<PAGE> 1
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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, 1999
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)
<TABLE>
<S> <C>
HAWAII 99-0049500
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code 972-507-5000
(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, 1999. The Company's common stock is 100% owned by GTE Corporation.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------- --------------- --------------- ----------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 70.4 $ 68.6 $ 138.8 $ 137.0
Network access services 46.9 41.6 92.1 90.6
Other services and sales 70.7 67.9 113.6 110.8
-------------- -------------- -------------- ---------------
Total revenues and sales 188.0 178.1 344.5 338.4
-------------- -------------- -------------- ---------------
OPERATING COSTS AND EXPENSES
Cost of services and sales 57.7 69.2 119.3 140.1
Selling, general and administrative 29.7 28.7 67.8 57.3
Depreciation and amortization 30.6 29.8 62.5 58.9
-------------- -------------- -------------- ---------------
Total operating costs and expenses 118.0 127.7 249.6 256.3
-------------- -------------- -------------- ---------------
OPERATING INCOME 70.0 50.4 94.9 82.1
OTHER (INCOME) EXPENSE
Interest - net 9.3 9.5 18.5 19.1
Other - net (0.1) -- (0.8) (0.9)
-------------- -------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 60.8 40.9 77.2 63.9
Income taxes 20.9 13.3 25.6 21.1
-------------- -------------- -------------- ---------------
NET INCOME $ 39.9 $ 27.6 $ 51.6 $ 42.8
============== ============== ============== ===============
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1.4 $ 1.3
Receivables, less allowances of $2.8 million and $6.5 million 166.9 179.1
Affiliate receivables 7.0 13.0
Inventories and supplies 12.0 11.0
Prepayments and other 10.8 22.9
---------- ------------
Total current assets 198.1 227.3
---------- ------------
Property, plant and equipment, at cost 2,042.9 2,045.7
Accumulated depreciation (1,211.3) (1,191.5)
---------- ------------
Total property, plant and equipment, net 831.6 854.2
---------- ------------
Prepaid pension costs 264.2 234.8
Other assets 7.3 12.1
---------- ------------
Total assets $ 1,301.2 $ 1,328.4
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt $ 2.3 $ 2.3
Notes payable to affiliate 88.3 93.7
Accounts payable 27.6 47.7
Affiliate payables 19.8 30.6
Taxes payable 42.7 15.6
Accrued payroll costs 28.8 22.5
Dividends payable 5.0 18.5
Other 43.4 48.4
---------- ------------
Total current liabilities 257.9 279.3
---------- ------------
Long-term debt 462.4 467.5
Deferred income taxes 161.7 150.8
Employee benefit plans and other 30.8 38.1
---------- ------------
Total liabilities 912.8 935.7
---------- ------------
Shareholder's equity
Common stock (10,000,000 shares issued) 250.0 250.0
Additional paid-in capital 91.1 91.1
Retained earnings 47.3 51.6
---------- ------------
Total shareholder's equity 388.4 392.7
---------- ------------
Total liabilities and shareholder's equity $ 1,301.2 $ 1,328.4
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Net income $ 51.6 $ 42.8
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 62.5 58.9
Provision for uncollectible accounts 6.0 7.6
Changes in current assets and current liabilities 8.3 60.7
Deferred taxes and other - net (15.4) (3.8)
-------- --------
Net cash from operations 113.0 166.2
-------- --------
INVESTING
Capital expenditures (39.1) (66.9)
Other - net 0.5 --
-------- --------
Net cash used in investing (38.6) (66.9)
-------- --------
FINANCING
Long-term debt retired (4.8) (1.0)
Dividends (69.5) (16.5)
Decrease in short-term obligations, excluding current maturities -- (77.6)
-------- --------
Net cash used in financing (74.3) (95.1)
-------- --------
Increase in cash and cash equivalents 0.1 4.2
Cash and cash equivalents:
Beginning of period 1.3 0.7
-------- --------
End of period $ 1.4 $ 4.9
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
GTE Hawaiian Telephone Company Incorporated (the Company) is incorporated under
the laws of the State of Hawaii and is a subsidiary of GTE Corporation (GTE).
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 1998 Annual Report on
Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.
NOTE 2. CAPITALIZED SOFTWARE
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." As a result of adopting SOP 98-1, the Company capitalized
software expenditures of $2.9 million and $3.7 million, respectively, for the
three and six months ended June 30, 1999, which would have previously been
expensed.
NOTE 3. SPECIAL CHARGE
In 1999, GTE continued the review of its operations and cost structure to ensure
they were consistent with its growth objectives. In connection with this ongoing
review, GTE initiated employee separation programs that resulted in a one-time
charge for GTE during the first quarter of 1999. The charge pertaining to the
Company totaled $7.2 million and is reflected as "Selling, general and
administrative" costs and expenses in the condensed consolidated income
statements. The components of the charge include separation programs and related
benefits such as outplacement and benefit continuation costs. These programs
were completed during the first quarter of 1999.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company is
currently assessing the impact of adopting SFAS No. 133, as amended, which is
effective January 1, 2001.
5
<PAGE> 7
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 5. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock that they own.
The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger.
Both companies are working diligently to complete the merger at the earliest
practicable date. However, Bell Atlantic and GTE must obtain the approval of a
variety of state and federal regulatory agencies and, accordingly, the merger
may close in the first half of 2000.
6
<PAGE> 8
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
RESULTS OF OPERATIONS
Net income increased 21% or $8.8 million for the six months ended June 30, 1999,
compared to the same period in 1998, primarily due to an overall increase in
revenues and sales as well as a decline in total operating costs and expenses.
<TABLE>
<CAPTION>
REVENUES AND SALES
(Dollars in Millions) Six Months Ended
June 30,
-------------------- Percent
1999 1998 Increase Change
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Local services $ 138.8 $ 137.0 $ 1.8 1%
Network access services 92.1 90.6 1.5 2%
Other services and sales 113.6 110.8 2.8 3%
--------- --------- ----------
Total revenues and sales $ 344.5 $ 338.4 $ 6.1 2%
========= ========= ==========
</TABLE>
Network Access Services Revenues
Network access services revenues increased for the first six months of 1999
driven by an 11% increase in minutes of use, which generated additional revenues
of $3.1 million. Special access revenues grew by $6.6 million as a result of
greater demand for increased bandwidth services by high-capacity users.
Partially offsetting these increases was a decrease of $10.0 million reflecting
the impact of interstate and intrastate access price changes.
Other Services and Sales Revenues
Other services and sales revenues increased in the first six months of 1999
primarily due to increased rental activity.
<TABLE>
<CAPTION>
OPERATING COSTS AND EXPENSES
(Dollars in Millions) Six Months Ended
June 30,
-------------------------------- Percent
1999 1998 Decrease Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Total operating costs and expenses $ 249.6 $ 256.3 $ (6.7) (3)%
</TABLE>
Total operating costs and expenses decreased for the six months ended June 30,
1999, compared to the same period in 1998, primarily as a result of pension
settlement gains of $19.0 million recorded in the second quarter of 1999.
Additionally, a reduction in software right-to-use (RTU) costs of $3.7 million
due to the capitalization of software costs in 1999 as a result of the adoption
of Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," contributed to the decrease.
Offsetting these reductions in costs was a one-time special charge of $7.2
million associated with employee separation programs completed in the first
quarter of 1999. The reductions in costs were further offset by favorable
adjustments in the second quarter of 1998 of certain employee benefits and other
liabilities in the amount of $5.2 million. Also offsetting the reductions in
costs were increased depreciation and amortization expense resulting from higher
average plant balances in the first six months of 1999 over the first six months
of 1998, as well as the amortization of previously capitalized software
associated with the implementation of new administrative systems within the
Company.
7
<PAGE> 9
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
OTHER INCOME STATEMENT ITEMS
Income tax expense increased 21% or $4.5 million for the six months ended June
30, 1999, compared to the same period in 1998. The increase is primarily
attributable to an increase in pretax income.
INTERSTATE REGULATORY DEVELOPMENTS
During the second quarter of 1999, regulatory and legislative activity at both
the state and federal levels continued to be a direct result of the
Telecommunications Act of 1996 (Telecommunications Act). Along with promoting
competition in all segments of the telecommunications industry, the
Telecommunications Act was intended to preserve and advance universal service.
GTE continued in the second quarter of 1999, to meet the wholesale requirements
of new competitors. To date, GTE has signed interconnection agreements with
other carriers, providing them the capability to purchase individual unbundled
network elements (UNEs), resell retail services and interconnect
facilities-based networks. Several of these interconnection agreements were the
result of the arbitration process established by the Telecommunications Act, and
incorporated prices or terms and conditions based upon the Federal
Communications Commission (FCC) rules that were subsequently overturned by the
Eighth Circuit Court (Eighth Circuit) in July 1997. GTE challenged a number of
such agreements in federal district courts during 1997.
GTE's position in these challenges was supported by the Eighth Circuit's July
1997 decision stating that the FCC had overstepped its authority in several
areas concerning implementation of the interconnection provisions of the
Telecommunications Act. In January 1999, the U.S. Supreme Court (Supreme Court)
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on the merits by the Eighth Circuit. On the other
hand, the Supreme Court vacated the FCC rule setting forth the UNEs that
incumbent local exchange carriers (ILECs) are required to provide to competitive
LECs (CLECs). This latter ruling has led to a proceeding before the FCC
concerning what elements will have to be offered under what conditions. Pending
the final rulemaking by the FCC on the provisions of UNEs, GTE is continuing to
provide individual UNEs on a non-combined basis set forth in existing
interconnection agreements even though it is not legally obligated to do so.
In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. The major issues are (1) the FCC's cost
methodology used to set prices, (2) its methodology for setting wholesale
discounts, and (3) the "proxy rates" it set for interconnection, UNEs and
wholesale discounts. Supplemental opening briefs from petitioners and supporting
intervenors were filed July 16, 1999 and the opening brief of the FCC and its
supporting intervenors is due August 16, 1999. Reply briefs are due August 31,
1999. Oral argument is scheduled for September 1999.
Universal Service
GTE is active before both state and federal regulators advocating rapid
development and implementation of measures that will meet the requirements of
Section 254 of the Telecommunications Act that covers the Federal Universal
Service Program. Specifically, GTE urges regulators to identify and remove all
hidden subsidies and to provide an explicit replacement mechanism.
8
<PAGE> 10
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
In October 1998, the FCC issued an order selecting a cost model for universal
service and planned to select cost inputs in the second quarter of 1999. Due to
unforeseen delays, the FCC has now moved the implementation date of the new
universal service mechanism for nonrural carriers to January 2000. As a result,
many state regulators are awaiting FCC action so they can design their universal
service programs to be complementary with the FCC program. On July 30, 1999, the
United States Court of Appeals for the Fifth Circuit (Fifth Circuit) affirmed in
part, reversed in part, and remanded in part the FCC's universal service regime.
Specifically, the Fifth Circuit upheld the agency's decisions regarding: 1)
several aspects of the high-cost support program, including implementation
timing, separate treatment of rural carriers, the definition of service areas
and use of the forward-looking costs to determine support; 2) no mandatory
unbundling of supported services; 3) inclusion of commercial mobile radio
service providers as universal service fund contributors; and 4) aspects of the
schools and libraries program, including support for Internet access and
internal connections and payments to non-telecommunications carriers. The Fifth
Circuit reversed: 1) the assessment of contributions for schools and libraries
fund based, in part, on intrastate revenues; 2) the rule prohibiting local
telephone service providers from disconnecting low-income subscribers for
non-payment of long distance charges; 3) the decision to assess high-cost fund
contributions on primarily international carriers despite marginal interstate
revenues; 4) the requirement that ILECs recover their contributions from access
charges; and 5) the blanket prohibition on additional state eligibility
requirements for carriers receiving high cost support. GTE is considering its
options.
Price Cap
In May 1999, the U.S. Court of Appeals for the District of Columbia (Court)
released a decision regarding the FCC's choice of a 6.5% price cap productivity
factor in a 1997 order. The Court found the FCC's choice of a 6.0% base and a
0.5% Consumer Productivity Dividend to be inadequately supported. The Court
remanded the matter back to the FCC for further action and established an April
2000 date by which the FCC must complete its deliberations. The Court also
stayed application of its order, allowing the status quo use of the 6.5%
productivity factor pending conclusion of the FCC's further review.
Interstate Access Revision
Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction for the Company was $5.1 million. Similar
filings during 1997 and 1998 had already resulted in price reductions.
In July 1999, GTE, along with a coalition of local exchange and long distance
companies, submitted a proposal for interstate access charge and universal
service reform to the FCC. It is likely that the FCC will put the coalition's
proposal out for public comment in August 1999. The proposal would accelerate
the shift in access revenue recovery from per-minute to flat-rated charges, set
a schedule for elimination of the price cap productivity factor, and provide
more explicit support for universal service.
On August 4, 1999, the FCC announced adoption of an Order that grants price cap
LECs the ability to introduce new services without regulatory delay. The Order
also offers the promise of progressively greater flexibility in setting the
prices for interstate special access services as competition develops, gradually
replacing regulation with competition as the primary means of setting prices.
Although the text of the Order is not yet available, based upon the FCC press
release, the FCC has taken a reasonable step towards lessening regulation of
interstate special access. It appears the FCC has established a framework that
will allow ILECs the ability to use some of the same pricing mechanisms offered
by CLECs for special access services. The press release indicates the FCC has
begun a new rulemaking proceeding that is likely to lead to additional pricing
flexibility for interstate switched access services.
Advanced Telecommunications Services
Section 706 of the Telecommunications Act required the FCC to "encourage the
deployment on a reasonable and timely basis of advanced telecommunications
capability to all Americans." Further, the FCC was required to conduct a
proceeding aimed at determining the availability of advanced telecommunications,
and to take action to remove barriers to infrastructure investment and to
promote competition.
In an Order and Notice of Proposed Rulemaking (NPRM) released in August 1998,
the FCC ruled that advanced services offered by an incumbent LEC are subject to
the unbundling and resale requirements of the Telecommunications Act. In the
NPRM, the FCC sought comment on extensive, new separate affiliate rules under
which an incumbent LEC's affiliate could offer advanced services free from the
unbundling and resale obligations of the Telecommunications Act. In addition,
the NPRM sought comment on a number of issues regarding collocation, local
loops, unbundling and resale obligations for network facilities needed for
advanced services.
9
<PAGE> 11
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
In March 1999, the FCC released an Order stemming from the August 1998 NPRM. In
the Order the FCC adopted a number of new collocation rules designed to make
competitive entry easier and less costly. These rules specify how incumbent LECs
will manage such items as alternate collocation arrangements, security, space
preparation cost allocation, provisioning intervals, and space exhaustion. GTE
has appealed this order to federal Court. The FCC also released a Further Notice
of Proposed Rulemaking (FNPRM) seeking comment on spectrum compatibility issues
and line sharing. Line sharing is a concept wherein two or more service
providers are allowed to use the same local loop (e.g., voice and xDSL). GTE
will vigorously oppose line sharing.
The FCC has yet to release an order addressing separate affiliates, local loops,
unbundling and resale.
Number Portability
In December 1998, the FCC released a Memorandum Opinion and Order establishing
cost recovery rules for local number portability (LNP) that permitted the
recovery of carrier-specific costs directly related to the provision of
long-term LNP via a federally tariffed end-user monthly charge. GTE subsequently
filed an LNP tariff with the FCC, and in March 1999 instituted an end-user
number portability fee. This charge is levied on all business and residence
customers because all customers benefit from the competitive environment created
by LNP capability. In June 1999, GTE's tariffed LNP charge was reviewed and
accepted by the FCC at $0.36 per access line.
Internet Service Traffic
Incumbent LECs are required to provide open access to all Internet service
providers (ISPs), while cable television operators are not. Several major cable
television operators providing Internet access through cable modem facilities
are only offering their affiliated ISPs to consumers. Cable television operators
that do allow customers to select non-affiliated ISPs often require the customer
to also pay for their affiliated ISP's service (i.e., to pay twice for the same
service).
GTE has been active in encouraging municipalities engaged in reviewing cable
television mergers or franchise renewals to require cable modem open access as a
condition for approval. The city of Portland, Oregon was first to adopt such a
requirement and a subsequent federal court challenge by AT&T was denied. AT&T
has appealed that decision and arguments will take place in October 1999. The
FCC announced that it will file a brief to express its concern over the effect
that the actions of local franchising authorities could have on the FCC's
hands-off approach to the broadband market, and specifically address the
importance of a national policy.
In July 1999, Broward County, Florida also adopted an ordinance requiring cable
television franchisees to provide ISPs "nondiscriminatory equal access" to their
cable modem platforms. AT&T subsequently announced that it would appeal that
decision as well. Also, in July 1999, Comcast Cablevision and Advanced Cable
Communications filed a lawsuit claiming Broward County violated the
Communications Act by inserting unlawful requirements into the franchise
agreement.
INTRASTATE REGULATORY DEVELOPMENTS
In January 1999, the Public Utilities Commission (PUC) issued a decision and
order establishing rules and procedures for a framework that will govern
telecommunications competition in Hawaii. Some of the order's significant
rulings are: (1) the Company must offer its retail services to other
telecommunications providers at a 15% discount, (2) all telecommunications
providers will contribute to support a universal service fund, (3) the Company
must recalculate its costs and prices for UNEs, and (4) reciprocal compensation
will be provided to transport and terminate local calls, including calls for all
ISPs. The
10
<PAGE> 12
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
Company also sought to have ISP traffic declared interstate and not subject to
reciprocal compensation based on the FCC's ruling, but in May 1999, the PUC
issued a ruling denying the Company's request.
In June 1999, the Company filed a rate rebalancing proposal in the rate design
phase of its 1995 rate case. Included in the filing is a proposal to eliminate
an 11.23% intrastate surcharge that is currently being applied to recover the
revenue increase granted in the rate case. In July 1999, in response to a PUC
order, the Company filed comments urging the PUC to proceed with the rate design
phase of the rate case. The PUC sought the comments because of its concerns
regarding the revenue requirement being based on 1995 test year data. A decision
from the PUC is pending.
Briefs were filed in April 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. In June 1998, the PUC issued an order granting a motion by TelHawaii to
compel the Company to transfer its assets in Ka'u to TelHawaii. In April 1999,
the First Circuit Court (Circuit Court) ruled that a forced sale or condemnation
was illegal and violated both state and federal law. TelHawaii appealed the
Circuit Court decision to the Hawaii Supreme Court (Supreme Court). In July
1999, the Supreme Court denied TelHawaii's appeal. Also in July 1999, TelHawaii
filed a motion to dismiss their secondary appeal with the Supreme Court,
indicating their intention to cease operations in the state of Hawaii. This
motion was subsequently granted by the Supreme Court.
OTHER DEVELOPMENTS
Proposed Merger with Bell Atlantic Corporation
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards 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 qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger.
Both companies are working diligently to complete the merger at the earliest
practicable date. However, Bell Atlantic and GTE must obtain the approval of a
variety of state and federal regulatory agencies and, accordingly, the merger
may close in the first half of 2000.
11
<PAGE> 13
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
Tax Audits
In 1997, the State of Hawaii (the State) issued proposed notices of assessment
to the Company for a $12 million tax deficiency pertaining to general excise tax
(GET) and public service company tax (PSCT) audits of years 1992-1994. In June
1999, a settlement was reached with the State. The Company had provided adequate
reserve for the issue and the settlement did not have a material impact on the
Company's results of operations or financial condition.
YEAR 2000 CONVERSION
State of Readiness
As of June 30, 1999, GTE has completed Year 2000 remediation, conducted system
testing and returned to production the essential systems that support its
domestic telecommunications businesses. GTE's portion of the public switched
telephone network (PSTN) in the United States has been upgraded for Year 2000,
and all of GTE's access lines are now operating using Year 2000 compliant
central office switches and network elements.
GTE expects its Internet businesses to be Year 2000 compliant in the third
quarter of 1999. Also in the third quarter, GTE's domestic wireless company, all
international affiliate companies, and all remaining domestic companies will
have completed the Year 2000 compliance of their systems.
GTE's remaining effort consists of quality assurance and validation of our Year
2000 efforts across our businesses; assuring forward compliance of our systems
and services; planning for reasonably foreseeable contingencies associated with
the millennium rollover; and staffing our corporate Year 2000 communications
watch center through March 1, 2000.
Independent verification and validation is the final step in GTE's Year 2000
process. This quality assurance process is expected to be substantially complete
in the third quarter of 1999. However, GTE will continue its periodic reviews
conducted by internal audit into 2000. Program status will also continue to be
reported each quarter to the Company's external auditors.
Cost to Address Year 2000 Issues
With the incorporation of the TELUS Year 2000 program, the estimated total
multi-year cost of GTE's Year 2000 Program is not expected to exceed $400
million. Through June 30, 1999, expenditures totaled $320 million. The current
estimate for the cost of remediation for the Company is approximately $9.7
million. Through June 30, 1999, expenditures totaled $6.1 million. Year 2000
remediation costs are expensed in the year incurred. Approximately 67% of GTE's
program effort involves U.S. domestic operations. GTE has not elected to replace
or accelerate the planned replacement of any systems due to the Year 2000 issue.
As a result of completions in June 1999, GTE has begun to reduce the staff
assigned to the Year 2000 program. From a program peak of over 1,200 full-time
equivalent workers, we are currently staffed with an estimated 700 to 800
full-time equivalent workers (both company employees and contractors) worldwide.
Risks of Year 2000 Issues
With the completion of conversion and system testing, GTE believes that the risk
of multiple, simultaneous Year 2000 disruptions affecting GTE's ability to
provide basic services has been substantially eliminated. While isolated system
issues may exist, the "most reasonably likely worse case scenario" would be any
disruptions resulting from interoperability issues with other international
carriers that have not completed their Year 2000 efforts.
12
<PAGE> 14
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
Contingency Planning
GTE continues to enhance its normal business continuity planning to address
potential Year 2000 interruptions. GTE's disaster preparedness recovery teams
have included procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs. GTE has established a corporate Year 2000
communications watch center to be operational in Dallas, Texas from September 8,
1999 through March 1, 2000. The initial versions of these plans were completed
during the second quarter of 1999. These plans will be kept current through the
millennium rollover, and are expected to be tested (as appropriate) by the end
of September 1999. GTE's Year 2000 contingency plans include business continuity
planning; disaster recovery/emergency preparedness; millennium rollover
planning; post millennium degradation tracking; a network and information
technology freeze period; employee availability and logistics backup planning;
"follow-the-sun" time-zone impact analysis; and coordination with other
(non-PSTN) telecommunications providers.
RECENT ACCOUNTING PRONOUNCEMENT
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis, the Company has made
forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets" or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
13
<PAGE> 15
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2).)
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service, UNEs
and resale rates; (4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA (local access
transport area) toll service markets; and (5) the success and expense of our
remediation efforts and those of our suppliers, customers and all
interconnecting carriers in achieving Year 2000 compliance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's market risks since December
31, 1998.
14
<PAGE> 16
PART II. OTHER INFORMATION
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
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
1999.
15
<PAGE> 17
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 12, 1999 /s/ Stephen L. Shore
--------------------- --------------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
16
<PAGE> 18
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
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) Six Months Ended
June 30, 1999
--------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 51.6
Add - Income taxes 25.6
- Fixed charges 21.7
------------
Adjusted earnings $ 98.9
============
Fixed charges:
Interest expense $ 20.1
Portion of rent expense representing interest 1.6
------------
Adjusted fixed charges $ 21.7
============
RATIO OF EARNINGS TO FIXED CHARGES 4.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,400
<SECURITIES> 0
<RECEIVABLES> 176,700
<ALLOWANCES> 2,800
<INVENTORY> 12,000
<CURRENT-ASSETS> 198,100
<PP&E> 2,042,900
<DEPRECIATION> 1,211,300
<TOTAL-ASSETS> 1,301,200
<CURRENT-LIABILITIES> 257,900
<BONDS> 462,400
0
0
<COMMON> 250,000
<OTHER-SE> 138,400
<TOTAL-LIABILITY-AND-EQUITY> 1,301,200
<SALES> 344,500
<TOTAL-REVENUES> 344,500
<CGS> 119,300
<TOTAL-COSTS> 249,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,100
<INCOME-PRETAX> 77,200
<INCOME-TAX> 25,600
<INCOME-CONTINUING> 51,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,600
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
