1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1996
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 033-00348
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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-718-5600
(Former name, former address and former fiscal year,
if changed since last report)
The registrant, a wholly-owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and
is therefore filing this form with reduced disclosure format pursuant to
General Instruction H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
The Company had 10,000,000 shares of $25 par value common stock outstanding at
October 31, 1996. The Company's common stock is 100% owned by GTE Corporation.
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PART I. FINANCIAL INFORMATION
GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1996 1995 1996 1995
-------- -------- --------- --------
(Thousands of Dollars)
REVENUES AND SALES
Local services $ 60,477 $ 59,567 $ 180,583 $ 178,459
Network access services 37,226 33,900 109,705 99,771
Toll services 23,252 26,072 69,498 74,173
Other services and sales 32,586 33,184 113,115 110,080
-------- -------- --------- --------
Total revenues and sales 153,541 152,723 472,901 462,483
-------- -------- --------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 63,350 71,244 194,654 197,494
Selling, general and administrative 26,906 25,504 83,398 86,840
Depreciation and amortization 31,788 30,339 93,435 90,391
-------- -------- --------- --------
Total operating costs and expenses 122,044 127,087 371,487 374,725
-------- -------- --------- --------
OPERATING INCOME 31,497 25,636 101,414 87,758
OTHER (INCOME) EXPENSE
Interest - net 8,932 10,267 29,136 29,666
Other - net (613) (523) (3) (787)
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 23,178 15,892 72,281 58,879
Income taxes 7,697 2,935 24,245 15,294
-------- -------- --------- --------
NET INCOME $ 15,481 $ 12,957 $ 48,036 $ 43,585
======== ======== ========= ========
Per share data is omitted since the Company's common stock is 100%
owned by GTE Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
Nine Months Ended
September 30,
------------------
1996 1995
------ ------
Net income $ 48.0 $ 43.6
Net income increased 10% or $4.4 for the nine months ended September 30, 1996,
compared to the same period in 1995. The increase is primarily the result of
higher network access service revenues and favorable operating expenses,
partially offset by lower toll service revenues and higher income tax expense.
Revenues and Sales
Nine Months Ended
September 30,
-------------------
1996 1995
------- -------
Local services $ 180.6 $ 178.4
Network access services 109.7 99.8
Toll services 69.5 74.2
Other services and sales 113.1 110.1
Total revenues and sales $ 472.9 $ 462.5
Total revenues and sales increased 2% or $10.4 for the nine months ended
September 30, 1996, compared to the same period in 1995.
Local service revenues increased 1% or $2.2 for the nine months ended September
30, 1996, compared to the same period in 1995. The number of switched access
lines increased 3% for the nine months ended September 30, 1996, which
generated additional revenues of $3.9. Partially offsetting this increase are
lower private line revenues of $1.8.
Network access service revenues increased 10% or $9.9 for the nine months ended
September 30, 1996, compared to the same period in 1995. The increase is
primarily a result of an 11% increase in minutes of use, which generated $5.7
in additional revenues. The increase is also attributable to a $4.2 increase
in special access revenues associated with growth in special access lines.
Toll service revenues decreased 6% or $4.7 for the nine months ended September
30, 1996, compared to the same period in 1995, primarily as a result of
optional discount calling plans and lower domestic toll volumes resulting from
continued competition with long distance carriers authorized to provide
interisland toll service on a 10XXX and 1+ basis.
Other services and sales revenues increased 3% or $3 for the nine months ended
September 30, 1996, compared to the same period in 1995, primarily as a result
of $3.2 in additional revenues from international service contracts initiated
in the second half of 1995. Revenues also increased $2.6 from growth in sales
of radio paging and voice messaging services. Partially offsetting these
increases are $3.9 of lower directory advertising revenues recognized in 1996.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Operating Costs and Expenses
Nine Months Ended
September 30,
-------------------
1996 1995
------- -------
Total operating costs and expenses $ 371.5 $ 374.7
Total operating costs and expenses decreased 1% or $3.2 for the nine months
ended September 30, 1996, compared to the same period in 1995. The reduction
in operating costs and expenses is primarily driven by a decrease in labor
costs of $4 associated with productivity gains from process re-engineering and
other cost containment programs, and by lower product sales expense of $2.1.
In addition, settlement gains of $0.2 were recorded in the first quarter of
1996 which resulted from lump-sum payments from the Company's pension plans.
These expense reductions are partially offset by higher depreciation expense of
$3.1.
Income Taxes
Nine Months Ended
September 30,
-------------------
1996 1995
------ -------
Income taxes $ 24.2 $ 15.3
Income taxes increased 58% or $8.9 for the nine months ended September 30,
1996, compared to the same period in 1995, primarily due to a higher pre-tax
income and adjustments to prior years' tax provision.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pre-tax
restructuring charge of $78.3, which reduced net income by $48.2, 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 major components of the estimated cost to implement the re-engineering plan
and activity since inception are as follows (dollars in millions):
December 31, 1994 and December 31, 1996 September 30,
Component 1993 1995 Activity 1995 Activity 1996
- -------------------- -------------- ------------- -------------- ----------- --------------
Customer service $ 52.8 $ (28.5) $ 24.3 $ (9.3) $ 15.0
Administrative 19.0 (3.9) 15.1 (1.9) 13.2
Other 6.5 (6.5) -- -- --
-------------- ------------- -------------- ----------- --------------
Total $ 78.3 $ (38.9) $ 39.4 $ (11.2) $ 28.2
============== ============= ============== =========== ==============
Implementation of the re-engineering plan began during 1994 and is expected to
be substantially completed by the end of 1996. Costs of $50.1 have been
incurred since the plan's inception. These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits related to employee reductions. As of
September 30, 1996, $28.2 remains in the restructuring reserve which management
believes is adequate to cover future expenditures.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
On August 8, 1996, the Federal Communications Commission (FCC) published its
Report and Order (Order) containing rules implementing Section 251 of the
Telecommunications Act of 1996 (the Telecommunications Act) dealing with
interconnection, unbundling of network elements and wholesale prices and other
terms for competitive entry into local-exchange service (Competitive Entry
Terms). On August 9, 1996, the FCC released its Second Report and Order
implementing the provision of number portability and dialing parity in accord
with the Telecommunications Act.
GTE believes that if the Order were implemented as drafted, it would cause
irreparable harm to local-exchange carriers (LECs) by providing unfair
advantages to other carriers who will compete with the LECs in providing local
service in the LEC's local territory.
On September 16, 1996, GTE filed an appeal and motion for stay of the Order
with the United States Court of Appeals for the District of Columbia. This
appeal argued that the FCC had no jurisdiction to impose national pricing rules
for what is essentially local service. This appeal was subsequently transferred
to the Court of Appeals for the Eighth Circuit together with appeals by other
LECs and state regulatory commissions. On October 15, 1996, the Eighth Circuit
granted a partial stay. The stay delays implementation of the Order's pricing
provisions and associated rules, as well as the rules requiring GTE and other
LECs to permit requesting carriers to select terms and conditions from various
agreements between them and other carriers for purposes of interconnection.
Additionally, the Court scheduled oral argument on the merits for the week of
January 13, 1997. On November 12, 1996, the Supreme Court denied applications
to vacate the stay filed by the FCC and various companies seeking to enter the
local-exchange business.
While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.
GTE is continuing to negotiate with requesting carriers over the terms of
interconnection, unbundled network elements and resale rates. In some cases,
the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions, including Hawaii. It is expected that in December 1996, the first
state commission decision determining the prices and terms of unresolved issues
will be released. Subsequent decisions are expected to be issued over a period
extending through the first quarter of 1997.
On May 15, 1996, GTE, through a separate subsidiary, began offering long
distance to its customers in Hawaii, marketed under the name GTE Easy Savings
Plan(service mark). GTE plans to offer this service by December 31, 1996 in
all 50 states, including the 28 states where it currently offers local telephone
service.
During the first quarter of 1996, the Company purchased the remaining shares of
common stock outstanding in its subsidiary, Micronesian Telecommunications
Corporation (MTC).
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC interim price cap rules. In doing so, the Company
changed its productivity factor from 5.3% to 4.0% for its subsidiary, MTC. On
June 24, 1996, the FCC ordered all LECs subject to price cap regulation,
including the Company, to update their GDP-PI inflation factors through the
fourth quarter of 1995. Overall, the final 1996 interstate access filing
resulted in an annual price increase of $1, effective July 1, 1996.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
On September 29, 1995, the Company filed an application to increase its rates
by $74 in its 1995 Rate Case. The Public Utilities Commission of the State of
Hawaii (PUC) approved bifurcation of the proceeding into a revenue requirement
phase (Phase I) and a rate design phase (Phase II). The PUC held public
hearings on Phase I in late 1995. The Department of Defense (DOD), AT&T
Communications of Hawaii (AT&T) and Pacwest Telecommunications Corporation
(Pacwest) filed motions to intervene in this proceeding. On January 12, 1996,
the PUC granted the DOD intervention in both phases but limited AT&T and
Pacwest to participating in the formulation of issues for Phase I. The PUC
indicated that after the issues are approved, AT&T and Pacwest may file motions
to intervene if it appears that the issues will significantly impact their
interests. On March 22, 1996, the PUC approved another request by AT&T for
participation in the Company's rate case. The PUC, however, limited the scope
of AT&T's participation only to issues relating to cost allocations,
jurisdictional separations, and competitive impacts. The PUC denied a similar
second request by Pacwest to participate in the Company's rate case.
In May 1996, the other parties in the proceeding filed their positions on the
Company's proposed increase. On July 26, 1996, the Company filed a
stipulation with the PUC requesting approval of an agreement reached with the
Division of Consumer Advocacy, DOD and AT&T that resolves most of the issues
presented in the Company's Rate Case. Based on the issues resolved, the
parties agreed the Company is entitled to an interim revenue increase of $17.9.
This figure is based on $10.1 for the agreed upon issues plus an additional
$7.8 to allow the Company to recover depreciation expense at levels currently
authorized by the PUC. On August 1, 1996, the PUC adopted the agreement with
the interim revenue increase of $17.9. The four remaining issues before the
PUC pending a final decision are hurricane Iniki recovery, interisland fiber
recovery, depreciation expense levels and incentive compensation recovery. The
Company anticipates that it will file its Phase II proposal by year end 1996.
On March 1, 1996, the PUC ordered the Company to implement 1+ and 0+ equal
access within the state by May 1, 1996. On March 11, 1996, the Company
filed a motion for stay of proceedings and for reconsideration of the PUC's
order. On April 19, 1996, the PUC denied the Company's motion for stay of the
order. Effective July 10, 1996, the Company implemented 1+ and 0+ equal
access.
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. On May 17, 1996, the PUC formally adopted new
administrative rules governing telecommunications competition and establishing
a universal service fund in Hawaii. Since June 3, 1996, the effective date of
the new rules, the PUC granted certificates of authority to twenty five
applicants to operate as resellers of telecommunications services. As many as
nine more applications for certificates of authority remain pending before the
Commission.
On June 12, 1996, the PUC issued its decision and order implementing their new
administrative rules. Among its provisions, the order approved the Company's
cost recovery tariff and denied interexchange carriers' requests for
"discounted" or impaired intrastate access rates. It further required the
Company to implement remote call forwarding within six months as an interim
measure pending full number portability and to file various position papers
concerning recovery of the undepreciated balance of its facilities, rate
restructuring, and universal service. In addition, the PUC ordered the parties
to meet informally to arrive at a consensus on unbundling the Company's network
functions and services. Position statements were filed by the Company in July
relating to equal access cost recovery and impaired assets. In August 1996,
the Company also filed position statements relating to revenue neutral rate
rebalancing, universal service, and the classification of services into
non-competitive, partially competitive and fully competitive categories.
Collaborative meetings with the PUC, Consumer Advocate and
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
various parties were held in July to discuss issues related to unbundling of
the local network. On June 24, 1996, the Company filed a Motion for
Reconsideration of the PUC's June 12, 1996 order. On August 30, 1996, the PUC
ruled in the Company's favor on the majority of the issues raised in the
Company's Motion for Reconsideration.
On July 15, 1996, as part of a pilot project, the PUC selected TelHawaii
Incorporated (TelHawaii) as the alternative provider of telecommunications
services and as the carrier of last resort (COLR) in the Ka'u area of the
island of Hawaii, effective May 15, 1997. The Company must continue to provide
service in the Ka'u area while TelHawaii seeks federal universal service
funding. The PUC further required the Company and TelHawaii to negotiate all
necessary agreements including, as required or appropriate, an agreement for
the transfer to or use by TelHawaii of the Company's assets and agreements for
extended area service, directory assistance and publications, interconnection,
enhanced 911, and telecommunications relay services. The Company intends to
continue offering a competitive alternative for Ka'u customers even after
TelHawaii begins providing alternative telecommunications services as a COLR.
On July 25, 1996, the Company filed a Motion for Reconsideration/Clarification
of the Commission's July 15, 1996 order selecting TelHawaii as the alternative
provider of telecommunications services and as the COLR in the Ka'u area of the
island of Hawaii.
On August 16, 1996, the Company filed its Notice of Appeal of the PUC's orders
selecting TelHawaii as the alternative provider of the Ka'u area. The Company
is appealing the PUC's order on the basis that the Company opposes the effective
taking of its property by forced sale of its assets in Ka'u. On September 5,
1996, the Company filed an Expedited Motion for Stay Pending Appeal and an
Emergency Motion for Temporary Stay Pending Supreme Court Review of the
Expedited Motion.
On September 16, 1996, the PUC ordered the Company to show cause why it should
not pay a fine for not complying with the Commission's prior order to respond
to information requests issued by TelHawaii. A hearing was held on September
30, 1996 with an order from the PUC assessing a $0.3 fine on the Company. The
Company paid the fine under protest on October 3, 1996, and filed a Motion for
Reconsideration on the PUC's order on October 3, 1996 due to the legal grounds
for noncompliance with the PUC's order.
On July 16, 1996, the Company filed its tariff on implementation of Minimum
Point of Entry (MPOE). The filing provides for further opening of the
competitive telecommunications arena in Hawaii for inside wire, intra building
cable and multi-unit locations. November 18, 1996 is the proposed effective
date of the tariff which is pending PUC approval. The proposed implementation
period for MPOE begins January 1, 1997 and extends over a five year period.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
-------------- ------------
(Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 21,362 $ 4,515
Receivables, less allowances of $6,931 and $6,338 149,825 150,560
Inventories and supplies 12,419 8,829
Deferred income tax benefits 1,726 18,157
Prepaid taxes and other 23,146 15,327
------------ ------------
Total current assets 208,478 197,388
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 2,002,270 1,967,801
Accumulated depreciation (1,210,158) (1,158,356)
------------ ------------
Total property, plant and equipment, net 792,112 809,445
------------ ------------
OTHER ASSETS, primarily employee benefit plans 167,760 147,982
------------ ------------
Total assets $ 1,168,350 $ 1,154,815
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 37,964 $ 123,764
Accounts payable 32,728 37,531
Taxes payable 8,075 15,927
Accrued interest 6,015 11,786
Accrued payroll costs 29,648 31,351
Dividends payable 4,093 --
Accrued restructuring costs 28,161 39,353
Other 31,097 30,771
------------ ------------
Total current liabilities 177,781 290,483
------------ ------------
Long-term debt 513,700 482,412
Deferred income taxes 98,347 78,114
Other liabilities 40,473 30,378
------------ ------------
Total liabilities 830,301 881,387
------------ ------------
SHAREHOLDER'S EQUITY:
Common stock (10,000,000 shares issued) 250,000 250,000
Additional paid-in capital 91,146 41,146
Retained deficit (3,097) (17,718)
------------ ------------
Total shareholder's equity 338,049 273,428
------------ ------------
Total liabilities and shareholder's equity $ 1,168,350 $ 1,154,815
============ ============
See Notes to Condensed Consolidated Financial Statements.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
OPERATIONS
Net income $ 48,036 $ 43,585
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 93,435 90,391
Deferred income taxes 33,074 12,151
Provision for uncollectible accounts 7,325 8,701
Change in current assets and current liabilities (58,441) (6,105)
Other - net (14,351) (14,846)
--------- ---------
Net cash from operations 109,078 133,877
--------- ---------
INVESTING
Capital expenditures (70,227) (83,091)
Purchase of MTC stock (450) --
--------- ---------
Net cash used in investing (70,677) (83,091)
--------- ---------
FINANCING
Long-term debt issued 148,353 148,236
Long-term debt retired (147,173) (6,914)
Dividends (29,322) (23,693)
Capital contribution from GTE 50,000 --
Decrease in short-term obligations, excluding current maturities (53,155) (172,261)
Other - net 9,743 --
--------- ---------
Net cash used in financing (21,554) (54,632)
--------- ---------
Increase (decrease) in cash and temporary investments 16,847 (3,846)
Cash and temporary investments:
Beginning of period 4,515 7,709
--------- ---------
End of period $ 21,362 $ 3,863
========= =========
See Notes to Condensed Consolidated Financial Statements.
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GTE HAWAIIAN TELEPHONE COMPANY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in
the opinion of management of the Company, the condensed consolidated
financial statements include all adjustments, which consist only of normal
recurring accruals, necessary to present fairly the financial information
for such periods. These condensed consolidated financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's 1995 Annual Report on Form 10-K.
(2) On April 1, 1996, the Company redeemed prior to stated maturity its $35
million Series V 8.5% first mortgage bond. On June 1, 1996, the Company
redeemed prior to stated maturity its $75 million Series AA 9.0% first
mortgage bond. The Company issued $150 million of 7 3/8% debentures in
September 1996 to refinance this high coupon debt. In anticipation of
this refinancing program, the Company entered into forward contracts to
sell $150 million of U.S. Treasury bonds in order to hedge against future
changes in market interest rates. A gain of approximately $9 million
occurred upon the settlement of the forward contracts and will be
amortized over the life of the associated refinanced debt as an offset to
interest expense. In August 1996, the Company received a capital
contribution of $50 from GTE to improve the Company's financial position.
(3) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
(12) Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
(27) Financial Data Schedule
(b) The Company filed a report on Form 8-K dated July 1, 1996, under
Item 7, "Financial Statements and Exhibits." No financial information
was included with this report.
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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: November 13, 1996 William M. Edwards, III
------------------- -------------------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------------------ ------------------------------------------------------
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule