<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 June 30, 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,
Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, 972-718-5600
including area code
(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, 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 Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 68,644 $ 64,813 $ 137,046 $ 129,556
Network access services 41,572 44,587 90,619 85,099
Toll services 12,042 13,383 27,772 33,083
Other services and sales 55,851 53,516 82,987 78,507
---------- ---------- ---------- ----------
Total revenues and sales 178,109 176,299 338,424 326,245
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 69,224 64,806 140,045 126,290
Selling, general and administrative 28,691 32,877 57,292 63,471
Depreciation and amortization 29,820 32,213 58,931 62,574
---------- ---------- ---------- ----------
Total operating costs and expenses 127,735 129,896 256,268 252,335
---------- ---------- ---------- ----------
OPERATING INCOME 50,374 46,403 82,156 73,910
OTHER (INCOME) EXPENSE
Interest - net 9,516 9,238 19,129 18,541
Other - net (15) (92) (924) (428)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 40,873 37,257 63,951 55,797
Income taxes 13,259 13,572 21,116 20,450
---------- ---------- ---------- ----------
NET INCOME $ 27,614 $ 23,685 $ 42,835 $ 35,347
========== ========== ========== ==========
</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,
----------------------------------
<S> <C>
1998 1997
--------------- ---------------
Net income $ 42.8 $ 35.3
</TABLE>
Net income increased 21% or $7.5 for the six months ended June 30, 1998,
compared to the same period in 1997. 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,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Local services $ 137.0 $ 129.5
Network access services 90.6 85.1
Toll services 27.8 33.1
Other services and sales 83.0 78.5
--------------- ---------------
Total revenues and sales $ 338.4 $ 326.2
</TABLE>
Total revenues and sales increased 4% or $12.2 for the six months ended June 30,
1998, compared to the same period in 1997.
Local service revenues increased 6% or $7.5 for the six months ended June 30,
1998, compared to the same period in 1997. Demand for custom calling features,
such as SmartCall(R), contributed $2.6 to the increase. Access line growth of 3%
generated additional revenues of $1.5 from basic local services and $0.8 from
Integrated Services Digital Network (ISDN) and Digital Channel Services (DCS).
Network access service revenues increased 6% or $5.5 for the six months ended
June 30, 1998, compared to the same period in 1997. Increased access rates for
dedicated private lines contributed $7 to the increase. Minutes of use increased
5%, which generated $2.2 of additional revenues. Special access revenues grew
$1.4 due to greater demand for increased bandwidth by Internet Service Providers
(ISPs) and other high-capacity users. In 1997, the Federal Communications
Commission (FCC) ordered significant changes that altered the structure of
access charges collected by the Company. These changes, effective January 1,
1998, resulted in a $5 decrease in network access revenues during the first six
months of 1998.
2
<PAGE> 4
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Toll service revenues decreased 16% or $5.3 for the six months ended June 30,
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 basis 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.
Other services and sales increased 6% or $4.5 for the six months ended June 30,
1998, compared to the same period in 1997. The increase is primarily
attributable to a $1.5 increase related to the FCC's order increasing payphone
compensation from interexchange carriers, a $1 increase in equipment sales and
a $0.7 increase in billing and collection services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cost of services and sales $ 140.1 $ 126.3
Selling, general and administrative 57.3 63.4
Depreciation and amortization 58.9 62.6
--------------- ---------------
Total operating costs and expenses $ 256.3 $ 252.3
</TABLE>
Total operating costs and expenses increased 2% or $4 for the six months ended
June 30, 1998, compared to the same period in 1997. The increase is primarily
due to a $2.9 increase in operating taxes and a $2.4 increase in access charges
incurred to terminate intraLATA (local access transport area) toll calls
outside the Company's service territory. 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 $3.7 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.
OTHER MATTERS
Federal Regulatory Developments
The Company filed interstate access revisions during 1997 that became effective
June 3, 1997 and July 1, 1997. Overall, these filings resulted in a net annual
price reduction of $7.4. In 1997, the FCC issued an order to file revised access
rates effective January 1, 1998, which resulted in additional interstate access
charge reductions of approximately $1.8 annually. In
3
<PAGE> 5
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
1997, the FCC also ordered significant changes that altered the structure of
access charges collected by the Company, effective January 1, 1998. Generally,
the FCC reduced and restructured the per minute charges paid by long distance
carriers and implemented new per line charges. The FCC also created an access
charge structure that resulted in different access charges for residential
primary and secondary lines and single line and multi-line business access
lines. In aggregate, the annual reductions in usage sensitive access charges of
$6.9 paid by long distance carriers were offset by $6.5 of new per line charges
and the charges paid by end-users. Effective July 1, 1998, access charges were
further reduced by $9.3 annually in compliance with FCC requirements to restate
the impacts of access charge reform.
In May 1997, the FCC released a major decision relating to implementation of the
Telecommunications Act's provision on universal service. The Company's parent,
GTE, and numerous other parties have challenged the FCC's decision before the
U.S. Court of Appeals for the Fifth Circuit on the grounds that the FCC did not
follow the requirements of the Telecommunications Act to develop a sufficient,
explicit and competitively neutral universal service program. Oral argument is
not expected until mid-September 1998 at the earliest, with a final decision to
be issued by mid-1999.
On March 9, 1998, the FCC adopted a Memorandum Opinion and Order (MO&O)
clarifying the payphone-specific coding digit requirements set forth in the
previous payphone orders and granting limited waivers of the requirement that
local exchange carriers (LECs) provide payphone-specific coding digits to
payphone service providers (PSPs), and that PSPs provide payphone-specific
coding digits from their payphones to interexchange carriers (IXCs), before PSPs
can receive per-call compensation from IXCs for subscriber 800 and access code
calls. GTE was granted waivers through 1998 in this order for Flex-ANI (Flexible
Automatic Number Identification) implementation due to technical problems
associated with switch conversions.
On April 3, 1998, the FCC issued another MO&O which granted the IXCs a waiver of
the per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted technology
waivers. GTE will receive per-phone compensation under this waiver until the
Flex-ANI capable offices are activated. Qualifying payphone calls from Flex-ANI
capable switches will then be eligible for per-call compensation rather than
per-phone.
In a related court case between MCI and the FCC, the U.S. Court of Appeals,
District of Columbia Circuit, upheld the fundamental premise underlying the
FCC's
4
<PAGE> 6
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
approach to setting the per-call compensation rate for uncompensated payphone
calls, thereby supporting the ordered per-call compensation rate noted in the
March 9th order. At the same time, however, the Court held that the FCC had
failed to clearly explain its methodology on the development of that same
per-call compensation rate. The Court remanded this portion back to the FCC.
State Regulatory Developments
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
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 denied the Company's motion and submitted the AT&T
model to the FCC. The Company filed comments and reply comments with the FCC on
June 25, 1998 and July 9, 1998, respectively.
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 alleged 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.
On May 18, 1998, TelHawaii filed a petition for arbitration which identified
unbundled loops, subloop unbundling, collocation and number portability as
issues requiring arbitration. The Company filed its response to the petition on
June 12, 1998.
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. On June 16, 1998, the PUC issued an order granting a motion by TelHawaii
to compel the Company to transfer its assets in Ka'u to TelHawaii
5
<PAGE> 7
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
but denied TelHawaii's request for civil penalties against the Company. On July
15, 1998, the First Circuit Court stayed the order, pending resolution of a
motion for reconsideration and/or motion for stay that the Company must file
with the PUC.
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 toll-free numbers nationwide. On August 1, 1997, the CNMI was integrated
into the U.S. domestic rate structure.
RECENT DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies in a merger of equals
transaction. Under terms of the definitive agreement, which was unanimously
approved by the board of directors of both companies, GTE shareholders will
receive 1.22 shares of Bell Atlantic stock for each GTE share they own. The
merger is expected to be accounted for as a pooling of interests, is subject to
shareholder and regulatory approval, and is expected to be completed during the
second half of 1999. For additional information regarding the merger, refer to
the Form 8-K filed by GTE dated July 27, 1998.
In April 1998, 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 to $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 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.
6
<PAGE> 8
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,863 $ 672
Receivables, less allowances of $8,569 and $8,596 161,689 215,928
Inventories and supplies 17,758 15,030
Prepaid taxes 2,328 16,264
Other 8,221 3,775
----------- -----------
Total current assets 194,859 251,669
----------- -----------
Property, plant and equipment, at cost 2,055,391 2,019,252
Accumulated depreciation (1,203,647) (1,173,900)
----------- -----------
Total property, plant and equipment, net 851,744 845,352
----------- -----------
Prepaid pension costs 215,899 202,473
Other assets 13,690 6,619
----------- -----------
Total assets $ 1,276,192 $ 1,306,113
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 2,263 $ 99,702
Accounts payable 81,951 57,221
Taxes payable 3,857 1,818
Accrued interest 11,574 10,375
Accrued payroll costs 25,456 26,434
Accrued dividends 8,241 10,803
Other 37,955 35,251
----------- -----------
Total current liabilities 171,297 241,604
----------- -----------
Long-term debt 508,852 510,184
Deferred income taxes 151,537 130,065
Employee benefit plans and other 49,789 58,496
----------- -----------
Total liabilities 881,475 940,349
----------- -----------
Shareholder's equity:
Common stock (10,000,000 shares issued) 250,000 250,000
Additional paid-in capital 91,146 91,146
Retained earnings 53,571 24,618
----------- -----------
Total shareholder's equity 394,717 365,764
----------- -----------
Total liabilities and shareholder's equity $ 1,276,192 $ 1,306,113
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
7
<PAGE> 9
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------
1998 1997
----------------- -----------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 42,835 $ 35,347
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 58,931 62,574
Deferred income taxes 20,740 5,188
Provision for uncollectible accounts 7,615 8,983
Changes in current assets and current liabilities 60,715 (64,247)
Other - net (24,621) (6,831)
----------------- -----------------
Net cash from operations 166,215 41,014
----------------- -----------------
INVESTING
Capital expenditures (66,942) (60,642)
----------------- -----------------
Cash used in investing (66,942) (60,642)
----------------- -----------------
FINANCING
Long-term debt retired (1,026) (18,172)
Increase (decrease) in short-term obligations,
excluding current maturities (77,612) 27,411
Dividends (16,444) (5,327)
----------------- -----------------
Net cash from (used in) financing (95,082) 3,912
----------------- -----------------
Increase (decrease) in cash and cash equivalents 4,191 (15,716)
Cash and cash equivalents:
Beginning of period 672 20,154
----------------- -----------------
End of period $ 4,863 $ 4,438
================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 10
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 consolidated 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:
In compliance with Financial Accounting Standards No. 6,
"Classification of Short-Term Obligations Expected to Be Refinanced"
(FAS 6), long-term debt as of June 30, 1998 includes $40 million of
short-term borrowings in the form of affiliate notes payable. These
affiliate notes payable represent notes payable to the Company's
parent, GTE.
(3) RECENT ACCOUNTING PRONOUNCEMENTS:
Computer Software
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, and intends to implement as
of January 1, 1999.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. The Company has not yet assessed the impact
of adopting FAS 133.
9
<PAGE> 11
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
1998.
10
<PAGE> 12
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, 1998 /s/ Stephen L. Shore
------------------------ -------------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
11
<PAGE> 13
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>
Six Months Ended
June 30, 1998
--------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 42,835
Add - Income taxes 21,116
- Fixed charges 22,876
--------------------
Adjusted earnings $ 86,827
====================
Fixed charges:
Interest expense $ 20,679
Portion of rent expense
representing interest 2,197
--------------------
Adjusted fixed charges $ 22,876
====================
RATIO OF EARNINGS TO FIXED CHARGES 3.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,863
<SECURITIES> 0
<RECEIVABLES> 170,258
<ALLOWANCES> 8,569
<INVENTORY> 17,758
<CURRENT-ASSETS> 194,859
<PP&E> 2,055,391
<DEPRECIATION> 1,203,647
<TOTAL-ASSETS> 1,276,192
<CURRENT-LIABILITIES> 171,297
<BONDS> 508,852
0
0
<COMMON> 250,000
<OTHER-SE> 144,717
<TOTAL-LIABILITY-AND-EQUITY> 1,276,192
<SALES> 338,424
<TOTAL-REVENUES> 338,424
<CGS> 140,045
<TOTAL-COSTS> 256,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,129
<INCOME-PRETAX> 63,951
<INCOME-TAX> 21,116
<INCOME-CONTINUING> 42,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,835
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
