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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: MARCH 31, 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)
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)
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
April 30, 1999. The Company's common stock is 100% owned by GTE Corporation.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
---------- ----------
(Dollars in Millions)
<S> <C> <C>
REVENUES AND SALES
Local services $ 68.4 $ 68.4
Network access services 45.2 49.1
Other services and sales 42.9 42.8
---------- ----------
Total revenues and sales 156.5 160.3
---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 61.6 70.8
Selling, general and administrative 38.1 28.6
Depreciation and amortization 31.9 29.1
---------- ----------
Total operating costs and expenses 131.6 128.5
---------- ----------
OPERATING INCOME 24.9 31.8
OTHER (INCOME) EXPENSE
Interest - net 9.2 9.6
Other - net (0.7) (0.9)
---------- ----------
INCOME BEFORE INCOME TAXES 16.4 23.1
Income taxes 4.7 7.9
---------- ----------
NET INCOME $ 11.7 $ 15.2
========== ==========
</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.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3.8 $ 1.3
Receivables, less allowances
of $3.9 million and $6.5 million 158.3 179.1
Accounts receivable from affiliate 3.1 7.7
Note receivable from affiliate 41.1 5.3
Inventories and supplies 12.0 11.0
Prepaid taxes 7.3 11.1
Prepaid insurance 4.3 9.9
Other 1.9 1.9
---------- ----------
Total current assets 231.8 227.3
---------- ----------
Property, plant and equipment, at cost 2,038.5 2,045.7
Accumulated depreciation (1,200.2) (1,191.5)
---------- ----------
Total property, plant and equipment, net 838.3 854.2
---------- ----------
Prepaid pension costs 242.9 234.8
Other assets 10.2 12.1
---------- ----------
Total assets $ 1,323.2 $ 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>
March 31, December 31,
1999 1998
---------- ----------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt $ 2.4 $ 2.3
Notes payable to affiliate 103.4 93.7
Accounts payable 32.0 47.7
Affiliate payables 20.0 30.6
Taxes payable 28.6 15.6
Accrued interest 7.8 15.4
Accrued payroll costs 34.3 22.5
Dividends payable 51.0 18.5
Other 36.0 33.0
---------- ----------
Total current liabilities 315.5 279.3
---------- ----------
Long-term debt 463.0 467.5
Deferred income taxes 156.3 150.8
Employee benefit plans and other 34.9 38.1
---------- ----------
Total liabilities 969.7 935.7
---------- ----------
Shareholder's equity
Common stock (10,000,000 shares issued) 250.0 250.0
Additional paid-in capital 91.1 91.1
Retained earnings 12.4 51.6
---------- ----------
Total shareholder's equity 353.5 392.7
---------- ----------
Total liabilities and shareholder's equity $ 1,323.2 $ 1,328.4
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Net income $ 11.7 $ 15.2
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 31.9 29.1
Deferred income taxes 5.4 20.7
Provision for uncollectible accounts 1.9 2.4
Changes in current assets and current liabilities 18.5 0.9
Other - net (2.7) (2.2)
--------- ---------
Net cash from operations 66.7 66.1
--------- ---------
INVESTING
Capital expenditures (15.8) (37.3)
Other - net 0.5 --
--------- ---------
Net cash used in investing (15.3) (37.3)
--------- ---------
FINANCING
Long-term debt retired (4.4) (0.5)
Dividends (18.5) (10.8)
Decrease in short-term obligations,
excluding current maturities (26.0) (15.0)
--------- ---------
Net cash used in financing (48.9) (26.3)
--------- ---------
Increase in cash and cash equivalents 2.5 2.5
Cash and cash equivalents:
Beginning of period 1.3 0.7
--------- ---------
End of period $ 3.8 $ 3.2
========= =========
</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 the American Institute of
Certified Public Accountants' (AICPA) 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, in the first quarter of 1999
the Company capitalized $0.8 million of software expenditures, 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 voluntary and involuntary 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 voluntary
and involuntary 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 PRONOUNCEMENTS
Derivative Instruments and Hedging Activities
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 which is effective
January 1, 2000.
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<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 Corporation 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.
We expect the merger 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, receipt of
opinions that the merger will be tax-free, and the approval of the shareholders
of both Bell Atlantic and GTE. Special meetings to vote on the merger will be
held on May 18, 1999 for GTE shareholders and on May 19, 1999 for Bell Atlantic
shareholders.
6
<PAGE> 8
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
March 31,
-------------------------------- Percent
1999 1998 Decrease Change
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net income $ 11.7 $ 15.2 $ (3.5) (23%)
</TABLE>
Net income for the three months of 1999 decreased primarily due to a one-time
special charge of $7.2 million recorded in the first quarter of 1999 combined
with a decline in network access services revenues and income taxes.
REVENUES AND SALES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
March 31,
----------------------- Increase Percent
1999 1998 (Decrease) Change
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Local services $ 68.4 $ 68.4 $ -- --
Network access services 45.2 49.1 (3.9) (8%)
Other services and sales 42.9 42.8 0.1 --
---------- ---------- ---------
Total revenues and sales $ 156.5 $ 160.3 $ (3.8) (2%)
========== ========== =========
</TABLE>
Network Access Services Revenues
Network access services revenues declined in the quarter ended March 31, 1999,
compared to the same period in 1998, primarily as a result of implementation of
the Federal Communications Commission's (FCC) 1998 access reform provisions,
which decreased revenues $9.0 million. This decrease was partially offset by
demand for access services by long-distance carriers, which generated 16% growth
in minutes of use and $2.2 million of additional revenues. Greater demand for
increased bandwidth by high-capacity users also contributed $3.7 million in
revenue growth.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
March 31,
-------------------------------- Percent
1999 1998 Increase Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Total operating costs and expenses $ 131.6 $ 128.5 $ 3.1 2%
</TABLE>
Total operating costs and expenses for the first quarter of 1999 increased,
compared to the same quarter in 1998, primarily as a result of a one-time
special charge of $7.2 million associated with voluntary and involuntary
separation programs, which were completed in the first quarter of 1999.
Offsetting these increases were lower operating taxes of $2.2 million and a
reduction in switch right-to-use (RTU) software fees associated with network
switching equipment of $2.1 million. The reduction in RTU costs includes a
decrease of $0.8 million, due to the capitalization of software cost in 1999, as
a result of the adoption of the AICPA's SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," in addition to an
overall reduction in RTU fees of $1.3 million.
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 taxes decreased 41% or $3.2 million for the quarter ended March 31, 1999,
compared to the same period in 1998. The decrease is primarily attributable to a
decline in pretax income and other tax adjustments.
INTERSTATE REGULATORY DEVELOPMENTS
During the first 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 first quarter of 1999 to meet the wholesale requirements of
new competitors. GTE 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 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 on many of the FCC rules related to
pricing and costing, that had previously been reversed by the Eighth Circuit on
jurisdictional grounds. The pricing rules established by the FCC will now be
remanded back to the Eighth Circuit for a determination on the merits. On the
other hand, the Supreme Court vacated the FCC rule requiring incumbent local
exchange carriers (LECs) to provide UNEs to competitive LECs. This latter ruling
will be the subject of continued proceedings before the FCC and the state
commissions concerning what elements will have to be offered under what
conditions. Pending the final rulemaking by the FCC on the provisions of UNEs,
GTE will continue to provide individual UNEs set forth in existing
interconnection agreements even though it is not legally obligated to do so.
Universal Service
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs in the second quarter of 1999. For this
reason, the FCC moved the implementation date of the new universal service
mechanism for nonrural carriers to July 1999. GTE filed a Petition for
Reconsideration in December 1998, stating that the adopted model is incomplete
and requires additional time for proper evaluation. GTE is currently awaiting
action from the FCC.
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.
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 an Order and Notice of Proposed Rule Making (NPRM) released in August 1998,
the FCC clarified 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
and unbundling and resale obligations for network facilities needed for advanced
services.
On March 31, 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. The
FCC also released a Further NPRM 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.
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 fifteen percent discount, (2) all
telecommunications providers will contribute to support a universal service
fund, (3) the Company must recalculate its costs and prices for UNEs based on
ordered modifications to its cost model and a common cost fixed allocator of
twenty percent, and (4) compensation will be provided to transport and terminate
local calls, including calls for all Internet Service Provider (ISPs). The
Company has appealed portions of this decision given the delay in implementation
of retail rate rebalancing and universal service funding while proceeding with
the setting of the UNE rates, among other matters. The Company also sought
relief from the PUC on the ISP determination given the FCC's ruling, but in May
1999, the PUC issued a ruling denying GTE's request to have ISP traffic declared
interstate and not subject to reciprocal compensation.
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. An order from the PUC is pending. 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 but denied TelHawaii's request for civil penalties against the
Company. In July 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. The PUC issued an order in July 1998 denying the
Company's motion for reconsideration. In October 1998, TelHawaii and the Company
filed its Proposed Findings of Fact and Conclusions of Law, pursuant to the
court's instruction at the hearing in September 1998. In April 1999, the First
Circuit Court ruled favorably on the Company's appeal and vacated the
Commission's orders selecting Tel Hawaii as the carrier of last resort in the
district of Ka'u.
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.
We expect the merger 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, receipt of
opinions that the merger will be tax-free, and the approval of the shareholders
of both Bell Atlantic and GTE. Special meetings to vote on the merger will be
held on May 18, 1999 for GTE shareholders and on May 19, 1999 for Bell Atlantic
shareholders.
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).)
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 use
tax (GET) and public service company tax (PSCT) audits of years 1992-1994. The
Company completed its analysis of the auditor's position in the notices of
assessment and believed that it had reasonable argument that the access charges
for interstate long-distance calls should be characterized as wholesale revenues
subject to the reduced 0.5% tax rate, instead of the 4% GET rate and 5.885% PSCT
rate. The Company also believed that it could make a reasonable argument for the
alternative position that such access charges should properly be subject to the
GET (at 4%) rather than the PSCT (at 5.885%). In February 1999, the State did
not accept the Company's position that interstate carrier access revenues should
not be subject to the PSCT. Additionally, in February 1999, the State issued
proposed notices of assessment for 1995 through 1997 for $14 million pertaining
to the same above mentioned tax issues. The Company's legal counsel is prepared
to present state and federal constitutional arguments to the State in meetings
targeted for the second quarter of 1999. The central issue remains whether or
not interstate access charges are properly taxable under the PSCT or under the
GET. Management believes the Company has adequately reserved for this issue and
therefore does not expect that it will have a material impact on the Company's
results of operations or financial condition.
YEAR 2000 CONVERSION
General
The Year 2000 issue concerns the potential inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. GTE has had an active Year 2000
program in place since 1995. This program is necessary because the Year 2000
issue could impact telecommunications networks, systems and business processes
at GTE. Although GTE maintains a significant portion of its own systems and
infrastructure, it also depends on certain, material external supplier products
that GTE must verify as Year 2000 compliant in their condition of use. In 1997,
GTE's Year 2000 methodology and processes were certified by the Information
Technology Industry Association of America. GTE presently expects that the
essential functions of its domestic wireline telecommunications business will
complete Year 2000 testing by June 30, 1999, and remaining businesses will
complete before October 1999.
State of Readiness
GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for which
GTE is responsible; 2) systems that directly support GTE's telecommunications
network operations and interactions with customers; 3) systems and products that
support GTE's national and international business units; 4) software that
supports basic business operations, customer premise equipment and
interconnection with other telecommunications carriers; and 5) systems that
support GTE's physical infrastructure, financial operations and facilities.
Corporate-wide, essential remediation was approximately 88% complete as of March
31, 1999. In addition to the essential remediation budget, GTE has set aside
funds equivalent to approximately 11% of it's overall Year 2000 budget. These
funds are planned for verification, problem resolution and administrative
program closeout in the last six months of 1999 and to address contingencies and
millennium program operations and control through March 2000. GTE's portion of
the PSTN in the United States has been upgraded substantially for Year 2000; 97%
of GTE's access lines are already operational using Year 2000 compliant central
office switches. Additionally, over
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).)
98% of GTE's essential software has been remediated. GTE's focus continues to be
on deployment and testing of these systems throughout GTE's operations.
GTE's Year 2000 program has been organized into five phases as follows:
Awareness: program definition and general education; Assessment: analysis and
prioritization of systems supporting the core business; Renovation: rectifying
Year 2000 issues; Validation: testing the Year 2000 solutions; Implementation:
placing the tested systems into production. Awareness and Assessment are more
than 95% complete; System Renovation, including supplier products, is
approximately 91% complete; Validation, including enterprise testing in
operational environments, and Implementation, including regional deployment, are
approximately 73% complete. It is anticipated that the Renovation, Validation
and Implementation phases for essential functions will be substantially complete
in June 1999.
In summary, compliant product deployment and enterprise testing for GTE's
domestic telecommunications-related business, including national and
international interoperability and validation, are presently expected to be
complete by the end of June 1999. The remaining domestic and international
businesses are on schedule for completing testing before October 1999.
Successful conclusion of GTE's Year 2000 program depends upon timely delivery of
Year 2000 compliant products and services from external suppliers. With the
addition of new products, approximately 1,500 of third-party products used by
GTE have been determined to be "vital" products, critical to GTE's business and
operations. As of March 31, 1999, Year 2000 compliant versions, or suitable
alternatives, for 95% of these vital supplier products have been provided and
are currently undergoing certification testing by GTE.
Use of Independent Verification and Validation
Independent verification and validation is the final step in GTE's process. As
part of independent verification and validation, GTE's Year 2000 program
management office has established a corporate-wide quality oversight and control
function that reviews and evaluates quality reports on the Year 2000 issue. Each
GTE business unit has access to an independent quality team that evaluates the
conversion and testing of applications and third-party supplier products. This
quality assurance process is expected to be completed in October 1999.
Separately, GTE's corporate internal auditors conduct periodic reviews and
report significant findings, if any, to business unit and corporate management
and the audit committee of the Board of Directors. Program status is also
reported each quarter to GTE's external auditors.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is expected not to
exceed $400 million. Through March 31, 1999, expenditures totaled $283 million.
The current estimate for the cost of remediation for the Company is
approximately $9.7 million. Through March 31, 1999, expenditures totaled $5.4
million. Year 2000 remediation costs are expensed in the year incurred. GTE has
not elected to replace or accelerate the planned replacement of systems due to
the Year 2000 issue.
Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000 to
1,200 full-time equivalent workers (both company employees and contractors).
Approximately 10% of these full-time equivalent workers are engaged in all
aspects of program management; 4% are engaged in system conversion; 27% are
involved in external supplier management; 54% are involved in testing at all
levels; and 5% are addressing contingency planning and interoperability
operations both nationally and internationally. Approximately 66% of GTE's
program effort involves U.S. domestic operations of all types.
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).)
Risks of Year 2000 Issues
GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios." To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to threaten
GTE's present schedule. GTE's program and plans currently indicate a compliant
network infrastructure to be deployed by the end of June 1999. A general,
unspecific, schedule shift that would erode progress beyond January 1, 2000,
cannot reasonably be calculated. If, however, there were a schedule delay
lasting no more than six months, such schedule erosion would likely affect only
nonessential systems due to the prioritization of work schedules.
Other scenarios might include a possible but presently unforeseen failure of key
supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.
To date, GTE has not encountered any conditions requiring tactical contingency
planning to its existing Year 2000 program; however, contingency planning for
business and network operations and customer contact during 1999 and 2000 is
ongoing.
GTE is bolstering its normal business continuity planning to address potential
Year 2000 interruptions. In addition, GTE's disaster preparedness recovery teams
are including procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs. GTE is also developing its plans with respect to
possible occurrences immediately before, during, and after the millennium
transition. These plans are expected to be completed by June 30, 1999, and
tested (as appropriate) by the end of September 1999. This contingency plan
includes: business continuity planning; disaster recovery/emergency
preparedness; millennium rollover planning; post millennium degradation
tracking; a network and information technology "stabilization" period; employee
availability and logistics backup planning; "follow-the-sun" time-zone impact
analysis; coordination with other (non-PSTN) telecommunications providers; a
Year 2000 "war room" operation to provide high-priority recovery support, plans
for key personnel availability, command structures and contingency traffic
routing; and plans for round-the-clock, on-call repair teams.
RECENT ACCOUNTING PRONOUNCEMENTS
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, which is effective January 1, 2000.
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).)
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.
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,
unbundled network elements and resale rates; (4) the extent, timing, success and
overall effects of competition from others in the local telephone and intraLATA
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.
13
<PAGE> 15
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 first quarter of
1999.
14
<PAGE> 16
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 13, 1999 /s/ Stephen L. Shore
------------------------ ----------------------------------------------
Stephen L. Shore
Controller
(Principal Accounting Officer)
<PAGE> 17
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) Three Months Ended
March 31, 1999
---------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 11.7
Add - Income taxes 4.7
- Fixed charges 10.5
---------------
Adjusted earnings $ 26.9
===============
Fixed charges:
Interest expense $ 10.0
Portion of rent expense representing interest 0.5
---------------
Adjusted fixed charges $ 10.5
===============
RATIO OF EARNINGS TO FIXED CHARGES 2.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,800
<SECURITIES> 0
<RECEIVABLES> 206,400
<ALLOWANCES> 3,900
<INVENTORY> 12,000
<CURRENT-ASSETS> 231,800
<PP&E> 2,038,500
<DEPRECIATION> 1,200,200
<TOTAL-ASSETS> 1,323,200
<CURRENT-LIABILITIES> 315,500
<BONDS> 463,000
0
0
<COMMON> 250,000
<OTHER-SE> 103,500
<TOTAL-LIABILITY-AND-EQUITY> 1,323,200
<SALES> 156,500
<TOTAL-REVENUES> 156,500
<CGS> 61,600
<TOTAL-COSTS> 131,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 16,400
<INCOME-TAX> 4,700
<INCOME-CONTINUING> 11,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,700
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
