UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2004
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.
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) |
Registrants 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]
At November 15, 2004, 25 million shares of no par common stock of the registrant were outstanding.
1
INDEX
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
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49 | ||||||||
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51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
52 | ||||||||
53 | ||||||||
Certification of Principal Executive Officer | ||||||||
Certification of Principal Financial Officer | ||||||||
Certification Pursuant to Section 906 |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 121,449 | $ | 21,732 | ||||
Accounts receivable, net of allowance for doubtful accounts
of $131,668 and $131,106 in 2004 and 2003, respectively |
270,284 | 287,247 | ||||||
Deferred income tax |
26,628 | 26,158 | ||||||
Inventory and supplies, net |
18,096 | 21,202 | ||||||
Prepaid expenses |
32,657 | 35,255 | ||||||
Total current assets |
469,114 | 391,594 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
1,467,202 | 1,558,246 | ||||||
GOODWILL |
126,927 | 126,927 | ||||||
INTANGIBLES, net |
188,566 | 189,136 | ||||||
DEFERRED INCOME TAX |
203,595 | 246,794 | ||||||
OTHER ASSETS |
109,794 | 108,541 | ||||||
TOTAL ASSETS |
$ | 2,565,198 | $ | 2,621,238 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Short-term debt |
$ | 123,082 | $ | 59,729 | ||||
Other current liabilities |
209,186 | 213,480 | ||||||
Total current liabilities |
332,268 | 273,209 | ||||||
LONG-TERM DEBT, excluding current portion |
706,100 | 802,135 | ||||||
PENSION AND OTHER POST-EMPLOYMENT BENEFITS |
516,518 | 594,113 | ||||||
OTHER NON-CURRENT LIABILITIES |
192,385 | 237,405 | ||||||
Total liabilities |
$ | 1,747,271 | $ | 1,906,862 | ||||
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY |
14,135 | 13,025 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Common stock |
$ | 703,884 | $ | 703,884 | ||||
Deferred ESOP compensation |
(26,153 | ) | (26,153 | ) | ||||
Subscription receivable |
| (39,515 | ) | |||||
Retained earnings |
227,446 | 164,520 | ||||||
Accumulated other comprehensive loss, net of taxes |
(101,385 | ) | (101,385 | ) | ||||
Total shareholders equity |
803,792 | 701,351 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 2,565,198 | $ | 2,621,238 | ||||
The accompanying notes are an integral part of these financial statements.
3
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
REVENUES: |
||||||||||||||||
Local services |
$ | 137,240 | $ | 142,385 | $ | 410,374 | $ | 434,923 | ||||||||
Access services |
59,469 | 63,697 | 206,050 | 223,426 | ||||||||||||
Long distance services |
30,906 | 35,580 | 103,400 | 102,260 | ||||||||||||
Cellular services |
49,425 | 46,295 | 144,882 | 140,324 | ||||||||||||
Paging services |
| 223 | | 1,026 | ||||||||||||
Directory services and other |
23,901 | 20,656 | 64,797 | 58,986 | ||||||||||||
Total revenues |
300,941 | 308,836 | 929,503 | 960,945 | ||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||
Labor and benefits |
88,456 | 100,428 | 280,637 | 303,440 | ||||||||||||
Other operating expenses |
98,272 | 175,177 | 253,937 | 407,922 | ||||||||||||
Early retirement and voluntary separation provision |
| | 1,635 | 4,700 | ||||||||||||
Depreciation and amortization |
64,751 | 63,851 | 195,136 | 187,130 | ||||||||||||
Total operating costs and expenses |
251,479 | 339,456 | 731,345 | 903,192 | ||||||||||||
OPERATING INCOME (LOSS) |
49,462 | (30,620 | ) | 198,158 | 57,753 | |||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||
Interest expense, net |
(11,195 | ) | (18,826 | ) | (32,653 | ) | (42,691 | ) | ||||||||
Equity income from joint venture |
737 | 539 | 2,072 | 1,840 | ||||||||||||
Minority interest in consolidated subsidiary |
(656 | ) | (357 | ) | (1,874 | ) | (1,187 | ) | ||||||||
Total other income (expense), net |
(11,114 | ) | (18,644 | ) | (32,455 | ) | (42,038 | ) | ||||||||
INCOME (LOSS) BEFORE INCOME TAX EXPENSE |
38,348 | (49,264 | ) | 165,703 | 15,715 | |||||||||||
INCOME TAX EXPENSE (BENEFIT) |
14,388 | (19,557 | ) | 63,816 | 4,744 | |||||||||||
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE |
23,960 | (29,707 | ) | 101,887 | 10,971 | |||||||||||
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax provision of $40,672 |
| | | 58,529 | ||||||||||||
NET INCOME (LOSS) |
$ | 23,960 | $ | (29,707 | ) | $ | 101,887 | $ | 69,500 | |||||||
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 | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common | Deferred ESOP | Subscription | Retained | Comprehensive | ||||||||||||||||||||
Stock |
Compensation |
Receivable |
Earnings |
Loss |
Total |
|||||||||||||||||||
BALANCE, DECEMBER 31, 2002 |
$ | 703,270 | $ | (27,408 | ) | $ | (76,093 | ) | $ | 155,789 | $ | (90,182 | ) | $ | 665,376 | |||||||||
Dividends paid |
| | | (68,125 | ) | | (68,125 | ) | ||||||||||||||||
Accretion of discount on subscription
receivable |
| | (3,422 | ) | | | (3,422 | ) | ||||||||||||||||
PRTA capital contribution |
| | 40,000 | | | 40,000 | ||||||||||||||||||
Release of ESOP shares |
614 | 1,255 | | | | 1,869 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 76,856 | | 76,856 | ||||||||||||||||||
Other comprehensive loss, net of taxes: |
||||||||||||||||||||||||
Minimum pension liability adjustment |
| | | | (11,203 | ) | (11,203 | ) | ||||||||||||||||
Comprehensive income |
| | | | | 65,653 | ||||||||||||||||||
BALANCE, DECEMBER 31, 2003 |
$ | 703,884 | $ | (26,153 | ) | $ | (39,515 | ) | $ | 164,520 | $ | (101,385 | ) | $ | 701,351 | |||||||||
(UNAUDITED) |
||||||||||||||||||||||||
Dividends paid |
| | | (12,386 | ) | | (12,386 | ) | ||||||||||||||||
Dividends declared |
| | | (26,575 | ) | | (26,575 | ) | ||||||||||||||||
Net income, for the nine months ended
September 30, 2004 |
| | | 101,887 | | 101,887 | ||||||||||||||||||
Accretion of discount on subscription
receivable |
| | (485 | ) | | | (485 | ) | ||||||||||||||||
PRTA capital contribution |
| | 40,000 | | | 40,000 | ||||||||||||||||||
BALANCE, SEPTEMBER 30, 2004 |
$ | 703,884 | $ | (26,153 | ) | $ | | $ | 227,446 | $ | (101,385 | ) | $ | 803,792 | ||||||||||
The accompanying notes are an integral part of these financial statements.
5
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2004 |
2003 |
|||||||
(Unaudited) | ||||||||
CASH FLOWS
FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 101,887 | $ | 69,500 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
195,136 | 187,130 | ||||||
Provision for uncollectible accounts |
39,597 | 55,414 | ||||||
Cumulative effect of accounting change |
| (58,529 | ) | |||||
Abandoned software project |
| 32,262 | ||||||
Deferred income tax |
42,730 | (35,747 | ) | |||||
Accretion of discount on subscription receivable |
(485 | ) | (2,681 | ) | ||||
Equity income from joint venture |
(2,072 | ) | (1,840 | ) | ||||
Early retirement and voluntary separation provision |
1,635 | 4,700 | ||||||
Minority interest in consolidated subsidiary |
1,874 | 1,187 | ||||||
Gain on sale of land and building |
(353 | ) | (824 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(22,634 | ) | (59,837 | ) | ||||
Inventory and supplies |
3,106 | 4,134 | ||||||
Prepaid expenses and other assets |
2,362 | (15,182 | ) | |||||
Other current and non-current liabilities |
(78,664 | ) | 89,029 | |||||
Pension and other post-employment benefits |
(79,230 | ) | (4,649 | ) | ||||
Net cash provided by operating activities |
204,889 | 264,067 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures, including removal costs |
(104,456 | ) | (110,059 | ) | ||||
Proceeds from sale of land and building |
1,073 | 6,000 | ||||||
Net salvage on retirements and other |
214 | 552 | ||||||
Net cash used in investing activities |
(103,169 | ) | (103,507 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Capital contribution |
40,000 | 40,000 | ||||||
Net repayments of short-term debt, including
capital leases |
(29,617 | ) | (141,799 | ) | ||||
Dividends paid |
(12,386 | ) | (68,125 | ) | ||||
Net cash used in financing activities |
(2,003 | ) | (169,924 | ) | ||||
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS |
99,717 | (9,364 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
21,732 | 33,667 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 121,449 | $ | 24,303 | ||||
The accompanying notes are an integral part of these financial statements.
6
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
1. | Business / Corporate Structure |
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the Companyor we), 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. The Company also holds a 24% 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 service is provided by the wireless division of PRTC, under the brand of Verizon Wireless Puerto Rico (Verizon Wireless). The Companys off-island long distance service is provided by PRTLD. The Companys dial-up Internet access service is provided by Coqui.net and the 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 Companys financial results with its own financial results.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and 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 for annual financial statements have been condensed or omitted pursuant to such rules and regulations. Management believes the financial statements include all adjustments and recurring accruals necessary to present fairly the results of operations and financial condition for the interim periods shown. The Condensed Consolidated Balance Sheet at December 31, 2003 was derived from audited financial statements and should be read in conjunction with the notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
Impairment or Disposal of Long-lived Assets
Assets are assessed for impairment when changes in circumstances indicate that their carrying values are not recoverable. Effective, January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Losses are recognized in circumstances where impairment exists, at the amount by which the carrying value of assets exceeds fair value. Fair value is determined based on quoted market prices, if not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows and fundamental analysis.
For the last three years, the Company has been operating a TDMA network and CDMA network for its wireless clients. During 2003, management decided to migrate in 2004 all TDMA clients to the CDMA network and subsequently dispose
7
of the TDMA network. The expected undiscounted future cash flow from operations on the TDMA network was estimated to be $27 million ($47.4 million estimated cash flows from operations less $20.4 million of related expenses). The discounted fair value of the network was estimated at $26 million determined by discounting anticipated future cash flows at a risk free rate of 3.76%.
Since the estimated fair value of $26 million is lower than the $37.8 million carrying amount of the TDMA network as of December 31, 2003, the Company recorded an impairment loss of $11.8 million.
Reclassifications
Reclassifications of prior periods data have been made to conform to the current periods presentation.
3. | Accounting Change for Directory Revenue Recognition |
Effective January 1, 2003, the Company changed its method of accounting for directory-publishing revenues and related expenses from the point-of-publication method to the amortization method.
Under the point-of-publication method, such revenues and related expenses are recognized on the date that the directory is published and substantially delivered. Under the amortization method, pre-publication revenues and expenses are deferred and capitalized, respectively. Subsequent to publication, revenues are recognized and expenses amortized over the lives of the directories, which is generally one year.
While both methods fully comply with accounting principles generally accepted in the United States, the Company adopted the amortization method because it is becoming the industry standard.
The cumulative effect of applying this accounting change to prior years was recognized as of January 1, 2003 as a one-time, non-cash loss of $17 million ($13 million, after tax). The effect of applying the new method for the year ended December 31, 2003 was a one-time non-cash revenue increase of $13 million, which was included in operating income.
4. | Summary of Recent Accounting Pronouncements |
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. The adjustment was recorded as a cumulative effect of an accounting change, resulting in the recognition of an estimated gain of $117 million ($71 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. The net increase to operating income in 2003, excluding the cumulative effect adjustment, was approximately $12 million ($7 million after-tax).
8
Amendments of Statement 133 on Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied prospectively. However, the provisions of this statement that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters beginning prior to June 15, 2003 continue to be applied in accordance with their respective effective dates. The Company evaluated the impact of the adoption of SFAS No. 149 and concluded that there is no material effect on its results of operations and financial condition.
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This standard clarifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. The requirements of this statement apply to issuers classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company evaluated the impact of the adoption of SFAS No. 150 and concluded that there is no material effect on its results of operations and financial condition.
Accounting for Revenue Arrangements with Multiple Deliverables
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses how to account for arrangements that may involve multiple revenue-generating activities. Specifically, the issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The consensus guidance will be applicable to agreements entered into in quarters beginning after June 15, 2003. The Company evaluated the impact of the adoption of EITF No. 00-21 and concluded that there is no material effect on its results of operations and financial condition.
5. | Property, Plant and Equipment |
Property, plant and equipment consist of:
Remaining Useful | September 30, | December 31, | ||||||||||||||
Lives (Yrs) |
2004 |
2003 |
||||||||||||||
(In thousands) | ||||||||||||||||
Current |
Previous |
|||||||||||||||
Outside plant |
9.2 | 8.5 | $ | 2,129,633 | $ | 2,097,902 | ||||||||||
Central office and transmission equipment |
4.4 | 4.1 | 1,212,067 | 1,184,357 | ||||||||||||
Equipment and other |
2.7 | 3.2 | 304,375 | 323,459 | ||||||||||||
Buildings |
11.0 | 14.3 | 319,773 | 316,052 | ||||||||||||
Land |
N/A | N/A | 26,325 | 26,400 | ||||||||||||
Gross plant in service |
3,992,173 | 3,948,170 | ||||||||||||||
Less: accumulated depreciation |
2,588,147 | 2,455,127 | ||||||||||||||
Net plant in service |
1,404,026 | 1,493,043 | ||||||||||||||
Construction in progress |
63,176 | 65,203 | ||||||||||||||
Total |
$ | 1,467,202 | $ | 1,558,246 | ||||||||||||
9
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 $117 million ($71 million after-tax). Effective January 1, 2003, the Company began expensing costs of removal in excess of salvage for these assets as incurred. The impact of this change in accounting will result in a decrease in depreciation expense and an increase in operational and support expenses. The net increase to operating income in 2003, excluding the cumulative effect adjustment, was approximately $12 million ($7 million after-tax).
During the fourth quarter of 2003, the board of directors approved the replacement of the Companys General Ledger System and Inventory Management System. The new systems have been implemented and are currently operating. The projected capitalized costs for software and labor are approximately $11 million. As of September 30, 2004, the Company had capitalized costs of $10 million associated with the new systems.
Effective July 2004, the Company performed its periodic review of plant useful lives estimates based on a comprehensive analysis detailed review of the lives underlying the depreciation rates. The review incorporates the impact of technology, future competition and assumptions employed in the industry relative to depreciation and retirement rates. The revision resulted in a decrease in depreciation expense by approximately $1.7 million for the quarter ended September 30, 2004 and approximately $3.3 million for the year 2004.
The Company revised the method to calculate the composite useful lives to be consistent with the current depreciation study.
6. | Goodwill |
Following is a breakdown of goodwill.
CarryingValue |
||||||||
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Wireline (PRTC) |
$ | 102,731 | $ | 102,731 | ||||
Dial-up Internet (Coqui.net) |
24,196 | 24,196 | ||||||
Total |
$ | 126,927 | $ | 126,927 | ||||
10
7. | Intangibles |
CarryingValue |
||||||||
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Indefinite Life: |
||||||||
Wireline concession |
$ | 85,120 | $ | 85,120 | ||||
FCC Cellular licenses |
23,855 | 23,855 | ||||||
Total Indefinite Life |
$ | 108,975 | $ | 108,975 | ||||
September 30, 2004 |
December 31, 2003 |
|||||||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||
Definite Life: |
Cost |
Acc. Amort |
Book Value |
Cost |
Acc. Amort |
Book Value |
||||||||||||||||||
Wireline trade name |
$ | 48,400 | $ | 10,798 | $ | 37,602 | $ | 48,400 | $ | 9,502 | $ | 38,898 | ||||||||||||
Software licenses |
78,780 | 36,791 | 41,989 | 67,068 | 25,805 | 41,263 | ||||||||||||||||||
Customer base |
15,544 | 15,544 | | 15,544 | 15,544 | | ||||||||||||||||||
Other |
500 | 500 | | 500 | 500 | | ||||||||||||||||||
Total Definite Life |
$ | 143,224 | $ | 63,633 | $ | 79,591 | $ | 131,512 | $ | 51,351 | $ | 80,161 | ||||||||||||
Plus: Total Indefinite Life |
$ | 108,975 | $ | 108,975 | ||||||||||||||||||||
Total |
$ | 143,224 | $ | 63,633 | $ | 188,566 | $ | 131,512 | $ | 51,351 | $ | 189,136 | ||||||||||||
SFAS No. 142, Goodwill and Other Intangible Assets, 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 fair value approach.
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. For 2003 and 2004, 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 on the Companys results of operations. The evaluation of the two reporting units revealed no impairment exposure.
8. | Other assets |
Other assets consist of:
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Deferred activation and installation costs |
$ | 72,692 | $ | 69,347 | ||||
Notes receivable-equipment sales |
7,886 | 10,446 | ||||||
Deferred pension asset |
19,785 | 19,785 | ||||||
Deferred financing costs, net |
2,496 | 3,146 | ||||||
Other deferred costs |
2,165 | 1,426 | ||||||
Interest rate swap |
1,757 | 2,811 | ||||||
Investment in Verizon Information Services |
1,055 | | ||||||
Other assets |
1,958 | 1,580 | ||||||
Total |
$ | 109,794 | $ | 108,541 | ||||
11
9. | Pension Plan |
The Company has noncontributory pension plans for full-time employees, which are tax qualified as they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements. The Company realizes tax deductions when contributions are made to the trusts. The trusts invest in equity and fixed income securities to meet the benefit obligation.
The pension benefit is composed of an annuity and a lump sum. An employee receives an annuity at retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated by applying a percentage times years of service to the last three years of salary. The second element is a lump sum based on years of service, up to a maximum of nine months of salary for hourly employees and twelve months of salary for salaried employees.
There are separate trusts for the annuity and the lump sum benefit with a further separation of the annuity benefit into a plan for the UIET union (craft union), the HIETEL union and management employees. Health care and life insurance benefits are also provided to retirees.
The components of the net pension and other post-employment benefit expenses for the quarters ended September 30,
(In thousands) |
Pension and Lump Sum Benefit |
Post-Retirement Benefits |
||||||||||||||||||||||||||||||
Three months ended Sept. 30, |
Nine months ended Sept. 30, |
Three months ended Sept. 30, |
Nine months ended Sept. 30, |
|||||||||||||||||||||||||||||
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||||||||
Service cost |
$ | 5,041 | $ | 4,523 | $ | 15,413 | $ | 13,569 | $ | (187 | ) | $ | 2,175 | $ | 4,943 | $ | 6,525 | |||||||||||||||
Interest cost |
19,316 | 16,825 | 54,450 | 50,475 | 5,193 | 8,878 | 24,497 | 26,634 | ||||||||||||||||||||||||
Expected return on plan assets |
(14,718 | ) | (11,578 | ) | (44,538 | ) | (34,734 | ) | | | | | ||||||||||||||||||||
Amortization of unrecognized: |
||||||||||||||||||||||||||||||||
Transition obligation |
12,576 | 108 | 12,756 | 324 | 9,586 | 551 | 10,688 | 1,653 | ||||||||||||||||||||||||
Prior service cost (benefit) |
1,585 | 1,186 | 3,943 | 3,558 | (2,253 | ) | (628 | ) | (3,509 | ) | (1,884 | ) | ||||||||||||||||||||
Actuarial gain, net |
(6,767 | ) | 3,281 | 269 | 9,843 | (7,190 | ) | 3,926 | 1,652 | 11,778 | ||||||||||||||||||||||
Net periodic benefit cost |
17,033 | 14,345 | 42,293 | 43,035 | 5,149 | 14,902 | 38,271 | 44,706 | ||||||||||||||||||||||||
Effect of early retirement program |
| 2,179 | 939 | 6,536 | | 1,556 | 696 | 4,667 | ||||||||||||||||||||||||
Total |
$ | 17,033 | $ | 16,524 | $ | 43,232 | $ | 49,571 | $ | 5,149 | $ | 16,458 | $ | 38,967 | $ | 49,373 | ||||||||||||||||
Cash Flows
The Company expects to contribute $177 million to the pension and lump sum plans and $30 million to the post-retirement plan in 2004. We have adequate liquidity resources to fund these amounts. As of September 30, 2004, the Company has contributed $140 million to the pension plan.
Medicare Drug Act
On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Medicare Drug Act) was signed into law. The Medicare Drug Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Companys plan provides prescription drug benefits that are deemed actuarially equivalent to the Medicare Part D and elected to recognize the impact of the federal subsidy on our accumulated postretirement benefit obligation and net postretirement benefit costs in the third quarter of 2004. The reduction in the APBO for the subsidy related to benefits attributed to past service is $77.4 million for year 2004. The effect of the subsidy on the measurement of net periodic postretirement benefit cost of $10.7 million for the current period 2004 consists of the following: (a) the amortization of the actuarial experience gain from the reduction in the APBO of $4.3 million, (b) the reduction in current period service cost due to the subsidy of $1.6 million, and (c) the resulting reduction in interest cost on the APBO as a result of the subsidy. During the three months and nine months ended September 30, 2004, the Medicare Drug Act has reduced our net postretirement benefit cost by $8 million.
12
10. | Early Retirement and Voluntary Separation Provision |
In January 2003, 29 qualified management employees accepted the voluntary separation program, offered by the Company to qualified management employees during the fourth quarter of 2002, representing an expense of $1.4 million, which was recorded in the first quarter 2003. During the second quarter of 2003, the Company offered to members of one of the unions a voluntary separation program that closed on June 20, 2003, which 44 qualified employees accepted. Also, during the second quarter of 2003, an additional 147 employees in the craft union accepted a retirement program offered by the Company that closed on June 30, 2003. As a result of these two programs, an additional non-cash provision of $3.3 million was recorded in the second quarter 2003.
In December 2003, the Company offered an early retirement program to qualified management employees. A non-cash provision of $12.6 million was recorded relating to 147 employees who had accepted as of December 31, 2003. In January 2004, an additional 19 qualified management employees accepted the early retirement program offered by the Company in December 2003, which resulted in a provision of $1.6 million.
In September 30, 2004, the Company offered a voluntary separation program, closing on December 3, 2004, to qualified management employees.
11. | 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 shares of the Companys common stock. Shares are held by the ESOPs trustee and maintained in a suspense account until they are released to employee 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, which is based on an independent appraisal performed annually. The ESOP released approximately 36,072 shares in 2003. This release resulted in compensation expense of $2 million for year ended December 31, 2003, reflecting the market value of the shares. The release of shares, based upon the per share price established at the Acquisition, amounted to $1.3 million for December 31, 2003, which is reflected as a reduction of deferred ESOP compensation in equity.
12. | Other Current Liabilities |
Other current liabilities consist of:
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Accounts payable |
$ | 28,011 | $ | 58,625 | ||||
Accrued expenses |
79,001 | 75,999 | ||||||
Employee benefit accruals |
69,169 | 44,697 | ||||||
Carrier payables |
12,955 | 26,388 | ||||||
Taxes |
1,790 | 1,420 | ||||||
Interest |
18,260 | 6,351 | ||||||
Total |
$ | 209,186 | $ | 213,480 | ||||
13
13. | Debt |
Debt consists of:
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Senior notes
|
||||||||
Due May 15, 2006 at 6.65% |
$ | 399,960 | $ | 399,943 | ||||
Due May 15, 2009 at 6.80% |
299,909 | 299,896 | ||||||
Term credit facilities: |
||||||||
Due May 16, 2005 at 57 basis points over LIBOR |
30,000 | 30,000 | ||||||
Due June 24, 2005 at 70 basis points over LIBOR |
30,000 | 30,000 | ||||||
Due August 19, 2005 at 70 basis points over LIBOR |
63,000 | 63,000 | ||||||
Commercial paper |
| 29,500 | ||||||
Deferred derivative |
4,325 | 6,337 | ||||||
Interest rate swap |
1,757 | 2,811 | ||||||
Capital leases |
231 | 377 | ||||||
Total |
829,182 | 861,864 | ||||||
Less short-term debt |
123,082 | 59,729 | ||||||
Long-term debt |
$ | 706,100 | $ | 802,135 | ||||
The senior notes, commercial paper, term credit facilities, working capital facility, and bank notes are unsecured and non-amortizing. PRTC is the guarantor of these debt instruments. The senior notes indentures and credit facility agreements do not contain dividend restrictions.
The Company has a $360 million commercial paper program with maturities not to exceed 364 days, which is backed by two working capital facilities. The commercial paper agreement was signed in November 2000. In March 2004, the Companys existing $400 million bank note credit facility matured.
On March 2, 2004 the Company entered into a new unsecured, $360 million 364-day revolving credit facility with a syndicate of banks and other lenders for whom Citibank, N.A. acts as administrative agent, Banco Bilbao Vizcaya Argentaria Puerto Rico acts as syndication agent and Banco Popular de Puerto Rico, FirstBank Puerto Rico and Scotiabank de Puerto Rico act as co-documentation agents. Amounts borrowed under this facility are guaranteed by PRTC, and bear interest at the applicable Eurodollar rate plus a margin or at the base rate; which is the higher of the base rate publicly announced by the administrative agent from time to time or the Federal Funds rate plus 0.5%, plus a margin. The Company is also required to pay a quarterly facility fee on commitments under the facility and a quarterly utilization fee on borrowed amounts that exceed 50% of the commitments under the facility. Accrued interest on Eurodollar rate borrowings is payable based on elected intervals of one, two, three or six months or other interest period as the Company may select, subject to certain conditions. Accrued interest on base rate borrowings is payable quarterly.
This facility matures on March 1, 2005, on which date the Company has the right to convert outstanding amounts into a term loan that matures on March 1, 2006. This facility contains negative covenants, including covenants which limit the Companys ability to grant or permit liens on its or subsidiaries properties, merge or sell all or substantially all of its assets and permit its subsidiaries to incur debt. This facility also requires that the Company maintain certain financial ratios. Upon the occurrence of a default or an event of default, the lenders have various remedies or rights, which may include termination of the lenders obligations to make advances and declare all borrowed amounts and interest thereon immediately due and payable. The intended purpose of this facility is for working purposes and serves as backstop facility for commercial paper program.
The Company had a $40 million working capital credit facility with Banco Popular de Puerto Rico, an affiliate of Popular, Inc. that matured on June 2004. On June 2004, the Company renewed the undrawn $40 million working capital credit facility maturing on June 30, 2005. Amounts outstanding under this facility bear interest at a rate of 30 basis points over LIBOR. This facility serves as additional backstop for the commercial paper program. At September 30, 2004, the Company had no outstanding balance under this facility.
14
At December 31, 2002, the Company had $225 million in term credit facilities with maturities ranging from two to three years, and bearing interest from 60 to 100 basis points over LIBOR. By October 29, 2003, the Company repaid one of the $50 million term loans, and prepaid principal in an aggregate amount of $62 million of the outstanding term credit loans, while reducing interest rate to 70 basis points over LIBOR. One of the $30 million term loans matured on May 16, 2004. The Company renewed the $30 million term loan at an interest rate of 57 basis points over LIBOR maturity due on May 16, 2005.
On August 31, 2001, the Company entered into an interest rate swap contract with 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 as required by SFAS No. 104, and created a deferred derivative, which will be amortized until 2006. As of September 30, 2004, the unamortized balance of the deferred derivative is $4 million. The purpose of the swap is to hedge against changes in the fair market value of the Companys senior notes to achieve a targeted mix of fixed and variable rate debt. The swap receives interest at a fixed rate of 6.65% and pays interest at a net variable rate equal to six month LIBOR plus 170 basis points, with semiannual settlements and reset dates every May 15 and November 15 until maturity of the May 15, 2006 senior notes. The swap was entered into at market and as a result, there was no exchange of premium at the initial date of the swap. The Company designates the swap as a hedge of the changes in fair market value of the senior notes due to changes in the designated benchmark interest rate. PRTC is the guarantor of the interest rate swap.
Aggregate maturities of the senior notes and term credit facilities are as follow:
Year |
Amount |
|||||
(In thousands) | ||||||
2005
|
Term credit facilities | $ | 123,000 | |||
2006
|
Senior note | 400,000 | ||||
2009
|
Senior note | 300,000 | ||||
Total
|
$ | 823,000 | ||||
Currently, the Company is in compliance with debt covenant agreements and financial ratios as specified by the term credit facilities.
14. | Other Non-Current Liabilities |
Other non-current liabilities consist of:
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
(In thousands) | ||||||||
Deferred activation and installation revenues |
$ | 72,692 | $ | 69,347 | ||||
Deferred directory-publishing revenues |
11,619 | 12,877 | ||||||
Customer deposits |
26,174 | 26,954 | ||||||
Other liabilities |
81,900 | 128,227 | ||||||
Total |
$ | 192,385 | $ | 237,405 | ||||
15
15. | Shareholders Equity |
Common Stock
Common stock consists of fifty million authorized shares, no par value, of which twenty five million shares were outstanding at September 30, 2004 and December 31, 2003.
Subscription Receivable
The subscription receivable reflects receipts from the PRTA originally recorded at its present value (at an 8% discount rate). As part of the Acquisition agreement, the PRTA agreed to contribute a total of $200 million in cash or stock as a capital contribution in equal installments of $40 million over five years beginning on March 2, 2000. The Company employed the $200 million capital contribution to partially fund its under funded pension and other post-employment benefit obligations, as agreed. The stock purchase agreement required the Company to contribute $66 million, which included the $40 million received from PRTA, to the pension plan immediately upon receipt of the proceeds each year. The Company received the fifth and final $40 million installment in March 2004 and made the required pension payment of $66 million. All installments were made in cash.
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, 2003 has been adjusted in the amount of $64.8 million in order to reflect the after-tax amount in accordance with the provisions of SFAS No.130 Reporting Comprehensive Income.
Dividends
The Companys 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:
2004 |
2003 |
|||||||||
(In thousands) | (In thousands) | |||||||||
4th Quarter
|
$ | 26,575 | 4th Quarter | $ | | |||||
3rd Quarter
|
12,386 | 3rd Quarter | | |||||||
2nd Quarter
|
| 2nd Quarter | 68,125 | |||||||
1st Quarter
|
| 1st Quarter | | |||||||
Total
|
$ | 38,961 | Total | $ | 68,125 | |||||
The senior notes indentures and credit facility agreements do not contain dividend restrictions. Fourth quarter dividend payment was considered through November 15, 2004.
16
16. | Fair Value of Financial Instruments |
The carrying amounts and fair values of the Companys financial instruments are as follows:
September 30, | December 31, | |||||||||||||||
2004 |
2003 |
|||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount |
Value |
Amount |
Value |
|||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 121,449 | $ | 121,449 | $ | 21,732 | $ | 21,732 | ||||||||
Accounts receivable |
270,284 | 270,284 | 287,247 | 287,247 | ||||||||||||
Liabilities: |
||||||||||||||||
Other current liabilities |
$ | 209,186 | $ | 209,186 | $ | 213,480 | $ | 213,480 | ||||||||
Short-term debt |
123,082 | 123,082 | 59,729 | 59,729 | ||||||||||||
Long-term debt, including interest rate swap |
706,100 | 759,241 | 802,135 | 872,822 |
17
17. | 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 services; 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.
18
Segment results for the Company are as follow:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
(in thousands) | ||||||||||||||||
Wireless: |
||||||||||||||||
Revenues- |
||||||||||||||||
Local services |
$ | 139,283 | $ | 144,602 | $ | 417,403 | $ | 439,524 | ||||||||
Long distance services |
31,291 | 35,721 | 104,683 | 104,490 | ||||||||||||
Access services |
59,843 | 63,997 | 207,521 | 225,158 | ||||||||||||
Directory services and other |
17,901 | 16,954 | 50,748 | 49,129 | ||||||||||||
Total revenues |
$ | 248,318 | $ | 261,274 | $ | 780,355 | $ | 818,301 | ||||||||
Operating income (loss) |
$ | 54,388 | $ | (28,082 | ) | $ | 207,285 | $ | 62,908 | |||||||
Wireless: |
||||||||||||||||
Revenues- |
||||||||||||||||
Cellular services |
$ | 50,840 | $ | 46,519 | $ | 146,557 | $ | 140,661 | ||||||||
Paging services |
| 223 | | 1,026 | ||||||||||||
Equipment sales and other |
6,006 | 3,525 | 14,051 | 9,400 | ||||||||||||
Total revenues |
$ | 56,846 | $ | 50,267 | $ | 160,608 | $ | 151,087 | ||||||||
Operating loss |
$ | (4,926 | ) | $ | (2,538 | ) | $ | (9,127 | ) | $ | (5,155 | ) | ||||
Consolidated: |
||||||||||||||||
Revenues for reportable segments |
$ | 305,164 | $ | 311,541 | $ | 940,963 | $ | 969,388 | ||||||||
Elimination of intersegment revenues |
(4,223 | ) | (2,705 | ) | (11,460 | ) | (8,443 | ) | ||||||||
Consolidated revenues |
$ | 300,941 | $ | 308,836 | $ | 929,503 | $ | 960,945 | ||||||||
Operating income (loss) |
$ | 49,462 | $ | (30,620 | ) | $ | 198,158 | $ | 57,753 | |||||||
As of | As of | |||||||
September 30, | December 31, | |||||||
2004 |
2003 |
|||||||
Assets |
||||||||
Wireline assets |
$ | 2,541,006 | $ | 2,599,277 | ||||
Wireless assets |
342,226 | 314,172 | ||||||
Segment assets |
$ | 2,883,232 | $ | 2,913,449 | ||||
Elimination of intersegment assets |
(318,034 | ) | (292,211 | ) | ||||
Consolidated assets |
$ | 2,565,198 | $ | 2,621,238 | ||||
19
18. | Condensed Consolidating Information |
The following summarizes the unaudited condensed consolidating financial information as of September 30, 2004 and December 31, 2003 and for the quarters then ended presents the financial position, results of operations and cash flows of (i) the Company as if it had accounted for its subsidiaries using the equity method, (ii) the Guarantor Subsidiary (as defined below); and (iii) the Non-Guarantor Subsidiaries (as defined below) on a combined basis. The consolidation entries eliminate investments in subsidiaries and intercompany balances and transactions.
The Notes are guaranteed by PRTC (the Guarantor Subsidiary), a wholly-owned subsidiary of the Company, but not guaranteed by the Companys other subsidiaries, Coqui.net, PRTLD and Datacom (the Non-Guarantor Subsidiaries). The guarantee by the Guarantor Subsidiary is full and unconditional.
20
Condensed Consolidating Balance Sheets
September 30, 2004
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 9 | $ | 105,742 | $ | 15,698 | $ | | $ | 121,449 | ||||||||||
Intercompany accounts receivable |
1,083,422 | 86,292 | 45,661 | (1,215,375 | ) | | ||||||||||||||
Accounts receivable, net |
| 269,987 | 297 | | 270,284 | |||||||||||||||
Deferred income tax |
718 | 25,866 | 44 | | 26,628 | |||||||||||||||
Inventory and supplies, net |
| 18,096 | | | 18,096 | |||||||||||||||
Prepaid expenses |
| 30,532 | 2,125 | | 32,657 | |||||||||||||||
Total current assets |
1,084,149 | 536,515 | 63,825 | (1,215,375 | ) | 469,114 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net |
| 1,456,903 | 10,299 | | 1,467,202 | |||||||||||||||
GOODWILL AND OTHER INTANGIBLES, net |
| 290,880 | 24,613 | | 315,493 | |||||||||||||||
DEFERRED INCOME TAX |
| 204,229 | (634 | ) | | 203,595 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES |
631,261 | | | (631,261 | ) | | ||||||||||||||
OTHER ASSETS |
10,154 | 106,462 | (1 | ) | (6,821 | ) | 109,794 | |||||||||||||
TOTAL ASSETS |
$ | 1,725,564 | $ | 2,594,989 | $ | 98,102 | $ | (1,853,457 | ) | $ | 2,565,198 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||||
Short-term debt |
$ | 123,000 | $ | 123,082 | $ | | $ | (123,000 | ) | $ | 123,082 | |||||||||
Intercompany accounts payable |
74,434 | 285,846 | 34,722 | (395,002 | ) | | ||||||||||||||
Other current liabilities |
18,387 | 180,915 | 9,884 | | 209,186 | |||||||||||||||
Total current liabilities |
215,821 | 589,843 | 44,606 | (518,002 | ) | 332,268 | ||||||||||||||
LONG-TERM DEBT, excluding current portion |
705,951 | 700,018 | | (699,869 | ) | 706,100 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES |
| 713,227 | | (4,324 | ) | 708,903 | ||||||||||||||
Total liabilities |
921,772 | 2,003,088 | 44,606 | (1,222,195 | ) | 1,747,271 | ||||||||||||||
MINORITY INTEREST |
| | | 14,135 | 14,135 | |||||||||||||||
SHAREHOLDERS EQUITY: |
||||||||||||||||||||
Common stock, Additional paid in capital and Treasury stock |
703,884 | 485,590 | 41,143 | (526,733 | ) | 703,884 | ||||||||||||||
Deferred ESOP compensation |
(26,153 | ) | | | | (26,153 | ) | |||||||||||||
Retained earnings |
227,446 | 207,696 | 12,353 | (220,049 | ) | 227,446 | ||||||||||||||
Accumulated other comprehensive loss |
(101,385 | ) | (101,385 | ) | | 101,385 | (101,385 | ) | ||||||||||||
Total shareholders equity |
803,792 | 591,901 | 53,496 | (645,397 | ) | 803,792 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 1,725,564 | $ | 2,594,989 | $ | 98,102 | $ | (1,853,457 | ) | $ | 2,565,198 | |||||||||
21
Condensed Consolidating Balance Sheets
December 31, 2003
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 12,438 | $ | 9,294 | $ | | $ | 21,732 | ||||||||||
Intercompany accounts receivable |
1,059,752 | 85,610 | 40,608 | (1,185,970 | ) | | ||||||||||||||
Accounts receivable, net |
1 | 287,193 | 53 | | 287,247 | |||||||||||||||
Deferred income tax |
| 26,158 | | | 26,158 | |||||||||||||||
Inventory and supplies, net |
| 21,202 | | | 21,202 | |||||||||||||||
Prepaid expenses |
| 34,489 | 766 | | 35,255 | |||||||||||||||
Total current assets |
1,059,753 | 467,090 | 50,721 | (1,185,970 | ) | 391,594 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net |
| 1,546,503 | 11,743 | | 1,558,246 | |||||||||||||||
GOODWILL AND OTHER INTANGIBLES, net |
| 291,362 | 24,701 | | 316,063 | |||||||||||||||
DEFERRED INCOME TAX |
| 247,276 | (482 | ) | | 246,794 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES |
570,870 | | | (570,870 | ) | | ||||||||||||||
OTHER ASSETS |
12,633 | 105,390 | (2 | ) | (9,480 | ) | 108,541 | |||||||||||||
TOTAL ASSETS |
$ | 1,643,256 | $ | 2,657,621 | $ | 86,681 | $ | (1,766,320 | ) | $ | 2,621,238 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||||
Short-term debt |
$ | 59,500 | $ | 59,729 | $ | | $ | (59,500 | ) | $ | 59,729 | |||||||||
Intercompany accounts payable |
73,844 | 233,531 | 29,399 | (336,774 | ) | | ||||||||||||||
Other current liabilities |
6,574 | 200,512 | 6,394 | | 213,480 | |||||||||||||||
Total current liabilities |
139,918 | 493,772 | 35,793 | (396,274 | ) | 273,209 | ||||||||||||||
LONG-TERM DEBT, excluding current portion |
801,987 | 792,987 | | (792,839 | ) | 802,135 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES |
| 837,855 | | (6,337 | ) | 831,518 | ||||||||||||||
Total liabilities |
941,905 | 2,124,614 | 35,793 | (1,195,450 | ) | 1,906,862 | ||||||||||||||
MINORITY INTEREST |
| | | 13,025 | 13,025 | |||||||||||||||
SHAREHOLDERS EQUITY: |
||||||||||||||||||||
Common stock, Additional paid in capital and Treasury stock |
703,884 | 485,591 | 41,143 | (526,734 | ) | 703,884 | ||||||||||||||
Deferred ESOP compensation |
(26,153 | ) | | | | (26,153 | ) | |||||||||||||
Subscription receivable |
(39,515 | ) | | | | (39,515 | ) | |||||||||||||
Retained earnings |
164,520 | 148,801 | 9,745 | (158,546 | ) | 164,520 | ||||||||||||||
Accumulated other comprehensive loss |
(101,385 | ) | (101,385 | ) | | 101,385 | (101,385 | ) | ||||||||||||
Total shareholders equity |
701,351 | 533,007 | 50,888 | (583,895 | ) | 701,351 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 1,643,256 | $ | 2,657,621 | $ | 86,681 | $ | (1,766,320 | ) | $ | 2,621,238 | |||||||||
22
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2004
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
REVENUES: |
||||||||||||||||||||
Local services |
$ | | $ | 131,698 | $ | 8,473 | $ | (2,931 | ) | $ | 137,240 | |||||||||
Access services |
| 61,033 | | (1,564 | ) | 59,469 | ||||||||||||||
Long distance services |
| 22,320 | 8,639 | (53 | ) | 30,906 | ||||||||||||||
Cellular services |
| 49,425 | | | 49,425 | |||||||||||||||
Directory and other services and sales |
| 26,237 | | (2,336 | ) | 23,901 | ||||||||||||||
Total revenues |
| 290,713 | 17,112 | (6,884 | ) | 300,941 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Labor and benefits |
| 87,621 | 835 | | 88,456 | |||||||||||||||
Other operating expenses |
| 91,509 | 13,646 | (6,883 | ) | 98,272 | ||||||||||||||
Depreciation and amortization |
| 64,184 | 567 | | 64,751 | |||||||||||||||
Total operating costs and expenses |
| 243,314 | 15,048 | (6,883 | ) | 251,479 | ||||||||||||||
OPERATING INCOME |
| 47,399 | 2,064 | (1 | ) | 49,462 | ||||||||||||||
OTHER INCOME (EXPENSE), NET |
24,496 | (10,568 | ) | 121 | (25,163 | ) | (11,114 | ) | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE |
24,496 | 36,831 | 2,185 | (25,164 | ) | 38,348 | ||||||||||||||
INCOME TAX EXPENSE |
536 | 12,994 | 858 | | 14,388 | |||||||||||||||
NET INCOME |
$ | 23,960 | $ | 23,837 | $ | 1,327 | $ | (25,164 | ) | $ | 23,960 | |||||||||
23
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2003
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
REVENUES: |
||||||||||||||||||||
Local services |
$ | | $ | 137,682 | $ | 7,787 | $ | (3,084 | ) | $ | 142,385 | |||||||||
Access services |
| 65,385 | | (1,688 | ) | 63,697 | ||||||||||||||
Long distance services |
| 25,979 | 9,627 | (26 | ) | 35,580 | ||||||||||||||
Cellular services |
| 46,295 | | | 46,295 | |||||||||||||||
Paging services |
| 223 | | | 223 | |||||||||||||||
Directory and other services and sales |
| 22,745 | | (2,089 | ) | 20,656 | ||||||||||||||
Total revenues |
| 298,309 | 17,414 | (6,887 | ) | 308,836 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Labor and benefits |
| 99,634 | 794 | | 100,428 | |||||||||||||||
Other operating expenses |
| 168,886 | 13,178 | (6,887 | ) | 175,177 | ||||||||||||||
Depreciation and amortization |
| 63,106 | 745 | | 63,851 | |||||||||||||||
Total operating costs and expenses |
| 331,626 | 14,717 | (6,887 | ) | 339,456 | ||||||||||||||
OPERATING (LOSS) INCOME |
| (33,317 | ) | 2,697 | | (30,620 | ) | |||||||||||||
OTHER INCOME (EXPENSE), net |
(29,707 | ) | (18,379 | ) | 92 | 29,350 | (18,644 | ) | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAX EXPENSE |
(29,707 | ) | (51,696 | ) | 2,789 | 29,350 | (49,264 | ) | ||||||||||||
INCOME TAX EXPENSE (BENEFIT) |
| (20,898 | ) | 1,341 | | (19,557 | ) | |||||||||||||
NET INCOME (LOSS) |
$ | (29,707 | ) | $ | (30,798 | ) | $ | 1,448 | $ | 29,350 | $ | (29,707 | ) | |||||||
24
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2004
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
REVENUES: |
||||||||||||||||||||
Local services |
$ | | $ | 394,321 | $ | 25,261 | $ | (9,208 | ) | $ | 410,374 | |||||||||
Access services |
| 211,366 | | (5,316 | ) | 206,050 | ||||||||||||||
Long distance services |
| 75,077 | 28,418 | (95 | ) | 103,400 | ||||||||||||||
Cellular services |
| 144,882 | | | 144,882 | |||||||||||||||
Directory and other services and sales |
| 71,724 | | (6,927 | ) | 64,797 | ||||||||||||||
Total revenues |
| 897,370 | 53,679 | (21,546 | ) | 929,503 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Labor and benefits |
| 278,132 | 2,505 | | 280,637 | |||||||||||||||
Other operating expenses |
178 | 234,954 | 40,351 | (21,546 | ) | 253,937 | ||||||||||||||
Early retirement provision |
| 1,635 | | | 1,635 | |||||||||||||||
Depreciation and amortization |
| 193,436 | 1,700 | | 195,136 | |||||||||||||||
Total operating costs and expenses |
178 | 708,157 | 44,556 | (21,546 | ) | 731,345 | ||||||||||||||
OPERATING INCOME (LOSS) |
(178 | ) | 189,213 | 9,123 | | 198,158 | ||||||||||||||
OTHER INCOME (EXPENSE), NET |
101,707 | (30,864 | ) | 294 | (103,592 | ) | (32,455 | ) | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE |
101,529 | 158,349 | 9,417 | (103,592 | ) | 165,703 | ||||||||||||||
INCOME TAX EXPENSE (BENEFIT) |
(358 | ) | 60,498 | 3,676 | | 63,816 | ||||||||||||||
NET INCOME |
$ | 101,887 | $ | 97,851 | $ | 5,741 | $ | (103,592 | ) | $ | 101,887 | |||||||||
25
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2003
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
REVENUES: |
||||||||||||||||||||
Local services |
$ | | $ | 420,479 | $ | 22,117 | $ | (7,673 | ) | $ | 434,923 | |||||||||
Access services |
| 227,412 | | (3,986 | ) | 223,426 | ||||||||||||||
Long distance services |
| 75,777 | 26,572 | (89 | ) | 102,260 | ||||||||||||||
Cellular services |
| 140,324 | | | 140,324 | |||||||||||||||
Paging services |
| 1,026 | | | 1,026 | |||||||||||||||
Directory and other services and sales |
| 63,912 | | (4,926 | ) | 58,986 | ||||||||||||||
Total revenues |
| 928,930 | 48,689 | (16,674 | ) | 960,945 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Labor and benefits |
| 301,054 | 2,386 | | 303,440 | |||||||||||||||
Other operating expenses |
| 391,376 | 33,220 | (16,674 | ) | 407,922 | ||||||||||||||
Voluntary separation and retirement provision |
| 4,700 | | | 4,700 | |||||||||||||||
Depreciation and amortization |
| 184,933 | 2,197 | | 187,130 | |||||||||||||||
Total operating costs and expenses |
| 882,063 | 37,803 | (16,674 | ) | 903,192 | ||||||||||||||
OPERATING INCOME |
| 46,867 | 10,886 | | 57,753 | |||||||||||||||
OTHER INCOME (EXPENSE), net |
69,500 | (41,037 | ) | 186 | (70,687 | ) | (42,038 | ) | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE |
69,500 | 5,830 | 11,072 | (70,687 | ) | 15,715 | ||||||||||||||
INCOME TAX EXPENSE |
| 215 | 4,529 | | 4,744 | |||||||||||||||
INCOME BEFORE CUMULATIVE EFFECT |
69,500 | 5,615 | 6,543 | (70,687 | ) | 10,971 | ||||||||||||||
CUMULATIVE EFFECT OF ACCOUNTING CHANGES |
| 58,529 | | | 58,529 | |||||||||||||||
NET INCOME |
$ | 69,500 | $ | 64,144 | $ | 6,543 | $ | (70,687 | ) | $ | 69,500 | |||||||||
26
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2004
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Consolidated |
|||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
$ | (106 | ) | $ | 198,567 | $ | 6,428 | $ | 204,889 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures, including removal costs |
| (104,431 | ) | (25 | ) | (104,456 | ) | |||||||||
Proceeds from sale of building |
| 1,073 | | 1,073 | ||||||||||||
Net salvage on retirements |
| 215 | (1 | ) | 214 | |||||||||||
Net cash used in investing activities |
| (103,143 | ) | (26 | ) | (103,169 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Capital contribution |
40,000 | | | 40,000 | ||||||||||||
Net repayments of short-term debt, including |
| |||||||||||||||
capital leases |
(29,470 | ) | (147 | ) | | (29,617 | ) | |||||||||
Dividends paid |
(12,386 | ) | | | (12,386 | ) | ||||||||||
Borrowings/(repayment) intercompany loans |
1,971 | (1,971 | ) | | | |||||||||||
Net cash provided by (used in) financing activities |
115 | (2,118 | ) | | (2,003 | ) | ||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
9 | 93,306 | 6,402 | 99,717 | ||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 12,438 | 9,294 | 21,732 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 9 | $ | 105,744 | $ | 15,696 | $ | 121,449 | ||||||||
27
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2003
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||
Parent |
Subsidiary |
Subsidiaries |
Consolidated |
|||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | (201 | ) | $ | 264,222 | $ | 46 | $ | 264,067 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures, including removal costs |
| (109,657 | ) | (402 | ) | (110,059 | ) | |||||||||
Net salvage on retirements |
| 787 | (235 | ) | 552 | |||||||||||
Proceeds from sales of building |
| 6,000 | | 6,000 | ||||||||||||
Net cash used in investing activities |
| (102,870 | ) | (637 | ) | (103,507 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Capital contribution |
40,000 | | | 40,000 | ||||||||||||
Net (repayments) of short-term debt, including
capital leases |
(141,672 | ) | (127 | ) | | (141,799 | ) | |||||||||
Dividends paid |
(68,125 | ) | | | (68,125 | ) | ||||||||||
Borrowings/(repayments) intercompany loans |
170,022 | (170,022 | ) | | | |||||||||||
Net cash provided by (used in) financing activities |
225 | (170,149 | ) | | (169,924 | ) | ||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS |
24 | (8,797 | ) | (591 | ) | (9,364 | ) | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD |
1 | 27,009 | 6,657 | 33,667 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 25 | $ | 18,212 | $ | 6,066 | $ | 24,303 | ||||||||
28
19. 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 Companys financial condition and results of operations. See Managements 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, 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 United States Federal Communications Commission (the FCC) for inter-state wireline services and by the Puerto Rico Telecommunications Board (TRB) for intra-island wireline services.
The Company has an agreement with a provider for the implementation of a traffic polling and billing software system for its wireline operations. While the traffic polling portion has been implemented, management decided to abandon the billing portion of the software system. The amount of capitalized costs for software and labor related to the billing portion of $32.3 million was written off and included in operating expenses during the second quarter of 2003.
In September 2003, the Company established a pre-tax reserve of $73 million, including interest, for the end-user and AT&T refund referred to in the TRB Resolution and Order of February 28, 2002. See Managements Discussion and Analysis of Financial Condition and Results of Operations Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute for more information regarding the TRB Resolution and Order of February 28, 2002. In November 2003, the Company proposed, and two members of the TRB indicated their support for, an integrated plan to revise the Boards end-user refund order and end the dispute over this issue. As a result, the 2003 cash flow impact was a reduction of $16 million to the pre-tax reserve. After a hearing in June 2004, the TRB terminated a stay it had issued and allowed the Company to continue to implement the EAS expansion plan which was part of the integrated plan, subject to certain customer information and data collection requirements relating to the impact of the plan on measured service customers. As a result, the Company reduced the pre-established reserve to $14 million, which is associated with the anticipated single line credit planned for 2005.
In September 2004, the Company suffered damages resulting from Tropical Storm Jeanne. Business interruption and other losses are estimated at $12 million. At this point, the Company is unable to determine the collection, if any, on the insurance policy claim.
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the largest telecommunications service provider in Puerto Rico and the seventh largest local exchange carrier in the United States as measured by access lines in service. Wireline service, which has been provided since 1914, is marketed under the PRT brand. At September 30, 2004, we had approximately 1.2 million access lines in service, including 897,000 residential and 284,000 business lines. Since November 2001, we have been marketing our cellular service under the Verizon Wireless brand as part of a strategy to align our product and service offerings with those of Verizon Wireless in the United States.
We have two reportable segments: Wireline and Wireless. Wireline service is provided by PRTC and wireless services are provided by Verizon Wireless. The Companys off-island long distance service is provided by PRTLD and its dial-up Internet access service is provided by Coqui.net. Directory publishing revenues are generated by VISI.
The sections that follow provide information aspects of our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, financial position and sources and uses of cash, as well as significant future commitments. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources. We also monitor several key economic indicators as well as the state of the economy in general, primarily in Puerto Rico, in evaluating our operating results and analyzing and understanding business trends.
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect the managements focus on the following four key areas:
| Revenue Growth Our emphasis is on revenue transformation, devoting resources to growth markets such as wireless services and data as well as expanded services to enterprise markets. In the nine months ended September 30, 2004, revenues from the growth of wireless area, in particular post-paid cellular services increased by 8% compared to the same period in 2003 and wireless represented 16% of total revenues, up from 15% of total revenues for the nine months ended September 30, 2003. The Company added approximately 25,000 post-paid wireless customers. |
| Operational Efficiency While focusing resources on growth markets, we are continually challenging our management team to lower expenses in all segments through technology-assisted productivity improvements. The effect of these and other efforts, such as labor agreements and early retirement and voluntary separation plans, has been to decrease the Companys cost structure. The Company has reduced workforce levels by approximately 2,800 since 1998, which will provide ongoing expense benefits. Labor and benefits expenses declined by approximately $23 million for the nine months ended September 30, 2004 compared to the same period in 2003 largely as a result of early retirement and voluntary separation plans in 2003. |
| Capital Allocation Capital spending has been, and will continue to be directed toward growth markets. High-speed wireless data, replacement of TDMA networks as well as voice over the Internet and expanded services to enterprise markets, are examples of areas of capital spending in support of these growth markets. |
| Cash Flow Generation The financial statements reflect the emphasis by management on using cash provided by our operating and investing activities towards reducing our debt and funding our pension plans. |
Supporting these key focus areas are continuing initiatives to more effectively package and add more value to our products and services. Innovative product bundles include local wireline services, long distance, wireless and broad band data for consumer and general business retail customers.
30
CONSOLIDATED RESULTS OF OPERATIONS
In this section, we discuss our overall results of operations and highlight special and non-recurring items. In the following section, we review the performance of our two segments. We believe this presentation will assist readers in better understanding our results of operations and trends from period to period.
Consolidated Revenues
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2004 |
2003 |
% Change |
2004 |
2003 |
% Change |
|||||||||||||||||||
(In millions) | ( In millions ) | |||||||||||||||||||||||
Local |
$ | 137 | $ | 142 | (4 | )% | $ | 410 | $ | 435 | (6 | )% | ||||||||||||
Network Access |
59 | 64 | (8 | ) | 206 | 223 | (8 | ) | ||||||||||||||||
Long Distance |
31 | 36 | (14 | ) | 103 | 102 | 1 | |||||||||||||||||
Cellular |
49 | 46 | 7 | 145 | 141 | 3 | ||||||||||||||||||
Paging |
| | | | 1 | | ||||||||||||||||||
Directory and Other |
25 | 21 | 19 | 65 | 59 | 10 | ||||||||||||||||||
Consolidated revenues |
$ | 301 | $ | 309 | (3 | ) | $ | 929 | $ | 961 | (3 | ) | ||||||||||||
Consolidated revenues for the third quarter of 2004 decreased by $8 million, or 3%, to $301 million from $309 million for the same period in 2003. For the nine months ended September 30, 2004, consolidated revenues decreased $32 million, or 3%, to $929 million from $961 million for the same period in 2003. These decreases were primarily the result of lower revenues from local basic services and network access, partially offset by higher directory and other services revenues.
Local service revenues for the quarter ended September 30, 2004 decreased $5 million, or 4%, to $137 million from $142 million for the comparable 2003 period. For the nine months ended September 30, 2004, local service revenues decreased $25 million, or 6%, to $410 million from $435 million for the same period in 2003. These decreases were primarily due to a decline in basic voice services driven by a 5% decrease in access lines, the absence of touchtone billing and a decrease in public phone services.
Network access revenues for the quarter ended September 30, 2004 decreased $5 million, or 8%, to $59 million when compared to $64 million for the same period in 2003. For the nine months ended September 30, 2004, network access revenues decreased $17 million, or 8%, to $206 million when compared to $223 million for the same period in 2003. These decreases were driven by a decrease in intra-island access revenues due to the implementation of phase rate reduction required by the TRB in its Resolution and Order issued on February 28, 2002 (the February 2002 Order). See Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute.
Directory and other revenues for the quarter ended September 30, 2004 increased $4 million, or 19%, to $25 million from $21 million for the same period in 2003. For the nine months ended September 30, 2004, directory and other revenues increased $6 million, or 10%, to $65 million from $59 million for the same period in 2003. These increases were mainly due to increased revenues from unbundled network services.
Consolidated Operating Expenses
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2004 |
2003 |
%Change |
2004 |
2003 |
%Change |
|||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Labor and benefits |
$ | 88 | $ | 100 | (12 | )% | $ | 281 | $ | 303 | (7 | )% | ||||||||||||
Other operating expenses |
98 | 175 | (44 | ) | 254 | 408 | (38 | ) | ||||||||||||||||
Total consolidated operating expenses |
$ | 186 | $ | 275 | (32 | ) | $ | 535 | $ | 711 | (25 | ) | ||||||||||||
Consolidated operating expenses for the quarter ended September 30, 2004 decreased $89 million, or 32%, to $186 million from $275 million for the same period in 2003. For the nine months ended September 30, 2004, consolidated operating expenses decreased $176 million, or 25%, to $535 million from $711 million for the same period in 2003.
Labor and benefit expenses for the quarter ended September 30, 2004 decreased $12 million, or 12%, to $88 million from $100 million for the same period in 2003. For the nine months ended September 30, 2004, labor and benefit expenses decreased $22 million, or 7%, to $281 million from $303 million for the same period in 2003. These decreases were mainly due to a decrease in pension and OPEB expenses mainly associated with the Companys recognition of the Medicare Drug
31
Act 2003 as determined by our actuaries. See Note 9 to the unaudited condensed consolidated financial statements.
Other operating expenses for the quarter ended September 30, 2004 decreased $77 million, or 44%, to $98 million from $175 million for the same period in 2003. For the nine months ended September 30, 2004, other operating expenses decreased $154 million, or 38%, to $254 million from $408 million for the same 2003 period. These decreases were primarily due to the absence of the pre-tax reserve for the end-user and AT&T refund directed by the TRB in its February 2002 Order which was recognized during the quarter ended September 30, 2003. See Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute. Other factors contributing to the reduction were a decrease in bad debt expense due to a settlement with the PRDOE with respect to amounts owed and a decrease in management fees as the Verizon Management and Technology License Agreements expired on March 2, 2004 and replaced by a new Service Agreement. See Regulatory and Other Matters Puerto Rico Department of Education (the PRDOE) Debt.
Other Consolidated Results
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||
2004 |
2003 |
%Change |
2004 |
2003 |
%Change |
||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
Retirement and voluntary separation provision |
$ | | $ | | | % | $ | 2 | $ | 5 | (60 | )% | |||||||||||||
Depreciation and amortization |
65 | 64 | 2 | 195 | 187 | 4 | |||||||||||||||||||
Interest expense and others |
11 | 19 | (42 | ) | 33 | 43 | (23 | ) | |||||||||||||||||
Equity income in joint venture |
(1 | ) | (1 | ) | | (2 | ) | (2 | ) | | |||||||||||||||
Minority interest in consolidated subsidiary |
1 | | | 2 | 1 | 100 | |||||||||||||||||||
Income tax (benefit) expense |
14 | (19 | ) | (174 | ) | 64 | 5 | 1,180 | |||||||||||||||||
Cumulative effect of accounting change |
| | | | (59 | ) | (100 | ) | |||||||||||||||||
Total Other Consolidated Results |
$ | 90 | $ | 63 | 43 | $ | 294 | $ | 180 | 63 | |||||||||||||||
Retirement and voluntary separation provisions
In January 2004, 19 qualified management employees accepted the early retirement program offered by the Company in December 2003, which resulted in a provision of $1.6 million.
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 $1.4 million. During the second quarter of 2003, 191 union employees accepted a combined voluntary separation program and retirement program offered by the Company that closed on June 20, 2003 and June 30, 2003, respectively, which resulted in an additional provision of $3.3 million.
Depreciation and amortization expense
Depreciation and amortization expense of $65 million for the quarter ended September 30, 2004 was $1 million higher than the same period in 2003. Depreciation and amortization expense of $195 million for the nine months ended September 30, 2004 was $8 million higher, or 4%, than the same period in 2003. The increase in depreciation and amortization expense is mainly due to the accelerated depreciation on TDMA network resulting from managements decision during 2003 to migrate all TDMA customers to the CDMA platform in 2004 and an increase in software amortization expense due to the implementation of various operational support systems.
Interest expense and other
Interest expense of $11 million for the quarter ended September 30, 2004 was $8 million, or 42%, lower than for the comparable 2003 period. The decrease was primarily due to the absence of the interest associated with the pre-tax reserve recognized during the same 2003 period for the end-user and AT&T refund referred to in the February 2002 Order.
Interest expense of $33 million for the nine months ended September 30, 2004 was $10 million lower, or 23%, than for the same 2003 period due to a decrease in capitalized interest of $3 million resulting from the write-off of the billing software system, during the six months ended June 30, 2003 and a decrease in other interest expense of $8 million associated with the partial reversal during the nine months ended September 30, 2004 of the pre-tax reserve for the end-user and the AT&T refund referred to in the February 2002 Order.
32
Equity income from joint venture
Equity income was generated from our 24% interest in VISI, the largest yellow page publishing company in Puerto Rico. For the quarter ended September 30, 2004, equity income remained constant at $1 million compared to the same period in 2003. Also, for the nine months ended September 30, 2004, equity income remained constant at $2 million compared to the same period in 2003
Minority interest in consolidated subsidiary
The $1 million and $2 million minority interest included in the Companys results of operations for the quarter ended September 30, 2004 and for the nine months ended September 30, 2004, respectively, reflect the 33% interest in Coqui.net, that is held by Popular, Inc., one of our shareholders.
Income taxes
The effective income tax rate is the provision for income taxes as a percentage of income before tax from continuing operations. A $14 million tax provision for the quarter ended September 30, 2004 reflects a 37.5% effective tax rate. For the nine months ended September 30, 2004, a $63.8 million tax provision reflects a 38.5% effective tax rate. The difference between the effective and the statutory tax rate (39%) equates $1.4 million, primarily reflecting permanent differences related to recognition of equity income from the joint venture and amortization of tax-deductible goodwill.
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 value. 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 value 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 $117 million ($71 million after-tax). Effective January 1, 2003, we began expensing costs of removal in excess of salvage value for these assets in the period in which they are incurred.
Effective January 1, 2003, the Company changed its method of accounting for revenues from directory publishing rights and related expenses from the point-of-publication method to the amortization method. Although both methods fully comply with accounting principles generally accepted in the United States, the Company adopted the amortization method because it is becoming the industry standard. The cumulative effect of applying this accounting change to prior years was recognized as of January 1, 2003 as a one-time, non-cash loss of $17 million ($13 million, after tax).
33
SEGMENT RESULTS OF OPERATIONS
The Company has two reportable segments, Wireline and Wireless. See Note 17 to the unaudited condensed consolidated financial statements for additional information on the Companys segments. Reclassifications of prior periods data have been made to conform to the current periods presentation.
The Wireline segment consists of:
| Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed private line services, Internet access and public phone service; |
| Long distance services including direct dial on-island and off-island, operator assisted calls, prepaid calling card and high-speed private line services; |
| Access services to long distance carriers, competitive local exchange carriers, and cellular and paging operators to originate and terminate calls on the Companys network; |
| Directory publishing rights services; and |
| Telecommunication equipment sales and billing and collection services to competing long distance operators in Puerto Rico. |
The Wireless segment consists of:
| Cellular services; and |
| Wireless equipment sales. |
34
Wireline Revenues
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||
2004 |
2003 |
% Change |
2004 |
2003 |
% Change |
||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
Local |
$ | 139 | $ | 145 | (4 | )% | $ | 417 | $ | 440 | (5 | )% | |||||||||||||
Network Access |
60 | 64 | (6 | ) | 207 | 225 | (8 | ) | |||||||||||||||||
Long Distance |
31 | 36 | (14 | ) | 105 | 104 | 1 | ||||||||||||||||||
Directory and Other |
18 | 17 | 6 | 51 | 49 | 4 | |||||||||||||||||||
Total Wireline |
$ | 248 | $ | 262 | (5 | ) | $ | 780 | $ | 818 | (5 | ) | |||||||||||||
OPERATING DATA
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2004 |
2003 |
% Change |
2004 |
2003 |
% Change |
|||||||||||||||||||
Access Lines in Service (000s): |
||||||||||||||||||||||||
Residential |
897 | 949 | (5 | )% | 897 | 949 | (5 | )% | ||||||||||||||||
Business |
284 | 293 | (3 | ) | 284 | 293 | (3 | ) | ||||||||||||||||
Total |
1,181 | 1,242 | (5 | ) | 1,181 | 1,242 | (5 | ) |
Wireline revenues include local service, network access, long distance, directory and other revenues. For the quarter ended September 30, 2004, wireline revenues decreased $14 million, or 5%, to $248 million from $262 million for the same period in 2003. For the nine months ended September 30, 2004, wireline revenues decreased $38 million, or 5%, to $780 million from $818 million for the same period in 2003.
Local Services
Local service revenues include revenues from basic voice, telephone and telecommunications equipment rental, value-added services, high-speed private line services, Internet access, and public phone service. Local service revenues for the quarter ended September 30, 2004 decreased $6 million, or 4%, to $139 million from $145 million for the same period in 2003. The decrease is due to decreased revenues from local voice services of $7 million partially offset by increased revenues from local data services of $2 million. The decrease in revenues from local voice services was driven mainly due to lower access lines and a decrease in public phone revenues of $2 million. The increase in local data service revenues was primarily driven by an increase in the number of customers requesting our high-speed special services and internet services, which resulted in a $1 million increase in both high-speed special services and internet service revenue.
Local service revenues for the nine months ended September 30, 2004 decreased $23 million, or 5%, to $417 million from $440 million for the same period in 2003. The decrease was driven by a decrease in revenues from basic voice services of $25 million mainly due to 5% fewer access lines and the elimination of touchtone charges.
Network Access
Network access revenues include revenues from services provided to long distance carriers, competitive local exchange carriers, and cellular and paging operators to originate and terminate calls on our network. These revenues for the quarter ended September 30, 2004 decreased $4 million, or 6%, to $60 million, compared to $64 million for the same period in 2003. The decrease was driven by a decrease in intra-island access revenues of $9 million due to the implementation of phased rate reduction required by the TRB in the February 2002 Order and included in the integrated plan and a decrease in off-island special revenues of $1 million, which were offset in part by an increase in off-island switching revenues of $6 million. See Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute.
These revenues for the nine months ended September 30, 2004 decreased $18 million, or 8%, to $207 million compared to $225 million for the same period in 2003. The decrease was driven by a decrease in intra-island access revenues of $20 million due to the implementation of phased rate reductions required by the TRB in the February 2002 Order and agreed to as part of the integrated plan, partially offset by an increase in subscriber line charges of $3 million.
35
Long Distance
Long distance revenues include direct dial on-island and off-island, operator-assisted calls, prepaid calling cards and on-island private line long distance revenues. Long distance revenues for the quarter ended September 30, 2004 decreased $5 million, or 14%, to $31 million from $36 million for the same period in 2003 as a result of the impact of the Extended Area Service (EAS) implementation and a decrease in long distance call volumes. See Regulatory and Other Matters Extended Area Service (EAS) Local Calling Zone Dispute.
Long distance revenues for the nine months ended September 30, 2004 increased $1 million, or 1%, to $105 million from $104 million for the same 2003 period. The increase was due to an increase in on-island private line revenues of $9 million resulting from an increase in the client base, which was partially offset by a decrease in intra-island long distance revenues of $7 million and in off-island long distance revenues of $1 million as a result of the impact of the EAS implementation and a decrease in long distance call volumes.
Directory and Other
Directory and other revenues include revenues from directory publishing rights, telecommunication equipment sales and billing and collection services provided to competing long distance operators in Puerto Rico. Directory and other revenues for the quarter ended September 30, 2004 increased $1 million, or 6%, to $18 million from $17 million for the same period in 2003 due to an increase in directory revenues of $5 million, which was partially offset by a decrease in wireline equipment sales of $1 million, a decrease in billing and collections revenues of $1 million and a decrease in revenues from other services to carriers of $1 million.
Directory and other revenues for the nine months ended September 30, 2004 increased $2 million, or 4%, to $51 million from $49 million for same period in 2003. The increase was mainly due to an increase of $7 million in unbundled network services, which was offset, in part, by a decrease in revenues from billing and collection services of $2 million, a decrease in revenues from wireline equipment sales of $3 million and a decrease in other service revenues to carriers of $1 million.
Wireline Expense and Charges
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||
2004 |
2003 |
%Change |
2004 |
2003 |
%Change |
||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
Labor and benefits |
$ | 80 | $ | 93 | (14 | )% | $ | 257 | $ | 280 | (8 | )% | |||||||||||||
Other operating expenses |
66 | 146 | (55 | ) | 162 | 320 | (49 | ) | |||||||||||||||||
Total Wireline |
$ | 146 | $ | 239 | (39 | ) | $ | 419 | $ | 600 | (30 | ) | |||||||||||||
Wireline expenses for the quarter ended September 30, 2004 decreased $93 million, or 39%, to $146 million from $239 million for the same period in 2003. Wireline expenses for the nine months ended September 30, 2004 decreased $181 million, or 30%, to $419 million from $600 million for the same period in 2003.
Labor and benefits
Labor and benefit expenses for the quarter ended September 30, 2004 decreased $13 million, or 14%, to $80 million from $93 million for the same period in 2003, due to a decrease in pension and OPEB expenses of $8 million and a headcount reduction which resulted in a decrease in salary expenses of $2 million and a decrease in expatriate expenses of $3 million.
Labor and benefit expenses for the nine months ended September 30, 2004 decreased $23 million, or 8%, to $257 million from $280 million for the same period in 2003, due to a decrease in pension and OPEB expenses of $9 million, and a headcount reduction which resulted in a decrease in salary expenses of $8 million and a decrease in expatriate expenses of $5 million.
36
Other operating expenses
Other operating expenses for the quarter ended September 30, 2004 decreased $80 million, or 55%, to $66 million from $146 million for the same period in 2003. The decrease was due to the absence of the pre-tax reserve, established during the same period in 2003, of $66 million for the end-user and AT&T refund previously referred to, which was recognized during the quarter ended September 30, 2003. See -Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute. In addition, bad debt expense decreased $16 million due to PRTCs agreement with the Puerto Rico Department of Education (The PRDOE) to settle the amounts owed by the PRDOE under the PRDOEs Reeducate Program out of court. See Regulatory and Other Matters Puerto Rico Department of Education (The PRDOE) Debt. These decreases were offset in part by higher regulatory fees of $2 million mainly due to an increase in revenues subject to regulatory fees.
Other operating expenses for the nine months ended September 30, 2004 decreased $158 million, or 49%, to $162 million from $320 million for the same 2003 period. The decrease was primarily due to the fact that the 2003 results included a $29 million write-off of the billing software system which was abandoned by the Company and recognized for the nine months ended September 30, 2003, and a $66 million pretax reserve for the end user and AT&T refund previously referred to. Of the latter reserve, $43 million was reversed during the nine months ended September 30, 2004. See Regulatory and Other Matters Intra-Island Long Distance Access Rate Dispute. Two other changes contributed to the reduction in expenses: a decrease in management fees of $7 million as the Verizon Management and Technology License Agreements expired on March 2, 2004 and was replaced by a new Service Agreement and a decrease in bad debt expense of $19 million due to PRTCs agreement with the PRDOE. See Regulatory and Other Matters Puerto Rico Department of Education (The PRDOE) Debt. These decreases were partially offset by higher off-island long distance access charges of $3 million and higher regulatory fees of $2 million mainly due to an increase in revenues subject to regulatory fees.
Wireless Revenues
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||
2004 |
2003 |
% Change |
2004 |
2003 |
% Change |
||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
Postpaid Cellular |
$ | 46 | $ | 40 | 15 | % | $ | 131 | $ | 121 | 8 | % | |||||||||||||
Prepaid Cellular |
4 | 7 | (43 | ) | 14 | 20 | (30 | ) | |||||||||||||||||
Total Cellular |
50 | 47 | 6 | 145 | 141 | 3 | |||||||||||||||||||
Paging |
| | | | 1 | | |||||||||||||||||||
Wireless Equipment |
6 | 4 | 50 | 14 | 9 | 56 | |||||||||||||||||||
Total Wireless |
$ | 56 | $ | 51 | 10 | $ | 159 | $ | 151 | 5 | |||||||||||||||
OPERATING DATA
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2004 |
2003 |
% Change |
2004 |
2003 |
% Change |
|||||||||||||||||||
Cellular Customers (000s): |
||||||||||||||||||||||||
Postpaid |
262 | 237 | 11 | % | 262 | 237 | 11 | % | ||||||||||||||||
Prepaid |
89 | 117 | (24 | ) | 89 | 117 | (24 | ) | ||||||||||||||||
Total |
351 | 354 | (1 | ) | 351 | 354 | (1 | ) | ||||||||||||||||
Postpaid Cellular Average Revenue Per Unit (ARPU) |
$ | 50 | $ | 51 | (2 | )% | $ | 49 | $ | 52 | (6 | )% | ||||||||||||
Prepaid Cellular ARPU |
16 | 17 | (6 | ) | 17 | 19 | (11 | ) | ||||||||||||||||
Combined Cellular ARPU |
41 | 40 | 3 | 40 | 40 | |
Revenues from cellular services and related equipment sales for the three months ended September 30, 2004 increased $5 million, or 10%, to $56 million from $51 million for the comparable 2003 period. Revenues from cellular services and related equipment sales for the nine months ended September 30, 2004 increased $8 million, or 5%, to $159 million from $151 million for the comparable 2003 period.
37
Cellular Services
Cellular service revenues for the quarter ended September 30, 2004 increased $3 million, or 6%, to $50 million from $47 million for the same period in 2003. For the nine months ended September 30, 2004, cellular services increased $4 million, or 3%, to $145 million from $141 million for the same period in 2003. These increases were primarily the result of an increase of 25,000 post paid cellular customers for the third quarter of 2004 compared to the same period in 2003 due to attractive price plans and the implementation of marketing strategies to align the Companys product and service offerings with those of Verizon Wireless in the United States.
Wireless Equipment
Revenues from wireless equipment sales increased $2 million, or 50%, to $6 million for the quarter ended September 30, 2004 from $4 million for the comparable 2003 period and increased $5 million, or 56%, to $14 million for the nine months ended September 30, 2004 from $9 million for the comparable 2003 period. These increases are the result of postpaid contract renewals and customer adquisitions.
Wireless Expenses and Changes
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||
2004 |
2003 |
%Change |
2004 |
2003 |
%Change |
||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
Labor and benefits |
$ | 8 | $ | 8 | | % | $ | 23 | $ | 24 | (4 | )% | |||||||||||||
Other operating expenses |
33 | 29 | 14 | 91 | 87 | 5 | |||||||||||||||||||
Total Wireless |
$ | 41 | $ | 37 | 11 | $ | 114 | $ | 111 | 3 | |||||||||||||||
Wireless expenses for the quarter ended September 30, 2004 increased $4 million, or 11%, to $41 million from $37 million for the same period in 2003. Wireless expenses for the nine months ended September 30, 2004 increased $3 million, or 3%, to $114 million from $111 million for the same period in 2003.
Labor and benefits
Labor and benefit expenses for the quarter ended September 30, 2004 remained constant at $8 million compared to the same period in 2003.
Labor and benefit expenses for the nine months ended September 30, 2004 decreased $1 million, or 4%, to $23 million from $24 million for the same period in 2003, which was due to a decrease in salary-related expenses resulting from fewer employees for the nine months ended September 30, 2004 compared with the same period in 2003.
Other operating expenses
Other operating expenses for the quarter ended September 30, 200 Net cash used in investing activities for the nine months ended September 30, 2004 was $103 million compared to $104 million for the same period in 2003. The $1 million decrease in net cash used in investing activities was due to a $6 million decrease in capital expenditures and costs of removal as a result of 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, offset by a $5 million decrease in proceeds from the sale of buildings in 2003.
Other operating expenses for the nine months ended September 30, 2004 increased $4 million, or 5%, to $91 million from $87 million for the comparable 2003 period. The increase was due to a higher subsidy on equipment sales of $7 million partially offset by a decrease in cellular roaming expenses of $3 million due to the termination of a $3 million contract with a wireless service provider for the usage of their CDMA network at the end of the third quarter of 2003.
38
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2003
Nine Months Ended September 30, |
||||||||||||
2004 |
2003 |
Change |
||||||||||
(Dollars in Millions) | ||||||||||||
Net cash provided by (used in): |
||||||||||||
Operations |
$ | 205 | $ | 264 | $ | (59 | ) | |||||
Investing |
(103 | ) | (104 | ) | 1 | |||||||
Financing |
(2 | ) | (170 | ) | 168 |
OVERALL LIQUIDITY ASSESSMENT
The Company believes that cash provided by operations is sufficient to meet its working capital needs. At September 30, 2004, current assets exceeded current liabilities by $137 million. We believe our sources of funds, from operations and from readily available external financing arrangements, are sufficient to meet ongoing requirements related to operating, financing and investing activities. We expect that presently foreseeable capital requirements will continue to be financed through internally generated funds.
On March 2, 2004, the Company entered into a new unsecured, undrawn $360 million 364-day revolving credit facility, which matures in March 2005. An undrawn $40 million working capital credit facility, which matured in June 2004 was renewed and matures on June 30, 2005. See Note 13 to the unaudited condensed consolidated financial statements for more detailed information.
OPERATIONS
Net cash provided by operating activities continued to be our primary source of funds. For the nine months ended September 30, 2004, net cash provided by operating activities was $205 million compared to $264 million for the same period in 2003. The $59 million decrease was primarily due to a $66 million increase in pension plan contributions, which are part of managements strategy to fully fund the pension plans by 2007 partially offset by a decrease in OPEB disbursements of $8 million associated with the Companys recognition of the effects of the Medicare Drug Act. See Note 9 to the unaudited condensed consolidated financial statements for more detailed information.
INVESTING
Net cash used in investing activities for the nine months ended September 30, 2004 was $103 million compared to $104 million for the same period in 2003. The $1 million decrease in net cash used in investing activities was due to a $6 million decrease in capital expenditures and costs of removal as a result of 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, offset by a $5 million decrease in proceeds from the sale of buildings in 2003.
We have invested approximately $1.2 billion from the date of the Acquisition through September 30, 2004 to expand and enhance our networks. Our planned capital expenditures for 2004 are approximately $160 million, which we expect to finance with internally generated funds.
39
FINANCING
Net cash used in financing activities for the nine months ended September 30, 2004 and 2003 was $2 million and $170 million, respectively. We reduced outstanding debt, including capital leases by $30 million for the nine months ended September 30, 2004 and by $142 million for the same period in 2003. Borrowings under term credit facilities, working capital facilities and commercial paper decreased from $153 million at December 31, 2003 to $123 million at September 30, 2004 and from $323 million at December 31, 2002 to $181 million at September 30, 2003.
In connection with the Acquisition, 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 partially fund its under funded pension and other post-employment benefit obligations. In March 2004, the Company received the fifth and final $40 million installment in cash from PRTA. See Note 15 to the unaudited condensed consolidated financial statements for more information.
The shareholders agreement requires the payment of dividends equal to at least 50% of our consolidated net income, payable quarterly to the extent that funds are legally available therefore. For the nine months ended September 30, 2004, the Company paid dividends in the amount of $12 million, which were declared in the first quarter of 2004. Dividends in the amount of $27 million were declared in the third quarter of 2004 were not paid until October 2004. For the six months ended June 30, 2003, the Company paid dividends in the amount of $68 million, which were declared in the first quarter of 2003 and the fourth quarter of 2002. The senior notes indentures and credit facility agreements do not contain restrictions on the payment of dividends.
OFF-BALANCE SHEET ARRANGEMENTS
The Company currently does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following table provides a summary of our contractual obligations and commercial commitments at September 30, 2004. Additional detail about these items is included in the notes to the unaudited consolidated financial statements.
Contractual Obligations & |
||||||||||||||||||||||||||||
Other Commercial Commitments: |
Payments Due In Period |
|||||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||||||
Total |
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
||||||||||||||||||||||
Long Term Debt, including interest rate swap |
$ | 705 | $ | | $ | | $ | 405 | $ | | $ | | $ | 300 | ||||||||||||||
Term Credit Facilities |
123 | | 123 | | | | | |||||||||||||||||||||
Pension Benefit Obligations |
528 | 177 | 127 | 111 | 87 | 16 | 10 | |||||||||||||||||||||
Operating Leases |
47 | 12 | 10 | 7 | 4 | 2 | 12 | |||||||||||||||||||||
Total |
$ | 1,403 | $ | 189 | $ | 260 | $ | 523 | $ | 91 | $ | 18 | $ | 322 | ||||||||||||||
40
REGULATORY AND OTHER MATTERS
REGULATORY AND COMPETITIVE TRENDS
Regulatory activity at the federal and local levels has been primarily directed at meeting challenges in maintaining support for local exchange rates and Universal Service while effecting the rate rebalancing and restructuring required by an increasingly competitive environment. Among the issues generating regulatory activity are the expansion of local calling areas, local number portability requirements, interconnection agreements, the FCCs triennial review and the elimination of reverse toll billing.
We have continued to meet the wholesale requirements of new competitors and have signed agreements with wireless and wireline carriers. These agreements permit these carriers to purchase unbundled network elements, resell retail services, and 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 TRBs 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 on the Companys 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 go into effect 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 that the TRB made errors of law and procedure in its determination of access charges and its order to make the cash refund.
On April 2, 2002, AT&T, Sprint and LTD (the 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 submitting the case for final adjudication. On August 19, 2003, the Court issued its final decision on the proceeding confirming the TRB Order on Reconsideration of February 28, 2002 in all respects and rejecting the claims of PRTC and the Carriers. On September 4, 2003, PRTC requested reconsideration of the Courts determination on the grounds that although the Court correctly described the applicable legal standards the Court erred in applying those standards to the facts of the case. On October 2, 2003, the Court denied PRTCs reconsideration request. As a result of the Courts decision, the Company established a pre-tax reserve of $73 million, including interest, in September 2003 (3rd quarter) for the end-user and AT&T refund referred to in the February 2002 Order. This reserve is in addition to the reserve established in connection with the stay of the TRB Order on Reconsideration issued by the Court.
On October 30, 2003, the Company filed a petition for a writ for certiorari before PR Supreme Court challenging the $68 million refund portion of the Order. The phased-rate reduction portion of the Order was settled with the major carriers. See Carrier Access Billing.
41
In November 2003, the Company proposed, and two members of the TRB indicated their support for, a plan to revise the TRBs end-user refund order and end the dispute over this issue. First, PRTC has filed tariffs implementing the reduction in intra-island access charges ordered by the TRB in its Order on Reconsideration of February 27, 2002. The composite per minute access rate was reduced from 9.3 cents to 6.5 cents on January 1, 2004 and will continue to decrease in accordance with the TRB phase reduction schedule, which will end on April 1, 2005. In addition, PRTC agreed to implement a phased reduction in the number of local exchange calling areas from 68 to 10, the first phase of which became effective in February 2004, coupled with the deferred implementation of a flat charge designed to offset the resulting revenue losses. The plan included a number of other elements benefiting consumers; elimination of touchtone charges; one time credits for single line residential customers equal to their basic monthly service rate in December 2003 and June 2005 of approximately $14 million; and a commitment not to raise residential rates through December 2006 without providing certain information to the TRB in advance. The 2003 cash flow impact was a reduction of $16 million to the pre-tax reserve associated with one of the two one-time single line credits.
On February 4, 2004, Centennial filed with the Puerto Rico Supreme Court an opposition to PRTCs request that the Court hold the case in abeyance until the TRB issued a Resolution and Order confirming the commitments negotiated in November 2003. On April 6, 2004, Centennial filed a motion requesting dismissal of the case, arguing that the settlement between the TRB and PRTC rendered the case moot. In the alternative, Centennial also argued that the TRB lacks jurisdiction to modify the end user refund order, pending the petition for certiorari before the Puerto Rico Supreme Court. Centennial claimed that the commitment negotiated in November 2003 with respect to the $68 million refund was null and void. On April 15, 2004, PRTC responded to and opposed Centennials filing.
On April 23, 2004, PRTC and Centennial entered into a settlement agreement and on April 29, 2004, jointly filed a motion with the Supreme Court informing the Supreme Court of the settlement. Centennial withdrew its opposition to PRTCs petition and on April 30, 2004, the Puerto Rico Supreme Court issued a Resolution denying PRTCs petition for certiorari on the grounds of that the issue was moot.
As a result of the TRBs support of the revision to the end-user refund order through agreed rate reductions and consolidation of calling areas, the final settlement of carrier access rate disputes and the Supreme Court resolution rendering the litigation moot; the Company revised the pre-established contingency at $14 million, associated with the expected June 2005 single line credit.
EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE
In December 2003, AT&T and Sprint, (later followed by TLD) challenged PRTCs actions in implementing the reduction of calling areas before the TRB, and sought an injunction to further reductions in the number of calling areas. PRTC has opposed the request for the injunction and intends to fulfill its commitments to the TRB. The TRB considered the matter in a hearing held on April 28, 30 and May 3, 2004 and determined that the carriers request for injunctive relief should not proceed. The TRB allowed PRTC to implement its EAS Phase IV as scheduled on May 4, 2004 and ordered PRTC to sustain from further EAS implementation until an expedited investigation process is completed.
On May 6, 2004, PRTC submitted to the TRB and to the carriers a proposed expedited schedule in an effort to resolve the investigation prior to the next phase of the EAS implementation, which was scheduled for June 7, 2004 and covers Puerto Ricos metro area. A hearing on the investigation was held on June 2, 2004.
After the hearing, the TRB terminated the stay it had issued and allowed PRTC to continue to the next phase of the EAS implementation, subject to the satisfaction of certain customer information and data collection requirements relating to the impact of the EAS implementation on measured service customers. On June 7, 2004, the TRB allowed the Company to continue with the implementation of the metro area zone, which is the largest zone.
As a result of the TRBs determination subsequent to the hearing of June 2, 2004, the Company reduced the reserve originally established in September 2003 to $14 million.
On July 8, 2004, the TRB issued a Resolution and Order initiating the investigation process regarding the EAS implementation impact on measured service customers. The TRB ordered PRTC to submit monthly reports that would reflect the impact on measured service customers. PRTC complied with the filing of the first two reports on September 7 and October 7, 2004. PRTC is also required to file a report on its customer information program with respect to EAS on that date.
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On September 20 and September 22, 2004, AT&T and Sprint filed a motion requesting authorization to amend the complaint and and to obtain discovery from PRTC. On October 4, 2004, PRTC opposed to both motions. A resolution on both motions is pending.
As of October 4, 2004, PRTC has completed all phases of its EAS implementation program.
CARRIER ACCESS BILLING
During the first and second quarters of 2003, certain carriers made a series of billing claims against the Company regarding tariff interpretation, traffic routing at the network level and misclassification of access traffic for determination of applicable access elements.
The Company entered into negotiations with the major carriers and settled the billing claims and phased-rate reductions required by the February 2002 Order. The Company does not believe that the impact of these settlements will have a material effect on the Companys results of operations.
PUBLIC TELEPHONE SERVICE PROVIDER ANTI COMPETITIVE ACTIONS
On November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the largest competitive provider of public pay phones in Puerto Rico filed a lawsuit against us in the United States District Court of Puerto Rico, claiming predatory, exclusionary and anticompetitive acts and seeking $75 million in damages. The Company filed a motion to dismiss the lawsuit which was largely denied by the Court on August 2004. The lawsuit is currently in the discovery stage and trial is scheduled to begin November 22, 2004. The Companys management believes that TPPRs claim is without merit.
Pan American Telephone, Inc., Intouch Telecommunications, Inc., and Choicetel Communications, Inc., three other competitive providers of public pay phones in Puerto Rico, also filed a similar lawsuit against us in the United States District Court of Puerto Rico on September 4, 2002 on the same grounds. On November 8, 2002, we filed a motion to dismiss the lawsuit and/or in the alternative to consolidate the lawsuit with TPPRs lawsuit. The Court denied the motion to dismiss without prejudice. On September 7, 2004, the parties filed a joint motion for dismissal with prejudice after reaching a settlement agreement which puts an end to all claims and controversies between them in the proceeding. On October 4, 2004, the Court dismissed the case with prejudice.
On August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico, filed a lawsuit against PRTC in the United States bankruptcy court in the District of Delaware, claiming anti competitive acts. The claims have since been transferred to the United States District Court of Delaware and the disputes between the two parties include PRTCs amended administrative claim against PSA, and PSAs claim for over $9 million from PRTC. PRTCs motion to change venue to Puerto Rico was granted by the United States District Court of Delaware and the motion to dismiss is currently pending before the United States District Court of Puerto Rico. On September 24, 2004, the Court issued an Opinion and Order granting PRTCs motion to dismiss.
PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT
On June 30, 2003, PRTC filed a complaint against the PRDOE with the Puerto Rico Superior Court, seeking collection of fees due for services rendered under the PRDOEs Reeducate Program, which is based on the Federal E-Rate Program, from 1999 to June 30, 2003. The Reeducate Program funds Internet connections for schools throughout Puerto Rico and PRTC has provided contracted services to the PRDOE. Based on PRTCs review of its services rendered under the Reeducate Program, the outstanding amount that PRDOE currently owes to PRTC is $34 million. Under the E-Rate program, 89% of this amount is to be paid by the FCCs School & Libraries Division (SLD), which administers the Federal E-Rate Program, if the funding for the fourth and fifth years under the program is released. PRTC is currently evaluating the outstanding amounts owed by PRDOE for the third year under the program, which we believe is approximately $1.2 million, after SLD paid its corresponding percentage (87%) under the program.
On March 4, 2004, PRTC filed a motion to dismiss the complaint based on an agreement with the PRDOE to attempt to settle the amounts owed out of court. On March 24, 2004, the court dismissed the case without prejudice.
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In November 2003, the FCC directed SLD to audit the PRDOEs compliance with the E-Rate program rules as well as billings for the Reeducate Program for years one through three of the program before the funds will be released. The audit of the PRDOE began on May 15, 2004. The auditor has contacted PRTC and PRTC is cooperating with the audit. There is no scheduled timetable for the completion of the audit process. Upon completion of that audit, SLD will determine if there is a need to recover any, or all, of the funds that were distributed during those years to the PRDOE and its vendors, including PRTC.
On June 17, 2004, the United States House Energy and Commerce Committee Subcommittee on Oversight and Investigations held a hearing entitled Problems with the E-Rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nations Schools to the Internet. Representatives from PRTC, as well as representatives from the PRDOE testified at the hearing. This hearing was one of a series of ongoing hearings focused upon the E-Rate program.
At the beginning of July, 2004, the Universal Service Administrative Company (USAC), the E-Rate programs administrator commenced the audit directed by the FCC. The audit was divided into two time periods: Years 1 to 3 (1999 to June 2001) and Years 4 and 5 (July 2001 to June 2003). PRTC has been providing information with respect to contracts, billing, payments and the network designed and installed by PRTC, and service levels provided in response to requests from the auditors.
On July 30, 2004, the FCC released its Fourth Report and Order addressing the manner in which funds would be recovered under the E-Rate program. On August 13, 2004, the FCC released its Fifth Report and Order (Order) in the same proceeding adopting measures to address issues raised in audit conducted as part of ongoing oversight of the schools and libraries support mechanisms and programmatic concerns noted by its Office of Inspector General. Based on the standards established by the FCC, PRTC does not believe that amounts it has received from the E-Rate program are subject to recovery. PRTC is implementing procedures to ensure compliance with the requirements established by the Order.
TOUCHTONE CHARGES
On November 17, 2003, six residential subscribers and eight business service subscribers filed a class action suit with the Superior Court of Puerto Rico (the Superior Court) under the Puerto Rico Telecommunications Act of 1996 (Act) and the Puerto Rico Class Action Act of 1971. The plaintiffs have claimed that the Companys charges for touchtone service are not based on cost, and therefore violate of the Act. The plaintiffs have requested that the Superior Court (i) issue an order certifying the case as a class action, (ii) designate the plaintiffs as representative of the class, (iii) find that the charges are illegal, and (iv) order the Company to reimburse every subscriber for excess payments made since September 1996. On December 30, 2003, PRTC filed its answer to the complaint and requested dismissal on the grounds that the claim is not a legitimate class action suit. On February 17, 2004, the plaintiffs filed their first set of interrogatories and request for admissions to initiate discovery.
A status conference was held on April 30, 2004 and the Superior Court ruled that at this stage of the proceedings the discovery process would be addressed, but not limited to the determination of the class.
On June 28, 2004, a second hearing was held. During this hearing PRTC was ordered to submit responses to the plaintiffs request for admissions and to their first and second sets of interrogatories. PRTC submitted its responses to the plaintiffs request for admissions and to their first and second sets of interrogatories on July 6 and July 16, 2004, respectively. However, these responses were limited to the issue of class certifications, and the interrogatories and requests for admissions relating to the merits of the case were objected and a protective order was requested. The Superior Court denied PRTCs requests and ordered full responses. On July 16, 2004, PRTC filed a writ of certiorari with the Puerto Rico Court of Appeals seeking reversal of the Superior Courts order allowing discovery concerning the merits of the case before the class certification issue is resolved. On October 13, 2004, plaintiffs filed a motion opposing to PRTCs writ of certiorari. A determination is pending before the Court of Appeals.
On October 8, 2004, plaintiffs filed with the Superior Court a motion requesting the dismissal and substitution of one of the plaintiffs.
44
CTI ASSET TRANSFER
Prior to the Acquisition, PRTC transferred its net wireless assets on September 1, 1998 to CTI (which became Verizon Wireless, a division 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 that ratepayers did not bear the cost of our predecessors wireless investment.
The FCC denied the Companys 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.
In the February 2002 Order, the TRB provided that any prospective rate increase must first be applied against the gain from the wireless asset transfer, equating to $56 million applicable to intrastate. We plan to contest this position on the grounds 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.
Currently, the TRB is performing an agreed upon procedures audit, which includes an audit of the CTI asset transfer. The audit is in the field work stage. While we believe that the resolution of this matter and any related proceedings will not have a material impact on the Companys financial condition and results of operations, we cannot predict the effect of any further regulatory actions.
PRICE CAP REGULATION
Under the FCCs all or nothing rule, telecommunications carriers that set interstate access rates based on a price cap formula are required to use the price cap formula for all of their affiliates. The price cap formula is based on a plan adopted by the FCC called the Coalition of Affordable Local and Long Distance Service (CALLS), which uses rate-of-return as a basis for setting rates. The Company would have been required to implement price caps by March 2, 2000 under the FCCs rules. Prior to March 2, 2000, the Company had set its interstate access rates based on rate-of-return principles.
However, the FCC delayed conversion to price cap regulation until June 30, 2002, and the Company requested an extension until June 30, 2003. Under an order issued by the FCC on April 18, 2002, the Company is no longer required to file a waiver request until the FCC completes its review of the all-or-nothing rule. In addition, upon the issuance of an Order and Second Further Notice of Proposed Rulemaking (the Order) by the FCC on February 28, 2004, the FCC deferred further action on the all-or-nothing rule until it reviews the record compiled in response to the further notice included in the Order. Additionally, in the Order the FCC stated that all outstanding interim waivers of the all-or-nothing rule that depend on the FCCs decision shall continue to be effective until the FCC issues a final order on this matter. As a result, the Company currently continues to set its interstate access rates based on rate-of-return principles.
On May 10, 2004, PRTC filed comments in response to the Order, requesting that the FCC eliminate the all or nothing rule or, in the alternative, if the rule is not eliminated, that the FCC grant PRTCs 1999 waiver request to permit PRTC to remain a carrier that sets its interstate access rates based on rate-of-return principles. The basis of PRTCs request is that if PRTC were no longer eligible to receive Interstate Common Line Support (ICLS), PRTC would require $139 million in additional universal service support to offset lost ICLS revenues and that the CALLS plan cannot accommodate PRTC since there is a $650 million cap on the equivalent support in the CALLS plan, which was based on the anticipated universal service needs of price cap carriers that were participating in the plan at the time of its adoption. There has been no announcement regarding the expected timing for the completion of this proceeding.
INTERSTATE HIGH COST SUBSIDY
On October 21, 1999, the FCC adopted a new high cost loop support mechanism for non-rural companies, which has resulted in the phase out of the Companys high cost loop subsidy revenues. The Company is classified as a non-rural telephone company under the United States Telecommunications Act of 1996. The Companys high cost loop revenues were $49 million in 2000, $33 million in 2001 and $4 million in 2002. On February 28, 2003, PRTC sent a letter to the FCC, requesting that the FCC take action to restore the high-cost loop universal service support that the Company lost due to FCC policies adopted for non-rural telephone companies and arguing that the non-rural telephone company mechanism is based on cost characteristics of mainland telephone companies. PRTC requested that the FCC address the loss of its high cost loop universal service support by adopting rules for insular areas that are similar to those applied to rural carriers. If rural carrier rules were applied to PRTC it would continue to receive high cost loop support as it had prior to the adoption of the FCCs
45
1999 rules for non-rural telephone companies. On October 27, 2003, the FCC issued an order rejecting PRTCs request for reconsideration that it be considered a rural carrier. However, the order did not address PRTCs request to restore the high-cost universal service support based on the establishment of a new high cost loop support mechanism for insular carriers. On January 14, 2004, PRTC filed a petition for clarification and/or reconsideration of several portions of the FCC Order of October 27, 2003 on the grounds that the FCC has not acted upon the specific mandate of Section 254 to provide support for insular areas. No announcement has been made regarding the expected timing for addressing this issue.
TRB AGREED UPON PROCEDURES AUDIT
As required by law, the TRB is currently conducting an ordinary audit of our affiliate transactions and regulatory accounting. We do not expect the results of this audit to have a material impact on the Companys financial condition and result of operations.
WORLDNET ARBITRATION PROCEEDING
Recently, an arbitrator resolved a dispute related to an interconnection contract between PRTC and WorldNet and rendered a decision which, among other things, requires PRTC to agree to contract terms establishing numerous service quality metrics, liquidated damages provisions, reduced prices for certain network elements, continuation of wholesale discounts, certain Operational Support System parity standards, and certain requirements with respect to bundled services. PRTC is examining the impact of this decision. In accordance with the applicable rules, the parties have executed and filed the arbitrated contract with the TRB.
On June 7, 2004, PRTC filed a request for reconsideration of the TRBs Resolution and Order which adopted the arbitrators decision and a request for stay of the new interconnection agreement until the reconsideration was finally resolved. WorldNet also filed a request for reconsideration. On June 17, 2004, the TRB issued a Resolution and Order accepting both motions for reconsideration and notified the parties that a final decision on both motions would be issued within ninety days from the date of the filing, (i.e., by September 7, 2004). On June 25, 2004, PRTCs motion for a stay was granted.
On September 7, 2004, the TRB issued its Order on Reconsideration requiring PRTC and WorldNet to submit a revised interconnection agreement by October 22, 2004, which was subsequently extended to October 29, 2004. The new agreement must be implemented within a period of six (6) months following the filing of the same.
PRTC believes that some of the TRBs determinations in the Order on Reconsideration are contrary to law, and on October 7, 2004, filed before the Federal District Court for the District of Puerto Rico (District Court) an appeal of the TRBs Order on Reconsideration (Order) of September 7, 2004. In addition, we filed an emergency motion for a partial stay of the Order with the TRB. Worldnet has also appealed the TRBs Order of September 7, 2004 to the Federal District Court.
PRTC and Worldnet are continuing to negotiate a new interconnection agreement to meet the filing deadline established by the TRB.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this report, the Company makes forward-looking statements. These statements are based on the Companys 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 Companys 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, including new legislation; (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 the Companys 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 Companys discussion and analysis of its financial condition and results of operations are based upon the Companys unaudited condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States for interim financial information and the 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 for annual financial statements 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 ongoing basis, the Company evaluates its estimates, including those related to bad debts, intangible assets, income taxes, financing operations, contingencies and litigation. The Company 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 Companys 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, the Companys estimate of losses and the related allowance may change. The Company does not depend on any single customer for its business.
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Deferred Taxes
The Company uses an asset and liability approach in accounting for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for temporary differences between the way certain income and expense items are reported for financial reporting purposes and for 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 in which 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 provided by law, the Puerto Rico Treasury Department is currently conducting an ordinary audit of our corporate income tax returns. We do not expect the results of this audit to have a material impact on the Companys financial condition and result of operations.
Property, Plant and Equipment and Depreciation
Property, plant and equipment is stated at original cost, plus interest on funds borrowed to finance capital additions. Repair and maintenance costs are expensed as incurred. Depreciable property disposed of in the ordinary course of business, less any salvage value, is charged to accumulated depreciation with no gain or loss recognized. Gains or losses from the sale of land are recorded in the Companys consolidated statement of operations.
The Companys depreciation expense is based on the composite group remaining life method using 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, industry and other competitive forces. Effective July 1, 2002, the Company revised its accounting estimates relating to depreciation based on a detailed review of the lives underlying the depreciation rates. The depreciation rate revisions reflect expected useful lives resulting from the impact of technology and future competition and more closely approximate the assumptions used by other telephone companies. These revisions resulted in a decrease in depreciation expense of approximately $12 million for the year ended December 31, 2003. Effective July 2004, the Company performed its periodic review of its plant useful lives estimates based on a comprehensive analysis of the lives underlying the depreciation rates. The revision resulted in a decrease in depreciation expense by approximately $1.7 million for the quarter ended September 30, 2004 and approximately $3.3 million for the year 2004.
The Company revised the method to calculate the composite useful lives to be consistent with the current depreciation study.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 4 to our unaudited condensed consolidated financial statements.
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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 changes in the interest rates on our senior notes and interest rate swap agreements.
The following table summarizes the fair value of our senior notes and interest rate swap agreements at September 30, 2004 and December 31, 2003 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 they are not significantly affected by changes in market interest rates.
Fair Value | ||||||||||||||||
Assuming 100 Basis |
||||||||||||||||
Book Value |
Fair Value |
Increase |
Decrease |
|||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2004: |
||||||||||||||||
Senior notes |
$ | 699,869 | $ | 753,010 | $ | 733,666 | $ | 773,111 | ||||||||
Interest rate swap |
1,757 | 1,757 | (802 | ) | 4,338 | |||||||||||
Total |
$ | 701,626 | $ | 754,767 | $ | 732,864 | $ | 777,449 | ||||||||
December 31, 2003: |
||||||||||||||||
Senior notes |
$ | 699,839 | $ | 770,526 | $ | 746,165 | $ | 795,974 | ||||||||
Interest rate swap |
2,811 | 2,811 | (467 | ) | 6,133 | |||||||||||
Total |
$ | 702,650 | $ | 773,337 | $ | 745,698 | $ | 802,107 | ||||||||
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ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in the Companys reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. In designing and evaluating the Companys disclosure controls and procedures, the Companys chief executive officer and chief financial officer recognized that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Companys chief executive officer and chief financial officer have evaluated the effectiveness of the Companys disclosure controls and procedures, as of the end of the period covered by this report (the Evaluation Date). They have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in the Companys internal control over financial reporting during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various legal matters arising in the ordinary course of business. Management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Companys financial position and results of operations. See Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations Regulatory and Other Matters, which is incorporated herein by reference, for more information regarding legal and regulatory matters, including a regulatory dispute regarding intra-island access fees charged to long distance carriers.
Item 2. Unregistered Sales of Equity 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
See Exhibit Index on page following signatures.
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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/ Cristina M. Lambert | |||
Name: Cristina M. Lambert | ||||
Title: President and Chief Executive Officer | ||||
Date: November 15, 2004 | ||||
By: | /s/ Adail Ortiz | |||
Name: Adail Ortiz | ||||
Title: Vice President Finance and Chief Financial Officer | ||||
Date: November 15, 2004 | ||||
By: | /s/ Raúl E. García | |||
Name: Raúl E. García | ||||
Title: Controller | ||||
Date: November 15, 2004 |
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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 Companys Registration Statement filed on Form S-4, as amended (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 Companys 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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (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 Companys Registration Statement filed on Form S-4, as amended (File 333-85503)). | |
53
EXHIBIT | ||
NUMBER |
DESCRIPTION |
|
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 Companys Registration Statement filed on Form S-4, as amended (File 333-85503)). | |
10.10
|
Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, 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 Companys Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |
10.11
|
Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, 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 Companys Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |
10.12
|
Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, 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 Companys 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 Telefónica, 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 Companys Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |
10.14
|
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 Telefónica, Inc., as Guarantors, and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.29 of the Companys Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |
10.15
|
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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2001 (File 333-85503)). | |
10.16
|
ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Bank of America, N.A., as the Bank. (Incorporated by reference to Exhibit 10.27 of the Companys Quarterly Report on Form 10-Q for the period ended September 31, 2001 (File 333-85503)). | |
10.17
|
ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Citibank, N.A., as the Bank. (Incorporated by reference to Exhibit 10.28 of the Companys Quarterly Report on Form 10-Q for the period ended September 31, 2001 (File 333-85503)). |
54
EXHIBIT | ||
NUMBER |
DESCRIPTION |
|
10.18
|
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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File 333-85503)). | |
10.19
|
$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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File 333-85503)). | |
10.20
|
$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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File 333-85503)). | |
10.21
|
$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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File 333-85503)). | |
10.22
|
$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 Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File 333-85503)). | |
10.23
|
$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 Companys Quarterly Report on Form 10-Q for the period ended September 30, 2002 (File 333-85503)). | |
10.24
|
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 Companys Annual Report on Form 10-K for the year ended December 31, 2002 (File 333-85503)). | |
10.25
|
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 Companys Annual Report on Form 10-K for the year ended December 31, 2002 (File 333-85503)). | |
10.26
|
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 Companys Annual Report on Form 10-K for the year ended December 31, 2002 (File 333-85503)). | |
10.27
|
Second Allonge to the $90 million working capital revolving credit agreement dated as of June 30, 2003. (Incorporated by reference to Exhibit 10.31 of the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File 333-85503)). | |
10.28
|
364-Day Credit Agreement dated as of March 2, 2004, among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto Rico, as Syndication Agent, and Banco Popular de Puerto Rico, Firstbank Puerto Rico and Scotiabank de Puerto Rico, as Co-documentation Agents. (Incorporated by reference to Exhibit 10.29 of the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (File 333-85503)). |
55
EXHIBIT | ||
NUMBER |
DESCRIPTION |
|
10.29
|
Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. (Incorporated by reference to Exhibit 10.29 of the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (File 333-85503)). | |
10.30
|
$40,000,000 working capital revolving credit agreement dated as of June 30, 2004, 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 10.30 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)) | |
10.31
|
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. English Version. (Incorporated by reference to Exhibit 10.31 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)) | |
10.32
|
Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. English Version. (Incorporated by reference to Exhibit 10.32 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)) | |
10.33
|
$30,000,000 1-Year term credit agreement dated as of May 17, 2004, among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor and Banco Bilbao Vizcaya Argentaria Puerto Rico, as Administrative Agent. (Incorporated by reference to Exhibit 10.33 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)) | |
31.1
|
Certification of Principal Executive Officer (Filed herewith). | |
31.2
|
Certification of Principal Financial Officer (Filed herewith). | |
32.1
|
Certification Required by 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
56