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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: SEPTEMBER 30, 2002
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 333-85503
TELECOMUNICACIONES DE PUERTO RICO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF PUERTO RICO 66-0566178
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1515 FD ROOSEVELT AVENUE
GUAYNABO, PUERTO RICO 00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 787-792-6052
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
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1
INDEX
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed consolidated balance sheets--September 30, 2002 and December 31, 2001 3
Condensed consolidated statements of income and comprehensive
income--Three months ended September 30, 2002 and 2001; Nine
months ended September 30, 2002 and 2001 4
Condensed consolidated statements of changes in shareholders' equity--Nine months
ended September 30, 2002 and year ended December 31, 2001 5
Condensed consolidated statements of cash flows--Nine months ended September 30, 2002
and 2001 6
Notes to condensed consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Changes in Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 42
CERTIFICATIONS 43
EXHIBIT INDEX 46
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,000 $ 34,797
Accounts receivable, net of allowance for doubtful accounts
of $125,755 and $107,436 in 2002 and 2001, respectively 369,202 359,914
Inventory and supplies, net 17,037 24,755
Prepaid expenses 27,941 11,610
---------- ----------
Total current assets 438,180 431,076
PROPERTY, PLANT AND EQUIPMENT, net 1,571,275 1,631,770
GOODWILL, net 126,927 178,094
INTANGIBLES, net 178,164 180,370
DEFERRED INCOME TAX 306,891 221,499
OTHER ASSETS 110,530 105,441
---------- ----------
TOTAL ASSETS $2,731,967 $2,748,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 155,089 $ 494,335
Other current liabilities 343,810 345,203
---------- ----------
Total current liabilities 498,899 839,538
LONG-TERM DEBT, excluding current portion 936,307 701,441
PENSION AND OTHER POST-EMPLOYMENT BENEFITS 501,344 531,636
OTHER NON-CURRENT LIABILITIES 127,392 126,561
---------- ----------
Total liabilities 2,063,942 2,199,176
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 11,868 10,759
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 701,952 701,952
Deferred ESOP compensation (28,793) (28,793)
Subscription receivable (74,665) (109,959)
Retained earnings 136,140 53,592
Accumulated other comprehensive loss (78,477) (78,477)
---------- ----------
Total shareholders' equity 656,157 538,315
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,731,967 $2,748,250
========== ==========
The accompanying notes are an integral part of these financial statements.
3
TELECOMUNICACIONES de PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Local services $145,508 $142,891 $431,953 $ 426,338
Long distance services 36,922 47,305 111,907 141,859
Access services 80,181 84,356 244,318 265,950
Cellular services 42,719 48,214 127,720 136,056
Paging services 1,080 3,265 4,367 12,945
Directory services 52 79 12,359 12,689
Other services and sales 11,946 19,300 39,867 57,875
-------- -------- -------- ----------
Total revenues 318,408 345,410 972,491 1,053,712
-------- -------- -------- ----------
OPERATING COSTS AND EXPENSES:
Labor and benefits 90,954 94,594 279,593 291,539
Other operating expenses 104,364 109,400 314,451 313,048
Early retirement provision - 5,400 - 16,400
Depreciation and amortization 63,827 66,975 196,801 202,843
-------- -------- -------- ----------
Total operating costs and expenses 259,145 276,369 790,845 823,830
-------- -------- -------- ----------
OPERATING INCOME 59,263 69,041 181,646 229,882
-------- -------- -------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (10,833) (16,673) (36,536) (46,969)
Equity income from joint venture 577 529 1,729 1,589
Minority interest in consolidated subsidiary (447) 115 (1,107) 141
-------- -------- -------- ----------
Total other income (expense), net (10,703) (16,029) (35,914) (45,239)
-------- -------- -------- ----------
INCOME BEFORE INCOME TAX EXPENSE 48,560 53,012 145,732 184,643
INCOME TAX EXPENSE 16,708 19,557 10,274 68,400
-------- -------- -------- ----------
NET INCOME AND COMPREHENSIVE INCOME $ 31,852 $ 33,455 $135,458 $ 116,243
======== ======== ======== ==========
The accompanying notes are an integral part of these financial statements.
4
TELECOMUNICACIONES de PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
DEFERRED RETAINED OTHER
COMMON ESOP SUBSCRIPTION EARNINGS COMPREHENSIVE
STOCK COMPENSATION RECEIVABLE (DEFICIT) LOSS TOTAL
-------- ------------ ------------ ---------- ------------- --------
BALANCE, DECEMBER 31, 2000 $700,220 $(28,653) $(141,323) $ (7,002) $(25,475) $497,767
Net income - - - 118,456 - 118,456
Dividends paid - - - (57,862) - (57,862)
Accretion of discount on subscription receivable - - (8,636) - - (8,636)
PRTA capital contribution - - 40,000 - - 40,000
Release of ESOP shares 1,732 1,420 - - - 3,152
Advance to ESOP - (1,535) - - - (1,535)
Other ESOP contribution - (25) - - - (25)
Minimum pension liability adjustment - - - - (53,002) (53,002)
-------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 $701,952 $(28,793) $(109,959) $ 53,592 $(78,477) $538,315
(UNAUDITED)
Net income, for the nine months ended
September 30, 2002 - - - 135,458 - 135,458
Dividends paid - - - (52,910) - (52,910)
Accretion of discount on subscription receivable - - (4,706) - - (4,706)
PRTA capital contribution - - 40,000 - - 40,000
-------- -------- --------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2002 $701,952 $(28,793) $ (74,665) $136,140 $(78,477) $656,157
======== ======== ========= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------ -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTVITIES:
Net income $ 135,458 $116,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 196,801 202,843
Provision for uncollectible accounts 51,392 46,031
Deferred income tax (34,225) 17,589
Accretion of discount on subscription receivable (4,706) (6,575)
Equity income from joint venture (1,729) (1,589)
Minority interest in consolidated subsidiary 1,107 (141)
Accretion of deferred derivative (185) -
Early retirement provision - 16,400
Release of ESOP shares - 2,876
Gain on sale of subsidiary stock - (5,414)
Changes in assets and liabilities:
Accounts receivable (60,680) (58,828)
Inventory and supplies 7,718 1,684
Prepaid expenses and other assets (20,897) (27,492)
Other current and non-current liabilities 10,609 (88,460)
Pension and other post-employment benefits (30,292) (98,036)
--------- --------
Net cash provided by operating activities 250,371 117,131
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs (135,686) (118,482)
Net salvage on retirements and other 1,645 4,014
Proceeds from sale of subsidiary stock - 16,367
--------- --------
Net cash used in investing activities (134,041) (98,101)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 40,000
Net repayments of short-term debt, including
capital leases (339,217) (36,755)
Borrowings of long-term debt 225,000 -
Dividends paid (52,910) (41,135)
--------- --------
Net cash used in financing activities (127,127) (37,890)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,797) (18,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 34,797 30,834
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,000 $ 11,974
========= =========
The accompanying notes are an integral part of these financial statements.
6
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BUSINESS / CORPORATE STRUCTURE
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the
"Company"), holds 100% of the common stock of Puerto Rico Telephone
Company, Inc. ("PRTC"), PRT Larga Distancia, Inc. ("PRTLD"), and
Datacom Caribe, Inc. ("Datacom"). The Company also holds a 67% interest
in Coqui.net Corporation ("Coqui.net"), in which Popular, Inc., one of
our shareholders, holds the remaining 33% interest, and a 25% interest
in Verizon Information Services, Inc. ("VISI"), in which GTE Holdings
(Puerto Rico) LLC, our majority shareholder, holds a 36% interest. The
Company is the largest telecommunications service provider in Puerto
Rico. PRTC is the incumbent local exchange carrier for the island of
Puerto Rico. Wireline service is provided by PRTC and cellular and
paging services are provided by the wireless division of PRTC. The
Company's off-island long distance service is provided by PRTLD. The
Company's dial-up Internet access service is provided by Coqui.net. The
Company's directory publishing revenues are generated by VISI.
GTE Corporation ("GTE"), through its subsidiary GTE Holdings (Puerto
Rico) LLC, acquired a 40% interest in and management control over the
Company on March 2, 1999 from Puerto Rico Telephone Authority ("PRTA"),
an entity of the Commonwealth of Puerto Rico (the "Acquisition"). In
the Acquisition, Popular, Inc. acquired a 10% interest in the Company.
GTE and Bell Atlantic Corporation merged on June 30, 2000 to form
Verizon Communications Inc. ("Verizon"). On January 25, 2002, GTE
Holdings (Puerto Rico) LLC and Popular, Inc. acquired an additional 12%
and 3% interest in the Company, respectively, by exercising an option
each held since the Acquisition (the "Option Exercise"). Verizon and
Popular, Inc. obtained the additional ownership interest from PRTA
Holdings Corp., a subsidiary of the PRTA ("PRTA Holdings"). Verizon and
Popular, Inc. paid PRTA Holdings $138 million and $34 million,
respectively, for a total of $172 million in cash for the additional
3,750,000 shares at a $45.9364 per share price established in the Share
Option Agreement, an agreement entered into at the time of the
Acquisition. As a result, Verizon now owns 52%, Popular owns 13%, PRTA
owns 28% and the Employee Stock Ownership Plan owns 7% of the
outstanding capital stock of the Company. The Company is an affiliate
of Verizon, which now consolidates the Company's financial results with
its own financial results.
PRTC/VERIZON WIRELESS MERGER
On May 1, 2002, the Company completed a tax-free reorganization whereby
it merged Verizon Wireless Puerto Rico, Inc. ("Verizon Wireless") into
PRTC. Prior to the merger, the Company created a new wholly owned
subsidiary, PRTLD, to carry the off-island long distance business
previously provided by Verizon Wireless. The objectives of the
reorganization were to (i) integrate the wireline and wireless
operations without jeopardizing the continuity of the off-island long
distance license, (ii) simplify the overall corporate structure to
reduce administrative costs, and (iii) provide better control and
monitoring of the off-island long distance business and increase its
potential for growth in Puerto Rico. As a result of this merger, the
Company released a deferred tax valuation allowance, related to the
Acquisition, of $93 million, of which $51 million was recorded against
goodwill and $42 million was recorded as a deferred tax benefit in the
Company's consolidated statement of income for the second quarter of
2002 in accordance with Statements of Financial Accounting Standards
("SFAS") No. 109.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the rules and
regulations of the Securities and Exchange Commission ("SEC").
Accordingly, certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. In the
opinion of management the financial statements include all adjustments
consisting of normal recurring accruals, necessary to fairly present
the results of operations and financial condition for the interim
periods shown. The December 31, 2001 condensed consolidated balance
sheet was derived from audited financial statements and should be read
in conjunction with the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
7
RECLASSIFICATIONS
Reclassifications of prior periods' data have been made to conform to
the current period's presentation.
3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
BUSINESS COMBINATIONS AND ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141, which applies to business
combinations occurring after June 30, 2001, requires that the purchase
method of accounting be used and includes guidance on the initial
recognition and measurement of goodwill and other intangible assets
acquired in the combination. The adoption of SFAS No. 141 did not have
an effect on the Company's financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142. SFAS No.
142 no longer permits the amortization of goodwill and other
indefinite-lived intangible assets, which has resulted in reducing
amortization expense by $12 million for the nine months ended September
30, 2002. Under SFAS No. 142 assets of each reporting unit must be
reviewed annually (or, under certain conditions, more frequently) for
impairment. The Company has three reporting units; wireline, wireless
and dial-up Internet access.
The Company, together with an independent appraiser, performed the
impairment test for the three reporting units. The evaluation revealed
that the assets of the three reporting units were fully realizable. The
Company intends to perform future tests for impairment at least
annually and more often if the Company believes that events or
circumstances warrant such action.
The following financial information represents the adjusted condensed
consolidated results of operations as if adoption of SFAS No. 142 had
been applied to the prior period presented. Adjusted results presented
below exclude the effects (net of tax) of the amortization of goodwill
and other indefinite life intangibles.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(ADJUSTED) (AS REPORTED) (ADJUSTED) (AS REPORTED)
2002 2001 2001 2002 2001 2001
-------- ---------- ------------- -------- ---------- -------------
(In thousands)
Revenues $318,408 $345,410 $345,410 $972,491 $1,053,712 $1,053,712
Operating costs and expenses 259,145 272,452 276,369 790,845 812,079 823,830
-------- -------- -------- -------- ---------- ----------
Operating income 59,263 72,958 69,041 181,646 241,633 229,882
Other expense, net 10,703 16,029 16,029 35,914 45,239 45,239
-------- -------- -------- -------- ---------- ----------
Income before income tax 48,560 56,929 53,012 145,732 196,394 184,643
Income tax expense 16,708 20,647 19,557 10,274 71,670 68,400
-------- -------- -------- -------- ---------- ----------
Net income $ 31,852 $ 36,282 $ 33,455 $135,458 $ 124,724 $ 116,243
======== ======== ======== ======== =========== ==========
8
The following table reconciles net income reported for the quarter and
nine months ended September 30, 2001, respectively, to the adjusted net
income for the same period, as required by the provisions of SFAS No.
142.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
------------- -------------
(In thousands)
RECONCILIATION:
Net income, as reported $33,455 $116,243
Discontinued amortization of goodwill 1,879 5,637
Discontinued amortization of other
indefinite life intangibles 2,038 6,114
Tax effect (1,090) (3,270)
------- --------
Adjusted net income $36,282 $124,724
======= ========
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the
cost of legal obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires that companies recognize the fair value
of a liability for asset retirement obligations in the period in which
the obligations are incurred and capitalize that amount as a part of
the book value of the long-lived asset. That cost is then depreciated
over the remaining life of the underlying long-lived asset. The Company
is required and will adopt SFAS No. 143 effective January 1, 2003. The
Company is currently evaluating the impact this new statement will have
on the Company's future results of operations and financial position.
ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144. This standard supersedes
SFAS No. 121 and the provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" with regard
to reporting the effects of a disposal of a segment of a business.
SFAS No. 144 establishes a single accounting model for assets to be
disposed of by sale and addresses several SFAS No. 121 implementation
issues. The Company adopted SFAS No. 144 effective January 1, 2002 and
the adoption thereof did not have an impact on its financial
statements.
EXTINGUISHMENTS OF DEBT AND ACCOUNTING FOR CERTAIN CAPITAL LEASE
OBLIGATIONS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections." For most companies, SFAS No. 145 will require
gain and losses on extinguishments of debt to be classified as income
or loss from continuing operations rather than as extraordinary items
as previously required under SFAS No. 4. However, extraordinary
treatment will be required for certain extinguishments as provided in
APB Opinion No. 30. This statement also amends SFAS No. 13 to require
that certain modifications to capital leases be treated as
sale-leaseback transactions and modifies the accounting for sub-leases.
In addition, the FASB rescinded SFAS No. 44, which addressed the
accounting for intangible assets of motor carriers and made numerous
technical corrections. At this time, the Company is evaluating the
impact, if any, of the adoption of SFAS No. 145 on its results of
operations and financial condition.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other costs to Exit an Activity (including Certain Costs
Incurred in Restructuring)." EITF Issue No. 94-3 required accrual of
liabilities related to exit and disposal activities at a plan
(commitment) date. SFAS No. 146 requires that a liability for a cost
9
associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31,
2002. At this time, the Company is evaluating the impact, if any, of
the adoption of SFAS No. 146 on its results of operations and financial
condition.
4. PROPERTY, PLANT AND EQUIPMENT
REMAINING USEFUL SEPTEMBER 30, DECEMBER 31,
LIVES (YRS)(1) 2002 2001
--------------- ------------- ------------
CURRENT PREVIOUS (In thousands)
------- --------
Outside plant 8.9 8.6 $2,018,003 $1,978,670
Central office and transmission equipment 4.7 4.0 1,277,849 1,228,540
Equipment and other 3.0 3.5 365,756 357,885
Buildings 21.5 23.3 331,878 334,307
Land N/A N/A 25,511 25,309
---------- ----------
Gross plant in service 4,018,997 3,924,711
Less: accumulated depreciation 2,553,953 2,407,760
---------- ----------
Net plant in service 1,465,044 1,516,951
Construction in progress 106,231 114,819
---------- ----------
Total $1,571,275 $1,631,770
========== ==========
(1) These lives consider estimated removal costs and estimated proceeds from
disposal.
Effective July 1, 2002, the Company changed its accounting estimates
relating to depreciation, resulting from a detailed review of the lives
underlying the depreciation rates. The rate changes reflect expected
useful lives resulting from the impact of technology and future
competition as well as more closely approximating the assumptions used
by other telephone companies. These changes resulted in decreasing
depreciation expense by approximately $3 million for the quarter ended
September 30, 2002.
5. GOODWILL
Following is a breakdown of goodwill by reporting unit.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------- ---------------------------------
COST ACC. AMORT. BOOK VALUE COST ACC. AMORT. BOOK VALUE
---- ----------- ---------- ---- ----------- ----------
(In thousands)
Wireline (PRTC) $122,373 $19,642 $102,731 $173,540 $19,642 $153,898
Dial-up Internet (Coqui.net) 30,542 6,346 24,196 30,542 6,346 24,196
-------- ------- -------- -------- ------- --------
Total $152,915 $25,988 $126,927 $204,082 $25,988 $178,094
======== ======= ======== ======== ======= ========
10
6. INTANGIBLES
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------------------------- --------------------------------------
COST ACC. AMORT. BOOK VALUE COST ACC. AMORT. BOOK VALUE
---- ----------- ---------- ---- ----------- ----------
(In thousands)
INDEFINITE LIFE:
Wireline concession $ 96,000 $10,880 $ 85,120 $ 96,000 $10,880 $ 85,120
FCC Cellular licenses 30,361 6,506 23,855 30,361 6,506 23,855
DEFINITE LIFE:
Wireline trade name 48,400 6,934 41,466 48,400 5,485 42,915
Software licenses 40,410 13,636 26,774 35,501 8,453 27,048
Customer base 15,544 14,595 949 15,544 14,112 1,432
Other 500 500 - 500 500 -
-------- ------- -------- -------- ------- --------
Total $231,215 $53,051 $178,164 $226,306 $45,936 $180,370
======== ======= ======== ======== ======= ========
The following table presents current and expected amortization expense of
existing intangible assets as of September 30, 2002 and for each of the
following periods:
AMOUNT
------
(In thousands)
Aggregate amortization expense:
For the nine months ended September 30, 2002 $7,115
Expected amortization expense for the years ending
December 31:
2003 8,016
2004 7,516
2005 7,291
2006 7,291
2007 7,291
7. OTHER ASSETS
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Deferred activation and installation costs $ 61,343 $ 49,744
Notes receivable-equipment sales 16,938 21,394
Deferred pension asset 15,010 15,010
Investment in VISI 4,833 4,119
Deferred financing costs, net 4,169 5,044
Other deferred costs 5,248 6,205
Interest rate swap - 1,147
Other assets 2,989 2,778
-------- --------
Total $110,530 $105,441
======== ========
11
8. OTHER CURRENT LIABILITIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(In thousands)
Accounts payable $86,883 $126,316
Accrued expenses 62,817 83,631
Employee benefit accruals 65,731 57,770
Carrier payables 53,813 36,774
Taxes 55,823 32,739
Interest 18,743 7,973
-------- --------
Total $343,810 $345,203
======== ========
9. EARLY RETIREMENT AND VOLUNTARY SEPARATION PROGRAMS
During the third quarter of 2001, the Company recorded a $5 million
provision based on 29 employee acceptances related to a disability
early retirement program offered to eligible employees. A total
provision of $16 million was recorded related to early retirement and
voluntary separation programs for the nine months ended September 30,
2001. There have been no early retirement or voluntary separation
programs offered to employees during 2002.
10. DEBT
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(In thousands)
Senior notes:
Due May 15, 2006 at 6.65% $ 399,915 $ 399,900
Due May 15, 2009 at 6.80% 299,877 299,866
Due May 15, 2002 at 6.15% - 299,991
Term credit facilities:
Due May 16, 2004 at 70 basis points over LIBOR 50,000 -
Due May 31, 2004 at 75 basis points over LIBOR 50,000 -
Due June 24, 2005 at 100 basis points over LIBOR 50,000 -
Due August 19, 2005 at 100 basis points over LIBOR 75,000 -
Commercial paper 155,000 94,100
Working capital credit facility - 100,000
Deferred derivative 10,984 -
Interest rate swap - 1,147
Capital leases 620 772
---------- ----------
Total 1,091,396 1,195,776
Less short-term debt 155,089 494,335
---------- ----------
Long-term debt $ 936,307 $ 701,441
========== ==========
The senior notes, commercial paper, term credit facilities, working
capital facility, and bank notes are unsecured and non-amortizing. PRTC
is the guarantor of these instruments.
The Company has a $500 million commercial paper program, which is
backed by a bank note facility, with maturities not to exceed 365 days.
The commercial paper dealer agreement was signed in November 2000. The
bank note is a syndicated five-year revolving facility expiring in
March 2004. Amounts outstanding under this facility bear interest at
32.5 basis points over LIBOR. The bank note credit agreement includes
financial covenants, the most significant being that the outstanding
principal balance will not exceed four times adjusted Earnings Before
Interest, Taxes, Depreciation, and Amortization ("EBITDA"), as defined
in the facility agreement.
12
The Company also has a $90 million working capital credit facility
with Banco Popular de Puerto Rico, an affiliate of Popular, Inc.
Amounts outstanding under this facility bear interest at a rate of 30
basis points over LIBOR. This facility was renewed in June 2002 with a
term of one year. At September 30, 2002, the Company had the entire
balance of the facility available for use.
The Company entered into an interest rate swap contract on
August 31, 2001 at a notional amount of $150 million. In September
2002, the Company drew the value out of the hedge position without
changing the fixed/floating funding mix of the original swap
transaction. This transaction resulted in cash proceeds of $11 million,
reflected in cash from operations consistent with SFAS No. 104, and
created a deferred derivative, which will be amortized until 2006. The
purpose of the swap is to hedge against changes in the fair market
value of the Company's senior notes to achieve a targeted mix of fixed
and variable rate debt. The swap receives interest at a fixed rate of
6.65% and pays interest at a net variable rate equal to six month LIBOR
plus 170 basis points, with semiannual settlements and reset dates
every May 15 and November 15 until maturity of the May 15, 2006 senior
notes. The swap was entered into "at market" and as a result, there was
no exchange of premium at the initial date of the swap. The Company
designates the swap as a hedge of the changes in fair market value of
the senior notes due to changes in the designated benchmark interest
rate. PRTC is the guarantor of the interest rate swap.
Aggregate maturities of the senior notes and term credit facilities
are as follow:
AMOUNT
-------------
(In thousands)
2004 $100,000
2005 125,000
2006 400,000
2009 300,000
--------
Total $925,000
========
11. OTHER NON-CURRENT LIABILITIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ -----------
(In thousands)
Deferred activation and installation revenues $ 61,343 $ 49,744
Customer deposits 27,538 27,911
Other liabilities 38,511 48,906
-------- --------
Total $127,392 $126,561
======== ========
12. SHAREHOLDERS' EQUITY
COMMON STOCK
Common stock consists of fifty million authorized shares, no
par value, of which twenty five million shares were outstanding at
September 30, 2002 and December 31, 2001.
SUBSCRIPTION RECEIVABLE
The subscription receivable reflects future receipts from the
PRTA at present value (at an 8% discount rate). As part of the
Acquisition agreement, the PRTA agreed to contribute cash or stock of
$200 million as a capital contribution in equal $40 million
installments over five years on March 2 of each year, beginning on
March 2, 2000. The stock purchase agreement requires that the Company
contribute $66 million, which includes the $40 million received from
PRTA, to fund its underfunded pension and other post-employment benefit
obligations upon receipt of the proceeds on March 2nd of each year. The
Company received the third $40 million installment in March 2002 and
made the required $66 million contribution.
13
ACCUMULATED OTHER COMPREHENSIVE LOSS
The accumulated other comprehensive loss represents unrecognized
losses, other than unrecognized prior service costs, associated with
the hourly pension fund since the accumulated benefit obligation
exceeds the fair market value of plan assets at December 31, 2001.
DIVIDENDS
The shareholders agreement requires the payment of dividends equal
to at least 50% of net income, to be paid in the following quarter to
the extent funds are legally available.
Dividends payments were made in the following periods:
2002 2001
---- ----
(In thousands) (In thousands)
3rd Quarter $40,301 4th Quarter $16,727
2nd Quarter 11,502 3rd Quarter 23,163
1st Quarter 1,107 2nd Quarter 17,972
------- -------
Total $52,910 Total $57,862
------- -------
13. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair market values of the Company's financial
instruments are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- ---------
(In thousands)
Assets:
Cash and cash equivalents $ 24,000 $ 24,000 $ 34,797 $ 34,797
Accounts receivable, net 369,202 369,202 359,914 359,914
Liabilities:
Other current liabilities $343,810 $343,810 $345,203 $345,203
Short-term debt 155,089 155,089 494,335 498,649
Long-term debt, including interest rate swap 936,307 929,275 701,441 699,001
14. SEGMENT REPORTING
The Company has two reportable segments: Wireline and Wireless.
The Wireline segment consists of:
- Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services,
high-speed private line services, Internet access and public
phone service;
- Long distance services including direct dial
on-island and off-island, operator assisted calls, prepaid
calling card and high-speed private line services;
- Access services to long distance carriers, competitive local
exchange carriers, and cellular and paging operators to
originate and terminate calls on our network;
- Directory publishing rights services; and
- Telecommunication equipment sales and billing and
collection services to competing long distance operators in
Puerto Rico.
The Wireless segment consists of:
- Cellular and paging services; and
- Wireless equipment sales.
14
The Company measures and evaluates the performance of its
segments based on EBITDA, which is a common industry profitability and
liquidity measurement. The accounting policies of the segments are the
same as those followed by the Company (See Note 2). The Company
accounts for intersegment revenues at market prices. Segment results
for the Company are as follow:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- --------- ----------
(In thousands)
WIRELINE:
Revenues-
Local services $147,099 $145,263 $436,819 $ 430,706
Long distance services 37,059 47,305 112,308 141,877
Access services 81,547 85,743 248,862 269,486
Directory services and other 10,530 15,221 46,834 57,634
-------- -------- -------- ----------
Total revenues $276,235 $293,532 $844,823 $ 899,703
======== ======== ======== ==========
EBITDA $113,154 $127,247 $348,838 $ 401,607
======== ======== ======== ==========
WIRELESS:
Revenues-
Cellular services $ 43,112 $ 48,214 $128,928 $ 136,056
Paging services 1,081 3,265 4,367 12,945
Equipment sales and other 1,373 4,158 5,100 12,930
-------- -------- -------- ----------
Total revenues $ 45,566 $ 55,637 $138,395 $ 161,931
======== ======== ======== ==========
EBITDA $ 9,936 $ 8,769 $ 29,609 $ 31,118
======== ======== ======== ==========
CONSOLIDATED:
Revenues for reportable segments $321,801 $349,169 $983,218 $1,061,634
Elimination of intersegment revenues (3,393) (3,759) (10,727) (7,922)
-------- -------- -------- ----------
Consolidated revenues $318,408 $345,410 $972,491 $1,053,712
======== ======== ======== ==========
EBITDA:
Operating income $ 59,263 $ 69,041 $181,646 $ 229,882
Depreciation and amortization 63,827 66,975 196,801 202,843
-------- -------- -------- ----------
EBITDA $123,090 $136,016 $378,447 $ 432,725
======== ======== ======== ==========
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
- ------------------------- ------------- ------------
Wireline assets $2,652,126 $2,591,488
Wireless assets 286,494 468,062
---------- ----------
Segment assets $2,938,620 $3,059,550
Elimination of intersegment assets (206,653) (311,300)
---------- ----------
Consolidated assets $2,731,967 $2,748,250
========== ==========
15
15. CONDENSED CONSOLIDATING INFORMATION
The Senior Notes are guaranteed by PRTC, a wholly owned
subsidiary of the Company (the "Guarantor Subsidiary"), but not
guaranteed by the Company's other subsidiaries, Coqui.net, PRTLD, and
Datacom (the "Non-Guarantor Subsidiaries"). The guarantee by the
Guarantor Subsidiary is full and unconditional.
The following condensed consolidating financial information as
of September 30, 2002 and December 31, 2001 and for the quarter and
nine months ended September 30, 2002 and 2001, respectively, presents
the financial position, results of operations and cash flows of (i) the
Company as if it accounted for its subsidiaries on the equity method,
(ii) the Guarantor Subsidiary; and (iii) the Non-Guarantor Subsidiaries
on a combined basis. The consolidation entries eliminate investments in
subsidiaries and intercompany balances and transactions.
16
CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,096 $ 19,893 $ 2,011 $ - $ 24,000
Intercompany accounts receivable 1,253,607 185,168 21,485 (1,460,260) -
Accounts receivable, net - 369,435 (233) - 369,202
Inventory and supplies, net - 17,037 - - 17,037
Prepaid expenses - 27,287 654 - 27,941
---------- ---------- --------- ----------- ----------
Total current assets 1,255,703 618,820 23,917 (1,460,260) 438,180
PROPERTY, PLANT AND EQUIPMENT, net - 1,561,079 10,196 - 1,571,275
GOODWILL AND OTHER INTANGIBLES, net - 279,946 25,145 - 305,091
DEFERRED INCOME TAX - 306,703 188 - 306,891
INVESTMENT IN SUBSIDIARIES 566,816 - - (566,816) -
OTHER ASSETS 15,226 110,458 (1) (15,153) 110,530
---------- ---------- --------- ----------- ----------
TOTAL ASSETS $1,837,745 $2,877,006 $ 59,445 $(2,042,229) $2,731,967
========== ========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 155,000 $ 155,089 $ - $ (155,000) $ 155,089
Intercompany accounts payable 69,526 298,466 16,645 (384,637) -
Other current liabilities 21,286 318,331 4,193 - 343,810
---------- ---------- --------- ----------- ----------
Total current liabilities 245,812 771,886 20,838 (539,637) 498,899
LONG-TERM DEBT, excluding current portion 935,776 925,323 - (924,792) 936,307
OTHER NON-CURRENT LIABILITIES - 639,720 - (10,984) 628,736
---------- ---------- --------- ----------- ----------
Total liabilities 1,181,588 2,336,929 20,838 (1,475,413) 2,063,942
---------- ---------- --------- ----------- ----------
MINORITY INTEREST - - - 11,868 11,868
---------- ---------- --------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 701,952 489,627 37,106 (526,733) 701,952
Deferred ESOP compensation (28,793) - - - (28,793)
Subscription receivable (74,665) - - - (74,665)
Retained earnings 136,140 128,927 1,501 (130,428) 136,140
Accumulated other comprehensive loss (78,477) (78,477) -- 78,477 (78,477)
---------- ---------- --------- ----------- ----------
Total shareholders' equity 656,157 540,077 38,607 (578,684) 656,157
---------- ---------- --------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,837,745 $2,877,006 $ 59,445 $(2,042,229) $2,731,967
========== ========== ========= =========== ==========
17
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2001
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 32,591 $ 2,206 $ - $ 34,797
Intercompany accounts receivable 1,316,922 311,067 233 (1,628,222) -
Accounts receivable, net - 359,521 393 - 359,914
Inventory and supplies, net - 24,755 - - 24,755
Prepaid expenses - 11,200 410 - 11,610
---------- ---------- ------- ----------- ----------
Total current assets 1,316,922 739,134 3,242 (1,628,222) 431,076
PROPERTY, PLANT AND EQUIPMENT, net - 1,623,717 8,053 - 1,631,770
GOODWILL AND OTHER INTANGIBLES, net - 332,836 25,628 - 358,464
DEFERRED INCOME TAX - 221,324 175 - 221,499
INVESTMENT IN SUBSIDIARIES 486,201 -- - (486,201) -
OTHER ASSETS 6,190 105,441 - (6,190) 105,441
---------- ---------- ------- ----------- ----------
TOTAL ASSETS $1,809,313 $3,022,452 $37,098 $(2,120,613) $2,748,250
========== ========== ======= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 494,100 $ 494,335 $ - $ (494,100) $ 494,335
Intercompany accounts payable 65,715 371,007 2,688 (439,410) -
Other current liabilities 8,280 335,274 1,649 - 345,203
---------- ---------- ------- ----------- ----------
Total current liabilities 568,095 1,200,616 4,337 (933,510) 839,538
LONG-TERM DEBT, excluding current portion 700,903 701,441 - (700,903) 701,441
OTHER NON-CURRENT LIABILITIES 2,000 656,197 - - 658,197
---------- ---------- ------- ----------- ----------
Total liabilities 1,270,998 2,558,254 4,337 (1,634,413) 2,199,176
---------- ---------- ------- ----------- ----------
MINORITY INTEREST - - - 10,759 10,759
---------- ---------- ------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in
capital and Treasury stock 701,952 490,927 35,806 (526,733) 701,952
Deferred ESOP compensation (28,793) - - - (28,793)
Subscription receivable (109,959) - - - (109,959)
Retained earnings (deficit) 53,592 51,748 (3,045) (48,703) 53,592
Accumulated other comprehensive loss (78,477) (78,477) - 78,477 (78,477)
---------- ---------- ------- ----------- ----------
Total shareholders' equity 538,315 464,198 32,761 (496,959) 538,315
---------- ---------- ------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,809,313 $3,022,452 $37,098 $(2,120,613) $2,748,250
========== ========== ======= =========== ==========
18
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
REVENUES:
Local services $ - $141,359 $ 6,467 $ (2,318) $145,508
Long distance services - 27,600 9,469 (147) 36,922
Access services - 82,980 - (2,799) 80,181
Cellular services - 43,112 - (393) 42,719
Paging services - 1,081 - (1) 1,080
Directory and other services and sales - 15,080 - (3,082) 11,998
------- -------- ------- -------- --------
Total revenues - 311,212 15,936 (8,740) 318,408
------- -------- ------- -------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits - 90,419 535 - 90,954
Other operating expenses (1,860) 104,576 10,388 (8,740) 104,364
Depreciation and amortization - 63,139 688 - 63,827
------- -------- ------- -------- --------
Total operating costs and expenses (1,860) 258,134 11,611 (8,740) 259,145
------- -------- ------- -------- --------
OPERATING INCOME 1,860 53,078 4,325 - 59,263
------- -------- ------- -------- --------
OTHER INCOME (EXPENSE), NET 29,992 (10,248) (8) (30,439) (10,703)
------- -------- ------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 31,852 42,830 4,317 (30,439) 48,560
INCOME TAX EXPENSE - 14,949 1,759 - 16,708
------- -------- ------- -------- --------
NET INCOME AND COMPREHENSIVE INCOME $31,852 $ 27,881 $ 2,558 $(30,439) $ 31,852
======= ======== ======= ======== ========
19
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 2001
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
REVENUES:
Local services $ - $139,792 $6,032 $ (2,933) $142,891
Long distance services - 48,750 - (1,445) 47,305
Access services - 86,974 - (2,618) 84,356
Cellular services - 48,844 - (630) 48,214
Paging services - 3,271 - (6) 3,265
Directory and other services and sales - 22,719 - (3,340) 19,379
------- -------- ------ -------- --------
Total revenues - 350,350 6,032 (10,972) 345,410
------- -------- ------ -------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits - 94,236 358 - 94,594
Other operating expenses - 116,509 3,863 (10,972) 109,400
Early retirement provision - 5,400 - - 5,400
Depreciation and amortization - 65,480 1,495 - 66,975
------- -------- ------ -------- --------
Total operating costs and expenses - 281,625 5,716 (10,972) 276,369
------- -------- ------ -------- --------
OPERATING INCOME - 68,725 316 - 69,041
------- -------- ------ -------- --------
OTHER INCOME (EXPENSE), net 33,429 (16,165) 8 (33,301) (16,029)
------- -------- ------ -------- --------
INCOME BEFORE INCOME TAX 33,429 52,560 324 (33,301) 53,012
INCOME TAX EXPENSE (BENEFIT) (26) 18,912 671 - 19,557
------- -------- ------ -------- --------
NET INCOME (LOSS) AND COMPREHENSIVE INCOME $33,455 $ 33,648 $ (347) $(33,301) $ 33,455
======= ======== ====== ======== ========
20
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
REVENUES:
Local services $ - $420,222 $18,879 $ (7,148) $431,953
Long distance services - 98,350 13,972 (415) 111,907
Access services - 252,533 - (8,215) 244,318
Cellular services - 128,928 - (1,208) 127,720
Paging services - 4,367 - - 4,367
Directory and other services and sales - 61,746 - (9,520) 52,226
-------- -------- ------- --------- --------
Total revenues - 966,146 32,851 (26,506) 972,491
-------- -------- ------- --------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits - 277,950 1,643 - 279,593
Other operating expenses (1,860) 321,754 21,063 (26,506) 314,451
Early retirement provision - - - - -
Depreciation and amortization - 194,579 2,222 - 196,801
-------- -------- ------- --------- --------
Total operating costs and expenses (1,860) 794,283 24,928 (26,506) 790,845
-------- -------- ------- --------- --------
OPERATING INCOME 1,860 171,863 7,923 - 181,646
-------- -------- ------- --------- --------
OTHER INCOME (EXPENSE), NET 133,598 (34,798) (9) (134,705) (35,914)
-------- -------- ------- --------- --------
INCOME BEFORE INCOME TAX EXPENSE 135,458 137,065 7,914 (134,705) 145,732
INCOME TAX EXPENSE - 6,976 3,298 - 10,274
-------- -------- ------- --------- --------
NET INCOME AND COMPREHENSIVE INCOME $135,458 $130,089 $ 4,616 $(134,705) $135,458
======== ======== ======= ========= ========
21
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2001
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
REVENUES:
Local services $ - $ 414,059 $17,208 $ (4,929) $ 426,338
Long distance services - 143,477 - (1,618) 141,859
Access services - 273,947 - (7,997) 265,950
Cellular services - 137,659 - (1,603) 136,056
Paging services - 12,953 - (8) 12,945
Directory and other services and sales - 82,186 - (11,622) 70,564
-------- ---------- ------- --------- ----------
Total revenues - 1,064,281 17,208 (27,777) 1,053,712
-------- ---------- ------- --------- ----------
OPERATING COSTS AND EXPENSES:
Labor and benefits - 290,559 980 - 291,539
Other operating expenses (5,034) 334,833 11,026 (27,777) 313,048
Early retirement provision - 16,400 - - 16,400
Depreciation and amortization - 198,389 4,454 - 202,843
-------- ---------- ------- --------- ----------
Total operating costs and expenses (5,034) 840,181 16,460 (27,777) 823,830
-------- ---------- ------- --------- ----------
OPERATING INCOME 5,034 224,100 748 - 229,882
-------- ---------- ------- --------- ----------
OTHER INCOME (EXPENSE), NET 111,487 (45,484) 26 (111,268) (45,239)
-------- ---------- ------- --------- ----------
INCOME BEFORE INCOME TAX EXPENSE 116,521 178,616 774 (111,268) 184,643
INCOME TAX EXPENSE 278 66,851 1,271 - 68,400
-------- ---------- ------- --------- ----------
NET INCOME (LOSS) AND COMPREHENSIVE INCOME $116,243 $ 111,765 $ (497) $(111,268) $ 116,243
======== ========== ======= ========= ==========
22
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES CONSOLIDATED
--------- ---------- ------------- ------------
CASH PROVIDED BY (USED IN) OPERATING
ACTVITIES: $ 11,294 $ 235,449 $ 3,628 $ 250,371
--------- --------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs - (132,128) (3,558) (135,686)
Net salvage on retirements - 1,910 (265) 1,645
--------- --------- ------- ---------
Net cash used in investing activities - (130,218) (3,823) (134,041)
--------- --------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 - - 40,000
Net repayments of short-term debt, including
capital leases (339,071) (146) - (339,217)
Borrowings of long-term debt 225,000 - - 225,000
Dividends paid (52,910) - - (52,910)
Borrowings/(repayments) intercompany loans 117,783 (117,783) - -
--------- --------- ------- ---------
Net cash provided by (used in) financing
activities (9,198) (117,929) - (127,127)
--------- --------- ------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 2,096 (12,698) (195) (10,797)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD - 32,591 2,206 34,797
--------- --------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,096 $ 19,893 $ 2,011 $ 24,000
========= ========= ======= =========
23
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- -------------
CASH PROVIDED BY OPERATING ACTVITIES $ 2,332 $ 112,808 $1,991 $ 117,131
-------- --------- ------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs - (117,827) (655) (118,482)
Net salvage on retirements - 4,175 (161) 4,014
Proceeds from sale of subsidiary stock 16,367 - - 16,367
-------- --------- ------ ---------
Net cash provided by (used in) investing
activities 16,367 (113,652) (816) (98,101)
-------- --------- ------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 - - 40,000
Net borrowings (repayments) of short-term debt,
including capital leases (36,817) 62 - (36,755)
Dividends paid (41,135) - - (41,135)
Borrowings/(repayments) intercompany loans 19,253 (19,253) - -
-------- --------- ------ ---------
Net cash used in financing activities (18,699) (19,191) - (37,890)
-------- --------- ------ ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS - (20,035) 1,175 (18,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD - 29,950 884 30,834
-------- --------- ------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 9,915 $2,059 $ 11,974
======== ========= ====== =========
24
16. CONTINGENCIES AND REGULATORY MATTERS
The Company is a defendant in various legal matters arising in
the ordinary course of business. Management, after consultation with
legal counsel, believes at this time that the resolution of these
matters will not have a material adverse effect on the Company's
financial position and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Regulatory Matters" for more information regarding legal
and regulatory matters, including a regulatory dispute regarding
intra-island access fees charged to long distance carriers.
In connection with the privatization of the Company, the PRTA
agreed to indemnify, defend and hold the Company harmless from
specified litigation in excess of $50 million in the aggregate,
including one environmental matter.
The Company is regulated by the FCC for inter-state wireline
services and by the Puerto Rico Telecommunications Board ("TRB") for
intra-state wireline services.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Form 10-Q, we have made forward-looking statements. These
statements are based on Company estimates and assumptions and are subject to
certain risks and uncertainties. Forward-looking statements include information
concerning possible or assumed future results of operations, as well as those
statements preceded or followed by the words "anticipates," "believes,"
"estimates," "expects," "hopes," "targets" or similar expressions.
Future results could be affected by subsequent events and could differ
materially from those expressed in the forward-looking statements. If future
events and actual performance differ from the Company's assumptions, the actual
results could vary significantly from the performance projected in the
forward-looking statements.
The following important factors could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in Puerto Rico; (2) material changes in available technology; (3)
the final resolution of regulatory initiatives and proceedings, including
arbitration proceedings pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; (4) changes in our accounting assumptions that may be
required by regulatory agencies, including the SEC, or that result from changes
in the accounting rules or their application, which could result in an impact
on earnings; and (5) the extent, timing, success and overall effects of
competition from others in the Puerto Rico telecommunications service industry.
CRITICAL ACCOUNTING POLICIES
GENERAL
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's unaudited condensed
consolidated financial statements, which have been prepared pursuant to rules
and regulations of the SEC. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations.
The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported interim amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to bad debts, income taxes, goodwill and
intangible asset impairment, and contingencies and litigation. The Company's
management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Because of uncertainties inherent in the estimation
process, management's estimate of losses and the related allowance may change.
The Company is not dependent on any single customer.
26
DEFERRED TAXES
The Company uses an asset and liability approach in accounting for
income taxes following the provisions of SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are established for temporary
differences between the way certain income and expense items are reported for
financial reporting and tax purposes. Deferred tax assets and liabilities are
adjusted to the extent necessary to reflect tax rates expected to be in effect
when temporary differences reverse.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that it believes is more likely than not to be realized.
While the Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination were made. Likewise, should the Company determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
As discussed in Note 1 to the condensed consolidated financial
statements, the Company executed a reorganization plan, which became effective
May 1, 2002, whereby Verizon Wireless merged into PRTC. As a result of this
merger, the Company released a deferred tax valuation allowance, related to the
Acquisition, of $93 million, of which $51 million was recorded against goodwill
and $42 million was recorded as a deferred tax benefit in the Company's
consolidated statement of income during the second quarter of 2002 in
accordance with SFAS No. 109. Management believes that sufficient book and tax
income will be generated by the merged company to realize the benefits of these
tax assets.
GOODWILL AND INTANGIBLE IMPAIRMENT
In assessing the recoverability of the Company's goodwill and other
intangible assets, the Company must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets not
previously recorded. Effective January 1, 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets," and has evaluated, on a reporting
unit basis, its goodwill and other indefinite life intangibles for impairment.
See Note 3 to the condensed consolidated financial statements for further
details.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment is stated at original cost, including
interest on funds borrowed to finance the acquisition of capital additions.
Repairs and maintenance are expensed as incurred. Depreciable property disposed
of in the ordinary course of business, together with the cost of removal, less
salvage value, is charged to accumulated depreciation with no gain or loss
recognized. Gains or losses from the sale of land are recorded in results of
operations.
The Company's depreciation expense is based on the composite group
remaining life method and straight-line composite rates. This method provides
for the recognition of the cost of the remaining net investment in telephone
plant, less anticipated net salvage value, over the remaining asset lives. This
method also requires a periodic evaluation of the average remaining useful
lives related to the expected recoverability of the carrying value of assets
based on changes in technology, environmental factors, the federal and local
regulatory environment, and other competitive forces. Effective on July 1,
2002, the Company changed its accounting estimates relating to depreciation.
Refer to Note 4 to the condensed consolidated financial statements for further
details.
27
RESULTS OF OPERATIONS
We have two reportable segments, Wireline and Wireless. See Note 14 to
the condensed consolidated financial statements for additional information on
our segments. Reclassifications of prior years' data have been made to conform
to the 2002 presentation.
The Wireline segment consists of:
- - Local services, including basic voice, telephone and telecommunications
equipment rentals, value-added services, high-speed private line
services, Internet access and public phone service;
- - Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private
line services;
- - Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;
- - Directory publishing rights revenues; and
- - Telecommunication equipment sales and billing and collection services
to competing long distance operators in Puerto Rico.
The Wireless segment consists of:
- - Cellular and paging services; and
- - Wireless equipment sales.
28
REVENUES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ --------------- -------------------- ----------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
WIRELINE:
Local $ 145 46% $ 143 41% $ 432 44% $ 426 40%
Long Distance 37 12 47 14 112 12 142 14
Network Access 80 25 84 24 244 25 266 25
Directory and Other 11 3 16 5 47 5 58 6
------- --- ------ --- ------- --- ------ ---
Total Wireline 273 86% 290 84% 835 86% 892 85%
------- --- ------ --- ------- --- ------ ---
WIRELESS:
Postpaid Cellular 37 12 42 12 109 11 115 11
Prepaid Cellular 6 2 6 2 19 2 21 2
------- --- ------ --- ------- --- ------ ---
Total Cellular 43 14 48 14 128 13 136 13
Paging 1 -- 3 1 4 -- 13 1
Wireless Equipment 1 -- 4 1 5 1 13 1
------- --- ------ --- ------- --- ------ ---
Total Wireless 45 14% 55 16% 137 14% 162 15%
------- --- ------ --- ------- --- ------ ---
Revenues $ 318 100% $ 345 100% $ 972 100% $1,054 100%
======= === ======= === ======= === ======= ===
EXPENSES AND CHARGES
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
WIRELINE: (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Labor and benefits $ 83 $ 87 $ 256 $ 266
Other operating expenses 80 73 240 214
----- ---- ----- -----
Total Wireline 163 160 496 480
WIRELESS:
Labor and benefits $ 8 $ 8 $ 24 $ 26
Other operating expenses 24 36 74 99
----- ---- ----- -----
Total Wireless 32 44 98 125
OTHER:
Early retirement provision $ -- $ 5 $ -- $ 16
Depreciation and amortization 64 67 197 203
Interest expense, net 11 17 36 47
Equity income from joint venture (1) (1) (2) (2)
Minority interest in consolidated subsidiary -- ---- 1 -----
Income tax expense 17 20 10 69
Net income $ 32 $ 33 $ 136 $ 116
===== ==== ===== =====
OPERATING DATA
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Access Lines in Service (000's):
Residential 959 968 959 968
Business 308 308 308 308
----- ----- ----- ------
Total 1,267 1,276 1,267 1,276
Cellular Customers (000's):
Postpaid 219 197 219 197
Prepaid 120 95 120 95
----- ----- ----- ------
Total 339 292 339 292
Postpaid Cellular Average Revenue per Unit (ARPU) $ 52 $ 64 $ 53 $ 61
Prepaid Cellular ARPU 18 16 19 21
Combined Cellular ARPU 40 47 41 46
Paging Customers (000's) 20 61 20 61
29
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues for the quarter ended September 30, 2002 decreased
$27 million, or 8%, to $318 million from $345 million for the same 2001 period.
WIRELINE:
Wireline revenues include local service, network access, long
distance, directory revenues and other services. Wireline revenues for the
quarter ended September 30, 2002 decreased $17 million, or 6%, to $273 million
from $290 million for the same 2001 period.
Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service
revenues for the quarter ended September 30, 2002 increased $2 million to $145
million from $143 million for the same 2001 period. The increase was mainly due
to higher local voice services of $1 million and higher local data services of
$1 million.
Long distance revenues include direct dial on-island and
off-island, operator-assisted calls, prepaid calling cards and on-island
private line revenues. Long distance revenues decreased $10 million, or 21%, to
$37 million for the quarter ended September 30, 2002 from $47 million for the
same 2001 period. The decrease was due to a decrease in intra-island long
distance revenues of $8 million, a decrease in long distance private lines of
$1 million and a decrease in operator services of $1 million. Long distance
revenues have decreased mainly due to long distance calls being included in
cellular calling plans.
Network access revenues include services provided to long
distance carriers, competitive local exchange carriers, and cellular and paging
operators to originate and terminate calls on our network. These revenues for
the quarter ended September 30, 2002 decreased $4 million, or 5%, to $80
million compared to $84 million for the same 2001 period. The decrease was
caused by a reduction in interstate high cost fund subsidies, reflecting a
phasing out of this subsidy (see "Regulatory Matters-Interstate High Cost
Subsidy").
Directory and other revenues include directory publishing
rights, telecommunications equipment sales and billing and collection services
to competitor long distance operators. Directory and other revenues decreased
$5 million, or 31%, to $11 million for the quarter ended September 30, 2002
from $16 million for the same 2001 quarter. This decrease was mainly due to
lower equipment sales.
WIRELESS:
Revenues from cellular and paging services and related
equipment sales for the three months ended September 30, 2002 decreased $10
million, or 18%, to $45 million from $55 million for the comparable 2001
period. Cellular service revenues decreased $5 million, or 10%. This was
primarily the result of postpaid cellular ARPU declining from $64 to $52 as new
price plans involving large bundles of minutes were introduced into the market,
which was partially offset by customer growth.
Paging revenues declined $2 million, or 67%, to $1 million
for the quarter ended September 30, 2002 from $3 million for the comparable
2001 period. The decrease was related to a reduction of approximately 41,000
customers.
Wireless equipment sales decreased $3 million, or 75%, to $1
million for the quarter ended September 30, 2002 from $4 million for the
comparable 2001 period. This decrease is mainly due to lower prepaid gross
additions associated with lower promotional activities during the 2002 quarter.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
quarter ended September 30, 2002 decreased $9 million, or 4%, to $195 million
from $204 million reported for the comparable 2001 period.
WIRELINE:
Wireline expenses for the quarter ended September 30, 2002
increased $3 million, or 2%, to $163 million from the $160 million reported for
the quarter ended September 30, 2001.
30
Labor and benefit expenses decreased $4 million, or 5%, to
$83 million from $87 million reported for the quarter ended September 30, 2001.
This decrease in labor and benefit expenses primarily reflects the effect of
early retirement and voluntary separation programs, as well as a reduction in
overtime expense.
Other operating expenses of $80 million for the quarter ended
September 30, 2002, increased $7 million, or 10%, compared to the same 2001
period. The increase is primarily due to higher operating tax provisions of $4
million and higher regulatory fees of $2 million.
WIRELESS:
Wireless expenses for the quarter ended September 30, 2002,
decreased $12 million, or 27%, to $32 million from the $44 million reported for
the quarter ended September 30, 2001.
Labor and benefit expenses for the quarter ended September
30, 2002 of $8 million remained constant as compared to the quarter ended
September 30, 2001.
Other operating expenses decreased $12 million, or 33%, to
$24 million from the $36 million reported for the comparable 2001 period. The
decrease was mainly due to lower costs from equipment sales of $6 million and a
decrease in bad debt provisions of $8 million. This decrease was partially
offset by higher operating tax provisions of $1 million and higher facilities
expense of $1 million associated with the new CDMA network.
EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. An
early retirement program was offered to eligible disabled employees during the
third quarter of 2001. As a result of this early retirement program, a $5
million provision was recorded based on 29 employee acceptances. No early
retirement or voluntary separation programs were offered to employees during
the third quarter of 2002.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense of $64 million for the quarter ended September 30, 2002
was $3 million lower than for the same 2001 period, a decrease of 4%. The
decrease in depreciation and amortization expense is mainly due to a change in
depreciation rates, which became effective July 1, 2002, reducing depreciation
expense by $3 million and the discontinued amortization of goodwill and other
indefinite life intangibles, as a result of the adoption of SFAS No. 142, which
reduced amortization expense by $4 million for the quarter ended September 30,
2002. This decrease of $7 million was offset by higher gross plant balances,
which resulted in $4 million in depreciation expense.
INTEREST EXPENSE. Interest expense of $11 million for the
quarter ended September 30, 2002 was $6 million, or 35%, lower than for the
comparable period in 2001 due to lower interest rates and lower debt
outstanding.
EQUITY INCOME FROM JOINT VENTURE. Earnings of $1 million were
generated for the three months ended September 30, 2002 from our approximate
25% interest in VISI, the largest yellow page publishing company in Puerto Rico.
INCOME TAXES. A $17 million tax provision for the quarter
ended September 30, 2002 reflects a 34% effective tax rate. The difference
between the effective and the statutory tax rate of 39%, or $2 million,
primarily reflects permanent differences related to interest accretion on the
Government subscription receivable, which is a capital contribution, and joint
venture equity income.
31
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues for the nine months ended September 30, 2002
decreased $82 million, or 8%, to $972 million from $1,054 million for the same
2001 period.
WIRELINE:
Wireline revenues include local service, network access, long
distance, directory revenues and other services. Wireline revenues for the nine
months ended September 30, 2002 decreased $57 million, or 6%, to $835 million
from $892 million for the same 2001 period.
Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service
revenues for the nine months ended September 30, 2002 increased $6 million, or
1%, to $432 million from $426 million in the comparable 2001 period. The
increase is due to higher local data services while local voice services
remained constant.
Long distance revenues include direct dial on-island and
off-island, operator-assisted calls, prepaid calling cards and on-island
private line revenues. Long distance revenues decreased $30 million, or 21%, to
$112 million for the nine months ended September 30, 2002 from $142 million for
the same 2001 period. The decrease was mainly due to a decrease in intra-island
long distance revenues of $21 million, a decrease in operator service revenues
of $5 million and a decrease in off-island long distance revenues of $3
million. Long distance revenues have decreased mainly due to long distance
calls being included in cellular calling plans.
Network access revenues include services provided to long
distance carriers, competitive local exchange carriers, and cellular and paging
operators to originate and terminate calls on our network. These revenues for
the nine months ended September 30, 2002 decreased $22 million, or 8%, to $244
million compared to $266 million for the same 2001 period. The decrease was
primarily caused by a decrease in interstate high cost fund subsidies of $23
million, reflecting a phasing out of this subsidy (see "Regulatory
Matters-Interstate High Cost Subsidy").
Directory and other revenues include directory publishing
rights, telecommunication equipment sales and billing and collection services
to competitor long distance operators. Directory and other revenues for the
nine months ended September 30, 2002 decreased $11 million, or 19%, to $47
million from $58 million for the nine months ended September 30, 2001, mainly
due to a decrease in equipment sales of $8 million and lower billing and
collection service revenues of $3 million, reflecting lower long distance
traffic from competitors.
WIRELESS:
Revenues from cellular and paging services and related
equipment sales for the nine months ended September 30, 2002 decreased $25
million, or 15%, to $137 million from $162 million for the comparable 2001
period. Cellular service revenues decreased $8 million, or 6%. This was
primarily the result of postpaid cellular ARPU declining from $61 to $53 as new
price plans with large bundles of minutes were introduced into the market,
which was partially offset by customer growth.
Paging revenues declined $9 million, or 69%, to $4 million
for the nine months ended September 30, 2002 from $13 million for the
comparable 2001 period. The decrease was related to a reduction of 41,000
customers.
Wireless equipment sales decreased $8 million, or 62%, to $5
million for the nine months ended September 30, 2002 from $13 million for the
comparable 2001 period. This decrease is mainly due to lower prepaid gross
additions associated with lower promotional activities during the nine months
period ended September 30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
nine months ended September 30, 2002 decreased $11 million, or 2%, to $594
million from $605 million reported for the first nine months in 2001.
WIRELINE:
Wireline expenses for the nine months ended September 30,
2002 increased $16 million, or 3%, to $496 million from the $480 million
reported for the nine months ended September 30, 2001.
32
Labor and benefit expenses decreased $10 million, or 4%, to
$256 million from $266 million reported for the nine months ended September 30,
2001. This decrease in labor and benefit expense primarily reflects the effect
of early retirements and voluntary separation programs as well as a reduction
in overtime and contractors expenses.
Other operating expenses of $240 million for the nine months
ended September 30, 2002, increased $26 million, or 12%, compared to the same
2001 period. The increase is primarily due to higher operating tax provisions
of $16 million, the absence of a $5 million gain from the sale of a 33%
interest in Coqui.net in 2001 and higher interconnection charges of $5 million.
WIRELESS:
Wireless expenses for the nine months ended September 30,
2002, decreased $27 million, or 22%, to $98 million from the $125 million
reported for the nine months ended September 30, 2001.
Labor and benefit expenses decreased $2 million, or 8%, from
the $26 million reported for the nine months ended 2001. The decrease in labor
and benefits expenses is mainly due to lower overtime, expatriate and temporary
employee expenses.
Other operating expenses decreased $25 million, or 25%, to
$74 million from the $99 million reported for the comparable 2001 period. The
decrease was due to lower costs from equipment sales of $20 million, lower bad
debt provisions of $4 million and a $3 million gain on the sale of assets.
These decreases were offset by increases in operating tax provisions of $1
million and higher facilities expense of $2 million associated with the new
CDMA network.
EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. An
early retirement program was offered to management employees in December 2000.
Those choosing to retire received a credit for three years additional service,
five years of additional age, and were immediately eligible for retiree medical
benefits. A $4 million non-cash provision was recorded in the first quarter of
2001 based on 13 employee acceptances during this period.
During the first quarter of 2001, a combined early retirement
and voluntary separation program was offered to approximately 200 non-union
employees. Those eligible to retire received a credit for three years
additional service and three years of additional age, a separation bonus based
on years of service, which averaged eight months of salary, and were
immediately eligible for retiree medical benefits. Those not eligible to retire
received the separation bonus. A $7 million provision was recorded in the
second quarter of 2001 based on 19 early retirement and 52 voluntary
acceptances.
In addition, an early retirement program was offered to
eligible disabled employees during the third quarter of 2001. As a result of
this early retirement program, a $5 million provision was recorded during the
third quarter of 2001 based on 29 employee acceptances during this period.
A total provision of $16 million has been recorded related to
early retirement and voluntary separation programs for the nine months ended
September 30, 2001 involving 113 employees. No early retirement or voluntary
separation programs have been offered to employees during 2002.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense of $197 million for the nine months ended September 30,
2002 was $6 million lower than for the same 2001 period, a decrease of 3%. The
decrease in depreciation and amortization expense is mainly due to a change in
depreciation rates, which became effective July 1, 2002, reducing depreciation
expense by $3 million and the discontinued amortization of goodwill and other
indefinite life intangibles, as a result of the adoption of SFAS No. 142, which
reduced amortization expense by $12 million for the nine month period ended
September 30, 2002. This decrease of $15 million was offset by higher gross
plant balances, which produced $9 million in depreciation expense.
INTEREST EXPENSE. Interest expense of $36 million for the
nine months ended September 30, 2002 was $11 million lower than for the
comparable period in 2001 due to lower interest rates and lower debt
outstanding.
EQUITY INCOME FROM JOINT VENTURE. Earnings of $2 million were
generated for the nine months ended September 30, 2002 from our approximate 25%
interest in VISI.
33
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $1 million
minority interest included in the Company's results of operations for the nine
months ended September 30, 2002 represents the minority share, of the income or
loss of Popular's, Inc. 33% investment in Coqui.net.
INCOME TAXES. A $10 million tax provision for the nine months
ended September 30, 2002 reflects the tax effect of the merger of Verizon
Wireless into PRTC (See Note 1 to the condensed consolidated financial
statements). As a result of this merger, the Company released a deferred tax
valuation allowance of $93 million, of which $51 million was recorded against
goodwill and $42 million of which was recorded as a deferred tax benefit during
the second quarter of 2002. This tax benefit was offset in part by a tax
provision that reflects a 36% effective tax rate. The difference between the
effective and the statutory tax rate of 39%, or $5 million, primarily reflects
permanent differences related to interest accretion on the Government
subscription receivable, which is a capital contribution, and joint venture
equity income.
34
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2002 2001 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)
Cash provided by (used in):
Operations $ 250 $ 117 $ 133
Investing (134) (98) (36)
Financing (127) (38) (89)
OVERALL LIQUIDITY ASSESSMENT
We believe that cash from operations is sufficient to meet working
capital needs. While current liabilities exceeded current assets at September
30, 2002 by $60 million, we believe our sources of funds, from operations and
from readily available external financing arrangements, are sufficient to meet
ongoing operating, financing and investing requirements. We expect that
presently foreseeable capital requirements will continue to be financed through
internally generated funds.
Additionally, we have an undrawn $500 million revolving credit
facility maturing in March 2004 as well as a $90 million undrawn working
capital credit facility maturing in June 2003.
OPERATIONS
The increase in cash from operations of $133 million for the nine
months ended September 30, 2002, as compared to the same period in 2001, was
primarily due to lower payments of management fees and royalties of $78
million, a decrease in pension contributions of $53 million and a decrease in
income taxes of $26 million. This increase in cash from operations was
partially offset by higher disbursements including voluntary separation
payments of $14 million, made in first quarter 2002, and an increase in
operating tax payments of $5 million.
INVESTING
Net cash used in investing activities for the quarter ended September
30, 2002 was $134 million compared to $98 million for the same 2001 period. The
increase in cash used in investing activities of $36 million is mainly due to
an increase in capital expenditures and removal costs of $18 million and the
absence of the $16 million proceeds from the sale of 33% interest in Coqui.net
to Popular Inc. recorded in the second quarter of 2001.
The capital expenditure program, including removal costs, for the nine
months ended September 30, 2002 amounted to $136 million, which was financed
from internally generated funds. We have invested approximately $825 million
from the date of the Acquisition through September 30, 2002 to expand and
enhance our networks.
FINANCING
Debt decreased $104 million for the nine months ended September 30,
2002. During this period, the Company refinanced $300 million of senior notes,
which matured on May 15, 2002, with the combination of commercial paper and
term credit agreements. The term credit agreements were executed with four
different banks. The aggregate amount of the term loans is $225 million, they
have maturities ranging from two to three years, and they bear interest at 70
to 100 basis points over LIBOR.
35
The shareholders' agreement requires the payment of dividends equal to
at least 50% of net income, payable quarterly to the extent funds are legally
available therefor. The Company paid dividends of approximately $53 million for
the nine-month period ended September 30, 2002. The senior note indentures and
credit facility agreements do not contain restrictions on the payment of
dividends.
In the Acquisition, the PRTA agreed to contribute cash or stock worth
a total of $200 million as a capital contribution in five even $40 million
installments over five years beginning on March 2, 2000 to fund its underfunded
pension and other post-employment benefit obligations. In March 2002, $40
million was received in cash from the PRTA for the third installment. See Note
12 to the condensed consolidated financial statements.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
CONTRACTUAL OBLIGATIONS &
OTHER COMMERCIAL COMMITMENTS: PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
2007-
(Dollars in Millions) Total 2002 2003-2004 2005-2006 Thereafter
----- ---- --------- --------- ----------
Long Term Debt $ 711 $ -- $ -- $ 411 $ 300
Term Credit Facilities 225 -- 100 125 --
Pension Benefit Obligations (1) 444 -- 153 211 80
Commercial Paper 155 155 -- -- --
Operating Leases 49 3 18 13 15
Capital Lease Obligations 1 -- 1 -- --
----------- ---------- ----------- ----------- -----------
Total $ 1,585 $ 158 $ 272 $ 760 $ 395
=========== ========== =========== =========== ===========
(1) Pension obligations represent contributions based on ERISA minimum rules.
36
REGULATORY MATTERS
INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE
On February 28, 2002, the TRB issued a Resolution and Order (the
"February 2002 Order") with respect to the reconsideration requested by the
Company of the TRB October 10, 2001 order to reduce the access rates the
Company charges to long distance carriers to originate and terminate
intra-island long distance calls through the Company's network.
The February 2002 Order requires new rates for intra-island access to
be implemented through phased rate reductions over four years and directs PRTC
to make a cash refund to end-user customers. The prospective access rate
reductions (on a two-way basis) were ordered to take place on April 1st of each
year as follows:
April 2002: From 9.3 cents per minute to 7.9 cents per minute
April 2003: From 7.9 cents per minute to 6.5 cents per minute
April 2004: From 6.5 cents per minute to 5.0 cents per minute
April 2005: From 5.0 cents per minute to 2.1 cents per minute
The February 2002 Order also requires PRTC to pay a $68 million refund
to end-user customers. The TRB calculated this amount based on the difference
between the 9.3 cents and 7.9 cents rate for TRB estimated traffic from the
period April 1, 2000 through March 31, 2002. The refund can be made in 12
quarterly, equal installments starting April 1, 2002.
The Company filed with the Puerto Rico Circuit Court of Appeals
("Court") an appeal of the February 2002 Order in which the Company alleges the
TRB made errors of law and procedure in its determination of access charges and
its order to make the cash refund. The Court stayed the refund and the rate
reduction on March 27, 2002 and is currently hearing the appeal.
On April 2, 2002, AT&T, Sprint and Telefonica Larga Distancia
("Carriers") filed a petition with the Court for review of the February 2002
Order, requesting the Court to order the rate reduction without a phase-in
period, remand the case back to the TRB and direct the TRB to calculate the
refund from and after April 1997 instead of April 2000, with the Carriers
receiving the refund instead of the end-user customers.
At present, the stay of the TRB's February 2002 Order is in effect. At
this preliminary stage it is too early to assess the probability of success in
the appeals process. The Company believes the Carriers' petition for review is
without merit.
PUBLIC TELEPHONE SERVICE PROVIDER - ANTI COMPETITIVE ACTIONS
Telefonos Publicos de Puerto Rico, Inc. ("TPPR") the largest
competitive provider of public pay phones in Puerto Rico filed a suit in the
United States District Court of Puerto Rico on November 8, 2001, claiming
predatory, exclusionary and anticompetitive acts and seeking damages of $75
million. We have filed a motion to dismiss the case and are awaiting a decision
of the court.
Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three additional competitive providers also
filed a similar suit in the United States District Court of Puerto Rico on
September 4, 2002 on the same grounds. PRT filed a 45-day extension request on
September 24, 2002 to present its response.
On August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico
("Phoenix") filed a suit in the Delaware bankruptcy court claiming anti
competitive acts and seeking $20 million in damages. On September 18, 2002, PRT
filed a motion to dismiss based on lack of summons and lack of jurisdiction and
failure to list the claims as assets on the debtor's bankruptcy schedules.
The Company's management believes all of these claims are without
merit.
TOUCHTONE AND MEASURED SERVICE UNIT CHARGES
On July 2, 2002, three residential telephone service subscribers and
one business service subscriber filed a class action suit with the Superior
Court of Puerto Rico (the "Superior Court") under the Puerto Rico
Telecommunications Act of 1996 ("Act").
37
The plaintiffs claim that the Company's charges for touchtone service are not
based on cost, and are therefore in violation of the Act. On July 16, 2002, one
residential telephone service subscriber and three business service subscribers
filed a class action with the same Superior Court under the Act. The plaintiffs
claim that the Company's unit charges for local measured service are not based
on cost, and are therefore in violation of the Act.
The plaintiffs requested that the Superior Court (i) issue an order
certifying the case as a class action, (ii) designate the plaintiffs as
representatives of the class, (iii) find that the charges are illegal, (iv)
establish a maximum charge based on cost, and (v) order the Company to
reimburse every subscriber for excess payments made since September 1996. At
this preliminary stage of the process, management and the Company's legal
counsel are evaluating the case.
The Company believes the suit does not meet the requirements of a
class action suit but must enter into a discovery process, including the taking
of depositions to establish this. On September 19, 2002, PRT filed a motion
requesting discovery with respect to the class certification.
INTERSTATE HIGH COST SUBSIDY
On October 21, 1999, the FCC adopted a new high cost support
mechanism, which has resulted in the phase out of the Company's High Cost
Subsidy revenues. These revenues were $48 million in 2000, $33 million in 2001
and are expected to be approximately $3 million for 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 to the condensed consolidated financial statements in Item 1
(Part 1) of this Form 10-Q for disclosure on recent accounting pronouncements.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We are exposed to market risk in the normal course of business,
resulting primarily from interest rate changes on our senior notes and interest
rate swap agreements.
The following table summarizes the fair value of our senior notes and
interest rate swap at September 30, 2002 and December 31, 2001 and provides a
sensitivity analysis of the fair values of these instruments assuming a 100
basis point increase or decrease in the yield curve. The sensitivity analysis
does not include the fair values of our floating-rate debt since it is not
significantly affected by changes in market interest rates.
FAIR VALUE
AT 100 BASIS POINTS
-------------------
BOOK VALUE FAIR VALUE INCREASE DECREASE
---------- ---------- -------- --------
(In thousands)
September 30, 2002:
Senior notes $ 699,792 $ 692,760 $ 665,412 $ 721,609
Interest rate swap -- -- -- --
------------ ------------ ------------ ------------
Total $ 699,792 $ 692,760 $ 665,412 $ 721,609
============ ============ ============ ============
December 31, 2001:
Senior notes $ 999,757 $ 1,001,874 $ 969,805 $ 1,035,800
Interest rate swap 1,147 1,147 4,081 6,635
------------ ------------ ------------ ------------
Total $ 1,000,904 $ 1,003,021 $ 973,886 $ 1,042,435
============ ============ ============ ============
39
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934), as of a date within 90 days of the filing date of this quarterly report
(Evaluation Date), that ensure that material information relating to the
Company which is required to be disclosed in this report is recorded,
processed, summarized and reported, within required time periods. They have
concluded that as of the Evaluation Date, the registrant's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them by others within those entities, particularly during the period in
which this quarterly report was being prepared.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent
to the Evaluation Date, nor were there any significant deficiencies or material
weaknesses in these controls requiring corrective actions. As a result, no
corrective actions were taken.
40
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in various legal matters arising in the ordinary
course of business. We, after consultation with legal counsel, believe at this
time that the resolution of these matters will not have a material adverse
effect on the Company's financial position and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Regulatory Matters" for more information regarding legal and
regulatory matters, including a regulatory dispute regarding intra-island
access fees charged to long distance carriers.
In connection with the privatization of the Company, the PRTA agreed
to indemnify, defend and hold the Company harmless from specified litigation in
excess of $50 million in the aggregate, including one environmental matter.
We are regulated by the FCC for inter-state wireline services and by
the TRB for intra-state wireline services.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-K.
10) Material Contracts
.28) $75 million three-year term credit agreement between
Telecomunicaciones de Puerto Rico, Inc., as borrower, Puerto
Rico Telephone Company, Inc., as guarantor, and The Bank of
Nova Scotia, as lender and administrative agent.
See Exhibit Index.
b) No reports on Form 8-K were filed during the third quarter of
2002.
41
SIGNATURES
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.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By: /s/ JON E. SLATER
-------------------------------------
Name: Jon E. Slater
Title: Chief Executive Officer
Date: November 14, 2002
By: /s/ WILLARD J. REAGAN
-------------------------------------
Name: Willard J. Reagan
Title: Chief Financial Officer
Date: November 14, 2002
By: /s/ ROBERT P. HUBERTY
-------------------------------------
Name: Robert P. Huberty
Title: Chief Accounting Officer
Date: November 14, 2002
42
CEO CERTIFICATION
I, Jon E. Slater, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Telecomunicaciones de Puerto Rico, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date November 14, 2002
---------------------------
/s/ JON E. SLATER
---------------------------
Jon E. Slater
Chief Executive Officer
(Principal Executive Officer)
43
CFO CERTIFICATION
I, Willard J. Reagan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Telecomunicaciones de Puerto Rico, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date November 14, 2002
-----------------------------
/s/ WILLARD J. REAGAN
-----------------------------
Willard J. Reagan
Chief Financial Officer
(Principal Financial Officer)
44
CERTIFICATION REQUIRED BY 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002), the undersigned hereby certify that this
Quarterly Report on Form 10-Q fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in this quarterly report fairly presents, in all material respects,
the financial condition and results of operations of the registrant.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By: /s/ JON E. SLATER
--------------------------------
Name: Jon E. Slater
Title: Chief Executive Officer
Date: November 14, 2002
By: /s/ WILLARD J. REAGAN
--------------------------------
Name: Willard J. Reagan
Title: Chief Financial Officer
Date: November 14, 2002
45
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).
3.2 Certificate of Amendment to the Certificate of Incorporation of
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the year ended December 31, 1999 (File 333-85503)).
3.3 By-Laws of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.4 of the Company's Registration Statement
filed on Form S-4 (File 333-85503)).
4.1 Trust Indenture dated as of May 20, 1999 between Telecomunicaciones
de Puerto Rico, Inc. and The Bank of New York. (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
filed on Form S-4 (File 333-85503)).
10.1 Shareholders Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., Puerto Rico Telephone Authority and the
shareholders of Telecomunicaciones de Puerto Rico, Inc., who
shall from time to time be parties thereto as provided
therein. (Incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).
10.2 Amended and Restated Puerto Rico Management Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement filed on Form
S-4 (File 333-85503)).
10.3 Amended and Restated U.S. Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement filed on Form
S-4 (File 333-85503)).
10.4 Amended and Restated Technology Transfer Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement filed on Form
S-4 (File 333-85503)).
10.5 Non-Competition Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc, GTE Holdings (Puerto Rico)
LLC, GTE International Telecommunications Incorporated, Popular,
Inc., Puerto Rico Telephone Authority, and the Government
Development Bank for Puerto Rico. (Incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement filed on Form
S-4 (File 333-85503)).
10.6 Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of
March 2, 1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference
to Exhibit 10.12 of the Company's Registration Statement filed on
Form S-4 (File 333-85503)).
10.7 ESOP Loan Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.13 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).
10.8 Pledge Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.15 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).
10.9 Tag Along Agreement, dated as of March 2, 1999, by and among GTE
Holdings (Puerto Rico) LLC, GTE International Telecommunications
Incorporated, and the Trust of the Employee Stock Ownership Plan
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.16 of the Company's Registration Statement
filed on Form S-4 (File 333-85503)).
10.10 $500,000,000 Five-Year Credit Agreement, dated as of March 2, 1999,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company and Celulares Telefonica, as Guarantors,
the Initial Lenders named therein, Citibank, N.A., as
Administrative Agent, Bank of America National Trust and Savings
Association, as Syndication Agent, and The Chase Manhattan Bank
and Morgan Guaranty Trust Company of New York, as Documentation
Agents. (Incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).
10.11 Letter Amendment to the Five-Year Credit Agreement, dated May 7,
1999. (Incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).
10.12 Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2000 until
January 17, 2003. Approved on October 6, 2000. (Incorporated
by reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).
10.13 Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Brotherhood of Telephone Company
Employees effective from October 23, 1999 until October 22, 2003.
Approved on October 20, 2000. (Incorporated by reference to
Exhibit 10.24 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (File 333-85503)).
10.14 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Merrill Lynch Money Markets Inc., as Dealer for
notes with maturities up to 240 days; Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Dealer for notes with maturities
over 270 days up to 365 days. Concerning notes to be issued
pursuant to an Issuing and Paying Agency Agreement dated as of
November 9, 2000 between the Issuer and The Chase Manhattan Bank,
as Issuing and Paying Agent. (Incorporated by reference to Exhibit
10.25 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File 333-85503)).
10.15 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Salomon Smith Barney Inc., as Dealer. Concerning
notes to be issued pursuant to an Issuing and Paying Agency
Agreement dated as of November 9, 2000 between the Issuer and The
Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.26 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File 333-85503)).
10.16 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Banc of America Securities LLC. Concerning notes
to be issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.27 of the Company's Annual Report on Form
10-K for the year ended December 31, 2000 (File 333-85503)).
10.17 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Popular Securities, Inc., as Dealer for notes with
maturities up to 365 days. Concerning notes to be issued pursuant
to an Issuing and Paying Agency Agreement dated as of November 9,
2000 between the Issuer and The Chase Manhattan Bank, as Issuing
and Paying Agent. (Incorporated by reference to Exhibit 10.28 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).
10.18 Issuing and Paying Agency Agreement dated as of November 9, 2000,
by and among Telecomunicaciones de Puerto Rico, Inc., as Issuer,
Puerto Rico Telephone Company and Celulares Telefonica, Inc., as
Guarantors, and The Chase Manhattan Bank, as Issuing and Paying
Agent. (Incorporated by reference to Exhibit 10.29 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2000 (File 333-85503)).
10.19 Letter Amendment, to the March 2, 1999 Shareholders Agreement,
dated as of May 25, 2001, by and among Telecomunicaciones de
Puerto Rico, Inc., GTE Holdings (Puerto Rico) LLC, GTE
International Telecommunications Incorporated, Popular, Inc., and
the Puerto Rico Telephone Authority. (Incorporated by reference
to Exhibit 10.25 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001 (File 333-85503)).
10.20 Third Letter Amendment, dated August 3, 2001, to the Five-Year
Credit Agreement with Citibank, N.A., dated as of March 2, 1999,
as amended by the Letter Amendment to Five-Year Credit Agreement
dated as of May 7, 1999 and as further amended by the second
Letter Amendment to Five-Year Credit Agreement dated as of
February 15, 2001. (Incorporated by reference to Exhibit 10.26 of
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2001 (File 333-85503)).
10.21 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counter party,
Puerto Rico Telephone Company and Celulares Telefonica, Inc., as
Guarantors, and Bank of America, N.A., as the Bank. (Incorporated
by reference to Exhibit 10.27 of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2001 (File
333-85503)).
10.22 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counter party,
Puerto Rico Telephone Company and Celulares Telefonica, Inc., as
Guarantors, and Citibank, N.A., as the Bank. (Incorporated by
reference to Exhibit 10.28 of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2001 (File
333-85503)).
10.23 Plan of Reorganization and Agreement of Merger, dated as of May 1,
2002, between Puerto Rico Telephone Company, Inc. and Verizon
Wireless Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.25 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).
10.24 $90,000,000 working capital revolving credit agreement dated as of
May 16, 2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, and
Banco Popular de Puerto Rico, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.26 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002
(File 333-85503)).
10.25 $50,000,000 2-Year term credit agreement dated as of May 16, 2002,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, and Banco Bilbao
Vizcaya Argentaria, S.A., as Lender and Banco Bilbao Vizcaya
Puerto Rico, as Administrative Agent. (Incorporated by reference
to Exhibit 10.27 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2002 (File 333-85503)).
10.26 $50,000,000 2-Year term credit agreement dated as of May 31, 2002,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, and HSBC Bank USA, as
Lender. (Incorporated by reference to Exhibit 10.28 of the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 2002 (File 333-85503)).
10.27 $50,000,000 3-Year term credit agreement dated as of June 24, 2002,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, and Australia and New
Zealand Banking Group Limited, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.29 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002
(File 333-85503)).
10.28 $75,000,000 3-Year term credit agreement dated as of August 19,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and The Bank of
Nova Scotia, as Lender and Administrative Agent.