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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: MARCH 31, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer.
YES [ ] NO [X]
Telecomunicaciones de Puerto Rico, Inc. had 25 million shares of no par common
stock outstanding at May 15, 2003.
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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--March 31, 2003 and December 31, 2002 3
Condensed consolidated statements of operations--Three months ended March 31, 2003
and 2002 4
Condensed consolidated statements of changes in shareholders' equity--Three
months ended March 31, 2003 and year ended December 31, 2002 5
Condensed consolidated statements of cash flows--Three months ended March 31, 2003
and 2002 6
Notes to condensed consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURES 40
CERTIFICATIONS 41
EXHIBIT INDEX 44
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,186 $ 33,667
Accounts receivable, net of allowance for doubtful accounts
of $135,049 and $132,894 in 2003 and 2002, respectively 330,883 343,519
Deferred income tax 23,427 23,502
Inventory and supplies, net 15,786 18,039
Prepaid expenses 17,939 10,876
----------- ------------
Total current assets 411,221 429,603
PROPERTY, PLANT AND EQUIPMENT, net 1,657,690 1,575,334
GOODWILL 126,927 126,927
INTANGIBLES, net 186,445 180,848
DEFERRED INCOME TAX 239,980 285,349
OTHER ASSETS 124,609 119,336
----------- ------------
TOTAL ASSETS $ 2,746,872 $ 2,717,397
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 20,194 $ 97,932
Other current liabilities 301,376 268,034
----------- ------------
Total current liabilities 321,570 365,966
LONG-TERM DEBT, excluding current portion 937,736 937,035
PENSION AND OTHER POST-EMPLOYMENT BENEFITS 540,475 590,157
OTHER NON-CURRENT LIABILITIES 147,365 146,634
----------- ------------
Total liabilities 1,947,146 2,039,792
----------- ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 12,663 12,229
----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 703,270 703,270
Deferred ESOP compensation (27,408) (27,408)
Subscription receivable (37,292) (76,093)
Retained earnings 238,675 155,789
Accumulated other comprehensive loss, net of taxes (90,182) (90,182)
----------- ------------
Total shareholders' equity 787,063 665,376
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,746,872 $ 2,717,397
=========== ============
The accompanying notes are an integral part of these financial statements.
3
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
(UNAUDITED)
REVENUES:
Local services $ 145,038 $ 141,799
Long distance services 32,862 38,792
Access services 81,855 81,098
Cellular services 47,454 42,223
Paging services 611 1,924
Directory services and other 12,672 14,795
---------- ----------
Total revenues 320,492 320,631
---------- ----------
OPERATING COSTS AND EXPENSES:
Labor and benefits 102,897 97,759
Other operating expenses 98,084 106,073
Voluntary separation provision 1,443 --
Depreciation and amortization 60,503 66,300
---------- ----------
Total operating costs and expenses 262,927 270,132
---------- ----------
OPERATING INCOME 57,565 50,499
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (10,183) (14,121)
Equity income from joint venture 786 576
Minority interest in consolidated subsidiary (433) (365)
---------- ----------
Total other expense, net (9,830) (13,910)
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 47,735 36,589
INCOME TAX EXPENSE 18,143 13,585
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 29,592 23,004
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of taxes of $45,445 71,082 --
---------- ----------
NET INCOME $ 100,674 $ 23,004
========== ==========
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 OTHER
COMMON ESOP SUBSCRIPTION RETAINED COMPREHENSIVE
STOCK COMPENSATION RECEIVABLE EARNINGS LOSS TOTAL
--------- ------------ ------------ ---------- ------------- ----------
BALANCE, DECEMBER 31, 2001 $ 701,952 $ (28,793) $ (109,959) $ 53,592 $ (78,477) $ 538,315
Dividends paid -- -- -- (68,836) -- (68,836)
Accretion of discount on
subscription receivable -- -- (6,134) -- -- (6,134)
PRTA capital contribution -- -- 40,000 -- -- 40,000
Release of ESOP shares 1,318 1,385 -- -- -- 2,703
Comprehensive income:
Net income -- -- -- 171,033 -- 171,033
Other comprehensive loss, net of taxes:
Minimum pension liability adjustment -- -- -- -- (11,705) (11,705)
----------
Comprehensive income -- -- -- -- -- 159,328
--------- --------- ------------ ---------- ---------- ----------
BALANCE, DECEMBER 31, 2002 $ 703,270 $ (27,408) $ (76,093) $ 155,789 $ (90,182) $ 665,376
(UNAUDITED)
Dividends declared -- -- -- (17,788) -- (17,788)
Net income, for the three months ended
March 31, 2003 -- -- -- 100,674 -- 100,674
Accretion of discount on
subscription receivable -- -- (1,199) -- -- (1,199)
PRTA capital contribution -- -- 40,000 -- -- 40,000
--------- --------- ------------ ---------- ---------- ----------
BALANCE, MARCH 31, 2003 $ 703,270 $ (27,408) $ (37,292) $ 238,675 $ (90,182) $ 787,063
========= ========= ============ ========== ========== ==========
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 THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTVITIES:
Net income $ 100,674 $ 23,004
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 60,503 66,300
Provision for uncollectible accounts 14,525 16,209
Cumulative effect of accounting change (71,082) --
Deferred income tax -- 7,481
Accretion of discount on subscription receivable (1,199) (1,850)
Equity income from joint venture (786) (576)
Voluntary separation provision 1,443 --
Minority interest in consolidated subsidiary 433 365
Changes in assets and liabilities:
Accounts receivable (1,889) (15,037)
Inventory and supplies 2,253 1,564
Prepaid expenses and other assets (10,247) (8,479)
Other current and non-current liabilities 15,617 8,747
Pension and other post-employment benefits (51,125) (62,080)
--------- ---------
Net cash provided by operating activities 59,120 35,648
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,986) (39,437)
Net salvage on retirements and other 115 345
--------- ---------
Net cash used in investing activities (31,871) (39,092)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 40,000
Net repayments of short-term debt, including capital leases (77,730) (55,131)
Dividends paid -- (1,107)
--------- ---------
Net cash used in financing activities (37,730) (16,238)
--------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (10,481) (19,682)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 33,667 34,797
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,186 $ 15,115
========= =========
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 Puerto Rico, Inc. S. en C. ("VISI"), in which
GTE Holdings (Puerto Rico) LLC, our majority shareholder also 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 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%, PRTA owns 28%,
Popular owns 13% and the Employee Stock Ownership Plan owns 7% of the
outstanding capital stock of the Company. The Company is an affiliate of
Verizon, which 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"), a wholly
owned subsidiary of the Company, 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.
7
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"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and
regulations. Management believes the financial statements include all
adjustments and recurring accruals necessary to fairly present the results
of operations and financial condition for the interim periods shown. The
December 31, 2002 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, 2002.
RECLASSIFICATIONS
Reclassifications of prior periods' data have been made to conform to the
current period's presentation.
3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets"
effective January 1, 2002, which provides guidance on the initial
recognition and measurement of goodwill and other intangible assets
acquired in a business combination.
SFAS No. 142 no longer permits the amortization of goodwill and other
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or, under certain conditions, more frequently) for impairment in
accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company has evaluated its assets using the fair value approach
for each reporting unit, to determine if there is an impairment exposure
(transitional impairment test) and the impact it would have in the
Company's results of operations for 2002. The evaluation of the three
reporting units revealed no impairment exposure.
The Company is currently undergoing its annual evaluation of assets to
determine if there is an impairment exposure and any impact in the Company
results of operations of 2003.
ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement 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 part of the book
value of the long-lived asset. We have determined that PRT does not have a
material legal obligation to remove long-lived assets as described by this
statement. However, we have included estimated removal costs in our group
depreciation models. These costs have increased depreciation expense and
accumulated depreciation for future removal costs for existing assets.
These removal costs are recorded as a reduction to accumulated depreciation
when the assets are retired and removal costs are incurred.
For some assets, such as telephone poles, the removal costs exceed salvage
value. Under the provisions of SFAS No. 143, we are required to exclude
costs of removal from our depreciation rates for assets for which the
removal costs exceed salvage. Accordingly, in connection with the initial
adoption of this standard on January 1, 2003, we have reversed accrued
costs of removal in excess of salvage from our accumulated depreciation
accounts for these assets.
8
The adjustment was recorded as a cumulative effect of an accounting change,
resulting in the recognition of an estimated gain of $116.5 million ($71.1
million after-tax). Effective January 1, 2003, we began expensing costs of
removal in excess of salvage for these assets as incurred. The impact of
this change in accounting resulted in a decrease in depreciation expense
and an increase in operational and support expenses. We estimate the net
increase to operating income in 2003, excluding the cumulative effect
adjustment, will be approximately $12 million ($7 million after-tax).
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 without any 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 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. The Company believes that the
adoption of SFAS No. 146 will not have a material effect on its results of
operations and financial condition.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
REMAINING USEFUL MARCH 31, DECEMBER 31,
LIVES (YRS) 2003 2002
----------- ----------- ------------
CURRENT PREVIOUS (In thousands)
------- --------
Outside plant 8.5 8.9 $ 2,049,254 $ 2,039,412
Central office and transmission equipment 4.1 4.7 1,307,497 1,297,454
Equipment and other 3.2 3.0 358,496 349,832
Buildings 14.3 21.5 317,616 314,345
Land N/A N/A 27,541 27,541
----------- ------------
Gross plant in service 4,060,404 4,028,584
Less: accumulated depreciation 2,501,958 2,568,380
----------- ------------
Net plant in service 1,558,446 1,460,204
Construction in progress 99,244 115,130
----------- ------------
Total $ 1,657,690 $ 1,575,334
=========== ============
9
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 a decrease to depreciation expense by
approximately $6 million for the second half of 2002 and $3 million for
the first quarter of 2003.
5. GOODWILL
Following is a breakdown of goodwill by reporting unit.
CARRYING VALUE
--------------------------
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
(In thousands)
Wireline (PRTC) $ 102,731 $ 102,731
Dial-up Internet (Coqui.net) 24,196 24,196
---------- -----------
Total $ 126,927 $ 126,927
========== ===========
6. INTANGIBLES
Intangibles consist of:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(In thousands)
INDEFINITE LIFE $ 108,975 $ 108,975
DEFINITE LIFE 77,470 71,873
----------- ----------
Total Intangibles $ 186,445 $ 180,848
=========== ==========
CARRYING VALUE
----------------------------
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(In thousands)
INDEFINITE LIFE:
Wireline concession $ 85,120 $ 85,120
FCC Cellular licenses 23,855 23,855
----------- ----------
Total Indefinite Life $ 108,975 $ 108,975
=========== ==========
MARCH 31, 2003 DECEMBER 31, 2002
-------------------------------------- --------------------------------------
(In thousands)
COST ACC. AMORT BOOK VALUE COST ACC. AMORT BOOK VALUE
---- ---------- ---------- ---- ---------- -----------
DEFINITE LIFE:
Wireline trade name $ 48,400 $ 7,900 $ 40,500 $ 48,400 $ 7,417 $ 40,983
Software licenses 53,429 17,045 36,384 45,708 15,525 30,183
Customer base 15,544 14,958 586 15,544 14,837 707
Other 500 500 -- 500 500 --
---------- ---------- ---------- ---------- ---------- -----------
Total Definite Life $ 117,873 $ 40,403 $ 77,470 $ 110,152 $ 38,279 $ 71,873
========== ========== ========== ========== ========== ===========
10
7. OTHER ASSETS
Other assets consist of:
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
(In thousands)
Deferred activation and installation costs $ 68,155 $ 65,351
Notes receivable-equipment sales 14,895 15,396
Deferred pension asset 20,646 20,646
Deferred financing costs, net 3,768 3,970
Other deferred costs 5,766 5,288
Interest rate swap 4,246 2,883
Investment in Verizon Information Services 5,609 4,823
Other assets 1,524 979
----------- ----------
Total $ 124,609 $ 119,336
=========== ==========
8. VOLUNTARY SEPARATION PROGRAMS
The Company offered a voluntary separation program to qualified management
employees during the fourth quarter of 2002 and recorded a $0.5 million
non-cash provision relating to 8 employees accepting. In January 2003, an
additional 29 qualified management employees accepted the voluntary
separation program representing an additional expense of $1.4 million
recorded in the first quarter of 2003.
9. DEFERRED ESOP COMPENSATION
The Employee Stock Ownership Plan ("ESOP") acquired a 3% interest in the
Company in 1999 with a $26 million, twenty-year note borrowed from the
Company to establish a contributory investment fund for employees. The ESOP
only invests in Company shares. Shares are maintained in a suspense account
until released to participants. The yearly release of shares to
participants is based on the greater of participant contributions plus a
Company match of 30% up to 5% of wages or a minimum based on an
amortization schedule. The minimum is based on the ratio of annual debt
service to total debt service multiplied by the initial 750,000 shares.
Compensation expense is recorded based on the release of shares at market
value, based on an independent appraisal performed annually. The ESOP
released approximately 39,800 shares in 2002. This release resulted in
compensation expense of $3 million for year ended December 31, 2002,
reflecting the market value of the shares. The release of shares, based
upon the per share price established at the Acquisition, amounted to $1.4
million for December 31, 2002, which is reflected as a reduction of
deferred ESOP compensation in equity.
10. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(In thousands)
Accounts payable $ 46,333 $ 80,137
Accrued expenses 111,835 86,078
Employee benefit accruals 57,429 39,954
Carrier payables 41,441 46,540
Taxes 25,557 8,622
Interest 18,781 6,703
----------- ----------
Total $ 301,376 $ 268,034
=========== ==========
11
11. DEBT
Debt consists of:
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
(In thousands)
Senior notes
Due May 15, 2006 at 6.65% $ 399,921 $ 399,921
Due May 15, 2009 at 6.80% 299,881 299,881
Term credit facilities:
Due May 16, 2004 at 70% basis points over LIBOR 50,000 50,000
Due May 31, 2004 at 75% basis points over LIBOR 50,000 50,000
Due June 24, 2005 at 100% basis points over LIBOR 50,000 50,000
Due August 19, 2005 at 100% basis points over LIBOR 75,000 75,000
Commercial paper 20,000 57,700
Working capital credit facility -- 40,000
Deferred derivative 8,348 9,018
Interest rate swap 4,246 2,883
Capital leases 534 564
---------- -----------
Total 957,930 1,034,967
Less short-term debt 20,194 97,932
---------- -----------
Long-term debt $ 937,736 $ 937,035
========== ===========
The senior notes, commercial paper, working capital facility, and bank
notes are unsecured and non-amortizing. PRTC is the guarantor of these
instruments.
The Company has a $400 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. Effective November 2002, the bank note facility was decreased
from $500 million to $400 million. 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.
The Company also has a $50 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 March 31, 2003, the Company had not drawn any working capital under this
facility.
On August 31, 2001, the Company entered into an interest rate swap contract
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.
12
Aggregate maturities of the senior notes and term credit facilities are as
follows (in thousands):
YEAR AMOUNT
- ---- ------
2004 $ 100,000
2005 125,000
2006 400,000
2009 300,000
----------
Total $ 925,000
==========
12. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(In thousands)
Deferred activation and installation revenues $ 68,155 $ 65,352
Customer deposits 27,401 27,490
Other liabilities 51,809 53,792
----------- ----------
Total $ 147,365 $ 146,634
=========== ==========
13. SHAREHOLDERS' EQUITY
COMMON STOCK
Common stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at March 31, 2003 and
December 31, 2002.
SUBSCRIPTION RECEIVABLE
The subscription receivable reflects future receipts from the Puerto Rico
Telephone Authority ("PRTA") at its present value (at an 8% discount rate).
As part of the Acquisition agreement, the PRTA agreed to contribute cash or
stock worth a total of $200 million as a capital contribution in even $40
million installments over five years beginning on March 2, 2000. The
Company will use the $200 million to fund its underfunded pension and other
post-employment benefit obligations. The stock purchase agreement requires
that the Company contribute $66 million, which includes the $40 million
received from PRTA, to the pension plan immediately upon receipt of the
proceeds each year. The Company received the fourth $40 million installment
in March 2003 and made the required pension payment of $66 million.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs which are reflected as an other
asset, associated with the hourly employee pension fund since the
accumulated benefit obligation exceeds the fair value of plan assets.
The accumulated other comprehensive loss amount as of December 31, 2002 has
been adjusted in the amount of $57.6 million in order to reflect it net of
tax in accordance with the provisions of SFAS No.130.
13
DIVIDENDS
The shareholders agreement requires the payment of dividends equal to at
least 50% of consolidated net income, to be paid in the following quarter
to the extent funds are legally available.
Dividend payments were made in the following periods:
2002
----
(In thousands)
4th Quarter $ 15,926
3rd Quarter 40,301
2nd Quarter 11,502
1st Quarter 1,107
---------
Total $ 68,836
---------
The Company declared a dividend on March 2003 amounting to $17.8 million
corresponding to the fourth quarter 2002 and paid it in April 2003. The
senior note indentures and credit facility agreements do not contain
dividend restrictions.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
are as follows:
MARCH 31, DECEMBER 31,
2003 2002
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- ----------
(In thousands)
Assets:
Cash and cash equivalents $ 23,186 $ 23,186 $ 33,667 $ 33,667
Accounts receivable 330,883 330,883 342,359 342,359
Liabilities:
Other current liabilities $ 301,376 $ 301,376 $ 268,034 $ 268,034
Short-term debt 20,194 20,194 97,932 97,932
Long-term debt, including interest rate swap 937,736 1,006,334 937,035 984,233
14
15. 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;
- Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;
- Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private
line services;
- 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 service; and
- Wireless equipment sales.
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.
15
Segment results for the Company are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- -----------
(In thousands)
WIRELINE:
Revenues
Local services $ 146,128 $ 143,443
Long distance services 33,999 38,924
Access services 82,560 82,810
Directory services and other 9,649 12,838
----------- -----------
Total revenues $ 272,336 $ 278,015
=========== ===========
Operating income $ 58,181 $ 52,894
=========== ===========
WIRELESS:
Revenues and sales
Cellular services $ 47,385 $ 42,645
Paging services 611 1,925
Equipment sales and other 2,885 1,854
----------- -----------
Total revenues and sales $ 50,881 $ 46,424
=========== ===========
Operating income $ (616) $ (2,395)
=========== ===========
CONSOLIDATED:
Revenues for reportable segments $ 323,217 $ 324,439
Elimination of intersegment revenues (2,725) (3,808)
----------- -----------
Consolidated revenues $ 320,492 $ 320,631
=========== ===========
Operating income $ 57,565 $ 50,499
=========== ===========
AS OF AS OF
ASSETS MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
Wireline assets $ 2,702,453 $ 2,645,088
Wireless assets 287,859 290,891
------------ -------------
Segment assets $ 2,990,312 $ 2,935,979
Elimination of intersegment assets (243,440) (218,582)
------------ -------------
Consolidated assets $ 2,746,872 $ 2,717,397
============ =============
16
16. CONDENSED CONSOLIDATING INFORMATION
The following condensed consolidating financial information as of March 31,
2003 and December 31, 2002 and for the quarters then ended 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.
The 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.
17
CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2003
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (266) $ 16,504 $ 6,948 $ -- $ 23,186
Intercompany accounts receivable 1,161,612 75,430 28,500 (1,265,542) --
Accounts receivable, net -- 330,825 53 5 330,883
Deferred income tax -- 23,399 28 -- 23,427
Inventory and supplies, net -- 15,786 -- -- 15,786
Prepaid expenses -- 17,592 347 -- 17,939
------------- ------------ ------------- ------------- ------------
Total current assets 1,161,346 479,536 35,876 (1,265,537) 411,221
PROPERTY, PLANT AND EQUIPMENT, net -- 1,644,543 13,147 -- 1,657,690
GODDWILL AND OTHER INTANGIBLES, net -- 288,111 25,261 -- 313,372
DEFERRED INCOME TAX -- 239,922 58 -- 239,980
INVESTMENT IN SUBSIDIARIES 657,306 -- -- (657,306) --
OTHER ASSETS 17,725 119,001 (1) (12,116) 124,609
------------- ------------ ------------- ------------- ------------
TOTAL ASSETS $ 1,836,377 $ 2,771,113 $ 74,341 $ (1,934,959) $ 2,746,872
============= ============ ============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 20,000 $ 20,194 $ -- $ (20,000) $ 20,194
Intercompany accounts payable 72,681 233,019 18,801 (324,501) --
Other current liabilities 19,228 273,754 8,387 7 301,376
------------- ------------ ------------- ------------- ------------
Total current liabilities 111,909 526,967 27,188 (344,494) 321,570
LONG-TERM DEBT, excluding current portion 937,405 925,141 -- (924,810) 937,736
OTHER NON-CURRENT LIABILITIES -- 696,188 -- (8,348) 687,840
------------- ------------ ------------- ------------- ------------
Total liabilities 1,049,314 2,148,296 27,188 (1,277,652) 1,947,146
------------- ------------ ------------- ------------- ------------
MINORITY INTEREST -- -- -- 12,663 12,663
------------- ------------ ------------- ------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 703,270 485,591 41,143 (526, 734) 703,270
Deferred ESOP compensation (27,408) -- -- -- (27,408)
Subscription receivable (37,292) -- -- -- (37,292)
Retained earnings 238,675 227,408 6,010 (233,418) 238,675
Accumulated other comprehensive loss (90,182) (90,182) -- 90,182 (90,182)
------------- ------------ ------------- ------------- ------------
Total shareholders' equity 787,063 622,817 47,153 (669,970) 787,063
------------- ------------ ------------- ------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,836,377 $ 2,771,113 $ 74,341 $ (1,934,959) $ 2,746,872
============= ============ ============= ============= ============
18
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 27,009 $ 6,657 $ -- $ 33,667
Intercompany accounts receivable 1,187,799 196,889 21,694 (1,406,382) --
Accounts receivable, net -- 343,307 212 -- 343,519
Deferred income tax -- 23,474 28 -- 23,502
Inventory and supplies, net -- 18,039 -- -- 18,039
Prepaid expenses -- 10,467 409 -- 10,876
------------ ------------ ------------- -------------- ------------
Total current assets 1,187,800 619,185 29,000 (1,406,382) 429,603
PROPERTY, PLANT AND EQUIPMENT, net -- 1,561,866 13,468 -- 1,575,334
GOODWILL AND OTHER INTANGIBLES, net -- 282,393 25,382 -- 307,775
DEFERRED INCOME TAX -- 285,291 58 -- 285,349
INVESTMENT IN SUBSIDIARIES 574,833 -- -- (574,833) --
OTHER ASSETS 16,187 116,138 (1) (12,988) 119,336
------------ ------------ ------------- -------------- ------------
TOTAL ASSETS $ 1,778,820 $ 2,864,873 $ 67,907 $ (1,994,203) $ 2,717,397
============ ============ ============= ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 97,700 $ 97,932 $ -- $ (97,700) $ 97,932
Intercompany accounts payable 71,062 299,064 17,724 (387,850) --
Other current liabilities 7,979 254,570 5,485 -- 268,034
------------ ------------ ------------- -------------- ------------
Total current liabilities 176,741 651,566 23,209 (485,550) 365,966
LONG-TERM DEBT, excluding current portion 936,703 925,133 -- (924,801) 937,035
OTHER NON-CURRENT LIABILITIES -- 745,810 -- (9,019) 736,791
------------ ------------ ------------- -------------- ------------
Total liabilities 1,113,444 2,322,509 23,209 (1,419,370) 2,039,792
------------ ------------ ------------- -------------- ------------
MINORITY INTEREST -- -- -- 12,229 12,229
------------ ------------ ------------- -------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 703,270 485,590 41,143 (526,733) 703,270
Deferred ESOP compensation (27,408) -- -- -- (27,408)
Subscription receivable (76,093) -- -- -- (76,093)
Retained earnings 155,789 146,956 3,555 (150,511) 155,789
Accumulated other comprehensive loss (90,182) (90,182) -- 90,182 (90,182)
------------ ------------ ------------- -------------- ------------
Total shareholders' equity 665,376 542,364 44,698 (587,062) 665,376
------------ ------------ ------------- -------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,778,820 $ 2,864,873 $ 67,907 $ (1,994,203) $ 2,717,397
============ ============ ============= ============== ============
19
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended March 31, 2003
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
REVENUES:
Local services $ -- $ 140,113 $ 7,089 $ (2,164) $ 145,038
Long distance services -- 24,545 8,344 (27) 32,862
Access services -- 82,987 -- (1,132) 81,855
Cellular services -- 47,454 -- -- 47,454
Paging services -- 611 -- 611
Directory and other services and sales -- 14,049 -- (1,377) 12,672
------------- ------------ ------------- ------------ ----------
Total revenues -- 309,759 15,433 (4,700) 320,492
------------- ------------ ------------- ------------ ----------
OPERATING COSTS AND EXPENSES:
Labor and benefits -- 102,083 814 -- 102,897
Other operating expenses -- 93.350 9,434 (4,700) 98,084
Voluntary separation provision -- 1,443 -- -- 1,443
Depreciation and amortization -- 59,799 704 -- 60,503
------------- ------------ ------------- ------------ ----------
Total operating costs and expenses -- 256,675 10,952 (4,700) 262,927
------------- ------------ ------------- ------------ ----------
OPERATING INCOME -- 53,084 4,481 -- 57,565
------------- ------------ ------------- ------------ ----------
OTHER INCOME (EXPENSE), NET (433) (9,437) 40 -- (9,830)
------------- ------------ ------------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (433) 43,647 4,521 -- 47,735
INCOME TAX EXPENSE -- 16,491 1,652 -- 18,143
------------- ------------ ------------- ------------ ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT (433) 27,156 2,869 -- 29,592
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax of $45,445 -- 71,082 -- -- 71,082
------------- ------------ ------------- ------------ ----------
NET INCOME (LOSS) $ (433) $ 98,238 $ 2,869 $ -- $ 100,674
============= ============ ============= ============ ==========
20
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended March 31, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
REVENUES:
Local services $ -- $ 137,771 $ 6,465 $ (2,437) $ 141,799
Long distance services -- 38,907 -- (115) 38,792
Access services -- 83,962 -- (2,864) 81,098
Cellular services -- 42,645 -- (422) 42,223
Paging services -- 1,925 -- (1) 1,924
Directory and other services and sales -- 17,913 -- (3,118) 14,795
---------- ---------- ---------- ---------- ----------
Total revenues -- 323,123 6,465 (8,957) 320,631
---------- ---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Labor and benefits -- 97,234 525 -- 97,759
Other operating expenses -- 111,799 3,231 (8,957) 106,073
Depreciation and amortization -- 65,511 789 -- 66,300
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses -- 274,544 4,545 (8,957) 270,132
---------- ---------- ---------- ---------- ----------
OPERATING INCOME -- 48,579 1,920 -- 50,499
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE), NET 23,004 (13,556) 11 (23,369) (13,910)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 23,004 35,023 1,931 (23,369) 36,589
INCOME TAX EXPENSE -- 12,761 824 -- 13,585
---------- ---------- ---------- ---------- ----------
NET INCOME $ 23,004 $ 22,262 $ 1,107 $ (23,369) $ 23,004
========== ========== ========== ========== ==========
21
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2003
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES CONSOLIDATED
-------- ---------- ------------- ------------
CASH PROVIDED BY OPERATING: $ -- $ 58,628 $ 492 $ 59,120
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (31,891) (95) (31,986)
Net salvage on retirements -- 221 (106) 115
-------- -------- -------- --------
Net cash used in investing activities -- (31,670) (201) (31,871)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 -- -- 40,000
Net repayments of short-term debt, including
capital leases (77,691) (39) -- (77,730)
Dividends paid -- -- -- --
Borrowings/(repayment) intercompany loans 37,424 (37,424) -- --
-------- -------- -------- --------
Net cash used in financing activities (267) (37,463) -- (37,730)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (267) (10,505) 291 (10,481)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1 27,009 6,657 33,667
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ (266) $ 16,504 $ 6,948 $ 23,186
======== ======== ======== ========
22
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2002
(In thousands)
GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
CASH PROVIDED BY (USED IN) OPERATING
ACTVITIES: $ -- $ 36,700 $ (1,052) $ 35,648
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (39,392) (45) (39,437)
Net salvage on retirements -- 550 (205) 345
-------- -------- -------- --------
Net cash used in investing activities -- (38,842) (250) (39,092)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 -- -- 40,000
Net repayments of short-term debt, including
capital leases (55,084) (47) -- (55,131)
Dividends paid (1,107) -- -- (1,107)
Borrowings/(repayment) intercompany loans 16,249 (16,249) -- --
-------- -------- -------- --------
Net cash provided by (used in) financing activities 58 (16,296) -- (16,238)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 58 (18,438) (1,302) (19,682)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD -- 32,591 2,206 34,797
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 58 $ 14,153 $ 904 $ 15,115
======== ======== ======== ========
23
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company declared a dividend on March 2003 amounting to $17.8 million
corresponding to the fourth quarter of 2002 and paid it in April 2003.
18. CONTINGENCIES AND REGULATORY AND OTHER 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 and Other 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-island wireline
services.
24
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, the Company has 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 of America 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, intangible assets, income taxes, financing
operations, 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.
25
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.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that 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 was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset 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 109. Management believes that sufficient book and tax income was
generated by the merged company to realize the benefits of these tax assets.
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, 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 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 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 charges resulted in decreasing depreciation expense by approximately $6
million for the second half of 2002 and $3 million for the first quarter of
2003. Refer to Note 4 to the condensed consolidated financial statements for
further details.
26
RESULTS OF OPERATIONS
We have two reportable segments, Wireline and Wireless. See Note 15 to
the condensed consolidated financial statements for additional information on
our segments. Reclassifications of prior years' data have been made to conform
to the 2003 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;
- - Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;
- - Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private line
services;
- - 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 services; and
- - Wireless equipment sales.
27
REVENUES
THREE MONTHS ENDED MARCH 31,
2003 2002
------------------ ------------------
(DOLLARS IN MILLIONS)
WIRELINE:
Local $145 45% $142 44%
Network Access 82 26 81 25
Long Distance 33 10 39 12
Directory and Other 10 3 13 4
---- ---- ---- ----
Total Wireline 270 84% 275 85%
---- ---- ---- ----
WIRELESS:
Postpaid Cellular 40 13 36 11
Prepaid Cellular 7 2 6 2
---- ---- ---- ----
Total Cellular 47 15 42 13
Paging - - 2 1
Wireless Equipment 3 1 2 1
---- ---- ---- ----
Total Wireless 50 16% 46 15%
---- ---- ---- ----
Revenues $320 100% $321 100%
==== ==== ==== ====
EXPENSES AND CHARGES
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
(DOLLARS IN MILLIONS)
WIRELINE:
Labor and benefits $ 95 $ 90
Other operating expenses 69 79
---- ----
Total Wireline 164 169
WIRELESS:
Labor and benefits $ 8 $ 8
Other operating expenses 29 27
---- ----
Total Wireless 37 35
OTHER:
Voluntary separation provision 1 --
Depreciation and amortization 61 66
Interest expense and others 10 15
Equity income in joint venture (1) (1)
Income tax expense 18 14
Cumulative effect of accounting change, net of taxes (71)
---- ----
Net income $101 $ 23
==== ====
OPERATING DATA
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Access Lines in Service (000's):
Residential 954 961
Business 300 308
------ ------
Total 1,254 1,269
Cellular Customers (000's):
Postpaid 229 205
Prepaid 120 100
------ ------
Total 349 305
Postpaid Cellular ARPU $ 52 $ 54
Prepaid Cellular ARPU $ 20 $ 20
Combined Cellular ARPU $ 41 $ 43
Paging Customers (000's) 12 37
28
QUARTER ENDED MARCH 31, 2003 COMPARED WITH QUARTER ENDED MARCH 31, 2002
REVENUES. Revenues for the quarter ended March 31, 2003 remained in
line with the same comparable period in 2002.
WIRELINE:
Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the quarter ended
March 31, 2003 decreased $5 million, or 2%, to $270 million from $275 million
for the same period in 2002.
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 March 31, 2003 increased $3 million, or 2%, to $145
million from $142 million in the comparable 2002 period. The increase is due to
higher local voice services in addition to local data services. The increase in
local voice services was mainly driven by an increase in directory assistance
revenues and deferred activation and installation revenues of $1 million each.
The increase in local data services was mainly driven by an increase in Internet
access revenues, DSL and frame relay revenues of $1 million.
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
increased $1 million, or 1%, to $82 million compared to $81 million for the same
2002 period. The increase was driven by higher subscriber line charges of $2
million resulting from a rate increase in July 2002 coupled with higher carrier
common line access revenues of $2 million that were partially offset by lower
intra-island access revenues of $3 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 $6 million, or 15%, to $33 million
for the quarter from $39 million for the same 2002 period. The decrease was due
to lower intra-island long distance revenues of $5 million, a decrease in
operator service revenues of $1 million and a decrease in on-island private
lines revenues of $1 million that was partially offset by an increase of $1
million for off-island long distance revenues. Intra-island long distance
revenues have decreased mainly due to customer traffic migration to the cellular
network and general economic conditions.
Directory and other revenues include directory publishing rights,
telecommunication equipment and billing and collection services to competitor
long distance operators. Directory and other revenues for the quarter ended
March 31, 2003 decreased $3 million, or 23%, to $10 million, from $13 million
for the quarter ended March 31, 2002, mainly due to a decrease in wireline
equipment sales and customer premise equipment maintenance of $2 million and
lower billing and collection services of $1 million, reflecting a decrease in
long distance traffic from carriers.
WIRELESS:
Revenues from cellular and paging services and related equipment sales
for the three months ended March 31, 2003 increased $4 million, or 9%, to $50
million from $46 million for the comparable 2002 period. Cellular service
revenues increased $5 million, or 12%, to $47 million from $42 million in the
quarter ended March 31, 2002. This was primarily the result of an increase of
44,000 in cellular customers in comparison with the quarter ended March 31, 2002
due to attractive price plans and the implementation of a marketing strategy
intended to align our product and service offerings with those of Verizon
Wireless in the U.S.
Paging revenues declined $2 million for the quarter ended March 31,
2003. The decrease was related to a reduction of 25,000 customers. The Company
received an offer to sell its paging division and is waiting for the FCC
approval of the negotiated agreement, which the Company expects will close by
July 2003. Management believes that this transaction will not have a material
effect on the Company's results of operations and financial condition.
Wireless equipment sales increased $1 million, to $3 million for the
quarter ended March 31, 2003 from $2 million for the comparable 2002 period.
This increase is a result of the increase in customers who subscribed for
wireless services in 2003.
29
LABOR AND BENEFITS AND OTHER OPERATING EXPENSES. Operating costs and
expenses for the quarter ended March 31, 2003 decreased $3 million, or 1%, to
$201 million from $204 million reported for the first quarter in 2002.
WIRELINE:
Wireline expenses for the quarter ended March 31, 2003 decreased $5
million, or 3%, to $164 million from the $169 million incurred for the quarter
ended March 31, 2002.
Labor and benefit expenses increased $5 million to $95 million from
$90 million reported for the quarter ended March 31, 2002, mainly due to
increases in pension and other post-employment benefits ("OPEBs") expense
recognition of $10 million, which resulted from a decrease in rate of return on
plan assets in addition to a decrease in the discount rate, reflective of a
softening economy. These increases were partially offset by a decrease in
contractor expenses of $2 million, expatriate expenses of $1 million and
overtime of $1 million as part of the cost-constraint measures taken.
Other operating expenses of $69 million for the quarter ended March 31,
2003, decreased $10 million, or 13%, compared to the same 2002 period. The
decrease is primarily due to lower interconnection charges of $10 million that
resulted from an interconnection settlement agreement coupled with a decrease in
rates and a decrease in off-island long distance access charges of $2 million.
This decrease was partially offset by higher activation charges of $1 million
and higher software expenses of $1 million.
WIRELESS:
Wireless expenses for the quarter ended March 31, 2003 increased $2
million, or 6%, to $37 million from the $35 million reported for the quarter
ended March 31, 2002. Labor and benefit expenses remained constant at $8 million
for the quarter ended March 31, 2003 and 2002. Other operating expenses
increased $2 million, or 7%, to $29 million from the $27 million reported for
the comparable 2002 period. The increase was due to higher commission and rent
expenses.
VOLUNTARY SEPARATION PROGRAM. In January 2003, 29 qualified management
employees accepted the voluntary separation program offered by the Company in
December 2002, which resulted in a provision of $1 million recorded during the
first quarter of 2003.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
of $61 million for the quarter ended March 31, 2003 was $5 million lower than
for the comparable 2002 period. The decrease in depreciation and amortization
expense is mainly due to a change in wireline depreciation rates, which became
effective July 1, 2002, reducing depreciation expense by $3 million for the
quarter ended March 31, 2003, and the adoption of SFAS No. 143 effective January
1, 2003 that required the exclusion of the costs of removal from our
depreciation rates for assets for which the removal costs exceed salvage. The
impact of this change in accounting principle resulted in a decrease in
depreciation expense of $3 million. This depreciation was partially offset by
higher gross plant balances.
INTEREST EXPENSE. Interest expense of $10 million for the quarter ended
March 31, 2003 was $5 million lower than for the comparable 2002 period as a
result of lower interest rates and debt balances.
EQUITY INCOME FROM JOINT VENTURE. Earnings of $1 million were generated
from our 25% interest in Verizon Information Services, Inc., the largest yellow
page publishing company in Puerto Rico.
INCOME TAXES. An $18 million tax provision for the quarter ended March 31,
2003 reflects a 38% effective tax rate. The difference between the effective and
the statutory tax rate of 39% equates to $1 million, primarily reflecting
permanent differences related to interest accretion on the Government
subscription receivable.
30
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Under the provisions of SFAS No.
143, we are required to exclude costs of removal from our depreciation rates for
assets for which the removal costs exceed salvage. Accordingly, in connection
with the initial adoption of this standard on January 1, 2003, we have reversed
accrued costs of removal in excess of salvage from our accumulated depreciation
accounts for these assets. The adjustment was recorded as a cumulative effect of
an accounting change, resulting in the recognition of an estimated gain of
$116.5 million ($71.1 million after-tax). Effective January 1, 2003, we began
expensing costs of removal in excess of salvage for these assets as incurred.
31
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED FINANCIAL CONDITION
QUARTER ENDED MARCH 31, 2003 COMPARED WITH QUARTER ENDED MARCH 31, 2002
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)
Cash provided by (used in):
Operations $ 59 $ 36 $ 23
Investing (32) (39) (7)
Financing (38) (16) (22)
OVERALL LIQUIDITY ASSESSMENT
The Company believes that cash from operations is sufficient to meet
working capital needs. While current liabilities exceeded current assets at
March 31, 2003 by $66 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.
We have an undrawn $400 million revolving credit facility maturing in
March 2004, as well as a $50 million working capital credit facility, which
matures in June 2003. At March 31, 2003, the Company had no outstanding balance
under the working capital credit facility. An aggregate principal amount of $300
million of the Company's senior notes matured on May 15, 2002. During the year
ended December 31, 2002, we refinanced these notes and the related interest
payment through the issuance of new term loans totaling $225 million.
OPERATIONS
Cash from operations continued to be our primary source of funds. The
increase in cash from operations of $23 million for the quarter ended March 31,
2003 as compared to the same period in 2002 was primarily due to lower voluntary
separation payments of $12 million and lower pension contributions of $5
million.
The Company offered a voluntary separation program to qualified
management employees during the fourth quarter of 2002 and recorded a $0.5
million non-cash provision relating to 8 employees who accepted. In January
2003, an additional 29 qualified management employees accepted the voluntary
separation program representing an additional expense of $1.4 million recorded
in first quarter of 2003.
INVESTING
Net cash used in investing activities for the quarter ended March 31,
2003 was $32 million compared to $39 million for the same period in 2002. The
decrease in cash used in investing activities of $7 million is mainly due to a
decrease in capital expenditures and cost of removal. Effective January 1, 2003,
under SFAS No. 143, cost of removal is expensed when incurred.
The capital expenditure program for 2002 amounted to $205 million,
which was financed from internally generated funds. The decrease in capital
expenditures during 2002 is partially due to decreased spending on specific
software projects, as well as a general decrease in spending as the Company
aligned its capital spending with softening demand for new wireline service.
We have invested approximately $932 million from the date of the
Acquisition through March 31, 2003 to expand and enhance our networks. In 2003,
we expect to make up to approximately $185 million in capital expenditures.
32
FINANCING
Debt, excluding capital leases, decreased $78 million for the quarter
ended March 31, 2003 and $55 million for the quarter ended March 31, 2002.
Borrowings under bank loans, working capital facilities and commercial paper
decreased from $98 million at December 31, 2002 to $20 million at March 31, 2003
and from $194 million at December 31, 2001 to $139 million at March 31, 2002.
During 2002, the Company refinanced $300 million of senior notes, which
matured on May 15, 2002, with new term credit agreements with four banks. The
aggregate amount of the term loans is $225 million, with maturities ranging from
two to three years, bearing interest at 70 to 100 basis points over LIBOR.
In the Acquisition, the PRTA agreed to contribute cash or stock worth a
total of $200 million as a capital contribution in five equal $40 million
installments over five years beginning on March 2, 2000 to fund its underfunded
pension and other post-employment benefit obligations. In March 2003, $40
million was received in cash from the PRTA for the third installment. See Note
13 to the condensed consolidated financial statements.
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. For the quarter ended March 31, 2002, the Company paid dividends
amounting to $1.1 million corresponding to the fourth quarter 2001. In April
2003, the Company paid dividends amounting to $17.8 million corresponding to the
fourth quarter 2002. The senior note indentures and credit facility agreements
do not contain restrictions on the payment of dividends.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
CONTRACTUAL OBLIGATIONS &
OTHER COMMERCIAL COMMITMENTS: PAYMENTS DUE BY PERIOD
- --------------------------------------------- ----------------------------------------------------------------
2009-
(Amounts in Thousands) Total 2004 2005-2006 2007-2008 Thereafter
----- ---- --------- --------- ----------
Long Term Debt, including interest rate swap $ 712 $ -- $ 412 $ -- $ 300
Term Credit Facilities 225 100 125 -- --
Pension Benefit Obligations (1) 403 95 219 89 --
Commercial Paper 20 20 -- -- --
Operating Leases 45 11 15 7 12
Capital Lease Obligations 1 1 -- -- --
------- ------- ------- ------- -------
Total $ 1,406 $ 227 $ 771 $ 96 $ 312
======= ======= ======= ======= =======
(1) Pension obligations represent contributions based on ERISA minimum rules.
33
REGULATORY AND OTHER MATTERS
REGULATORY AND COMPETITIVE TRENDS
Regulatory activity at the federal and local levels was primarily
directed at meeting challenges in maintaining existing access rates and
retaining subsidies to support the costs of Universal Service and other
services. We are also addressing local number portability requirements.
We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to interconnect their networks with ours.
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's 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. 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 LTD ("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.
The hearing involving oral presentations by the parties was held on
February 19, 2003. On April 22, 2003, the parties filed their corresponding
post-hearing final briefs therefore finally submitting the case for
adjudication. The Company believes there are several legal grounds to reverse or
vacate the TRB's order. The Company also 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 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. On November 8, 2002, after having
evaluated and determined that this claim is similar to TPPR claim, we filed a
motion to dismiss the case. At present, we are awaiting a decision of the court.
34
In 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. The claims have since been transferred to Federal District
Court and the disputes between the two parties include PRTC's amended
administrative claim against PSA, and PSA's complaint for over $9 million
against PRTC. PRTC has filed a motion to dismiss and change of venue which is
pending before the Federal District Court.
The Company's management believes all of these claims are without
merit.
TOUCHTONE 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"). The plaintiffs claim that the Company's
charges for touchtone service are not based on cost, and are therefore in
violation of the Act. They have requested that the 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.
On October 25, 2002, plaintiffs filed a motion requesting class
certification. The plaintiffs filed on November 22, 2002, a voluntary request
for dismissal as to some plaintiffs. On December 19, 2002, PRTC filed its answer
to the amended complaint. On February 18, 2003, PRTC filed its respective
opposition to plaintiff's motion for class certification. On April 4, 2003, the
Court issued a partial order granting the voluntary dismissals. On this same
date, the Court issued an Order scheduling a hearing for May 20, 2003 in order
to discuss the request and opposition for class certification. The Court ordered
the stay of the discovery proceeding until the certification of class issue is
determined.
MEASURED SERVICE UNIT CHARGES
On July 16, 2002, one residential telephone service subscriber and
three business service subscribers filed a class action with the 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. They
have requested that the 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 unit charges are illegal, (iv) establish a maximum unit charge
based on cost, and (v) order the Company to reimburse every subscriber for
excess payments made since September 1996.
On November 22, 2002 plaintiffs filed a request for voluntary dismissal
without prejudice. On February 26, 2003, the Court issued an Order with respect
to the motion requesting voluntary dismissal. Specifically, the Court ordered
the plaintiffs to present within a period of twenty (20) days, that is until
March 18, 2003, their position towards the class action suit if the dismissal is
granted. However, on March 5, 2003 the Court issued an Order dismissing the case
without prejudice.
CTI ASSET TRANSFER
Prior to the Acquisition, PRTC transferred its net wireless assets on
September 1, 1998 to CTI (which became Verizon Wireless, a part of PRTC on May
1, 2002). Our Predecessors later filed a waiver request in 1998 with the FCC to
record this transfer at book value instead of fair value. Since our Predecessors
had not included the costs of wireless operations in the regulated rate setting
process, we believe ratepayers did not bear the cost of our Predecessor's
wireless investment.
The FCC denied the Company's petition in April 2001, but recognized that
while there were questions concerning certain costs and expenses, the cellular
and paging assets had been removed from the interstate rate base.
The TRB stated in its February 2002 Order that for any prospective rate
increase that the Company may pursue to compensate for revenue deficiencies it
must first be applied against the gain in the wireless asset transfer, equating
to $56 million applicable to intrastate. We will contest this position based on
the fact that the wireless entity was set up after the last regulated intrastate
rate increase in 1982 and therefore these costs were not included in setting
such rates.
35
Neither the FCC nor the TRB has commenced any further proceedings to
address this issue. While we believe that the resolution of this matter and any
related proceedings will not have a material effect on our financial condition
and results of operations, we cannot provide assurance that any further
regulatory actions will be favorable to the Company.
PRICE CAP REGULATION
The FCC requires that companies which set interstate access rates based
on a price cap formula must use the price cap formula for all their affiliates.
The price cap formula is based on a plan called Coalition of Affordable Local
and Long Distance Service ("CALLS") that used rate-of-return as a basis for
setting rates. We were, therefore, required to implement price caps no later
than March 2, 2000.
However, the FCC delayed conversion to price cap regulation until June
30, 2002 and the Company has requested a further extension to June 30, 2003. As
per Memorandum and Order released by the FCC on April 18, 2002, (DA 02-888), the
Company is no longer required to file a waiver request until the FCC completes
its review of the "all-or-nothing" rule.
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 $49 million in 2000, $33 million in 2001 and $4 million for
2002. On February 28, 2003 PRTC sent a letter to FCC, asking the Commission to
take action to restore the high-cost universal service support that the Company
lost due to FCC policies adopted for non-rural companies based on the cost
characteristics of mainland companies. PRTC requested the FCC to address the
loss of its universal service support by adopting rules for insular areas that
are similar to those applied to rural carriers.
MESSAGE PROCESSING AND BILLING SYSTEM
The Company has an agreement for the implementation of a traffic
polling and billing software system for its wireline operations. The billing
portion of the project is currently behind schedule and management is evaluating
the feasibility of continuing that portion. As of March 31, 2003 the Company has
invested approximately $33 million in hardware, software and labor on the
billing system portion of the project.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 3 to the condensed consolidated financial statements in Item 1
(Part 1) of this Form 10-Q for disclosure on recent accounting pronouncements.
36
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 March 31, 2003 and December 31, 2002 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)
March 31, 2003:
Senior notes $ 699,802 $ 768,400 $ 740,293 $ 803,464
Interest rate swap 4,246 4,246 (457) 9,025
----------- ------------ ------------ ------------
Total $ 704,048 $ 772,646 $ 739,836 $ 812,489
=========== ============ ============ ============
December 31, 2002:
Senior notes $ 699,802 $ 747,000 $ 724,420 $ 783,860
Interest rate swap 2,883 2,883 359 5,405
----------- ------------ ------------ ------------
Total $ 702,685 $ 749,883 $ 724,779 $ 789,265
=========== ============ ============ ============
37
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 Company'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.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in various legal matters arising in the ordinary
course of business, including a regulatory dispute regarding intra-island access
fees charged to long distance carriers. We, after consultation with legal
counsel, believe 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 and Other Matters" for more information regarding these
matters.
In connection with the privatization of the Company, the PRTA agreed to
indemnify, defend and hold the Company harmless for 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-island 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) No exhibits required by Item 601 of Regulation S-K.
b) No reports on Form 8-K were filed during the first quarter of 2003.
39
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: May 15, 2003
By: /s/ Michael D. Mills
-----------------------------------------
Name: Michael D. Mills
Title: Chief Financial Officer
Date: May 15, 2003
By: /s/ Adail Ortiz
-----------------------------------------
Name: Adail Ortiz
Title: Chief Accounting Officer
Date: May 15, 2003
40
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
we 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 60 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 the 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: May 15, 2003
/s/ Jon E. Slater
---------------------------------
Jon E. Slater
Chief Executive Officer
(Principal Executive Officer)
41
CFO CERTIFICATION
I, Michael D. Mills, 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
we 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 60 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: May 15, 2003
/s/ Michael D. Mills
--------------------------------
Michael D. Mills
Chief Financial Officer
(Principal Financial Officer)
42
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: May 15, 2003
By: /s/ Michael D. Mills
----------------------------------------
Name: Michael D. Mills
Title: Chief Financial Officer
Date: May 15, 2003
43
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)).
44
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 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)).
10.13 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)).
10.14 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 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)).
10.15 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 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)).
10.16 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 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)).
10.17 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)).
45
10.18 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)).
10.19 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 31, 2001 (File 333-85503)).
10.20 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
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 31,
2001 (File 333-85503)).
10.21 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
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 31, 2001 (File
333-85503)).
10.22 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)).
10.23 $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)).
10.24 $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)).
10.25 $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)).
10.26 $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)).
10.27 $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. (Incorporated by
reference to Exhibit 10.28 of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2002 (File
333-85503)).
46
10.28 Letter Amendment to the $90 million working capital revolving
credit agreement dated as of December 31, 2002. (Incorporated by
reference to Exhibit 10.28 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (File
333-85503)).
10.29 Assignment and Acceptance agreement, dated as of December
31,2002, relating to the $50 million 3-Year Term Credit
Agreement, dated as of June 24, 2002. (Incorporated by reference
to Exhibit 10.29 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 (File 333-85503)).
10.30 Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Union of Telephone Employees of Puerto
Rico effective from January 18, 2003 until January 17, 2006.
Approved on February 13, 2003. (Incorporated by reference to
Exhibit 10.30 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 (File 333-85503)).
47