1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1994
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1177 BISHOP STREET, HONOLULU, HAWAII 96813
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 808-546-4511
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
---
THE COMPANY HAD 10,000,000 SHARES OF $25 PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1995. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE CORPORATION.
THE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 5
6. Selected Financial Data 6
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
The following items have been omitted in accordance with the relief provisions
under General Instruction J of Form 10-K:
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners
and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 34
3
PART I
Item 1. Business
GTE Hawaiian Telephone Company Incorporated (the Company) (formerly Hawaiian
Telephone Company) was incorporated under the laws of the Kingdom of Hawaii in
1883. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
provides communications services in Hawaii and throughout the Pacific and Asia.
The Company owns a majority interest in the Micronesian Telecommunications
Corporation (MTC). MTC, which is headquartered on Saipan in the Commonwealth of
the Northern Marianas, provides local and international telecommunications
services on the islands of Saipan, Tinian and Rota. In addition, the Company has
a wholly-owned subsidiary, Hawaiian Tel Insurance Company, which provides auto
liability, general liability and workers' compensation insurance to the Company
on a direct basis.
The Company provides a wide variety of communications services ranging from
local telephone service for the home and office to highly complex voice and data
services for industry. The Company provides local telephone service on each
island in Hawaii and long distance service among the islands. InterLATA (Local
Access Transport Area) services between Hawaii and domestic points within the
United States are provided by interexchange (long distance) common carriers
which connect to the Company's local facilities for call origination and
termination. The Company provides interLATA service between Hawaii and
international termination points in competition with these carriers. These
common carriers are charged fees (access charges) for interconnection to the
Company's local facilities. End user business and residential customers are also
charged access charges for access to the facilities of the long distance
carriers. The Company also earns other revenues by leasing interexchange plant
facilities to interexchange carriers, primarily AT&T Corp. The number of access
lines served by the Company has grown steadily from 594,642 on January 1, 1990
to 749,023 on December 31, 1994.
The Company's principal line of business is providing telecommunication
services. These services fall into five major classes: local network, network
access, long distance, equipment sales and services and other. Revenues from
each of these classes over the last three years are as follows:
Years Ended December 31
-------------------------------------------
1994 1993 1992
---- ---- ----
(Thousands of Dollars)
Local Network Services $ 225,913 $ 214,627 $ 203,908
% of Total Revenues 38% 38% 37%
Network Access Services $ 128,840 $ 112,712 $ 107,347
% of Total Revenues 22% 20% 19%
Long Distance Services $ 121,871 $ 106,867 $ 111,254
% of Total Revenues 20% 19% 20%
Equipment Sales and Services $ 81,484 $ 95,653 $ 101,948
% of Total Revenues 13% 17% 18%
Other $ 40,819 $ 35,030 $ 34,565
% of Total Revenues 7% 6% 6%
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At December 31, 1994, the Company had 3,240 employees. The Company has written
agreements with the International Brotherhood of Electrical Workers (IBEW)
covering substantially all non-management employees. In 1994, the contracts with
the IBEW expired. An agreement has not yet been reached and negotiations will
continue during 1995.
Telephone Competition and Regulatory Developments
The Company holds franchises, licenses and permits adequate for the conduct of
its business in the territories which it serves.
The Company is subject to regulation by the Public Utilities Commission (PUC) of
the State of Hawaii as to its intrastate business operations and by the Federal
Communications Commission (FCC) as to its interstate and international business
operations. Information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies can
be found in Note 10 of the Company's consolidated financial statements included
in Item 8.
During 1994, the Company began implementation of a three-year $78 million
re-engineering plan. In the initial year of the plan, $18 million was expended
to implement this program. These expenditures were primarily associated with the
consolidation of certain customer service centers, separation benefits
associated with employee reductions and incremental expenditures to redesign and
streamline systems and processes. During 1995, the level of re-engineering
activities and related expenditures are expected to accelerate as pilot programs
are rolled out and other major initiatives are completed. The overall
re-engineering plan remains on schedule and is expected to be completed by the
end of 1996. Continued implementation of this program will position the Company
to accelerate delivery of a full array of voice, video and data services and to
reach its stated objective of being the easiest company to do business with in
the industry.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas. In 1994, GTE
announced plans to build a new video network over the next 10 years which will
pass seven million homes in 66 key GTE markets. GTE has requested FCC approval
to construct facilities in the initial three markets, including Honolulu,
Hawaii, and expects to begin construction in 1995.
On January 13, 1995, the United States District Court for the Eastern District
of Virginia issued an injunction declaring that GTE has the right to provide
video programming to its in-franchise customers. The court's decision means that
GTE is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
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During 1994, GTE unveiled its World Class Network in eight key markets,
including Honolulu, Hawaii, to provide advanced communications for business
customers. This program includes sophisticated high-speed, digital fiber-optic
rings, a high-capacity switching network (known as SONET), and a new centralized
operations center that monitors the entire network. These SONET rings are an
integral part of the high-speed information network that enables GTE to provide
advanced services such as high-speed data transmission and video conferencing.
Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has continued. Regulatory authorities have adopted various
forms of alternative regulation, which provide economic incentives to telephone
service providers to improve productivity and provide the foundation for
implementing pricing flexibility necessary to address competitive entry into the
markets the Company serves.
Many states are currently investigating whether to authorize local and toll
competition. Several have concluded that competition is in the public interest
and five states, not including Hawaii, have authorized plans that would allow
customers to pre-subscribe to a specific carrier to handle intraLATA toll calls.
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to limit
the rates a carrier may charge, rather than just regulating the rate of return
which may be achieved. Under this approach, the maximum prices that the Company
may charge are increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. The Company may, within
certain ranges, price individual services above or below the overall cap.
Under its price cap regulatory plan, the FCC adopted a productivity sharing
feature. Because of this feature, under the minimum productivity-gain option,
the Company must share equally with its ratepayers any realized interstate
return above 12.25% up to 16.25%, and all returns higher than 16.25%, by
temporarily lowering prospective prices.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services and private line services. Expanded Interconnection
requires LECs to permit competitors to connect directly to LEC central offices
and the LEC network under negotiated terms and conditions. Competitors are
thereby able to compete more effectively than previously to replace LEC services
between large users and interexchange carriers (IXCs), or between large users
and the LEC switch. The FCC accompanied its Expanded Interconnection mandate
with a slight relaxation of the rigid pricing rules that govern how LECs price
their access services. In 1994, the FCC also reaffirmed the switched access rate
structure changes adopted in 1993 that allow LECs to better reflect the actual
cost characteristics of transport services and improves the LEC's ability to
compete with alternative access providers.
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The GTE Consent Decree, which was issued in connection with the 1983 acquisition
of GTE Sprint and GTE Spacenet (both since divested), prohibits GTE's domestic
telephone operating subsidiaries from providing long distance service beyond the
boundaries of the LATA. However, the Company is permitted to provide services
between Hawaii and international points. The degree of competition allowed in
the intraLATA market is subject to state regulation. However, regulatory
constraints on intraLATA competition are gradually being relaxed.
These and other actions to eliminate the existing legal and regulatory barriers,
together with rapid advances in technology, are facilitating a convergence of
the computer, media and telecommunications industries. In addition to allowing
new forms of competition, these developments are also creating new opportunities
to develop interactive communications networks. The Company intends to continue
to respond aggressively to regulatory and legal developments that allow for
increased competition and opportunities in the marketplace. The Company expects
its financial results to benefit from reduced costs and the introduction of new
products and services that will result in increased usage of its networks.
However, it is likely that such improvements will be offset, in part, by
continued strategic pricing reductions and the effects of increased competition.
Item 2. Properties
The Company's property consists of network facilities (79%), company facilities
(13%), customer premises equipment (2%) and other (6%). From January 1, 1990 to
December 31, 1994, the Company made gross property additions of $800 million and
property retirements of $300 million. Substantially all of the Company's
property is subject to liens securing long-term debt. In the opinion of
management, the Company's telephone plant is substantially in good repair.
Item 3. Legal Proceedings
There are no pending legal proceedings, either for or against the Company, which
would have a material impact on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's common stock is the First
National Bank of Boston.
GTE Corporation
C/O Bank of Boston
P.O. Box 9191
Boston, MA 02205-9191
10-K REPORT
A copy of the 1994 annual report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by writing to:
GTE Telephone Operations
External Reporting
P.O. Box 407, MC: INAAACG
Westfield, IN 46074
(317)896-6464
PARENT COMPANY ANNUAL REPORT
A copy of the 1994 annual report of our parent company may be obtained by
writing to:
GTE Corporation
Corporate Secretary's Office
One Stamford Forum
Stamford, CT 06904
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Item 6. Selected Financial Data
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
For the years ended December 31,
-------------------------------------------------------------------
1994 1993(b) 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
SELECTED INCOME STATEMENT ITEMS (a)
Operating revenues $ 598,927 $ 564,889 $ 559,022 $ 545,910 $ 539,283
Operating expenses 518,857 548,891 461,640 449,700 443,089
---------- ---------- ---------- ---------- ----------
Net operating income 80,070 15,998 97,382 96,210 96,194
Interest expense 36,104 31,660 29,214 33,843 30,811
Other - net 1,554 (755) 350 (446) 1,405
Income tax provision (benefit) 12,613 (9,865) 24,228 16,115 12,015
---------- ----------- ---------- ---------- ----------
Net income (loss) $ 29,799 $ (5,042) $ 43,590 $ 46,698 $ 51,963
========== =========== ========== ========== ==========
Dividends declared on common stock $ 15,631 $ 29,768 $ 35,189 $ 38,584 $ 43,456
--------------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
SELECTED BALANCE SHEET ITEMS
Investment in property, plant
and equipment - net $1,205,827 $1,145,673 $1,053,127 $ 983,243 $ 944,095
Total assets 1,527,249 1,425,945 1,281,007 1,224,682 1,121,529
Long-term debt 371,840 379,901 401,475 345,409 310,765
Common stock, reinvested
earnings and other capital 523,436 508,835 503,548 495,549 418,652
--------------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
SELECTED STATISTICS
Access lines 749,023 725,029 681,171 659,844 630,885
Access line gain 23,994 43,858 21,327 28,959 36,243
Net investment in property, plant
and equipment per access line $ 1,610 $ 1,580 $ 1,546 $ 1,490 $ 1,496
Number of employees 3,240 3,320 3,887 4,099 4,185
Access lines per employee 231 218 175 161 151
Capital expenditures (thousands) $ 174,271 $ 191,837 $ 158,119 $ 137,440 $ 136,104
--------------------------------------------------------------------------------------------------------------
(a) Per share data is omitted since the Company's common stock is 100% owned by
GTE Corporation.
(b) Net operating income in 1993 included a $78.3 million pretax charge for
restructuring costs which reduced net income by $48.2 million.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
BUSINESS OPERATIONS
GTE Hawaiian Telephone Company Incorporated (the Company), a wholly-owned
subsidiary of GTE Corporation (GTE), provides a full range of telecommunications
products and services in Hawaii and in the Pacific and Asia. The Company's
majority-owned subsidiary, Micronesian Telecommunications Corporation (MTC), is
headquartered on Saipan and provides local and international telecommunications
services on the islands of Saipan, Tinian and Rota.
RESULTS OF OPERATIONS
Net income was $30 million in 1994 compared to a net loss of $5 million in 1993.
The 1993 loss included a one-time after-tax charge of $48 million to restructure
operations and a one-time after-tax gain of $5 million associated with the
enhanced early retirement and voluntary separation programs completed during the
second quarter of 1993.
Excluding these special items, net income decreased 21% or $8 million in 1994
and 14% or $6 million in 1993. The 1994 decrease is primarily the result of a
decrease in equipment sales and service revenues and increases in depreciation
and amortization expenses and data processing costs, partially offset by higher
local network, network access and long distance service revenues. The 1993
decrease was primarily the result of the adoption of Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" effective January 1, 1993.
OPERATING REVENUES
Operating revenues were $599 million in 1994 and $565 million in 1993. Operating
revenues increased 6% or $34 million in 1994 and increased 1% or $6 million in
1993.
Local network services revenues are comprised mainly of fees charged to
customers for providing local exchange service. Local network service revenues
were $226 million and $215 million in 1994 and 1993, respectively. This reflects
increases of 5% or $11 million in both 1994 and 1993. These increases are
primarily due to continued customer growth as reflected by access line increases
of 3% in 1994 and 6% in 1993 and increased revenues from custom calling and
other enhanced features.
Network access service revenues are fees charged to interexchange carriers that
use the local telecommunication network to provide long-distance services to
their customers. In addition, end users pay access fees to connect to the local
network to obtain long-distance service. These revenues were $129 million and
$113 million in 1994 and 1993, respectively. This reflects increases of 14% or
$16 million in 1994 and 5% or $5 million in 1993. These increases are primarily
the result of increases in minutes of use of 10% and 4% in 1994 and 1993,
respectively.
The Company's revenues for long distance services from designated geographical
areas are provided under revenue sharing arrangements with various telephone
companies. Long distance service revenues were $122 million and $107 million
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in 1994 and 1993, respectively. These revenues increased 14% or $15 million in
1994 and decreased 4% or $4 million in 1993. The 1994 increase is primarily
attributable to increased customer usage of both domestic and international toll
services. The 1993 decrease was primarily due to a decline in international toll
volumes.
Equipment sales and services revenues consist of the sale, lease, installation
and maintenance of customer premises equipment. These revenues were $81 million
and $96 million in 1994 and 1993, respectively. This reflects decreases of 16%
or $15 million in 1994 and 6% or $6 million in 1993. The 1994 decrease is
primarily due to lower revenues from sales of large private branch exchanges.
The 1993 decrease was primarily due to the settlement of a large government
contract in 1992, partially offset by additional international contracts in
1993.
Other operating revenues were $41 million and $35 million in 1994 and 1993,
respectively. This represents an increase of 17% or $6 million in 1994 and
virtually no change in 1993. The 1994 increase is primarily due to lower
provisions for uncollectible accounts partially offset by lower directory
advertising revenues.
OPERATING EXPENSES
Cost of sales and services were $172 million in 1994 and $167 million in 1993.
This reflects increases of 3% or $5 million in 1994 and 4% or $6 million in
1993. The 1994 increase is primarily due to higher installation and maintenance
expenses. The 1993 increase was due to the adoption of SFAS No. 106 effective
January 1, 1993. The 1993 increase was partially offset by lower product sales
costs and the result of benefits of ongoing quality and cost control programs,
modernization of facilities, and a reduction in workforce.
Depreciation and amortization expenses were $116 million and $104 million in
1994 and 1993, respectively. This reflects increases of 12% or $12 million in
1994 and 7% or $7 million in 1993. These increases are primarily due to an
increase in plant investments and increased amortization.
Marketing, selling, general and administrative expenses were $231 million and
$199 million in 1994 and 1993, respectively, including the 1993 one-time
before-tax settlement gain of $8 million, discussed earlier, associated with
the enhanced early retirement and voluntary separation programs completed in
the second quarter of 1993. Excluding this gain, marketing, selling, general
and administrative expenses increased 12% or $24 million in 1994 and 2% or $4
million in 1993. The 1994 increase is primarily the result of higher general
and administrative costs, including $14.8 million of one-time adjustments
primarily relating to interexchange settlement activity, and higher payments
associated with taxes and insurance. The 1993 increase was primarily due to
costs associated with the adoption of SFAS No. 106, partially offset by lower
advertising costs.
OTHER (INCOME) DEDUCTIONS
Interest expense was $36 million and $32 million in 1994 and 1993, respectively.
This reflects increases of 14% or $4 million in 1994 and 8% or $2 million in
1993. These increases are due to higher average debt levels.
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Income tax expense was $12.6 million in 1994 compared to an income tax benefit
of $9.9 million in 1993. This reflects an increase of $22.5 million in 1994
compared to a decrease of $34.1 million in 1993. The changes are primarily due
to corresponding changes in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet operating requirements for construction of new
plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations although external
financing is available. Short-term borrowings can be obtained through commercial
paper borrowings or borrowings from GTE. In addition, a $2.8 billion line of
credit is available to the Company through shared lines of credit with GTE and
other affiliates to support short-term financing needs.
The Company's primary source of funds was cash flow from operations of $110
million in 1994 and $141 million in 1993. The decrease of 22% or $31 million in
1994 is primarily due to unfavorable timing of tax payments and a decrease in
results from operations.
Capital expenditures represented the largest use of funds during 1994 and 1993
reflecting the Company's continued growth in access lines and modernization of
current facilities and provisioning of new products and services. The Company's
capital expenditures during 1994 were $174 million compared to $192 million in
1993. In 1995, capital expenditures are expected to increase slightly from the
1994 level, reflecting deployment of new technologies.
Cash provided from financing activities was $69 million in 1994 compared to $52
million in 1993. The Company issued $125 million of 6.75% First Mortgage Bonds
in 1993 and $40 million of common stock. The proceeds were used to retire
short-term debt. The Company retired $13 million in long-term debt in 1994
compared to $19 million in 1993. Net short-term debt borrowings were $102
million in 1994 compared to net reductions of $68 million in 1993.
During the fourth quarter of 1994, the Company's long-term debt rating was
reduced to "A-" from "A" by one of its rating agencies. During the third quarter
of 1994, the Company's long-term debt rating was reduced to "A" from "A+" by one
of its rating agencies. These remain strong investment grade ratings. The
Company's long-term debt ratings were not changed by other rating agencies. The
Company believes that its present ratings provide it the financial flexibility
necessary to fund its operations and construction program.
REGULATORY AND COMPETITIVE TRENDS
REGULATORY DEVELOPMENTS
Fundamental changes continue to significantly impact the telecommunications
industry. During 1994, telecommunications legislation that would have changed
the way the industry does business passed the House of Representatives, but was
subsequently withdrawn from consideration. Telecommunications legislation has
been introduced again in 1995.
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Federal and state regulatory activity directed toward changing the traditional
cost-based rate of return regulatory framework for intrastate and interstate
telephone services has also continued. Regulatory authorities have adopted
various alternative forms of regulation, which provide economic incentives to
telephone service providers to improve productivity and provide the foundation
for implementing pricing flexibility necessary to address competitive entry into
the markets the Company serves.
During 1992-1994, the FCC took a number of steps to increase competition for
local exchange carrier (LEC) access services. These steps, known as Expanded
Interconnection requirements, allow competing communications carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services and private line services. Expanded Interconnection
requires LECs to permit competitors to connect directly to LEC central offices
and the LEC network under negotiated terms and conditions. Competitors are
thereby able to compete more effectively than previously to replace LEC services
between large users and interexchange carriers (IXCs), or between large users
and the LEC switch. The FCC accompanied its Expanded Interconnection mandate
with a slight relaxation of the rigid pricing rules that govern how LECs price
their access services. In 1994, the FCC also reaffirmed the switched access rate
structure changes adopted in 1993 that allow LECs to better reflect the actual
cost characteristics of transport services and improve the LEC's ability to
compete with alternative access providers.
Further information regarding the Company's activities with the various
regulatory agencies is discussed in Note 10 of the Company's consolidated
financial statements included in Item 8.
COMPETITION
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the Company's
operations face increasing competition in virtually all aspects of its business.
Today, the Company is subject to competition from numerous sources, including
competitive access providers for network access services, specialized
communications companies that have constructed new systems in certain markets to
bypass the local exchange network and cellular telephone companies. Competition
from IXCs, wireless and cable TV companies, as well as more recent entry by
media and computer companies, is expected to increase in the rapidly changing
telecommunications marketplace.
In late 1994, the FCC began to auction new licenses for radio spectrum in 51
major markets and 492 basic trading areas across the United States to encourage
the development of a new generation of wireless voice, data and messaging
services which are generally referred to as broadband Personal Communications
Services (PCS). PCS will compete with the Company's traditional wireline
services.
The Company supports greater competition in telecommunications provided that,
overall, the actions to eliminate existing legal and regulatory barriers allow
an opportunity for all service providers to participate equally in a competitive
marketplace under comparable conditions.
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INITIATIVES
The increasingly competitive environment provides the Company with both
challenges and opportunities. In order to respond aggressively to these
competitive developments and benefit from the new opportunities, the Company has
embarked on a series of initiatives.
One such initiative involves the implementation of the Company's $78 million
re-engineering plan. During 1994, the initial year of the three-year plan, $18
million was expended as significant progress was made in implementing this
program. These expenditures were primarily associated with the consolidation of
customer contact, network operations and operator service centers, separation
benefits associated with employee reductions and incremental expenditures to
redesign and streamline systems and processes. During 1995, the level of
re-engineering activities and related expenditures are expected to accelerate as
pilot programs are rolled out and other major initiatives are completed.
Continued implementation of this program will position the Company to accelerate
delivery of a full array of voice, video and data services and to reach its
stated objective of being the easiest company to do business with in the
industry.
In 1992, the FCC issued a "video dialtone" ruling that allows telephone
companies to transmit video signals over their networks. The FCC also
recommended that Congress amend the Cable Act of 1984 to permit telephone
companies to supply video programming in their service areas. In 1994, GTE
announced plans to build a new video network over the next 10 years which will
pass seven million homes in 66 key GTE markets. GTE has requested FCC approval
to construct facilities in the initial three markets, including Honolulu,
Hawaii, and expects to begin construction in 1995.
On January 13, 1995, the United States District Court for the Eastern District
of Virginia issued an injunction declaring that GTE has the right to provide
video programming to its in-franchise customers. The court's decision means that
GTE is now permitted to offer video programming over its own video dialtone
networks, as well as to compete as a franchised cable operator in the Company's
telephone territories.
During 1994, GTE unveiled its World Class Network in eight key markets,
including Honolulu, Hawaii, to provide advanced communications for business
customers. This program includes sophisticated high-speed, digital fiber-optic
rings, a high-capacity switching network (known as SONET), and a new centralized
operations center that monitors the entire network. These SONET rings are an
integral part of the high-speed information network that enables GTE to provide
advanced services such as high-speed data transmission and video conferencing.
These and other actions to eliminate the existing legal and regulatory barriers,
together with rapid advances in technology, are facilitating a convergence of
the computer, media and telecommunications industries. In addition to allowing
new forms of competition, these developments are also creating new opportunities
to develop interactive communications networks. The Company intends to continue
to respond aggressively to regulatory and legal developments that allow for
increased competition and opportunities in the marketplace. The Company expects
its financial results to benefit from reduced costs and the introduction of new
products and services that will result in increased usage of its networks.
However, it is likely that such
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improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." In general,
SFAS No. 71 requires companies to depreciate plant and equipment over lives
approved by regulators which may extend beyond the assets' actual economic and
technological lives. SFAS No. 71 also requires deferral of certain costs and
obligations based upon approvals received from regulators to permit recovery in
the future. Consequently, the recorded net book value of certain assets and
liabilities, primarily telephone plant and equipment, may be greater than that
which would otherwise be recorded by unregulated enterprises. On an ongoing
basis, the Company reviews the continued applicability of SFAS No. 71 based on
the current regulatory and competitive environment. Although recent developments
suggest that the telecommunications industry will become increasingly
competitive, the degree to which regulatory oversight of LECs, including the
Company, will be lifted and competition will be permitted to establish the cost
of service to the consumer is uncertain. As a result, the Company continues to
believe that accounting under SFAS No. 71 is appropriate. If the Company were to
determine that the use of SFAS No. 71 was no longer appropriate, it would be
required to write-off the deferred costs and obligations referred to above. It
may also be necessary for the Company to reduce the carrying value of its plant
and equipment to the extent that it exceeds fair market value. At this time, it
is not possible to estimate the amount of the Company's plant and equipment, if
any, that would be considered unrecoverable in such circumstances. The financial
impact of such a determination, however, which would be non-cash, could be
material.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
-12-
15
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- -------
(Thousands of Dollars)
OPERATING REVENUES (a):
Local network services $ 225,913 $ 214,627 $ 203,908
Network access services 128,840 112,712 107,347
Long distance services 121,871 106,867 111,254
Equipment sales and services 81,484 95,653 101,948
Other 40,819 35,030 34,565
---------- ---------- ----------
598,927 564,889 559,022
---------- ---------- ----------
OPERATING EXPENSES (b):
Cost of sales and services 171,646 167,211 160,836
Depreciation and amortization 116,478 104,202 97,318
Marketing, selling, general and
administrative 230,733 199,203 203,486
Restructuring costs -- 78,275 --
---------- ---------- ----------
518,857 548,891 461,640
---------- ---------- ----------
NET OPERATING INCOME 80,070 15,998 97,382
---------- ---------- ----------
OTHER (INCOME) DEDUCTIONS:
Interest expense 36,104 31,660 29,214
Other - net 1,554 (755) 350
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 42,412 (14,907) 67,818
---------- ---------- ----------
INCOME TAX PROVISION (BENEFIT) 12,613 (9,865) 24,228
---------- ---------- ----------
NET INCOME (LOSS) $ 29,799 $ (5,042) $ 43,590
========== ========== ==========
(a) Includes billings to affiliates of $38,420, $38,198 and $45,934 for the
years 1994-1992, respectively.
(b) Includes billings from affiliates of $37,322, $33,174 and $24,911 for the
years 1994-1992, respectively.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- -------
(Thousands of Dollars)
BALANCE AT BEGINNING OF YEAR $ 217,325 $ 252,135 $ 243,734
ADD -
Net income (loss) 29,799 (5,042) 43,590
DEDUCT -
Cash dividends declared on common stock 15,631 29,768 35,189
---------- ---------- ----------
BALANCE AT END OF YEAR $ 231,493 $ 217,325 $ 252,135
========== ========== ==========
See Notes to Consolidated Financial Statements.
-13-
16
CONSOLIDATED BALANCE SHEETS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
December 31 1994 1993
----------- ----------- --------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash $ 7,709 $ 808
Accounts receivable
Customers (including unbilled revenues) 118,508 101,319
Affiliated companies 5,244 747
Other 22,736 26,473
Allowance for uncollectible accounts (9,010) (9,072)
Materials and supplies 7,998 6,981
Deferred income tax benefits 12,061 14,203
Prepayments and other 14,792 14,924
----------- -----------
180,038 156,383
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 1,908,423 1,823,848
Accumulated depreciation (702,596) (678,175)
----------- -----------
1,205,827 1,145,673
----------- -----------
PREPAID PENSION COSTS 114,804 96,209
----------- -----------
OTHER ASSETS 26,580 27,680
----------- -----------
TOTAL ASSETS $ 1,527,249 $ 1,425,945
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt $ 204,250 $ 101,909
Current maturities of long-term debt 7,679 12,090
Accounts payable 25,785 27,288
Affiliate payables and accruals 16,875 22,939
Advanced billings and customer deposits 16,764 14,381
Accrued taxes 15,310 10,141
Accrued interest 7,341 7,285
Accrued payroll and vacations 24,497 19,251
Accrued dividends -- 5,000
Accrued restructuring costs and other 38,417 55,313
----------- -----------
356,918 275,597
----------- -----------
LONG-TERM DEBT 371,840 379,901
----------- -----------
DEFERRED CREDITS:
Deferred income taxes 214,548 206,900
Restructuring costs and other 60,507 54,712
----------- -----------
275,055 261,612
----------- -----------
SHAREHOLDER'S EQUITY:
Common stock (10,000,000 shares outstanding) 250,000 250,000
Other capital 41,943 41,510
Reinvested earnings 231,493 217,325
----------- -----------
523,436 508,835
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,527,249 $ 1,425,945
=========== ===========
See Notes to Consolidated Financial Statements.
-14-
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
Years ended December 31 1994 1993 1992
----------------------- ---------- ---------- -------
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 29,799 $ (5,042) $ 43,590
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 116,478 104,202 97,318
Restructuring costs -- 78,275 --
Deferred income taxes and investment
tax credits 13,405 4,264 6,995
Provision for uncollectible accounts 5,673 12,679 19,810
Change in current assets and current
liabilities (39,752) (22,180) 13,031
Other - net (15,782) (31,134) (35,989)
---------- ---------- ----------
Net cash from operating activities 109,821 141,064 144,755
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (174,271) (191,837) (158,119)
Other - net 2,343 (4,396) (4,204)
---------- ---------- ----------
Net cash used in investing activities (171,928) (196,233) (162,323)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued -- 40,000 --
Long-term debt issued -- 123,466 4,883
Long-term debt retired (12,702) (19,143) (74,316)
Dividends paid to shareholder (20,631) (24,648) (45,000)
Increase (decrease) in short-term debt 102,341 (67,944) 122,423
---------- ---------- ----------
Net cash from financing activities 69,008 51,731 7,990
---------- ---------- ----------
INCREASE (DECREASE) IN CASH 6,901 (3,438) (9,578)
CASH:
Beginning of year 808 4,246 13,824
---------- ---------- ----------
End of year $ 7,709 $ 808 $ 4,246
========== ========== ==========
See Notes to Consolidated Financial Statements.
-15-
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTE Hawaiian Telephone Company Incorporated and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GTE Hawaiian
Telephone Company Incorporated (the Company) and subsidiaries. All significant
intercompany items have been eliminated. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
TRANSACTIONS WITH AFFILIATES
Certain affiliated companies supply construction and maintenance equipment and
supplies to the Company. These purchases amounted to $27.1 million, $42.4
million and $38.9 million for the years 1994-1992, respectively. Such purchases
are recorded in the accounts of the Company at cost which includes a normal
return realized by the affiliates.
The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension management
services from other affiliated companies. These charges amounted to $37.3
million, $33.2 million and $24.9 million for the years 1994-1992, respectively.
The amounts charged for these affiliated transactions are based on a
proportional cost allocation method.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these activities
amounted to $38.4 million, $38.2 million and $45.9 million for the years
1994-1992, respectively.
TELEPHONE PLANT
Maintenance and repairs are charged to income as incurred. Additions to,
replacements and renewals of property are charged to telephone plant accounts.
Property retirements are charged in total to the accumulated depreciation
account. No adjustment to depreciation is made at the time properties are
retired or otherwise disposed of, except in the case of significant sales of
property where profit or loss is recognized.
The Company provides for depreciation on telephone plant on a straight-line
basis over asset lives approved by regulators. Depreciation is based upon rates
prescribed by the Federal Communications Commission (FCC) and the Public
Utilities Commission (PUC) of the State of Hawaii. The provisions for
depreciation and amortization were equivalent to composite annual rates of 6.5%,
6.2% and 6.4% for the years 1994-1992, respectively.
-16-
19
REGULATORY ACCOUNTING
The Company follows the accounting prescribed by the Uniform System of Accounts
of the FCC and PUC and Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation." This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, SFAS No. 71 requires companies to
depreciate plant and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon approvals received
from regulators to permit recovery of such amounts in future years. The Company
annually reviews the continued applicability of SFAS No. 71 based upon the
current regulatory and competitive environment.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local exchange networks or facilities. For other products and
services, revenue is recognized when services are rendered or products are
delivered to customers.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost (average cost) or market
value.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new standard
requires that the expected costs of postretirement benefits be charged to
expense during the years that the employees render service. The Company elected
to adopt this new accounting standard on the delayed recognition method and
commencing January 1, 1993, began amortizing the estimated unrecorded
accumulated postretirement benefit obligation over twenty years. Prior to the
adoption of SFAS No. 106, the cost of these benefits was charged to expense
as paid.
The Company also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. SFAS No. 112 requires employers to accrue
the future cost of benefits provided to former or inactive employees and their
dependents after employment but before retirement. Previously, the cost of these
benefits was charged to expense as paid. The impact of this change in accounting
on the Company's results of operations was immaterial.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes are established for all temporary differences between the amount of
assets and liabilities recognized for financial reporting purposes and for tax
purposes.
-17-
20
As further explained in Note 6, during the fourth quarter of 1992, the Company
adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1,
1992. SFAS No. 109 changed the method by which companies account for income
taxes. Among other things, the Statement requires that deferred tax balances be
adjusted to reflect new tax rates when they are enacted into law. The impact of
this change in accounting on the Company's results of operations was immaterial.
Investment tax credits were repealed by the Tax Reform Act of 1986 (the Act).
Those credits claimed prior to the Act were deferred and are being amortized
over the lives of the properties giving rise to the credits.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1994, the estimated fair
value of long-term debt based on either quoted market prices or an option
pricing model was lower than the carrying value by approximately $26 million.
The estimated fair value of long-term debt as of December 31, 1993 exceeded the
carrying value by approximately $27 million.
COMPUTER SOFTWARE
The cost of computer software for internal use, except initial operating system
software, is charged to expense as incurred. Initial operating system software
is capitalized and amortized over the life of the related hardware.
PRIOR YEARS' FINANCIAL STATEMENTS
Reclassifications of prior year data have been made in the financial statements
where appropriate to conform to the 1994 presentation.
-18-
21
2. RESTRUCTURING COSTS
Results for 1993 included a one-time pretax restructuring charge of $78.3
million, which reduced net income by $48.2 million, primarily for incremental
costs related to implementation of the Company's three-year re-engineering plan.
The re-engineering plan will redesign and streamline processes to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The re-engineering
plan included $31.3 million to upgrade or replace existing customer service and
administrative systems and enhance network software, $35.4 million for employee
separation benefits associated with workforce reductions and $9.6 million
primarily for the consolidation of facilities and operations and other related
costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. During 1994, expenditures of $17.5 million were
made in connection with the implementation of the re-engineering plan. These
expenditures were primarily associated with the consolidation of customer
contact, network operations and operator service centers, separation benefits
from employee reductions and incremental expenditures to redesign and streamline
processes. The level of re-engineering activities and related expenditures are
expected to accelerate in 1995.
3. SHAREHOLDER'S EQUITY
The authorized common stock of the Company consists of 18,000,000 shares with a
par value of $25 per share. The Company issued $40 million in common stock to
GTE in 1993. All outstanding shares of common stock are held by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
Other capital includes additional paid-in-capital in excess of par value and the
minority shareholders' interest in Micronesian Telecommunications Corporation.
-19-
22
4. LONG-TERM DEBT
Long-term debt outstanding, exclusive of current maturities, is as follows:
December 31 1994 1993
----------- ----------- -------
(Thousands of Dollars)
FIRST MORTGAGE BONDS:
4 1/2 % Series Q, due 1995 $ -- $ 5,000
5 5/8 % Series R, due 1997 16,000 16,000
6 3/4 % Series S, due 1998 20,000 20,000
8 3/4 % Series T, due 2000 35,000 35,000
8 % Series U, due 2001 20,000 20,000
8 1/2 % Series V, due 2006 35,000 35,000
9 % Series AA, due 2000 75,000 75,000
6 3/4 % Series BB, due 2005 125,000 125,000
----------- -----------
326,000 331,000
OTHER:
5% Rural Utilities Services
First Mortgage Bond, due 2018 9,585 9,806
Rural Telephone Bank (RTB) First Mortgage
Bonds, maturing 2010 through 2025, rates
ranging from 5.43% to 7.21% 27,979 28,919
7.5% RTB First Mortgage Bond, due 2021 3,927 3,975
GTE Leasing Corporation Financing Agreements-
maturing 1997 through 2001,
rates ranging from 8.8% to 10.32% 4,831 6,623
Other 1,422 1,712
----------- -----------
Total principal amount 373,744 382,035
DISCOUNT AND PREMIUM - NET (1,904) (2,134)
----------- -----------
Total long-term debt $ 371,840 $ 379,901
=========== ===========
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures.
None of the securities shown above were held in sinking or other special funds
of the Company or pledged by the Company.
Debt discount and premium on the Company's outstanding long-term debt are
amortized over the lives of the respective issues.
Maturities, installments and sinking fund requirements for the five-year period
from January 1, 1995 are summarized below (in thousands of dollars):
1995 $ 7,679
1996 2,783
1997 18,558
1998 21,977
1999 2,108
Substantially all of the Company's telephone plant is subject to the liens of
the indentures under which the bonds listed above were issued.
-20-
23
5. SHORT-TERM DEBT
The Company finances part of its construction program through the use of interim
short-term loans, primarily commercial paper, which are generally refinanced at
a later date by issues of long-term debt or equity. Information relating to
short-term borrowings is as follows:
1994 1993 1992
--------- --------- -------
(Thousands of Dollars)
DURING THE YEAR -
Commercial Paper -
Maximum month-end balance $204,250 $176,700 $145,351
Average monthly balance $149,342 $ 68,889 $103,446
Weighted average interest rate 4.4% 3.14% 3.57%
AT DECEMBER 31 -
Balance outstanding -
Note payable to GTE $ -- $ 3,009 $ 1,201
Average interest rate -- 3.40% 4.32%
Commercial paper and similar
obligations $204,250 $ 98,900 $ 43,652
Average interest rate 5.92% 2.86% 3.45%
A $2.8 billion credit line is available to the Company through shared lines of
credit with GTE and other affiliates. Most of these arrangements require payment
of annual commitment fees of .1% of the unused lines of credit.
-21-
24
6. INCOME TAXES
The provision (benefit) for income taxes is as follows:
1994 1993 1992
-------------- -------------- ---------
(Thousands of Dollars)
CURRENT
Federal $ 3,195 $ (6,730) $ 17,788
State (3,987) (7,399) (555)
-------------- -------------- --------------
Total (792) (14,129) 17,233
-------------- -------------- --------------
DEFERRED
Federal 8,253 88 3,846
State 5,970 5,247 4,195
-------------- -------------- --------------
Total 14,223 5,335 8,041
-------------- -------------- --------------
AMORTIZATION OF DEFERRED
INVESTMENT TAX CREDITS (818) (1,071) (1,046)
-------------- -------------- --------------
Total $ 12,613 $ (9,865) $ 24,228
============== ============== ==============
The components of deferred income tax provision are as follows:
1994 1993 1992
-------------- -------------- ---------
(Thousands of Dollars)
Depreciation and
amortization $ 4,253 $ 12,236 $ (5,896)
Employee benefit obligations (5,007) 2,084 (966)
Prepaid pension costs 11,205 7,218 5,097
Restructuring costs 5,639 (29,303) --
Capital goods excise tax
credits 3,761 7,779 2,660
Other - net (5,628) 5,321 7,146
-------------- -------------- --------------
Total $ 14,223 $ 5,335 $ 8,041
============== ============== ==============
A reconciliation between taxes computed by applying the statutory federal income
tax rate to pretax income and income taxes provided in the Consolidated
Statements of Income is as follows:
1994 1993 1992
-------------- -------------- ---------
(Thousands of Dollars)
AMOUNTS COMPUTED AT STATUTORY
RATES $ 14,844 $ (5,217) $ 23,058
State income taxes,
net of federal
income tax benefits 1,288 (6,554) 647
Amortization of deferred
investment tax credits (818) (1,071) (1,046)
Depreciation of telephone
plant construction costs
previously deducted for
tax purposes - net 1,516 1,728 1,741
Rate differentials applied
to reversing temporary
differences (1,267) (1,046) (1,820)
Rate differential on
foreign results (4,154) (2,424) (1,400)
Other differences - net 1,204 4,719 3,048
-------------- -------------- --------------
TOTAL PROVISION (BENEFIT) $ 12,613 $ (9,865) $ 24,228
============== ============== ==============
-22-
25
As a result of implementing SFAS No. 109, the Company recorded additional
deferred income tax liabilities primarily related to temporary differences which
had not previously been recognized in accordance with established rate-making
practices. Since the manner in which income taxes are treated for rate-making
has not changed, pursuant to SFAS No. 71 a corresponding regulatory asset was
also established. In addition, deferred income taxes were adjusted and a
regulatory liability established to give effect to the current statutory federal
income tax rate and for unamortized investment tax credits. The net unamortized
regulatory liability balance at December 31, 1994 of $3.1 million and the net
unamortized regulatory asset balance at December 31, 1993 of $1.5 million are
reflected as other deferred credits and other assets, respectively, in the
accompanying Consolidated Balance Sheets. These amounts are being amortized over
the lives of the related depreciable assets concurrent with recovery in rates
and in conformance with the provisions of the Internal Revenue Code. The assets
and liabilities established in accordance with SFAS No. 71 have been increased
for the tax effect of future revenue requirements.
The tax effects of all temporary differences that give rise to the deferred tax
liability and deferred tax asset at December 31 are as follows:
1994 1993
--------- -------
(Thousands of Dollars)
Depreciation and amortization $ 160,418 $ 162,817
Employee benefit obligations (9,278) (4,271)
Prepaid pension costs 42,390 31,185
Restructuring costs (23,664) (29,303)
Investment tax credits 5,193 6,011
Capital goods excise tax credits 24,523 20,762
Other - net 2,905 5,496
--------- ---------
Total $ 202,487 $ 192,697
========= =========
-23-
26
7. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has trusteed, noncontributory, defined benefit pension plans
covering substantially all employees. The benefits to be paid under these plans
are generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The components of the net pension credit for 1994-1992 were as follows (in
thousands of dollars):
1994 1993 1992
--------- --------- -------
Benefits earned during the year $ 11,988 $ 13,919 $ 13,186
Interest cost on projected benefit
obligations 26,565 31,254 28,898
Return on plan assets:
Actual 1,168 (98,181) (35,180)
Deferred (49,374) 48,102 (10,226)
Other - net (9,087) (11,429) (10,713)
--------- --------- ---------
Net pension credit $ (18,740) $ (16,335) $ (14,035)
========= ========= =========
The expected long-term rate of return on plan assets was 8.5% for 1994 and 8.25%
for 1993 and 1992.
The funded status of the plans and the prepaid pension costs at December 31,
1994 and 1993 were as follows (in thousands of dollars):
1994 1993
--------- -------
Plan assets at fair value $ 607,449 $ 624,171
Projected benefit obligations 346,595 361,043
--------- ---------
Excess of assets over projected
benefit obligations 260,854 263,128
Unrecognized net transition asset (36,322) (44,414)
Unrecognized net gain (109,728) (122,505)
--------- ---------
Prepaid pension costs $ 114,804 $ 96,209
========= =========
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $264.4 million and $276.6 million and vested
benefit obligations of $254.7 million and $268.1 million, respectively.
Assumptions used to develop the projected benefit obligations at December 31,
1994 and 1993 were as follows:
1994 1993
---- ----
Discount rate 8.25% 7.50%
Rate of compensation increase 5.50% 5.25%
-24-
27
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 1, effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as appropriate from time to time.
The postretirement benefit cost for 1994 and 1993 included the following
components (in thousands of dollars):
1994 1993
--------- -------
Benefits earned during the year $ 2,595 $ 3,275
Interest cost on accumulated postretirement
benefit obligations 16,374 15,320
Actual return on plan assets 1,086 (925)
Amortization of transition obligation 7,598 11,466
Other - net (722) --
--------- ---------
Postretirement benefit cost $ 26,931 $ 29,136
========= =========
During 1992, the cost of postretirement health care and life insurance benefits
on a pay-as-you-go basis was $3.8 million.
The following table sets forth the plans' funded status and the accrued
obligations as of December 31, 1994 and 1993 (in thousands of dollars):
1994 1993
--------- -------
Accumulated postretirement benefit obligations attributable to:
Retirees $ 105,544 $ 99,802
Fully eligible active plan participants 86,350 92,007
Other active plan participants 23,485 20,521
--------- ---------
Total accumulated postretirement benefit obligations 215,379 212,330
Fair value of plan assets 35,193 23,890
--------- ---------
Excess of accumulated obligations over plan assets 180,186 188,440
Unrecognized transition obligation (135,971) (144,355)
Unrecognized prior service cost (13,629) (20,205)
Unrecognized net loss (19,161) (21,602)
--------- ---------
Accrued postretirement benefit obligations $ 11,425 $ 2,278
========= =========
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 8.25% at December 31, 1994 and 7.5% at December 31,
1993. The assumed health care cost trend rates in 1994 and 1993 were 12% and 13%
for pre-65 participants and 9.0% and 9.5% for post-65 retirees, each rate
declining on a graduated basis to an ultimate rate in the year 2004 of 6%. A one
percentage point increase in the assumed health care cost trend rate for each
future year would have increased 1994 costs by $3.1 million and the accumulated
postretirement benefit obligations at December 31, 1994 by $32.5 million.
-25-
28
During 1993, the Company made certain changes to its postretirement health care
and life insurance benefits for non-union employees retiring on or after January
1, 1995. These changes include newly established limits to the Company's annual
contribution to postretirement medical costs and a revised cost sharing schedule
based on a retiree's years of service. The net effect of these changes reduced
the accumulated postretirement benefit obligations at December 31, 1993 by $17.2
million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, the Company provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$3.0 million, $3.5 million and $3.1 million in 1994-1992, respectively.
8. LEASE COMMITMENTS
The Company has noncancelable leases covering certain buildings, office space
and equipment that contain renewal options for terms up to 72 years. Rental
expense was $15.7 million, $14.0 million and $15.0 million in 1994-1992,
respectively. Minimum rental commitments under noncancelable leases through 1999
do not exceed $1.6 million annually and aggregate $12.9 million thereafter.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which is stated at cost, is summarized as follows
at December 31:
1994 1993
---------- -------
(Thousands of Dollars)
Land $ 10,782 $ 5,728
Buildings 150,120 134,168
Central office equipment 821,543 755,428
Outside plant 710,686 649,937
Other 215,292 278,587
---------- ----------
Total property, plant and equipment 1,908,423 1,823,848
Accumulated depreciation (702,596) (678,175)
---------- ----------
Net property, plant and equipment $1,205,827 $1,145,673
========== ==========
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10. REGULATORY MATTERS
The Company is subject to regulation by the FCC for its interstate and
international business operations, earth station ownership and the use of
authorized radio frequencies and by the PUC with respect to intrastate business
operations.
INTRASTATE RATE MATTERS
The 1992-1993 Hawaii state budget bill, which was signed by the Governor of the
State of Hawaii on June 30, 1992, contained a requirement that the PUC open a
docket within six months to conduct, among other things, an earnings review of
the Company.
On October 23, 1992, the Company filed a proposal with the PUC to restructure
its intrastate rates by lowering interisland toll rates and increasing local and
private line rates over a three year period. The revenue neutral proposal, if
adopted, would have over time reduced interisland toll service revenues by $4.8
million offset by increases in private line and local exchange revenues of $2.7
million and $2.1 million, respectively. This proposal was intended to more
closely align the prices of these services with their underlying costs. In
addition, this proposal would lower intrastate toll rates to be more
commensurate with interstate rates.
On November 6, 1992, the PUC issued an order suspending the Company's rate
restructure proposal, pending investigation, and also issued an order initiating
a proceeding to review the Company's earnings. This docket also consolidated the
rate restructure proposal into the earnings review.
On May 11, 1993, the Company filed a general rate increase application with the
PUC, requesting approval to increase intrastate revenues by $50.4 million. This
represented a 15.9% increase over intrastate revenues for 1993 at current rates,
and was the first rate increase application the Company has filed since 1985.
The Company's rate restructure proposal and earnings investigation which were in
progress were incorporated into the rate case docket. Hearings took place in
March and April 1994. On June 14, 1994, the PUC issued an interim decision
indicating that it had not yet completed its review of the record. The PUC
ordered that the Company continue its rates at existing levels and denied the
Consumer Advocate's (CA) recommendation for an interim revenue decrease. A final
order is pending.
On October 14, 1994, the Company filed a Notice of Intent to file another rate
case with the PUC. The Company also filed a Motion for Waiver of Commission
Rules and for approval of 1995 to be the test year. The waiver requested that
the Company be allowed the option to file its rate case application in early
1995 without having to use a split 1995/1996 test year. On November 29, 1994,
the PUC approved the Company's request for the waiver of its test year rules.
On November 29, 1994, the PUC issued an order approving the adoption of accrual
accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) for
ratemaking purposes. The PUC'S order directed the Company to file plans for
reflecting the full impact of SFAS No. 106 in rates to be effective January 1,
1995. The PUC approved on January 19, 1995, the Company's plan to reflect an
additional $10.7 million of Postretirement Benefits Other Than Pensions in its
rates, retroactive to January 1, 1995.
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INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to limit
the rates a carrier may charge, rather than just regulating the rate of return
which may be achieved. Under this approach, the maximum price that the local
exchange carrier (LEC) may charge is increased or decreased each year by a price
index based upon inflation less a predetermined productivity target. LECs may,
within certain ranges, price individual services above or below the overall cap.
As a safeguard under its price cap regulatory plan, the FCC adopted a
productivity sharing feature. Because of this feature, under the minimum
productivity-gain option, the Company must share equally with its ratepayers any
realized interstate return above 12.25% up to 16.25%, and all returns higher
than 16.25%, by temporarily lowering the prospective prices. During 1995, the
FCC is scheduled to review the LEC price cap plan to determine whether it should
be continued or modified.
In 1992, the Company's rates were voluntarily reduced by $4.4 million effective
July 1, 1992 and $3.9 million effective October 2, 1992.
OTHER MATTERS
The Company is the primary telephone provider on the Hawaiian island of Kauai.
Portions of the Company's telephone equipment and facilities were severely
damaged on September 11, 1992, as a result of Hurricane Iniki. Capital
requirements to fully and permanently restore the plant necessary to provide
service to customers statewide were $28.2 million in 1992 and 1993. In addition
to restoration of plant, the Company incurred additional hurricane related
expenses of $21.2 million during 1992 and 1993. On December 30, 1992, the PUC
issued an order approving a stipulation agreement between the Company and the
Division of Consumer Advocacy of the Hawaii Department of Commerce and Consumer
Affairs that will permit the Company to accrue an allowance for funds used
during construction on all restoration of plant and defer all associated
depreciation and non-capital expenses for potential recovery in the upcoming
rate case. In addition, the FCC permitted deferral of Hurricane Iniki costs with
amortization treatment to be determined at a later date. Deferral of these costs
prevented Hurricane Iniki from having a material effect on 1992 and 1993 results
of operations. The 1993 Hawaii State Legislature subsequently passed a bill and
the Governor of the State of Hawaii signed the act to provide a statewide
monthly surcharge assessment on ratepayers when a public utility sustains
damages to its facilities from a state-declared emergency and incurs restoration
and repair costs that may result in a rate increase of more than 15% of the
average ratepayer on the affected island. On August 19, 1993, the Company filed
an application to establish a $1.20 monthly surcharge for five years to recover
costs incurred by the devastation of Hurricane Iniki. On November 17, 1993, the
PUC denied the Company's application, stating that the Company had no immediate
need for relief and that the rate increase that would result would not meet the
15% threshold necessary for the surcharge to apply. The PUC also stated that the
Company may seek recovery of its Iniki restoration costs in its pending rate
case.
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On May 11, 1993, the PUC initiated a communications infrastructure proceeding
which was intended to investigate such issues as: what markets should be opened
to competition; who should be allowed to compete in those markets; and what
rules, if any, should apply. Following the initiation of the docket, the PUC
allowed parties to seek intervenor or participant status. To date, over 35
parties representing a wide range of interests have been granted either
intervenor or participant status. The majority of the effort in the proceeding
has been directed toward developing a list of issues to be addressed. Two
reports were submitted to the PUC on June 9, 1994 and January 11, 1995
identifying the issues to be addressed and recommending that the proceeding be
divided into phases. The PUC directed parties to file opening testimony on these
matters on March 24, 1995.
On February 10, 1995, the PUC authorized AT&T to provide interisland toll on a
10XXX basis, effective March 1, 1995. AT&T will be required to report on the
impact of its service on the interisland toll business. The Commission reserves
the right to modify or rescind the authority depending on the impact to the
Company. On February 14, 1995, the PUC approved the Company's request to lower
its toll rates and make changes to its various calling plans to keep them
competitive with AT&T's rates.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access, billing and
collection and interexchange leased facilities during the years 1994-1992 under
various arrangements and amounted to $46.0 million, $44.0 million and $48.0
million, respectively.
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11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Set forth below is information with respect to changes in current assets and
current liabilities, and cash paid for interest and income taxes:
1994 1993 1992
-------- -------- ------
(Thousands of Dollars)
(INCREASE) DECREASE IN CURRENT ASSETS:
Accounts receivable - net $(23,684) $(29,413) $ 9,708
Materials and supplies (1,017) 11,181 6,050
Prepayments and other current assets 132 (9,414) 2,063
INCREASE (DECREASE) IN CURRENT LIABILITIES:
Accounts payable (1,503) (292) (4,241)
Affiliate payables and accruals (6,064) 4,307 2,202
Advanced billings and customer deposits 2,383 (1,258) 2,422
Accrued liabilities 10,471 3,027 (7,991)
Other (20,470) (318) 2,818
-------- -------- --------
Total $(39,752) $(22,180) $ 13,031
======== ======== ========
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $ 35,737 $ 28,459 $ 30,232
Income taxes 4,960 (11,086) 23,162
-30-
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
GTE Hawaiian Telephone Company Incorporated:
We have audited the accompanying consolidated balance sheets of GTE Hawaiian
Telephone Company Incorporated (a Hawaii corporation and wholly-owned subsidiary
of GTE Corporation) and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, reinvested earnings and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Hawaiian Telephone Company
Incorporated and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for postretirement
benefits other than pensions. Also as discussed in Note 1, effective January 1,
1992, the Company changed its method of accounting for income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This supporting schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 25, 1995.
-31-
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MANAGEMENT REPORT
To Our Shareholder:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are based
on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has also instituted
policies and guidelines which require employees to maintain the highest level of
ethical standards.
WARREN H. HARUKI
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
-32-
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-33-
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE Hawaiian Telephone Company
Incorporated's consolidated financial statements and report of
independent accountants thereon in the Financial Statements
section included elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended December
31, 1994-1992 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
3-1* Amended Articles of Incorporation (Exhibit 3-2 of the
1987 Form 10-K, File No. 2-33059).
3-2 Amended By-laws (Exhibit 3-2 of the 1994 Form 10-K,
File No. 2-33059).
27 Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the fourth quarter of 1994.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
-34-
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Thousands of Dollars)
------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Deductions
Balance at Charged Charged from Balance at
Beginning to to Other Reserves Close of
Description of Year Income Accounts (Note 1) Year
------------------------------------------------------------------------------------------------------------------
Allowance for uncollectible accounts
for the year ended:
December 31, 1994 $ 9,072 $ 5,673 $ 8,817(2) $ 14,552 $ 9,010
========== ========== ============ ========== ==========
December 31, 1993 $ 8,368 $ 12,679 $ 22,600(2) $ 34,575 $ 9,072
========== ========== ============ ========== ==========
December 31, 1992 $ 693 $ 19,810 $ 11,280(2) $ 23,415 $ 8,368
========== ========== ============ ========== ==========
Accrued restructuring costs
for the year ended (Note 3):
December 31, 1994 $ 78,275 $ 0 $ 0 $ 17,459 $ 60,816
========== ========== ========= ========== ==========
December 31, 1993 $ -- $ 78,275 $ -- $ -- $ 78,275
========== ========== ========= ========== ==========
December 31, 1992 $ -- $ -- $ -- $ -- $ --
========== ========== ========= ========== ==========
-----------------
NOTES:
(1) Charges for purpose for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) See Note 2 to the Consolidated Financial Statements included elsewhere
herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 28, 1995 By WARREN H. HARUKI
-------------- -------------------------
WARREN H. HARUKI
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
WARREN H. HARUKI President and Director March 28, 1995
-----------------------------
WARREN H. HARUKI (Principal Executive Officer)
GERALD K. DINSMORE Senior Vice President - Finance March 28, 1995
-----------------------------
GERALD K. DINSMORE and Planning and Director
(Principal Financial Officer)
WILLIAM M. EDWARDS, III Controller March 28, 1995
-----------------------------
WILLIAM M. EDWARDS, III (Principal Accounting Officer)
RICHARD M. CAHILL Director March 28, 1995
-----------------------------
RICHARD M. CAHILL
MICHAEL B. ESSTMAN Director March 28, 1995
-----------------------------
MICHAEL B. ESSTMAN
KENT B. FOSTER Director March 28, 1995
-----------------------------
KENT B. FOSTER
THOMAS W. WHITE Director March 28, 1995
-----------------------------
THOMAS W. WHITE
-36-
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EXHIBIT INDEX
3-1* Amended Articles of Incorporation (Exhibit 3-2 of the
1987 Form 10-K, File No. 2-33059).
3-2 Amended By-laws (Exhibit 3-2 of the 1994 Form 10-K,
File No. 2-33059).
27 Financial Data Schedule.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.