder's equity $ 1,294,444 $ 1,306,113
=========== ===========
</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,
------------------------
1998 1997
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 15,221 $ 11,662
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 29,111 30,361
Deferred income taxes 20,747 2,593
Provision for uncollectible accounts 2,374 2,723
Changes in current assets and current liabilities 859 (55,243)
Other - net (2,194) (1,358)
-------- --------
Net cash from (used in) operations 66,118 (9,262)
-------- --------
INVESTING
Capital expenditures (37,323) (29,365)
-------- --------
Cash used in investing (37,323) (29,365)
-------- --------
FINANCING
Long-term debt retired (516) (743)
Increase (decrease) in short-term obligations,
excluding current maturities (14,996) 28,349
Dividends (10,803) (5,327)
-------- --------
Net cash from (used in) financing (26,315) 22,279
-------- --------
Increase (decrease) in cash and cash equivalents 2,480 (16,348)
Cash and cash equivalents:
Beginning of period 672 20,154
-------- --------
End of period $ 3,152 $ 3,806
======== ========
</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) BASIS OF PRESENTATION:
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 1997 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate,
to conform to the 1998 presentation.
(2) DEBT:
Long-term debt as of March 31, 1998 includes $40 million of short-term
borrowings in the form of affiliate notes payable which the Company
anticipates refinancing during 1998. These affiliate notes payable
represent notes payable to the Company's parent, GTE.
(3) RECENT ACCOUNTING PRONOUNCEMENT:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 defines internal-use software and establishes accounting
standards for the costs of such software. The Company is currently
assessing the impact of adopting SOP 98-1.
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
1998.
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 15, 1998 /s/ Stephen L. Shore
-------------------- --------------------------------------------
Stephen L. Shore
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,
1998
--------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 15,221
Add - Income taxes 7,857
- Fixed charges 11,416
---------------
Adjusted earnings $ 34,494
===============
Fixed charges:
Interest expense $ 10,357
Portion of rent expense representing interest 1,059
---------------
Adjusted fixed charges $ 11,416
===============
RATIO OF EARNINGS TO FIXED CHARGES 3.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,152
<SECURITIES> 0
<RECEIVABLES> 186,913
<ALLOWANCES> 5,340
<INVENTORY> 14,956
<CURRENT-ASSETS> 227,559
<PP&E> 2,035,091
<DEPRECIATION> 1,185,546
<TOTAL-ASSETS> 1,294,444
<CURRENT-LIABILITIES> 200,951
<BONDS> 509,523
0
0
<COMMON> 250,000
<OTHER-SE> 125,344
<TOTAL-LIABILITY-AND-EQUITY> 1,294,444
<SALES> 160,315
<TOTAL-REVENUES> 160,315
<CGS> 70,821
<TOTAL-COSTS> 128,533
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,613
<INCOME-PRETAX> 23,078
<INCOME-TAX> 7,857
<INCOME-CONTINUING> 15,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,221
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
