<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1999
REGISTRATION NO. 333-85503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TELECOMUNICACIONES DE PUERTO RICO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COMMONWEALTH OF PUERTO RICO 4813 66-0566178
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
PUERTO RICO TELEPHONE COMPANY, INC., AS GUARANTOR
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COMMONWEALTH OF PUERTO RICO 4813 66-0564397
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
AND
CELULARES TELEFONICA, INC., AS GUARANTOR
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COMMONWEALTH OF PUERTO RICO 4812 66-0551848
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
COPIES TO:
<TABLE>
<S> <C> <C>
1515 F.D. ROOSEVELT AVENUE LAWRENCE GOODMAN, ESQ. JOSE ARROYO, ESQ.
GUAYNABO, PUERTO RICO 00968 CURTIS, MALLET-PREVOST, 1515 F.D. ROOSEVELT AVENUE,
(787) 793-1818 COLT & MOSLE LLP 12TH FLOOR
(Address, including Zip Code, 101 PARK AVENUE GUAYNABO, PUERTO RICO 00968
and telephone number NEW YORK, NEW YORK 10178 (787) 793-8441
including area code, of (212) 696-6000 (Name, address, including Zip
registrants' Code,
principal executive offices) and telephone number,
including area code, of agent for
service)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PROSPECTUS
[PRTC LOGO] [CT LOGO]
$1,000,000,000
TELECOMUNICACIONES DE PUERTO RICO, INC.
We are offering to exchange all of the notes we previously sold in a
private offering for new registered exchange notes.
The exchange notes will be fully and unconditionally guaranteed by our
subsidiaries to the extent they guarantee any of our credit facilities.
OFFER TO EXCHANGE OUR OUTSTANDING
$300,000,000 6.15% SENIOR NOTES DUE 2002
$400,000,000 6.65% SENIOR NOTES DUE 2006
$300,000,000 6.80% SENIOR NOTES DUE 2009
FOR
$300,000,000 6.15% SENIOR NOTES DUE 2002
$400,000,000 6.65% SENIOR NOTES DUE 2006
$300,000,000 6.80% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
MATERIAL TERMS OF THIS EXCHANGE OFFER:
- - This exchange offer expires at 12:00 midnight New York City time on
, 1999, unless extended;
- - The terms of the exchange notes are substantially identical to the old notes,
except that they will not be subject to transfer restrictions and registration
rights; and
- - We will not list the exchange notes on any exchange.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. YOU SHOULD CAREFULLY
CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 11
The Exchange Offer.......................................... 16
Use of Proceeds............................................. 24
The Acquisition and Related Corporate Restructuring......... 24
Capitalization.............................................. 27
Selected Historical Financial and Operational Data.......... 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 48
Business.................................................... 53
Management.................................................. 70
Shareholders and Shareholder Relationships.................. 76
Certain Relationships and Related Transactions.............. 81
Description of Some of Our Debt............................. 83
Description of Exchange Notes............................... 87
Plan of Distribution........................................ 103
Tax Considerations.......................................... 104
Legal Matters............................................... 108
Experts..................................................... 108
Index to Financial Statements............................... F-1
Annex A -- Commonwealth of Puerto Rico...................... A-1
Annex B -- Glossary of Certain Telecommunications Terms..... B-1
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should carefully consider all of the information contained in this
prospectus before investing in the exchange notes, including the factors set
forth under "Risk Factors."
TELECOMUNICACIONES DE PUERTO RICO, INC.
Our company is the leading telecommunications company in Puerto Rico and
one of the ten largest local exchange carriers in the United States. On March 2,
1999, the GTE Group acquired control of our company. We operate through our
principal wholly-owned subsidiaries, Puerto Rico Telephone Company, Inc. and
Celulares Telefonica, Inc. which currently offer the following services:
PUERTO RICO TELEPHONE COMPANY
- LOCAL SERVICES -- include basic and enhanced local voice services, and
Internet and data services, offered to residential and business customers
throughout Puerto Rico, as well as private branch exchange rentals and
revenues from public phones. Puerto Rico Telephone Company provides local
exchange services to approximately 1.2 million regular access lines in
service and as of June 1999 had a 95% share of the local wireline market;
- NETWORK ACCESS SERVICES -- include services provided to inter-exchange
carriers, cellular operators, other local exchange carriers and paging
companies for the origination and termination of calls from and to Puerto
Rico Telephone Company's customers;
- ON-ISLAND LONG DISTANCE SERVICES -- consist primarily of direct dialing,
operator-assisted and calling card long distance services within Puerto
Rico. Puerto Rico Telephone Company also provides wide area
telecommunications services, toll-free services and toll private line
services. For the month of June 1999, Puerto Rico Telephone Company had
an estimated 63% share of the on-island long distance market; and
- DIRECTORY AND OTHER SERVICES -- include Puerto Rico Telephone Company's
share of directory revenues from the publication of white and yellow page
directories and from customer listings, as well as fees paid by
inter-exchange carriers for billing and collection services provided by
Puerto Rico Telephone Company and sales of private branch exchange,
cellular and paging equipment.
CELULARES TELEFONICA
- WIRELESS TELEPHONY SERVICES -- include analog and digital cellular
services. As of June 30, 1999, Celulares Telefonica had approximately
254,000 cellular subscribers, estimated to be 35% of Puerto Rico's
wireless telephony market;
- WIRELESS PAGING SERVICES -- consist of numeric and alphanumeric paging
services. As of June 30, 1999, Celulares Telefonica had approximately
204,000 paging subscribers, making it the leading provider of these
services in Puerto Rico; and
- OFF-ISLAND LONG DISTANCE SERVICE -- consists of long distance service
outside Puerto Rico for both wireline and wireless customers. Off-island
long distance services began on February 1, 1999. As of June 30, 1999, it
had a 5% share of the off-island long distance market.
THE ACQUISITION AND RELATED CORPORATE RESTRUCTURING
- On April 7, 1997, the government of Puerto Rico announced a plan which
resulted in the privatization of Puerto Rico Telephone Company and
Celulares Telefonica, as predecessors of our company, through a bidding
process.
1
<PAGE> 5
- On July 21, 1998, after the conclusion of the bidding process, the GTE
Group was awarded the right to acquire a controlling equity interest in
our company. The GTE Group consists of GTE Holdings (Puerto Rico) LLC and
Popular, Inc. GTE Holdings (Puerto Rico) LLC is an indirect wholly-owned
subsidiary of GTE Corporation, one of the largest telecommunications
companies in the world. Popular, Inc. is the largest publicly traded
company in Puerto Rico and is the parent company of Banco Popular de
Puerto Rico, the largest bank in Puerto Rico.
- On March 2, 1999, the acquisition was consummated and the Puerto Rico
Telephone Authority sold 40.01% plus one share of the shares of our
company to GTE Holdings, 9.99% to Popular and an additional 3% to our
employee stock ownership plan. The Puerto Rico Telephone Authority
received gross proceeds of $2,040.0 million in cash and retained 43%,
less one of our shares. The Puerto Rico Telephone Authority is a public
corporation and governmental instrumentality of Puerto Rico.
STRATEGY
We seek to enhance our leadership position in the Puerto Rico
telecommunications market by stimulating demand for our core telephony services
and continuing to extend our franchise in the growth areas of wireless and data
services. The principal elements of our strategy are to:
- improve our systems and processes;
- strengthen our marketing focus;
- leverage our relationship with GTE Corporation; and
- make service quality and customer responsiveness priorities for our
workforce.
RISK FACTORS
Investing in the exchange notes involves some risks, including, among
others, risks relating to:
- THE TELECOMMUNICATIONS INDUSTRY IN GENERAL, such as increased
competition, rapidly changing technology and risks associated with year
2000 issues;
- INVESTING IN OUR COMPANY, such as our lack of experience in managing our
operations as a private company, our outmoded operational processes, and
our failure to fill new orders expeditiously;
- THE CHARACTERISTICS OF THE EXCHANGE NOTES, such as the absence of a
public market for the exchange notes; and
- OPERATIONS IN PUERTO RICO, such as natural disasters and adverse
economic, social, political, regulatory or governmental developments in
Puerto Rico.
For more information regarding these and other risks involved in an
investment in the exchange notes, see "Risk Factors" beginning on page 11.
2
<PAGE> 6
CORPORATE STRUCTURE
After giving effect to the acquisition and related corporate restructuring,
the ownership structure of Telecomunicaciones de Puerto Rico, Inc. is as
follows:
[Ownership Structure of Telpri Flow Chart]
3
<PAGE> 7
THE OLD NOTE OFFERING
Old Notes..................... We sold the old notes to a syndicate of
investment banks on May 13, 1999. This
syndicate subsequently resold the old notes to
several qualified institutional buyers and to
non-U.S. persons pursuant to Regulation S under
the U.S. Securities Act of 1933, as amended.
Exchange and Registration
Rights Agreement.............. As required in the purchase agreement, we and
the syndicate that purchased the old notes
entered into a registration rights agreement on
May 13, 1999. This agreement grants the holders
of the notes both exchange and registration
rights. This exchange offer is intended to
satisfy these exchange rights which terminate
once the exchange offer is completed.
THE EXCHANGE OFFER
Securities Offered............ We are offering:
$300,000,000 principal amount of 6.15% Senior
Notes due 2002;
$400,000,000 principal amount of 6.65% Senior
Notes due 2006; and
$300,000,000 principal amount of 6.80% Senior
Notes due 2009,
together with related guarantees.
The terms of the old notes and the exchange
notes are substantially identical, except for
specified transfer restrictions and
registration rights relating to the old notes.
Each series of exchange notes is also
guaranteed by our two principal subsidiaries to
the same extent that they guaranteed the old
notes.
The Exchange Offer............ We are offering to exchange the old notes for
exchange notes that are equal in principal
amount.
Expiration Date; Withdrawal of
Tender........................ Our exchange offer will expire at 12:00
midnight New York City time, on ,
1999, unless this date and time are extended.
You may withdraw your tender of old notes at
any time prior to the expiration date. Any old
notes that we do not accept for exchange will
be returned to you without expense as promptly
as possible after the expiration or termination
of our exchange offer.
Conditions to the Exchange
Offer......................... We believe that the exchange notes we issue in
exchange for the old notes may be offered for
resale, resold and otherwise transferred
without compliance with the registration and
prospectus delivery requirements of the
Securities Act. We have based this belief on
letters issued in connection with past
offerings of this kind in which the staff of
the Securities and Exchange Commission, which
we refer to as the Commission, has interpreted
the laws and regulations relating to resale of
notes to the public without the requirement of
further registration under the Securities Act.
However, any noteholder which is our
"affiliate" within the meaning of Rule 405
under the U.S. Securities Exchange Act of 1934,
as
4
<PAGE> 8
amended may not offer for resale, resell or
otherwise transfer the exchange notes without
meeting these registration and prospectus
delivery requirements.
In order for the exchange notes to be offered
for resale, resold, or otherwise transferred:
- they must be acquired in the ordinary
course of your business; and
- you must not intend to participate in
the distribution of those exchange
notes.
Our obligation to accept for exchange, or to
issue the exchange notes in exchange for, any
old notes is subject to conditions relating to
compliance with applicable law, or any
applicable interpretation by the staff of the
Commission, or any order of any governmental
agency or court of law. We currently expect
that each of the conditions will be satisfied.
Procedures for Tendering
Notes......................... Each holder of old notes wishing to accept the
exchange offer must complete, sign and date the
accompanying letter of transmittal, or a
facsimile thereof, in accordance with its
instructions and mail or fax it, together with
any other documentation required by the letter
of transmittal, prior to the expiration or
termination of the exchange offer to the
exchange agent at the following address:
The Bank of New York
101 Barclay Street
Floor 7E
ATTENTION: Enrique Lopez
Reorganization Department
New York, NY 10286
Telephone: (212) 815-2742
Facsimile: (212) 815-4699
Consequences of Failure To
Exchange the Old Notes........ If you do not exchange your old notes for
exchange notes, you will no longer be able to
require us to register your old notes under the
Securities Act. In addition you will not be
able to offer or sell your old notes unless:
- they are registered under the Securities
Act; or
- you offer or sell them in accordance
with an applicable exemption from the
registration requirements of the
Securities Act.
Use of Proceeds............... We will not receive any cash proceeds from the
exchange of old notes pursuant to this exchange
offer.
Exchange Agent................ The Bank of New York is serving as the exchange
agent in connection with our exchange offer.
Broker-Dealers................ Each broker-dealer that receives exchange notes
for its own account in exchange for old notes,
where those old notes were acquired by that
broker-dealer as a result of market-making or
other trading activities, must acknowledge that
it will deliver a
5
<PAGE> 9
prospectus in connection with any resales of
those exchange notes. See "Plan of
Distribution."
U.S. Federal Income Tax
Consequences................ The exchange of old notes pursuant to the
exchange offer should not be a taxable event to
you for federal income tax purposes.
Consequently, a U.S. holder should not
recognize taxable income or loss as a result of
exchanging old notes for exchange notes
pursuant to this exchange offer. The holding
period of the exchange notes will include the
holding period of the old notes and the basis
of the exchange notes will be the same as the
basis of the old notes immediately before the
exchange.
Puerto Rico Tax
Consequences.................. Provided the exchange occurs outside Puerto
Rico, as contemplated, non-Puerto Rico holders
will not be subject to Puerto Rico income tax
on the exchange of the old notes pursuant to
the exchange offer.
An exchange of the old notes for exchange notes
will be considered to have occurred outside
Puerto Rico if the exchange of the old notes
occurs physically at the office of the exchange
agent in New York, pursuant to instructions
given by the holder and notice of acceptance
given by us, in each case outside Puerto Rico.
6
<PAGE> 10
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
The terms of the exchange notes are substantially identical to the terms of
the old notes, except that the old notes differed with respect to transfer
restrictions and registration rights.
Issuer........................ Telecomunicaciones de Puerto Rico.
The Exchange Notes............ $300,000,000 principal amount of 6.15% Senior
Notes due 2002.
$400,000,000 principal amount of 6.65% Senior
Notes due 2006.
$300,000,000 principal amount of 6.80% Senior
Notes due 2009.
Interest Payment Dates........ May 15 and November 15 of each year, commencing
November 15, 1999.
Subsidiary Guarantees......... Puerto Rico Telephone Company, Celulares
Telefonica and Telecomunicaciones de Puerto
Rico's other subsidiaries will guarantee the
exchange notes to the extent they guarantee any
of our credit facilities. Each of our
outstanding credit facilities are fully and
unconditionally guaranteed by Puerto Rico
Telephone Company and Celulares Telefonica. For
additional information about the guarantees,
see "Description of Exchange Notes -- Certain
Covenants."
Sinking Fund.................. None.
Optional Redemption........... The 2006 exchange notes and the 2009 exchange
notes will be redeemable from time to time, in
whole or in part, at our option, at the prices
described under "Description of Exchange
Notes -- Optional Redemption."
Optional Tax Redemption....... In the event of specified changes affecting
Puerto Rico withholding taxes, each series of
exchange notes will be redeemable in whole, but
not in part, at Telecomunicaciones de Puerto
Rico's option at the prices described under
"Description of Exchange Notes -- Optional Tax
Redemption."
Additional Amounts............ If payments made by us or by any subsidiary
guarantor with respect to the exchange notes
become subject to withholding tax or deduction
under Puerto Rico tax laws, Telecomunicaciones
de Puerto Rico and the subsidiary guarantors
will pay additional amounts so that the net
amount received by holders of the exchange
notes, other than specified excluded holders,
after the withholding or deduction will not be
less than the amount that they would have
received in the absence of the withholding or
deduction. For additional information about
these payments, see "Description of Exchange
Notes -- Additional Amounts."
Ranking....................... Like the old notes, the exchange notes will be
unsecured senior obligations of
Telecomunicaciones de Puerto Rico and the
subsidiary guarantors and will rank equally
with their other unsecured senior obligations.
Specific Covenants............ The indenture governing the exchange notes will
limit our ability to, among other things:
- create specified liens;
7
<PAGE> 11
- enter into some types of sale and
leaseback transactions; and
- merge, consolidate or sell assets.
The indenture will also limit the ability of
Telecomunicaciones de Puerto Rico's
non-guarantor subsidiaries to incur debt during
any period that Telecomunicaciones de Puerto
Rico's credit facilities restrict their ability
to incur debt. All the covenants are subject to
a number of important qualifications and
limitations. For additional information about
these covenants, see "Description of Exchange
Notes -- Certain Covenants."
Absence of a Public Market for
the Exchange Notes............ The exchange notes are new securities, there is
no public trading market for them and we do not
intend to apply for listing of the exchange
notes on any national securities exchange or
for quotation of the exchange notes on any
automated dealer quotation system. For
additional information about the risks
resulting from the absence of a public market
for the exchange notes, see "Risk
Factors -- Absence of a Public Market for the
Exchange Notes."
8
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The summary financial data presented below have been derived from, and
should be read in conjunction with, the historical consolidated financial
statements of Telecomunicaciones de Puerto Rico as of the six-month period ended
June 30, 1999 and for the period from March 2, 1999 through June 30, 1999 and
the notes thereto. This data has also been derived from the combined financial
statements and notes thereto of our predecessors (a) as of and for the
three-year period ended on December 31, 1998 and the notes thereto, (b) for the
six-month period ended June 30, 1998 and (c) for the period from January 1, 1999
through March 1, 1999. The financial results for the year ended December 31,
1998 and the six months ended June 30, 1999 have also been presented below on a
pro forma basis to give effect to the acquisition and related transactions as
though they had occurred on January 1, 1998. The pro forma adjustments do not
give effect to all of the changes in our business. For a more detailed
discussion of the changes in our business see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma
Condensed Consolidated Financial Statements," and "Selected Historical Financial
and Operating Data," including the introductory paragraph and notes. The
unaudited pro forma consolidated financial data has been included for
comparative purposes only and does not purport to be indicative of the results
that would have occurred if these transactions had actually occurred on the
dates or for the periods indicated or which may occur in the future.
<TABLE>
<CAPTION>
COMPANY PREDECESSORS COMPANY PREDECESSORS
---------------------- ----------------------- --------- ------------------------------
PRO FORMA
SIX PERIOD PERIOD SIX
MONTHS FROM FROM MONTHS
ENDED MARCH 2 JANUARY 1 ENDED
JUNE 30, THROUGH THROUGH JUNE 30, YEAR ENDED DECEMBER 31,
1999 JUNE 30, MARCH 1, 1998 PRO FORMA ------------------------------
(UNAUDITED) 1999 1999 (UNAUDITED) 1998 1998 1997 1996
----------- -------- --------- ----------- --------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues and Sales......... $635.3 $447.0 $223.3 $639.0 $1,200.7 $1,270.7 $1,234.1 $1,201.4
Operating Costs and
Expenses................. 622.7 386.8 222.4 504.7 1,141.4 1,043.4 989.6 1,060.5
------ ------ ------ ------ -------- -------- -------- --------
Operating Income........... 12.6 60.2 .9 134.3 59.3 227.3 244.5 140.9
Interest Income (Expense),
Net...................... (46.7) (29.3) .4 1.7 (100.3) 2.5 3.0 1.6
Other Income (Expense)..... 1.8 1.2 .6 (.1) (5.4) (5.4) (1.7) (0.8)
Income Tax (Provision)
Benefit.................. 12.6 (11.7) -- -- 18.1 -- -- --
------ ------ ------ ------ -------- -------- -------- --------
Net Income (Loss), Before
Extraordinary Charge..... (19.7) 20.4 1.9 135.9 (28.3) 224.4 245.8 141.7
Extraordinary Charge....... -- (60.5) -- -- -- -- -- --
------ ------ ------ ------ -------- -------- -------- --------
Net Income (Loss).......... $(19.7) $(40.1) $ 1.9 $135.9 $ (28.3) $ 224.4 $ 245.8 $ 141.7
====== ====== ====== ====== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY --------------------------------
-------------- AS OF DECEMBER 31,
AS OF JUNE 30, --------------------------------
1999 1998 1997 1996
-------------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets................................. $ 469.0 $ 435.4 $ 379.7 $ 410.1
Property, Plant & Equipment, Net............... 1,730.7 1,987.9 2,019.1 1,947.0
Total Assets................................... 2,713.7 2,456.6 2,434.8 2,388.0
Current Liabilities............................ 370.6 347.2 243.6 278.7
Total Debt and Lease Obligations............... 1,526.5 0.8 1.2 1.4
Shareholders' Equity........................... 452.7 1,812.7 1,925.0 1,851.3
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
COMPANY PREDECESSORS COMPANY PREDECESSORS
-------------------- ----------------------- --------- ------------------------------
PRO FORMA PERIOD PERIOD SIX
SIX FROM FROM MONTHS
MONTHS MARCH 2 JANUARY 1 ENDED
ENDED THROUGH THROUGH JUNE 30, YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, MARCH 1, 1998 PRO FORMA ------------------------------
1999 1999 1999 (UNAUDITED) 1998 1998 1997 1996
--------- -------- --------- ----------- --------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Depreciation and
Amortization.............. $ 151.6 $ 99.5 $ 50.4 $ 145.7 $ 308.2 $ 296.5 $ 279.2 $ 254.6
Cash Flow from Operations... 128.5 123.8 55.9 272.8 366.4 613.8 508.2 504.1
Capital Expenditures........ 104.3 71.1 33.2 110.6 288.0 288.0 362.2 391.4
Cash used in Investing
Activities................ 100.2 67.1 33.1 106.1 279.6 279.6 351.3 380.7
Cash Flow from Financing
Activities................ (51.4) (65.6) 14.2 (166.9) (319.8) (319.8) (178.7) (103.5)
EBITDA(1)................... 164.1 159.7 51.3 280.0 367.5 523.8 523.7 395.5
EBITDA Margin(2)............ 26% 36% 23% 44% 31% 41% 42% 33%
Total Debt to EBITDA
Ratio(3).................. 4.7x 3.2x 4.3x
EBITDA to Interest Expense
Ratio..................... 3.5x 5.5x 3.7x
Ratio of Earnings to Fixed
Charges(4)................ 0.5 2.1 0.3
</TABLE>
- ---------------
(1) EBITDA represents operating income plus depreciation and amortization
expense. EBITDA is used by some investors and analysts to analyze and
compare companies on the basis of liquidity. EBITDA is not recognized under
generally accepted accounting principles and should therefore not be
construed as an alternative for net income, which is an indicator of a
company's performance, or cash flow from operations, which is a liquidity
measure. It is included in this prospectus because management believes that
it provides additional information with respect to our anticipated ability
to meet future debt service, capital expenditures, and working capital
requirements. Our calculation of EBITDA may be different from the
calculation used by other companies and therefore comparability may be
affected.
(2) Determined by dividing EBITDA by Revenues and Sales.
(3) Calculated by dividing EBITDA into long-term debt including current
maturities. For the pro forma period June 30, 1999, pro forma EBITDA for the
six months ended June 30, 1999 has been annualized.
(4) The ratio of earnings to fixed charges of the predecessors has not been
presented as the fixed charges were nominal prior to the acquisition since
there was no significant indebtedness.
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------- --------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Access Lines in Service (000).................. 1,252 1,236 1,231 1,221 1,156
Wireless Subscribers:
Cellular (000)............................... 254 164 204 135 153
Paging (000)................................. 204 230 219 235 200
Total Access Lines (per 100 households)........ 75 76 75 76 74
Number of Full-Time Employees.................. 7,445 7,784 7,703 7,863 7,971
Access Lines/Wireline Employee................. 178 167 169 164 153
Cellular Average Monthly Service Revenue Per
User......................................... $ 48 $ 54 $ 49 $ 59 $ 71
</TABLE>
See the introductory paragraphs and notes to "Selected Historical Financial and
Operating Data."
10
<PAGE> 14
RISK FACTORS
An investment in the exchange notes is subject to a number of risks. You
should carefully consider all of the information in this prospectus and, in
particular, the following risk factors in connection with an investment in the
exchange notes. You should consult your own financial and legal advisors as to
the risks entailed by an investment in the exchange notes and the suitability of
investing in the exchange notes in light of your particular circumstances.
COMPETITION FROM OTHER TELECOMMUNICATIONS PROVIDERS IN PUERTO RICO MAY REDUCE
OUR MARKET SHARE AND ADVERSELY AFFECT PRICES
The Puerto Rico telecommunications market is highly competitive.
Competition from other telecommunications providers may reduce our market share
and have an adverse effect on our prices and profitability. Primarily as a
result of recent laws, many new competitors have entered the Puerto Rico
telecommunications market and as a result, we expect our market share to
decline, particularly in our local exchange and on-island long distance service
lines of business. Our competitors include:
- AT&T Corp.;
- Telefonica Larga Distancia;
- Cellular Communications of Puerto Rico, Inc., which markets its services
as CellularOne;
- Centennial Cellular Corp., which for wireline services is marketed as
Lambda;
- MCI Worldcom, Inc.;
- Sprint Corporation; and
- SBC Communications Inc. and Telefonos de Mexico who have recently
announced an agreement to acquire Cellular Communications of Puerto Rico,
subject to obtaining regulatory approval.
Prior to February 1, 1999, the selection of an alternate on-island long
distance carrier required dialing 5 additional digits when making a call.
Competition has increased since February 1, 1999, when the requirement to dial
additional numbers was eliminated. We had a 98% on-island long distance market
share as of December 31, 1998. As a result of increased competition, our market
share decreased. For the month of June 1999, we had an estimated 63% market
share in the on-island long distance market. In response to increased
competition, we reduced our long distance rates in February 1999.
We also expect increased competition in the wireless market, including from
some of the competitors listed above. Our competitors may be able to use their
substantial financial, personnel and other resources, including their brand
names, to compete effectively with us.
WE COULD BE REQUIRED TO PROVIDE OTHER COMPETITORS WITH ACCESS TO OUR SERVICES
AND FACILITIES ON TERMS THAT WE CONSIDER UNFAVORABLE
The Federal Telecommunications Act of 1996 and the Puerto Rico
Telecommunications Act require us, among other things, to provide access to some
of our infrastructure and services to other industry participants. While the law
requires our competitors to pay us for access to and the use of our network,
these payments may be inadequate. These provisions include requirements that we:
- interconnect any other telecommunications company to our facilities at
any point in our network where it is technically feasible;
- charge for interconnection based on the "real costs and a profit" as
provided in the Federal Telecommunications Act of 1996;
- provide for the reselling of all services offered on a retail basis; and
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- provide other telecommunications companies with access to poles, ducts,
conduits and rights of way, directory assistance, telephone directories,
911 service and operation support systems, for which we will be
compensated.
WE HAVE EXPERIENCED SERVICE DELIVERY AND CUSTOMER SERVICE PROBLEMS AND FACE
WORKFORCE CHALLENGES, ALL OF WHICH MAY INHIBIT OUR ABILITY TO COMPETE
EFFECTIVELY WITH OTHER INDUSTRY PARTICIPANTS
Our ability to compete effectively will depend upon our ability to offer
high quality, market-driven services at prices generally equal to or below those
charged by our competitors. Our ability to respond to these challenges could be
affected by:
- our lack of experience in managing our operations as a private company;
- the increasingly competitive environment in the telecommunications
industry;
- outmoded operational processes, many of which are currently manually
intensive; and
- our failure to fill new orders for basic wireline service expeditiously
due to delays in processing and execution and because equipment and
components are unavailable.
In addition, our predominantly unionized work-force needs to become more
service-oriented. To change our work rules, we will need to engage in collective
bargaining with our unions and modify existing agreements which expire in 1999
and 2000. In 1998, our unions organized a 41-day work stoppage to protest the
privatization of our company. In 1997, there were sporadic protests after the
privatization was originally announced. We cannot predict the outcome of the
upcoming collective bargaining negotiations.
WE OPERATE ONLY IN PUERTO RICO AND ARE EXPOSED TO NATURAL DISASTERS AND OTHER
LOCAL RISKS WHICH MAY SIGNIFICANTLY AFFECT OUR OPERATIONS
Puerto Rico has been, and in the future may be, affected by natural
disasters, including hurricanes, earthquakes and tropical storms, as evidenced
by Hurricane Georges. On September 21, 1998, Hurricane Georges struck Puerto
Rico and caused considerable property damage to our service area in general,
including our telecommunications systems. Future hurricanes, tropical storms,
earthquakes and other natural disasters could have a material adverse effect on
our business due to resulting damage to our network facilities or from curtailed
telephone traffic resulting from the effects of these events, such as the
destruction of homes and businesses. For a discussion of the effects of
Hurricane Georges on our operations, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations --
Hurricane Georges."
In addition, in 1996 Section 936 of the United States Internal Revenue Code
was amended to phase out and eliminate significant federal tax benefits for
specified companies with operations in Puerto Rico. It is not possible at this
time to determine what long-term effects these amendments will have on the
Puerto Rico economy or our business. These amendments may, however, adversely
affect future growth in Puerto Rico's economy and consequently, our business.
WE FACE RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY -- OUR FAILURE TO
OBTAIN EFFECTIVE TECHNOLOGY AND EQUIPMENT MAY ADVERSELY AFFECT OUR ABILITY TO
PROVIDE COMPETITIVE PRODUCTS AND SERVICE
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new products and services, increased
availability of transmission capacity, and the increasing utilization of the
Internet for voice and data transmission. Our success will depend substantially
on the ability of our management and controlling shareholders to predict which
of the many possible current and future networks, products and services will be
important to finance, establish and maintain. The cost of implementing emerging
and future technologies could be significant, and we may not select appropriate
technology and equipment or obtain appropriate new technology on a timely basis
and/or on satisfactory terms.
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In addition, the introduction of new products or technologies may reduce
the cost or increase the supply of certain services similar to those that we
provide. As a result, our most significant competitors in the future may be new
entrants to the telecommunications industry.
THE LOCAL TELEPHONY AND LONG DISTANCE INDUSTRIES ARE SUBJECT TO SIGNIFICANT
GOVERNMENT REGULATION WHICH MAY INCREASE OUR COST OF PROVIDING SERVICES, LIMIT
OUR EXPANSION INTO NEW MARKETS AND SUBJECT US TO PENALTIES FOR NON-COMPLIANCE
We are required to obtain and maintain licenses, permits and other
regulatory approvals from the FCC and the Telecommunications Regulatory Board of
Puerto Rico in connection with some of our services. Any of the following could
have an adverse effect on our business:
- failure to establish tariffs in accordance with federal and local
regulations;
- failure to comply with federal or local laws and regulations;
- failure to obtain and maintain required licenses and permits; and
- burdensome or adverse regulatory requirements or developments.
We are also required to file tariffs for many of our services and to comply
with local license or permit requirements relating to installation and operation
of our network. For more information regarding the regulatory environment in
Puerto Rico, see "Business -- Regulatory Environment in Puerto Rico."
IF OUR COMPUTER SYSTEMS AND SOFTWARE FAIL TO COMPLY WITH YEAR 2000 REQUIREMENTS,
WE COULD FACE SERVICE DISRUPTIONS, BILLING DIFFICULTIES AND OTHER PROBLEMS
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems including, among others, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The billing
system for Celulares Telefonica is currently being customized, installed and
tested by its third party developer and is scheduled to be installed by the end
of October 1999. The billing system is Year 2000 compliant; however, if it is
not ready on time, we may experience significant Year 2000 problems. We may also
face significant Year 2000 problems if the business processes or systems of our
key suppliers or customers fail. Although we have been addressing our Year 2000
exposure since the second quarter of 1997, we cannot know the actual effects of
the Year 2000 issue on our business and operations until the year 2000. We
cannot be certain that full compliance will be achieved.
FRAUDULENT CONVEYANCE -- U.S. FEDERAL AND PUERTO RICO STATUTES ALLOW COURTS,
UNDER SPECIFIC CIRCUMSTANCES, TO VOID SOME CLAIMS IN RESPECT OF THE EXCHANGE
NOTES AND THE SUBSIDIARY GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS
RECEIVED
Under applicable provisions of the federal bankruptcy law or comparable
provisions of the Commonwealth of Puerto Rico fraudulent conveyance law, claims
in respect of the exchange notes could be avoided or subordinated to some or all
of our other debts or those of Puerto Rico Telephone Company, Celulares
Telefonica or any future subsidiary guarantor and payments made in respect of
the exchange notes or guarantees may be required to be returned. This avoidance,
subordination or returned payment would occur if at the time we incurred the
indebtedness evidenced by the exchange notes and at the time that Puerto Rico
Telephone Company, Celulares Telefonica or any future subsidiary guarantor,
issued its guarantee, we or our subsidiary guarantors, among other things:
- incurred the debt with the intent to hinder, delay or defraud a present
or future creditor; or
- received less than reasonably equivalent fair value or fair consideration
for the incurrence of the debt; and
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(1) we were or are insolvent or rendered insolvent by reason of such
incurrence; or
(2) we were or are engaged in a business or transaction for which the
assets remaining with our company constituted unreasonably small
capital; or
(3) we intended or intend to incur, or believed or believe that we or
our subsidiaries would incur, debts beyond an ability to pay such
debts as they mature; or
(4) we are subject to an outstanding unsatisfied money judgment or
attachment writ not subsequently satisfied or vacated, upon which
the aggrieved creditor cannot recover.
A creditor of Puerto Rico Telephone Company, Celulares Telefonica or any
future subsidiary guarantor may challenge the guarantee of the exchange notes on
fraudulent conveyance grounds by alleging that, among other things Puerto Rico
Telephone Company, Celulares Telefonica or any future subsidiary guarantor, as
the case may be, did not receive fair value for its guarantee. To the extent one
of our subsidiary's guarantee of the exchange notes is avoided, you would cease
to have any claim in respect of that guarantee and would be creditors solely of
us and of the subsidiary whose guarantee was not avoided.
We believe that the issuance of the exchange notes by us and the issuance
of the guarantees by Puerto Rico Telephone Company and Celulares Telefonica
complied with fraudulent conveyance laws. However, we cannot predict the precise
standard a court might apply, including whether or not a court would take into
account equitable considerations, or whether a court's conclusion would be the
same as our views with respect to these issues.
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES -- YOU CANNOT BE SURE THAT AN
ACTIVE TRADING MARKET WILL DEVELOP FOR THESE EXCHANGE NOTES
The exchange notes are a new issue of securities for which there is no
active trading market. The members of the initial syndicate have advised us that
they currently intend to make a market in the old notes and, when issued, the
exchange notes, although they are under no obligation to do so and they may stop
any market-making activities without notice. Therefore, there can be no
assurance as to the future development of a market for the exchange notes, the
ability of the holders of the exchange notes to sell their exchange notes, or
the price for which those holders would be able to sell their exchange notes. In
addition, the liquidity of, the trading market and the market price quoted for,
these exchange notes may be disproportionately affected by:
- changes in the overall market for debt securities;
- adverse economic, social, political, regulatory or governmental
developments in Puerto Rico;
- changes in our financial performance or prospects; and
- changes in the prospects for companies in our industry in general.
We do not intend to apply for listing or quotation of the exchange notes on
any national securities exchange or through the National Association of
Securities Dealers Automated Quotation System. As a result, you cannot be sure
that an active market for these exchange notes will develop.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES FOR EXCHANGE NOTES, YOUR OUTSTANDING NOTES
MAY TRADE AT A DISCOUNT AND YOU MAY NOT BE ABLE TO SELL YOUR OLD NOTES
In the event the exchange offer is consummated, we will not be required to
register the outstanding old notes under the Securities Act. In this event, the
exchange notes would rank equally with the outstanding old notes. However,
holders of outstanding old notes seeking liquidity in their investment would
have to rely on exemptions from registration requirements under the securities
laws, including the Securities Act. A reduction of the aggregate principal
amount of the currently outstanding old notes as a result of the exchange offer
may have an adverse effect on the ability of holders of outstanding old notes to
sell the notes or on the price at which a holder could sell the notes.
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THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE INHERENTLY
UNCERTAIN
This prospectus contains forward-looking statements, including the
statements about our plans, strategies and prospects under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." These forward-looking statements reflect our views with respect to
our financial performance and future events. All forward-looking statements
contained in this prospectus are inherently uncertain. Although we believe that
these statements accurately reflect our plans and expectations, economic and
social conditions in the U.S. and Puerto Rico, the effects of increased
competition and significant government regulation, as well as other risks
described in this section and elsewhere in this prospectus, could cause actual
results to differ materially and adversely from these forward-looking
statements. Words such as "believe," "expect," "intend," "estimate," "strategy,"
"plans," "may," "should" and "anticipate" and similar expressions identify
forward-looking statements. We caution you not to place reliance on these
forward-looking statements.
You should not regard the inclusion of forward-looking statements in this
prospectus as a representation by us or any other person that the projected
results will be achieved or that we will inform you about changes in our
projections.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We originally sold the old notes on May 13, 1999 to a syndicate of
investment banks in accordance with the terms of the purchase agreement. The
syndicate subsequently resold the old notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act and to non-U.S. persons in
accordance with the terms of Regulation S under the Securities Act.
As a condition to the purchase agreement, we entered into the registration
rights agreement with the syndicate pursuant to which we agreed to:
(1) file a registration statement within 90 days after the date on
which the old notes were issued with respect to an offer to exchange the
old notes for the exchange notes. The exchange notes will have terms
substantially identical to the old notes, except that the exchange notes
will not be subject to transfer restrictions and registration rights;
(2) cause the exchange offer registration statement to be declared
effective under the Securities Act within 150 days after the date on which
the old notes were originally issued; and
(3) consummate the exchange offer on or prior to the 180th day
following the date of the original issuance of the old notes.
Upon the exchange offer registration statement being declared effective, we
will offer the exchange notes in exchange for surrender of the old notes. We
will keep the exchange offer open for not less than 20 business days and not
more than 40 business days after the date that notice of the exchange offer is
mailed to the holders of the old notes. For each of the old notes surrendered to
us pursuant to the exchange offer, the surrendering holder will receive exchange
notes having a principal amount equal to that of the surrendered old notes.
Interest on each exchange note will accrue from the later of
(1) the last interest payment date on which interest was paid on the
old note surrendered; or
(2) from the date of the original issue of the old note, if no
interest has been paid on the old note.
Under existing interpretations of the Commission contained in several
no-action letters to third parties, the exchange notes will be freely
transferable by holders that are not our affiliates after the exchange offer
without further registration under the Securities Act. These letters include
Exxon Capital Holdings Corporation (available as of May 13, 1988) and Morgan
Stanley and Co. Inc. (available as of June 5, 1991). However, in order for the
exchange notes to be freely transferable in accordance with the Commission's no-
action letters, each holder that wishes to exchange its old notes for exchange
notes will be required to represent the following at the time of the
consummation of the exchange offer:
(1) that any exchange note it is to receive will be acquired in the
ordinary course of its business;
(2) will have no arrangement or understanding with any person to
participate in the distribution of the old notes or the exchange notes in
violation of the Securities Act;
(3) that it is not our "affiliate" as that term is defined in Rule 405
promulgated under the Securities Act;
(4) that if it is not a broker-dealer, it is not engaged in, and does
not intend to engage in, the distribution of exchange notes; and
(5) that if that holder is a broker-dealer, it will receive exchange
notes for its own account in exchange for old notes that were acquired as a
result of market-making or other trading activities and that it will
deliver a prospectus in connection with any resale of the exchange notes.
Upon receipt of written notice following the completion of the exchange
offer stating that a broker-dealer has received exchange notes in the exchange
offer, we will agree to make available, during the period required
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by the Securities Act, a prospectus meeting the requirements of the Securities
Act for use by broker-dealers and other persons, if any, with similar prospectus
delivery requirements.
SHELF REGISTRATION
In the event that:
- changes in the law or in currently applicable interpretations of the
staff of the Commission do not permit us to effect this exchange offer;
- for any other reason the exchange offer registration statement is not
declared effective within 150 days after the date of the original
issuance of the old notes or the exchange offer is not consummated within
180 days after the original issuance of the old notes;
- the initial syndicate requests that we file a shelf registration
statement with respect to old notes not eligible to be exchanged for
exchange notes in the registered exchange offer and in certain other
circumstances; or
- any holder of old notes, other than a member of the initial syndicate, is
not eligible to participate in the registered exchange offer or does not
receive freely tradable exchange notes in the registered exchange offer
other than by reason of such holder being an affiliate of
Telecomunicaciones de Puerto Rico,
then we will, at our expense,
(a) not later than 45 days after so required or requested pursuant to
the registration rights agreement, file a shelf registration statement
covering resales of the old notes or the exchange notes, as the case may
be;
(b) cause the shelf registration statement to be declared effective
under the Securities Act; and
(c) use our best efforts to keep the shelf registration statement
effective until two years after its effective date or such shorter period
that will terminate when all notes covered by the shelf registration
statement have been sold.
We will, in the event a shelf registration statement is filed, provide to
each holder for whom it was filed copies of the prospectus which is a part of
the shelf registration statement, notify each such holder when the shelf
registration statement has become effective and take several other actions as
are required to permit unrestricted resales of the old notes or the exchange
notes, as the case may be. Holders of old notes will be required to deliver
information to be used in connection with the shelf registration statement in
order to have their notes included in the shelf registration statement. A holder
selling some old notes or exchange notes pursuant to the shelf registration
statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers. In
addition, these selling holders will be subject to some of the civil liability
provisions under the Securities Act in connection with their sales and will be
bound by the applicable provisions of the registration rights agreement.
In addition, we shall:
- make available a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any
exchange notes;
- pay all expenses incident to the exchange offer, including the expense of
one counsel to the holders covered thereby; and
- indemnify holders of the notes, including any broker-dealer, against
specific liabilities, including liabilities under the Securities Act.
A broker-dealer which delivers a prospectus to purchasers in connection
with resales of exchange notes will be subject to the certain civil liability
provisions under the Securities Act and will be bound by the provisions of the
registration rights agreement, including indemnification rights and obligations.
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The Commission has taken the position that broker-dealers may fulfill their
prospectus delivery requirements with respect to the exchange notes, other than
a resale of an unsold allotment from the original sale of the notes, with the
prospectus contained in the exchange offer registration statement. Under the
registration rights agreement, we are required to allow broker-dealers and other
persons, if any, subject to similar prospectus delivery requirements to use the
prospectus contained in the exchange offer registration statement in connection
with the resale of the exchange notes.
If the holder is not a broker-dealer, it will be required to include a
representation in its letter of transmittal with respect to the exchange offer
that it has not entered into any arrangement or understanding with us or any of
our affiliates to distribute the exchange notes.
The foregoing description of the material provisions of the registration
rights agreement does not purport to be complete and is qualified in its
entirety by reference to all provisions of the registration rights agreement.
INCREASE IN INTEREST RATE
If any of the following events occur:
- neither an exchange offer registration statement nor a shelf registration
statement is filed with the Commission on or prior to 90 days after the
date on which the old notes were originally issued;
- on or prior to the 150th day following the date of the original issuance
of the old notes, neither the exchange offer registration statement nor
the shelf registration statement has been declared effective;
- on or prior to the 180th day following the date of the original issuance
of the old notes, neither the registered exchange offer has been
consummated nor the shelf registration statement has been declared
effective; or
- after either the exchange offer registration statement or the shelf
registration statement has been declared effective, the exchange offer
registration statement or the shelf registration statement thereafter
ceases to be effective or usable, subject to some exceptions, in
connection with resales of old notes or exchange notes in accordance with
and during the periods specified in the registration rights agreement;
then additional interest pursuant to provisions of the old notes shall become
payable in respect of the notes. Additional interest will accrue on the
principal amount of the old notes from and including the date on which any
registration default event described in the clauses above shall occur up to, but
excluding, the date on which any registration default has been cured. Additional
interest will accrue at a rate of 0.25% per annum during the 90-day period
immediately following the occurrence of such registration default and shall
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event shall such rate exceed 1.0% per annum.
Any amounts of additional interest due will be payable in cash, on the same
original interest payment dates as the notes. The amount of additional interest
will be determined by multiplying the applicable rate of additional interest by
the principal amount of the notes, multiplied by a fraction. The numerator of
the fraction is the number of days that rate of additional interest was
applicable during that period, which is determined on the basis of a 360-day
year comprised of twelve 30-day months. The denominator of the fraction is 360.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 12:00 midnight New York City time on the
expiration date. We will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes accepted in the
exchange offer. Holders may tender some or all of their old notes pursuant to
the exchange offer. However, old notes may be tendered only in integral
multiples of $1,000.
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The form and terms of the exchange notes are the same as the form and terms
of the old notes except that:
- the exchange notes have been registered under the Securities Act and
therefore will not bear legends restricting their transfer; and
- the holders of the exchange notes will not be entitled to some of their
rights under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the notes in
circumstances relating to the timing of this exchange offer, all of which
will terminate when the exchange offer is consummated.
The exchange notes will evidence the same debt as the old notes and will be
entitled to the benefits of the indenture.
As of the date of this prospectus, $1,000,000,000 aggregate principal
amount of old notes were outstanding. We have fixed the close of business on
, 1999 as the record date for the exchange offer for purposes of
determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice to the exchange agent. The exchange agent
will act as agent for the tendering holders for the purpose of receiving the
exchange notes from us.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of several other events set forth herein or otherwise,
the certificates for these unaccepted notes will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the expiration
date.
Telecommunicaciones de Puerto Rico, Puerto Rico Telephone Company and
Celulares Telefonica have agreed to pay all expenses incurred in connection with
the performance of their obligations arising from the exchange offer, including
reimbursing the initial purchasers for the reasonable fees and disbursements of
counsel therewith. For additional information regarding these fees and expenses
see "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" means 12:00 midnight New York City time, on
, 1999, unless we, in our reasonable discretion, extend the exchange
offer, in which case the term "expiration date" shall mean the latest date and
time to which the exchange offer is extended. Notwithstanding the foregoing, we
will not extend the expiration date beyond , 1999.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will mail to the registered holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date. We reserve the
right, in our reasonable discretion, to:
- delay accepting any old notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below
under "-- Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the exchange
agent; or
- amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
INTEREST ON THE EXCHANGE NOTES
Interest on each exchange note will accrue from the later of (a) the date
of original issue of the old notes, if no interest has been paid on such old
notes or (b) the last interest payment on which interest was paid on
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the old notes surrendered. Holders of old notes that are accepted for exchange
will receive, in cash, accrued interest thereon to, but not including, the date
of issuance of the exchange notes. This interest will be paid with the first
interest payment on the exchange notes on November 15, 1999. Interest on the old
notes accepted for exchange will cease to accrue upon issuance of the exchange
notes. Interest on the exchange notes is payable semiannually on each May 15 and
November 15, commencing on November 15, 1999.
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of old notes may tender its old notes in the exchange offer.
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile thereof, have the signatures guaranteed if
required by the letter of transmittal, and mail or otherwise deliver the letter
of transmittal or the facsimile, together with the old notes and any other
required documents, to the exchange agent prior to 12:00 midnight New York City
time, on the expiration date. To be tendered effectively, the old notes, letter
of transmittal and other required documents must be completed and received by
the exchange agent at the address set forth below under "Exchange Agent" prior
to 12:00 midnight New York City time, on the expiration date. Delivery of the
old notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of delivery by book-entry transfer must be
received by the exchange agent prior to the expiration date.
By executing the letter of transmittal, each holder will make to us the
representations set forth above in the fourth paragraph under the heading
"-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance of the tender by us will
constitute agreement between that holder and us in accordance with the terms,
and subject to the conditions, set forth in this prospectus and in the letter of
transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender old notes should contact the registered holder promptly and instruct
that registered holder to tender on the beneficial owner's behalf. For
additional information about notification to a registered holder, see
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an institution that is a member firm of the
Medallion system unless the notes are tendered as follows: (1) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the letter of transmittal;
or (2) for the account of a member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed therein, those old notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as the registered holder's name appears on the notes with the
signature guaranteed by an institution that is a member firm of the Medallion
system.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, the
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the notes at
the book-entry transfer facility, The Depository Trust Company,
20
<PAGE> 24
for the purpose of facilitating the exchange offer. Subject to the establishment
thereof, any financial institution that is a participant in The Depository Trust
Company's system may make book-entry delivery of old notes by causing the
book-entry transfer facility to transfer the old notes into the exchange agent's
account with respect to the old notes in accordance with the book-entry transfer
facility's procedures for the transfer. Although delivery of the old notes may
be effected through book-entry transfer into the exchange agent's account at the
book-entry transfer facility, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, or an agent's
message, which is described below, in connection with a book-entry transfer, and
all other required documents must in each case be transmitted to and received or
confirmed by the exchange agent at its address set forth below on or prior to
the expiration date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under those procedures.
Delivery of documents to the book-entry transfer facility does not constitute
delivery to the exchange agent. The term "agent's message" means a message
transmitted by the book-entry transfer facility to, and received by, the
exchange agent and forming part of a book-entry confirmation, which states that
such book-entry transfer facility has received an express acknowledgment from
the participant in such book-entry transfer facility tendering the old notes
that such participant has received and agrees to be bound by the terms of the
letter of transmittal and that we may enforce such agreement against such
participant.
All questions as to the validity, form, eligibility, acceptance of tendered
old notes and withdrawal of tendered old notes will be determined by us in our
reasonable discretion, which determination will be final and binding. We reserve
the absolute right to reject any and all old notes not properly tendered or any
old notes which, if accepted, would, in the opinion of our counsel, be unlawful.
We also reserve the right in our reasonable discretion to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer and the
instructions in the letter of transmittal will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within the amount of time we shall determine.
Although we intend to notify holders of defects or irregularities with respect
to tenders of old notes, neither us, the exchange agent nor any other person
shall incur any liability for failure to give such notification. Tenders of old
notes will not be deemed to have been made until any defects or irregularities
have been cured or waived. Any old notes received by the exchange agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
GUARANTEED DELIVERY PROCEDURES OF OLD NOTES
Holders who wish to tender their old notes and:
- whose old notes are not immediately available;
- who cannot deliver their old notes, the letter of transmittal or any
other required documents to the exchange agent; or
- who cannot complete the procedures for book-entry transfer prior to the
expiration date;
may effect a tender if:
- the tender is made through an institution that is a member firm of the
Medallion system;
- prior to the expiration date, the exchange agent receives by fax, mail or
hand delivery from a Medallion system member firm a properly completed
and duly executed notice of guaranteed delivery setting forth the name
and address of the holder, the certificate number(s) of old notes and the
principal amount of old notes tendered, stating that the tender is being
made and guaranteeing that, within five New York Stock Exchange trading
days after the expiration date, the letter of transmittal together with
the certificate(s) representing the notes, and any other documents
required by the letter of transmittal will be deposited by the firm with
the exchange agent; and
- the properly completed and executed letter of transmittal, as well as the
certificate(s) representing all tendered old notes in proper form for
transfer, and all other documents required by the letter of
21
<PAGE> 25
transmittal are received by the exchange agent upon five New York Stock
Exchange trading days after the expiration date.
Under this procedure, the certificate(s) representing the old notes may be
substituted by a confirmation of book-entry transfer of those old notes into the
exchange agent's account at the book-entry transfer facility. Upon request to
the exchange agent, a notice of guaranteed delivery will be sent to holders who
wish to tender their old notes according to the guaranteed delivery procedures
set forth above.
WITHDRAWAL OF TENDERS OF OLD NOTES
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 12:00 midnight New York City time, on the expiration date.
To withdraw a tender of old notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth herein prior to 12:00 midnight New York
City time on the expiration date. Any notice of withdrawal must:
- specify the name of the person having deposited the old notes to be
withdrawn;
- identify the old notes to be withdrawn, which must include the
certificate number(s) and principal amount of those old notes, or, in the
case of old notes transferred by book-entry transfer, the name and number
of the account at the book-entry transfer facility to be credited;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered or be
accompanied by documents of transfer sufficient to have the trustee with
respect to the old notes register the transfer of the old notes into the
name of the person withdrawing the tender, and be accompanied by any
required signature guarantees; and
- specify the name in which any of the old notes are to be registered, if
different from that of the person who deposited the old notes.
We will determine all questions as to the validity, form and eligibility
and the time of receipt of withdrawal notices and our determination shall be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no exchange
notes will be issued with respect thereto unless the old notes so withdrawn are
validly retendered. Any old notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange any old notes for exchange notes,
and may terminate or amend the exchange offer as provided herein before the
acceptance of such old notes, if:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer or any material adverse development has
occurred in any existing action or proceeding with respect to us or any
of our subsidiaries; or
- any law, statute, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in our reasonable
judgment, might materially impair our ability to proceed with the
exchange offer or materially impair the contemplated benefits of the
exchange offer to us; or
- any governmental approval has not been obtained, which approval we shall,
in our reasonable discretion, deem necessary for the consummation of the
exchange offer as contemplated hereby.
22
<PAGE> 26
If we determine in our reasonable discretion that any of the conditions are
not satisfied, we may:
- extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw those notes; or
- waive any unsatisfied conditions with respect to the exchange offer and
accept all properly tendered notes which have not been withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
The Bank of New York
101 Barclay Street
Floor 7E
ATTENTION: Enrique Lopez
Reorganization Department
New York, NY 10286
Telephone: (212) 815-2742
Facsimile: (212) 815-4699
Delivery to an address other than as set forth above will not constitute a valid
delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telecopy, telephone or in person by our officers and regular
employees and employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We have agreed to pay all expenses incurred in connection with the exchange
offer, including reimbursing the initial purchasers for the reasonable fees and
disbursements of counsel. In the event that a shelf registration statement is
filed, (a) we have agreed to reimburse the holders for the reasonable fees and
disbursements of one firm or counsel designated by the majority holders
participating in the shelf registration and (b) each holder shall pay all
underwriting discounts, commissions and transfer taxes, if any, relating to the
sale or disposition of the holder's securities pursuant to the shelf
registration statement.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the old
notes on the exchange as reflected in our accounting records on the date of the
exchange. Accordingly, we will recognize no gain or loss for accounting
purposes.
CONSEQUENCES OF THE FAILURE TO TENDER
The old notes that are not exchanged for exchange notes pursuant to the
exchange offer will remain restricted securities. Accordingly, old notes that
are not exchanged may be resold only:
- to us upon redemption thereof or otherwise;
- so long as the old notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes
is a qualified institutional buyer within the meaning of Rule 144A under
the Securities Act in a transaction meeting the requirements of Rule
144A, in
23
<PAGE> 27
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act. Any
transaction of this type is to be based upon an opinion of counsel
reasonably acceptable to us;
- outside the United States to a foreign person in a transaction meeting
the requirements of Rules 901-905 under the Securities Act; or
- pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any
state of the United States.
RESALES OF THE EXCHANGE NOTES
With respect to resales of exchange notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
we believe that a holder or other person who receives exchange notes, whether or
not that person is the holder who receives exchange notes in exchange for notes
in the ordinary course of business and who is not participating, does not intend
to participate, and has no arrangement or understanding with any person to
participate, in the distribution of the exchange notes, will be allowed to
resell the exchange notes to the public without further registration under the
Securities Act and without delivering a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires exchange notes in the exchange offer for the purpose of distributing or
participating in a distribution of the exchange notes, that holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each broker-dealer that receives exchange notes
for its own account in exchange for old notes, where those old notes were
acquired by that broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of those exchange notes.
USE OF PROCEEDS
This exchange offer is intended to satisfy some of our obligations under
the registration rights agreement. We will not receive any cash proceeds from
the issuance of the exchange notes in this exchange offer.
The net proceeds from the sale of the old notes were $993,965,000. The net
proceeds were used, together with available cash on hand, to prepay a $1
billion, 364-day revolving credit facility with Citibank N.A., Bank of America
National Trust and Savings Association, The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York and other lenders, some of whose affiliates
were also the syndicate for the initial sale of the old notes. The borrowings
under this credit facility were used to pay a portion of a special dividend to
the Puerto Rico Telephone Authority in connection with the GTE Group's
acquisition of our company.
THE ACQUISITION AND RELATED CORPORATE RESTRUCTURING
On April 7, 1997, the Government of the Commonwealth of Puerto Rico
announced a plan which resulted in the privatization of our company through a
bidding process. The Puerto Rico Telephone Company was the incumbent provider of
local and on-island long distance telephone service and one of the principal
providers of wireless telephony, paging services and other telephone-related
products and services in Puerto Rico. In anticipation of the privatization,
Telecomunicaciones de Puerto Rico was formed to hold the capital stock of Puerto
Rico Telephone Company and Celulares Telefonica.
On July 21, 1998, the GTE Group agreed to purchase from the Puerto Rico
Telephone Authority a controlling equity interest in Telecomunicaciones de
Puerto Rico. The acquisition was completed on March 2, 1999, with the
acquisition by GTE Holdings of 40.01% plus one share, by Popular, Inc. of 9.99%
and by the employee stock ownership plan of 7% of the outstanding common stock
of Telecomunicaciones de Puerto Rico. The government received gross proceeds of
$2,040.0 million composed of the payment of $469.8 million paid by GTE Holdings,
Popular, Inc. and the employee stock ownership plan for the shares of
Telecomunica-
24
<PAGE> 28
ciones de Puerto Rico and the payment of a special dividend to the Puerto Rico
Telephone Authority by Telecomunicaciones de Puerto Rico of $1,570.2 million. In
addition, in exchange for its interest in Telecomunicaciones de Puerto Rico, the
Puerto Rico Telephone Authority agreed to make capital contributions to
Telecomunicaciones de Puerto Rico in an aggregate amount of $200 million over
five years to reduce our unfunded pension and other post-retirement benefit
liabilities which were under-funded as of December 31, 1998.
RELATED FINANCINGS. On the date of the closing of the acquisition, we
borrowed a total of $1,591.1 million through:
- a full drawing under a $1 billion, 364-day syndicated revolving credit
facility and a $500 million, five-year syndicated revolving credit
facility; and
- a partial drawing of $91.1 million under a $200 million credit facility.
Of the $91.1 million that we borrowed under the $200 million credit
facility, $65 million was used for the special dividend and $26.1 million was
used to make a loan to the employee stock ownership plan to purchase 3% of
Telecomunicaciones de Puerto Rico's shares from the Puerto Rico Telephone
Authority. For more information regarding the financing of the acquisition see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Some of Our
Debt."
EMPLOYEE OWNERSHIP.
As part of the acquisition, the Puerto Rico Telephone Authority contributed
3% of Telecomunicaciones de Puerto Rico's shares and the GTE Group purchased and
contributed an additional 1% of Telecomunicaciones de Puerto Rico's shares to
the employee stock ownership plan. As a result of these contributions and the
purchase of 3% of Telecomunicaciones de Puerto Rico's shares using funds
borrowed from Telecomunicaciones de Puerto Rico, the employee stock ownership
plan received a total of 7% of Telecomunicaciones de Puerto Rico's shares. For
more information regarding the employee stock ownership plan, see "Shareholders
and Shareholder Relationships."
CORPORATE GOVERNANCE.
Under the terms of the acquisition agreements, GTE Holdings is currently
entitled to nominate 5 of the 9 members of our Board of Directors. GTE Holdings
and Popular, Inc. have agreed that they will vote to elect one additional
director nominated by Popular, Inc. The Puerto Rico Telephone Authority and
other government entities are currently entitled to nominate 3 directors. Some
corporate actions require approval by the Puerto Rico Telephone Authority or by
the directors nominated by the Puerto Rico Telephone Authority. Specific other
corporate actions require approval by Popular, Inc. For more information
regarding the corporate governance of our company, see "Management,"
"Shareholders and Shareholder Relationships" and "Certain Relationships and
Related Transactions."
MANAGEMENT ASSISTANCE AND TECHNOLOGY LICENSE.
We will pay to subsidiaries of GTE, for five years after the acquisition, a
combination of fixed management fees for services to be rendered by them in
Puerto Rico and the mainland U.S. and a variable technology license royalty
primarily for advice and direction regarding the administration and operation of
our business. The aggregate amount of these fees and royalty will not exceed 8%,
and will gradually decrease to 6%, of our earnings before deducting interest
payments, taxes and depreciation allowance. The cash payment of the fees and
royalty will be deferred, with interest, until at least March 2, 2000. For more
information regarding our relationship with GTE Corporation, see "Certain
Relationships and Related Transactions."
25
<PAGE> 29
TRANSFER RESTRICTIONS; ADDITIONAL SHARES.
The following transfer restrictions are in effect as of the date of this
prospectus:
- GTE Holdings is able to sell shares representing up to 5% of our capital
stock only after March 2, 2002 and its remaining interest after March 2,
2004;
- Popular, Inc. is restricted from selling its equity interest in
Telecomunicaciones de Puerto Rico until March 2, 2002;
- However, transfers by GTE Holdings to a wholly-owned affiliate of GTE
Corporation or by Popular, Inc. to a wholly-owned affiliate of Popular,
Inc., or to other members of the GTE Group, are permitted at any time.
The government may sell any or all of its Telecomunicaciones de Puerto Rico
shares, excluding shares under an option agreement with the GTE Group and GTE
International Telecommunications Incorporated, which we refer to as GTE
International, at any time but subject to the GTE Group's right of first
refusal. The GTE Group holds a three-year option to acquire an additional 15% of
our shares from the Puerto Rico Telephone Authority at 132% of the initial per
share purchase price paid in the acquisition. For more information regarding
share transfer restrictions, see "Shareholders and Shareholder Relationships."
26
<PAGE> 30
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt, long-term debt and shareholders' equity as of June 30, 1999. For more
detailed information about our capitalization, see "The Acquisition and Related
Corporate Restructuring," "Selected Historical Financial and Operational Data,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Our Future Financial Results."
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
<S> <C>
CASH AND CASH EQUIVALENTS................................... $ 63.7
========
SHORT-TERM DEBT:
Current Portion of Capital Leases......................... $ .2
Banco Popular Revolving Credit Facility................... 26.1
--------
Total Short Term Debt..................................... 26.3
--------
LONG-TERM DEBT EXCLUDING CURRENT PORTION:
Long-Term Portion of Capital Leases....................... .5
Offered Notes............................................. 999.7
5-year Revolving Credit Facility.......................... 500.0
--------
Total Long-Term Debt.............................. 1,500.2
--------
Total Debt and Lease Obligations.................. 1,526.5
--------
SHAREHOLDERS' EQUITY:
Common Stock and Additional Paid-in Capital............... 699.3
Deferred Employee Stock Ownership Plan Obligation(1)...... (34.8)
Subscription Receivable(2)................................ (161.8)
Retained Deficit.......................................... (40.1)
Accumulated Other Comprehensive Loss...................... (9.9)
--------
Total Shareholders' Equity................................ 452.7
--------
Total Capitalization...................................... $1,979.2
========
</TABLE>
- ---------------
(1) Represents (a) an amount equal to $8.7 million representing the value of 1%
of Telecomunicaciones de Puerto Rico's shares contributed by the GTE Group
to the employee stock ownership plan and (b) an amount equal to $26.1
million representing the value of 3% of Telecomunicaciones de Puerto Rico's
shares purchased by the employee stock ownership plan with the proceeds of a
$26.1 million loan from Telecomunicaciones de Puerto Rico.
(2) Represents the commitment by the Puerto Rico Telephone Authority to make
future contributions to Telecomunicaciones de Puerto Rico to help fund our
pension and other post-retirement benefit liabilities. In accordance with
generally accepted accounting principles, the future contributions from the
Puerto Rico Telephone Authority are included in "Common Stock and Additional
Paid-in-Capital" and deducted as "Subscription Receivable" until the amounts
are actually contributed to Telecomunicaciones de Puerto Rico.
27
<PAGE> 31
SELECTED HISTORICAL FINANCIAL AND OPERATIONAL DATA
The following selected historical financial and operational data have been
derived from the historical consolidated financial statements of
Telecomunicaciones de Puerto Rico as of June 30, 1999 and for the period from
March 2, 1999 through June 30, 1999 and the notes thereto. This data has also
been derived from the historical combined financial statements of our
predecessors (a) as of and for the five-year period ended December 31, 1998, and
the notes thereto, (b) for the six-month period ended June 30, 1998 and (c) for
the period from January 1, 1999 through March 1, 1999. Following the
acquisition, our reported results of operations and financial condition differ
materially from those previously reported. You should read the following data
together with (a) the historical combined financial statements and notes thereto
of our predecessors as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, which have been audited by Deloitte
& Touche LLP, independent auditors, (b) our historical consolidated financial
statements and the notes thereto as of and for the six-month period ended June
30, 1999 and (c) our predecessor's historical combined financial statements and
the notes thereto as of and for the six-month period ended June 30, 1998
appearing elsewhere in this prospectus. The financial statements for the four
years ended December 31, 1995 to 1998 were prepared in conformity with GAAP
applicable to commercial entities. The 1994 financial statements were prepared
in conformity with GAAP applicable to government-owned entities and restated to
conform with GAAP applicable to commercial entities. The restatement involved
the recording of pension obligations and related expenses based on Statements of
Financial Accounting Standards (SFAS) Nos. 87 and 88 and liabilities for other
postretirement benefits under SFAS No. 106.
Prior to their acquisition by the GTE Group, Puerto Rico Telephone Company
and Celulares Telefonica, as wholly-owned subsidiaries of the Puerto Rico
Telephone Authority, were exempt from income, property, and certain other taxes
in Puerto Rico.
<TABLE>
<CAPTION>
COMPANY PREDECESSORS PREDECESSORS
-------- ----------------------- --------------------------------------------------------
PERIOD PERIOD SIX
FROM FROM MONTHS
MARCH 2 JANUARY 1 ENDED
THROUGH THROUGH JUNE 30, YEAR ENDED DECEMBER 31,
JUNE 30, MARCH 1, 1998 --------------------------------------------------------
1999 1999 (UNAUDITED) 1998 1997 1996 1995 1994
-------- --------- ----------- -------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues and Sales.............. $447.0 $223.3 $ 639.0 $1,270.7 $ 1,234.1 $ 1,201.4 $ 1,110.3 $ 983.4
Operating Costs and Expenses.... 386.8 222.4 504.7 1,043.4 989.6 1,060.5 836.7 769.4
------ ------ -------- -------- --------- --------- --------- ---------
Operating Income................ 60.2 .9 134.3 227.3 244.5 140.9 273.6 214.0
Interest Income (Expense),
Net........................... (29.3) .4 1.7 2.5 3.0 1.6 2.2 2.7
Other Income (Expense).......... 1.2 .6 (.1) (5.4) (1.7) (0.8) .5 4.8
Income Tax Provision............ (11.7) -- -- -- -- -- -- --
------ ------ -------- -------- --------- --------- --------- ---------
Net Income, Before Extraordinary
Charge........................ 20.4 1.9 135.9 224.4 245.8 141.7 276.3 221.5
Extraordinary Charge.......... (60.5) -- -- -- -- -- -- --
------ ------ -------- -------- --------- --------- --------- ---------
Net Income (Loss)............... $(40.1) $ 1.9 $ 135.9 $ 224.4 $ 245.8 $ 141.7 $ 276.3 $ 221.5
====== ====== ======== ======== ========= ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and Amortization... $ 99.5 $ 50.4 $ 145.7 $ 296.5 $ 279.2 $ 254.6 $ 213.4 $ 202.6
Cash Flow from Operations....... 123.8 55.9 272.8 613.8 508.2 504.1 518.1 424.4
Capital Expenditures............ 71.1 33.2 110.6 288.0 362.2 391.4 383.9 282.6
Cash Flow used in Investing
Activities.................... 67.1 33.1 106.1 279.6 351.3 380.7 373.4 369.1
Cash Flow from Financing
Activities.................... (65.6) 14.2 (166.9) (319.8) (178.7) (103.5) (134.6) (148.1)
EBITDA(1)....................... 159.7 51.3 280.0 523.8 523.7 395.5 487.0 416.6
EBITDA Margin(2)................ 36% 23% 44% 41% 42% 33% 44% 42%
Ratio of Earnings to Fixed
Charges(3).................... 2.1
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-------- ----------------------------------------------------
AS OF AS OF DECEMBER 31,
JUNE 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994(1)
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets........................................... $ 469.0 $ 435.4 $ 379.7 $ 410.1 $ 370.4 $ 333.5
Property, Plant and Equipment, Net....................... 1,730.7 1,987.9 2,019.1 1,947.0 1,820.3 1,659.7
Total Assets............................................. 2,713.7 2,456.6 2,434.8 2,388.0 2,219.6 2,029.0
Current Liabilities...................................... 370.6 347.2 243.6 278.7 225.1 202.1
Total Debt............................................... 1,526.5 0.8 1.2 1.4 1.5 1.8
Shareholders' Equity..................................... 452.7 1,812.7 1,925.0 1,851.3 1,811.7 1,665.8
</TABLE>
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
--------------- -------------------------------------------
AS OF AS OF DECEMBER 31,
JUNE 30, -------------------------------------------
1999 1998 1998 1997 1996 1995 1994(1)
------ ------ ------ ------ ------ ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Access Lines in Service (000)........................ 1,252 1,236 1,231 1,221 1,156 1,101 1,057
Wireless subscribers:
Cellular (000)..................................... 254 164 204 135 153 165 109
Paging (000)....................................... 204 230 219 235 200 135 59
Total Access Lines (per 100 households).............. 75 76 75 76 74 72 72
Number of Full-Time Employees........................ 7,445 7,784 7,703 7,863 7,971 8,102 7,977
Access Lines/Wireline Employee....................... 178 167 169 164 153 139 139
Cellular Average Monthly Service Revenue Per User.... $ 48 $ 54 $ 49 $ 59 $ 71 $ 69 $ 74
</TABLE>
- ---------------
(1) EBITDA represents operating income plus depreciation and amortization
expense. EBITDA is used by some investors and analysts to analyze and
compare companies on the basis of liquidity. EBITDA is not recognized under
generally accepted accounting principles and should therefore not be
construed as an alternative for net income, which is an indicator of a
company's performance, or cash flow from operations, which is a liquidity
measure. It is included in this prospectus because management believes that
it provides additional information with respect to our anticipated ability
to meet future debt service, capital expenditures, and working capital
requirements. Our calculation of EBITDA may be different from the
calculation used by other companies and therefore comparability may be
affected.
(2) Determined by dividing EBITDA by Revenues and Sales.
(3) The ratio of earnings to fixed charges of the predecessors has not been
presented as the fixed charges were nominal prior to the acquisition since
there was no significant indebtedness.
29
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on and should be read in
conjunction with our consolidated financial statements and the combined
financial statements of our predecessors and the notes thereto starting on page
F-1, the unaudited pro forma condensed consolidated financial statements and the
notes thereto and other financial information appearing elsewhere in this
prospectus.
RESULTS OF OPERATIONS
THE ACQUISITION AND CHANGE IN ACCOUNTING BASIS
Our results of operations and financial position as of and for the
six-month period ended June 30, 1999 reflect the adoption of a new accounting
basis for our assets and liabilities and reflect the effects of becoming a tax
paying enterprise as a result of the acquisition of control of
Telecomunicaciones de Puerto Rico by the GTE Group. The new asset and liability
valuation basis adopted reflects the fair market value paid by the GTE Group to
acquire their 50% plus one share interest in Telecomunicaciones de Puerto Rico
in excess of the historical net book value of the assets and liabilities
acquired. As a result of this acquisition, our reported results of operations
and financial position for periods ending after March 2, 1999 differ materially
from those previously reported by Puerto Rico Telephone Company and Celulares
Telefonica prior to the privatization, which we refer to as our predecessors.
The results of operations and financial position for periods subsequent to March
2, 1999 also reflect the discontinuation of the application of accounting
principles applicable to rate regulated companies. The opening up of our markets
to competitors, the change in the regulation of our rates so that they are no
longer based upon our costs of providing service and the privatization of our
company have resulted in the need to adopt accounting principles which are
followed by commercial companies in general and not the specialized accounting
principles applicable to rate regulated companies.
For a description of these changes and the pro forma effects that these
changes would have had on certain income statement items for the year ended
December 31, 1998, see "Factors Affecting Our Future Financial Results" and
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
We had originally prepared our financial statements as of and for the three
months ended March 31, 1999 without applying the applicable provisions of EITF
88-16 "Basis in Leveraged Buyout Transactions," which requires a partial step-up
in accounting basis to reflect the acquisition of Telecomunicaciones de Puerto
Rico by the GTE Group and without discontinuing the application of SFAS No. 71
regulatory accounting principles. We have restated these financial statements to
incorporate this partial step-up in accounting basis and to discontinue the
application of SFAS No. 71 in accordance with U.S. generally accepted accounting
principles. The financial statements as of and for the six months ended June 30,
1999 and the unaudited pro forma condensed consolidated financial statements
which are included in this prospectus reflect these adjustments. For a more
detailed discussion of the effects of applying partial step-up accounting and
discontinuing the application of SFAS No. 71, see note 1 to the condensed
consolidated financial statements for the six-month periods ended June 30, 1999
and 1998.
SEGMENT RESULTS OF OPERATIONS
Results of operations for the years ended December 31, 1998, 1997 and 1996
and for the six months ended June 30, 1998 included in the discussion below are
based on the operating results of our predecessors. The discussion for the six
months ended June 30, 1999 is based upon our operating results for the period
from March 2, 1999 to June 30, 1999 and those of our predecessors from January
1, 1999 to March 1, 1999. The following discussion is intended to facilitate an
understanding and assessment of significant changes and trends related to our
financial condition and our results of operations. As a result, we have not made
a distinction between Telecomunicaciones de Puerto Rico and our predecessors
where it would not be helpful in comparing trends in operating results and where
results are not affected by the changes in the basis of accounting. We discuss
the effect of the change in the basis of accounting for those balance sheet and
income statement items that are materially affected.
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<PAGE> 34
We have two reportable segments, Wireline and Wireless operations, which we
operate and manage as strategic business units. You can find additional
information about our segments in Note 14 to the combined financial statements
as of and for the year ended December 31, 1998 and Note 10 to the consolidated
financial statements as of and for the six months ended June 30, 1999, beginning
on page F-1 of this prospectus.
The Wireline segment provides:
- Local service, including basic voice, telephone and private branch
exchange rental, value-added services, high-speed private line services,
public phone services, Internet access and installations.
- Network access services provided to inter-exchange carriers, cellular
companies and paging operators and other local exchange companies to
originate and terminate calls to and from our local customers.
- Long distance service both on and off the island of Puerto Rico.
Off-island services began on February 1, 1999.
- Directory and other services, including publishing right revenues and
listing fees, billing and collection services to competing long distance
operators and private branch exchange equipment sales.
The Wireless segment includes cellular and paging services.
The comparability of revenues recorded before and after the acquisition was
not affected by the changes in the accounting basis of the assets and the
liabilities that was recorded on March 2, 1999. Accordingly, in the discussion
of revenue trends we have not distinguished between the operations of the
predecessors before March 2, 1999 and our operations on and after this date.
REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------
1999 1998 1998 1997 1996
---------- ---------- ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WIRELINE:
Local(1)........................ $241 36% $238 37% $ 468 37% $ 447 36% $ 419 35%
Network Access.................. 169 25 150 24 300 23 278 23 258 21
Long Distance................... 123 18 126 20 252 20 252 20 263 22
Directory and Other(1).......... 48 7 46 7 91 7 100 9 92 8
---- --- ---- --- ------ --- ------ --- ------ ---
Total Wireline......... 581 86 560 88 1,111 87 1,077 88 1,032 86
---- --- ---- --- ------ --- ------ --- ------ ---
WIRELESS:
Cellular........................ 65 10 48 7 100 8 102 8 135 11
Paging.......................... 24 4 31 5 60 5 55 4 34 3
---- --- ---- --- ------ --- ------ --- ------ ---
Total Wireless......... 89 14 79 12 160 13 157 12 169 14
---- --- ---- --- ------ --- ------ --- ------ ---
Total Revenues and Sales........ $670 100% $639 100% $1,271 100% $1,234 100% $1,201 100%
==== === ==== === ====== === ====== === ====== ===
</TABLE>
- ---------------
(1) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.
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<PAGE> 35
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------
1999 1998 1998 1997 1996
---- ---- ------ ---- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
WIRELINE:
Cost of services and sales................................. $250 $221 $ 460 $431 $ 445
Selling, general and administrative........................ 116 87 172 159 243
Employee stock ownership plan compensation expense......... 25 -- -- -- --
Effect of early retirement................................. 4 -- -- -- --
Depreciation and amortization.............................. 127 136 275 262 241
---- ---- ------ ---- ------
Total Wireline.................................... $522 $444 $ 907 $852 $ 929
---- ---- ------ ---- ------
WIRELESS:
Cost of services and sales................................. $ 21 $ 16 $ 23 $ 19 $ 24
Selling, general and administrative........................ 42 35 92 101 94
Employee stock ownership plan compensation expense......... 1 -- -- -- --
Depreciation and amortization.............................. 23 10 22 18 14
---- ---- ------ ---- ------
Total Wireless.................................... $ 87 $ 61 $ 137 $138 $ 132
---- ---- ------ ---- ------
Total Operating Costs and Expenses......................... $609 $505 $1,044 $990 $1,061
==== ==== ====== ==== ======
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Access Lines in Service (000)(1)........................... 1,252 1,236 1,231 1,221 1,156
On-island LD Minutes (millions)............................ 725 844 1,670 1,649 1,464
Off-island LD Minutes (millions)(2)........................ 13 -- -- -- --
Cellular Subscribers (000)................................. 254 164 204 135 153
Cellular Average Revenue Per Unit.......................... $ 48 $ 54 $ 49 $ 59 $ 71
Paging Subscribers (000)................................... 204 230 219 235 200
</TABLE>
- ---------------
(1) Access lines excludes Celulares Telefonica's wireless subscribers.
(2) Sales of off-island long distance service commenced February 1, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
REVENUES AND SALES. Total Wireline and Wireless revenues for the six
months ended June 30, 1999 increased $31 million, or 4%, to $670 million from
the $639 million reported for the same period of 1998.
Wireline:
Local service revenues for the six months ended June 30, 1999 increased $3
million, or 1%, to $241 million from $238 million for the same period in 1998,
resulting primarily from increases in measured service, value-added service, and
private lines of $4 million, $2 million and $2 million, respectively. These
increases were offset in part by decreases in telephone rentals of $3 million.
Access line growth in the six-month period ended June 30, 1999 was 2%,
compared to 1% growth for the same period in 1998. While the rate of growth has
increased slightly over 1998 levels, it is below historical levels of growth due
primarily to the existence of a high waiting list for new service. The waiting
list of orders for new installations decreased to 24,600 at June 30, 1999 from
31,600 in March 31, 1999, and 36,600 in December 31, 1998. The Company was
inhibited from deploying service during the first quarter of 1999
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<PAGE> 36
because efforts were devoted to restoring service in the areas adversely
affected by Hurricane Georges. During the second quarter of 1999, we refocused
our efforts on installations.
Network access revenues for the six months ended June 30, 1999 increased
$19 million, or 13%, to $169 million from $150 million reported for the
comparable 1998 period. We received $9 million of additional access revenues
from long distance carriers to originate intra-island calls which was the direct
result of our intra-island long distance market share loss. An additional $5
million was realized from cellular operators as a result of an increase in
cellular traffic volumes and $4 million of the increase was attributable to
higher long-term support subsidies.
Long distance revenues decreased $3 million, or 2%, to $123 million in the
six months ended June 30, 1999 from $126 million for the comparable period in
1998. The decrease was attributed to 12% lower intra-island minutes of use,
which was partially offset by an increase in off-island minutes-of-use and
higher operator assisted set-up fees. Competition in the intra-island market
started in earnest in February 1999 with the introduction of dialing parity and
the reduction in per-minute prices by our competitors. We have experienced
erosion in market share from 98% in February 1999 to an estimated 63% in June
1999. The increase in traffic volumes for the total market has mitigated some of
our market share loss. Additionally, we realized $2 million in new revenues from
our entrance into the off-island long distance market in February 1999.
Wireless:
Revenues from cellular and paging service increased $10 million, or 13%, to
$89 million in the six-month period ended June 30, 1999 from $79 million in the
same period of 1998. Cellular service revenues increased by $17 million as a
result of the net addition of approximately 50,000 new subscribers in the
six-month period ended June 30, 1999 and 90,000 new subscribers since June 1998.
Cellular average revenue per unit decreased $6 million, or 12%, to $48 million
for the six-month period ended June 30, 1999 as compared to $54 million for the
same period in 1998. This reduction in average revenue per unit is a result of
the promotion of new lower tariffs in order to meet competition and gain new
customers, and an increase in the number of pre-paid plans which have a lower
average revenue per unit. Revenues from paging declined $7 million, or 23%, to
$24 million in the six-month period ended June 30, 1999 from $31 million for the
comparable period in 1998, due primarily to a reduction of 14,600 subscribers
during the six-month period of 1999 and a reduction of 25,500 since June 1998.
This paging subscriber decrease is partly a result of customer migration to
cellular plans.
OPERATING COSTS AND EXPENSES. Total Wireline and Wireless costs and
expenses for the six months ended June 30, 1999 increased approximately $104
million, or 21%, to $609 million from $505 million reported for the comparable
period in 1998.
Wireline:
Total Wireline costs and expenses for the six-month period ended June 30,
1999 increased $78 million, or 18%, to $522 million from $444 million incurred
in the same period of 1998. Cost of sales and services increased $29 million, or
13%, to $250 million mainly due to an additional $28 million of maintenance and
labor expenses primarily associated with Hurricane Georges damage repairs.
Selling, general and administrative expenses of $116 million increased $29
million, or 33%, compared to the same period in 1998. The principal component of
the increase related to a management and technology license fee of $14 million
for the period.
Wireless:
Total Wireless costs and expenses for the six-month period ended June 30,
1999 increased $26 million, or 43%, to $87 million from $61 million reported for
the comparable period of 1998. Cost of services and sales increased $5 million,
or 31%, to $21 million from $16 million in 1998, primarily due to equipment
costs associated with gross subscriber additions. Selling, general and
administrative expenses increased $7 million, or 20%, to $42 million primarily
due to a management and technology license fee of $4.0 million and higher
property and municipal taxes.
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<PAGE> 37
Employee Stock Ownership Plan Compensation Expenses. A $26.1 million
non-recurring, non-cash provision was recorded in March 1999 representing the
Puerto Rico Telephone Authority's grant of shares to the employee stock
ownership plan in connection with the acquisition of control of
Telecomunicaciones de Puerto Rico. The grant from the Puerto Rico Telephone
Authority was recorded as compensation expense, with an offsetting credit to
paid-in-capital as these shares fully vested in 1999. The grant was made to
share with our employees the future results of our operations.
Effect of Early Retirement. Some of our predecessors' employees
participated in the Commonwealth of Puerto Rico Employees' Retirement System, a
cost-sharing multiple-employer retirement system. Effective March 1, 1999, some
employees that participated in this System were eligible for an early retirement
program. The statements of operations of the predecessors for the period ended
March 1, 1999 include expenses amounting to approximately $4.2 million resulting
from this program. Also, effective March 2, 1999, the employees which
participated in this System discontinued participating in the plan and became
participants in our defined benefit pension plans.
Depreciation and Amortization Expense. For the six-month period ended June
30, 1999, the amount of depreciation and amortization expense was also impacted
by the effects of proportional purchase accounting and the discontinuation of
regulatory accounting commencing from the date of the acquisition of control of
Telecomunicaciones de Puerto Rico on March 2, 1999.
Wireline depreciation and amortization expense was reduced for the six
months ended June 30, 1999 by $9 million. This reduction is attributable to a
reduction in the values assigned to the property, plant and equipment due to the
revaluation made in partial step-up purchase accounting and the discontinuation
of regulatory accounting principles. These decreases were offset by increases in
amortization related to the goodwill allocated to the Wireline operations in the
partial step-up in basis recorded in accordance with the purchase accounting
provisions of EITF 88-16 and depreciation on additional investments in property,
plant and equipment incurred as we continue to invest in new technology to
expand the services offered to our customers in order to remain competitive.
Wireless depreciation and amortization expense increased due to increased
investments in property, plant and equipment as we continue to invest in our
wireless network and due to the amortization of our customer base recorded in
the partial step-up in basis recorded in accordance with the purchase accounting
provisions of EITF 88-16. Amortization expense was also increased by a
non-recurring charge for the cost of a portion of a personal communications
service license that will not be developed and therefore a $6.5 million charge
was recorded in March 1999.
INTEREST EXPENSE, NET. On a consolidated basis, we incurred interest
expense of $28.9 million in the six-month period ended June 30, 1999,
substantially all of which was attributable to interest on debt of $1,591
million incurred on March 2, 1999 in connection with the acquisition of control
of Telecomunicaciones de Puerto Rico. We had no material debt or interest
expense during the six-month period ended June 30, 1998.
EXTRAORDINARY CHARGE. During 1996, the Government of the Commonwealth of
Puerto Rico enacted the Federal Telecommunications Act of 1996 and began the
process of deregulating the formerly restricted markets for telecommunications
services in Puerto Rico to open them to competition. This action was taken to
bring the benefits of competition to consumers of telecommunications services
and to stimulate investment in advanced technology and new telecommunications
services. Additionally, competition in the intra-island long distance market
increased on February 1, 1999, when the requirement to dial additional numbers
was eliminated in order to give equal access dialing to all of our competitors,
as mandated by the FCC. This deregulation process concluded with the
privatization of Telecomunicaciones de Puerto Rico through the acquisition of
control of Telecomunicaciones de Puerto Rico by the GTE Group.
Prior to the acquisition, Puerto Rico Telephone Company rates were based
upon the cost of providing services including a return on capital deployed.
Further competition in its markets was restricted and Puerto Rico Telephone
Company maintained a monopoly position in providing telecommunications services.
These factors provided sufficient assurance that the costs of investments in
property, plant and equipment would be recovered through the ratemaking process.
Accordingly, the technological changes in the provision of
34
<PAGE> 38
telecommunications services that resulted in a reduction in the economic life of
Puerto Rico Telephone Company telecommunications plant and equipment were not
reflected in the depreciation expense used in the ratemaking process on a timely
basis. Deferral of cost recovery did not require an increase in depreciation
expense for financial reporting purposes as future cost recovery was assured
through the ratemaking process as permitted by the application of the provisions
of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
With the deregulation of the operations of Telecomunicaciones de Puerto Rico and
the opening of Puerto Rico's telecommunications markets to competition this
assurance no longer exists. Puerto Rico Telephone Company has therefore
discontinued SFAS No. 71 and recorded a reduction in the value of its property,
plant and equipment that is not expected to be recoverable through future
operations over its remaining service life. Fifty percent of this asset
impairment, reflecting the portion of Telecomunicaciones de Puerto Rico acquired
by the GTE Group, was reflected as part of the proportional purchase price
adjustment reflecting the estimated fair market value of these assets. The
remaining portion was recorded as a non-cash, nonrecurring, extraordinary charge
to expense of $60.5 million, net of tax benefits of $38.8 million, in March
1999.
INCOME TAXES. In the six-month period ended June 30, 1999, we recorded
$11.7 million in income tax expenses applicable to taxable transactions recorded
in the measurement of income. Prior to our privatization on March 2, 1999 we
were not subject to income taxes.
NET INCOME. For the reasons discussed above, the Company had a net loss of
$38.2 million for the six months ended June 30, 1999 compared to net income of
$135.9 million for the same period in 1998. The net loss for the period March 2
through June 30, 1999 was 40.1 million. As noted above, the 1999 period included
an after-tax extraordinary charge of $60.5 million due to the discontinuance of
SFAS No. 71.
We believe that the results for the second quarter are not necessarily
indicative of our results for the remainder of the year because of the special
nature of certain of the charges incurred during the first and second quarters
of 1999 and because of the change in our basis of accounting.
Hurricane Georges
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to our service area in general, including our
telecommunications systems. Our expenses in the six-month period ended June 30,
1999 were higher than in the same period in 1998 in part because of
approximately $28 million of higher maintenance and labor expenses attributable
to repairing damage caused by Hurricane Georges.
In addition to the expenses incurred in the first and second quarters of
1999, we lost revenues and incurred expenses in 1998 due to Hurricane Georges.
As a result of the hurricane, we:
- believe that we lost approximately $18.6 million in revenues in 1998
because of lines out of service from September to December;
- incurred hurricane-related expenses of $31.7 million in 1998, of which
$18.1 million was due to repairs included in operating expenses, and
$13.6 million charged to depreciation expense;
- incurred capital expenditures of $30.5 million for the replacement of
destroyed property;
- were unable to dedicate resources to install new access lines,
particularly after the 41-day work stoppage in the second quarter of 1998
to protest the privatization; and
- recorded as other income, amounts received from insurance claims of
approximately $6.4 million.
We believe that substantially all of the repair work caused by Hurricane
Georges has now been completed.
35
<PAGE> 39
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUE AND SALES. We reported a revenue increase in 1998. Our Wireline
and Wireless revenues increased $37 million, or 3%, to $1,271 million for 1998
from $1,234 million for 1997. The increase resulted primarily from growth in
local service and access revenues.
Wireline:
In 1998, local service revenues increased $21 million, or 5%, to $468
million for 1998 from $447 million for 1997. The increase was primarily due to
growth in value added services, such as caller I.D. and call waiting, which
produced $8.0 million of higher basic voice service revenue; growth in the
number of access lines, which produced a $9.6 million increase in rental
revenues from business and residential lines; additional usage revenues of $6.0
million and an increase in Internet revenues of $2.5 million, in each case as
compared with 1997 revenues. Revenues from lines and installation charges
declined in 1998.
Access line growth in 1998 was only 0.8%, a substantial decrease in the
growth rate when compared to the growth rate for the preceding three years,
which ranged from 4% to 6%. The lower growth rate was primarily attributable to
Hurricane Georges and a 41-day work stoppage organized to protest the
privatization of our company. The waiting list of orders for new installations
increased to 36,600 at December 31, 1998 because we were inhibited from
deploying service after the work stoppage during the summer and because our
efforts in the fourth quarter were devoted primarily to restoring service in the
areas adversely affected by Hurricane Georges.
Network access revenues increased by $22 million, or 8%, to $300 million
for 1998 from $278 million for 1997. The increase resulted primarily from $21
million of higher universal support subsidies administered by the National
Exchange Carrier Association. These subsidies are derived from pooling
arrangements with other U.S. exchange carriers that generate end-user interstate
revenues. The pooled amounts are subsequently divided among the various
telephone companies based upon their respective estimated allocations of costs
and investments in providing interstate services. The amount received in 1998
was higher than in prior years because we incurred certain non-recurring costs,
which are included when calculating the amount of this support. In addition,
higher revenues of $4 million in access charges paid to us by on-island long
distance competitors contributed to the increase in access revenues.
Long distance revenues remained constant for 1998 at $252 million, with an
increase in on-island long distance revenues of $6 million over 1997 levels
offset by a reduction in toll private lines, toll-free services and wide area
telecommunications services revenues. On-island long distance minutes increased
by 1% in 1998, from 1,649 million minutes in 1997 to 1,670 million minutes in
1998. This increase was limited as a result of lines being out of service during
the 41-day work stoppage, Hurricane Georges and increased competition. We
adopted a new rate structure in April 1998, which produced slightly higher
average revenue per minute from $0.13 in 1997 to $0.14 in 1998.
Directory services and other revenues decreased by $9 million, or 9%, to
$91 million for 1998 from $100 million for 1997. The decrease resulted from a
decline in the revenues generated in connection with the directory service
revenue sharing agreement, which expires with the production of directories for
1999. See "Business -- Directory." In addition, the decrease in other revenues
resulted primarily from a decrease in equipment sales because of a larger than
normal equipment sales contract with the Puerto Rico Police Department in 1997.
Wireless:
Cellular revenues decreased $2 million, or 2%, to $100 million for 1998
from $102 million for 1997, despite an increase of 69,000 customers to 204,000
at year-end 1998 from 135,000 at year-end 1997. Approximately 48,000 of the
69,000 new customers were prepaid customers who generate substantially lower
average revenue per unit than regular customers due to lower average minutes of
use per customer. Monthly average revenue per unit averaged $49 in 1998, a
decrease of $10 from 1997. The decline in average revenues
36
<PAGE> 40
for regular accounts was caused by the addition of the prepaid customers and
lower-end regular subscribers in a more competitive market environment.
Paging revenues continued to grow in 1998, increasing by $5 million, or 9%,
to $60 million for 1998 from $55 million for 1997, as a result of an increase of
20% in average prices offset in part by a decrease in the number of customers
which was caused by our stricter collection policies.
OPERATING COSTS AND EXPENSES. Total Wireline and Wireless costs and
expenses for 1998 increased by $54 million, or 5.4%, to $1,044 million from the
$990 million reported for 1997.
Wireline:
Total Wireline costs and expenses for 1998 increased $55 million, or 6.5%,
to $907 million from the $852 million reported for 1997. Cost of services and
sales were $460 million, or $29 million higher, than the $431 million reported
in 1997, primarily due to non-recurring restoration costs related to damage
caused by Hurricane Georges. Interconnection charges paid for the first time to
wireless providers in 1998 also contributed $13 million to the increase.
Selling, general and administrative expenses were $172 million, or 8.1%, higher
than the $159 million reported for 1997. Consulting and commission fees also
contributed to the increase.
Wireless:
Total Wireless costs and expenses for 1998 of $137 million reflected a
slight reduction of $1 million as compared to the $138 million recorded in 1997.
Cost of services and sales increased $4 million, or 21% to $23 million
primarily due to the increase in cost of goods sold resulting from the growth of
69,000 new subscribers activated during 1998. Selling, general and
administrative expenses decreased $9 million, or 9% in 1998 to $92 million from
the $101 million reported in 1998, primarily due to reductions of $4 million in
access charges.
Depreciation and Amortization Expense. Consolidated depreciation and
amortization expense increased by $18 million, or 6%, to $297 million for 1998
from $279 million for 1997 due to higher levels of gross plant in service.
Net Income. For the reasons set forth above, consolidated net income
decreased $22 million, or 9%, to $224 million for 1998 from $246 million for
1997. As noted above, the 1998 period included $18 million of Hurricane Georges
restoration costs and an estimated $5 million of incremental costs associated
with the 41-day work stoppage.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES AND SALES. Total Wireline and Wireless revenue increased $33
million, or 3%, to $1,234 million for 1997 from $1,201 million for 1996. The
increase resulted primarily from the growth in local, paging and access
revenues.
Wireline:
Local revenues increased $28 million, or 7%, to $447 million for 1997 from
$419 million for 1996. The increase was due to the expansion of the number of
access lines, which produced higher revenues for basic voice services of $17
million. In addition, private branch exchange rental revenues increased $2
million and revenue from value-added services was $8 million, or 38%, higher
than the prior year because of strong demand for such services. Access lines
increased by 5.6% in 1997.
Long distance revenues decreased $11 million, or 4%, to $252 million for
1997 from $263 million for 1996. The decrease was driven by the full year effect
of the August 1996 price reductions associated with dial-around competition.
Prices decreased from a $0.16 average in 1996 to a $0.13 average in 1997.
Traffic volume increased, however, with a 13% increase in minutes, from 1,464
million minutes in 1996 to 1,649 million minutes in 1997.
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<PAGE> 41
Network access revenues increased $20 million, or 8%, to $278 million for
1997 from $258 million for 1996. The increase was driven by an increase in
switched access revenues and higher long-term support subsidies principally
because we were required to provide higher cost services than other pool
participants.
Directory services and other revenues increased by $8 million, or 9%, to
$100 million for 1997 from $92 million in 1996. Main increases were in the other
revenue category as a result of a large equipment sales contract with the Puerto
Rico Police Department.
Wireless:
Cellular revenues decreased $33 million, or 24%, to $102 million for 1997
from $135 million for 1996, due to a net reduction of 18,000 customers, from
153,000 to 135,000, and reductions in monthly average revenue per unit, to $59
in 1997 from $71 in 1996. The customer loss was due to customer terminations
resulting from network fraud and the associated inability to roam in the
continental U.S. Mainland carriers would not permit roaming because of concerns
regarding our problems with fraudulent phone usage. In addition, our stricter
credit and collection procedures contributed to the net loss of customers. We
addressed our fraud problems in late 1997 through the implementation of
authentication-fingerprinting software.
Paging revenues increased significantly to $55 million in 1997 from $34
million in 1996, a 62% increase, resulting from an 18% increase in customers and
an increase in monthly average revenue per unit from $17 in 1996 to $21 in 1997.
Paging customers grew from 200,000 in December 1996 to 235,000 in December 1997.
OPERATING COSTS AND EXPENSES. Total Wireline and Wireless costs and
expenses for 1997 decreased $71 million, or 7%, to $990 million from the $1.1
billion reported in 1996.
Wireline:
Total costs and expenses for the Wireline segment decreased $77 million, or
8%, to $852 million from the $929 million reported in 1997. Cost of services and
sales decreased $14 million, or 3%, million to $431 million. Selling, general
and administrative expenses decreased $84 million, or 35%, to $159 million.
Reductions in cost of services and sales as well as selling, general and
administrative were mainly due to the one-time charge of $99 million associated
to an early retirement program offered in 1996. This resulted in an improvement
in access lines per Wireline employee to 135 in 1997 from 153 in 1996.
Wireless:
Total Wireless costs and expenses for the year 1997 increased $6 million,
or 4.5%, to $138 million from the $132 million reported in 1996. Costs of
services and sales decreased $5 million, or 21%, to $19 million primarily due to
the reduction in cost of good sold associated to the decrease of lines in
service from 153,000 in 1996 to 135,000 in 1997. Selling, general and
administrative costs increased $7 million, or 7%, to $101 million from the $94
million reported in 1996, primarily due to an increase in operator services for
paging.
Depreciation and Amortization Expense. Consolidated depreciation and
amortization expense increased $25 million, or 10%, to $279 million for 1997
from $255 million for 1996 due to higher levels of gross plant in service and
the amortization of $4 million related to the acquisition cost of the personal
communications system licenses.
Net Income. As a result of all of the above, net income increased $104
million, or 73%, to $246 million for 1997 from $142 million for 1996. As noted
above, the 1996 period included $99 million of charges for an early retirement
program.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had working capital of $88 million, compared to
$136 million and $131 million for 1997 and 1996, respectively. Accounts payable
and accrued expenses increased substantially at December 31, 1998 due to planned
capital additions and replacement and restoration activities totaling
approximately $49 million accrued late in the fourth quarter of 1998. We delayed
our capital expenditures
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<PAGE> 42
program, first because of the 41-day work stoppage which ended by early August
1998 and then because of Hurricane Georges on September 21, 1998. This increase
in accounts payables was partially offset by an increase in accounts receivables
primarily attributable to delays in billing and collections caused by Hurricane
Georges.
As of June 30, 1999, we had working capital of $98.3 million compared to
working capital of $88.1 million at December 31, 1998.
As part of the closing of the acquisition of Telecomunicaciones de Puerto
Rico by the GTE Group, we distributed $1,570.2 million in cash to a Puerto Rico
Telephone Authority as a special dividend on March 2, 1999. We borrowed $1,591.1
million under our bank credit facilities at the closing of the acquisition, of
which $1,565 million was used to pay the special dividend and $26.1 million was
used to make a loan to the employee stock ownership plan to purchase 3% of our
shares. We used $5.2 million of cash on hand to pay a portion of the special
dividend. Cash and cash equivalents were $36 million at December 31, 1998,
compared with $21 million and $43 million for 1997 and 1996, respectively. Prior
to the acquisition, our predecessors distributed to the Puerto Rico Telephone
Authority cash dividends in an amount equal to net income plus depreciation and
amortization on the tenth day of each month. Cash balances at any balance sheet
date therefore represented net cash receipts for an approximate 20-day period.
As of June 30, 1999, cash and cash equivalents increased to $63.7 million
because no cash dividend distributions were made to the Puerto Rico Telephone
Authority after the acquisition.
At June 30, 1999, we had $174 million available under a $200 million
revolving credit facility with Banco Popular entered into in connection with the
acquisition.
Cash from operations for the six-month period ended June 30, 1999 was
$179.6 million compared to cash from operations for the six months ended June
30, 1998 of $272.8 million. The decrease in cash from operations of $93.2
million is primarily attributed to higher operating expenses, which included $28
million for repair expenses associated with Hurricane Georges. Cash expended for
investment activity for the six months ended June 30, 1999 was $100.3 million
compared to cash expended for investment activity of $106 million for the six
months ended June 30, 1998. We have continued our capital spending programs to
enhance the technological capability of our network to provide new products and
services to our customers to stay competitive.
Net cash from operations of $614 million in 1998 was $106 million and $110
million higher than 1997 and 1996, respectively. Internally generated funds have
been sufficient to fund capital expenditures of $288 million, $362.2 million and
$391 million for the years 1998, 1997 and 1996, respectively. We expect to spend
$1.2 billion under our five-year capital expenditure plan for the years 1999
through 2003 financed through internal and externally generated funds and we
have publicly committed to spend at least $1.0 billion on capital expenditures
during the same five-year period. Our capital expenditure budget for 1999 totals
approximately $224 million.
We had unfunded pension and other postretirement liabilities aggregating
$433 million as of December 31, 1998. We will reduce this liability with
internally generated funds, $200 million in capital contributions from the
Puerto Rico Telephone Authority and estimated tax savings of $128 million
associated with using the $200 million to pay such liabilities. The Puerto Rico
Telephone Authority is contractually obligated to contribute $40 million in cash
in 2000 and 2001 and in either cash or shares of Telecomunicaciones de Puerto
Rico stock for the next three years to reduce these unfunded pension and
postretirement liabilities. We are contractually obligated to apply these
proceeds plus the grossed-up effect of the tax deduction totaling $66 million
per year, regardless of whether the Puerto Rico Telephone Authority exercises
its share payment option. We believe the Puerto Rico Telephone Authority will
make those contributions in cash because a total of $175 million of certificates
of deposit issued by the Government Development Bank for Puerto Rico and agency
debentures issued by the Federal Home Loan Bank were placed in escrow to secure
this obligation.
We expect to fund our interest payment obligations and capital expenditure
plan with internally generated funds and to fund principal payment obligations
through a combination of internally generated funds and refinancings.
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<PAGE> 43
In connection with the acquisition, our shareholders agreed that the common
shares of Telecomunicaciones de Puerto Rico will bear a dividend, payable on a
quarterly basis, to the extent funds are legally available, and subject to any
restrictions imposed by any financing, that is at least equal to 50% of our
consolidated net income. The indenture for the old notes and the exchange notes
and our credit facilities do not contain dividend restrictions.
REGULATORY AND COMPETITIVE TRENDS
During the second quarter of 1999, regulatory and legislative activity at
both the state and federal levels continued to be a direct result of the Federal
Telecommunications Act of 1996. Along with promoting competition in all segments
of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
We continued in the second quarter of 1999, to meet the wholesale
requirements of new competitors. To date, we have signed over 20 interconnection
agreements with other carriers, providing them the capability to purchase
individual unbundled network elements, resell retail services and interconnect
facilities-based networks. Several of these interconnection agreements were the
result of the arbitration process established by the Telecommunications Act, and
incorporated prices or terms and conditions based upon the Federal
Communications Commission rules that were subsequently overturned by the Eighth
Circuit Court in July 1997.
Concurrent with our competitors entry in the markets, as a result of a
change in the regulatory environment, we have continued our expansion into
local, long-distance, Internet-access, wireless and video services both within
and outside our traditional operating areas.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
hedging instruments. SFAS No. 133, as amended by SFAS No. 137, is effective
January 1, 2001. The statement requires entities that use derivative instruments
to measure and record these instruments at fair value as assets or liabilities
on the balance sheet. It also requires entities to reflect the gains or losses
associated with changes in the fair value of these derivatives, either in
earnings or as a separate component of comprehensive income, depending on the
nature of the underlying contract or transaction. We do not currently utilize
derivative instruments. Therefore, the adoption of SFAS No. 133 is not expected
to have a significant effect on our results of operations or our financial
condition.
In March 1998, the American Institute of Certified Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this Statement
of Position, effective January 1, 1999, we capitalize and amortize the cost of
all internal-use software, including network-related software.
RECENT INTERNET REGULATORY ACTION
The FCC has been considering issues relating to whether Internet traffic is
subject to carrier-to-carrier reciprocal compensation arrangements. These
arrangements provide for the payment of compensation to a local telephone
company for transporting and terminating a local call that is placed by one of
its competitor's customers. There is an ongoing dispute in the telephone
industry over whether calls from wireline phones of one local exchange carrier
to Internet service providers served by a different local exchange carrier are
subject to reciprocal compensation.
Many incumbent local telephone companies, like us, argue that calls to
Internet service providers are interstate in nature because the call originates
in one state and may terminate in another state, in a foreign country or has
mixed termination. In other words, with just one call to the Internet service
provider the caller may access different local, interstate and foreign points.
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<PAGE> 44
On February 26, 1999, the FCC released a Declaratory Ruling regarding this
issue. In that ruling the FCC concluded that carriers are bound by their
existing interconnection agreements, as interpreted by state commissions, and
thus are subject to reciprocal compensation obligations to the extent provided
by such agreements or as determined by state commissions. The FCC also declared
that Internet traffic is jurisdictionally mixed but appears to be largely
interstate in nature, and thus subject to federal jurisdiction. The FCC
concluded that the calls at issue do not terminate at the Internet service
provider's local servers, but continue to their ultimate destinations, at
websites that are often located in other states or countries. The decision also
preserves the rule that exempts the Internet and other information services from
the payment of interstate access charges.
The FCC tentatively concluded that inter-carrier compensation for said
interstate traffic should be governed prospectively by interconnection
agreements negotiated pursuant to the provisions of the Federal
Telecommunications Act of 1996. It has also launched a proceeding to determine
an appropriate compensation scheme for such calls in the future.
The Telecommunications Regulatory Board of Puerto Rico had not approved,
prior to the FCC ruling, any agreement regarding how Internet traffic was to be
compensated in Puerto Rico. However, on September 28, 1999 an arbitrator issued
a Report and Order in the PRTC/Sprint arbitration proceeding in which she found
that traffic originated in Puerto Rico and bound for an Internet service
provider should be considered interstate traffic not subject to reciprocal
compensation. With respect to our operations, the Regulatory Board has approved
new interconnection agreements with Lambda and Centennial. Those agreements
state that traffic originated in Puerto Rico to an Internet service provider
shall not be subject to reciprocal compensation, but the parties also agreed
that the execution of the interconnection agreements did not constitute a waiver
of any rights the parties may have to seek compensation for such traffic in any
appropriate forum. Lambda/Centennial filed a motion for the reconsideration of
the Board Resolution and Order approving the interconnection agreements. The
Regulatory Board has issued an order upholding its previous resolution and
order.
We at present do not pay reciprocal compensation for calls to Internet
service providers. We, however, have exercised our rights under the previous
Lambda/Centennial interconnection agreements to conduct an audit to determine
the volume of local and interexchange (intrastate and interstate) traffic routed
between the parties' networks to determine the validity of the payments made by
the parties during the term of those agreements. In April 1999,
Lambda/Centennial filed an FCC tariff establishing a charge for calls made by
customers of Puerto Rico Telephone Company to an Internet service provider
served by Lambda/Centennial. We have withheld payments on the billings we have
received from Lambda/Centennial with regard to these calls.
We are also in the process of negotiating an interconnection agreement with
Sprint for which both parties have filed an arbitration petition before the
Regulatory Board. As stated above, the arbitrator issued her Report and Order
with regard to this matter on September 28, 1999. The arbitrator resolved
disputed issues and ordered the parties to file an interconnection agreement
consistent with her findings by October 13, 1999. The parties have filed an
interconnection agreement with the Regulatory Board and have the right to file
motions to petition for the reconsideration of any of the issues decided by the
arbitrator after the Regulatory Board issues an order approving the
interconnection agreement.
FACTORS AFFECTING OUR FUTURE FINANCIAL RESULTS
As a result of the acquisition, our reported results of operations and
financial condition for periods ended since the acquisition differ materially
from reported periods ended prior to the acquisition.
These changes derive principally from:
- a change from being a government-owned entity which did not pay taxes,
other than excise and in lieu of taxes, to a privately owned company
which will pay taxes;
- the incurrence of $1,591.1 million of debt in connection with the
acquisition;
- the creation of an employee stock ownership plan owning 7% of our shares;
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<PAGE> 45
- our obligation to pay management fees and a technology license royalty to
subsidiaries of GTE, the cash payment of which will be deferred, with
interest, until at least March 2, 2000;
- the reduction of under-funded pension plan liabilities and other
post-retirement liabilities through the capital contributions that will
be made by the Puerto Rico Telephone Authority over the next five years;
- our voluntary separation plan which became effective in June 1999 for the
early retirement of employees;
- the loss of National Exchange Carrier Association-administered long-term
support and the adoption of price cap interstate access formulae during
the first half of 2000 and a possible change in the amounts of universal
service fund subsidies;
- increasing competition and changes in the regulatory environment in
Puerto Rico, such as the implementation of dialing parity for on-island
long distance calls on February 1, 1999; which will make it easier for
our customers to use the facilities of competitors;
- our offering of off-island long distance service as a result of the
termination of certain mutual non-competition covenants with Telefonica
Larga Distancia;
- the changes in regulation affecting our operations and the introduction
of competition which has resulted in our discontinuation of regulatory
accounting principles; and
- the adoption of a new basis of accounting to reflect the acquisition
which results in an increase in the assets and shareholders' equity
components of our financial position. These assets will be amortized to
expense in the measurement of future results of operations as they are
realized.
Prior to the acquisition, Puerto Rico Telephone Company distributed to the
Puerto Rico Telephone Authority as a cash dividend an amount equal to its net
income plus amortization and depreciation. The Puerto Rico Telephone Authority
used the proceeds to service its debt and make payments in lieu of taxes to
governmental authorities in Puerto Rico. After the acquisition, we will report
substantially higher expenses for the direct payment of taxes as a result of
being a private company. We do not expect to have a cash income tax liability
for 1999. Based on a maximum statutory income tax rate of 39%, we would have
paid $67.2 million in income taxes on our 1998 results. Following the
acquisition, we must also pay property, municipal and unemployment taxes. Based
on 1998 results, we would have paid $52 million in such taxes.
We expect that our future income tax liability will be reduced annually by
an amount arising from a step-up of the tax basis of our assets and liabilities
to their fair values established in the acquisition. The estimated $475 million
step-up, representing the excess of the purchase price paid versus the net book
value of the assets, will be amortized as a deduction for income tax purposes
over 15 years. These amortizations when combined with the future tax deductions
of funding prior employee benefit costs and depreciation of property, plant and
equipment will produce future tax cash benefits. These future tax benefits have
been recorded as a deferred tax asset on our balance sheet with an increase in
equity. We have received a favorable ruling from the government of Puerto Rico
regarding the ability to step-up the assets to the values established in the
acquisition and deduct prior employee benefits costs funded.
In connection with the acquisition, we incurred $1,591.1 million of debt.
Assuming we incurred the debt on January 1, 1998 and calculating interest at an
effective interest rate of 6.37%, which was the average rate at the acquisition
date, we would have had approximately $100.4 million in interest expense in
1998.
We created the employee stock ownership plan on the date of the acquisition
and allocated 70,000 shares to the trust for the benefit of employees. The 7% of
our shares acquired by the employee stock ownership plan were valued at $60.9
million. The employee stock ownership plan allocation consists of three
elements, discussed below.
- A grant from the Puerto Rico Telephone Authority of 30,000 shares,
representing 3% of our shares, valued at $26.1 million. The grant vested
immediately and the $26.1 million non-cash amount was recorded as an
operating expense on March 1, 1999 by the predecessors;
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- A grant from the GTE Group of 10,000 shares, representing 1% of our
shares, valued at $8.7 million. The GTE Group grant was valued at $8.7
million, and recorded as deferred compensation on March 2, 1999 and was
credited to paid-in-capital with no effect on shareholders' equity. The
deferred compensation amount will be charged to earnings in future
periods when these shares vest; and
- A purchase by the employee stock ownership plan of 30,000 shares,
representing 3% of our shares, with the proceeds of a loan from us in the
amount of $26.1 million. The shares will be recorded by us as an
operating expense over a period not to exceed 20 years as these shares
are released to the employees.
We are obligated to pay subsidiaries of GTE management fees and a
technology license royalty aggregating 8% of EBITDA, or approximately $38
million based on pro forma 1998 EBITDA of $475.5 million prior to payment of the
management fee. The aggregate fee declines to 7% of EBITDA in 2002 and 2003 and
to 6% of EBITDA in 2004. The GTE subsidiaries have agreed to defer, with
interest, the payment of such fees and royalty until at least March 2, 2000.
We have introduced a voluntary early retirement program to our workforce to
reduce expenses and streamline operations. The program involves providing an
incentive equal to adding five years of age and five years of service in the
calculation of pension benefits for employees that reach a minimum of years of
age and service threshold. Employees accepting retirement will also be entitled
to normal medical and life insurance benefits.
The program was offered to our non-union salaried workforce in June 1999
and 273 employees accepted early retirement in July 1999. A provision of
approximately $83 million will be recorded in the third quarter of 1999
associated with this program. We have recently reached terms on a program with
our unions. The first union involving approximately 600 employees must accept
the offering in September 1999, whereas the second union involving 200 employees
must accept the offering in October 1999. Based on expected acceptance rates,
the cost associated with the union offerings is estimated to range from $30
million to $45 million each. Approximately $25 million associated with the total
cost for the union and non-union offering involves an immediate cash obligation.
Prior to the acquisition, our rates were regulated on a rate-of-return/cost
of services basis entitled to financial support from subsidy pools administered
by National Exchange Carrier Association. As a rate-of-return carrier, we were
permitted to charge prices sufficient to cover our costs and to provide an
annual rate of return of up to 11.5%. We were also entitled to long-term support
subsidies for operating in high cost areas which provided the funds to achieve
this return. After the acquisition, we will be considered a price cap carrier.
As a price cap carrier, our prices, rather than our costs and earnings, will be
regulated. We must exit the long term support pool in the first half of 2000 and
implement a price cap mechanism related to the recovery of common carrier line
and traffic sensitive costs. When we exit the pool, we will be able to charge
interexchange carriers a pre-subscribed interexchange common carrier line charge
which is assessed on an access line basis for interconnection to our local
network. We received $91 million in long-term support in 1998. Based on existing
pre-subscribed interexchange common carrier line charge rates established by the
FCC for all local exchange carriers and our estimates of projected access lines,
we expect to receive annualized pre-subscribed interexchange common carrier line
charge revenues of $33 million in 2000. Therefore, we estimate that the
annualized pre-tax loss in long term support will be $58 million.
We received $48 million in universal service fund subsidies in 1998 and $27
million in 1997. The amount received in 1998 was higher than normal because
Puerto Rico Telephone Company included certain non-recurring costs when
calculating the amount of such support. In October 1998, the FCC issued an order
selecting a cost model for universal service and planned to select cost inputs
in the second quarter of 1999. Due to unforeseen delays, the FCC has moved the
implementation date of the new universal service mechanism for nonrural carriers
to January 2000. Our universal service program will be designed to complement
the FCC program, however until we receive FCC action we cannot predict the
amount of future subsidies.
As a result of changes in the regulatory environment, Puerto Rico's
telecommunications market has become increasingly competitive. As of June 30,
1998, we held over 95% of the local wire-line market and our
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share of the on-island long distance market in Puerto Rico decreased from 98% in
February to 63% in June 1999. We expect to experience an erosion of market share
in the local market over time resulting from increased competition and
regulatory changes. See "-- Six Months Ended June 30, 1999 Compared with Six
Months Ended June 30, 1998."
Since February 1, 1999, customers can place long distance calls with any
pre-subscribed carrier by dialing the number as opposed to having to dial a
five-digit access code and the number. In addition, the Puerto Rico Telephone
Authority and Telefonica Larga Distancia terminated their mutual non-competition
covenants effective February 1, 1999. As a result, we are offering off- island
long distance service, and Telefonica Larga Distancia is offering on-island long
distance. In addition, some of our competitors, such as AT&T, Sprint and MCI
Worldcom, have made investments in offering services to residential and business
customers in Puerto Rico. See "Risk Factors -- We Face a Significant Increase in
Competition" and "Business -- Regulation."
The acquisition agreements provide that we will not raise tariffs for basic
residential service for three years.
As a result of the changes in regulation, the competitive environment and
the terms of the acquisition, we have determined that regulatory accounting
principles as set forth in SFAS No. 71 are no longer applicable to our
operations. Accordingly, we have discontinued the application of SFAS No. 71 in
conformity with SFAS No. 101 "Accounting for the Discontinuation of Application
of SFAS No. 71." We have made an assessment of the cost of property, plant and
equipment that will not be realized based on an analysis of the cash flows
expected to be generated by the telephone plant and equipment over their
remaining economic lives established in light of competitive trends and
technology replacement. Consistent with the rest of the local exchange telephone
industry, this assessment has resulted in the write-down of plant and equipment
in the amount of $198.5 million. A proportionate amount of this adjustment,
which is approximately $99.2 million, has been accounted for as a purchase price
adjustment in accordance with the provisions of partial step-up accounting to
reflect the fair market values of the assets acquired on March 2, 1999. The
remaining $99.2 million was recorded as an extraordinary charge in the
consolidated statements of operations. The amount of this extraordinary charge
was $60.5 million, net of a tax benefit of $38.7.
YEAR 2000 COMPLIANCE
GENERAL
The Year 2000 issue concerns the potential inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. We have been addressing potential Year
2000 issues since the second quarter of 1997. This program is necessary because
the Year 2000 issue could impact our telecommunication networks, systems and
business processes. Because of our system conversion, enhancement activities and
enterprise testing, we presently expect our networks, systems and processes to
be Year 2000 compliant by the end of October 1999. Enterprise testing of our new
wireless billing system is expected to be complete in early November 1999.
Although based on our progress to date, we presently expect that our Wireline
and Wireless telecommunications businesses will be ready in sufficient time for
the millennium rollover, we cannot know the actual effects of the Year 2000
issue on our business and operations until the Year 2000 arrives.
STATE OF READINESS
Our management considers systems preparation for Year 2000 to be a high
priority and has a program in place to address Year 2000 compliance issues.
Monthly reports are prepared in order to monitor our Year 2000 compliance
program and are reviewed by our board of directors. We are communicating with
customers, suppliers, financial institutions and others with whom we do business
to communicate our status and to coordinate Year 2000 compliance. The inventory
of our Year 2000 issues is complete and includes both information technology and
non-information technology systems. As of September 30, 1999, our overall
program is estimated to be 97% complete. Except for the new wireless billing
system, all testing of equipment, products, and mission critical systems was
completed in September 1999. Following standard industry practice, we have
grouped our Year 2000 issues into several categories by order of priority.
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- Network operations and call routing are deemed to be most important and
testing began in October 1998. This testing was completed in September
1999.
- Information technology and operational support systems such as billing
and customer care follow next in priority. Conversion and testing of
these systems were completed in September 1999 except for the wireless
operational support system, which is expected to be complete in November
1999.
- System level testing of third-party supplier products and internally
maintained software applications is in progress and is expected to be
completed at the same time as the associated network and information
technology systems.
- Enterprise or total company testing of all major processes began in
November 1998 and was completed in September 1999, except for the
wireless billing system, which is expected to be complete in early
November 1999.
USE OF INDEPENDENT VERIFICATION AND VALIDATION
In order to independently verify the results of our effort to date, we have
hired two independent contractors to perform a specialized scanning program
check on our mainframe applications programs which have already been tested and
converted and tested internally. We expect that this additional verification
process and any necessary conversion and testing will be complete by the end of
October 1999.
COST TO ADDRESS YEAR 2000 ISSUES
We have established a $21 million expense budget for Year 2000 compliance,
excluding costs relating to Celulares Telefonica's new billing system, of which
approximately $20.1 million had been spent as of September 30, 1999. We expense
costs associated with our Year 2000 compliance program in the year they are
actually incurred. We do not anticipate that we will incur significant operating
expenses or be required to make substantial additional investments in our
computer systems to be Year 2000 compliant.
RISKS OF YEAR 2000 ISSUES
We face a potential Year 2000 risk in connection with the billing system
for Celulares Telefonica, which is expected to be customized, installed and
tested by its third party developer in early November 1999. The new Year 2000
compliant billing system for Celulares Telefonica was developed by Amdocs (UK)
Limited and is currently in use by other major wireless companies, including
other affiliates of GTE Corporation, and is being customized for Celulares
Telefonica by the developer. If the Celulares Telefonica system is not ready in
time, Celulares Telefonica's billing system may experience significant Year 2000
problems. Celulares Telefonica is developing contingency plans to address this
situation, including using specific modules of already certified year 2000
applications.
Other scenarios might include a possible but presently unforeseen failure
of key supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. Our present assessment of our key suppliers and
customers does not indicate that this scenario is likely. As of August 31, 1999,
we have successfully deployed a compliant network infrastructure.
CONTINGENCY PLANS
Contingency plans exist or are being developed for critical and
non-critical systems. A major corporate-wide program is being implemented in
conjunction with the GTE Corporation's Year 2000 Program Office. This program
includes both contingency and business continuity planning.
Under GTE Corporation's umbrella program, we are bolstering our normal
business continuity planning to address potential Year 2000 interruptions. We
are also developing our plans with respect to possible occurrences immediately
before, during, and after the millennium transition. These plans are currently
98% complete. The testing of the contingency plans is 96% complete and we expect
to conclude testing by the end
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of October 1999. This contingency plan includes: business continuity planning;
disaster recovery/emergency preparedness; millennium rollover planning; post
millennium degradation tracking; a network and information technology
"stabilization" period; employee availability and logistics backup planning;
coordination with other telecommunications providers; a Year 2000 "war room"
operation to provide high-priority recovery support, plans for key personnel
availability, command structures and contingency traffic routing; and plans for
round-the-clock, on-call repair teams.
THIRD PARTY ISSUES
We continue our surveys of significant third-party vendors, suppliers and
customers whose systems, services or products are important to our operations.
We have instituted a verification process to determine the Year 2000 readiness
of these third-parties. This verification process includes reviewing test and
other data of third-parties and engaging in regular conferences with these
third-parties' Year 2000 teams. We believe that the systems, services or
products supplied by third-parties are either Year 2000 compliant or are
expected to be Year 2000 compliant by the end of the third quarter of 1999.
However, we cannot control the activities of third parties and the
non-compliance of third-party products and services could have a material
adverse effect on our operations. Assuming Celulares Telefonica's new billing
system is installed on time and performs properly, we do not presently
anticipate that business operations will be disrupted or that customers will
experience any significant interruption of services as a result of the
millennium change.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The table below provides information about our long-term debt obligations
as of June 30, 1999 which are sensitive to changes in interest rates. The table
presents the estimated interest requirement for each of the next five years and
in the aggregate thereafter as well as the related average interest rates.
<TABLE>
<CAPTION>
INTEREST REQUIREMENT INITIAL
--------------------------------------------------------------------------------- PRINCIPAL MATURITY
1999 2000 2001 2002 2003 2004 THEREAFTER TOTAL AMOUNT DATE
------- ------- ------- ------- ------- ------- ---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed
Senior Notes
2002(1)(2)..... $11,326 $18,450 $18,450 $20,200 $21,450 $21,450 $ 8,282 $119,608 $300,000 2002
Interest
Rate......... 6.15% 6.15% 6.15% 6.73% 7.15% 7.15% 7.15%
Senior Notes
2006(1)........ $16,329 $26,600 $26,600 $26,600 $26,600 $26,600 $ 36,575 $185,904 $400,000 2006
Interest
Rate......... 6.65% 6.65% 6.65% 6.65% 6.65% 6.65% 6.65%
Senior Notes
2009(1)........ $12,523 $20,400 $20,400 $20,400 $20,400 $20,400 $ 89,250 $203,773 $300,000 2009
Interest
Rate......... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
Floating
Five-year
Revolving
Credit
Facility(3)(4)... $30,938 $40,125 $41,625 $43,125 $43,125 $43,125 $208,294 $450,356 $500,000 2004
Average
interest
rate......... 7.425% 8.025% 8.325% 8.625% 8.625% 8.625% 8.625%
364-day Revolving
Credit
Facility(3)(5)... $ 1,977 $ -- $ -- $ -- $ -- $ -- $ -- $ 1,977 $ 26,100 2000
Average
interest
rate......... 7.625%
</TABLE>
- ---------------
Assumptions:
(1) Interest has been calculated on a 360-day basis from the date of issuance
(May 20, 1999) for 1999.
(2) Interest has been calculated from May 20, 2002 and thereafter on the
assumption that the notes are refinanced for an additional three years at a
7.15% interest rate.
(3) Interest has been calculated using a projected interest rate based on LIBOR
projections plus 100 basis points, plus a margin of .725 for the Five-Year
Revolving Credit Facility and a margin of .925 for the 364-day Revolving
Credit Facility.
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<PAGE> 50
(4) Interest has been calculated from May 20, 2004 and thereafter on the
assumption that the $500 million outstanding is rolled over for an
additional five years.
(5) Interest for 1999 has been calculated based on the principal amount of $91.1
million outstanding from March 2, 1999 through June 2, 1999 and $26.1
million outstanding as of June 30, 1999. The principal amount became zero as
the $26.1 million was repaid in full on July 6, 1999.
47
<PAGE> 51
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The unaudited pro forma condensed financial information presented below
reflects adjustments that give effect to:
(i) the acquisition and related expenses, the payment of the special
dividend and the incurrence of $1.591 billion of debt, the accrual of
management fees and a technology license royalty which are payable to
subsidiaries of GTE Corporation (excluding the accrual of interest on the
initial delayed payment) and the direct payment of income, unemployment,
property and municipal taxes;
(ii) the adoption of the partial step-up in accounting basis recorded
under the purchase accounting provisions under EITF 88-16 which establishes
a new basis of valuation for the assets and liabilities acquired in the
acquisition and the effect of Telecomunicaciones de Puerto Rico becoming a
taxable enterprise;
(iii) the discontinuation of regulatory accounting; and
(iv) an anticipated net loss in revenues, estimated at approximately
$70 million on an annualized basis in 2000, from losing the National
Exchange Carrier Association long-term support subsidies based on the
adoption of a price cap mechanism for common line access under applicable
FCC regulations. The change is not expected to take effect until sometime
in the first half of 2000.
The unaudited pro forma condensed consolidated statements of income give
effect to the adjustments as if the transactions they relate to had occurred as
of January 1, 1998. An unaudited pro forma balance sheet has not been presented
as the transaction has already been reflected in the June 1999 balance sheet.
The unaudited pro forma condensed financial information has been included
for comparative purposes only. It is based upon our financial statements and
those of our predecessors and should be read in conjunction with such financial
statements and related notes, which are included elsewhere in this prospectus.
The pro forma information does not purport to be indicative of the results which
would have occurred if the acquisition had occurred on the dates or for the
periods indicated or which may occur in the future, nor to consider all effects
of the acquisition and privatization.
The pro forma results for the year ended December 31, 1998 do not include a
$26.1 million non-recurring charge to earnings recorded in March 1999 associated
with the establishment of the employee stock ownership plan, which charge is
included in the pro forma results for the six months ended June 30, 1999. The
pro forma adjustments do not include a non-recurring charge anticipated to be
recorded in 1999, related to the implementation of a voluntary early retirement
program. This program is expected to produce a charge in the range of $143
million to $173 million. The pro forma condensed financial information does not
adjust for other potential favorable and unfavorable changes in our business,
including certain of those described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
the Company's Future Financial Results" and the June 30, 1999 financial
statements included elsewhere in this prospectus.
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<PAGE> 52
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS TO
REFLECT THE
ACQUISITION AND
HISTORICAL THE OFFERING OF THE PRO FORMA
PREDECESSORS OLD NOTES COMPANY
------------ ------------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues and Sales................................. $ 1,270,684 $ (70,000)(1) $1,200,684
------------ ---------- ----------
Operating Costs and Expenses, Excluding
Depreciation and Amortization.................... 746,890 52,000(2) 833,161
(3,729)(3)
38,000(4)
Depreciation and Amortization...................... 296,493 11,700(5) 308,193
------------ ---------- ----------
Operating Costs and Expenses....................... 1,043,383 97,971 1,141,354
------------ ---------- ----------
Operating Income................................... 227,301 (167,971) 59,330
Interest Income (Expense), net..................... 2,479 (800)(6) (100,371)
(101,350)(7)
(700)(8)
Other Income (Expense), net........................ (5,413) (5,413)
------------ ---------- ----------
Income (Loss) Before Taxes......................... 224,367 (270,821) (46,454)
Income Tax Provision (Benefit)..................... (18,117)(9) (18,117)
------------ ---------- ----------
Net Income (Loss).................................. $ 224,367 $ (252,704) $ (28,337)
============ ========== ==========
</TABLE>
See accompanying Footnotes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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<PAGE> 53
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL FOR THE 1999 PERIOD PRO FORMA
------------------------------ ADJUSTMENTS TO
COMPANY PREDECESSOR REFLECT THE
------------ -------------- ACQUISITION AND
MARCH 2, TO JANUARY 1, TO THE OFFERING OF PRO FORMA
JUNE 30, MARCH 1, SUBTOTAL OLD NOTES COMPANY
------------ -------------- -------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues and Sales............... $446,983 $223,300 $670,283 $(35,000)(1) $635,283
Operating Costs and Expenses,
Excluding Depreciation and
Amortization................... 287,274 172,032 459,306 8,700(2) 471,160
(746)(3) --
3,900(4) --
Depreciation and Amortization.... 99,484 50,393 149,877 1,678(5) 151,555
-------- -------- -------- -------- --------
Operating Costs and Expenses..... 386,758 222,425 609,183 13,532 622,715
-------- -------- -------- -------- --------
Operating Income................. 60,225 875 61,100 (48,532) 12,568
Interest (Income) Expense, net... 29,336 (407) 28,929 200(6) 46,729
16,900(7) --
700(8) --
Other Income, net................ 1,285 569 1,854 -- 1,854
-------- -------- -------- -------- --------
Income (Loss) Before Taxes....... 32,174 1,851 34,025 (66,332) (32,307)
Income Tax Provision (Benefit)... 11,729 -- 11,729 (24,282)(9) (12,553)
-------- -------- -------- -------- --------
Net Income (Loss) Before
Extraordinary Charge........... $ 20,445 $ 1,851 $ 22,296 $(42,050) $(19,754)
======== ======== ======== ======== ========
</TABLE>
See accompanying Footnotes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
50
<PAGE> 54
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
The pro forma results of operations reflect the effects of the adoption of
partial step up accounting and the change in status of the Company which has
become a tax paying enterprise with the completion of the acquisition.
The following pro forma adjustments have been made to the unaudited pro
forma condensed consolidated financial statements:
(1) Reflects an anticipated loss in revenues, estimated at
approximately $70 million on an annualized basis in 2000, from losing the
National Exchange Carrier Association long-term support subsidies based on
the adoption of a price cap mechanism for common line access under
applicable FCC regulations. The change is not expected to take effect until
sometime in the first half of 2000.
(2) Prior to the acquisition, Puerto Rico Telephone Company paid a
cash dividend to the Puerto Rico Telephone Authority in an amount equal to
its net income plus noncash amortization and depreciation expense. Due to
this payment, Puerto Rico Telephone Company was not required to pay
municipal and property taxes or Puerto Rico income taxes. As a result of
the acquisition, Puerto Rico Telephone Company is now responsible for the
direct payment of municipal and property taxes and income taxes. We
estimated the amount reflected for municipal and property taxes by applying
the statutory tax rate of each municipality by the appraised value for each
property and municipality, determined in accordance with guidelines
established by the Puerto Rico government and the municipalities.
The $52 million pro forma adjustment to Operating Costs and Expenses,
Excluding Depreciation and Amortization for the year ended December 31,
1998 and the $8.7 million pro forma adjustment to Operating Costs and
Expenses, Excluding Depreciation and Amortization for the six months ended
June 30, 1999, reflect estimated municipal and property taxes for the
period prior to the acquisition on March 2, 1999.
(3) Prior to the acquisition, the Company was amortizing unrecognized
prior service costs related to its pension and other past employment
benefit plans to Operating Costs and Expenses, Excluding Depreciation and
Amortization. As a result of partial step-up accounting adjustments
recorded at the time of the acquisition, prior service cost amortization
for 50% of these liabilities will not occur in periods subsequent to March
2, 1999.
The $3.7 million pro forma adjustment to Operating Costs and Expenses,
Excluding Depreciation and Amortization for the year ended December 31,
1998 and the $.7 million pro forma adjustment to Operating Costs and
Expenses, Excluding Depreciation and Amortization for the six months ended
June 30, 1999 reflect the prior service cost amortization accrued in
partial step-up accounting at the time of the acquisition.
(4) Subsequent to the acquisition, a management and technology license
fee is payable by the Company to the GTE Group. The $38 million pro forma
adjustment to Operating Costs and Expenses, Excluding Depreciation and
Amortization for the year ended December 31, 1998 and the $3.9 million pro
forma adjustment to Operating Costs and Expenses, Excluding Depreciation
and Amortization for the six months ended June 30, 1999 reflect the
estimated management fee and technology license fee for periods subsequent
to the acquisition. The estimates are based on a percentage of operating
income plus noncash amortization and depreciation.
(5) The $11.7 million pro forma adjustment for the year ended December
31, 1998 and the $1.7 million pro forma adjustment for the six months ended
June 30, 1999 reflect the net effect of the partial step-up in basis
required under the provisions of EITF 88-16 recorded at the time of the
acquisition on March 2, 1999 (primarily goodwill amortization). As a result
of the acquisition, the Company recorded goodwill and other intangible
assets (primarily cellular customer base) of $268.0 million and $18.2
million, respectively. Goodwill is being amortized on a straight-line basis
over a period of 40 years. The cellular customer base is being amortized
over a period of approximately three years to reflect the period over which
revenue is expected to be generated by customers acquired as of the
acquisition date. We monitor the loss of cellular subscribers due to
attrition and plan to adjust amortization if changes in attrition rates are
experienced.
(6) Reflects the amortization of underwriting discounts and expenses
related to the offering of the old notes over a ten-year period.
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<PAGE> 55
(7) Reflects interest expense, calculated at a rate of 6.37% per year,
on the outstanding debt balance of $1.591 billion. The 6.37% rate reflects
the floating rate in effect on the acquisition date. A change in the
interest rate of 0.25% would result in a change of $4.0 million in annual
interest expense.
(8) Reflects fees associated with the employee stock ownership plan
that was established at the time of the acquisition.
(9) The $18.1 million pro forma adjustment to the Income Tax Provision
for the year ended December 31, 1998 and the $24.3 million pro forma
adjustment to the Income Tax Provision for the six months ended June 30,
1999 reflect the adjustments required to record Puerto Rico income taxes at
a statutory rate of 39% for each respective period on a pro forma basis
considering the imposition of income taxes and the tax effect of the pro
forma adjustments.
52
<PAGE> 56
BUSINESS
OVERVIEW
We are the largest telecommunications service provider in Puerto Rico and
one of the ten largest local exchange carriers in the United States as measured
by access lines in service. We have been providing telecommunications services
in Puerto Rico since 1914. We are a diversified telecommunications company,
providing local, on-island and off-island long distance services, wireless
telephony and paging services and telecommunications equipment to our
residential and business customers. We also provide network access and billing
services to wireline carriers and wireless operators in Puerto Rico. We operate
the island's largest network of public pay telephones and market Puerto Rico's
primary telephone directory.
We invested over $1.7 billion from 1994 to 1998 primarily to expand and
enhance our wireline and wireless communications networks. Our transmission
network is 100% digital, encompasses over 73,000 fiber miles and currently uses
SONET technology in a fiber optic ring configuration with speeds up to OC-48.
This network provides the principal transmission medium for most public and
special facilities circuits and supplies direct fiber optic connections to more
office buildings than any other service provider on the island. Our cellular
network utilizes the IS-136 standard with time division multiple access digital
technology and provides island-wide coverage in Puerto Rico.
We have more than 1.2 million regular access lines in service, including
962,000 residential lines and 290,000 business lines. We have the leading market
share of the local wireline market (approximately 95% in June 1999) and the
on-island long distance market (approximately 63% in June 1999) in Puerto Rico.
In addition, we have an estimated 35% share of the cellular market and a leading
share of the paging market. On February 1, 1999 we began offering off-island
long distance services.
The market share data in this prospectus has been determined based on
access lines in service for local telephony; minutes of use for long distance
services; and subscribers for wireless telephony, paging, and Internet services.
The wireless telephony market includes the total market for personal
communications services as well as traditional cellular services.
STRATEGY
We seek to enhance our leadership position in the Puerto Rico
telecommunications market by stimulating demand for our core telephony services
and continuing to extend our franchise in the growth areas of wireless and data
services. We plan to achieve these goals with innovative marketing strategies
and by providing superior service, value and convenience relative to our
competitors. We intend to capitalize on Puerto Rico's increasing wireline and
wireless penetration to grow our business. We expect to enhance this growth by
spurring demand for value-added services such as custom calling options,
caller-ID, voice messaging and other value-added services. We will leverage our
large customer base to penetrate the significant off-island long distance market
recently opened to us. We will also pursue opportunities with business and
government customers to provide end-to-end communications solutions and to
position Telecomunicaciones de Puerto Rico as the leading provider in the
emerging market for Internet and enhanced data services in Puerto Rico.
We are in the process of implementing key strategic initiatives to achieve
these goals. The principal elements of these initiatives are to:
- STRENGTHEN OUR MARKETING FOCUS
We plan to capitalize on marketplace opportunities in Puerto Rico through
segment-based marketing and by leveraging our brand recognition as Puerto Rico's
leading telecommunications company. We will target high value customers in both
residential and business markets and design products and services targeted
specifically to meet their needs. We are developing retention programs for our
most profitable customers and plan to expand the sale of value-added and
Internet services.
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<PAGE> 57
We believe we can leverage our island-wide capabilities and differentiate
our services from the fragmented service offerings of our competitors. As the
only full service telecommunications provider in Puerto Rico, we plan to offer
customized packages that include local, enhanced network products/services, long
distance, cellular, paging, data and Internet services, and our new off-island
long distance service. We believe that by segmenting our customer base, bundling
our product and service offerings and implementing value-based pricing, we will
be able to retain and improve our market share and operating margins.
- IMPROVE OUR SYSTEMS AND PROCESSES
We are taking steps to improve the delivery of services by implementing
better processes for customer service, product development, technology
implementation and service delivery. We believe that by becoming a more
efficient telecommunications provider, we will increase customer satisfaction
and profitability.
Many of our current processes are manually intensive and can be streamlined
to reduce processing complexity, delivery time and cost. We believe that the
majority of our core business processes can be improved. For example, our sales
and repair operations are decentralized, with 16 commercial sales offices and 24
repair centers that do not share a linked information system. We intend to
rationalize these resources and to operate them using an integrated delivery and
customer care system.
We are redesigning our information systems to facilitate implementation of
our strategy. For example, our current billing systems do not permit the
efficient billing of multiple services. As a first step, we have ordered a new
billing system for our wireless telephony business which we expect to be in
place in the fourth quarter of 1999. This new system will facilitate our
strategy of segmenting customers, offering bundled services and providing
customized billing options. We plan to link this system to new and existing
information systems for our other businesses.
- LEVERAGE OUR RELATIONSHIP WITH GTE CORPORATION
We will utilize GTE Corporation's experience, resources and capabilities to
improve our operating efficiency and profitability. For example, GTE Corporation
has already begun to assist us in the procurement of products and services from
key GTE Corporation vendors at prices more favorable than we could otherwise
obtain. We are also working with GTE Corporation to assess and re-engineer core
business processes such as order-entry, inventory management, service
provisioning and customer care. Discussions are also underway to subcontract
some key elements of these processes to GTE Supply, an established provider of
logistics and supply-line services to the telecommunications industry.
GTE Corporation will provide support for emerging technologies, advanced
systems implementation, and marketing expertise. We plan to obtain network
planning tools from GTE Corporation for both wireline and wireless systems and
are also working with GTE Internetworking to develop and offer integrated data
and Internet-related service to our larger business and municipal government
customers. In addition, our relationship with GTE Corporation, one of the
leading wireless telephony providers in the mainland United States, will enable
us to expand significantly our roaming capabilities in the mainland U.S. market.
- MAKE SERVICE QUALITY AND CUSTOMER RESPONSIVENESS PRIORITIES FOR OUR
WORKFORCE
We are promoting a more collaborative workforce and are working with our
employees to improve our service orientation and operations efficiency. In
support of this strategy we expect to offer increased training, introduce more
incentive-based compensation plans and negotiate changes in work rules. An
example of management's commitment to this goal was the creation of the
Telecomunicaciones de Puerto Rico employee stock ownership plan whereby for the
first time, our employees obtained an ownership position in our company. We also
expect to develop specific improvement programs to measure and reward actual
performance.
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<PAGE> 58
LOCAL SERVICES
OVERVIEW
Local services include basic voice, telephone rental, value-added services,
special services, Internet and data access, and installation services. The
following table shows our breakdown of residential and business access lines in
service, excluding public phones, direct inward dialing business lines, wide
area telecommunications services lines, private branch exchange trunks, and
cellular and paging customers:
ACCESS LINES IN SERVICE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------
1999 1998 1997 1996
------------- ----- ----- -----
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Residential Lines...................................... 962 947 950 901
Business Lines......................................... 290 284 271 255
----- ----- ----- -----
Total Access Lines in Service.......................... 1,252 1,231 1,221 1,156
===== ===== ===== =====
Growth................................................. 1.7% 0.8% 5.6% 5.0%
</TABLE>
Wireline penetration in Puerto Rico was 77% at December 31, 1998 as
compared with penetration of over 90% in the mainland United States.
BASIC VOICE SERVICE
Basic voice service is the most significant component of the local services
category, representing $352 million in revenues in 1998, or 28% of total
revenues and $241 million in revenues, or 36% of total revenues for the period
ended June 30, 1999. Our basic voice service revenues have increased with the
growth in the number of access lines in service. The growth in access lines for
1996 and 1997 resulted from a strong local economy and increasing demand for
telecommunications services by businesses, as well as strong residential demand
for second lines. Line growth slowed in 1998 because of the impact of Hurricane
Georges and the 41-day work stoppage.
To establish basic local rates, communities in Puerto Rico are grouped into
five categories based on the number of lines served within a given geographical
area. For example, the largest cities (those with densities of more than 40,000
lines) carry flat rates for unlimited usage of $18.80 per month, while small,
typically rural communities (less than 1,000 lines) carry flat rates for
unlimited usage of $7.60 per month. Residential rates for unlimited usage
average $13.60 per month. The pricing scale has not changed since 1982 and,
under the terms of the acquisition, basic rates for residential customers cannot
be increased for three years after the acquisition. The business rate scale is
narrower and rates for basic service range from $34.60 to $36.65 per month and
average, including usage, $46.00 per month. These rates exclude the $3.50 and
$6.00 per month subscriber line access charges for residential and multi-line
business customers, respectively, that are set by the FCC and are included in
access revenues.
Our principal competitor in the local service business has been Centennial,
the first facilities-based competitive local exchange carrier in Puerto Rico.
Centennial entered the San Juan market in 1997 with a fiber optic network
targeted at business customers. Centennial also began marketing a fixed wireless
local loop service to high volume on-island long distance residential users
throughout the island in 1997.
TELEPHONE RENTAL
Approximately 90% of small, single line businesses and 63% of residential
customers rent telephones which generated approximately $28 million in revenues
in 1998 and approximately $14 million in revenues for the period ended June 30,
1999. Telephone rental revenues for the entire residential and business customer
base average $2.00 and $2.60 per customer per month, respectively. Rental levels
are high compared to mainland telecommunications companies as we still own the
inside wire on the customer premises and therefore are still responsible for
maintenance of inside wires and rental phones. Mainland telecommunica-
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<PAGE> 59
tions companies saw consumers shift from renting to purchasing phones from
retail outlets during the 1980's as consumers became responsible for instrument
repairs.
We are considering a plan to transfer inside wire and telephone repair
responsibility to consumers and we believe that this would be economically
advantageous despite the fact that rental revenues will likely decrease over
time. Repair fees and repair maintenance contracts could potentially replace the
telephone rental revenue stream. More important, however, would be the reduction
of inventory costs for rental equipment and the expected reduction in operating
expenses as the free repair policy has had the effect of producing multiple
visits per customer repair. We believe that the adoption of this new policy will
not result in a charge to earnings as we began expensing inside wire costs when
the industry changed its commercial practices.
VALUE-ADDED SERVICES
Value-added services include over fifteen voice features, such as caller
ID, call return, call waiting, 3-way calling and voice mail. Value-added service
revenues increased 30% from $27 million in 1997 to $35 million in 1998 and were
$19 million for the period ended June 30, 1999. The most popular services are
caller ID, call return and call waiting. Value-added services are sold
individually or in packages with prices ranging from $1.50 to $7.50 per month.
Residential customer acceptance of these services has been strong. Of the
906,525 customers whose lines are equipped for custom calling features
approximately 39% have subscribed for at least one custom calling feature and of
the 805,000 customers whose lines are equipped for class services, such as
return call and caller ID, over 33% have subscribed for at least one class
service feature.
SPECIAL SERVICES
Special services include private lines marketed to businesses primarily for
data transport. For 1998, these lines contributed $12 million in the local
revenue category with an additional $18 million included in the long distance
category for private line carriage beyond the local central office exchange.
Management believes that strong demand for these lines exists from both large
and medium-sized business customers. We expect to complete an ATM Network in
1999 which will enhance our ability to offer broad bandwidth, tailored, cost
effective services to our business customers.
INTERNET AND DATA SERVICES
We launched our Internet services in late 1996 by offering unlimited dial
access to our customers in the San Juan metropolitan area and have expanded our
service to 43 additional towns outside the metropolitan area. During 1997, we
introduced dedicated Internet access to business customers through the use of
private lines. Internet services contributed approximately $4 million to our
revenues in 1998.
We currently have approximately 2,500 modems which can provide service to
more than 25,000 customers and 120 ports for dedicated access. We are improving
our platform by adding 2,600 additional modems across 6 nodes and doubling the
number of T-1 connections to the main Internet backbone in the United States
from 5 to 10.
NETWORK ACCESS SERVICES
Network access services include services provided to inter-exchange
carriers, other local exchange carriers, cellular and personal communications
service operators and paging companies for the origination and termination of
calls to and from Puerto Rico Telephone Company's local customers. These
operators pay an access fee to Puerto Rico Telephone Company based on tariffs or
specific interconnection agreements which have a duration of one, two or three
years. We also collect network access fees directly from our customers in the
form of FCC-mandated line charges.
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<PAGE> 60
We recorded total network access revenues of $300 million in 1998. The
principal components of network access revenues are:
- $170 million from long distance carriers;
- $48 million from the Universal Service Fund, the federal subsidy provided
to cover revenue requirements for a high-cost regulated
telecommunications company;
- revenues from subscriber lines and end-users of $56 million;
- special access revenues of $12 million;
- cellular and beeper access revenues of $7 million; and
- intra-island access revenues of $7 million.
The long-term support subsidy relates to the common line pool, which is
managed by the National Exchange Carrier Association. The revenues received from
National Exchange Carrier Association are based on our participation in revenue
pools with other telephone companies funded by access charges authorized by the
FCC. These pooled amounts are subsequently divided among the various telephone
companies based upon their respective allocations of costs and investments in
providing interstate service.
GTE Corporation does not participate in the National Exchange Carrier
Association common line pool, but instead generates common line revenues from
several access elements. These elements include explicit pre-subscribed
inter-exchange common carrier line charges assessed on a per line basis and
increased end-user subscriber line charges. GTE Corporation also assesses a per
minute carrier common line charge established under an FCC price-cap formula if
revenues generated from the first two elements are insufficient to cover revenue
requirements. GTE Corporation is subject to price-cap regulation, a regulatory
regime that under FCC rules must apply to all of GTE Corporation's local
exchange subsidiaries. Consequently, Puerto Rico Telephone Company is required
to exit the National Exchange Carrier Association pool and adopt price-cap based
access charges. The FCC provides a 12-month period after the date of the
acquisition for the transition to price-caps. For additional information about
the effect of this change, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Our Future
Financial Results."
PUBLIC PHONES
The decline in public phone revenues from $12 million in 1997 to $9 million
in 1998 resulted from the entrance of new payphone operators in the market. We
have historically taken a universal service approach to the pricing of this
service, as evidenced by a price of 10 cents for a call of unlimited duration.
However, several payphone operators have challenged our historical pricing
practices before the Telecommunications Board, arguing that the wireline
business is subsidizing public phones.
These new competitors have begun charging higher prices, which currently
are 25 cents for each 3 minutes for the duration of a call. We also adopted this
price policy on January 15, 1999 for new, "intelligent" phones. Intelligent
phones have self-diagnostic, credit card and phone card reading capabilities and
the ability to transmit billing and operating information to a central office.
As of June 30, 1999 approximately 3,000 of our 19,400 pay phones have been
replaced with "intelligent" phones. We are currently developing plans to replace
the remaining "non-intelligent" phones.
LONG DISTANCE SERVICES
OVERVIEW
Long distance services consist primarily of direct long distance dialing,
operator-assisted, calling card, and toll private lines services within Puerto
Rico. We also provide wide area telephone services, toll-free services and
enhanced toll-free services.
For regulatory purposes, the FCC has organized the United States into
geographic markets known as local access transport areas. Puerto Rico has the
status of a single local access transport area and, as such there
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<PAGE> 61
is no inter-local-access transport area telecommunications traffic within Puerto
Rico. Therefore, in the Puerto Rico telecommunications market, there are two
types of long distance service: on-island and off-island.
Until February 1, 1999, we were prohibited from offering off-island long
distance service by a non-compete agreement with Telefonica Larga Distancia. An
agreement between the Puerto Rico Telephone Authority and Telefonica Larga
Distancia to terminate their mutual non-competition covenants became effective
on February 1, 1999. Because of competition in the on-island long distance
market and the introduction of dialing parity on February 1, 1999 for competing
long distance companies, we have experienced a decrease in our market share of
the on-island long distance business. However, we have entered the off-island
long distance market and obtained 5% of that market for the month of June. We
expect to experience a further decrease in our on-island long distance market
share and an increase in our off-island market share in the future. We, along
with our competitors, reduced our on-island long distance rates on February 1,
1999. We expect this price reduction to increase total minutes of use. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
ON-ISLAND LONG DISTANCE SERVICES
The Puerto Rico on-island long distance market had approximately 1.7
billion minutes of use in 1998. The following chart shows our minutes of use in
the on-island long distance market for the years ended December 31, 1996 through
1998 and the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
SIX-MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED --------------------------
JUNE 30, 1999 1998 1997 1996
------------- ------ ------ ------
<S> <C> <C> <C> <C>
On-island Minutes (millions)(1)..................... 725 1,670 1,649 1,464
Percent Increase (Decrease)......................... (14%) 1.3% 12.6% 13.9%
Average Revenue per Minute.......................... $ .15 $ .13 $ .13 $ .16
</TABLE>
- ---------------
(1) Consists of on-island long distance, direct dialing and operator services.
The on-island long distance market has been open to competition since
September 1996. We held a 98% market share as of December 31, 1998, largely
because the selection of an alternate carrier required dialing 5 additional
digits when making a call. Competition has increased since February 1, 1999,
when dialing parity was introduced to give equal access to all competitors, as
mandated by the FCC and the Telecommunications Board. For the month ended June
30, 1999, our market share was approximately 63%.
The procedure used when dialing parity was introduced involved a customer
mailing. Customers were advised of the right to change along with a list of
carriers and how to contact them. Customers remain by default with Puerto Rico
Telephone Company for on-island long distance service unless they elect to
change to an alternate carrier. Our primary competitors in the on-island long
distance market include AT&T, Centennial, MCI Worldcom, Sprint and Telefonica
Larga Distancia. We offer per-minute charges of $.12 during peak hours and $.10
for off-peak hours. Our on-island long distance rates are competitive with those
offered by other carriers. Our competitors have been actively advertising their
service and rates.
OFF-ISLAND LONG DISTANCE
We entered the off-island market in February 1999, thereby making us the
only telecommunications provider in Puerto Rico that currently offers customers
a complete range of services. The off-island long distance market had
approximately 1.173 billion minutes of use in 1998. We believe that entry into
this service area provides us with a significant competitive advantage, allowing
us to enhance other service offerings and in particular our on-island long
distance service. We are currently reselling AT&T long distance service, which
we purchase at a discount, and will evaluate using our own facilities after
obtaining the appropriate regulatory approvals and licenses and when
commercially viable. We estimate we acquired 145,100 customers that accounted
for a 5% market share of the off-island long distance minutes of use for the
month ended June 30, 1999.
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Our primary competitors in the off-island long distance market include
AT&T, MCI Worldcom, Sprint and Telefonica Larga Distancia. We offer per minute
charges of $.12 during peak hours, plus a monthly charge of $3 if monthly usage
is less than $25.00 and $.10 for off-peak hours. Our off-island long distance
rates are competitive with those offered by other carriers.
WIRELESS SERVICES
We offer analog and digital wireless cellular and numeric and alphanumeric
paging services island-wide through Celulares Telefonica.
CELLULAR SERVICES
Cellular penetration in Puerto Rico was 10% at December 1997 and increased
to 15% at December 1998, as compared to 25.5% in the United States. We believe
this represents an opportunity for faster growth than in the mainland United
States.
The following chart compares penetration in the United States (50 states)
and Puerto Rico:
COMPARISON OF WIRELESS PENETRATION AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
POPS SUBSCRIBERS
COUNTRY (000) GDP/CAPITA (000) PENETRATION
- ------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
United States (50 states)................... 270,933 $32,042 69,209 25.5%
Puerto Rico................................. 3,844 $14,092 567 14.7%
</TABLE>
- ---------------
Sources: CTIA 1998, Bureau of Economic Analysis and Banco Popular
Wireless telephony has experienced significant market acceptance in Puerto
Rico, with compound industry-wide annual customer growth of 44% from 1992 to
1998. Celulares Telefonica offers island-wide coverage. We hold an estimated 35%
of the wireless telephony market. The distribution of Celulares Telefonica's
customer base is approximately two-thirds individual accounts and one-third
corporate and group accounts. Celulares Telefonica's minutes of use per customer
per month averaged 125 to 150 in 1998, and monthly average revenue per unit was
$49 for 1998. This compares to mainland U.S. averages of 100-125 minutes per
customer per month and average revenue per unit of $43. The significant decrease
in average revenue per unit from $71 in 1996 to $49 in 1998 reflects the
entrance of another competitor and the increasing penetration of lower-end
users, in particular prepaid customers in late 1997 and 1998.
The following chart shows wireless telephony in Puerto Rico, as well as
market share and subscribers for Celulares Telefonica and its two principal
competitors:
WIRELESS TELEPHONE SUBSCRIBERS
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
------------- -----------------------
JUNE 30, 1999 1998 1997 1996
------------- ----- ----- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
CELLULAR PENETRATION
Market POPs............................................ 3,888 3,844 3,770 3,755
Market Subscribers..................................... 721 567 371 312
Subscriber Growth...................................... 27% 53% 19% 11%
Market Penetration..................................... 19% 15% 10% 8%
SUBSCRIBERS
Celulares Telefonica(1)................................ 254 204 135 153
CellularOne............................................ 348 286 189 159
Centennial PCS......................................... 119 77 47 --
----- ----- ----- -----
Total........................................ 721 567 371 312
===== ===== ===== =====
</TABLE>
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<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
------------- -----------------------
JUNE 30, 1999 1998 1997 1996
------------- ----- ----- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
MARKET SHARE (ESTIMATED)
Celulares Telefonica................................... 35% 36% 36% 49%
CellularOne............................................ 48% 50% 51% 51%
Centennial PCS......................................... 17% 14% 13% --
----------- ----- ----- -----
Total........................................ 100% 100% 100% 100%
</TABLE>
- ---------------
(1) 1996 amounts were Restated to remove 10 reseller subscribers.
Our cellular service was launched in 1986 under the Celulares Telefonica
brand. The A block service was launched in 1991 by Cellular Communication of
Puerto Rico under the CellularOne brand name. SBC and Telmex recently announced
their agreement to acquire Cellular Communication of Puerto Rico subject to
obtaining regulatory approval. Two of three license holders of the 30-megahertz
island-wide spectrum have launched digital service. Centennial PCS launched a
CDMA service in 1996 whereas AT&T launched a time division multiple access
service under the Sun Com brand in June 1999. ClearComm, the other license
holder, has announced that it will launch its service in a joint venture with
Telefonica Larga Distancia.
Celulares Telefonica and CellularOne have been migrating customers to our
time division multiple access digital networks in recent years. We also hold two
10-megahertz personal communications service licenses which have not been
developed; one for San Juan and the other for the reminder of the island. After
the acquisition, the new management team determined that the license for the
rest of the island would likely not be developed and wrote-off the value of the
carrying cost. Other winners of the 10-megahertz license are Sprint with an
island-wide license, Omnipoint with a license for San Juan, and Pegasus with a
license for the remainder of the island.
We experienced very high turnover in 1996 and through the first half of
1997, due to a high incidence of fraud on the network. Monthly turnover averaged
6.4%, 5.5%, and 3.8% from 1996 through 1998, respectively. This resulted from
terminations relating to network fraud, the inability to roam in the continental
United States and the better performance of CellularOne's and Centennial's
digital networks in reducing fraud.
We have taken various steps to overcome poor customer perception. In 1997,
we began performing more aggressive collection procedures and implemented
authentication-fingerprinting software to reduce fraud substantially.
Approximately 40% of Celulares Telefonica's customer base has now switched to
digital service, which further reduces fraud problems. This transition is being
pursued to distance us from the poor image of our analog service and to provide
service comparable in network quality and features to that of our competitors.
We have been restoring roaming service to the mainland U.S. While lacking
nationwide coverage, Celulares Telefonica's customers can roam in major Puerto
Rico population centers in the Northeast, Florida, Washington, D.C., and
Chicago, as well as other major cities in the United States, Mexico and Canada.
Our GTE affiliation will enable us to obtain additional roaming agreements.
We also have expanded penetration in the low-end user market by offering
prepaid packages. Since introducing prepaid wireless services in late 1997, our
prepaid customer base has grown to 77,000 as of June 30, 1999.
PAGING SERVICES
We are the market leader in Puerto Rico in paging services. Our
facility-based service has been marketed under the Celulares Telefonica brand
since 1994. Major competitors include Celpage, CellularOne and Skytel. The
paging market and Celulares Telefonica realized significant customer growth in
1997. We experienced a contraction in customers in 1998 because of high
disconnections associated with aggressive collection efforts. Our alphanumeric
service is priced at levels approaching low-end cellular prepaid plans,
consequently we are experiencing migration to the cellular prepaid cellular
plans resulting in a contraction in customers in 1999.
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PAGING SUBSCRIBERS
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
------------- --------------------------
JUNE 30, 1999 1998 1997 1996
------------- ------ ------ ------
<S> <C> <C> <C> <C>
Market POPs (in thousands).......................... 3,888 3,844 3,770 3,755
Celulares Telefonica Total Subscribers (in
thousands)........................................ 204 219 235 200
Celulares Telefonica Subscriber Growth.............. (7)% (7)% 18% 48%
Celulares Telefonica Revenues (millions)............ $24 $60 $55 $34
Celulares Telefonica average revenue per unit per
month............................................. $20 $22 $21 $17
</TABLE>
SALES AND DISTRIBUTION
We actively market our wireless services and products through various
distribution channels. Our distribution network consists of:
- a direct sales force composed of 74 retail sales representatives and 19
corporate sales representatives;
- an indirect sales force composed of 108 independent distributors that
operate a total of 207 distribution outlets; and
- other sales through primary distribution channels that are supplemented
by sales through our regional stores.
Our distribution network, with its multiple direct and indirect points of
sale, is intended to make the purchase of cellular telephone service and
equipment simple and convenient for existing and potential customers and to
enhance our flexibility in meeting the needs of subscribers in varying
localities and with diverse schedules. We continually seek to strengthen the
reach and quality of our distribution network in order to acquire additional
high quality customers.
Direct Sales. We distribute our services and products through 74 retail
sales representatives who are based out of our 12 regional stores. In addition,
19 corporate sales representatives and 39 customer care coordinators handle
small, medium and large businesses. These personnel are dedicated to targeting
and developing corporate and government accounts.
Independent Distributors. Our distribution network includes as of June 30,
1999, 108 independent distributors for telephony services that operate 207
distribution outlets. The distributors are managed by a company-employed
distribution sales manager, who serves as the distributors' liaison with
Celulares Telefonica. The manager assists the distributors with training and
sales related functions, including the development of promotional material.
Other Sales and Marketing. We conduct co-marketing campaigns with other
consumer services and products providers, including non-profit associations and
professional trade associations as well as local banks such as Banco Popular.
These providers include sales information about our services and products in
their sales literature and other communications with their customers. We also
distribute our services and products through kiosks located in shopping centers,
exhibitions and professional conventions.
DIRECTORY
Directory revenue of approximately $40 million in 1998 was derived from
three primary sources: publishing, electronic yellow pages, and customer
listings. Directory revenues for the period ended June 30, 1999 were
approximately $20 million. In 1998, we earned $26 million in publishing rights
from the sale of yellow page advertising according to the terms of a revenue
sharing arrangement with VNU World Directories. This agreement expires with the
publishing of the 1999 directory.
In 1999, we entered into a new 95-year agreement with AXESA Puerto Rico
Incorporado, a partnership formed among various entities, including subsidiaries
of Puerto Rico Telephone Company and GTE Corporation. Under the terms of the
agreement which will become operative with the publishing of the 2000 directory,
the percentage of income we will receive for publishing rights from the sale of
yellow page
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advertising will decrease from 53% to an estimated 44%, based on a 35% share of
gross yellow page revenues, additional income from the billing and collection
for directory advertisements, and from the provision of Puerto Rico Telephone
Company's subscriber list. AXESA has entered into an advisory agreement with GTE
Directories Corporation and an affiliate of VNU pursuant to which AXESA will pay
a fee equal to 2% of the gross revenues to GTE Directories Corporation and the
VNU affiliate.
In addition, customers are charged $5 per month to add and $2.50 to remove
a listing from the white pages. We derived $11 million in revenues from these
charges. This category also includes $3 million of revenue from directory
assistance service.
OTHER REVENUES
This category primarily includes revenues from the sale of private branch
exchange and cellular equipment and revenues from billing and collection
services provided to off-island long distance carriers.
BILLING AND COLLECTIONS
We bill and collect on behalf of most off-island long distance carriers,
including AT&T, MCI Worldcom, Sprint and Telefonica Larga Distancia, with AT&T
representing 50% of the revenue volume. These companies may eventually
discontinue using our services and establish their own billing and collection
capability. However, AT&T agreed in 1999 to extend its contract with us through
2001. The remaining billing and collection arrangements are generally
short-term.
NETWORK INFRASTRUCTURE
We invested approximately $1.7 billion from 1994 to 1998 to expand and
enhance our wireline and wireless telecommunications networks. We expect to
spend $1.2 billion under our five-year capital expenditure plan for the years
1999 through 2003 through internally generated funds, and have publicly
committed to spend at least $1 billion on capital expenditures during the same
five-year period.
WIRELINE NETWORK
Our switching and transmission network is 100% digital, consisting of 29
local host offices and two access tandems to ensure redundancy and network
reliability for long distance calling within Puerto Rico. Our network has the
following characteristics:
- Approximately 75% of our transmission circuits in the island use fiber
optic systems; the fiber optic portion of the network consists of 73,000
miles of fiber optic cable in fiber-ring and point-to-point
configurations.
- The entire transmission network for the San Juan Metropolitan Area is
constructed using self-healing SONET rings operating at bandwidths up to
OC-48 and offering high levels of redundancy and reliability to Puerto
Rico Telephone Company business and residential customers. Puerto Rico
Telephone Company has also extended fiber optic cable to over 200 office
buildings in the San Juan Metropolitan Area.
- Approximately 39% of the outside cable network serving the local loop is
underground. The outside plant modernization program has been directed at
burying cable wherever economically feasible to improve network
reliability, reduce maintenance expenses and reduce exposure to tropical
storms.
- Our switching network and transmissions systems are monitored by a
Network Monitoring Center provided by Bellcore, which operates 24 hours
per day.
We offer enhanced services including data networking and specialized
application services. Data networking services include the provision of high
speed broadband services such as Integrated Services Digital Network, Basic and
Primary Rate Interface. We provide high speed circuits with speed from
fractional T-1s to DS-3. We have completed the installation of an Asynchronous
Transfer Mode Network to offer our customers
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high-speed data transmission on a more efficient and reliable network capable of
offering Frame Relay and Asynchronous Transfer Mode.
WIRELESS NETWORK
We believe our island-wide coverage is more extensive than that of our
competitors as a result of having installed a greater number of cell sites in
the interior of the island. Our wireless network:
- consists primarily of Ericsson equipment;
- utilizes the IS-136 standard with time division multiple access digital
technology; and
- is composed of 131 cells with digital capability and 18 microcells.
REGULATORY ENVIRONMENT IN PUERTO RICO
INTRODUCTION
We hold franchises, licenses and permits adequate for the conduct of our
business in the markets which we serve. Advances in technology, together with a
number of regulatory, legislative and judicial actions, continue to accelerate
and increase the competition affecting our operations and the opportunities
available to us. The Federal Telecommunications Act of 1996 is intended to
promote competition in all sectors of the telecommunications marketplace, while
preserving and advancing universal telephone service.
The Federal Telecommunications Act of 1996 presents us with both challenges
and opportunities. We will face additional competition from numerous sources,
such as other incumbent local exchange carriers, new competitive local exchange
carriers, wireless carriers, cable television service providers, and long
distance companies. However, we have been permitted, since February 1, 1999, to
provide a full array of local, long distance, Internet access, wireless and
video services both within and outside of our traditional operating areas, and
are now able to generate new sources of revenue from customers previously beyond
our reach.
The telecommunications regulatory environment in Puerto Rico is undergoing
change. With the passage of the Federal Telecommunications Act of 1996, which
amended the 1934 Federal Act, our legal monopoly was eliminated. The Puerto Rico
legislature amended the Puerto Rico Telephone Authority Organic Act and enacted
the Puerto Rico Telecommunications Act in September 1996, which reorganized the
regulation of the telecommunications sector in Puerto Rico. The Puerto Rico
Telecommunications Act provides for the creation of the Telecommunications
Board, the main purpose of which is to regulate telecommunications and cable
television services on the island. The Puerto Rico Telecommunications Act also
incorporates the pro-competitive and universal service features found in the
Federal Telecommunications Act of 1996. We are also subject to regulation by the
Puerto Rico Planning Board, the Administration of Regulations and Permits of
Puerto Rico and the Environmental Quality Board.
We have been responding and will continue to respond to the challenges
presented by regulatory and legal developments that allow for increased
competition and opportunities in Puerto Rico's telecommunications market. We
expect our financial results to benefit from reduced costs and the introduction
of new products and services that will result in increased usage of our
telephone and wireless networks. However, it is likely that these improvements
will be offset, at least in part, by continued strategic pricing reductions and
the effects of increased competition. For a discussion of a recent regulatory
development which addresses reciprocal compensation arrangements with Internet
service providers, see "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Recent Internet Regulatory Action."
We are involved in proceedings arising under the Federal Telecommunications
Act of 1996, the FCC Rules and the Puerto Rico Telecommunications Act, including
disputes relating to access charges. The unfavorable resolution of these matters
may have an adverse effect on our financial results.
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UNITED STATES TELECOMMUNICATIONS REGULATION
The regulation of telecommunications services is generally divided between
the inter-state and intra-state jurisdictions, as required under Section 2(b) of
the 1934 Federal Act, as amended. The FCC regulates inter-state and wireless
services, and state commissions regulate intra-state services. Recent
legislative efforts and the development of new services, however, have blurred
this distinction.
Local Competition
The Federal Telecommunications Act of 1996 amended the 1934 Federal Act to
advance universal service and open the telecommunications market to local
competition by requiring the incumbent local exchange carriers to enter into
agreements permitting other telecommunications carriers to access and utilize
the incumbent local exchange carriers' network for the provision of competitive
local services. The Federal Telecommunications Act of 1996 also provides for the
resale of incumbent local exchange carrier services by other telecommunications
companies. Although local services have been regulated at the state level,
Sections 251 and 252 of the 1934 Federal Act set forth a blend of state and
federal oversight of competitive entry into the local exchange service market.
The statute provides detailed procedures that state commissions must follow in
the mediation, arbitration, revision and approval of interconnection agreements
between carriers. If a state fails to act in this regard, the FCC is required to
act in its place.
In August 1996, the FCC issued extensive rules implementing the local
competition provisions of the Federal Telecommunications Act of 1996. Included
in the FCC's local competition rules is a detailed pricing methodology to be
employed by states in interconnection proceedings and proxy rates that may be
applied until states complete the cost studies needed to implement the FCC's
pricing methodology. Upon complaint by GTE Corporation, various other incumbent
local exchange carriers and several regulatory entities, enforcement of the
FCC's pricing rules was stayed by the United States Court of Appeals for the
Eighth Circuit in October 1996. In July 1997, the court found that the FCC had
overstepped its authority in a number of areas and upheld the complainants'
position that state regulatory agencies bear the primary responsibility for
determining the prices which competing firms must pay when interconnecting their
networks. The judgment of the Court of Appeals was appealed to the United States
Supreme Court and a decision was rendered in January 1999. The Supreme Court
held that the FCC had authority to implement the pricing provisions of the
Federal Telecommunications Act of 1996 and "jurisdiction to design a pricing
methodology" to be followed by the states in interconnection proceedings. The
Supreme Court remanded to the Eighth Circuit the issue of the substantive
validity of the rules adopted by the FCC. GTE Corporation has stated publicly
that it plans to contest the merits and validity of the FCC's current rules
setting out the pricing methodology. The Supreme Court also ruled that the FCC
failed to properly construe the legal standards of the Federal
Telecommunications Act of 1996 that govern which network elements incumbent
local exchange carriers must make available to competitive local carriers,
overturning the blanket unbundling rule which was adopted by the FCC and
challenged by GTE Corporation and other incumbent local exchange carriers.
Universal Service and Access Charges
With regard to universal service, the U.S. Congress similarly has provided
for a dual effort to ensure that basic telephone service is affordable for all
citizens. The FCC has also adopted rules designed to provide support for high
cost carriers for the inter-state jurisdiction, although this support may only
be used to offset the cost of inter-state services. The FCC rules also provide
support to low income subscribers, public and non-profit health care centers,
schools and libraries. The Federal Telecommunications Act of 1996 further
provides that states may also create these price support funds as long as they
are not inconsistent with the Federal program. All telecommunications carriers
in Puerto Rico are required by Federal and Puerto Rico laws to contribute to the
federal and Puerto Rico universal service programs.
The Federal Telecommunications Act of 1996 mandates that all universal
service support be specific and predictable. Thus, inter-state access charges
must be adjusted to remove any implicit universal service support. To the extent
that these changes reduce the revenues generated by inter-state access charges
and are
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not offset by universal service support, any unrecovered revenue requirement
likely will fall to the intra-state jurisdiction for recovery.
Regulation of Commercial Mobile Radio Service Providers
In 1993, Congress preempted state regulation of market entry and rates
charged by commercial mobile radio service providers such as Celulares
Telefonica, including for intra-state wireless calls, and the FCC has since
deregulated commercial mobile radio service rates. Jurisdiction over
consumer-related issues, such as billing disputes and fraud, still resides with
the states. Despite this statutory distinction, however, some parties have
disputed the appropriate forum for deciding issues related to mobile services on
jurisdictional grounds.
PUERTO RICO FEDERAL TELECOMMUNICATIONS ACT OF 1996
General Provisions
The Puerto Rico Telecommunications Act was signed into law on September 12,
1996. The Puerto Rico Telecommunications Act creates the Telecommunications
Regulatory Board, investing it with the duty and authority to regulate the
provision of telecommunications services in Puerto Rico. The Telecommunications
Board regulates us and all other telecommunications and cable service providers
in Puerto Rico.
The Puerto Rico Telecommunications Regulatory Board
The Telecommunications Board is an independent agency of the Commonwealth
of Puerto Rico and is comprised of three members appointed by the Governor with
the advice and consent of the Puerto Rico Senate. On May 16, 1997, the
Telecommunications Board adopted regulations regarding the certification of
telecommunications providers in Puerto Rico and the imposition of regulatory
fees on telecommunications companies. The Telecommunications Board's
"Regulations for the Issuance of Certifications and Franchises" establish the
conditions and procedures for telecommunications companies to secure
certifications and for cable companies to secure franchises under the Puerto
Rico Telecommunications Act. Among other things, the certification regulations
provide that companies seeking certification must submit to the
Telecommunications Board a detailed petition, which will be granted if the
petitioner is found to be legally, technically, financially and morally
qualified. Companies already providing telecommunications services in Puerto
Rico will be certified automatically once they submit the required petition, and
commercial mobile radio service providers and inter-state service providers need
not be certified to offer service.
The Telecommunications Board's "Regulation on the Imposition of Charges on
Telecommunications Companies" governs the assessment of a quarterly charge to
defray the costs of the Telecommunications Board's operations. Pursuant to the
Puerto Rico Telecommunications Act, the regulation establishes that all
telecommunications companies with an annual gross income of $25,000 or more are
to pay a quarterly charge equal to 0.25% of their gross revenues earned from the
provision of intra-state telecommunications services in Puerto Rico. The
regulation also provides that the Telecommunications Board may order a
telecommunications company to reimburse the extraordinary expenses incurred for
professional and advisory services in connection with hearings and
investigations by the Telecommunications Board with respect to the company.
Provisions for Telecomunicaciones de Puerto Rico
The Puerto Rico Telecommunications Act directs the Telecommunications Board
to presume that we control the local service, access service and on-island toll
markets as of the date of enactment of the Puerto Rico Telecommunications Act.
The Telecommunications Board is not to presume that we possess control of the
cellular or paging service markets. The Telecommunications Board may refrain
from enforcing the provisions of the Puerto Rico Telecommunications Act, with
the exception of the universal service contribution requirement, against
carriers which do not possess control of the market. Within three years of the
effective date of the Puerto Rico Telecommunications Act, the Telecommunications
Board is to initiate a proceeding to determine if we retain control of the
various markets or any parts thereof. If it is determined that the we do not
retain control of the market in any line of business, the Telecommunications
Board may refrain from enforcing the provisions of the Puerto Rico
Telecommunications Act against us to that extent.
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Competitive Provisions
The Puerto Rico Telecommunications Act includes a number of competitive
provisions that mirror the Federal Telecommunications Act of 1996. In some
instances, the Puerto Rico Telecommunications Act extends the Federal
Telecommunications Act of 1996's incumbent local exchange carrier-specific
obligations to non-incumbent local exchange carrier's as well. Under the Puerto
Rico Telecommunications Act, every telecommunications company is required to
provide interconnection to its facilities at any point in its network where it
is technically feasible and each telecommunications company is to be paid for
interconnection to its network based on the "real costs" and the profits as
provided for in the Federal Telecommunications Act of 1996. The Puerto Rico
Telecommunications Act also guarantees the competitive availability of unbundled
network elements, wholesale discounts for resale offerings, physical and virtual
colocation, access to poles, ducts, conduits and rights-of-way, number
portability, and access to directory assistance, telephone directories, 911
service and repair service.
Under the Puerto Rico Telecommunications Act, no telecommunications company
may subsidize competitive services with income generated by noncompetitive
services. All telecommunications companies are to maintain separate accounting
records for their competitive and noncompetitive services for this purpose.
Similarly, no telecommunications company may offer any service at prices below
cost except for promotional offerings of short duration with the previous
consent of the Telecommunications Board. The Telecommunications Board is
directed to take appropriate action to enforce these requirements or to lodge
complaints with the Puerto Rico Department of Justice.
Interconnection Agreements
The Puerto Rico Telecommunications Act duplicates the provisions of the
Federal Telecommunications Act of 1996 regarding negotiation, arbitration, and
approval of interconnection agreements. In particular, the Puerto Rico
Telecommunications Act follows the federal scheme of voluntary interconnection
negotiations supplemented by Telecommunications Board mediation or arbitration
of unresolved issues. All interconnection agreements must be submitted to the
Telecommunications Board for approval.
Universal Service
The Puerto Rico Telecommunications Act contains a provision on universal
service that complements the provisions in the Federal Telecommunications Act of
1996. This law requires all telecommunications companies operating in Puerto
Rico to make an equitable and nondiscriminatory contribution to the Universal
Service Fund program adopted by the Telecommunications Board. The
Telecommunications Board is required to conduct a rule-making proceeding to
establish a mechanism for the collection and distribution of universal service
support. The Telecommunications Board must certify a telecommunications company
in order for it to receive universal service funds from the local as well as the
federal programs. Puerto Rico Telephone Company is already certified to receive
funds.
Filing of Prices and Charges
The Puerto Rico Telecommunications Act requires all telecommunications
companies, except for wireless companies, to submit to the Telecommunications
Board a list of prices and charges and to update that list each time a change is
implemented in the market. Upon complaint by an interested party, the
Telecommunications Board is to determine whether or not the prices and charges
set forth in a company's list are based on cost of providing service to
customers. The Telecommunications Board is given a maximum of thirty days to
adjudicate these complaints. However, the local courts have determined that the
thirty day period is only a directive and not a jurisdictional limit. It may
suspend the prices or charges in question pending resolution of the matter. The
Telecommunications Board may order the permanent suspension of a rate if it is
determined not to be based on cost and it may impose an administrative fine of
up to $25,000 for each violation of the Puerto Rico Telecommunications Act.
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Interconnection Arbitration Proceedings and Agreements
Pursuant to the local competition provisions of the 1934 Federal Act, as
amended by the Federal Telecommunications Act of 1996, incumbent local exchange
carriers must negotiate the terms of interconnection agreements with new
entrants. When the parties cannot mutually agree on all terms and conditions of
interconnection, either the new entrant or the incumbent carrier may initiate
arbitration before the Telecommunications Board. On September 5, 1997, the
Telecommunications Board approved regulations regarding procedures for the
negotiation, arbitration and approval of interconnection agreements.
We have been a party to six arbitration proceedings before the
Telecommunications Board. Each proceeding was instituted by an entity seeking an
interconnection agreement with us but which did not agree with particular terms
or conditions of interconnection we required. These proceedings are conducted by
the Telecommunications Board pursuant to Section 252 of the Federal
Telecommunications Act of 1996 and the Puerto Rico Telecommunications Act.
As a result of the proceedings, the initiating parties have executed
interconnection agreements with us. At present an arbitration proceeding has
been requested with regard to a new interconnection agreement that is still
being negotiated.
EMPLOYEES
Our workforce totaled 7,703, employees plus 495 temporary employees as of
December 31, 1998 and 6,746 employees plus 349 temporary employees as of
September 30, 1999. Approximately 77% of the full-time employees are members of
one of two unions, the Union of Independent Telephone Workers, known as UIET, or
the Brotherhood of Independent Telephone Workers, known as HIETEL. Union
membership is mandatory for certain job categories. Our employees generally fall
into three different groups:
- management;
- employees represented by HIETEL under a collective bargaining agreement
that is in effect until October 22, 1999 that covers more than 1,700
professional, office and technical employees in the bargaining unit.
Preliminary bargaining with HIETEL began on September 15, 1999; and
- employees represented by the UIET under two collective bargaining
agreements which are effective until January 17, 2000. One of the
agreements with UIET covers approximately 3,900 employees, including all
hourly employees with the exception of those employed in personnel,
payroll, and safety matters, as well as professional, office, and
technical employees. The other agreement with UIET covers approximately
160 office and administrative employees. We anticipate early bargaining
with UIET to commence on or about October 1, 1999.
We agreed as a condition to the acquisition not to terminate an employee
other than for cause. The workforce will therefore decrease only though
voluntary retirement and separation programs and attrition. A voluntary early
retirement was recently implemented for the three employee groups:
<TABLE>
<CAPTION>
MANAGEMENT UIET HIETEL
----------- ------------ -------------
<S> <C> <C> <C>
Date Announced............................ May 21 June 25 July 28
Retirement Date........................... July 9 September 3 October 15
Eligible Employees........................ 277 585 201
Employees Accepting Early Retirement...... 274 542 200*
Estimated Program Cost.................... $83 million $44 $35 million -
million -
$45 million
</TABLE>
- ---------------
*Estimate
The main feature of the early retirement program involved adding five years
to age and five years to service in the pension calculation. Management
employees who are at least 50 years old and have a minimum of 20 years of
service qualified for the program.
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<PAGE> 71
To be eligible for the early retirement program union employees must:
- be 50 years old and have 20 years service, or
- be 62 years old and have 10 years of service (UIET); or
- be 60 years old and have 10 years of service (HIETEL), or
- be 65 years old and have 9 years of service, or
- have 30 years of service.
The range in estimates for the union programs is due to a range in
estimated acceptance rates.
The voluntary early retirement program is also available to disabled
employees. As of September 30, 1999, 81 HIETEL employees and 263 UIET employees
have applied to participate in this program. The final number of participants
will be determined after the medical evaluation of the employees who have
applied for this program.
PROPERTIES
Our principal properties consist of telecommunications network
infrastructure and related buildings throughout Puerto Rico. As of December 31,
1998, we owned an aggregate of approximately 148 acres of land upon which our
offices and network equipment are located.
Our principal administrative office and operations center are located in
the metropolitan area of San Juan. We also maintain retail stores,
administrative offices and operations centers throughout Puerto Rico.
INSURANCE
We believe that we maintain the types and amounts of insurance customary in
the telecommunications industry in the type of geographic area in which we
operate, including coverage for employee-related accidents and injuries and
property damage. Our outside plant is currently insured within a 1,000 foot
radius of our property. We consider our insurance coverage to be adequate both
as to risks and amounts for the business we conduct.
ENVIRONMENTAL REGULATIONS
Our operations are subject to federal, state and local laws and regulations
governing the use, storage, disposal of, and exposure to, hazardous materials,
the release of pollutants into the environment and the remediation of
contamination. As an owner or operator of facilities where hazardous materials
are used, we could be subject to environmental laws that impose liability for
the entire cost of cleanup at contaminated sites, regardless of fault or the
lawfulness of the activity that resulted in the contamination. We believe,
however, that our operations are in substantial compliance with applicable
environmental laws and regulations.
Many of our properties formerly and currently contain underground and
aboveground storage tanks used for the storage of fuel. Some of these tanks may
have leaked or otherwise caused contamination. We have investigated and
remediated, and are currently investigating and remediating, known contamination
at a number of properties. We cannot be sure, however, that we have discovered
all contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.
Our cellular operations are also subject to regulations and guidelines that
impose a variety of operational requirements relating to radio frequency
emissions. The potential connection between radio frequency emissions and
certain negative health effects, including some forms of cancer, has been the
subject of substantial study by the scientific community in recent years. To
date, the results of these studies have been inconclusive. Although we have not
been named in any lawsuits alleging damages from radio frequency emissions, it
is possible we could be sued in the future, particularly if scientific studies
conclusively determine that radio frequency emissions are harmful.
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<PAGE> 72
LEGAL PROCEEDINGS
We are involved from time to time in various legal and administrative
proceedings and are threatened with legal and administrative proceedings
incidental to our business. In the opinion of management, the resolution of any
of these matters will not have a material adverse effect on our consolidated
financial position. In connection with the acquisition, the Puerto Rico
Telephone Authority agreed to indemnify, defend and hold us harmless for
specified significant litigation, including one environmental matter.
On March 1, 1999, several Puerto Rico labor unions and a Puerto Rico
elected official filed a Notice of Appeal in the U.S. Court of Appeals for the
D.C. Circuit, challenging the FCC's order granting the applications for the
transfer of control of licenses held by Puerto Rico Telephone Company and
Celulares Telefonica from the Puerto Rico Telephone Authority to GTE Holdings
and the authorization to provide off-island long distance service. The Notice of
Appeal claims that the FCC's denial of public hearings in Puerto Rico resulted
from a clear error of judgment, amounting to a capricious and arbitrary action
that constituted an abuse of discretion of the FCC's adjudicating authority. The
petitioners seek to stay the operation of the FCC Order pending final hearing
and determination of the petition, vacate the FCC Order, or in the alternative,
remand the FCC Order with instructions to hold public hearings in Puerto Rico.
The petitioners recently voluntarily withdrew their appeal before the Court of
Appeals, but have submitted a Petition for Reconsideration before the FCC. We
believe that the claims of the petitioners are without merit.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-4
under the Securities Act, to register the offering of exchange notes
contemplated in this prospectus. This prospectus, which is a part of the
registration statement, does not contain all of the information presented in the
registration statement. For further information about us, the exchange offer and
any documents referred to in this prospectus, you should refer to the
registration statements and its exhibits.
As a result of the filing of this registration statement with the
Commission, we will become subject to the informational requirements of the
Exchange Act and will be required to file with or furnish to the Commission
certain reports and other information.
The registration statement, its exhibits and schedules, reports, and other
information that we have filed with or furnished to the Commission may be
inspected and copied at the Commission's Public Reference Room located at 450
Fifth Street, N. W. Washington, D.C. 20549. You may obtain information by
calling the Commission's Public Reference Room at 1-800-SEC-0330. You may also
obtain information filed by us with the Commission at the Commission's Internet
site at http://www.sec.gov.
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<PAGE> 73
MANAGEMENT
BOARD OF DIRECTORS
The directors of the Company as of October 15, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION NOMINATED BY
- ---- --- -------------------- ------------
<S> <C> <C> <C>
Fares Salloum 50 Senior Vice President -- GTE Holdings (Puerto Rico) LLC
International Operations of
GTE Service Corporation
Alfred C. Giammarino 43 Senior Vice President -- GTE Holdings (Puerto Rico) LLC
International Finance,
Planning and Business
Development of GTE Service
Corporation
Michael T. Masin 53 Vice Chairman and President GTE Holdings (Puerto Rico) LLC
International of GTE
Jon Slater 53 President and Chief GTE Holdings (Puerto Rico) LLC
Executive Officer of
Telecomunicaciones de Puerto
Rico
Richard Carrion 46 Chairman, President and Popular, Inc.
Chief Executive Officer of
Popular, Inc.
Angel Morey 52 Chief of Staff, Office of Puerto Rico Telephone Authority
the Governor of Puerto Rico
Lourdes M. Rovira 49 President, Government Puerto Rico Telephone Authority
Development Bank
Carlos Vivoni 40 Secretary, Puerto Rico Puerto Rico Telephone Authority
Department of Economic
Development and Commerce
</TABLE>
Fares Salloum is Chairman of the Board of Telecomunicaciones de Puerto
Rico. He was appointed Senior Vice President of International Operations for GTE
Service Corporation in June of 1997 and Executive Vice President of GTE
International Telecommunications Incorporated in July 1998. Prior to June 1997,
Mr. Salloum was Executive Vice President of BC TELECOM Inc., a full service
telecommunications provider in the province of British Columbia, Canada. He is a
director of BCT.Telus Communications, Inc., a telephone company operating in
Canada and Compania Anonima Nacional de Telefonos de Venezuela, known as CANTV,
a telephone company operating in Venezuela.
Alfred C. Giammarino was appointed Senior Vice President of International
Finance, Planning and Business Development for GTE Service Corporation and
Senior Vice President of GTE International Telecommunications Incorporated in
July 1998. Prior to that he held various positions at GTE Service Corporation.
He is a director of VenWorld Telecom C.A., which holds a controlling interest in
CANTV, CTI Holdings, S.A., and The QuebecTel Group, Inc.
Michael T. Masin was appointed Vice Chairman of GTE Corporation in October
1993 and President International in 1995. Prior to that, he was Managing Partner
of the New York office of the law firm of O'Melveny & Myers and co-chair of that
firm's International Practice Group. Mr. Masin joined that firm in 1969 and
became a partner in 1977. He is a director of GTE, Citigroup Inc., BCT.Telus
Communications, Inc., CANTV and VenWorld Telecom C.A. Mr. Masin is a member of
the Board of Trustees and Executive Committee of Carnegie Hall, the Board of
Directors and Executive Committee of the W.M. Keck Foundation, the Board of
Directors of the China America Society, the Dean's Advisory Council of Dartmouth
70
<PAGE> 74
College and the Business Committee of the Board of Trustees of the Museum of
Modern Art, the Council of Foreign Relations and a Personal Trustee of the GTE
Foundation.
Jon Slater was appointed our President and Chief Executive Officer-elect in
October 1998. Prior to that, he was Vice President -- Operating Support for GTE
Wireless since 1997, having previously served in various positions with GTE
since 1971. Other positions that Mr. Slater has held with GTE include Area
President -- Texas for GTE Mobilnet's Texas region, Vice President and General
Manager for GTE Telecom and GTE Government/Telecommunications Services, and Vice
President -- Operations for GTE Airfone. Mr. Slater oversaw the transition
during the period prior to the assumption of his duties as President and Chief
Executive Officer of the Company on March 2, 1999.
Richard L. Carrion has been Chairman of the Board, President and Chief
Executive Officer of Popular, Inc., a bank holding company formerly called
BanPonce Corporation, since 1990 and has been a director of Banco Popular since
1982. Mr. Carrion is a director of the Federal Reserve Bank of New York and Bell
Atlantic Corporation and serves as a member of its Human Resources Committee.
Angel Morey has been the Chief of Staff of the Governor of Puerto Rico and
Secretary of Strategic Development of Puerto Rico since 1995. Prior to that he
was President of Badillo, Nazca, Saatchi & Saatchi since 1994. Prior to that he
was Executive Vice President and General Manager of the Foods and Spirits
Distribution Corporation. Since 1988, and prior to that, Mr. Morey held various
executive positions with the Bacardi Corporation and F. & J.M. Carrera Inc.
Lourdes M. Rovira has been the President of the Government Development Bank
since August 1998. From 1995 until her appointment as President, Ms. Rovira was
Executive Vice President and held other positions at the Government Development
Bank. Prior to that she was Director of Finance at the University of Puerto Rico
from 1993 to 1995. From 1990 through 1993, Ms. Rovira was Senior Vice-President
of Operations and Treasurer at Caribbean Life Assurance Company and Caribbean
American Property Insurance Company, subsidiaries of the American Bankers
Insurance Group. Ms. Rovira is Chairman of the Board of Directors of the
Economic Development Bank and the Governor's Financial Board. She is also a
Director of the Puerto Rico Aqueduct and Sewer Authority, the Teachers
Retirement System and the Retirement System of the Employees of the Government
of Puerto Rico.
Carlos Vivoni has been the Secretary of the Puerto Rico Department of
Economic Development and Commerce since January of 1997. From 1993 to 1996 Mr.
Vivoni headed the Puerto Rico Department of Housing. Prior to that he worked as
Vice President for Citibank N.A. in Puerto Rico, as a Research Engineer for
Exxon Production Research Company in Houston, Texas and Tokyo, Japan, and as an
intern at the Lawrence Livermore Laboratory in California. Mr. Vivoni is a
member of the Governor's Economic Development Council, the Governor's Science
and Technology Council and the Governor's Foreign Trade Board, is President of
the Board of Directors of the Puerto Rico Tourism Company and the Puerto Rico
Industrial Development Company and is a member of the Board of Directors of the
Government Development Bank.
Since March 17, 1999 the Board of Directors has had a standing Audit
Committee. The members of the Audit Committee are Alfred Giammarino, Lourdes
Rovira, Carlos Vivoni and Ignacio Santillana. The Audit Committee oversees the
financial reporting process for which management is responsible, reviews the
services provided by our independent auditors, consults with the independent
auditors in regard to our audits and proposed audits, and reviews the need for
internal auditing procedures and the adequacy of our internal control systems.
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<PAGE> 75
EXECUTIVE OFFICERS
The executive officers of the Company as of October 15, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Jon Slater 53 President and Chief Executive Officer
Frank Gatto 45 Vice President of Finance and Chief Financial Officer
Jose E. Arroyo 35 Vice President of Legal and Regulatory Affairs
Cristina Lambert 50 Vice President and General Manager of Wireline
Carla Ussery 36 Vice President and General Manager of Wireless
Carmen Carro 51 Vice President of Customer Care and Sales
Georgia Scaife 49 Vice President of Human Resources
Ileana Molina de Bachman 43 Vice President Corporate Communications
Joaquin Rivera 60 Vice President of Network Services, Engineering and
Technical Planning
Felipe Piazza 48 Treasurer
</TABLE>
Frank Gatto was appointed Vice President of Finance and Chief Financial
Officer on August 27, 1999. He has over 21 years of experience with GTE
Corporation. Prior to joining Puerto Rico Telephone Company, Mr. Gatto was Vice
President -- Finance and Planning at GTE Airfone. From 1988 to 1995, Mr. Gatto
served in various finance and planning positions in GTE Wireless and GTE
Corporation. Prior to 1988, Mr. Gatto held numerous accounting positions within
GTE Electrical Products Group, including Division Controller. Mr. Gatto holds a
bachelor's degree in economics from Villanova University and a master's degree
in business administration in finance from Boston College.
Jose E. Arroyo was appointed Vice President of Legal and Regulatory Affairs
on March 17, 1999. He joined Puerto Rico Telephone Company in 1995 and served as
Legal Counsel to the President and was later appointed as Vice President of
Human Resources, Legal and Regulatory Affairs. Mr. Arroyo has held the positions
of Assistant Secretary of the Governing Board of the Puerto Rico Telephone
Authority, Assistant Secretary of the Board of Directors of Telecomunicaciones
de Puerto Rico, Puerto Rico Telephone Company, and Celulares Telefonica, and
President of the Pension Committee of Puerto Rico Telephone Company. Prior to
joining Puerto Rico Telephone Company, he was Associate Counsel for Civil and
Labor Litigation for two law firms in Puerto Rico. He also served as Special
Assistant to the Attorney General of Puerto Rico. Mr. Arroyo holds a B.S. Magna
Cum Laude and a J.D. Magna Cum Laude from the University of Puerto Rico.
Cristina Lambert was appointed Vice President and General Manager of
Wireline on June 3, 1999. Ms. Lambert is responsible for all of Puerto Rico
Telephone Company's voice and data wireline operations. She has over 25 years of
experience in the telecommunications industry. After serving in various service
management and staff positions in Contel and GTE Corporation, in 1995 she was
named general manager-customer operations in Illinois, where she supervised
wireline telephone services for nearly one million customers. In 1997, Ms.
Lambert became assistant Vice President -- Integrated Process Planning for GTE
Corporation. The following year she assumed her most recent responsibilities
directing and implementing business strategies for GTE Corporation national
customer care organization. Ms. Lambert was born in the Republic of Panama and
holds a bachelor's degree in business management from Indiana University and a
master's degree in business administration from Indiana Wesleyan University.
Carla Ussery was appointed Vice President and General Manager of Wireless
on March 17, 1999. Ms. Ussery began her career as an accountant with the firm of
Arthur Andersen. She remained at Arthur Andersen for five years, after which she
accepted a position with GTE Corporation as compliance coordinator, ensuring
field compliance with company policies. Ms. Ussery was subsequently appointed to
positions in the finance area, including Manager of SEC Reporting and Manager of
Budget Results. Most recently, she has held the position of General Manager,
responsible for field operations, including sales and installations, in-
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store customer service, marketing coordination, public relations and community
event coordination. Ms. Ussery has been with GTE Corporation for eight years.
She holds a bachelors degree in Business Administration from the University of
Virginia and is a licensed Certified Public Accountant in the State of Virginia.
Carmen Carro was appointed Vice President of Customer Care and Sales on
March 2, 1999. Prior to that, she held the position of Vice President of
Residential and Traffic Services. Ms. Carro has worked in the telecommunications
business for 28 years and has held various positions at Puerto Rico Telephone
Company, including Senior Director of Recruitment, and Payroll and Force
Management Supervisor since she was hired in 1971. Ms. Carro holds a bachelors
degree in Economics and Business Administration from the Inter-American
University in Puerto Rico.
Georgia Scaife was appointed Vice President of Human Resources on March 17,
1999. Ms. Scaife started her career with GTE Corporation in July 1981 in Santa
Monica, California. She has held numerous positions during her 17 year tenure
with GTE Corporation, including Director of Human Resources (GTE Supply),
Director of Diversity and Compliance Programs (GTE Telephone Operations),
Director of Workforce Effectiveness (GTE Telephone Operations), and Director of
Employee Relations (GTE Service Corporation). Ms. Scaife holds a bachelors of
arts degree in sociology and has done post-graduate work in public and business
administration.
Ileana Molina De Bachman was appointed Vice President of Corporate
Communication of the Puerto Rico Telephone Company, effective August 30, 1999.
Ms. Bachman has over 22 years of experience in marketing-strategic planning.
Prior to joining Puerto Rico Telephone Company, Ms. Bachman worked for Suiza
Fruit Caribbean and from 1995 to 1998 she worked for Frito Lay. She has also
worked for other multinational companies, including Procter & Gamble, Young and
Rubicam and RJ Reynolds. Ms. Bachman's experience includes markets such as
Puerto Rico, Mexico, Dominican Republic and the Hispanic market in the United
States. Ms. Bachman holds a bachelors degree from the Boston College School of
Management.
Joaquin Rivera was appointed Vice President of Network Services Engineering
and Technical Planning on March 17, 1999. Mr. Rivera has 34 years of experience
in operations and engineering positions in telecommunications companies. Since
joining Puerto Rico Telephone Company in 1993, he has held various management
positions at Puerto Rico Telephone Company, including Vice President of
Engineering and Network Services and Senior Vice President of Network Services.
Mr. Rivera also worked at the Puerto Rico Communications Corporation or PRCC as
Group Director of Telephone Operations between 1971 and 1977, and worked on the
integration of PRCC's operations into Puerto Rico Telephone Company. During his
years of service in the private sector, he held various management positions in
the international division of GTE Telecommunications Systems in Latin America
and the Caribbean. Mr. Rivera is a graduate of the University of Puerto Rico,
Mayaguez campus, and holds a bachelors of science degree in Electrical
Engineering.
Felipe Piazza has been Treasurer of Puerto Rico Telephone Company since
1996 and Treasurer of Telecomunicaciones de Puerto Rico and Celulares Telefonica
since March 17, 1999. Mr. Piazza has 26 years of experience in the
telecommunications industry. Since joining Puerto Rico Telephone Company in
1973, Mr. Piazza has occupied various management and executive positions,
including Director -- Corporate Budget, Comptroller, Vice President -- Finance
and Comptroller, Treasurer of the Puerto Rico Telephone Authority, Assistant
Vice President -- Cellular and Beepers, Assistant Vice President and Group
Director -- Cost Separations and Rates, Treasurer of Telecomunicaciones
Ultramarinas de Puerto Rico and Assistant Treasurer of Telecomunicaciones de
Puerto Rico. Mr. Piazza is a graduate of the University of Puerto Rico, Mayaguez
campus, and holds a bachelors degree in Business Administration.
INDEMNIFICATION FOR SECURITIES ACT LIABILITY
The certificate of incorporation of Telecomunicaciones de Puerto Rico
provides for the indemnification of its directors and officers to the full
extent permitted by the General Corporation Law of the Commonwealth of Puerto
Rico, as it currently exists or as may be hereafter amended. This
indemnification provision covers directors, officers, employees or agents
involved in any litigation or proceeding involving the corporation if he
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<PAGE> 77
or she acted in good faith and in a manner which the person reasonably deemed
consistent with the best interests of the corporation or not opposed thereto,
and with respect to any criminal proceeding, if he or she did not have
reasonable cause to believe that his or her conduct was unlawful. The indemnity
may include expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit. In the case of
actions or suits other than those initiated by the corporation or initiated to
protect the interests of the corporation, the indemnity may also include the
amount of any judgement paid in settlement of such action. However, no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation may indemnify her
against the expenses which such officer or director has actually incurred.
In addition, Telecomunicaciones de Puerto Rico maintains and has in effect
insurance policies covering all of its respective directors and officers against
certain liabilities for actions taken in such capacities. These employees are
also covered for specified liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling
Telecomunicaciones de Puerto Rico pursuant to the foregoing provisions,
Telecomunicaciones de Puerto Rico has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation for the
five most highly compensated employees of Telecomunicaciones de Puerto Rico.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- -------------------------------------
AWARDS PAYOUTS
------------------------ ----------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) SARS(#) PAYOUTS($)
--------------------------- ---- --------- -------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Jorge Menendez, CFO.......... 1998 136,004 11,503
Carmen Culpeper, President... 1998 137,000 --
Juan Velazquez, VP Network... 1998 119,090 9,653
Felipe Piazza, Treasurer..... 1998 116,400 10,170
Ivan Lopez Roura............. 1998 113,297 9,071
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION($)
--------------------------- ---------------
<S> <C>
Jorge Menendez, CFO..........
Carmen Culpeper, President...
Juan Velazquez, VP Network...
Felipe Piazza, Treasurer.....
Ivan Lopez Roura.............
</TABLE>
PENSION PLANS
The following table illustrates the estimated annual benefits payable under
our defined benefit pension plan. The table assumes normal retirement age 65 and
is calculated on a single life annuity basis, based upon final average earnings
(integrated with social security as described below) and years of service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
FINAL AVERAGE SALARY 15 YEARS 20 YEARS 25 YEARS 30 YEARS
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$100,000............................................ $26,851 $38,611 $48,264 $55,417
125,000............................................ 34,351 48,611 60,764 69,792
150,000............................................ 41,851 58,611 73,264 84,167
175,000............................................ 44,851 62,611 78,264 89,917
200,000............................................ 44,851 62,611 78,264 89,917
</TABLE>
All of our executive officers are covered under our retirement plan for
salaried employees. The retirement plan for salaried employees is a
noncontributory pension plan for the benefit of all of our employees who are not
covered by collective bargaining agreements, unless the agreement provides for
coverage under the retirement plan for salaried employees. It provides a benefit
based on a participant's years of service and earnings. Our pension benefits and
contributions to the retirement plan for salaried employees are related to
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<PAGE> 78
basic salary differentials, exclusive of overtime differentials, incentive
compensation and other similar types of payments. Under the retirement plan for
salaried employees, pensions are computed on an offset formula basis of 2% of
average annual salary for the three highest consecutive years for each year of
service up to 25 years plus 1.5% of average annual salary for the three highest
consecutive years for each year of service between 25 and 40 years, offset by a
percentage (based on age and service) of average annual salary up to the social
security wage base for the last three years of service, but not in excess of
social security covered compensation. As of December 31, 1998, the credited
years of service under the retirement plan for Messrs. Menendez, Velazquez,
Piazza and Roura, are 25, 23, 25 and 26 years, respectively. Ms. Culpeper was
not covered by the retirement plan for salaried employees.
Under federal law, an employee's benefits under a qualified pension plan,
such as the retirement plan for salaried employees, are limited to certain
maximum amounts. We maintain a supplemental executive retirement plan, which
supplements the benefits of any participant in the retirement plan for salaried
employees in an amount by which any participant's benefits under the retirement
plan for salaried employees are limited by law.
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SHAREHOLDERS AND SHAREHOLDER RELATIONSHIPS
SHARE OWNERSHIP
Our authorized capital stock consists of 10,000,000 shares of common stock
with a nominal per share par value equal to $.01, of which 1,000,000 shares have
been issued and are outstanding. The following table sets forth selected
information with respect to the beneficial ownership of our common stock, as of
October 15, 1999:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------
NAME OF BENEFICIAL OWNER ADDRESS NUMBER PERCENTAGE
- ------------------------ ------- ------- ----------
<S> <C> <C> <C>
GTE Holdings (Puerto Rico) LLC GTE Holdings (Puerto Rico) LLC
5221 North O'Connor Boulevard
Irving, Texas 75039 400,101 40.01
Puerto Rico Telephone
Authority Puerto Rico Telephone Authority
c/o Government Development Bank for
Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940 429,999 43.00
Popular, Inc. 209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918 99,900 9.99
Employee Stock Ownership Plan c/o Dennis M. Kunisaki
U.S. Trust Company, National
Association
515 South Flower Street
Los Angeles, California 90171 70,000 7.0(1)
All Directors and Executive
Officers as a Group (17
persons) 0 0
</TABLE>
- ---------------
(1) Of these shares, 3% are unallocated and pledged to Telecomunicaciones de
Puerto Rico to secure its loan to the employee stock ownership plan.
The GTE Group's percentage ownership of our company would increase further
upon exercise of the option granted by the Puerto Rico Telephone Authority under
a Share Option Agreement dated as of March 2, 1999. Under this option agreement
GTE Holdings and GTE International have the right, until March 2, 2002, to buy
up to 150,000 shares of Telecomunicaciones de Puerto Rico from the Puerto Rico
Telephone Authority at a price equal to $1,148.40 per share, which represents
132% of the original purchase price paid by the GTE Group. The GTE Group's
ownership interest in our company could also increase as a result of the
exercise of specific rights of first refusal. See "-- Shareholders'
Agreements -- Rights of First Refusal."
SHAREHOLDERS' AGREEMENT
On March 2, 1999, we, GTE International and our shareholders entered into
an agreement that sets forth, among other things, specific agreements relating
to the corporate governance of our company. On May 27, 1998, GTE Holdings, GTE
International and Popular, Inc. entered into an agreement that sets forth, among
other things, specific agreements relating to rights and obligations of GTE
Holdings and Popular, Inc. with respect to their ownership interest in
Telecomunicaciones de Puerto Rico, including the corporate governance thereof.
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CORPORATE GOVERNANCE
Our bylaws provide that directors are elected by a plurality vote of our
shareholders. In this respect, our shareholders agreement:
- states that our board of directors will consist of 9 directors, so long
as the Puerto Rico Telephone Authority and other specific entities of the
Government of Puerto Rico (excluding the employee stock ownership plan)
collectively own at least 4% of our issued and outstanding capital stock;
- entitles the Puerto Rico entities to nominate directors in proportion to
their ownership of our capital stock, thus, they are entitled to nominate
3, 2 and/or 1 director(s), for so long as they collectively own at least
25%, 15% or 4% of our issued and outstanding capital stock;
- grants GTE Holdings the right to nominate 5 directors so long as it owns
directly or indirectly more than 20% of our outstanding capital stock.
Under the Popular shareholders agreement, Popular, Inc. is entitled to
nominate 1 of our 9 directors, so long as it owns at least 4% of our outstanding
capital stock. GTE Holdings and Popular, Inc. also agreed to consult with each
other with respect to any matters requiring a vote of the directors or our
shareholders in order to reach a consensus. In the absence of a consensus,
Popular, Inc. would abstain from voting at any shareholder meeting and would
advise the Director nominated by it to abstain from voting on any matters unless
it votes in the same manner as the directors nominated by GTE Holdings except on
certain extraordinary transactions.
Pursuant to our shareholders agreement, for so long as the Puerto Rico
entities collectively own at least 10% of the outstanding capital stock of our
company, we may not take any of the following actions without approval by the
board and without unanimous approval by the government directors:
- any acquisition, strategic alliance or joint venture involving a dollar
amount equal to, or in excess of, 15% of our total assets;
- the issuance of equity securities or securities exercisable or
exchangeable for or convertible into equity securities;
- any amendment to the dividend policy established in our shareholders
agreement;
- transactions between us and any of our subsidiaries, on the one hand, and
any member of the GTE Group or any affiliate thereof on the other hand,
involving an aggregate dollar amount in any fiscal year of more than
$1,000,000 as to each member and its affiliates; and
- any amendment to our Certificate of Incorporation or Bylaws adversely
affecting the rights of the Puerto Rico entities as shareholders or the
rights of the government directors.
In addition, for so long as the Puerto Rico entities collectively own at
least 10% of our issued and outstanding capital stock, the following shareholder
actions require approval by the Puerto Rico Telephone Authority:
- any amendment to our Certificate of Incorporation adversely affecting the
rights of any governmental authority of Puerto Rico as a shareholder of
our company or the rights of the government directors;
- the liquidation, merger, consolidation or split up of Telecomunicaciones
de Puerto Rico (other than a merger in which Telecomunicaciones de Puerto
Rico is the survivor or a merger of Telecomunicaciones de Puerto Rico
into a wholly-owned subsidiary of Telecomunicaciones de Puerto Rico); and
- the sale of assets in any fiscal year representing 25% or more of our
total assets.
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Under the Popular shareholders agreement, decisions of our board or our
shareholders on the following matters, among others, require the consent of GTE
Holdings and Popular, Inc.:
- the liquidation, dissolution, winding up, merger, consolidation, other
combination or split up of our company or a material subsidiary or the
acquisition of an entity involving an amount of more than 5% of our
assets and our subsidiaries on a consolidated basis;
- the execution of agreements between us or our subsidiaries and any of our
shareholders for more than $1,000,000 in any fiscal year, except for
agreements described in "Certain Relationships and Related Transactions;"
- issuing any debt, except for the exchange notes, or preferred stock
financing or assumption of our liabilities or our subsidiaries to the
extent that the transaction is in excess of $25,000,000, if not
contemplated in our business plan;
- offering or selling equity or equity-linked securities of our company or
our subsidiaries;
- filing under any bankruptcy, insolvency, reorganization or similar law;
- any amendment to our Certificate of Incorporation or bylaws or any of our
subsidiaries adversely affecting the rights of Popular, Inc.;
- any sale, transfer or other disposition of our assets or liabilities or
any of our subsidiaries involving an amount of more than 5% of our assets
and our subsidiaries on a consolidated basis; and
- any change in the dividend policy established in our shareholders
agreement.
In connection with the acquisition, our shareholders agreed that our shares
will bear a dividend, payable on a quarterly basis, to the extent funds are
legally available therefor and subject to any restrictions imposed by any
financing, that is at least equal to 50% of our consolidated net income. The
indenture for the exchange notes and our credit facilities will not contain any
restrictions on the payment of dividends.
SHARE TRANSFERS
Our shareholders agreement establishes some restrictions on the transfer of
shares by our shareholders. Under our shareholders agreement, shares can be
transferred by GTE Holdings without any restrictions after March 2, 2004 and by
Popular, Inc. after March 2, 2002. GTE International agreed to maintain record
and beneficial ownership, directly or indirectly, of at least a majority in vote
and value of all equity or equity-linked securities of GTE Holdings unless
otherwise consented to by Popular, Inc. GTE Holdings and Popular, Inc. are
permitted to transfer shares to their wholly-owned subsidiaries at any time.
After March 2, 2002, GTE Holdings may reduce its ownership interest to 35%
through a widely distributed private placement or public offering, or if our
stock is publicly traded, in open market transactions. GTE Holdings and its
affiliates must maintain an ownership interest in our company of at least 35%
until March 2, 2004. Popular, Inc. may sell up to 33.3% of its initial ownership
interest prior to March 2, 2002 pursuant to "piggy-back" rights in the event of
a registration of our shares under the Securities Act in connection with a
public offering of our shares. Under the Popular shareholders agreement,
transfers by GTE Holdings and Popular, Inc. to the Puerto Rico entities or the
employee stock ownership plan are prohibited. The government of Puerto Rico may
sell, subject to a right of first refusal in favor of the GTE Group, any or all
of its shares at any time but excluding shares under an option agreement with
the GTE Group and GTE International.
If any member of the GTE Group proposes to transfer shares as permitted by
our shareholders agreement, other than to any of its affiliates or other than in
a public offering or widely distributed private placement, which is for more
than 7.5% of the total number of our shares or would result in the transferee
owning over 20% of our shares, the Puerto Rico entities shall have the right to
participate in this sale, by selling the applicable pro-rata portion of the
aggregate number of shares then owned by all of the Puerto Rico entities. If the
Puerto Rico entities would own 5% or less of our shares after exercising this
right, GTE Holdings shall have the option of requiring that the Puerto Rico
entities sell all of their remaining shares to the buyer, or requiring that the
Puerto Rico entities sell to the buyer the shares that the buyer is willing to
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purchase and sell any remaining shares owned by the Puerto Rico entities to GTE
Holdings. Under the Popular shareholders agreement, Popular, Inc. has the right
to require GTE Holdings to permit Popular, Inc. to participate on a pro-rata
basis in any transfer of shares by GTE Holdings, other than an underwritten
public offering or widely distributed private placement.
In addition, GTE Holdings and GTE International entered into a tag-along
agreement with the employee stock ownership plan. Pursuant to this tag-along
agreement, through March 2, 2009, the employee stock ownership plan has the
right to participate in any sale by GTE Holdings, GTE International or any of
their affiliates of more than 7.5% of the total number of our outstanding shares
or that would result in the transferee and its affiliates owning over 20% of our
shares. If the employee stock ownership plan has the right to participate in the
sale it can sell a pro rata portion of its shares equal to the lesser of 30,000
shares or the aggregate number of shares then owned by it to the buyer on the
same terms and conditions that are given to GTE Holdings, GTE International or
their affiliates.
RIGHTS OF FIRST REFUSAL
The Puerto Rico entities may transfer any or all of their shares, except
for those shares whose transfer is restricted by the option agreement, at any
time provided that GTE Group and GTE International shall have first refusal
rights with respect to these shares unless they are being sold in a public
offering or widely disseminated private placement. Under the Popular
shareholders agreement, any party that wishes to transfer its shares other than
pursuant to a public offering or a widely distributed private placement, must
obtain a purchase offer from a third party and offer the shares to the other
parties first for the same price and under the same conditions as the purchase
offer by the third party.
REGISTRATION RIGHTS
At any time after August 2000, any of the Puerto Rico entities may request
on three occasions the registration of shares of having an aggregate estimated
disposition price of at least $50 million. We agreed to use all commercially
reasonable efforts to effect promptly the requested registration under the
Securities Act. If at any time we determine to register any shares under the
Securities Act in connection with the public offering of the shares by us solely
for cash, each shareholder, other than the employee stock ownership plan, shall
have the right to request that Telecomunicaciones de Puerto Rico use
commercially reasonable efforts to cause to be registered under the Securities
Act any shares that the shareholder requests to be registered.
NON-COMPETITION AGREEMENT
On March 2, 1999, Telecomunicaciones de Puerto Rico, GTE Corporation, GTE
Holdings, GTE International, Popular, Inc., the Puerto Rico Telephone Authority
and Government Development Bank entered into a non-competition agreement as a
condition to closing the acquisition. This agreement establishes that the
parties, other than Popular, Inc., shall not engage, directly or indirectly, in
any manner, in:
- the development, acquisition, construction, management, ownership or
operation of wireline or wireless telecommunication services; or
- data transmission or Internet-related systems and businesses, and all
service businesses directly related thereto, including the application
for the development and acquisition of licenses, permits and
authorizations as are necessary and appropriate for any of the foregoing,
and which systems and businesses are primarily for services in or from
Puerto Rico for a certain time period and subject to certain exceptions.
The parties, other than Popular, Inc., shall not engage in restricted
activities until the earlier of:
- the date when the Puerto Rico Telephone Authority and any other
governmental authority of Puerto Rico ceases to own or control, in the
aggregate, at least 5% of our shares; and
- the later of (a) seven years or (b) one year after a sale of our
shares by any governmental authority of Puerto Rico in a public
offering of our shares on behalf of any of these entities.
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The parties, other than Popular, Inc., shall not engage in the activities
described above until the earlier of (A) the date when the Puerto Rico Telephone
Authority and any other governmental authority of Puerto Rico ceases to own or
control, in the aggregate, at least 5% of our Shares and (B) the later of (x)
seven years and (y) one year after a sale of shares by any governmental
authority of Puerto Rico in a public offering of shares.
The non-competition agreement does not prohibit:
- the parties, other than Popular, Inc., from acquiring as an investment
not more than 2%, in the aggregate, of the capital stock of a corporation
engaged, directly or indirectly, in the activities restricted under the
non-competition agreement, whose stock is traded on a national securities
exchange or over-the-counter;
- some enumerated activities of GTE Corporation or its subsidiaries and
divisions;
- activities of Governmental Authorities of Puerto Rico of the nature
conducted on March 2, 1999, other than the provision of local telephone
service or on-island or off-island long distance telecommunication
service, which activities are ancillary to the primary function of these
entities;
- ownership of shares of our company;
- the provision of services or technology to us pursuant to specified
management or technology license agreements; or
- each party from exercising any of its rights or complying with any of its
obligations under our shareholders agreement or the option agreement
executed on March 2, 1999.
Under the non-competition agreement, for so long as Popular, Inc. owns more
than 2% of our shares it must comply with the requirements of the Bank Holding
Company Act of 1956 restricting the non-banking activities of bank holding
companies. In any event, Popular, Inc. will not make an investment in the equity
of any other company engaged in providing substantial telecommunications
services in Puerto Rico, except for investments of not more than 2% of the
equity of companies whose stock is traded on a national securities exchange or
over-the-counter, or control the management of any other business with
substantial telecommunications operations in Puerto Rico.
Other than their equity interest in our company, neither GTE Corporation
nor Popular, Inc. have any substantial telecommunications activities in Puerto
Rico.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH AFFILIATES OF GTE CORPORATION
PUERTO RICO MANAGEMENT AGREEMENT, U.S. MANAGEMENT AGREEMENT AND TECHNOLOGY
LICENSE AGREEMENT
Telecomunicaciones de Puerto Rico, Puerto Rico Telephone Company and GTE
International or one of its affiliates are parties to:
- an Amended and Restated Puerto Rico Management Agreement, under which an
affiliate of GTE International Telecommunications Incorporated is
responsible for providing, within Puerto Rico, advice and direction
regarding the administration and operations of our business;
- an Amended and Restated U.S. Management Agreement, pursuant to which the
responsibilities of GTE International are substantially identical to the
ones of its affiliate under the Puerto Rico Management Agreement, except
that all services are to be provided outside of Puerto Rico; and
- a separate, nonexclusive Amended and Restated Technology License
Agreement, dated as of March 2, 1999.
Under the terms of the Technology License Agreement an affiliate of GTE
International granted us an unrestricted right during the term of the agreement
to use any of GTE International's technology that is not covered by patent or
copyright protection or treated as confidential by GTE International. We were
also granted a nonexclusive, irrevocable, nontransferable license to use within
Puerto Rico any other technical or business information, inventions, software
programs, trade secrets, know-how, and other technological or industrial
property of GTE Corporation, supplied to us in the course of providing the
services covered by the Puerto Rico Management Agreement and the U.S. Management
Agreement.
Term
The Puerto Rico Management Agreement, the U.S. Management Agreement and the
Technology License Agreement have an initial duration of five years. The parties
shall commence bona-fide negotiations to extend the term of both agreements not
less than six months before their expiration.
Fees
The combined total compensation under the Puerto Rico Management Agreement,
the U.S. Management Agreement and the Technology License Agreement shall be
equal to:
- 8% of our earnings before deducting interest expenses, taxes and
depreciation allowance for each of years 1 and 2 of the agreements;
- 7% of our earnings before deducting interest expenses, taxes and
depreciation allowance for each of years 3 and 4 of the agreements; and
- 6% of our earnings before deducting interest expenses, taxes and
depreciation allowance for year 5 of the agreements.
Earnings before deducting interest expenses, taxes and depreciation
allowance is defined for purposes of the Technology License Agreement as
consolidated earnings before interest, taxes, depreciation, amortization and the
fees paid under the Puerto Rico Management Agreement, the U.S. Management
Agreement and the Technology License Agreement, calculated in accordance with
generally accepted accounting principles in the United States consistently
applied, except that EBITDA shall be increased by any non-recurring costs
resulting from the implementation by the Company or its Subsidiaries of
voluntary severance programs. GTE International is also entitled to
reimbursement under the Puerto Rico Management Agreement and the U.S. Management
Agreement for transportation expenses and meals and lodging expenses incurred by
its personnel in performing their obligations thereunder. The cash payment of
the fees and royalty will be deferred, with interest, until at least March 2,
2000.
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AFFILIATE AGREEMENTS NOT COVERED UNDER THE TECHNOLOGY LICENSE AND MANAGEMENT
AGREEMENTS
Directory Agreement
GTE Directories Corporation, an affiliate of GTE Corporation, has entered
into an advisory agreement with AXESA, pursuant to which GTE Directories
Corporation expects to receive approximately $2 million in revenues from the
publication of directories for the year 2000.
Proposed Reimbursement Agreement with GTE Corporation Affiliates
We have agreed to reimburse GTE Corporation and its affiliates for the
salaries and benefits paid by them to employees which are seconded to us. The
initial term of the agreement will expire on March 2, 2004
TRANSACTIONS WITH AFFILIATES OF POPULAR, INC.
Banco Popular has provided and will continue to provide us with general
banking services in the ordinary course of our banking business. In 1998, Banco
Popular provided bill collection services, lock-box, payroll and other cash
management services pursuant to contracts with Puerto Rico Telephone Company for
which Banco Popular received approximately $2.8 million in 1998. GTE Holdings
has agreed to use commercially reasonable efforts to cause us to use Banco
Popular's general banking services.
We also entered into a $200 million revolving credit facility with Banco
Popular in connection with the acquisition, under which we have drawn $26.1
million as of June 30, 1999.
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DESCRIPTION OF SOME OF OUR DEBT
OVERVIEW
On March 2, 1999 we entered into three credit facilities:
- a syndicated five-year revolving credit facility, with Citibank N.A.,
Bank of America National Trust and Savings Association, The Chase
Manhattan Bank and Morgan Guaranty Trust Company of New York and other
lenders, for up to $500,000,000, which we refer to as, the Five-Year
Revolving Credit Facility;
- a syndicated 364-day revolving credit facility, with Citibank N.A., Bank
of America National Trust and Savings Association, The Chase Manhattan
Bank and Morgan Guaranty Trust Company of New York and other lenders, for
up to $1,000,000,000, which we refer to as, the Capital Markets Bridge
Facility; and
- a syndicated 364-day revolving credit facility, arranged by Banco
Popular, for up to $200,000,000, which we refer to as, the BPOP Revolving
Credit Facility.
In connection with the closing of the acquisition, the Capital Markets
Bridge Facility and the Five-Year Revolving Credit Facility were fully drawn for
the purpose of funding the special dividend. In addition, a borrowing in the
amount of $91.1 million was made under the BPOP Revolving Credit Facility to
fund (i) the remaining portion of the special dividend, in the amount of $65
million, and (ii) a loan from Telecomunicaciones de Puerto Rico to the employee
stock ownership plan to finance the purchase by the employee stock ownership
plan of 3% of the Shares.
FIVE-YEAR REVOLVING CREDIT FACILITY
PURPOSE
The Five-Year Revolving Credit Facility was established for general
corporate purposes, including to finance the special dividend and related fees
and expenses, working capital and to provide alternative credit support for the
repayment of commercial paper notes we may issue in the future. The total amount
of the borrowings provided for under the facility is $500,000,000 and the
facility has a maturity of five years from March 2, 1999. The facility was fully
drawn on such date.
RANKING; GUARANTY
The Five-Year Revolving Credit Facility is a senior unsecured
non-amortizing credit facility. We are the borrower, and Puerto Rico Telephone
Company and Celulares Telefonica provide joint and several guaranties of our
obligations.
PREPAYMENT
The Five-Year Revolving Credit Facility provides for prepayment at our
option in a minimum aggregate amount of $10,000,000.
INTEREST
We pay interest on borrowings under the Five-Year Revolving Credit Facility
at a rate which is comprised of:
- a basic interest rate which, at our option, subject to some limitations,
is either a Eurodollar rate, as quoted in the London interbank market, or
a base rate which is the higher of either Citibank's publicly announced
"base" rate or 1/2 of 1% above an overnight Federal funds rate; and
- if we choose to borrow at a Eurodollar rate, a margin determined
according to our financial performance and the total amount of the credit
under the facility that we use.
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We can choose an interest period for each borrowing at a Eurodollar rate
which can be one, two, three or six months. The rate for the interest period is
set two days before the beginning of the interest period. The base rate which
may apply to borrowings may change daily.
The reference banks which quote the Eurodollar rates for our borrowings
under this facility are Citibank, N.A., Bank of America National Trust and
Savings Association, The Chase Manhattan Bank and Morgan Guaranty Trust Company
of New York.
We pay a margin on borrowings under the Five-Year Revolving Credit Facility
for which we select a Eurodollar rate which varies from 0.200% if our financial
performance is at its strongest, to 1.550% if our financial performance is at
its weakest, and we have borrowed half or less than half of the total amount
available under the facility. If we have borrowed more than half of the total
amount available under the facility when we borrow or when a new interest period
begins, then the margin ranges from 0.350% if our financial performance is at
its strongest, to 1.800% if our financial performance is at its weakest. Our
financial performance is measured by our credit rating, with A- from S&P and A3
from Moody's being the highest for these purposes, and BB+ from S&P and Ba1
being the lowest. If no credit rating is available, then the margin is
determined based on the ratio of our outstanding debt to EBITDA.
If we fail to make a payment when due under the Five-Year Credit Facility,
then we pay interest on the outstanding loans at a rate of 2% above the base
rate.
We also have the option of borrowing under the Five-Year Credit Facility at
interest rates which we solicit from banks in the syndicate on a competitive bid
basis.
FEES
We are also required to pay to each of the lenders in the Five-Year
Revolving Credit Facility, on a quarterly basis, a facility fee equal to a
specified percentage of such lender's commitment thereunder. Such percentage
varies in accordance with our performance level, which is structured on the same
scale as that described above for the interest rate determination.
COVENANTS
We, Puerto Rico Telephone Company and Celulares Telefonica are subject to
certain affirmative and negative covenants contained in the Five-Year Revolving
Credit Facility. The covenants among other things require us:
- to comply with laws;
- to pay taxes;
- to maintain insurance;
- to preserve our corporate existence;
- to maintain our properties;
- to engage in arm's-length transactions with our affiliates, subject to
certain exceptions;
- to report several events; and
- to maintain several financial ratios under a determined level.
In addition, these covenants restrict our ability to:
- incur liens;
- merge, other than with a subsidiary of GTE Corporation;
- change our accounting methods; and,
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- incur debt, other than the credit facilities entered into on March 2,
1999 (and refinancings thereof), certain inter-company debt, operating
leases, certain transactions in the ordinary course of business and other
unsecured debt in the ordinary course of business aggregating for each of
Puerto Rico Telephone Company and Celulares Telefonica not more than $75
million at any one time outstanding.
EVENTS OF DEFAULT
Events of default under the Five-Year Revolving Credit Facility include:
- failure to pay any amounts due;
- any error in any material respect of any representation or warranty when
made or deemed made;
- failure to perform any of certain specified covenants;
- breach of the guaranty by either Puerto Rico Telephone Company or
Celulares Telefonica;
- cross-default or cross-acceleration to other debt outstanding in an
aggregate principal amount of at least $20 million;
- certain bankruptcy or insolvency events;
- judgments or orders rendered against us aggregating $30 million, which
are not covered by insurance or indemnification;
- certain specified failures of GTE Corporation to maintain direct or
indirect control of Telecomunicaciones de Puerto Rico; and
- certain events under the Employee Retirement Income Security Act.
CAPITAL MARKETS BRIDGE FACILITY
PURPOSE
The Capital Markets Bridge Facility was established for the purpose of
financing the special dividend. The total amount of the borrowings provided for
under the facility is $1,000,000,000 and the facility has a maturity of 364 days
from the effective date thereof, which was March 2, 1999. The facility was fully
drawn on such date.
PREPAYMENT
The Capital Markets Bridge Facility provided for mandatory prepayment out
of the net proceeds of any long-term debt issued by us in the capital markets,
and we prepaid it in full with the proceeds from the offering of the old notes.
BPOP REVOLVING CREDIT FACILITY
PURPOSE
The BPOP Revolving Credit Facility was established for working capital and
general corporate purposes, including without limitation to finance a portion of
the special dividend. The total amount of the borrowings provided for under the
facility is $200,000,000. The facility matures on March 1, 2000. Approximately
$91 million was drawn under the BPOP Revolving Credit Facility on March 2, 1999.
STATUS; GUARANTY
The BPOP Revolving Credit Facility is a senior unsecured non-amortizing
credit facility. We are the borrower, and Puerto Rico Telephone Company and
Celulares Telefonica provide joint and several guaranties of our obligations.
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PREPAYMENT
The BPOP Revolving Credit Facility provides for prepayment at our option of
revolving credit advances thereunder in a minimum aggregate amount of
$1,000,000.
INTEREST
Borrowings under the BPOP Revolving Credit Facility may be maintained from
time to time, at our option as:
- Base rate loans which bear interest at the base rate, which is the simple
average of the rates of interest announced publicly in the Wall Street
Journal by the principal commercial banks in New York, New York as their
prime commercial lending rates, or
- LIBOR rate loans bearing interest at the LIBOR, plus the applicable
margin. The applicable margin for LIBOR rate loans is, for a utilization
of less than or equal to 50% of the total commitments under the BPOP
Revolving Credit Facility, 0.925% and for a utilization of greater than
50% of the total commitments 1.075%.
FEES
Commitment fees are payable by us to lenders under the BPOP Revolving
Credit Facility on the daily average unused amount of each lender's commitment
thereunder, on a quarterly basis.
COVENANTS
The covenants of Telecomunicaciones de Puerto Rico, Puerto Rico Telephone
Company and Celulares Telefonica under the BPOP Revolving Credit Facility are
substantially the same as those described above for the Five-Year Revolving
Credit Facility. The BPOP Revolving Credit Facility contains an additional
covenant that requires our significant subsidiaries to guarantee the BPOP
Revolving Credit Facility.
EVENTS OF DEFAULT
Events of default under the BPOP Revolving Credit Facility are
substantially the same as those described above for the Five-Year Revolving
Credit Facility.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
We will issue the exchange notes in accordance with the terms of the
indenture dated as of May 20, 1999 among us, the subsidiary guarantors and The
Bank of New York, as trustee. The terms of the exchange notes include those
stated in the indenture and those made part of the indenture by reference to the
Trust indenture Act of 1939.
The following description is a summary of the material terms and provisions
of the indenture. It does not purport to be complete or to restate that
agreement in its entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of these exchange notes. The indenture and the
registration rights agreement are incorporated by reference into this
prospectus.
FORM
The exchange notes are to be issued in registered form only in
denominations of $1,000 and integral multiples of $1,000. The exchange notes
will be initially issued in the form of Global Securities and will be
exchangeable for exchange notes in certificate form only in the limited
circumstances set forth below under "-- Book Entry System."
MATURITY, PRINCIPAL AND INTEREST
The exchange notes will have the following terms:
<TABLE>
<CAPTION>
PRINCIPAL
SERIES AMOUNT INTEREST RATE MATURITY DATE
- ------ ------------ ------------- -------------
<S> <C> <C> <C>
2002 exchange notes......................... $300,000,000 6.15% May 15, 2002
2006 exchange notes......................... $400,000,000 6.65% May 15, 2006
2009 exchange notes......................... $300,000,000 6.80% May 15, 2009
</TABLE>
In each case, interest will be payable semi-annually in arrears on May 15
and November 15 of each year, commencing on November 15, 1999. We will pay
interest to those persons who were holders of record on the May 1 or November 1
immediately preceding each interest payment date.
Interest on the exchange notes will accrue from the date of original
issuance of the old notes or, if interest has already been paid, from the date
it was most recently paid. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
RANKING
The exchange notes will be senior unsecured obligations of
Telecomunicaciones de Puerto Rico, equal in ranking ("pari passu") with all of
our existing and future senior debt, and senior in right of payment to all of
our existing and future subordinated debt.
Each of Puerto Rico Telephone Company and Celulares Telefonica is currently
a subsidiary guarantor. Holders of the exchange notes will only be creditors of
Telecomunicaciones de Puerto Rico and of those subsidiaries that are subsidiary
guarantors. The note holders, through Telecomunicaciones de Puerto Rico, would
only have a stockholder's claim in the assets of its subsidiaries that were not
subsidiary guarantors. This stockholder's claim is junior to the claims that
creditors of our subsidiaries have against those subsidiaries. If in the future
we have subsidiaries that are not subsidiary guarantors, all the existing and
future liabilities of such subsidiaries, including any claims of trade creditors
and preferred stockholders, will be effectively senior to the exchange notes.
We conduct all of our operations through our subsidiaries. Therefore, our
ability to service our debt, including the exchange notes, is dependent upon the
earnings of our subsidiaries, and their ability to distribute
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those earnings as dividends, loans or other payments to us. Certain laws
restrict the ability of our subsidiaries to pay dividends or make loans and
advances to us. If in the future we have subsidiaries that are not subsidiary
guarantors and these restrictions apply to such subsidiaries, then we would not
be able to use the earnings of those subsidiaries to make payments on the
exchange notes. Furthermore, under certain circumstances, bankruptcy "fraudulent
conveyance" laws or other similar laws could invalidate the Subsidiary
Guaranties. If this were to occur, we would also be unable to use the earnings
of these subsidiary guarantors to the extent they face restrictions on
distributing funds to us. Any of the situations described above could make it
more difficult for us to service our debt.
SUBSIDIARY GUARANTIES
Our obligations under the indenture are fully and unconditionally
guaranteed, jointly and severally, on a senior unsecured basis by the subsidiary
guarantors to the extent that they guarantee our credit facilities.
Upon the sale or other disposition of a subsidiary guarantor permitted by
the indenture, or the release or termination of all guarantees provided by a
subsidiary guarantor under all credit facilities, such subsidiary guarantor will
be released from all its obligations under its subsidiary guarantee.
We and each of the subsidiary guarantors will agree to contribute to any
other subsidiary guarantor which makes payments pursuant to a subsidiary
guarantee an amount equal to its proportionate share of such payment, based on
its net worth relative to the aggregate net worth of Telecomunicaciones de
Puerto Rico and the subsidiary guarantors.
OPTIONAL REDEMPTION
The 2006 exchange notes and the 2009 exchange notes will be redeemable, in
whole or in part, at our option, at any time at a redemption price equal to the
greater of (i) 100% of the principal amount of the exchange notes of such series
and (ii) the sum of the present values, as determined by a Quotation Agent, of
the remaining scheduled payments of principal and interest thereon (not
including any portion of such payments of interest accrued as of the date of
redemption) discounted to the redemption date on a semi-annual basis at the
Adjusted Treasury Rate, plus:
- 15 basis points for the 2006 exchange notes
- 15 basis points for the 2009 exchange notes
In the event of any optional redemption accrued interest will be payable up
to the redemption date.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Quotation Agent as having a maturity comparable to the remaining
term of the 2006 exchange notes or the 2009 exchange notes, as the case may be,
to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of the applicable
series of exchange notes.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the Reference Treasury Dealer Quotations for such redemption
date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (ii) if the trustee obtains fewer than three such Reference
Treasury Dealer Quotations, the average of all such Quotations.
"Quotation Agent" means the Reference Treasury Dealer appointed by us.
"Reference Treasury Dealer" means (i) Salomon Smith Barney Inc. and its
respective successors; provided, however, that if the foregoing shall cease to
be a primary U.S. Government securities dealer in New
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York City (a "Primary Treasury Dealer"), we shall substitute therefor another
primary treasury dealer; and (ii) other primary treasury dealers, if any,
selected by us.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such redemption date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date. Unless we default in payment of the
redemption price, on and after the redemption date, interest will cease to
accrue on the exchange notes or portions thereof called for redemption.
OPTIONAL TAX REDEMPTION
If, as a result of any change in or any amendment to the laws, regulations
or rulings of Puerto Rico or taxing authority thereof or therein, or any change
in the official administration, application or interpretation of such laws,
regulations or rulings, which become effective on or after the issue date of the
exchange notes, it is determined by us or by any subsidiary guarantor under or
with respect to its Subsidiary Guarantee that we would be required to pay any
additional amounts, as defined in the next subsection, pursuant to the indenture
or the terms of the exchange notes of any series, or the terms of any subsidiary
guarantee, in respect of interest on the next succeeding interest payment date,
and that such obligation cannot be avoided by such obligor or successor by
taking reasonable measures available to it, the applicable obligor may, at its
option, redeem (or cause to be redeemed) all (but not less than all) of the
exchange notes of such series upon not less than 30 nor more than 60 days'
written notice as provided in the indenture, at a redemption price equal to 100%
of the outstanding principal amount thereof plus accrued and unpaid interest to
the redemption date; provided, however, that (a) no such notice of redemption
may be given earlier than 60 days prior to the earliest date on which such
obligor or successor would be obligated to pay such additional amounts were a
payment in respect of the exchange notes of such series then due, and (b) at the
time any such redemption notice is given, such obligation to pay such additional
amounts must remain in effect.
Prior to the publication of the notice of redemption in accordance with the
foregoing, we will deliver to the trustee an Officers' Certificate (together
with a copy of an independent opinion of counsel to the effect that the
applicable obligor will be or will become obligated to pay additional amounts),
stating that the we are entitled to effect such redemption in accordance with
the terms set forth in the indenture and setting forth a statement of facts
showing that the conditions precedent to the right of redemption have been
satisfied. Such notice, once delivered by us to the trustee, will be
irrevocable.
ADDITIONAL AMOUNTS
All payments made by us under or with respect to the exchange notes or by
any subsidiary guarantor under or with respect to our subsidiary guarantee, we
and any such subsidiary guarantor being referred to for purposes of this section
"additional amounts" individually as "obligor" and collectively as "obligors",
shall be made free and clear of and without withholding or deduction for, or on
account of any present or future taxes, levies, fees, duties, assessments or
governmental charges of whatever nature imposed, levied, collected or assessed
by or on behalf of, or within Puerto Rico, or any taxing authority thereof or
therein, unless the applicable obligor or any successor, as the case may be, is
required to withhold or deduct taxes by law or by the interpretation or
administration thereof. In that event, the applicable obligor or any successor,
as the case may be, will (i) make any required withholding or deduction in
respect of any taxes, (ii) remit the full amount deducted or withheld to the
relevant taxing authority in accordance with applicable law, and (iii) pay such
additional amounts as may be necessary so that the net amount received by each
holder and beneficial owner of exchange notes after such withholding or
deduction or other payment of taxes will not be less than the
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amounts that the holder and beneficial owner would have received if such taxes
had not been withheld or deducted or paid, except that no additional amounts
shall be so payable with respect to:
(1) taxes that would not have been imposed, payable or due but for the
existence of any present or former connection between the holder, or
between a fiduciary, settlor, beneficiary, member or shareholder, or
possessor of a power over, such holder, if such holder is an estate, trust,
partnership or corporation, and Puerto Rico other than the mere holding of
the exchange notes;
(2) any taxes that are imposed or withheld after the Issue Date where
such withholding or imposition is by reason of the failure of the holder or
beneficial owner of the exchange note to comply with any reasonable request
by the applicable obligor or any successor, as the case may be, to provide
information concerning the nationality, residence or identity of such
holder or beneficial owner or to make any declaration or similar claim or
satisfy any information or reporting requirement (A) if such compliance is
required or imposed by a statute, treaty, regulation or administrative
practice of Puerto Rico as a precondition to exemption from all or part of
such taxes, (B) such holder or beneficial owner may legally comply with
such requirements and (C) at least 30 days prior to the date on which the
applicable obligor or any successor, as the case may be, shall apply this
clause (2), such obligor or successor shall have either notified the
holders or notified the trustee and the trustee shall have notified the
holders of such requirements;
(3) any estate, inheritance, gift, sale, transfer, personal property
or similar tax, assessment or other governmental charge; or
(4) any combination of items (1), (2) and (3) above.
Such additional amounts shall also not be payable where, had the beneficial
owner of the note been the holder of the note, it would not have been entitled
to payment of additional amounts by reason of any of clauses (1), (2), (3) or
(4) above.
The applicable obligor or any successor, as the case may be, will furnish
to the trustee, upon written request, certified copies of tax receipts
evidencing the payment of any taxes by such obligor or successor in such form as
provided in the normal course by the Taxing Authority imposing such taxes and as
is reasonably available to the obligor or successor, as the case may be, within
60 calendar days after the date of receipt of such evidence by such obligor or
successor. If notwithstanding the obligor's or successor's, as the case may be,
efforts to obtain such receipts, the same are not obtainable, such obligor or
successor will provide to the trustee other evidence reasonably satisfactory to
the trustee of such payments by such obligor or successor. Copies of such
receipts will be made available to holders of exchange notes that are
outstanding on the date of such withholding or deduction for or on account of
taxes upon request to the trustee.
At least 30 days prior to each date on which any payment under or with
respect to the exchange notes is due and payable (unless such obligation to pay
additional amounts arises after the 30th day prior to the date on which payment
under or with respect to the exchange notes is due payable, in which case it
shall be promptly thereafter), if the applicable obligor or successor, as the
case may be, will be obligated to pay additional amounts with respect to such
payment, such obligor or successor will deliver to the trustee an Officers'
Certificate stating that such additional amounts will be payable and specifying
the amounts so payable. The Officers' Certificate will also set forth such other
information as is necessary to enable the trustee to pay such additional amounts
to the holders of the exchange notes on the payment date.
The applicable obligor or successor, as the case may be, will pay any
present or future stamp, issue, registration, value added, documentary taxes or
any other similar taxes and other duties (including interest and penalties)
payable in Puerto Rico (or any other jurisdiction in which the obligor or
successor, as the case may be, is organized or engaged in business for tax
purposes or, in each case, any political subdivision thereof or therein having
the power to tax) in respect of the creation, issue, offering, execution or
enforcement of the exchange notes, the subsidiary guarantee or any documentation
relating thereto.
In the event that additional amounts actually paid with respect to any
exchange notes are based on taxes in excess of the appropriate taxes applicable
to the holder or beneficial owner of such exchange notes and, as a
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result thereof, such holder or beneficial owner is entitled to make a claim for
a refund of such excess, or credit such excess against taxes then, to the extent
it is able to do so without jeopardizing its entitlement to such refund or
credit, such holder or beneficial owner shall, by accepting the exchange notes,
be deemed to have assigned and transferred all right, title and interest to any
claim for a refund or credit of such excess to the applicable obligor or
Successor, as the case may be. By making such assignment and transfer, the
holder or beneficial owner makes no representation or warranty that the
applicable obligor or Successor, as the case may be, will be entitled to receive
such claim for a refund or credit and incurs no other obligation with respect
thereto (including executing or delivering any documents and paying any costs or
expenses of the applicable obligor or Successor, as the case may be, relating to
obtaining such refund). Nothing contained in this paragraph shall interfere with
the right of each holder or beneficial owner of a note to claim any refund or
credit or to disclose any information relating to its tax affairs or any
computations in respect thereof or to do anything that would prejudice its
ability to benefit from any other credits, relief, remissions or repayments to
which it may be entitled.
Whenever in the indenture or in this "Description of Exchange Notes" there
is mentioned, in any context, the payment of principal, interest, purchase price
in connection with a purchase of the exchange notes or any other amount payable
on or with respect to any of the exchange notes, such mention shall be deemed to
include mention of the payment of additional amounts provided for in this
section to the extent that, in such context, additional amounts are, were or
would be payable in respect thereof.
The obligation described under this heading shall survive any defeasance of
the indenture.
SINKING FUND AND DEFEASANCE
There will be no mandatory sinking fund payments for the exchange notes.
The indenture provides that the exchange notes are subject to defeasance.
CERTAIN COVENANTS
The indenture limits our ability to take several actions:
1. In general, we are not permitted to incur any liens upon any of our
property. We are permitted to incur liens of up to 10% of our
consolidated net tangible assets or any other lien if the exchange notes
are also secured by the lien. In addition, we are permitted to incur
some additional liens, including liens:
- on property we acquire or construct;
- for taxes, assessments or governmental charges;
- of a company that is merged into us; and
- to secure capital lease obligations.
2. Our non-guarantor subsidiaries are generally prohibited from incurring
any debt.
They can incur some debt, including debt:
- that does not exceed 10% of consolidated net tangible assets;
- that existed at the time the company became our subsidiary;
- pursuant to capital lease obligations; and
- for a receivables financing so long as it does not exceed 15% of net
tangible assets.
3. We are generally prohibited from entering into sale-leaseback
transactions.
We can enter into some sale and leaseback transactions, including those:
- for financing property we acquire;
- existing at the time a company is merged into us;
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- which are refinancings of existing sale and leaseback transactions;
and
- equal to the par value of the property sold and leased back so long as
the proceeds are used to purchase property with the same value as that
which was sold and leased back or is used to retire debt.
The indenture also requires our subsidiaries to guarantee the exchange
notes to the extent they guarantee any of our credit facilities.
1. LIMITATION ON LIENS. The indenture limits our ability to, directly or
indirectly, incur any Lien (other than Permitted Liens) upon any of our
Property, including Capital Stock, unless:
(a) the exchange notes or the applicable Subsidiary Guaranty will also
be secured by such Lien equally and ratably with (or prior to) all other
Debt of Telecomunicaciones de Puerto Rico or any subsidiary guarantor
secured by such Lien or
(b) immediately after the Incurrence or existence of such Lien, the
aggregate principal amount of Secured Debt then outstanding plus the
aggregate amount of Capitalized Rent (without duplication) in respect of
Sale and Leaseback Transactions would not exceed 10% of our Consolidated
Net Tangible Assets.
2. LIMITATION ON DEBT OF NON-GUARANTOR SUBSIDIARIES. The indenture states
that we shall not permit any Non-Guarantor Subsidiary to incur any Debt other
than the following:
(a) Debt of such Non-Guarantor Subsidiary Incurred after the Issue
Date; provided, however, that immediately after the Incurrence of such Debt
the aggregate amount of Debt Incurred and outstanding pursuant to this
clause (a) and not otherwise permitted pursuant to the indenture does not
exceed 10% of Consolidated Net Tangible Assets;
(b) Debt of any Person existing at the time such Person becomes our
Subsidiary, such Person is merged into or consolidated with the Company or
a Subsidiary of the Company, or the Company or a Subsidiary of the Company
acquires all or substantially all of the assets of such Person, other than
Debt Incurred by such Person as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of transactions pursuant to which such Person becomes
a Subsidiary of the Company, is merged into or consolidated with the
Company or pursuant to which all or substantially all of the assets of such
Person are acquired by the Company or a Subsidiary of the Company;
(c) Debt pursuant to Capitalized Lease Obligations; provided, however,
that immediately after the Incurrence of such Debt, the aggregate amount of
Debt Incurred and outstanding pursuant to this clause (c) and not otherwise
permitted pursuant to the indenture, together with any Debt Incurred in
respect of this clause (c) pursuant to clause (f) below, does not exceed
10% of Consolidated Net Tangible Assets;
(d) Debt owed to the Company or any Subsidiary of the Company;
(e) Debt of any such Non-Guarantor Subsidiary existing on the Issue
Date;
(f) Debt of any Non-Guarantor Subsidiary constituting any Refinancing
of any Debt Incurred pursuant to clauses (b), (c) and (e) above to the
extent the aggregate principal amount of such Debt is not increased unless
otherwise permitted hereunder; or
(g) Debt Incurred by a Receivables Subsidiary in a Permitted
Receivables Financing that is non-recourse to the Company or any Subsidiary
of the Company, except to a limited extent customary for such transactions.
For purposes of determining compliance with this "Limitation on Debt of
Non-Guarantor Subsidiaries" covenant, (a) in the event that an item of Debt
meets the criteria of more than one of the categories of Debt described above,
the Company, in its sole discretion, will classify such item of Debt and will
only be required
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to include the amount and type of such Debt in one of the above categories and
(b) an item of Debt may be divided and classified in more than one of the types
of Debt described above.
3. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company shall not,
and shall not permit any subsidiary guarantor to, enter into any Sale and
Leaseback Transaction unless immediately after the completion of such Sale and
Leaseback Transaction, giving effect to the application of the proceeds
therefrom, the aggregate amount of Capitalized Rent in respect of Sale and
Leaseback Transactions, other than Sale and Leaseback Transactions described in
clauses (a) to (d), inclusive, of the immediately succeeding paragraph, plus the
aggregate principal amount of Secured Debt then outstanding, without
duplication, would not exceed 10% of Consolidated Net Tangible Assets.
The foregoing restrictions shall not apply to, and there shall be excluded
in computing the aggregate amount of Capitalized Rent for the purpose of such
restrictions, the following Sale and Leaseback Transactions:
(a) any Sale and Leaseback Transaction entered into to finance the
payment of all or any part of the purchase price of Property acquired or
constructed by the Company or any subsidiary guarantor, including any
improvements to existing Property, or entered into prior to, at the time of
or within 270 days after the acquisition or construction of such Property,
which Sale and Leaseback Transaction is entered into for the purpose of
financing all or part of the purchase or construction price thereof;
provided, however, that in the case of any such acquisition, such Sale and
Leaseback Transaction shall not involve any Property transferred by the
Company to a Subsidiary of the Company or by a Subsidiary of the Company to
the Company or by a Subsidiary of the Company to another Subsidiary of the
Company in contemplation of or in connection with such Sale and Leaseback
Transaction or involve any Property of the Company or any subsidiary
guarantor other than the Property so acquired, other than, in the case of
construction or improvement, any theretofore unimproved real Property or
portion thereof on which the Property so constructed, or the improvement,
is located;
(b) any Sale and Leaseback Transaction involving Property of any
Person existing at the time such Person is merged into or consolidated with
the Company or a subsidiary guarantor or the Company or a subsidiary
guarantor acquires all or substantially all of the assets of such entity
(other than a Sale and Leaseback Transaction entered into by such Person as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Person is merged into or consolidated with the
Company or a subsidiary guarantor or pursuant to which all or substantially
all assets of such Person are acquired by the Company or a subsidiary
guarantor);
(c) any Sale and Leaseback Transaction involving the Refinancing (or
successive Refinancings) in whole or in part of a lease pursuant to a Sale
and Leaseback Transaction referred to in the foregoing clause (a) or (b);
provided, however, that such lease Refinancing shall be limited to all or
any part of the same Property leased under the lease so Refinanced (plus
improvements to such Property); and
(d) any Sale and Leaseback Transaction the net proceeds of which are
at least equal to the fair value (as determined by the Board of Directors
of the Company or the applicable subsidiary guarantor) of the Property
leased pursuant to such Sale and Leaseback Transaction, so long as within
270 days of the effective date of such Sale and Leaseback Transaction, the
Company or the applicable subsidiary guarantor applies (or irrevocably
commits to an escrow account for the purpose or purposes hereinafter
mentioned) an amount equal to the net proceeds of such Sale and Leaseback
Transaction to either (x) the purchase of other Property having a fair
value at least equal to the fair value of the Property leased in such Sale
and Leaseback Transaction and having a similar utility and function, or (y)
the retirement or repayment (other than any mandatory retirement or
repayment at maturity) of (i) the Notes, (ii) other Funded Debt of the
Company or a subsidiary guarantor which ranks prior to or on a parity with
the Notes or (iii) Debt of any Non-Guarantor Subsidiary maturing by its
terms more than one year from its date of issuance (notwithstanding that
any portion of such Debt is included in current liabilities) or preferred
stock of any Non-Guarantor Subsidiary (other than any such Debt owed to or
preferred stock owned by the Company or any Subsidiary of the Company);
provided, however, that in
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lieu of applying an amount equivalent to all or any part of such net
proceeds to such retirement or repayment (or committing such an amount to
an escrow account for such purpose), the Company may deliver to the trustee
Outstanding Notes and thereby reduce the amount to be applied pursuant to
(y) of this clause (d) by an amount equivalent to the aggregate principal
amount of the Notes so delivered.
For purposes of determining compliance with this "Limitation on Sale and
Leaseback Transactions" covenant, (i) in the event that a Sale and Leaseback
Transaction meets the criteria of more than one of the categories of Sale and
Leaseback Transactions described above, the Company, in its sole discretion,
will classify such Sale and Leaseback Transaction and will only be required to
include the Sale and Leaseback Transaction in one of the categories described
above and (ii) a Sale and Leaseback Transaction may be divided and classified in
more than one of the categories described above.
4. FUTURE SUBSIDIARY GUARANTORS. The Company shall cause each Subsidiary
of the Company that becomes a guarantor or other similar obligor (which does not
include being a direct borrower) under a Credit Facility following the Issue
Date to execute and deliver to the trustee a Subsidiary Guarantee at the time
such Person becomes a guarantor or other similar obligor under the Credit
Facility such that such Subsidiary becomes a guarantor or other similar obligor
of the Notes to the same extent as under the Credit Facility.
MERGER AND CONSOLIDATION
We may consolidate or amalgamate with or merge into any other Person or
convey, transfer, lease or otherwise dispose of our Property substantially as an
entirety to any Person or may permit any Person to consolidate or amalgamate
with or merge into, or convey, transfer, lease or otherwise dispose of its
Property substantially as an entirety to, us; provided, however, that:
- the successor, transferee or lessee, if other than us or the
applicable subsidiary guarantor, is organized under the laws of any
United States jurisdiction, including the Commonwealth of Puerto
Rico;
- the successor, transferee or lessee, if other than us or the
applicable subsidiary guarantor, expressly assumes the obligations
of Telecomunicaciones de Puerto Rico or the applicable subsidiary
guarantor, as the case may be, under the indenture and the exchange
notes by means of a supplemental indenture entered into with the
trustee;
- immediately before and after giving effect to the transaction on a
pro forma basis, no Default shall have occurred and be continuing;
and
- several other conditions are met.
SEC REPORTS
Notwithstanding that we may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, we will file with the Commission and
provide the trustee and holders of the exchange notes with the annual reports
and information, documents and other reports specified in Sections 13 and 15(d)
of the Exchange Act and applicable to a U.S. corporation subject to such
Sections. We will file such information, documents and reports at the times
specified in the Exchange Act for their filing; provided, however, that we will
not be obligated to file such information, documents and reports with the
Commission if the Commission does not permit such filings.
MODIFICATIONS OF INDENTURE
We, the subsidiary guarantors and the trustee, with the consent of the
holders of a majority in aggregate principal amount of the outstanding exchange
notes of a series, can modify the indenture or any supplemental
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indenture affecting such series of exchange notes or the rights of the holders
of such series of exchange notes. However, we are not permitted to
- extend the fixed maturity of any exchange notes;
- reduce the principal amount or the interest rate of any exchange notes
or extend the time of payment of interest thereon;
- reduce any premium payable upon the redemption of any exchange note;
- change the currency in which the principal of any exchange note or the
interest thereon is payable;
- impair the right of any holder of exchange notes to receive payment of
principal of and interest on the exchange notes on or after the fixed
maturity or impair the right of any holder to institute suit for the
enforcement of any such payment on or after the fixed maturity or, in
the case of redemption, on or after the redemption date;
- change any Subsidiary Guaranty in any way that would adversely affect
the holders of the exchange notes, other than as permitted by the
indenture, without the consent of the holder of each exchange note so
affected; or
- reduce the percentage of note holders of each series of exchange notes
which is required to consent to any supplemental indenture or for any
waiver of several provisions of the indenture, without the consent of
each holder of exchange notes of such series then outstanding and
affected by such change.
We, the subsidiary guarantors and the trustee may execute, without the
consent of any holder of the exchange notes, any supplemental indenture for
several other usual purposes.
EVENTS OF DEFAULT
The indenture provides that the occurrence of any of the following events
with respect to any series of the exchange notes will constitute an "Event of
Default" with respect to the exchange notes of such series:
- failure for 30 business days to pay interest on the exchange notes of
such series when due;
- failure to pay principal or premium, if any, on the exchange notes of
such series when due, whether at maturity, upon redemption, by
declaration or otherwise;
- failure to observe or perform any other covenant in the indenture for
90 days after we have been given notice by the trustee or by the
trustee by the holders of not less than 25% in principal amount of the
outstanding exchange notes of such series, specifying the default and
requiring that it be cured;
- acceleration of, or failure to pay at maturity after giving effect to
any applicable grace period, any Debt of Telecomunicaciones de Puerto
Rico or any of its Subsidiaries having an aggregate principal amount
at the time in excess of the greater of $25 million and the lesser of
1% of Consolidated Net Tangible Assets at such time and $50 million,
subject to several conditions;
- any Subsidiary Guarantee ceases to be in full force and effect, other
than in accordance with the terms of the indenture or such Subsidiary
Guarantee, or any subsidiary guarantor denies or disaffirms its
obligations under its Subsidiary Guarantee; or
- certain events of bankruptcy, insolvency or reorganization.
The holders of a majority in aggregate outstanding principal amount of the
exchange notes of a series have the right to direct the time, method and place
of conducting any proceeding for any remedy in respect of such series available
to the trustee for the exchange notes of such series.
Except in the case of an Event of Default involving bankruptcy, insolvency
or reorganization, the trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the exchange notes of a series may declare the
principal due and payable immediately upon the occurrence and during the
continuance of an
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Event of Default with respect to the exchange notes of such series, but the
holders of a majority in aggregate outstanding principal amount of the exchange
notes of such series may rescind and annul such declaration and waive the
default if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal and any premium has been deposited with
the trustee. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to the Company shall
occur, the aggregate outstanding principal amount of the Exchange notes of each
series shall be due and payable immediately without any declaration or other act
on the part of the trustee or the holders of the exchange notes.
The holders of a majority in aggregate outstanding principal amount of the
exchange notes of a series may, on behalf of the holders of all the exchange
notes of such series, waive any past Default in respect of such series, except a
Default in the payment of principal, premium, if any, or interest or a Default
in respect of any provision of the indenture, the amendment of which requires
the consent of each holder of the exchange notes affected thereby. The Company
is required to file annually with the trustee a certificate as to whether or not
the Company is in compliance with all the conditions and covenants under the
indenture.
THE TRUSTEE
The Bank of New York is the trustee for each series of exchange notes under
the indenture.
In general, the trustee will perform only such duties as are specifically
set forth in the indenture. However, during the existence of an Event of
Default, the trustee will exercise the rights and powers vested in it under the
indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
CERTAIN DEFINITIONS
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Stock" means and includes any and all shares, interests,
participations or other equivalents (however designated) of ownership in a
corporation or other Person.
"Capitalization" means with respect to a Person the total of (a) Funded
Debt, (b) the par value or, in the case of Capital Stock with no par value, a
value stated on the books, of all outstanding shares of Capital Stock, (c) the
paid-in surplus and retained earnings or minus the net surplus deficit, as the
case may be, (d) deferred taxes and deferred investment tax credits, (e)
Capitalized Rent, and (f) minority interests in subsidiaries of such Person.
"Capitalized Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP. For
purposes of "-- Certain Covenants -- Limitation on Liens," a Capitalized Lease
Obligation shall be deemed secured by a Lien on the Property being leased.
"Capitalized Rent" means the present value discounted semi-annually at a
discount rate equal to the actual percentage rate inherent in the applicable
lease, as determined in good faith by the Company of the total net amount of
rent payable for the remaining term of any lease of Property by the Company or
any subsidiary guarantor including any period for which such lease has been
extended; provided, however, that no such rental obligation shall be deemed to
be Capitalized Rent unless the lease resulted from a Sale and Leaseback
Transaction. The total net amount of rent payable under any lease for any period
shall be the total amount of the rent payable by the lessee with respect to such
period but shall not include amounts required to be paid on account of
maintenance and repairs, insurance, taxes, assessments, water rates, sewer rates
and similar charges.
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"Consolidated Capitalization" means the Capitalization of the Company and
its Subsidiaries determined on a consolidated basis at the end of the Company's
then most recently reported fiscal year or quarter, as the case may be,
including minority interests in Subsidiaries.
"Consolidated Net Tangible Assets" means the consolidated total assets of
the Company and its Subsidiaries as reflected in the Company's most recent
balance sheet prepared in accordance with GAAP, less (a) current liabilities
excluding current maturities of long-term debt and obligations under capital
leases and (b) goodwill, trademarks, patents and minority interests of others.
"Credit Facility" means, with respect to the Company or any Subsidiary of
the Company, one or more debt or commercial paper facilities with banks or other
institutional lenders, including the $500,000,000 Five-Year Credit Agreement
dated as of March 2, 1999, as amended, among the Company, the subsidiary
guarantors and the lenders and agents named therein and the $200,000,000 Credit
Agreement dated as of March 2, 1999, as amended, among the Company, the
subsidiary guarantors and the lenders and agents named therein providing for
revolving credit loans, term loans, receivables or inventory financing,
including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory or trade letters of credit, in each case
together with any extensions, revisions, refinancings or replacements thereof by
a lender or syndicate of lenders.
"Debt" means, with respect to any Person, the aggregate amount of, without
duplication: (a) all obligations for borrowed money; (b) all obligations
evidenced by debentures, notes or other similar instruments; (c) all obligations
to pay the deferred purchase price of property or services, except trade
accounts payable, accrued commissions and other similar accrued current
liabilities in respect of such obligations, in any case not more than 120 days
overdue, arising in the ordinary course of business; (d) all Capitalized Lease
Obligations of such Person, including Capitalized Rent; (e) all obligations or
liabilities of others secured by a Lien on any Property owned by such Person
whether or not such obligation or liability is assumed, the amount of such Debt
being deemed to be the lesser of the value of such Property or the amount of the
Debt so secured; (f) all reimbursement obligations of such Person in respect of
any letters of credit or bankers' acceptances related to Debt of such Person or
another Person; (g) any stock of such person that by its terms matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise; and
(h) guarantees of or similar obligations with respect to Debt of other Persons.
The term "Debt" shall not include any obligations of a Person under a Swap
Contract.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Funded Debt" means any Debt maturing by its terms more than one year from
its date of issuance, notwithstanding that any portion of such Debt is included
in current liabilities.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth:
(a) in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants,
(b) in the statements and pronouncements of the Financial Accounting
Standards Board,
(c) in such other statements by such other entity as approved by a
significant segment of the accounting profession, and
(d) the rules and regulations of the Commission governing the
inclusion of financial statements, including pro forma financial statements
in periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur by merger, conversion, exchange or otherwise, extend,
assume, guarantee or become liable in respect of such
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Debt or other obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Debt or obligation on the balance sheet of such Person.
"Incurrence" and "Incurred" shall have meanings correlative to the foregoing;
provided, however, that a change in GAAP that results in an obligation of such
Person that exists at such time, and is not theretofore classified as Debt,
becoming Debt shall not be deemed an Incurrence of such Debt.
"Issue Date" means the date on which the old notes were originally issued.
"Lien" means any mortgage, pledge, security interest, lien, charge or
similar encumbrance.
"Non-Guarantor Subsidiary" means any Subsidiary of the Company other than a
subsidiary guarantor.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer, the Treasurer, any Vice President or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the trustee.
"Outstanding" means, subject to certain exceptions, all Notes issued under
the indenture, except those theretofore canceled by the trustee or delivered to
it for cancellation, defeased in accordance with the indenture, paid in full, or
in respect of which substitute Notes have been authenticated and delivered by
the trustee.
"Permitted Liens" means:
(a) Liens existing on the Issue Date;
(b) Liens upon Property acquired or constructed by the Company or any
subsidiary guarantor after the Issue Date to secure payment of all or part
of the purchase price thereof or to secure Debt incurred prior to, at the
time of or within 270 days after the acquisition or construction thereof
for the purpose of financing all or part of the purchase or construction
price thereof, or Liens of any kind existing on such Property at the time
of the acquisition thereof, or conditional sales agreements or other title
retention agreements with respect to any Property acquired after the Issue
Date; provided, however, that in the case of any such acquisition, such
Lien or agreement shall not involve any Property transferred by the Company
to a Subsidiary of the Company or by a Subsidiary of the Company to the
Company or by a Subsidiary of the Company to another Subsidiary of the
Company in contemplation of or in connection with the Incurrence of such
Lien or the entering into of such agreement; provided further, however,
that no such Lien, and no such agreement, shall extend to or cover any
other Property of the Company or any Subsidiary of the Company unless
otherwise permitted hereunder;
(c) the Refinancing of any such Lien or of any such agreement,
permitted by the foregoing clause (a) or (b), or the replacement or
renewal, without increase in principal amount unless otherwise permitted
hereunder, of the Debt secured thereby;
(d) Liens for taxes or assessments or governmental charges or levies;
pledges or deposits to secure obligations under worker's compensation laws,
unemployment insurance or similar legislation; pledges or deposits to
secure performance in connection with bids, tenders, contracts, other than
contracts for the payment of money or leases to which the Company or any
subsidiary guarantor is a party; deposits to secure public or statutory
obligations of the Company or any subsidiary guarantor; materialmen's,
mechanics', carriers', workers', repairmen's, warehousemen's, suppliers',
employees' or other like Liens in the ordinary course of business, or
deposits to obtain the release of such Liens; deposits to secure surety and
appeal bonds to which the Company or any subsidiary guarantor is a party;
other pledges or deposits for similar purposes in the ordinary course of
business; Liens created by or resulting from any litigation or legal
proceeding which at the time is currently being contested in good faith by
appropriate proceedings; leases made, or existing on property acquired, in
the ordinary course of business; landlord's Liens under leases to which the
Company or any subsidiary guarantor is a party; zoning restrictions,
easements, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not
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materially impair the use of such property in the operation of the business
of the Company or the applicable subsidiary guarantor or the value of such
property for the purpose of such business; Liens arising solely by virtue
of any statutory or common law provision relating to banker's Liens, rights
of set-off or similar rights and remedies as to deposit account or other
funds; other Liens on the Property of the Company or any subsidiary
guarantor incidental to the conduct of their respective businesses or the
ownership of their respective properties which were not created in
connection with the Incurrence of Debt or the obtaining of advances or
credit and which do not in the aggregate materially detract from the value
of their respective properties or materially impair the use thereof in the
operation of their respective businesses; or the Lien of the trustee
described in the indenture;
(e) Liens with respect to Debt of any Person at the time such Person
is merged into or consolidated with the Company or a subsidiary guarantor
or the Company or a subsidiary guarantor acquires all or substantially all
of the assets of such Person, other than a Lien Incurred by such Person as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Person is merged into or consolidated with the
Company or a subsidiary guarantor or pursuant to which all or substantially
all of the assets of such Person are acquired by the Company or a
subsidiary guarantor;
(f) Liens in favor of the Company or any subsidiary guarantor;
(g) Liens to secure Capitalized Lease Obligations; provided that (1)
any such Lien does not extend or cover any Property other than the Property
that is the subject of such Capitalized Lease Obligation (unless otherwise
permitted hereunder) and (2) such Capitalized Lease Obligation is otherwise
permitted under the indenture;
(h) Liens to secure obligations under Swap Contracts; and
(i) Liens Incurred in connection with any Permitted Receivables
Financing.
"Permitted Receivables Financing" means any financing not exceeding in the
aggregate, together with all other Permitted Receivables Financings Incurred
pursuant to clause (g) of "-- Certain Covenants -- Limitation on Debt of
Non-Guarantor Subsidiaries" or pursuant to clause (i) of the definition of
"Permitted Liens," 15% of Consolidated Net Tangible Assets pursuant to which the
Company or any Subsidiary of the Company may sell, convey or otherwise transfer
to a Receivables Subsidiary or any other Person, in the case of transfer by a
Receivables Subsidiary, or grant a security interest in, any accounts
receivable, and related assets of the Company or such Subsidiary; provided,
however, that (1) the covenants, events of default and other provisions
applicable to such financing shall be customary for such transactions and shall
be on market terms determined in good faith by the Board of Directors at the
time such financing is entered into, (2) the interest rate applicable to such
financing shall be a market interest rate determined in good faith by the Board
of Directors at the time such financing is entered into and (3) such financing
shall be non-recourse to the Company and its Subsidiaries, other than the
Receivables Subsidiary except to a limited extent customary for such
transactions. The grant of a security interest in any accounts receivable of the
Company or any Subsidiary of the Company, other than a Receivables Subsidiary to
secure Debt under any Credit Facility shall not be deemed a Permitted
Receivables Financing.
"Person" mean any individual, corporation, partnership, company, including
any limited liability company), joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Property" means, with respect to any Person, all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person and its
Subsidiaries under GAAP.
"Receivables Subsidiary" means a bankruptcy-remote, special-purpose Wholly
Owned Subsidiary formed in connection with a Permitted Receivables Financing.
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"Refinance" means to refinance, extend, renew, replace, refund, repay,
prepay, repurchase, redeem, defease or retire once or successive times. In
respect of any Debt, "Refinance" also means to issue other Debt, in exchange or
replacement for, such Debt. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Sale and Leaseback Transaction" means any arrangement with any Person
other than a Tax Consolidated Subsidiary providing for the leasing as lessee by
the Company or any subsidiary guarantor of any Property except for temporary
leases for a term, including any renewal thereof, of not more than three years
provided that any such temporary lease may be for a term of up to five years if
(a) the Board of Directors of the Company or the applicable subsidiary guarantor
reasonably finds such term to be in the best interest of the Company or the
applicable subsidiary guarantor and (b) the primary purpose of the transaction
of which such lease is a part is not to provide funds to or financing for the
Company, which Property has been or is to be sold or transferred by the Company
(1) to any Subsidiary of the Company in contemplation of or in connection with
such arrangement or (2) to such other Person. A "Tax Consolidated Subsidiary"
means a subsidiary of the Company with which, at the time a Sale and Leaseback
Transaction is entered into by the Company, the Company would be entitled to
file a consolidated federal income tax return.
"Secured Debt" means Debt of the Company or any subsidiary guarantor
secured by any Lien, other than Permitted Liens and Liens with which the Notes
are secured in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Liens" on Property, including Capital Stock of the
Company or such subsidiary guarantor.
"Subsidiary," in respect of any Person, means (i) any Person of which more
than 50% of the total voting power of shares of Capital Stock entitled, without
regard to the occurrence of any contingency to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more of the Subsidiaries of that
Person or a combination thereof, and (ii) any partnership, joint venture or
other Person in which such Person or one or more of the Subsidiaries of that
Person or a combination thereof has the power to control by contract or
otherwise the board of directors or equivalent governing body or otherwise
controls such entity.
"Subsidiary Guarantee" means a guarantee on the terms set forth in the
indenture by a subsidiary guarantor of the Company's obligations with respect to
the Notes.
"Subsidiary Guarantor" means, unless released from their Subsidiary
Guaranties as permitted by the indenture, Puerto Rico Telephone Company, Inc.,
Celulares Telefonica, Inc. and any Person that becomes a subsidiary guarantor
pursuant to the covenant described under "-- Certain Covenants -- Future
Subsidiary Guarantors."
"Swap Contract" means any agreement relating to any transaction that is a
rate swap, basis swap, forward rate transaction, commodity option, equity or
equity index swap or option, bond, note or bill option, interest rate option,
forward transaction, cap collar or floor transaction, currency swap,
cross-currency rate swap, swaption, currency option or any other similar
transaction, including any option to enter into any of the foregoing or any
combination of the foregoing, and, unless the context otherwise clearly
requires, any master agreement relating to or governing any or all of the
foregoing, provided that such Swap Contract was entered into for the purpose of
managing risks associated with liabilities, commitments or assets of the Company
or any Subsidiary of the Company and not for speculation, and provided further
that to the extent the obligations under such Swap Contract are directly related
to payment obligations on Debt, such Debt is otherwise permitted by the
indenture.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled, without regard to the
occurrence of any contingency to vote in the election of directors, managers or
trustees thereof.
"Wholly Owned Subsidiary" means, at any time, a Subsidiary all the Voting
Stock of which, except directors' qualifying shares is at such time owned,
directly or indirectly, by the Company and its other Wholly Owned Subsidiaries.
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BOOK-ENTRY SYSTEM
The exchange notes will be initially issued in the form of one or more
global securities registered in the name of The Depository Trust Company or its
nominee.
Upon the issuance of a global security, The Depository Trust Company or its
nominee will credit the accounts of persons holding through it with the
respective principal amounts of the exchange notes represented by such global
security purchased by such persons in the offering. Such accounts shall be
designated by the initial purchasers. Ownership of beneficial interests in a
global security will be limited to persons that have accounts with The
Depository Trust Company ("participants") or persons that may hold interests
through participants. Any person acquiring an interest in a global security
through an offshore transaction in reliance on Regulation S of the Securities
Act may hold such interest through Cedel or Euroclear. Ownership of beneficial
interests in a global security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by The
Depository Trust Company and such participants. The laws of some jurisdictions
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a global security.
Payment of principal of and interest on exchange notes represented by a
global security will be made in immediately available funds to The Depository
Trust Company or its nominee, as the case may be, as the sole registered owner
and the sole holder of the exchange notes represented thereby for all purposes
under the indenture. Telecomunicaciones de Puerto Rico has been advised by The
Depository Trust Company that upon receipt of any payment of principal of or
interest on any global security, The Depository Trust Company will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal or face amount of such global security as
shown on the records of The Depository Trust Company. Payments by participants
to owners of beneficial interests in a global security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name" and will be the sole responsibility of such participants.
A global security may not be transferred except as a whole by The
Depository Trust Company or a nominee of The Depository Trust Company to a
nominee of The Depository Trust Company or to The Depository Trust Company. A
global security is exchangeable for certificated exchange notes only if:
(a) The Depository Trust Company notifies the Company that it is
unwilling or unable to continue as a depositary for such global security or
if at any time The Depository Trust Company ceases to be a clearing agency
registered under the Exchange Act,
(b) the Company in its discretion at any time determines not to have
all the exchange notes represented by such global security, or
(c) there shall have occurred and be continuing a default or an event
of default with respect to the exchange notes represented by such
global security.
Any global security that is exchangeable for certificated exchange notes
pursuant to the preceding sentence will be exchanged for certificated exchange
notes in authorized denominations and registered in such names as The Depository
Trust Company or any successor depositary holding such global security may
direct. Subject to the foregoing, a global security is not exchangeable, except
for a global security of like denomination to be registered in the name of The
Depository Trust Company or any successor depositary or its nominee. In the
event that a global security becomes exchangeable for certificated exchange
notes,
(a) certificated exchange notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples
thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated exchange notes will be payable, and the transfer of
the certificated exchange notes will be registerable, at the
office or agency of the Company maintained for such purposes, and
(c) no service charge will be made for any registration of transfer or
exchange of the certificated exchange notes, although the Company
may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
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So long as The Depository Trust Company or any successor depositary for a
global security, or any nominee, is the registered owner of such global
security, The Depository Trust Company or such successor depositary or nominee,
as the case may be, will be considered the sole owner or holder of the exchange
notes represented by such global security for all purposes under the indenture
and the exchange notes. Except as set forth above, owners of beneficial
interests in a global security will not be entitled to have the exchange notes
represented by such global security registered in their names, will not receive
or be entitled to receive physical delivery of certificated exchange notes in
definitive form and will not be considered to be the owners or holders of any
exchange notes under such global security. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of The
Depository Trust Company or any successor depositary, and, if such person is not
a participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a holder under the indenture.
Telecomunicaciones de Puerto Rico understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in a global security desires to give or take
any action which a holder is entitled to give or take under the indenture, The
Depository Trust Company or any successor depositary would authorize the
participants holding the relevant beneficial interest to give or take such
action and such participants would authorize beneficial owners owning through
such participants to give or take such action.
The Depository Trust Company has advised the Company that The Depository
Trust Company is a limited-purpose trust company organized under the Banking Law
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the Exchange Act. The Depository Trust
Company was created to hold the securities of its participants and to facilitate
the clearance and settlement of securities transactions among its participants
in such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository Trust Company's participants include securities
brokers and dealers, which may include the Initial Purchasers, banks, trust
companies, clearing corporations and certain other organizations some of whom,
or their representatives, own The Depository Trust Company. Access to The
Depository Trust Company's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies, that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although The Depository Trust Company has agreed to the foregoing
procedures in order to facilitate transfers of interests in global securities
among participants of The Depository Trust Company, it is under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the trustee or the initial
purchasers will have any responsibility for the performance by The Depository
Trust Company or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
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PLAN OF DISTRIBUTION
Each participating broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of exchange notes received pursuant to the exchange offer. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of exchange notes
received in exchange for old notes where such old notes were acquired as a
result of market-making activities or other trading activities.
Telecomunicaciones de Puerto Rico has agreed that, starting on the expiration
date and ending on the close of business one year after the expiration date , it
will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any resale of those exchange notes. In
addition, until , 1999, all dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sales of the exchange notes by
participating broker-dealers. Exchange notes received by participating
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of those methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or negotiated
prices. Any resale of that kind may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any of those participating broker-dealers and/or
the purchasers of any of those exchange notes. Any participating broker-dealer
that resells the exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of these exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any resale of exchange notes
and any commissions or concessions received by those persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act, a participating broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of one year after the expiration date, Telecomunicaciones de
Puerto Rico will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
those documents in the Letter of Transmittal. Telecomunicaciones de Puerto Rico
has agreed to pay all the expenses incident to this exchange offer, including
the expenses of one counsel for the holders of the old notes, and will indemnify
the holders of the old notes, including broker-dealers, against specific
liabilities, including liabilities under the Securities Act.
BROKER DEALER OBLIGATIONS
Each broker-dealer that receives exchange notes for its account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of those exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an underwriter within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of exchange
notes received in exchange for old notes where those old notes were acquired by
that broker-dealer as a result of market-making activities or other trading
activities. Telecomunicaciones de Puerto Rico has agreed that, starting on the
expiration date and ending on the close of business one year after the
expiration date, it will make this prospectus available to any broker-dealer for
use in connection with any resale. See "Plan of Distribution."
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TAX CONSIDERATIONS
GENERAL
The following summary describes the material United States federal income
and Puerto Rico tax consequences of the acquisition, ownership, and disposition
of exchange notes by (a) in the case of United States federal income tax
consequences, U.S. holders, and (b) in the case of Puerto Rico tax consequences,
holders that are not Puerto Rico holders. The summary is based on the advice of
Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, with respect to United
States federal income taxes and the advice of O'Neill & Borges, Puerto Rico,
with respect to Puerto Rico taxes. The advice provided by Curtis, Mallet-
Prevost, Colt & Mosle LLP is based on the United States Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed Regulations and
temporary Regulations) promulgated thereunder, rulings, official pronouncements
and judicial decisions, all as in effect on the date of this prospectus, and the
advice of O'Neill & Borges is based on the Puerto Rico Internal Revenue Code of
1994, as amended, the regulations issued under the Puerto Rico Code and its
predecessor statute, the Puerto Rico Income Tax Act of 1954, administrative
practice and judicial decisions, all as in effect and applicable on the date of
this prospectus; all of which are subject to change, possibly with retroactive
effect, and to different interpretations. This summary does not purport to
address all of the tax consequences that may be applicable to holders of
exchange notes.
For purposes of this summary, a U.S. holder is any holder of exchange notes
who or that is, for United States federal income tax purposes:
- in the case of an individual, a resident of the United States, or a
citizen of the United States who is not a bona fide resident of Puerto
Rico during the entire taxable year within the meaning of Section 933 of
the Code,
- a corporation, partnership, or other entity created or organized in or
under the laws of the United States, or any political subdivision
thereof,
- an estate the income of which is includible in gross income for United
States federal income tax purposes regardless of source or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
For purposes of this summary, a Puerto Rico holder is any holder of
exchange notes who or that is, for Puerto Rico tax purposes:
- an individual, trust or estate resident of Puerto Rico,
- a Puerto Rico corporation or partnership,
- an individual, trust or estate engaged in a trade or business in Puerto
Rico, or
- a non-Puerto Rico corporation or partnership engaged in a trade or
business in Puerto Rico.
The description of the United States federal income tax and Puerto Rico tax
laws set forth below is based on the laws in force as of the date of this
prospectus and is subject to any changes in applicable United States or Puerto
Rico tax laws.
Each prospective holder should consult its tax advisors with respect to the
tax treatment applicable to such holder.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership, and disposition of exchange notes by
U.S. holders that hold exchange notes as capital assets as defined in Section
1221 of the Code. This summary is not addressed to certain types of holders
subject to special treatment under United States federal income tax law, such as
individual retirement and other tax-deferred accounts, dealers in securities or
currencies, insurance companies, tax-exempt organizations, persons holding
exchange notes as part of a straddle, hedging, conversion or other integrated
transaction, or persons whose functional currency is other than the U.S. Dollar.
The discussion below does not address United States federal estate and gift
tax considerations or the effect of any United States state or local tax law.
Persons considering the purchase of exchange notes should consult their own tax
advisors concerning the application of the United States federal income tax law
to their particular situations as well as any tax consequences arising under the
law of any state, local or foreign tax jurisdiction.
REGISTRATION OF NOTES
The exchange of old notes for exchange notes pursuant to the exchange offer
will not be treated as an exchange or other taxable event for U.S. federal
income tax purposes. Accordingly, there will be no U.S. federal income tax
consequences to holders of old notes who exchange old notes for exchange notes
pursuant to the exchange offer, and that holder will have the same adjusted tax
basis and holding period in the exchange notes as that holder had in the old
notes immediately before the exchange.
TAXATION OF INTEREST
The gross amount of interest in respect of the exchange notes generally
will be included in a U.S. holder's gross income as ordinary income at the time
it accrues or is paid, in accordance with the U.S. holder's usual method of tax
accounting for United States federal income tax purposes.
Interest on the exchange notes generally will be treated as foreign source
income for United States federal income tax purposes.
MARKET DISCOUNT
If a U.S. holder purchases an exchange note after its issue for an amount
that is less than its principal amount, then the amount of the difference will
be treated as "market discount" for United States federal income tax purposes,
unless the difference is less than a specified de minimis amount.
Under the market discount rules, a U.S. holder will be required to treat
any principal payment on an exchange note, or any gain on its sale, exchange,
retirement or other disposition, as ordinary income to the extent of the market
discount which has not previously been included in income. If the exchange note
is disposed of in a non-taxable transaction (other than a nonrecognition
transaction described in section 1276(c) of the Code), accrued market discount
will be included as ordinary income to the U.S. holder as if the holder had sold
the exchange note at its fair market value. In addition, a U.S. holder may be
required to defer, until the maturity of an exchange note or its earlier
disposition (including a non-taxable transaction other than a transaction
described in section 1276(c) of the Code), the deduction of all or a portion of
the interest expense in respect of any indebtedness incurred or continued to
purchase or carry the exchange note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of an exchange note, unless
the holder elects to accrue such discount on a constant yield basis. A U.S.
holder of an exchange note may elect to include market discount in income
currently, as it accrues (on either a ratable or a constant yield basis), in
which case the rules described above regarding the treatment as ordinary income
of gain upon the disposition of an exchange note and upon the receipt of certain
cash payments, and regarding the deferral of interest deductions, will not
apply. This election to include
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<PAGE> 109
market discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies, and may not be revoked without the consent of the Internal Revenue
Service.
In its fiscal year 2000 budget proposal, the Clinton Administration
recently proposed altering the taxation of market discount. Under the proposal,
subject to certain limitations, accrual basis U.S. holders would be required to
include market discount in income as it accrues. The proposal would affect U.S.
holders of debt instruments, such as the exchange notes, acquired on or after
the date of enactment.
AMORTIZABLE BOND PREMIUM
If a U.S. holder purchases an exchange note for an amount that is greater
than the amount payable at maturity, the excess will be considered an
"amortizable bond premium." Such a holder may elect to amortize the bond premium
to offset the interest from the exchange note he would otherwise be required to
include in income. In any tax year, a holder can only use as much of the bond
premium as the constant yield method would allocate to that year. The U.S.
holder's basis in an exchange note will be reduced by the amount of bond premium
offset against interest.
TAXATION OF DISPOSITIONS
A U.S. holder generally will recognize gain or loss for United States
federal income tax purposes upon the sale, exchange, retirement or other
disposition of the exchange note in an amount equal to the difference between
the amount realized and the U.S. holder's tax basis in the exchange note. A U.S.
holder's tax basis in an exchange note will generally be the cost of the
exchange note, increased by any market discount previously included in income by
the U.S. holder, and reduced by any amortized bond premium. For these purposes,
the amount realized does not include any amount attributable to accrued interest
on the exchange note, which will be taxable as interest income.
Except as described above with respect to market discount and accrued
interest, the gain or loss will be capital gain or loss. If, at the time of
sale, exchange, or retirement, the exchange note has been held for more than 12
months, the gain or loss will be long-term capital gain or loss. If the exchange
note has been held for less than 12 months, the gain or loss will be short-term
capital gain or loss. Under current law, net long-term capital gains of
individuals are typically taxed at lower rates than items of ordinary income.
The deductibility of capital losses is subject to limitations. Any gain or loss
recognized by a U.S. holder generally will be treated as from sources within the
United States for United States federal income tax purposes.
UNITED STATES TAXATION OF NON-U.S. HOLDERS
An individual holder of exchange notes who is a bona fide resident of
Puerto Rico during the entire taxable year within the meaning of Section 933 of
the Code will not be subject to United States federal income tax on payments of
interest on the exchange notes provided that (a) for the 3 year period ending
with the close of Telecomunicaciones de Puerto Rico taxable year immediately
preceding the payment of interest, or the part of that period as may be
applicable, less than 80% of the Telecomunicaciones de Puerto Rico gross income
is derived from sources outside Puerto Rico and attributable to the active
conduct of a trade or business outside Puerto Rico, this determination to be
made under Section 861(c)(1)(B) of the Code and provided that interest on the
exchange notes is not treated as paid by a trade or business outside Puerto Rico
by Telecomunicaciones de Puerto Rico, this determination to be made under
Section 884(f)(1)(A) of the Code, and (b) the payments of interest on the
exchange notes are not effectively connected with the conduct by the holder of a
trade or business in the United States. Pursuant to Notice 89-40 issued by the
United States Internal Revenue Service on March 27, 1989, gain on the sale of
the exchange notes by a Section 933 Holder who is not a United States resident
for purposes of Section 865(g)(1) of the Code will constitute Puerto Rico source
income and, therefore, will not be subject to United States federal income tax
provided the exchange notes do not constitute inventory in the hands of the
holder, and provided the gain is not effectively connected with the conduct by
the holder of a trade or business in the United States.
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<PAGE> 110
Holders of exchange notes that are not U.S. holders and not Section 933
Holders will not be subject to United States federal income tax on payments of
interest with respect to the exchange notes unless such interest is effectively
connected with the conduct by the non-U.S. holders of a trade or business in the
United States. A non-U.S. holder generally will not be subject to United States
federal income tax on any gain realized on the sale or other disposition of
exchange notes, unless (a) such gain is effectively connected with the conduct
by the non-U.S. holder of a trade or business in the United States, or (b) in
the case of gain realized by an individual non-U.S. holder, the non-U.S. holder
is present in the United States for 183 days or more during the year of the sale
or disposition and certain other conditions are met.
BACKUP WITHHOLDING AND INFORMATION REPORTING
United States "backup" withholding may apply to certain payments of
principal and interest on the exchange notes and to certain payments of proceeds
from the sale or retirement of the exchange notes. Generally such payments made
by mail or wire transfer to an address in the United States or made by a paying
agent, broker or other intermediary in the United States will be subject to a
backup withholding tax equal to 31% of such payments if the U.S. holder fails to
furnish his taxpayer identification number (social security number or employer
identification number), to certify that it is not subject to backup withholding,
or to otherwise comply with the applicable requirements of the backup
withholding rules.
Certain U.S. holders (including, among others, all corporations) are not
subject to backup withholding. Interest paid with respect to exchange notes, and
payment of the proceeds from a sale of exchange notes to or through the United
States office of a broker or other intermediary, received by a non-U.S. holder
will be subject to backup withholding unless the payer has received the
appropriate certification from the non-U.S. holder or the non-U.S. holder
otherwise establishes an exemption therefrom. Payments made outside the United
States or to a non-U.S. holder by a non-U.S. broker or other intermediary
generally will not be subject to these United States certification requirements.
In addition, information reporting requirements may apply to certain payments of
principal and interest in respect of the exchange notes and to certain proceeds
from the sale or other disposition of the exchange notes.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. holder or non-U.S. holder with respect to the exchange notes will be
allowed as a refund or credit against the U.S. holder or non-U.S. holder's
United States federal income tax liability; provided, however, the holder timely
furnishes the required information to the United States Internal Revenue
Service.
The Treasury Department has promulgated final regulations, which are
generally effective for payments made after December 31, 2000, subject to
certain transition rules, regarding the backup withholding rules discussed
above. In general, the final regulations do not significantly alter the
substantive withholding and information reporting requirements, but unify
current certification procedures and forms and clarify reliance standards. Under
the final regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners.
PUERTO RICO TAX CONSIDERATIONS
GENERAL
This summary of certain Puerto Rico tax considerations deals only with
holders of exchange notes who are not Puerto Rico holders.
PAYMENTS OF INTEREST
Interest on exchange notes received by a non-Puerto Rico holder who is a
citizen of the United States will be exempt from withholding or other Puerto
Rico taxes.
Interest on exchange notes received by a non-Puerto Rico holder, other than
a non-Puerto Rico holder that is a citizen of the United States, will also be
exempt from withholding or other Puerto Rico taxes, except in the case of a
non-Puerto Rico holder that may be regarded as a "related person" with respect
to Telecomunicaciones de Puerto Rico. For this purpose, a "related person"
generally will be a person that
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<PAGE> 111
directly or indirectly owns 50% or more in value of the stock of
Telecomunicaciones de Puerto Rico, or a corporation or partnership 50% or more
of the value of whose stock or interests are owned directly or indirectly by
Telecomunicaciones de Puerto Rico.
The Puerto Rico Code does not provide rules with respect to the treatment
of the excess of the amount due at maturity over the initial offering price.
Under current administrative practice followed by the Puerto Rico Department of
Treasury, original issue discount (if any) on the exchange notes would be
treated as interest.
SALE OR RETIREMENT OF NOTES
Any gain realized on the sale or other disposition of exchange notes by a
non-Puerto Rico holder will not be subject to Puerto Rico taxes, except in the
case where such gain constitutes income from sources within Puerto Rico. In
general, gain realized on the sale or other disposition of an exchange note will
constitute income from sources within Puerto Rico if the sale or other
disposition of the exchange note occurs in Puerto Rico, i.e., if all right,
title and interest in the exchange note passes from the seller to the purchaser
in Puerto Rico. Retirement of the old notes in New York at the office of the
paying agent, and sale of the exchange notes effected through transfer of
beneficial ownership on the depository's records or the records of a U.S.-based
participant thereof, pursuant to instructions given outside Puerto Rico, will
not be considered to have occurred in Puerto Rico.
Any gain subject to tax in Puerto Rico on the sale or other disposition of
an exchange note will be included in an annual Puerto Rico income tax return due
from such non-Puerto Rico holder. Non-Puerto Rico holders should consult their
tax advisors with respect to the Puerto Rico tax consequences to them in the
case of a sale or other disposition of exchange notes that is considered to have
occurred in Puerto Rico.
REGISTRATION OF NOTES
Any gain realized by non-Puerto Rico holders on an exchange of old notes
for exchange notes pursuant to the exchange offer will not be subject to Puerto
Rico income tax provided the exchange, as contemplated, is effected outside
Puerto Rico.
An exchange of the old notes for exchange notes will be considered to have
occurred outside Puerto Rico if the exchange of such notes occurs physically at
the office of the exchange agent in New York, pursuant to instructions given by
the holder and notice of acceptance given by the Telecomunicaciones de Puerto
Rico, in each case outside of Puerto Rico.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION AND THE PUERTO RICO TAX
DISCUSSION SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT
BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL, PUERTO RICO OR OTHER TAX LAWS.
LEGAL MATTERS
The validity of the exchange notes, guarantees and certain other matters
governed by U.S. federal and New York state law will be passed upon by Curtis,
Mallet-Prevost, Colt & Mosle LLP, special U.S. and New York counsel to
Telecomunicaciones de Puerto Rico, Puerto Rico Telephone Company and Celulares
Telefonica, Inc. Certain matters governed by Puerto Rico law will be passed upon
by O'Neill & Borges, special Puerto Rico counsel to Telecomunicaciones de Puerto
Rico.
EXPERTS
The combined financial statements of Puerto Rico Telephone Company and
Celulares Telefonica, Inc. and related notes thereto as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, the
consolidated balance sheet of Telecomunicaciones de Puerto Rico, Inc. and
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<PAGE> 112
subsidiaries as of June 30, 1999, and the related consolidated statements of
operations, comprehensive income (loss), changes in shareholders' equity, and
cash flows for the period from March 2, 1999 through June 30, 1999, and the
combined statements of operations, comprehensive income (loss), changes in
shareholder's equity and cash flows of Puerto Rico Telephone Company, Inc. and
Celulares Telefonica, Inc. for the period from January 1, 1999 to March 1, 1999
incorporated in this prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
109
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
PUERTO RICO TELEPHONE COMPANY, INC. AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of December 31, 1998 and 1997.... F-3
Combined Statements of Income for the years ended December
31, 1998, 1997 and 1996................................... F-4
Combined Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996.................... F-5
Combined Statements of Changes in Shareholder's Equity for
the years ended December 31, 1998, 1997 and 1996.......... F-6
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Combined Financial Statements for the years ended
December 31, 1998, 1997 and 1996.......................... F-8
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-19
Consolidated Balance Sheets as of June 30, 1999 and December
31, 1998.................................................. F-20
Consolidated Statements of Operations for the six-month
periods ended June 30, 1999 and 1998 (Unaudited).......... F-21
Consolidated Statements of Comprehensive Income (Loss) for
the six-month periods ended June 30, 1999 and 1998
(Unaudited)............................................... F-22
Consolidated Statements of Changes in Shareholders' Equity
for the six-month periods ended June 30, 1999 and 1998
(Unaudited)............................................... F-23
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 1999 and 1998 (Unaudited).......... F-24
Notes to Consolidated Financial Statements for the six-month
periods ended June 30, 1999 and 1998 (Unaudited).......... F-25
</TABLE>
F-1
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Puerto Rico Telephone Company and Celulares Telefonica, Inc.:
We have audited the accompanying combined balance sheets of Puerto Rico
Telephone Company and Celulares Telefonica, Inc. (the "Companies") as of
December 31, 1998 and 1997, and the related combined statements of income,
comprehensive income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Companies management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Puerto Rico Telephone
Company and Celulares Telefonica, Inc. as of December 31, 1998 and 1997, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Juan, Puerto Rico
February 25, 1999
(March 2, 1999 as to Note 13)
F-2
<PAGE> 115
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 35,611 $ 21,254
Accounts receivable, net of allowance for doubtful
accounts of $56,003,000 and $64,277,000 in 1998 and
1997, respectively..................................... 365,137 319,467
Inventory and supplies.................................... 28,117 35,826
Prepaid expenses.......................................... 6,491 3,184
---------- ----------
Total current assets.............................. 435,356 379,731
PROPERTY, PLANT AND EQUIPMENT, Net (Notes 1, 2 and 6)....... 1,987,901 2,019,148
OTHER ASSETS, Net (Note 3).................................. 33,347 35,927
---------- ----------
TOTAL............................................. $2,456,604 $2,434,806
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations under capital leases (Note
6)..................................................... $ 235 $ 431
Accounts payable and accrued expenses..................... 286,513 199,827
Compensated absences and other liabilities................ 60,480 43,347
---------- ----------
Total current liabilities......................... 347,228 243,605
OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT PORTION (Note
6)........................................................ 515 748
CUSTOMERS' DEPOSITS......................................... 41,437 42,253
EMPLOYEE BENEFIT PLANS LIABILITY (Note 5)................... 221,085 196,243
OTHER LIABILITIES........................................... 33,655 26,919
---------- ----------
Total liabilities................................. 643,920 509,768
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
SHAREHOLDER'S EQUITY:
Common stock.............................................. 6 6
Additional paid-in capital................................ 1,835,800 1,930,792
Retained earnings......................................... -- --
Accumulated other comprehensive loss (Note 5)............. (23,122) (5,760)
---------- ----------
Total shareholders' equity........................ 1,812,684 1,925,038
---------- ----------
TOTAL............................................. $2,456,604 $2,434,806
========== ==========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 116
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES AND SALES:
Local services..................................... $ 467,819 $ 447,338 $ 419,670
Long distance services (Note 4).................... 251,754 252,259 263,055
Access services (Note 4)........................... 300,448 277,469 257,527
Cellular services.................................. 100,265 102,082 135,101
Paging services.................................... 59,728 55,212 33,628
Directory services................................. 40,195 42,611 45,555
Other services and sales........................... 50,475 57,150 46,889
---------- ---------- ----------
Total revenues and sales................... 1,270,684 1,234,121 1,201,425
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of services and sales......................... 482,877 450,288 468,915
Selling, general and administrative................ 264,013 260,084 336,995
Depreciation and amortization (Note 1)............. 296,493 279,198 254,609
---------- ---------- ----------
Total operating costs and expenses......... 1,043,383 989,570 1,060,519
---------- ---------- ----------
OPERATING INCOME..................................... 227,301 244,551 140,906
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income.................................... 3,208 3,705 3,322
Other expense, net (Note 7)........................ (6,142) (2,452) (2,499)
---------- ---------- ----------
Total other (expense) income, net.......... (2,934) 1,253 823
---------- ---------- ----------
NET INCOME (Note 8).................................. $ 224,367 $ 245,804 $ 141,729
========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 117
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME................................................. $224,367 $245,804 $141,729
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustment....................... (17,362) 6,259 897
-------- -------- --------
COMPREHENSIVE INCOME....................................... $207,005 $252,063 $142,626
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 118
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS TOTAL
------ ---------- --------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............. $ 5 $1,824,605 $ -- $(12,916) $1,811,694
Net income........................... 141,729 141,729
Dividends and return of capital...... (361,335) (141,729) (503,064)
Capital contributions................ 1 400,084 400,085
Minimum pension liability
adjustment........................ 897 897
--- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1996............. 6 1,863,354 -- (12,019) 1,851,341
Net income........................... 245,804 245,804
Dividends and return of capital...... (255,458) (245,804) (501,262)
Capital contributions................ 322,896 322,896
Minimum pension liability
adjustment........................ 6,259 6,259
--- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1997............. 6 1,930,792 -- (5,760) 1,925,038
Net income........................... 224,367 224,367
Dividends and return of capital...... (305,468) (224,367) (529,835)
Capital contributions................ 210,476 210,476
Minimum pension liability
adjustment........................ (17,362) (17,362)
--- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1998............. $ 6 $1,835,800 $ -- $(23,122) $1,812,684
=== ========== ========= ======== ==========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE> 119
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 224,367 $ 245,804 $ 141,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 296,493 279,198 254,609
Loss on retirement of telephone plant.............. 13,638 -- --
Changes in assets and liabilities:
Accounts receivable................................ (45,670) (14,860) (20,250)
Inventory and supplies............................. 7,709 23,606 1,053
Prepaid expenses................................... (3,307) (153) (595)
Other assets....................................... (346) 5,351 (4,716)
Accounts payable and accrued expenses, employee
benefit plans, compensated absences and other
liabilities, customers' deposits and other
liabilities...................................... 120,867 (30,706) 132,282
--------- --------- ---------
Net cash provided by operating activities............. 613,751 508,240 504,112
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of telephone plant,
including cost of removal.......................... (287,988) (362,247) (391,412)
Net salvage on retirements............................ 8,382 10,923 10,684
--------- --------- ---------
Net cash used in investing activities......... (279,606) (351,324) (380,728)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends and return of capital....................... (529,835) (501,262) (503,064)
Capital contributions................................. 210,476 322,896 400,085
Principal payments on capital lease obligations....... (429) (325) (546)
--------- --------- ---------
Net cash used in financing activities......... (319,788) (178,691) (103,525)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 14,357 (21,775) 19,859
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......... 21,254 43,029 23,170
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 35,611 $ 21,254 $ 43,029
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-7
<PAGE> 120
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Puerto Rico Telephone Company ("PRTC"), a Delaware corporation and a
wholly-owned subsidiary of Puerto Rico Telephone Authority (the "Authority") has
served as the primary provider of wireline local and inter-island long distance
telephone service in Puerto Rico. It was granted by the government the exclusive
franchises to provide these services and in exchange had the rates it charged to
customers established based upon its costs of providing non-discriminatory
services including a return on invested capital. The return on capital was
remitted to the Authority in the form of dividends each year. In addition, PRTC
participated in the cost-sharing pools established by the National Exchange
Carriers Association ("NECA") and in the universal service funds that provide
recovery of cost of service in rural high cost areas. Since 1996, regulation of
the rates and operations of PRTC were transferred to the Puerto Rico
Telecommunications Regulatory Board ("the Telecommunications Board"), an
independent agency of the Commonwealth of Puerto Rico established by the Puerto
Rico Telecommunications Act of 1996 to assume responsibility for regulating
telephone carriers. The Telecommunications Act directs the Telecommunications
Board to presume that PRTC controls the local service access and on-island toll
markets as of the date of enactment. The Telecommunications Act requires a list
of rates and charges be submitted to it and that they are to be based upon the
cost of providing services to customers. Accordingly, PRTC has followed the
accounting principles provided in Statement of Financial Accounting Standards
(SFAS) No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION.
In October 1997, the Federal Communications Commission ("FCC") issued an
order requiring that incumbent local exchange carriers establish a separate
affiliate for the provision of in-region broadband Commercial Mobile Radio
Services. Effective September 1, 1998, CT (a Predecessor of the Company), which
previously operated as a division of PRTC, was organized as a separate
corporation to provide the services as instructed by the FCC.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of PRTC
and CT (the "Companies") as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998. All significant intercompany
balances and transactions have been eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the original cost of acquisition
or construction. Maintenance, repairs and the cost of removal of minor items of
property are charged to expense. Replacements of major items of property are
charged to the plant accounts. Property retired or otherwise disposed of in the
ordinary course of business, together with the cost of removal, less salvage, is
charged to accumulated depreciation with no gain or loss recognized.
Depreciation and amortization is computed on the straight-line method at rates
considered adequate to allocate the cost of the various classes of property over
their estimated service lives.
F-8
<PAGE> 121
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CASH AND CASH EQUIVALENTS
All short-term investments with original maturities of three months or less
are considered to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is an amount that management believes
will be adequate to absorb possible losses on existing receivables that may
become uncollectible based on evaluations of the collectibility of the
receivables and prior loss experience. Because of uncertainties inherent in the
estimation process, management's estimate of losses in the receivables
outstanding and the related allowance may change in the near term.
INVENTORY AND SUPPLIES
Inventory and supplies are stated at average cost.
IMPAIRMENT OF LONG-LIVED ASSETS
The Companies periodically review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. As the Government of Puerto Rico moves forward with the
privatization of the Companies, if the rate setting process is deregulated so
that rates are no longer based upon the Companies' cost of providing service and
if the Companies' markets are opened to entry by competitors, the Companies may
need to reassess their ability to continue to follow regulatory accounting
principles and the ability to realize its investment in property, plant and
equipment.
LONG DISTANCE, ACCESS, AND OTHER REVENUES
Revenues are generally recognized when services are rendered or products
are delivered to customers.
Long distance and access services revenues are derived from long distance
calls within Puerto Rico, carrier charges for access to the local exchange
network, subscriber line charges and other services offered to the long distance
carriers under contractual arrangements. Carrier Common Line access services
revenues are generated based on the participation by the Companies in revenue
pools with other telephone companies managed by NECA, which are funded by access
charges authorized by the FCC and long term support amounts received from the
Universal Service Fund. Such pooled amounts are subsequently divided among the
various telephone companies based upon their respective estimated allocations of
costs and investments in providing interstate services.
Revenues generated from access services and certain other long distance
services have been determined from preliminary allocations and cost studies and
are subject to final settlements in subsequent periods (refer to Note 4).
Toll services provided from overseas long distance telecommunications
services are recognized when earned regardless of the period in which they are
billed to the customer.
Other revenues include services generated based on independent agreements
with long distance carriers.
Installation fees, which are set at amounts intended to recover the cost of
installation, are recognized as revenue at the time of installation.
F-9
<PAGE> 122
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
as well as interest on projected benefit obligations are accrued currently.
Prior service costs and credits resulting from changes in plan benefits are
amortized over the average remaining service period of the employees expected to
receive the benefits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to their short-term duration.
RECLASSIFICATIONS
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Companies adopted Statement of Financial Accounting Standards
("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. This Statement establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners.
In 1998, the Companies adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement introduces a new model for
segment reporting, called the "management approach." The management approach is
based on the way that the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure -- any manner in which management disaggregates
a company. The management approach replaces the notion of industry and
geographic segments in current Financial Accounting Standards Board ("FASB")
standards. Management operates and reports the results of operations in two
segments -- Wireline and Wireless telecommunications, which conforms to its two
operating segments.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which established accounting and reporting
standards for derivative instruments and hedging instruments. SFAS No. 133, as
amended, is effective January 1, 2001. The statement requires entities that use
derivative instruments to measure and record these instruments at fair value as
assets or liabilities on the balance sheet. It also requires entities to reflect
the gains or losses associated with changes in the fair value of these
derivatives, either in earnings or as a separate component of comprehensive
income, depending on the nature of the underlying contract or transaction. The
Companies do not currently utilize derivative instruments. Therefore, the
adoption of SFAS No. 133 is not expected to have a significant effect on the
Companies' results of operations or its financial condition.
F-10
<PAGE> 123
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 consists of:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 26,871 $ 26,798
Buildings................................................... 315,867 304,233
Central office and transmission equipment................... 1,004,347 915,740
Outside plant............................................... 1,733,846 1,672,361
Other equipment............................................. 359,282 348,069
---------- ----------
Total plant in service...................................... 3,440,213 3,267,201
Less accumulated depreciation and amortization.............. 1,701,288 1,477,295
---------- ----------
Net plant in service.............................. 1,738,925 1,789,906
Construction in progress.................................... 248,976 229,242
---------- ----------
Total............................................. $1,987,901 $2,019,148
========== ==========
</TABLE>
3. OTHER ASSETS
Other assets at December 31, 1998 and 1997, consist of:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred pension asset (note 5)............................. $21,664 $25,312
Other....................................................... 11,683 10,615
------- -------
Total............................................. $33,347 $35,927
======= =======
</TABLE>
4. LONG DISTANCE, ACCESS, AND OTHER REVENUES
The Companies long distance, access, and other revenues increased by
$491,000, $8,994,000 and $2,228,000 in 1998, 1997 and 1996, respectively, to
reflect settlements of prior years revenues.
5. PENSION PLANS
The Companies have two separate noncontributory defined benefit pension
plans covering substantially all of their salaried and hourly employees. The
Companies' funding policy for these plans is to make annual contributions as
required by applicable regulations. Contributions are intended to provide not
only for benefits attributed to service to date, but also for those expected to
be earned in the future. Plan assets are invested in equity and government
securities and in other instruments.
All salaried and hourly employees of the Companies participate in the
Puerto Rico Telephone Company Lump Sum Retirement Plan (the "Lump Sum Plan").
Participants are entitled to a lump sum amount equal to a specified number of
months of the employee's earnings. The specified number of months is determined
based on the employees' years of service. The Lump Sum Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974, and is
qualified under the Puerto Rico Internal Revenue Code; accordingly, the Lump Sum
Plan is exempt from income tax in Puerto Rico.
F-11
<PAGE> 124
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Companies provide certain health care and life insurance benefits for
retired employees. Substantially all of the employees may become eligible for
those benefits if they reach normal retirement age while working for the
Companies.
The following table sets forth the status of the plans, the actuarial
assumptions and the amounts in the Companies' combined balance sheets as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
PENSION AND LUMP OTHER
SUM BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year........................... $ 617,694 $ 575,266 $ 132,340 $ 146,957
Service cost...................... 17,795 16,517 3,981 3,510
Interest cost..................... 48,640 45,677 11,404 9,748
Amendments........................ -- 13,969 -- --
Actuarial loss (gain)............. 114,131 804 37,276 (21,824)
Benefits paid..................... (37,074) (34,539) (7,555) (6,051)
--------- --------- --------- ---------
Benefit obligation at end of
year........................... 761,186 617,694 177,446 132,340
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at
beginning of year.............. 426,528 346,223 -- --
Actual return on plan assets...... 74,559 57,065
Employer contributions............ 41,668 57,779
Benefits paid..................... (37,074) (34,539)
--------- --------- --------- ---------
Fair value of plan assets at end
of year........................ 505,681 426,528 -- --
--------- --------- --------- ---------
Funded status....................... (255,505) (191,166) (177,446) (132,340)
Unrecognized (gain) loss............ 107,742 34,033 26,657 (10,543)
Unrecognized prior service cost..... 33,519 38,634 16,649 18,441
Unrecognized net transition
obligation........................ 9,407 10,689 62,678 67,081
--------- --------- --------- ---------
Net amount recognized............... $(104,837) $(107,810) $ (71,462) $ (57,361)
========= ========= ========= =========
Amounts recognized in the combined
balance sheets consist of:
Accrued benefit liability......... $(149,623) $(138,882) $ (71,462) $ (57,361)
Intangible asset (Note 3)......... 21,664 25,312
Accumulated other comprehensive
loss........................... 23,122 5,760
--------- --------- --------- ---------
Net amount recognized............... $(104,837) $(107,810) $ (71,462) $ (57,361)
========= ========= ========= =========
</TABLE>
F-12
<PAGE> 125
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PENSION AND LUMP OTHER
SUM BENEFITS POSTRETIREMENT BENEFITS
-------------------- -----------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of
December 31 of each year:
Discount rate............................. 7% 8% 8% 7% 8% 8%
Rate of compensation increase............. 6% 6% 6% 6% 6% 6%
Expected return on plan assets............ 9% 8% 8% n/a n/a n/a
</TABLE>
The assumed health-care cost trend rate used in 1998, 1997 and 1996 in
measuring the accumulated postretirement benefit obligation was 7%, 8%, and 9%,
respectively, declining by 1% per year to an ultimate rate of 5%.
In accordance with the provisions of SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, the Companies were required to record an additional minimum pension
liability at December 31, 1998 and 1997. This amount represents the excess of
the accumulated benefit obligations over the fair value of plan assets and
accrued pension liabilities. The liabilities have been offset by intangible
assets to the extent possible. Because the asset recognized may not exceed the
amount of unrecognized prior service cost, the balance of the liability at the
end of each period is reported as a separate reduction to shareholder's equity
(Accumulated Other Comprehensive Loss).
See Note 13 for a description of the Authority's commitment to contribute
$200 million over five years to cover unfunded pension and other post-employment
benefit obligations.
The net periodic pension cost for the years ended December 31, 1998, 1997
and 1996 include the following components:
<TABLE>
<CAPTION>
PENSION AND LUMP OTHER
SUM BENEFITS POSTRETIREMENT BENEFITS
-------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost......... $ 17,795 $ 16,517 $ 14,070 $ 3,981 $ 3,510 $ 3,796
Interest cost........ 48,640 45,677 41,586 11,404 9,748 10,853
Expected return on
plan assets........ (34,280) (58,138) (36,516) -- -- --
Net amortization and
deferral........... 6,539 36,187 19,264 6,655 5,906 6,551
Effect of early
retirement
program............ -- -- 99,102 -- -- --
-------- -------- -------- ------- ------- -------
Net periodic pension
cost............... $ 38,694 $ 40,243 $137,506 $22,040 $19,164 $21,200
======== ======== ======== ======= ======= =======
</TABLE>
On January 25, 1996, a program was approved which allowed for the early
retirement of salaried employees who as of December 31, 1995 met certain
specific requirements. This "window benefit" program was accepted by most of the
eligible employees. The early retirement program resulted in an increase of
approximately $99 million in the net periodic pension cost for the year ended
December 31, 1996.
F-13
<PAGE> 126
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
PUERTO RICO EMPLOYEES' RETIREMENT SYSTEM
Some of the Companies' employees (the former employees of Puerto Rico
Communications Corporation, which was merged with PRTC on May 4, 1994)
participate in the Commonwealth of Puerto Rico Employees' Retirement System (the
"System"), a cost-sharing multiple-employer retirement system.
The Companies are required to contribute 9.275% of the employees' salaries.
Total payroll covered for the year ended December 31, 1998 was approximately
$16,752,000. Total employee and employer contributions for the year ended
December 31, 1998 amounted to approximately $1,285,000 and $1,538,000,
respectively. See Note 13 for change resulting from the acquisitions of PRTC and
CT by the GTE Group.
6. LEASES
The Companies use certain building facilities and equipment under various
capital and operating lease agreements.
At December 31, 1998 and 1997, the cost and accumulated amortization of
building facilities and equipment under capital leases are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Cost........................................................ $1,675 $2,305
Less accumulated amortization............................... 1,111 1,521
------ ------
Total............................................. $ 564 $ 784
====== ======
</TABLE>
The amortization of the building facilities and equipment under capital
leases is included in the depreciation and amortization expense account.
Future minimum lease payments under non-cancelable capital and operating
leases in effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1999...................................................... $295 $ 7,418
2000...................................................... 209 5,083
2001...................................................... 90 3,063
2002...................................................... 90 1,744
2003...................................................... 90 1,340
Thereafter................................................ 195 9,215
---- -------
Total minimum lease payments................................ 969 27,863
Less amount representing interest........................... 219 --
---- -------
Present value of minimum lease payments..................... $750 $27,863
==== =======
</TABLE>
Rental costs charged to operations under operating leases for the years
ended December 31, 1998, 1997 and 1996 amounted to approximately $9,898,000,
$10,426,000 and $9,361,000, respectively.
F-14
<PAGE> 127
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. OTHER EXPENSE, NET
The components of other expense at December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense......................................... $ 729 $ 710 $1,726
Other expenses........................................... 5,413 1,742 773
------ ------ ------
Total.......................................... $6,142 $2,452 $2,499
====== ====== ======
</TABLE>
8. TAXES
As discussed in Note 13, the Companies were wholly-owned subsidiaries of
Puerto Rico Telephone Authority until March 2, 1999. The act authorizing the
creation of the Authority exempts the Authority and its wholly-owned
subsidiaries from all taxes levied on their properties or revenues by the
Commonwealth of Puerto Rico and its municipalities. Therefore, the Companies
were exempt from income, property and other taxes in Puerto Rico. For the
periods covered in the accompanying combined financial statements of the
Companies, all taxes and payments in lieu of taxes were the responsibility of
the Authority.
9. COMMITMENTS AND CONTINGENCIES
(a) CONSTRUCTION COMMITMENTS
The Companies' construction program for 1999 amounts to approximately $224
million, including commitments for the purchase and installation of telephone
equipment and materials and supplies.
(b) LITIGATION
The Companies and their former parent company, Puerto Rico Telephone
Authority, have been advised of certain unasserted claims and were defendants in
several lawsuits including those arising out of the conduct of their normal
course of business, including those related to regulatory actions and commercial
transactions. These claims have been vigorously contested and management of the
Authority and the Companies, after consultation with legal counsel, established
adequate reserves to cover the claims. Management believes that the final
resolution of the legal cases will not have a material adverse effect on their
financial statements.
F-15
<PAGE> 128
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. SHAREHOLDER'S EQUITY
Capital stock at December 31, 1998 and 1997 consists of:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
------ ----------
DECEMBER 31, 1998 (IN THOUSANDS)
<S> <C> <C>
Puerto Rico Telephone Company:
Common stock -- par value of $10 per share:
1,000 shares authorized; 589 shares issued and
outstanding............................................ $6 $1,670,988
Celulares Telefonica, Inc.:
Common stock -- no par value: 10,000 shares authorized;
unissued............................................... 164,812
-- ----------
Total....................................................... $6 $1,835,800
== ==========
DECEMBER 31, 1997
Puerto Rico Telephone Company:
Common stock -- par value of $10 per share;
1,000 shares authorized; 579 shares issued and
outstanding............................................ $6 $1,930,792
-- ----------
</TABLE>
Under the terms of the Trust Agreement of the Authority with a financial
institution, the Companies were required to pay monthly dividends to the
Authority in amounts equal to their revenues less current expenses, excluding
depreciation and the Authority's current debt service requirements. Such
dividends were charged against retained earnings to the extent available and any
excess was accounted for as a return of capital to the Authority.
11. SIGNIFICANT EVENT
On September 21, 1998, Puerto Rico was struck by a hurricane which caused
extensive damages to the Island. The effect of the damages on the Companies'
telephone plant and telecommunications services was represented by the book
value of telephone plant destroyed and retired from the books of approximately
$13.6 million, cost of repairs and reconstruction of telephone plant of
approximately $54.0 million, and loss of revenues of approximately $18.6
million. At December 31, 1998, the Companies recorded expenses amounting to
approximately $31.7 million related to the above losses and as other income
amounts received from insurance companies and insurance claims outstanding for
approximately $6.4 million. In addition, the construction program for the year
was reallocated during the last quarter of 1998 to address reconstruction of the
telephone plant and services.
12. CASH FLOW INFORMATION
Noncash operating activities included changes in the accrual of additional
minimum liability amounting to approximately $13,714,000, $4,061,000 and
$3,495,000 as of December 31, 1998, 1997 and 1996, respectively, which had an
effect on deferred pension asset, employee benefit plans liability and
accumulated other comprehensive loss.
13. SALE OF THE COMPANIES
On April 7, 1997, the Governor of Puerto Rico announced the intention of
the Commonwealth of Puerto Rico to sell the Companies. In August 1997, the
Governor signed the legislation approved by the Legislature
F-16
<PAGE> 129
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
of Puerto Rico authorizing a committee to be designated by the Governor to
initiate the process to identify prospective buyers. In May 1998, the Governor
announced that the process had been completed, and that the Companies would be
sold to a consortium led by GTE Corporation. On February 12, 1999, the FCC
approved the sale of the Companies to a subsidiary of GTE Corporation. The
closing of the sale occurred on March 2, 1999 under the following terms:
- An Employee Stock Option Plan ("ESOP") was created, wherein the
Government of Puerto Rico contributed three percent (3%), and a
subsidiary of GTE Corporation and Popular Inc. contributed one percent
(1%) of the stock to the ESOP. The ESOP acquired an additional three
percent (3%) with funds borrowed from Telecomunicaciones de Puerto Rico,
Inc. ("Telpri").
- A subsidiary of GTE Corporation acquired 40.01% plus one share of Telpri
stock and Popular Inc. acquired 9.99% at the date of the closing.
- The Government of Puerto Rico retained forty-three percent (43%) less one
share of the shares of the stock of Telpri.
- The Authority received approximately $2.040 billion from the transaction.
Also, the Authority agreed to contribute cash or stock worth $200 million
over the next five years to cover unfunded pension and other
post-employment benefit obligations. Upon receipt of this contribution,
the Companies will be required to contribute amounts to the plans which
will produce an estimated tax benefit of approximately $128 million.
In addition, effective on the date of the closing the Companies' employees
which participated in the Commonwealth of Puerto Rico Employees' Retirement
System discontinued participating in the plan and became participants of the
Companies' noncontributory defined benefit pension plans.
Effective January 1, 1999, Puerto Rico Telephone Company, which was an
entity incorporated under the laws of the state of Delaware, U.S.A., was
reorganized as a Puerto Rico corporation under the name Puerto Rico Telephone
Company, Inc. On March 1, 1999, the ownership of Puerto Rico Telephone Company,
Inc. and Celulares Telefonica, Inc. was transferred to Telecomunicaciones de
Puerto Rico, Inc., which acquired all of PRTC and CT's stock from Puerto Rico
Telephone Authority.
14. SEGMENT INFORMATION
Effective December 31, 1998, the Companies adopted SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 establishes standards for reporting financial information about operating
segments in complete sets of financial statements.
The Companies have two reportable segments, Wireline and Wireless, in which
the Companies operate and organize their services. The Wireline segment
provides:
- Local service including basic voice, telephone and PBX rental, public
phone services, value-added services, high speed private line services,
Internet access and installations.
- Long distance service both in and off the island. Off-island services
began on February 1, 1999.
- Access service provided to long distance, competitor local exchange
carriers, cellular and paging operators to originate and terminate calls
on its network.
- Directory publishing right revenues and listing fees.
- PBX equipment sales and billing and collection services to competitor
long distance operators in Puerto Rico.
F-17
<PAGE> 130
PUERTO RICO TELEPHONE COMPANY AND CELULARES TELEFONICA, INC.
(PREDECESSORS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Wireless segment includes cellular and paging services and related
equipment sales.
The Companies measure and evaluate the performance of their segments based
on operating income. The accounting policies of the segments are the same as
those described in Note 1. The Companies account for intersegment sales of
products and services at current market prices. Intersegment revenues were not
material in 1998, 1997 and 1996. The Companies are not dependent on any single
customer.
Segment results for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
WIRELINE
Revenues and sales:
Local services............................ $ 467,819 $ 447,338 $ 419,670
Long distance services.................... 251,754 252,259 263,055
Access services........................... 300,448 277,469 257,527
Directory services and other.............. 90,670 99,761 92,444
---------- ---------- ----------
Total................................ $1,110,691 $1,076,827 $1,032,696
========== ========== ==========
Operating income............................. $ 203,137 $ 224,896 $ 103,452
Depreciation and amortization................ 275,005 261,711 240,997
Capital expenditures......................... 250,986 324,231 351,094
Total assets................................. 2,231,822 2,263,672 2,234,567
WIRELESS
Revenues and sales:
Cellular services......................... $ 100,265 $ 102,082 $ 135,101
Paging services........................... 59,728 55,212 33,628
---------- ---------- ----------
Total................................ $ 159,993 $ 157,294 $ 168,729
========== ========== ==========
Operating income............................. $ 24,164 $ 19,655 $ 37,454
Depreciation and amortization................ 21,488 17,487 13,612
Capital expenditures......................... 31,675 30,471 32,587
Total assets................................. 224,782 171,134 153,445
CONSOLIDATED REVENUES AND SALES................ $1,270,684 $1,234,121 $1,201,425
========== ========== ==========
CONSOLIDATED OPERATING INCOME.................. $ 227,301 $ 244,551 $ 140,906
========== ========== ==========
CONSOLIDATED ASSETS............................ $2,456,604 $2,434,806 $2,388,012
========== ========== ==========
</TABLE>
F-18
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Telecomunicaciones de Puerto Rico, Inc:
We have audited the accompanying consolidated balance sheet of
Telecomunicaciones de Puerto Rico, Inc. and subsidiaries (the "Company") as of
June 30, 1999, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity, and cash flows for
the period from March 2, 1999 to June 30, 1999 and the combined balance sheet of
Puerto Rico Telephone Company, Inc. and Celulares Telefonica, Inc. (the
"Predecessors") as of December 31, 1998 and their combined statements of
operations, comprehensive income (loss), changes in shareholder's equity and
cash flows for the period from January 1, 1999 to March 1, 1999. These financial
statements are the responsibility of the management of the Company and the
Predecessors. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Telecomunicaciones de Puerto
Rico, Inc. and subsidiaries as of June 30, 1999 and the consolidated results of
their operations and their cash flows for the period from March 2, 1999 to June
30, 1999, and the combined financial position of Puerto Rico Telephone Company,
Inc. and Celulares Telefonica, Inc. as of December 31, 1998 and their combined
results of operations and cash flows for the period from January 1, 1999 to
March 1, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Juan, Puerto Rico
October 7, 1999
F-19
<PAGE> 132
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
------------- ------------
JUNE 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 63,711 $ 35,611
Accounts receivable, net of allowance for doubtful
accounts of $60,227 and $56,003 in 1999 and 1998,
respectively........................................... 357,781 365,137
Inventory and supplies.................................... 33,450 28,117
Prepaid expenses.......................................... 14,015 6,491
---------- ----------
Total current assets.............................. 468,957 435,356
PROPERTY, PLANT AND EQUIPMENT, Net.......................... 1,730,708 1,987,901
INTANGIBLES, Net............................................ 295,712 21,664
DEFERRED INCOME TAX......................................... 202,068 --
OTHER ASSETS................................................ 16,295 11,683
---------- ----------
TOTAL....................................................... $2,713,740 $2,456,604
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................................... $ 26,263 $ 235
Accounts payable and accrued expenses..................... 279,797 286,513
Compensated absences and other liabilities................ 64,521 60,480
---------- ----------
Total current liabilities......................... 370,581 347,228
LONG-TERM DEBT, excluding current portion................... 1,500,226 515
CUSTOMERS' DEPOSITS......................................... 42,475 41,437
EMPLOYEE BENEFIT PLANS LIABILITY............................ 323,042 221,085
OTHER NON-CURRENT LIABILITIES............................... 24,698 33,655
---------- ----------
Total liabilities................................. 2,261,022 643,920
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.............................................. 10 6
Additional paid-in capital................................ 699,274 1,835,800
Deferred ESOP compensation................................ (34,800) --
Subscription receivable................................... (161,808) --
Retained earnings (deficit)............................... (40,055) --
Accumulated other comprehensive loss...................... (9,903) (23,122)
---------- ----------
Total shareholders' equity.................................. 452,718 1,812,684
---------- ----------
TOTAL....................................................... $2,713,740 $2,456,604
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 133
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
-------- --------------------------
FOR THE 1999 PERIOD
--------------------- FOR THE SIX
MARCH 2 JANUARY 1 MONTHS ENDED
THROUGH THROUGH JUNE 30, 1998
JUNE 30, MARCH 1, (UNAUDITED)
-------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES AND SALES:
Local services........................................ $160,612 $ 80,196 $238,454
Long distance services................................ 73,971 48,613 125,564
Access services....................................... 119,147 49,517 149,861
Cellular services..................................... 44,226 20,541 48,192
Paging services....................................... 16,659 8,202 30,808
Directory services.................................... 13,131 6,726 18,547
Other services and sales.............................. 19,237 9,505 27,599
-------- -------- --------
Total revenues and sales...................... 446,983 223,300 639,025
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of services and sales............................ 179,518 91,723 236,904
Selling, general and administrative................... 107,756 49,983 122,078
ESOP compensation expense............................. 26,100
Effect of early retirement............................ 4,226
Depreciation and amortization......................... 99,484 50,393 145,687
-------- -------- --------
Total operating costs and expenses............ 386,758 222,425 504,669
-------- -------- --------
OPERATING INCOME........................................ 60,225 875 134,356
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income (expense), net........................ (29,336) 407 1,715
Other income (expense), net........................... 1,285 569 (129)
-------- -------- --------
Total other income (expense), net............. (28,051) 976 1,586
-------- -------- --------
INCOME BEFORE INCOME TAX................................ 32,174 1,851 135,942
INCOME TAX.............................................. 11,729 -- --
-------- -------- --------
INCOME BEFORE EXTRAORDINARY CHARGE...................... 20,445 1,851 135,942
EXTRAORDINARY CHARGE-DISCONTINUANCE OF
REGULATORY ACCOUNTING, net of income tax benefit of
$38,750............................................... (60,500) -- --
-------- -------- --------
NET INCOME (LOSS)....................................... $(40,055) $ 1,851 $135,942
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE> 134
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
-------- ---------------------------
FOR THE 1999 PERIOD
---------------------- FOR THE SIX
MARCH 2 JANUARY 1 MONTHS ENDED
THROUGH THROUGH JUNE 30, 1998
JUNE 30, MARCH 1, (UNAUDITED)
-------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME (LOSS)........................................ $(40,055) $ 1,851 $135,942
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustment................... -- (2,369) 3,344
-------- ------- --------
COMPREHENSIVE INCOME (LOSS).............................. $(40,055) $ (518) $139,286
======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 135
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DEFERRED RETAINED OTHER
COMMON PAID-IN ESOP SUBSCRIPTION EARNINGS COMPREHENSIVE
STOCK CAPITAL COMPENSATION RECEIVABLE (DEFICIT) LOSS TOTAL
------ ----------- ------------ ------------ --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSORS (COMBINED):
BALANCE, DECEMBER 31, 1998......... $ 6 $ 1,835,800 $ -- $ -- $ -- $(23,122) $ 1,812,684
Net income, January 1, 1999 to
March 1, 1999.................. 1,851 1,851
Capital contributions............ 110,577 110,577
Special dividend................. (1,570,182) (1,570,182)
Dividends and return of
capital........................ (98,811) (1,851) (100,662)
Minimum pension liability
adjustment..................... 2,369 2,369
Shares of common stock
contributed to the ESOP........ 26,100 (26,100) -- -- -- --
--- ----------- -------- --------- --------- -------- -----------
PREDECESSOR
BALANCE, MARCH 1, 1999............. $ 6 $ 303,484 $(26,100) $ -- $ -- $(20,753) $ 256,637
=== =========== ======== ========= ========= ======== ===========
COMPANY:
BALANCE, MARCH 1, 1999............. $-- $ -- $ -- $ -- $ -- $ -- $ --
Acquisition by GTE and Popular
Inc. and partial step-up
accounting..................... 10 530,866 (26,100) (9,903) 494,873
ESOP contribution................ 8,700 (8,700)
Contribution receivable from
PRTA........................... 159,708 (159,708)
Accretion of discount on
subscription receivable........ (2,100) (2,100)
Net loss, March 2, 1999 to June
30, 1999....................... (40,055) (40,055)
--- ----------- -------- --------- --------- -------- -----------
BALANCE, JUNE 30, 1999............. $10 $ 699,274 $(34,800) $(161,808) $ (40,055) $ (9,903) $ 452,718
=== =========== ======== ========= ========= ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE> 136
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
----------- -------------------------------
FOR THE 1999 PERIOD FOR THE SIX
---------------------------- MONTHS
MARCH 2, JANUARY 1 ENDED JUNE 30,
THROUGH THROUGH 1998
JUNE 30, MARCH 1, (UNAUDITED)
----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (40,055) $ 1,851 $ 135,942
Adjustments to reconcile net income (loss)to net cash
provided by operating activities:
Extraordinary charge................................ 60,500
Depreciation and amortization....................... 99,484 50,393 145,687
Accretion of discount on subscription receivable
discounted....................................... (2,100)
Deferred income tax................................. 11,729
Compensation expense resulting from the contribution
of shares by PRTA to the ESOP.................... 26,100
Changes in assets and liabilities:
Accounts receivable.............................. 12,556 (14,496) (16,523)
Inventory and supplies........................... (4,027) (1,306) 2,714
Prepaid expenses................................. (8,196) 672 1,793
Other assets..................................... (6,558) 1,702 636
Accounts payable and accrued expenses, employee
benefit plans, compensated absences and other
liabilities, customers' deposits and other
liabilities.................................... 483 (9,059) 2,547
----------- ----------- ---------
Net cash provided by operating activities...... 123,816 55,857 272,796
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of telephone plant,
including cost of removal........................... (71,072) (33,237) (110,621)
Net salvage on retirements............................ 3,995 73 4,560
----------- ----------- ---------
Net cash used in investing activities.......... (67,077) (33,164) (106,061)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................. 110,577 106,639
Dividends and return of capital paid.................. (83,116) (273,132)
Deferred ESOP contribution............................ (26,100)
Net borrowings under line-of-credit agreement and
proceeds from issuance of long-term debt............ 1,034,711 1,583,044
Special dividend paid to PRTA......................... (1,570,182)
Payments of principal on debt and capital lease
obligations......................................... (1,100,266) (357)
----------- ----------- ---------
Net cash provided by (used in) financing
activities................................... (65,555) 14,223 (166,850)
----------- ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (8,816) 36,916 (115)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 72,527 35,611 21,254
----------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 63,711 $ 72,527 $ 21,139
=========== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 137
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998
1. THE ACQUISITION, RELATED CORPORATE RESTRUCTURING AND CHANGE TO ACCOUNTING
BASIS
THE ACQUISITION AND CORPORATE RESTRUCTURING
On April 7, 1997, the Government of the Commonwealth of Puerto Rico (the
"Government of Puerto Rico") announced a plan, which would result in the
privatization of the Puerto Rico Telephone Company, Inc. ("PRTC") and Celulares
Telefonica, Inc. ("CT"), through a competitive bidding process. On July 21,
1998, after the conclusion of the bidding process, a consortium led by GTE
Corporation (the "GTE Group") was awarded the right to purchase a controlling
interest in Telecomunicaciones de Puerto Rico, Inc. (the "Company" or the
"Successor") (the "Acquisition") and entered into a purchase agreement. Under
the provisions of the Acquisition agreement, the Company, a Puerto Rico
corporation, was utilized for the purpose of acquiring the stock of PRTC and CT
from the Puerto Rico Telephone Authority ("PRTA") in connection with the
privatization. On March 1, 1999, pursuant to the terms of the Acquisition
agreement, the Company acquired 100% of the common stock of PRTC and CT (the
"Predecessors"). Prior to the Acquisition of the Predecessors, the Company had
no operations, nor assets and liabilities, and operated as a holding company
formed in connection with the efforts to privatize the Predecessors and to
consummate the sale of an interest in the Predecessors to the GTE Group under
the Acquisition agreement.
Just prior to the closing of the acquisition, the Puerto Rico Telephone
Authority received approximately $2.040 billion as part of the acquisition. A
portion of this amount was paid in the form of a special dividend amounting to
approximately $1.570 billion.
The closing of the sale occurred on March 2, 1999, under the following
terms:
- A subsidiary of GTE Corporation (member of the GTE Group) acquired 40.01%
plus one share of the Company stock and Popular Inc. (Popular) acquired
9.99%.
- The Government of Puerto Rico obtained a forty-three percent (43%)
interest less one share in the shares of the stock of the Company in
exchange for its remaining interests in PRTC and CT. In the Acquisition
agreements, PRTA agreed to contribute cash or stock worth a total of $200
million as a capital contribution in even installments over five years
beginning on March 2, 1999. The Company will use the $200 million to fund
its unfunded pension and other post-employment benefit obligations. The
contribution must be in cash for the first two installments and cash or
stock of the Company for the last three installments. The future receipts
have been recorded at their discounted present value of $159.7 million
(at a 8% discount rate).
In conjunction with the Acquisition, PRTA contributed 3% of the Company's
shares to the Company's newly created employee stock ownership plan (the
"ESOP"), and the GTE Group purchased an additional 1% of the Company's shares
from the PRTA and contributed them to the ESOP. The ESOP also acquired an
additional 3% with funds borrowed from the Company.
PARTIAL STEP-UP IN ACCOUNTING BASIS
The Acquisition was accounted for following the applicable accounting rules
governing partial step-up in accounting basis under the Accounting Principles
Board Opinion (APB) No. 16, Business Combinations and EITF 88-16 "Basis in
Leveraged Buyout Transactions", for financial reporting purposes. The
Acquisition resulted in a purchase of 100% of the common stock of PRTC and CT by
the Company, a purchase of a controlling interest in the Company by a new group
of controlling investors with the shareholders of the Predecessors maintaining
only a minority interest in the new company. Under the provisions of EITF 88-16,
a partial change in the basis of assets and liabilities recorded based on the
higher fair market value paid by the GTE Group and Popular for their investment
in the transaction is required using a partial step-up in basis as
F-25
<PAGE> 138
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required under purchase accounting. Partial step-up accounting records a portion
of the assets and liabilities of the Company at the amounts paid by the GTE
Group. The application of partial step-up accounting results in an increase in
book value of the Company as the GTE Group and Popular paid fair market value
for their interests which exceeded prior recorded book values. In accordance
with EITF 88-16, the equity interests of PRTA exchanged for their investment in
the Predecessors were recorded at prior book value amounts.
The excess of the purchase price over the basis in the assets and
liabilities of the Company has been allocated to the net assets acquired on a
preliminary basis reflecting the 50% interest acquired by the GTE Group and
Popular as follows (amounts in thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $ 268,006
Deferred tax assets......................................... 171,356
Property, plant and equipment............................... (99,250)
Employee benefit plan liabilities........................... (116,426)
Other intangibles........................................... 3,700
---------
Total increase in paid-in capital........................... $ 227,386
=========
</TABLE>
These adjustments consider the effect of the change in the status of the
Company as a tax paying enterprise after March 2, 1999, as required by the
provisions of SFAS No. 109, Accounting for Income Taxes. The Company has made an
estimate of the allocation of the purchase price based upon an estimate of the
tax basis of the assets and liabilities that will be established with the Puerto
Rico Treasury Department. The Company intends to finalize the purchase price
allocation upon final determination of the tax basis of the assets and
liabilities for income tax purposes and other adjustments that may be required
by the end of the year. The deferred tax asset will be reduced in the future as
the tax benefits associated with the increase in the tax basis of the Company's
assets are realized through its payment of reduced income taxes.
DISCONTINUATION OF SFAS NO. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF
REGULATION
During 1996, the Government of the Commonwealth of Puerto Rico enacted the
Telecommunications Act of 1996 (the "Puerto Rico Act") which began a process to
open the local telecommunications market in Puerto Rico to competition. This
process resulted in the PRTA's decision to privatize the local exchange
telephone operations of the Predecessors through its acquisition by the GTE
Group and Popular Inc.
Prior to the Acquisition, PRTC's rates were regulated based upon rate of
return/cost of service regulation. The entity was also entitled to cost support
from subsidy pools administered by the National Exchange Carrier Association
("NECA") for operation in high cost regions. As a rate of return carrier, PRTC
was permitted to charge prices sufficient to cover its costs and provide the
entity with a permitted annual rate of return of up to 11.5%. The high cost
support subsidies provided the PRTC with the funds which assisted it in
achieving the 11.5% rate of return. After the Acquisition, PRTC, as an indirect
subsidiary of GTE, will be considered a price cap carrier. As a price cap
carrier, the PRTC's prices, rather than its costs and earnings, will be
regulated. The PRTC must exit the long-term support payment pool in the first
half of 2000 and implement a price cap mechanism related to the recovery of
common carrier line costs. When PRTC exits the long-term support pool, it will
be able to charge inter-exchange carriers a pre-subscribed inter-exchange common
carrier line charge ("PICC") which is assessed on an access line basis for
interconnection to the Company's local network. The PRTC estimates that the
annualized pre-tax loss in long term support will be approximately $58 million.
Competition will result in prices charged based upon market forces and not
PRTC's cost of providing customer service.
In addition to the opening of its markets to competitive entry and the
changes to the regulatory provisions for setting rates, PRTC also terminated, in
anticipation of the Acquisition, a mutual noncompete agreement
F-26
<PAGE> 139
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with Telefonica Larga Distancia (TLD), a provider of international long distance
services to Puerto Rico. The agreement had prohibited PRTC from providing
international long distance telephone service and had prohibited TLD from
providing local exchange telephone service in Puerto Rico. In addition, on
February 1, 1999, the requirement for customers of competitors to dial an access
code has been eliminated with the implementation of equal access dialing as
mandated by the FCC. These actions, along with entrance into the market place of
other competitors, will significantly increase competition in the future. PRTC
also agreed not to increase prices for basic wireline services for three years
as a condition in the Acquisition agreement.
As a result of the changes in the regulation of PRTC's rates, the
competitive environment and the terms of the Acquisition, PRTC has determined
that regulatory accounting principles as set forth in SFAS No. 71 are no longer
applicable to its operations. Accordingly, it has discontinued the application
of SFAS No. 71 in conformance with SFAS No. 101. In general, SFAS No. 71
required the Company to depreciate their telephone plant and equipment over
lives approved by the regulator that, in many cases, extended beyond the assets'
economic lives. SFAS No. 71 also required the deferral of certain costs based
upon approvals received from regulators to recover such costs in the future. As
a result of these requirements, the recorded net book value of the Company's
assets, primarily telephone plant and equipment, were in many cases higher than
that which would otherwise have been recorded had depreciation expense been
based on their economic lives. As a result of the decision to discontinue SFAS
No. 71, an assessment of the cost of property, plant and equipment that will not
be realized based on an analysis of the cash flows expected to be generated by
the telephone plant and equipment over their remaining economic lives
established in light of competitive trends and technology replacement by PRTC
has resulted in the write-down of plant and equipment in the amount of $198.5
million. A proportionate amount of this adjustment (approximately $99.2 million)
has been accounted for as a purchase price adjustment in accordance with the
provisions of partial step-up accounting to reflect the fair market values of
the assets acquired on March 2, 1999, as prescribed by EITF 88-16. The remaining
$99.2 million was recorded as an extraordinary charge in the accompanying
consolidated statements of operations ($60.5 million after tax). The Company has
shortened the depreciable lives of its telephone plant and equipment, as set
forth below, to reflect the estimated changes in economic lives experienced due
to the introduction of competition and changes in telecommunications technology.
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES IN YEARS
---------------
ASSET CATEGORY BEFORE AFTER
- -------------- ------ -----
<S> <C> <C>
Digital Switching Equipment................................. 17.2 11.5
Digital Circuit Equipment................................... 12.7 8.4
Underground Cable........................................... 25.9 15.2
Buried Cable................................................ 23.9 14.5
Other....................................................... 6.3 3.8
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Predecessors for the two-month
period ended March 1, 1999, the six-month period ended June 30, 1998, and as of
December 31, 1998, reflect the historical cost of its assets and liabilities and
results of its operations prior to completion of the Acquisition and are
referred to as the Predecessors' combined financial statements. Accordingly, the
accompanying financial statements of the Predecessors and the Company are not
comparable in all material respects, since the Company's financial statements
report financial position, results of operations, and cash flows using a new
accounting basis. PRTC and CT are wholly owned subsidiaries of the Company which
have guaranteed payment on the senior notes on a full and unconditional basis,
as set forth in the Indenture pursuant to which the senior notes were issued.
F-27
<PAGE> 140
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate financial statements for PRTC and CT have not been included because the
aggregate net assets, earnings and equity of PRTC and CT are substantially
equivalent to the aggregate net assets, earnings and equity of the Company on a
consolidated basis. Management of the Company believes that separate financial
statements and other disclosures concerning PRTC and CT are not material to
investors. In addition, the Company's only other subsidiary, Puerto Rico
Telephone Directories, Inc. (which is not a guarantor of the senior notes) is
inconsequential to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after the elimination of significant
intercompany transactions and balances.
The financial statements of the Predecessors include the combined accounts
of PRTC and CT after the elimination of all significant transactions between
these two companies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the original cost of acquisition
or construction. Maintenance, repairs and the cost of removal of minor items of
property are charged to expense. Replacements of major items of property are
charged to the plant accounts. Property retired or otherwise disposed of in the
ordinary course of business, together with the cost of removal, less salvage, is
charged to accumulated depreciation with no gain or loss recognized.
Depreciation and amortization is computed on the straight-line method at rates
considered adequate to allocate the cost of the various classes of property over
their estimated economic service lives.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenues are generally recognized when services are rendered or products
are delivered to customers.
Long distance and access services revenues are derived from long distance
calls within Puerto Rico, carrier charges for access to the local exchange
network, subscriber line charges and other services offered to the long distance
carriers under contractual arrangements. Carrier Common Line access services
revenues are generated based on the participation by the Companies in revenue
pools with other telephone companies managed by NECA, which are funded by access
charges authorized by the Federal Communications Commission ("FCC") and
long-term support amounts received from the Universal Service Fund. Such pooled
amounts are subsequently divided among the various telephone companies based
upon their respective estimated allocations of costs and investments in
providing interstate services.
F-28
<PAGE> 141
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues generated from access services and certain other long distance
services have been determined from preliminary allocations and cost studies and
are subject to final settlements in subsequent periods.
Toll services provided from overseas long distance telecommunications
services are recognized when earned regardless of the period in which they are
billed to the customer.
Revenues for installation fees are recognized as earned.
Other revenues include services generated based on independent agreements
with long distance carriers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is an amount that management believes
will be adequate to absorb possible losses on existing receivables that may
become uncollectible based on evaluations of the collectibility of the
receivables and prior loss experience. Because of uncertainties inherent in the
estimation process, management's estimate of losses in the receivables
outstanding and the related allowance may change in the near term.
INVENTORY AND SUPPLIES
Inventory and supplies are stated at average cost net of reserves for
obsolescence.
INTANGIBLE ASSETS
Goodwill represents the excess of the amounts paid by GTE and Popular over
the fair value of net tangible and specifically identifiable intangible assets
of that portion of the Company acquired for which partial step-up accounting was
applied. Goodwill is being amortized on the straight-line method over a period
of 40 years. The cellular customer base is being amortized over a period of
approximately three years to reflect the period over which revenue is expected
to be generated by customers acquired as of the acquisition date. The Company
monitors the loss of cellular subscribers due to attrition and plans to adjust
amortization if changes in attrition rates are experienced.
EMPLOYEE BENEFIT PLANS
Pension and post-retirement health care and life insurance benefits earned
as well as interest on projected benefit obligations are accrued currently.
Prior service costs and credits resulting from changes in plan benefits are
amortized over the average remaining service period of the employees expected to
receive the benefits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable approximate fair
value due to their short-term duration. The carrying value of short-term and
long term debt approximates fair value.
VALUATION OF ASSETS
The impairment of tangible and intangible assets is assessed when changes
in circumstances indicate that their carrying value may not be recoverable.
Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is
made based on estimated future cash flows, salvage value or expected net sales
proceeds depending on the circumstances. In circumstances where this assessment
indicates that impairment exists, a loss is recognized for the amount by which
the carrying value of the assets exceeds their fair value. Fair value is
determined based on quoted market prices or other pertinent information when
quoted market prices are not available.
F-29
<PAGE> 142
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In instances where goodwill has been recorded in connection with impaired
assets, the carrying amount of the goodwill would first be eliminated before any
reduction to the carrying value of tangible or identifiable intangible assets
would occur. The Company's policy is to record asset impairment losses, and any
subsequent adjustments to such losses as initially recorded, as well as net
gains or losses on sales of assets as a component of operating income. Under
Accounting Principles Board Opinion No. 17, "Intangible Assets," the Company
also annually evaluates the future period over which the benefit of goodwill
will be recovered, based on future cash flows, and changes the amortization life
accordingly.
INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the way certain income and expense items are reported for
financial reporting and tax purposes. Deferred tax assets and liabilities are
subsequently adjusted, to the extent necessary, to reflect tax rates expected to
be in effect when the temporary differences reverse. A valuation allowance is
established for deferred tax assets for which realization is not likely.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Under the provisions of this
SOP, effective January 1, 1999, the Company is required to capitalize and
amortize the cost of all internal-use software expenditures. Implementation of
this statement does not have a material effect on results of operations.
In June 1998, the Financial Accounting Standard Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires entities that use derivative
instruments to measure these instruments at fair value and record them as assets
or liabilities on the balance sheet. It also requires entities to reflect the
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, as amended by SFAS No.
137, which is now effective January 1, 2001.
3. PRO FORMA INFORMATION
The following unaudited pro forma condensed consolidated financial
information was prepared assuming the acquisitions of PRTC and CT and the sale
of the interests to the GTE Group took place on January 1, 1998.
Pro forma information is presented for comparative purposes only and does
not purport to be indicative of the results which would have been achieved had
this acquisition occurred as of January 1, 1998, nor does it purport to be
indicative of the results that may be achieved in the future.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1999 1998
-------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Total revenues and sales.................................. $635,283 $1,200,684
Income (loss) before income tax........................... $(32,307) $ (46,454)
Income (loss) before extraordinary charge................. $(19,754) $ (28,337)
</TABLE>
F-30
<PAGE> 143
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts reflect the inclusion in expenses of pro forma
adjustments for interest expense, property, municipal and unemployment taxes,
management and technology fees and amortization expense.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Land....................................................... $ 26,887 $ 26,871
Buildings.................................................. 275,087 315,867
Central office and transmission equipment.................. 781,930 1,004,347
Outside plant.............................................. 1,316,801 1,733,846
Other equipment............................................ 196,023 359,282
---------- ----------
Total plant in service..................................... 2,596,728 3,440,213
Less accumulated depreciation and amortization............. 1,000,385 1,701,288
---------- ----------
Net plant in service....................................... 1,596,343 1,738,925
Construction in progress................................... 134,365 248,976
---------- ----------
Total...................................................... $1,730,708 $1,987,901
========== ==========
</TABLE>
Fifty percent of the accumulated depreciation balance was adjusted based on
the revaluation of the original cost balances of property, plant and equipment,
as a part of partial step-up accounting as required by EITF 90-12, Allocating
Basis to Individual Assets and Liabilities for Transactions Within the Scope of
Issue No. 88-16.
F-31
<PAGE> 144
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLES
Intangibles consist of:
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $268,006 $ --
Customer base............................................... 18,200 --
Deferred pension asset...................................... 14,017 21,664
-------- -------
Total gross cost.................................. 300,223 21,664
Less accumulated amortization............................... 4,511 --
-------- -------
Total............................................. $295,712 $21,664
======== =======
</TABLE>
6. PENSION PLANS
The Company has two separate noncontributory defined benefit pension plans
covering substantially all of its salaried and hourly employees. The Company's
funding policy for these plans is to make annual contributions as required by
applicable regulations. Contributions are intended to provide not only for
benefits attributed to service to data, but also for those expected to be earned
in the future. Plan assets are invested in equity and government securities and
in other instruments.
All salaried and hourly employees of the Company participate in the Puerto
Rico Telephone Company Lump Sum Retirement Plan (the "Lump Sum Plan").
Participants are entitled to a lump sum amount equal to a specified number of
months of the employee's earnings. The specified number of months is determined
based on the employees' years of service. The Lump Sum Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974, and is
qualified under the Puerto Rico Internal Revenue Code; accordingly, the Lump Sum
Plan is exempt from income tax in Puerto Rico.
The Company provides certain health care and life insurance benefits for
retired employees. Substantially all of the employees may become eligible for
those benefits if they reach normal retirement age while working for the
Company.
F-32
<PAGE> 145
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the status of the plans, the actuarial
assumptions and the amounts in the Company's consolidated balance sheets as of
June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
PENSION AND LUMP OTHER
SUM BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- ---------------------------------------
FOR THE 1999 PERIOD FOR THE 1999 PERIOD
------------------------ ------------------------
PREDECESSORS PREDECESSORS
COMPANY (COMBINED) PREDECESSORS COMPANY (COMBINED) PREDECESSORS
--------- ------------ FOR THE YEAR --------- ------------ FOR THE YEAR
MARCH 2 JANUARY 1 ENDED MARCH 2 JANUARY 1 ENDED
THROUGH THROUGH DECEMBER 31, THROUGH THROUGH DECEMBER 31,
JUNE 30 MARCH 1 1998 JUNE 30 MARCH 1 1998
--------- ------------ ------------ --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning
of period.................... $ 767,862 $ 761,186 $ 617,694 $ 179,041 $ 177,446 $ 132,340
Service cost.................... 7,486 3,663 17,795 1,735 849 3,981
Interest cost................... 17,840 8,830 48,640 4,160 2,059 11,404
Amendments...................... -- -- -- -- -- --
Actuarial loss (gain)........... 2,834 258 114,131 37,276
Benefits paid................... (14,464) (6,075) (37,074) (2,627) (1,313) (7,555)
--------- --------- --------- --------- --------- ---------
Benefit obligation at end of
period....................... 781,558 767,862 761,186 182,309 179,041 177,446
--------- --------- --------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at
beginning of period.......... 515,456 505,681 426,528 -- -- --
Actual return on plan assets.... 23,696 7,846 74,559 -- -- --
Employer contributions.......... 11,874 6,004 41,668 -- -- --
Benefits paid................... (14,464) (6,075) (37,074) -- -- --
--------- --------- --------- --------- --------- ---------
Fair value of plan assets at end
of period.................... 534,562 513,456 505,681 -- -- --
--------- --------- --------- --------- --------- ---------
Funded status..................... (246,996) (254,406) (255,505) (182,309) (179,041) (177,446)
Unrecognized (gain) loss.......... 52,944 107,362 107,742 14,247 26,512 26,657
Unrecognized prior service cost... 16,822 32,667 33,519 8,548 16,350 16,649
Unrecognized net transition
obligation...................... 4,764 9,193 9,407 32,858 61,944 62,678
--------- --------- --------- --------- --------- ---------
Net amount recognized............. $(172,466) $(105,184) $(104,837) $(126,656) $ (74,235) $ (71,462)
========= ========= ========= ========= ========= =========
Amounts recognized in the balance
sheets consist of:
Accrued benefit liability....... $(196,386) $(140,317) $(149,623) $(126,656) $ (74,235) $ (71,462)
Intangible asset (Note 5)....... 14,017 22,965 21,664 -- --
Accumulated other comprehensive
loss......................... 9,903 12,168 23,122 -- --
--------- --------- --------- --------- --------- ---------
Net amount recognized............. $(172,466) $(105,184) $(104,837) $(126,656) $ (74,235) $ (71,462)
========= ========= ========= ========= ========= =========
</TABLE>
F-33
<PAGE> 146
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION AND OTHER
LUMP POSTRETIREMENT
SUM BENEFITS BENEFITS
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
<S> <C> <C> <C> <C>
Weighted-average assumptions as of the end of each
period:
Discount rate............................................ 7% 7% 7% 7%
Rate of compensation increase............................ 6% 6% 6% 6%
Expected return on plan assets........................... 9% 9% n/a n/a
</TABLE>
The assumed health-care cost trend rate used for the six months ended June
30, 1999 and December 31, 1998 was 7%.
In accordance with the provisions of SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, the Company was required to record an additional minimum pension
liability at December 31, 1998. This amount represents the excess of the
accumulated benefit obligations over the fair value of plan assets and accrued
pension liabilities. The liabilities have been offset by intangible assets to
the extent possible. Because the asset recognized may not exceed the amount of
unrecognized prior service cost, the balance of the liability at the end of each
period is reported as a separate reduction to shareholders' equity (Accumulated
Other Comprehensive Loss).
See Note 8 for a description of the Authority's commitment to contribute
$200 million over five years to cover unfunded pension and other post-employment
benefit obligations.
The net periodic pension cost for the six months ended June 30, 1999
includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION AND LUMP POST RETIREMENT
SUM BENEFITS BENEFITS
----------------------- ----------------------
FOR THE 1999 PERIOD FOR THE 1999 PERIOD
----------------------- ----------------------
PREDECESSORS PREDECESSORS
COMPANY (COMBINED) COMPANY (COMBINED)
-------- ------------ ------- ------------
MARCH 2 JANUARY 1 MARCH 2 JANUARY 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30 MARCH 1 JUNE 30 MARCH 1
-------- ------------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost................................................ $ 7,486 $ 3,663 $1,735 $ 849
Interest cost............................................... 17,840 8,830 4,160 2,059
Expected return on plan assets.............................. (15,389) (7,588) -- --
Net amortization and deferral............................... 1,444 1,446 1,180 1,176
Effect of early retirement program.......................... -- -- -- --
-------- ------- ------ ------
Net periodic pension cost................................... $ 11,381 $ 6,351 $7,075 $4,084
======== ======= ====== ======
</TABLE>
PUERTO RICO EMPLOYEES' RETIREMENT SYSTEM
Some of the predecessor company's employees (the former employees of Puerto
Rico Communications Corporation, which was merged with PRTC on May 4, 1994)
participated in the Commonwealth of Puerto Rico Employees' Retirement System
(the "System"), a cost-sharing multiple-employer retirement system.
The Company was required to contribute 9.275% of the employees' salaries.
Total employee and employer contributions for the predecessors during the period
January 1 through March 1, 1999 amounted to approximately $225,453 and $269,326,
respectively. These employees transferred to the successor Companies' pension
plans on March 2, 1999.
F-34
<PAGE> 147
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
---------- ------------
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Senior notes payable, due in various dates through 2009;
interest payable semiannually at interest rates varying
from 6.15% to 6.80% (net of discount).................... $ 999,711 $ --
Notes payable to banks under credit facilities, due March
2, 2004.................................................. 500,000
Working capital facility, due March 2, 2000................ 26,100
Other debt, obligations under capital leases............... 678 750
---------- --------
Total...................................................... 1,526,489 750
Less short-term debt....................................... 26,263 235
---------- --------
Long-term debt, net........................................ $1,500,226 $ 515
========== ========
</TABLE>
The Company issued senior notes dated May 20, 1999 that have the following
terms: $300,000,000 at 6.15% due in 2002, $400,000,000 at 6.65% due in 2006 and
$300,000,000 at 6.80% due in 2009, all of which are fully and unconditionally
guaranteed by PRTC and CT. Notes payable to banks consist of a $500 million
syndicated five-year revolving credit facility with a prepayment at the option
of the Company in minimum aggregate amounts of $10,000,000. Notes payable bear
interest of LIBOR plus .725%, approximately 5.725% at June 30, 1999.
The Company has a working capital facility totaling $200 million of which
approximately $174 million was available as of June 30, 1999. This working
capital facility provides for borrowings at LIBOR plus .925% (approximately
5.869% at June 30, 1999), is reviewed annually for renewal and may be used on
such terms as the Company and the bank granting the facility mutually agree.
This working capital credit facility does not require compensating balances.
All of the debt is unsecured and non-amortizing. The approximate aggregate
maturities of long-term debt, excluding obligations under capital leases, for
the next five fiscal years and thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2000................................................... $ --
2001................................................... --
2002................................................... 300,000
2003................................................... --
2004................................................... 500,000
Thereafter............................................. 700,000
----------
Total.......................................... $1,500,000
==========
</TABLE>
F-35
<PAGE> 148
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY
COMMON STOCK
The authorized common stock of the Company at June 30, 1999, consisted of
10,000,000 shares with a par value of $.01 per share, of which 1,000,000 shares
have been issued and are outstanding.
The authorized common stock of PRTC at December 31, 1998 consisted of 1,000
shares with a par value of $10 per share, of which 589 shares were issued and
outstanding. The authorized common stock of CT consisted of 10,000 no par value
shares, unissued at December 31, 1998.
ADDITIONAL PAID IN CAPITAL
Prior to the Acquisition, PRTC paid a cash dividend to PRTA in an amount
equal to its net income plus amortization and depreciation. Also a special
dividend amounting to $1.570 billion from additional paid in capital was paid to
PRTA just prior to the Acquisition. In connection with the Acquisition, the
Company's shareholders agreed that the common shares will bear a dividend,
payable on a quarterly basis, to the extent funds are legally available, and
subject to any restrictions imposed by any financing, that is at least equal to
50% of the consolidated net income. The indenture for the old notes and the
exchange notes and the credit facilities do not contain dividend restrictions.
DEFERRED ESOP COMPENSATION
An Employee Stock Option Plan ("ESOP") was created, wherein PRTA
contributed 3% and a subsidiary of GTE Corporation and Popular, Inc. contributed
1% of the Company's stock to the ESOP. The ESOP acquired an additional 3% with
funds borrowed from the Company. The contribution by PRTA vested at
contribution. The contributions made by GTE and Popular, and funded with
borrowings, vest over future periods.
SUBSCRIPTION RECEIVABLE
The subscription receivable reflects future receipts at their discounted
present value (at a 8% discount rate) of the amount to be contributed by PRTA in
even installments over five years in exchange for its equity interest to be used
to reduce unfunded pension and other post-employment benefit obligations.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss represents the excess of the
accumulated benefit obligations over the fair value of plan assets and accrued
pension liabilities.
9. INCOME TAXES
PRTC and CT were wholly owned subsidiaries of PRTA until March 1, 1999. The
act authorizing the creation of PRTA exempts PRTA and its formerly wholly owned
subsidiaries from all taxes levied on their properties or revenues by the
Government of Puerto Rico and its municipalities. Therefore, the Predecessors
were exempt from income, property, municipal gross receipts, and other taxes in
Puerto Rico until March 2, 1999, as all taxes and payments in lieu of taxes were
the responsibility of PRTA.
Effective March 2, 1999, due to the change in control brought about by the
Acquisition and under the provisions of the 1994 Puerto Rico Internal Revenue
Code, as amended, (the "Code"), the Company is subject to a regular or
alternative minimum tax ("AMT"). The Code imposes an AMT of 22% on regular
taxable income after adjustment for certain preference items. The income tax
liability is the greater of the tax computed under the regular tax or the AMT.
An AMT credit is generated for income taxes paid on an AMT
F-36
<PAGE> 149
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis in excess of the regular tax and may be claimed in future years to the
extent the regular tax exceeds the AMT.
The provision for income tax is determined based on applying a statutory
tax rate of 39% to pretax income. During the period from March 2, 1999 through
June 30, 1999, the Company recorded deferred income tax expense of $11,729,000.
The components of the provision for the income tax expense are as set forth
below (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
Current.......................................... $ -- $ --
Deferred......................................... 11,729 --
------- -------
Total.................................. $11,729 $ --
======= =======
</TABLE>
The amount of deferred tax assets as of June 30, 1999, which are all
non-current in nature, were as follows (amounts in thousands):
<TABLE>
<S> <C>
Goodwill.................................................. $ 71,491
Customer base intangible.................................. 7,529
Employee benefit plan liabilities......................... 120,682
Other items............................................... 2,366
--------
Total........................................... $202,068
========
</TABLE>
The above deferred tax asset will decrease in the future as associated tax
benefits are used to offset future taxable income. Management believes that the
realization of the recognized deferred tax asset is more likely than not, based
on expectations as to future taxable income. Consequently, no valuation
allowance against the deferred tax asset was recorded as of June 30, 1999.
10. EARLY RETIREMENT PROGRAM
The Company has introduced a voluntary early retirement program to its
workforce to reduce expenses and streamline operations. The program involves
providing an incentive equal to adding five years of age and five years of
service in the calculation of pension benefits for employees that reach a
minimum years of age and service threshold. Reduction factors in the calculation
of pension benefits will be eliminated. Employees accepting retirement will also
be entitled to normal medical and life insurance benefits.
The program was offered to the Company's non-union salaried workforce and
one of its unions in June 1999 and 814 employees accepted the offer in the third
quarter. A provision of $127 million will be recorded in the third quarter of
1999 associated with this program. The Company also reached terms on a program
with its second union involving approximately 200 employees who must accept the
offering in October 1999. Based on expected acceptance rates, the cost
associated with this offer is estimated to range from $30 million to $45
million. Approximately $25 million associated with the total cost for the union
and non-union offering involves cash disbursements.
11. SEGMENT REPORTING
Effective December 31 ,1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for reporting certain financial information about
operating segments in complete sets of financial statements.
F-37
<PAGE> 150
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has two reportable segments, its Wireline and Wireless
businesses, in which the Company operates and organizes its services. The
Wireline segment provides:
- Local service including basic voice, telephone and PBX rental, public
phone services, value-added services, high speed private line services,
Internet access and installations.
- Long distance service both on and off the island. Off-island services
began on February 1, 1999.
- Access service provided to long distance, competitive local exchange
carriers, cellular and paging operators to originate and terminate calls
on its network.
- Directory publishing right revenues and listing fees.
- PBX equipment sales and billing and collection services to competitor
long distance operators in Puerto Rico.
The Wireless segment includes cellular and paging services and related
equipment sales.
The Company measures and evaluates the performance of its segments based on
operating income. The accounting policies of the segments are the same as those
described in Note 2. The Company accounts for intersegment sales of products and
services at current market prices. Intersegment revenues were not material in
1999 and 1998. The Company is not dependent on any single customer.
F-38
<PAGE> 151
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment results for the Company and its Predecessors were as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
---------------- ---------------------------------------
FOR THE 1999 PERIOD
------------------------------------ FOR THE SIX MONTHS
MARCH 2 JANUARY 1 ENDED JUNE 30,
THROUGH JUNE 30, THROUGH MARCH 1, 1998
---------------- ---------------- -------------------
<S> <C> <C> <C>
Wireline:
Revenues and sales
Local services......................... $ 160,612 $ 80,196 $ 238,454
Long distance services................. 73,971 48,613 125,564
Access services........................ 119,147 49,517 149,861
Directory services and other........... 32,368 16,231 46,146
---------- ---------- ----------
$ 386,098 $ 194,557 $ 560,025
========== ========== ==========
Operating Income.......................... $ 57,395 $ 888 $ 116,721
========== ========== ==========
Depreciation and amortization............. $ 79,786 $ 40,870 $ 135,699
========== ========== ==========
Capital expenditures...................... $ 57,982 $ 31,427 $ 101,627
========== ========== ==========
Wireless:
Revenues and sales
Cellular services...................... $ 44,226 $ 20,541 $ 48,192
Paging services........................ 16,659 8,202 30,808
---------- ---------- ----------
$ 60,885 $ 28,743 $ 79,000
========== ========== ==========
Operating Income (Loss)..................... $ 2,830 $ (13) $ 17,635
========== ========== ==========
Depreciation and amortization............... $ 10,203 $ 4,762 $ 9,988
========== ========== ==========
Capital expenditures........................ $ 4,815 $ 5,388 $ 5,321
========== ========== ==========
Consolidated revenues and sales............. $ 446,983 $ 223,300 $ 639,025
========== ========== ==========
Consolidated operating income............... $ 60,225 $ 875 $ 134,356
========== ========== ==========
AS OF AS OF AS OF
JUNE 30, 1999 MARCH 1, 1999 JUNE 30, 1998
---------- ---------- ----------
Wireline Assets............................. $2,441,333 $2,234,243 $2,199,447
Wireless Assets............................. 272,407 216,178 205,173
---------- ---------- ----------
Consolidated Assets......................... $2,713,740 $2,450,421 $2,404,620
========== ========== ==========
</TABLE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest by the Company during the period from March 2, 1999
through June 30, 1999 amounted to approximately $22.4 million. The interest paid
by the Predecessors during the period from January 1, 1999 to March 1, 1999 was
not material.
13. LEASES
The Companies use certain building facilities and equipment under various
capital and operating lease agreements.
F-39
<PAGE> 152
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under non-cancelable capital and operating
leases in effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1999...................................................... $295 $ 7,418
2000...................................................... 209 5,083
2001...................................................... 90 3,063
2002...................................................... 90 1,744
2003...................................................... 90 1,340
Thereafter................................................ 195 9,215
---- -------
Total minimum lease payments................................ 969 27,863
Less amount representing interest........................... 219 --
---- -------
Present value of minimum lease payments..................... $750 $27,863
==== =======
</TABLE>
Rental costs charged to operations under operating leases for the Company
during the period March 2, 1999 through June 30, 1999 amounted to approximately
$4.1 million. For the Predecessors during the period from January 1, 1999 to
March 1, 1999, such costs amounted to approximately $3.8 million.
14. COMMITMENTS AND CONTINGENCIES
(a) CONSTRUCTION COMMITMENTS
The Company's construction program for the year 1999 amounts to
approximately $224,000,000, including commitments for the purchase and
installation of telephone equipment and materials and supplies.
(b) LITIGATION
PRTC and CT and their former parent company, have been advised of certain
unasserted claims and were defendants in several lawsuits including those
arising out of the conduct of their normal course of business, including those
related to regulatory actions and commercial transactions. These claims have
been vigorously contested and management of the Authority, PRTC and CT, after
consultation with legal counsel, established adequate reserves to cover the
claims. Management believes that the final resolution of the legal cases will
not have a material adverse effect on the Company's financial position and
results of operations.
On March 1, 1999, several Puerto Rico labor unions and a Puerto Rico
elected official filed a Notice of Appeal in the U.S. Court of Appeals for the
D.C. Circuit, challenging the FCC's order granting the applications for the
transfer of control of licenses held by PRTC and CT from PRTA to GTE Holdings
and the authorization to provide off-island long distance service. The Notice of
Appeal claims that the FCC's denial of public hearings in Puerto Rico resulted
in a clear error of judgment, amounting to a capricious and arbitrary action
that constituted an abuse of discretion of the FCC's adjudicating authority. The
petitioners seek to stay the operation of the FCC Order pending final hearing
and determination of the petition, vacate the FCC Order, or in the alternative,
remand the FCC Order with instructions to hold public hearings in Puerto Rico.
The Company's management believes that the claims of the petitioners are without
merit.
******
F-40
<PAGE> 153
ANNEX A
COMMONWEALTH OF PUERTO RICO
The following information has been derived from various public sources
which have not been prepared or independently verified by the Company, the
Initial Purchasers or any of their respective affiliates or advisers, and none
of such persons or entities accepts responsibility in respect of the accuracy or
completeness of such information.
A. OVERVIEW
1. GEOGRAPHIC LOCATION AND DEMOGRAPHY
Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,600 miles southeast of New York City. Puerto Rico has a land
area of approximately 3,459 square miles and a population of approximately 3.8
million. The island is roughly 70% the size of the state of Connecticut. The
population is concentrated primarily in Puerto Rico's coastal regions,
particularly, the San Juan Metropolitan Statistical Area, which has
approximately 2.0 million inhabitants. This MSA is one of the most densely
populated in the United States, with over 1,900 residents per square mile. By
comparison, the average United States population density is 319 residents per
square mile.
2. RELATIONSHIP WITH THE UNITED STATES
Puerto Rico was a possession of the Spanish Crown during the period between
1493 and 1898. After the military invasion of the island by the United States
during the Spanish-American War, Puerto Rico came under the formal sovereignty
of the United States pursuant to the terms of the Treaty of Paris, signed on
December 10, 1898, which ended the hostilities between the United States and
Spain. Puerto Ricans became citizens of the United States in 1917 with the
enactment of the Jones Act by the Congress of the United States. In 1952, a new
constitution, drafted by a popularly elected constitutional convention, approved
in a special referendum by the people of Puerto Rico, amended and ratified by
the Congress of the United States and subsequently approved by the President of
the United States came into effect and created the Commonwealth of Puerto Rico.
Under Commonwealth status, Puerto Rico exercises the same control over its
internal affairs as do the fifty states. Puerto Rico, however, differs from the
states in its relationship with the federal government. Most federal taxes,
except those such as social security taxes, are not levied in Puerto Rico. No
federal income tax is collected from Puerto Rico residents on ordinary income
earned from sources in Puerto Rico, except for federal employees who are subject
to taxes on their salaries. Puerto Rico does have its own income tax regime,
however, with a maximum corporate rate of 39% and a maximum rate on individuals
of 33%. In addition, Puerto Ricans have non-voting representation in Congress
and cannot vote in national elections (unless they reside in the United States).
The local system of government is modeled after the state governments of
the United States, with an executive branch headed by a Governor, and a
legislature consisting of a 27-member Senate and a 51-member House of
Representatives. The judicial system is closely linked to the United States
system. Most United States federal laws apply in Puerto Rico and the island is
under the jurisdiction of the First Circuit Court of Appeals, which maintains a
United States District Court in Puerto Rico. Judicial decisions may be appealed
to the Supreme Court of the United States in the same manner that decisions are
appealed from the state courts. Communications policies are regulated by both
the Federal Communications Commission and Puerto Rico's Telecommunications
Regulatory Board. The United States and Puerto Rico also share common monetary,
immigration, defense, and postal systems. The official languages of the
Commonwealth of Puerto Rico are Spanish and English.
3. POLITICAL TRENDS
For many years there have been two major views in Puerto Rico with respect
to the island's relationship with the United States: one favoring annexation
into the union, represented by the New Progressive Party, and the other favoring
commonwealth status, represented by the Popular Democratic Party. While the
electoral choices of voters in Puerto Rico are not determined solely by their
preferences regarding the island's
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relationship with the United States, candidates who support a continuing
relationship between Puerto Rico and the United States have prevailed in all
general elections held since the creation of the Commonwealth in 1952.
On December 13, 1998, a referendum was held in Puerto Rico in which voters
were asked to express their preference among five options: (a) statehood, (b)
independence, (c) two options describing a relationship with the United States
with varying degrees of sovereignty over local, national and international
matters, and (d) the option to vote for "none of the above." The "none of the
above" option obtained a majority of those votes cast with 50.3% of the voters
choosing this option. The statehood option obtained the second highest number of
votes, capturing 46.5% of the vote. Most political analysts of the Puerto Rican
situation agree that this vote may have little or no bearing on the ultimate
resolution of the Puerto Rico status issue.
B. ECONOMY
1. GENERAL
Puerto Rico is the most dynamic and modern business center in the
Caribbean. The strength of the Puerto Rican economy is due primarily to Puerto
Rico's political stability, its relationship with the United States, its modern
infrastructure, and its successful implementation of industrial incentives. The
table below demonstrates Puerto Rico's economic strength compared to the United
States and several Latin American and Caribbean countries:
<TABLE>
<CAPTION>
TOTAL GDP PER
POPULATION CAPITA GDP
(MILLIONS) (US$) (US$ BILLIONS)
---------- ------- --------------
<S> <C> <C> <C>
Puerto Rico...................................... 3.8 $13,939 $ 53
United States.................................... 268.0 30,263 8,110
Argentina........................................ 35.4 9,017 319
Brazil........................................... 159.7 4,790 765
Central America*................................. 25.4 1,675 43
Colombia......................................... 40.9 2,398 98
Dominican Republic............................... 8.9 1,636 15
Ecuador.......................................... 12.2 1,660 20
Mexico........................................... 97.1 4,250 413
Peru............................................. 24.8 2,680 66
Venezuela........................................ 22.7 3,770 86
</TABLE>
- ---------------
* Central America includes: Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua, Panama Source: Pyramid Research (1997)
The Government of Puerto Rico has established policies and programs
directed at developing the manufacturing and service sectors of the economy and
modernizing the island's infrastructure. Domestic and foreign investment has
been stimulated by selective tax exemption, development loans and other
financial and tax incentives. The modernization of the island's infrastructure
has been financed to a large extent by bonds and notes issued by the
Commonwealth of Puerto Rico, its public corporations and municipalities.
Economic growth has also been fueled by the significant improvement in the
human capital of Puerto Rico, specifically in the levels of education and
occupational skills of the island's population. The adult literacy rate is 90%
and the percentage of the civilian labor force that has had one or more years of
college has increased from less than 20% in the early 1970s to roughly 40%. This
has provided corporations with a workforce capable of meeting the challenges of
more sophisticated value-added manufacturing and service industries.
According to a 1997 Report of the General Accounting Office
(GAO/GGD-97-101) between 1982 and 1996, Puerto Rico's per capita GNP grew at an
annual rate of 1.7% while its GDP grew at an annual rate of 3.5%. The growth of
both indicators slowed somewhat after 1990 following the recession that occurred
in the United States, but per capita GDP and GNP began to grow again in late
1992. The faster rate of growth for Puerto Rico's GDP in comparison with its GNP
means that an increasing portion of total income produced in
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Puerto Rico went to U.S. and foreign investors rather than to Puerto Rican
residents. GDP is a measure of total income produced within Puerto Rico while
GNP is a measure of the income produced that is received by Puerto Rican-owned
factors of production. The difference between the two measures represents, for
the most part, remittance of profits and interest income to U.S. and foreign
investors. The trends in GDP and GNP are consistent with Puerto Rico's
development strategy, which emphasizes long-term tax incentives to firms that
locate in Puerto Rico see -- "Commonwealth of Puerto Rico -- Federal Tax
Issues."
Also during the period between 1982 and 1996, unemployment in Puerto Rico
generally declined, while the participation of Puerto Rican residents in the
labor force increased. The unemployment rate in Puerto Rico was 23.5% in 1983,
following the recession that affected the United States in 1981 and 1982, but
declined in most years after 1983 to reach a low of 13.8% in 1995 and 1996. The
labor force participation rate increased during this period from an average rate
of 43% during the 1980s to an average of 46% during the 1990s.
Total nonagricultural employment in Puerto Rico grew from 660,000 in 1982
to 945,000 in 1996. Over this period, the share of manufacturing employment
declined from 22.4% of the total to 16.3%, and the share of government
employment fell from 36.2% to 32.6%. Manufacturing employment has actually
fallen in absolute terms since it peaked in 1990. In contrast, during the same
period the share of employment in the retail trade sector rose from 12% to
15.8%, and the share of the nonfinancial service sector rose from 13.3% to
18.5%.
The dominant sectors of the Puerto Rican economy are manufacturing and
services. The manufacturing sector has experienced a basic change over the years
as a result of an increased emphasis on offering incentives to higher-wage,
capital-intensive industries. The Puerto Rican manufacturing sector currently
consists of over 2,000 foreign and domestic manufacturing companies operating in
industries such as electronics, apparel plastics/rubber, chemicals, and
pharmaceuticals.
Over the past decade Puerto Rico has experienced significant growth in the
services sector of the economy in terms of both income and employment. During
the period between fiscal 1993 and 1997, the gross domestic product in the
services sector increased at an annual average rate of 6.8%, while employment in
this sector increased at an annual average rate of 3.7% during the period
between fiscal 1994 and 1998. The services sector in Puerto Rico is diversified
(including finance, insurance, real estate, wholesale and retail trade and hotel
services among other services) and ranks second to manufacturing in its
contribution to gross domestic product.
The Puerto Rican government continues to promote economic expansion through
proactive measures directed at the development of manufacturing and the
expansion and modernization of the island's infrastructure. An aggressive $7.8
billion program is currently being undertaken by the governor of the island and
is targeted at improving the Commonwealth's infrastructure. Specific targets of
the investment include the Highway Authority and the Electrical Power Authority.
Telecommunications has also been established as an important area of
development. The government has also focused on six main areas to ensure future
sustainable economic growth and social development in Puerto Rico: foreign
trade, privatization, infrastructure investment, education reform, healthcare
reform, and crime prevention/reduction.
2. FISCAL YEAR 1998
According to preliminary government figures gross national product expanded
by 3% in fiscal year 1997/98 (July/June). However, private analysts, including
the Economist Intelligence Unit (see "Puerto Rico Business Outlook," in Business
Latin America, Economist Intelligence Unit, November 2, 1998) estimate growth at
2.5% or less. This slowdown is attributed to the massive devastation caused by
Hurricane Georges, the worst storm to hit the island since 1928.
- Industrial Production
Manufacturing, which accounts for more than 40% of GNP, suffered
hurricane-related production losses because of disruption to water and power
supplies and average manufacturing employment fell by 4% to 146,300 in 1997/98
compared with the previous fiscal year. The Puerto Rico Development Company
registered 149 projects that pledged investments of $315 million in 1997/1998.
However, only 17 new projects
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were registered in the first quarter of the current fiscal year in contrast with
36 in the same period in the previous fiscal year.
- Tourism
Tourism, a priority of the current administration, continued to grow.
Puerto Rico received more than 4.1 million visitors in fiscal 1997/98, according
to the most recent official figures. Total registrations at island hotels and
inns climbed by 6.8% to 1.5 million, while spending by visitors advanced by 15%
to $2.2 billion, when compared with the previous fiscal year. Special incentives
enacted in 1993 have fueled hotel construction throughout the island. Five major
hotels projects have opened their doors recently and a 2% increase in the room
tax will fund development of a new convention center in San Juan.
- Investment
Investment is stagnant in the face of reductions in federal tax incentives
and continuing concerns over the island's competitiveness. Annual foreign direct
investment is currently $6.5 billion and is forecast to remain flat over the
short-term. This trend will be partially offset by increased activity in the
tourism sector and a couple of large infrastructure projects, such as the $1
billion urban train system and a $350 million "superaqueduct" to serve the San
Juan area. Privatization of state-owned assets should also generate additional
investment opportunities. Professional Services Group will assume full
management of the troubled Puerto Rico Aqueduct and Sewer Authority under a $500
million contract. In addition the privatization of government-owned hotels and
hospitals is scheduled to move forward during the current fiscal year.
- Agriculture
Agriculture, which accounts for less than 1% of GNP, has been battered by
droughts, floods, and hurricanes over the past four years, as well as by
reductions in government incentives introduced in 1996. The latter benefited
existing agricultural concerns but failed to attract foreign investment.
Nonetheless, agricultural income rose slightly in fiscal 1997/98 to $708.3
million from $694.7 million in fiscal 1996/97. Local farmers organizations
estimate losses of $406.7 million resulting from Hurricane Georges.
- Employment
Average total employment increased by 26,000, or 2.3%, to 1,157,000 in
fiscal 1997/98 from 1,131,000 in fiscal 1996/97. This translated into an average
unemployment rate of 13.6% during fiscal 1997/98. The recent increase in the
federal minimum wage, to $5.15 per hour, could hurt business and investment
prospects.
- Inflation
Official data show an increase of 5.7% in the consumer price index during
fiscal 1997/98 -- much higher than the US inflation rate, which Puerto Rico
usually tracks. This increase is partially explained by the destruction of
domestic crops of tropical produce widely consumed by Puerto Ricans, while
plantations in the Dominican Republic, the usual alternate source of supply,
suffered a similar fate.
- Credit
Credit conditions in Puerto Rico traditionally reflect those in the United
States. The phase-out of federal tax incentives has eliminated a cheap source of
financing in the form of deposits held at local banks by Section 936
beneficiaries, which had previously enjoyed a tax exemption on investment
earnings. During fiscal 1997/98 such deposits declined by $3.9 billion, or 55%,
to $3.1 billion from $7.0 billion in fiscal 1996/97.
- Trade
During fiscal 1997/98 Puerto Rico had a positive balance of trade, with
total exports amounting to $30.3 billion against imports of $21.8 billion.
Imports of raw materials and finished products by US firms operating in the
island made up as much as 85% of the total import bill, while approximately 90%
of Puerto Rico's merchandise exports went to the United States.
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3. FEDERAL TAX ISSUES
One important element in the historic growth of the Puerto Rican economy,
which is no longer available to corporations beginning operations in Puerto
Rico, was Section 936 of the United States Internal Revenue Code. Corporations
electing to file under Section 936 received a tax credit equal to what would
have been owed as federal taxes. This effectively eliminated all United States
taxes due from Puerto Rican-source income, whether it was passive or active.
This combined with Puerto Rico's minimal local taxes provided a favorable tax
environment for corporations. Manufacturing companies, particularly
pharmaceutical companies, were active participants in the Puerto Rican economy
as a result of Section 936.
In 1996 Congress eliminated the federal tax benefits of Section 936 for
United States firms beginning operations in Puerto Rico. For companies with
existing operations in Puerto Rico, certain provisions of Section 936 regarding
active income credits were maintained for a period of 10 years with caps on the
benefits in the latter part of the ten years. All federal tax credits associated
with passive income were eliminated for new and existing companies.
The 1996 amendments also added a new Section 30A to the Code. Section 30A
permits a "qualifying domestic corporation" that meets certain eligibility
tests, to claim a credit against the federal income tax imposed on taxable
income derived from sources outside the United States, from the active conduct
of a trade or business in Puerto Rico or from the sale of substantially all the
assets used in such business. This credit is limited to the sum of (a) 60% of
qualified possession wages as defined in the Code, (b) a specified percentage of
depreciation deductions, and (c) a portion of Puerto Rico income taxes paid by
the qualified domestic corporation. Section 30A applies only to taxable years
beginning after December 31, 1995 and before January 1, 2006.
During 1997, the government of Puerto Rico lobbied Congress for the
enactment of a new permanent federal incentive program similar to what is now
provided under Section 30A. The fiscal 1998 and 1999 budgets submitted by
President Clinton to Congress included a proposal to modify Section 30A to (a)
extend the availability of Section 30A indefinitely; (b) make it available to
companies establishing operations in Puerto Rico after October 13, 1995; and (c)
eliminate the income cap. This proposal was not included in the final version of
the budget for those fiscal years.
On January 19, 1999, Senator Daniel Moynihan (D-NY) introduced a bill to
expand the Section 30A wage credit that is currently included in the Code. The
bill removes provisions that limit, in taxable years beginning after 2001, the
aggregate taxable income taken into account in determining the amount of the
credit. Employers would generally be eligible for a tax credit equal to 60% of
wages and fringe benefit expenses for employees located in Puerto Rico. New as
well as existing employers would be rewarded for creating local jobs. Instead of
expiring at the end of 2005, the credit would terminate three years later for
tax years starting after 2008. Thus, businesses would have a 10 year period in
which to take advantage of these incentives. As of April 7, 1999 no action had
been taken by the Senate in regard to this bill.
Finally, on March 8, 1999, Representative Don Young (R-Alaska), chairman of
the Resources Committee of the United States House of Representatives, announced
that he is considering introducing a bill to impose federal income taxes on the
residents of Puerto Rico, presumably including corporations, for the first time
since the United States annexed the island in 1898. The government of Puerto
Rico has announced its opposition to this measure. As of April 1, 1999 no action
had been taken by Representative Young in connection with this matter.
In conclusion, it is not possible at this time to determine the long-term
effect on the Puerto Rican economy of the enactment of the 1996 amendments to
the Code. The government of the Commonwealth, however, has taken an active
approach to the potential reduction of business activity caused by the
elimination of Section 936. It plans to act as a facilitator to promote Puerto
Rico's competitiveness and to help develop the island's capital markets.
Corporate laws, labor laws, and the tax code have been reformed recently.
Additional deregulation is planned. A new tax incentives law was enacted. Among
the most important initiatives is a flat 7% income tax for qualifying
manufacturing and service industries. The exemption lasts between 10 and 25
years depending on the corporation's location.
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ANNEX B
GLOSSARY OF CERTAIN TELECOMMUNICATIONS TERMS
Access Lines: Revenue producing switched access lines in
service serving the local market.
Airtime: The actual time spent talking on a cellular
telephone including the time in which a
cellular telephone channel is occupied, the
call set-up, call time and clear-down time.
Analog: A transmission method employing a continuous
electrical signal that varies in amplitude or
frequency in response to changes in sound,
light, position, etc.
Asynchronous Transfer Mode A high speed transmission technology.
Asynchronous Transfer Mode is a high bandwidth,
low-delay connection-oriented packet-like
switching and multiplexing technique used to
transfer voice, video, images and
character-based data.
Band: A range of frequencies between two defined
limits.
Bandwidth: The range of electrical frequencies a device
can handle; the relative range of frequencies
that can be passed through a transmission
medium without distortion. The greater the
bandwidth, the greater the information carrying
capacity. Bandwidth is measured in Hertz.
Cell site: The location of a transmitting/receiving
station serving a given geographic area in a
cellular communications system. The area served
by a cell site is referred to as a "cell".
Channel: A pathway for the transmission of information
between a sending point and a receiving point.
Churn: The rate of customer defection, typically
expressed as a percentage of the total customer
base.
Digital Switching and
Transmission Network: A method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission and switching technologies employ
a sequence of discrete, distinct pulses to
represent information, as opposed to the
continuous analog signal.
Fiber Optics: A technology in which light is used to
transport information from one point to
another. Fiber optic cables are thin filaments
of glass through which light beams are
transmitted over long distances carrying
enormous amounts of data. Modulating light on
thin strands of glass produces major benefits
including high bandwidth, relatively low cost,
low power consumption, small space needs and
total insensitivity to electromagnetic
interference.
Private Branch Exchange: A switching system within an office building
which allows telephone calls from outside to be
routed directly to the individual instead of
through a central number. The Private Branch
Exchange also allows for calling within an
office by way of four-digit extensions.
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Personal Communications
Service: In Canada and the United States, Personal
Communications Service spectrum has been
allocated for use by public systems at the
1.9GHz frequency range. It is expected that
Personal Communications Service will initially
consist primarily of enhanced voice, two-way
data and text messaging services. Such Personal
Communications Service applications are
expected to be followed over time by services
offering integrated voice, data, image and
eventually perhaps video capability. Personal
Communications Service systems operate in a
similar manner to cellular systems.
Penetration: A cellular operator's subscribers within a
defined area divided by total POPs within that
area.
POPs: Population equivalent. One person residing in a
license area equals one POP.
Roaming: A service offered by mobile communications
providers which allows a subscriber to make and
receive calls using the telephone number
assigned to the subscriber's handset while in
the service area of another carrier.
Switch: A device that opens or closes circuits or
selects the paths or circuits to be used for
transmission of information. Switching is the
process of interconnecting circuits to form a
transmission path between users.
Time Division Multiple Access: Time Division Multiple Access is one of several
technologies used to separate multiple
conversations transmissions over a finite
frequency allocation. Time Division Multiple
Access employs digital techniques at the base
station and in the cellular radio to subdivide
each channel into time slots which can be
assigned to different users. Voice, data and
access information are converted to digital
information that is sent and received in bursts
over the time slots. These bursts can be
encoded, transmitted, and decoded in a fraction
of the time required to produce sound. The
result is that only a fraction of the air time
is used, and other subscribers can use the
remaining time on a radio channel.
Trunk: A communications channel between two switches.
"Trunking" calls reduces the likelihood of
traffic blockage due to network congestion. A
trunked system combines multiple channels with
unrestricted access in such a manner that user
demand for channels are automatically "queued"
and then allocated to the first available
channel.
Wireline Telephone: Conventional landline telephone which uses
cable for transmitting signals.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TELECOMUNICACIONES DE PUERTO RICO, INC.
$300,000,000 6.15% SENIOR NOTES DUE 2002
$400,000,000 6.65% SENIOR NOTES DUE 2006
$300,000,000 6.80% SENIOR NOTES DUE 2009
-------------------------
P R O S P E C T U S
-------------------------
, 1999
Until , 1999, all dealers effecting transactions in the
exchange notes, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 161
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS
Telpri is incorporated under the laws of the Commonwealth of Puerto Rico.
Section 4.08 of the General Corporation Law of the Commonwealth of Puerto Rico
provides that a Puerto Rico corporation may indemnify directors, officers,
employees or agents involved in any litigation or proceeding involving the
corporation if he or she acted in good faith and in a manner which the person
reasonably deemed consistent with the best interests of the corporation or not
opposed thereto, and with respect to any criminal proceeding, if he or she did
not have reasonable cause to believe that his or her conduct was unlawful. The
indemnity may include expenses actually and reasonably incurred by such person
in connection with the defense or settlement of such action or suit. In the case
of actions or suits other than those initiated by the corporation or initiated
to protect the interests of the corporation, the indemnity may also include the
amount of any judgement paid in settlement of such action. However, no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation may indemnify him/her
against the expenses which such officer or director has actually incurred.
The Certificate of Incorporation of Telpri provides for the indemnification
of directors and officers to the full extent permitted by the General
Corporation Law of the Commonwealth of Puerto Rico, as it currently exists or
may be hereafter amended.
Section 4.08 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him/her and incurred by him/her in any
such capacity, arising out of him/her status as such, regardless whether or not
the corporation would otherwise have the power to indemnify him/her under
Section 4.08.
Telpri maintains and has in effect insurance policies covering all of its
respective directors and officers against certain liabilities for actions taken
in such capacities. These employees are also covered for specified liabilities
under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
3.1* Articles of Incorporation of Telecomunicaciones de Puerto
Rico, Inc.
3.2* Articles of Incorporation of Puerto Rico Telephone Company,
Inc.
3.3* Articles of Incorporation of Celulares Telefonica, Inc.
3.4* By-Laws of Telecomunicaciones de Puerto Rico, Inc.
3.5* By-Laws of Puerto Rico Telephone Company, Inc.
3.6* By-Laws of Celulares Telefonica, Inc.
4.1* Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York.
4.2* Purchase Agreement.
4.3* Registration Rights Agreement.
5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle LLP.
5.2 Opinion of O'Neill & Borges
10.1* Amended and Restated Stock Purchase Agreement, dated as of
May 27, 1998 and Amended and Restated as of July 21, 1998 by
and among Puerto Rico Telephone Authority, Puerto Rico
Telephone Company, GTE Holdings (Puerto Rico) LLC and GTE
International Telecommunications Incorporated.
</TABLE>
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<TABLE>
<C> <S>
10.2* First Amendment to the Stock Purchase Agreement, dated as of
January 4, 1999, by and among Puerto Rico Telephone
Authority, Puerto Rico Telephone Company, GTE Holdings
(Puerto Rico) LLC and GTE International Telecommunications
Incorporated.
10.3* Second Amendment to the Stock Purchase Agreement, dated as
of January 29, 1999, by and among Puerto Rico Telephone
Authority, Puerto Rico Telephone Company, GTE Holdings
(Puerto Rico) LLC and GTE International Telecommunications
Incorporated.
10.4* Third Amendment to the Stock Purchase Agreement, dated as of
March 2, 1999, by and among Puerto Rico Telephone Authority,
Puerto Rico Telephone Company, GTE Holdings (Puerto Rico)
LLC, GTE International Telecommunications Incorporated,
Telecomunicaciones de Puerto Rico, Inc. and Celulares
Telefonica, Inc.
10.5* 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.
10.6* 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.
10.7* 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.
10.8* 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.
10.9* 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.
10.10* Share Option Agreement, dated as of March 2, 1999, by and
among Puerto Rico Telephone Authority, Telecomunicaciones de
Puerto Rico, Inc, GTE Holdings (Puerto Rico) LLC, and GTE
International Telecommunications Incorporated.
10.11* Stock Purchase Agreement, dated as of March 1, 1999, by and
between Telecomunicaciones de Puerto Rico, Inc and Puerto
Rico Telephone Authority.
10.12* 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.
10.13* 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.
10.14* Stock Purchase Agreement, dated as of March 2, 1999, by and
between Puerto Rico Telephone Authority and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de
Puerto Rico, Inc.
10.15* 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.
10.16* 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.
10.17* $500,000,000 Five-Year Credit Agreement, dated as of March
2, 1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Bank of
America National Trust and Savings Association, as
Syndication Agent, and The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York, as Documentation Agents.
10.18* Letter Amendment to the Five-Year Credit Agreement, dated
May 7, 1999.
</TABLE>
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<TABLE>
<C> <S>
10.19* $200,000,000 Revolving Credit Agreement, dated as of March 2, 1999, among Telecomunicaciones de Puerto
Rico, Inc., as Borrower, Puerto Rico Telephone Company and Celulares Telefonica, as Guarantors, Banco
Popular de Puerto Rico, as Managing Agent and Administrative Agent, Scotiabank de Puerto Rico, as
Co-Agent, and Banco Popular de Puerto Rico, Scotiabank de Puerto Rico, Banco Bilbao Vizcaya Puerto Rico
and Banco Popular North America, as Initial Lenders.
10.20* First Amendment to $200,000,000 Revolving Credit Agreement.
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
15.1* Letter Regarding Unaudited Interim Financial Information.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of O'Neill & Borges -- included in Exhibit 5.2.
23.3 Consent of Curtis, Mallet-Prevost, Colt & Mosle LLP -- included in Exhibit 5.1.
24.1* Power of Attorney -- Included in signature page.
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedule as of December 31, 1998.
27.2* Financial Data Schedule as of June 30, 1999.
99.1* Form of Letter of Transmittal and Tender Instructions for Holders of the 6.15% Senior Notes due 2002.
99.2* Form of Letter of Transmittal and Tender Instructions for Holders of the 6.65% Senior Notes due 2006.
99.3* Form of Letter of Transmittal and Tender Instructions for Holders of the 6.80% Senior Notes due 2009.
99.4* Form of Notice of Guaranteed Delivery for Holders of the 6.15% Senior Notes due 2002.
99.5* Form of Notice of Guaranteed Delivery for Holders of the 6.65% Senior Notes due 2006.
99.6* Form of Notice of Guaranteed Delivery for Holders of the 6.80% Senior Notes due 2009.
99.7 Exchange Agent Agreement
</TABLE>
- ---------------
* Previously filed.
ITEM 22. UNDERTAKINGS
Each undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
II-3
<PAGE> 164
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefor, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-4 and have duly caused this Registration
Statement or amendment thereto, as the case may be, to be executed on their
behalf by the undersigned, thereunto duly authorized, in the City of Guaynabo,
Commonwealth of Puerto Rico, on October 20, 1999.
TELECOMUNICACIONES DE PUERTO RICO,
INC.
By: /s/ JON SLATER
------------------------------------
Name: Jon Slater
Title: Chief Executive Officer
PUERTO RICO TELEPHONE COMPANY, INC.
By: /s/ JON SLATER
------------------------------------
Name: Jon Slater
Title: Chief Executive Officer
CELULARES TELEFONICA, INC.
By: /s/ JON SLATER
------------------------------------
Name: Jon Slater
Title: Chief Executive Officer
II-5
<PAGE> 166
POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto, as the case may be, has been signed
by the following persons in the capacities stated herein on October 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ JON SLATER Chief Executive Officer
- --------------------------------------------------------
Jon Slater
/s/ FRANK GATTO Vice President -- Finance and
- -------------------------------------------------------- Chief Financial Officer
Frank Gatto
/s/ ROBERT HUBERTY Principal Accounting Officer
- --------------------------------------------------------
Robert Huberty
* Director
- --------------------------------------------------------
Fares Salloum
* Director
- --------------------------------------------------------
Alfred C. Giammarino
* Director
- --------------------------------------------------------
Michael T. Masin
* Director
- --------------------------------------------------------
Jon Slater
* Director
- --------------------------------------------------------
Richard Carrion
* Director
- --------------------------------------------------------
Angel Morey
* Director
- --------------------------------------------------------
Lourdes M. Rovira
* Director
- --------------------------------------------------------
Carlos Vivoni
*By: /s/ FELIPE PIAZZA
---------------------------------------------------
Name: Felipe Piazza
Title: Treasurer and Attorney-in-Fact
</TABLE>
II-6
<PAGE> 167
AUTHORIZED REPRESENTATIVE
TELECOMUNICACIONES DE PUERTO RICO, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
stated herein on October 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------- --------
<C> <S>
/s/ DONALD J. PUGLISI Puglisi and Associates
------------------------------------------------------ Authorized Representative in the United
Donald J. Puglisi States
</TABLE>
II-7
<PAGE> 168
AUTHORIZED REPRESENTATIVE
PUERTO RICO TELEPHONE COMPANY, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
stated herein on October 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------- --------
<C> <S>
/s/ DONALD J. PUGLISI Puglisi and Associates
------------------------------------------------------ Authorized Representative in the United
Donald J. Puglisi States
</TABLE>
II-8
<PAGE> 169
AUTHORIZED REPRESENTATIVE
CELULARES TELEFONICA, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
stated herein on October 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------- --------
<C> <S>
/s/ DONALD J. PUGLISI Puglisi and Associates
------------------------------------------------------ Authorized Representative in the United
Donald J. Puglisi States
</TABLE>
II-9
<PAGE> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
ITEM NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<C> <S> <C>
3.1* Articles of Incorporation of Telecomunicaciones de Puerto
Rico, Inc.
3.2* Articles of Incorporation of Puerto Rico Telephone Company,
Inc.
3.3* Articles of Incorporation of Celulares Telefonica, Inc.
3.4* By-Laws of Telecomunicaciones de Puerto Rico, Inc.
3.5* By-Laws of Puerto Rico Telephone Company, Inc.
3.6* By-Laws of Celulares Telefonica, Inc.
4.1* Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York.
4.2* Purchase Agreement.
4.3* Registration Rights Agreement.
5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle LLP.
5.2 Opinion of O'Neill & Borges
10.1* Amended and Restated Stock Purchase Agreement, dated as of
May 27, 1998 and Amended and Restated as of July 21, 1998 by
and among Puerto Rico Telephone Authority, Puerto Rico
Telephone Company, GTE Holdings (Puerto Rico) LLC and GTE
International Telecommunications Incorporated.
10.2* First Amendment to the Stock Purchase Agreement, dated as of
January 4, 1999, by and among Puerto Rico Telephone
Authority, Puerto Rico Telephone Company, GTE Holdings
(Puerto Rico) LLC and GTE International Telecommunications
Incorporated.
10.3* Second Amendment to the Stock Purchase Agreement, dated as
of January 29, 1999, by and among Puerto Rico Telephone
Authority, Puerto Rico Telephone Company, GTE Holdings
(Puerto Rico) LLC and GTE International Telecommunications
Incorporated.
10.4* Third Amendment to the Stock Purchase Agreement, dated as of
March 2, 1999, by and among Puerto Rico Telephone Authority,
Puerto Rico Telephone Company, GTE Holdings (Puerto Rico)
LLC, GTE International Telecommunications Incorporated,
Telecomunicaciones de Puerto Rico, Inc. and Celulares
Telefonica, Inc.
10.5* 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.
10.6* 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.
10.7* 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.
10.8* 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.
10.9* 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.
10.10* Share Option Agreement, dated as of March 2, 1999, by and
among Puerto Rico Telephone Authority, Telecomunicaciones de
Puerto Rico, Inc, GTE Holdings (Puerto Rico) LLC, and GTE
International Telecommunications Incorporated.
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
SEQUENTIALLY
ITEM NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<C> <S> <C>
10.11* Stock Purchase Agreement, dated as of March 1, 1999, by and
between Telecomunicaciones de Puerto Rico, Inc and Puerto
Rico Telephone Authority.
10.12* 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.
10.13* 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.
10.14* Stock Purchase Agreement, dated as of March 2, 1999, by and
between Puerto Rico Telephone Authority and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de
Puerto Rico, Inc.
10.15* 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.
10.16* 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.
10.17* $500,000,000 Five-Year Credit Agreement, dated as of March
2, 1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Bank of
America National Trust and Savings Association, as
Syndication Agent, and The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York, as Documentation Agents.
10.18* Letter Amendment to the Five-Year Credit Agreement, dated
May 7, 1999.
10.19* $200,000,000 Revolving Credit Agreement, dated as of March
2, 1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, Banco Popular de Puerto Rico, as
Managing Agent and Administrative Agent, Scotiabank de
Puerto Rico, as Co-Agent, and Banco Popular de Puerto Rico,
Scotiabank de Puerto Rico, Banco Bilbao Vizcaya Puerto Rico
and Banco Popular North America, as Initial Lenders.
10.20* First Amendment to $200,000,000 Revolving Credit Agreement
12.1* Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
15.1* Letter Regarding Unaudited Interim Financial Information.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of O'Neill & Borges -- Included in Exhibit 5.2.
23.3 Consent of Curtis, Mallet-Prevost, Colt & Mosle
LLP -- Included in Exhibit 5.1.
24.1* Power of Attorney -- Included in signature page.
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedule as of December 31, 1998.
27.2* Financial Data Schedule as of June 30, 1999.
99.1* Form of Letter of Transmittal and Tender Instructions for
Holders of the 6.15% Senior Notes due 2002.
99.2* Form of Letter of Transmittal and Tender Instructions for
Holders of the 6.65% Senior Notes due 2006.
99.3* Form of Letter of Transmittal and Tender Instructions for
Holders of the 6.80% Senior Notes due 2009.
99.4* Form of Notice of Guaranteed Delivery for Holders of the
6.15% Senior Notes due 2002.
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
SEQUENTIALLY
ITEM NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<C> <S> <C>
99.5* Form of Notice of Guaranteed Delivery for Holders of the
6.65% Senior Notes due 2006.
99.6* Form of Notice of Guaranteed Delivery for Holders of the
6.80% Senior Notes due 2009.
99.7 Exchange Agent Agreement
</TABLE>
- ---------------
* Previously Filed.
<PAGE> 1
EXHIBIT 5.1
[CURTIS, MALLET-PREVOST, COLT & MOSLE LLP LETTERHEAD]
October 20, 1999
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
Puerto Rico Telephone Company, Inc.
1515 Franklin D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
Celulares Telefonica, Inc.
1515 Franklin D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
Re: Exchange Offer
Ladies and Gentlemen:
We have acted as special United States counsel to Telecomunicaciones de
Puerto Rico, Inc. (the "Company"), a corporation organized under the laws of the
Commonwealth of Puerto Rico ("Puerto Rico"), Puerto Rico Telephone Company,
Inc., and Celulares Telefonica, Inc., both of which are corporations organized
under the laws of Puerto Rico (jointly, the "Guarantors") in connection with the
proposed exchange offer by the Company and the Guarantors of up to $300,000,000
aggregate principal amount of 6.15% Senior Notes due 2002, up to $400,000,000
aggregate principal amount of 6.65% Senior Notes due 2006 and up to $300,000,000
aggregate principal amount of 6.80% Senior Notes due 2009, to be issued by the
Company (the "Exchange Notes") which, if and when issued, will be fully and
unconditionally guaranteed by the Guarantors (the "Guarantees") to the extent
set forth in the Indenture, for the Company's issued and outstanding
unregistered $300,000,000 aggregate principal amount of 6.15% Senior Notes due
2002, $400,000,000 aggregate principal amount of 6.65% Senior Notes due 2006 and
$300,000,000 aggregate principal amount of 6.80% Senior Notes due 2009 (the "Old
Notes") which are fully and unconditionally guaranteed by the Guarantors to the
extent set forth in the Indenture, as more fully described in the registration
statement (the "Registration Statement") on Form S-4 filed by the Company and
the Guarantors with the Securities and Exchange Commission in accordance with
the requirements of the Securities Act of 1933, as
<PAGE> 2
Telecomunicaciones de Puerto Rico, Inc.
Page 2 October 20, 1999
amended (the "Act").
We have examined the Registration Statement and exhibits thereto, including
the Indenture, have reviewed originals or copies certified or otherwise
identified to our satisfaction of such documents and records of the Company and
the Guarantors and such other instruments and other certificates of public
officials, officers and representatives of the Company and the Guarantors and
such other persons, and have made investigations of law, as we have deemed
appropriate as a basis for the opinion expressed below.
In our examinations, we have assumed, without any independent investigation
or verification of any kind, the legal capacity of all persons, the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified, conformed or photostatic copies and the authenticity of the
originals of such latter documents. In making our examination of such documents,
we have assumed that the Indenture has been duly authorized, executed and
delivered by the Trustee.
This opinion is limited to matters arising under the laws of the State of
New York and the federal laws of the United States of America and we express no
opinion as to any system of law other than the laws of such jurisdictions. This
opinion does not cover any matters arising under the laws of any other
jurisdiction, including Puerto Rico. Insofar as the opinion set forth herein
relates to matters arising under the laws of Puerto Rico, we have assumed
without any independent investigation or verification of any kind the accuracy
of the opinion of O'Neill & Borges of even date herewith, and our opinion is
subject to any and all exceptions and reservations set forth therein.
Based upon the foregoing, and subject to the assumptions and qualifications
set forth below, we are of the opinion that when the Exchange Notes have been
(i) duly and validly executed by the Company in the form filed as Exhibit A to
the Indenture filed as Exhibit 4.1 to the Registration Statement, (ii)
authenticated by the Trustee in accordance with the Indenture and (iii) duly
issued and delivered by the Company in exchange for an equal principal amount of
Old Notes pursuant to the terms of the Exchange Offer as contemplated by the
Registration Statement, the Exchange Notes and the Guarantees will be valid,
binding and enforceable obligations of the Company and the Guarantors, as the
case may be.
Insofar as the foregoing opinion relates to the legality, validity, binding
effect or enforceability of the Exchange Notes and the Guarantees, such opinion
is subject, as to enforceability, to bankruptcy, insolvency (including, without
limitation, all laws relating to preferences and fraudulent transfers),
suspension of payments, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles (including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether enforcement
is sought in a proceeding at law or
<PAGE> 3
Telecomunicaciones de Puerto Rico, Inc.
Page 3 October 20, 1999
equity).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the captions
"Legal Matters" and "Tax Considerations" in the prospectus that is included in
the Registration Statement. In giving these consents, we do not hereby admit
that we are "experts" within the meaning of the Act or the rules and regulations
of the Securities and Exchange Commission issued thereunder with respect to any
part of the Registration Statement, including this exhibit.
The opinion set forth herein is solely for your benefit in connection with
the Registration Statement and may not be relied upon in any manner or for any
purpose by any other person or entity without our prior express written consent
other than (i) holders of Old Notes that will have exchanged their Old Notes for
Exchange Notes pursuant to the Exchange Offer and (ii) holders of the Exchange
Notes.
Cordially,
<PAGE> 1
EXHIBIT 5.2
[Letterhead of O'Neill & Borges]
September 27, 1999
Telecomunicaciones de Puerto Rico, Inc.
Puerto Rico Telephone Company, Inc.
Celulares Telefonica, Inc.
1515 Franklin D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
RE: EXCHANGE OFFER
Ladies and Gentlemen:
We have acted as special Puerto Rico counsel to Telecomunicaciones de
Puerto Rico, Inc. (the "Company"), a corporation organized under the laws of the
Commonwealth of Puerto Rico ("Puerto Rico"), Puerto Rico Telephone Company,
Inc., and Celulares Telefonica, Inc., both of which are corporations organized
under the laws of Puerto Rico (jointly, the "Guarantors"), in connection with
the proposed exchange offer by the Company and the Guarantors of up to
$300,000,000 aggregate principal amount of 6.15% Senior Notes due 2002, up to
$400,000,000 aggregate principal amount of 6.65% Senior Notes due 2006 and up to
$300,000,000 aggregate principal amount of 6.80% Senior Notes due 2009 issued by
the Company (the "Exchange Notes"), which will be fully and unconditionally
guaranteed by the Guarantors (the "Guarantees"), for the Company's issued and
outstanding unregistered $300,000,000 aggregate principal amount 6.15% Senior
Notes due 2002, $400,000,000 aggregate principal amount 6.65% Senior Notes due
2006 and $300,000,000 aggregate principal amount 6.80% Senior Notes due 2009
(the "Old Notes"), which are fully and unconditionally guaranteed by the
Guarantors, as more fully described in the registration statement (the
"Registration Statement") on Form S-4 filed by the Company and the Guarantors
with the Securities and Exchange Commission in accordance with the requirements
of the Securities Act of 1933, as amended (the "Act"). Unless the context
otherwise requires, capitalized terms used herein but not defined herein shall
have the meanings ascribed to them in the Registration Statement.
We have examined the Registration Statement and certain of the exhibits
thereto, including the Indenture, have reviewed originals or copies certified or
otherwise identified to our satisfaction of such documents and records of the
Company and the Guarantors and such other instruments and other certificates of
public officials, officers and representatives of the Company and the Guarantors
and such other persons, and have made investigations of law, as we have deemed
appropriate as a basis for the opinion expressed below.
In our examinations, we have assumed, without any independent
investigation or verification of any kind, the legal capacity of all persons,
the genuineness of all signatures, the
<PAGE> 2
Telecomunicaciones de Puerto Rico, Inc.
Puerto Rico Telephone Company, Inc.
Celulares Telefonica, Inc.
September 27, 1999
Page 2
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
photostatic copies and the authenticity of the originals of such latter
documents. In making our examination of such documents, we have assumed that the
Indenture has been duly authorized, executed and delivered by the Trustee.
Based upon the foregoing, and subject to the assumptions and qualifications
set forth herein, we are of the opinion that when the Exchange Notes are
executed on behalf of the Company by the Chairman of the Board or the Chief
Executive Officer of the Company, and by the Chief Financial Officer or the
Treasurer or the Secretary or an Assistant Secretary of the Company, in the form
filed as Exhibit A to the Indenture filed as Exhibit 4.1 to the Registration
Statement, and authenticated by the Trustee in accordance with the Indenture,
and duly issued and delivered by the Company and the Guarantors in exchange for
an equal principal amount of Old Notes pursuant to the terms of the Exchange
Offer as contemplated by the Registration Statement, the Exchange Notes and the
Guarantees will have been duly authorized, executed and delivered and validly
issued by the Company and the Guarantors.
We are admitted to practice only in the Commonwealth of Puerto Rico and
express no opinion as to any matters governed by any laws other than the laws of
the Commonwealth of Puerto Rico. We note that the Indenture, the Exchange Notes
and the Guarantees are governed by New York law and that we are therefore not
expressing an opinion as to their enforceability.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the captions
"Legal Matters" and "Tax Considerations" in the prospectus that is included in
the Registration Statement. In giving these consents, we do not hereby admit
that we are "experts" within the meaning of the Act or the rules and regulations
of the Securities and Exchange Commission issued thereunder with respect to any
part of the Registration Statement, including this exhibit.
The opinion set forth herein is solely for your benefit in connection with
the Registration Statement and the benefit of holders of Old Notes that exchange
their Old Notes for Exchange Notes pursuant to the Exchange Offer and for the
benefit of the holders of Exchange Notes that acquire such Exchange Notes under
the Registration Statement, and may not be relied upon for any other purpose or
by any other person or entity without our prior express written consent.
Cordially,
O'Neill & Borges
<PAGE> 1
[LETTERHEAD OF DELOITTE & TOUCHE]
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this amendment No. 2 to the Registration Statement
of Telecomunicaciones de Puerto Rico, Inc. on Form S-4 of our report dated
February 25, 1999 (March 2, 1999 as to Note 13) with respect to the combined
financial statements of Puerto Rico Telephone Company and Celulares Telefonica,
Inc. as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, and of our report dated October 7, 1999 with
respect to the consolidated financial statements of Telecomunicaciones de Puerto
Rico, Inc. and subsidiaries as of June 30, 1999 and for the period from March 2,
1999 through June 30, 1999, and the combined financial statements of Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc. as of December 31, 1998,
and for the period from January 1, 1999 to March 1, 1999, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" and to
the reference to our firm in the introduction to the Selected Historical
Financial and Operational Data.
Deloitte & Touche LLP
San Juan, Puerto Rico
October 15, 1999
<PAGE> 1
___________, 1999
EXCHANGE AGENT AGREEMENT
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Ladies and Gentlemen:
Telecomunicaciones de Puerto Rico, Inc., a corporation
organized under the laws of the Commonwealth of Puerto Rico (the "Company")
proposes to make an offer (the "Exchange Offer") to exchange up to $300,00,000
of its issued and outstanding 6.15% Senior Notes due 2002; up to $400,000,000 of
its issued and outstanding 6.65% Senior Notes due 2006; and up to $300,000,000
of its issued and outstanding 6.80% Senior Notes due 2009 (the "Old Notes") for
its $300,00,000 6.15% Senior Notes due 2002; $400,000,000 6.65% Senior Notes due
2006; and $300,000,000 6.80% Senior Notes due 2009 which have been registered
under the Securities Act of 1933, as amended (the "Exchange Notes"). The terms
and conditions of the Exchange Offer as currently contemplated are set forth in
a prospectus, dated ___________ (the "Prospectus"), proposed to be distributed
to all record holders of the Old Notes. The Old Notes and the Exchange Notes are
collectively referred to herein as the "Securities".
The Company hereby appoints The Bank of New York to act as
exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
References hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company
on or about _____________. The Letter of Transmittal accompanying the Prospectus
(or in the case of book-entry securities, the Automated Tender Offer Program
("ATOP") of the Book-Entry Transfer Facility (as defined below)) is to be used
by the holders of the Old Notes to accept the Exchange Offer and contains
instructions with respect to the delivery of certificates for Old Notes tendered
in connection therewith.
The Exchange Offer shall expire at 5:00 p.m., New York City
time, on _________ or on such subsequent date or time to which the Company may
extend the Exchange Offer (the "Expiration Date"). Subject to the terms and
conditions set forth in the Prospectus, the Company expressly reserves the right
to extend the Exchange Offer from time to time and may extend the Exchange Offer
by giving oral (promptly
<PAGE> 2
confirmed in writing) or written notice to you before 9:00 a.m., New York City
time, on the business day following the previously scheduled Expiration Date.
The Company expressly reserves the right to amend or terminate
the Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified in the Prospectus under the caption "The Exchange Offer
- -- Conditions." The Company will give oral (promptly confirmed in writing) or
written notice of any amendment, termination or nonacceptance to you as promptly
as practicable.
In carrying out your duties as Exchange Agent, you are to act
in accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
will your general duty to act in good faith be discharged by the foregoing.
2. You will establish a book-entry account with respect to the
Old Notes at The Depository Trust Company (the "Book-Entry Transfer Facility")
for purposes of the Exchange Offer within two business days after the date of
the Prospectus, and any financial institution that is a participant in the Book-
Entry Transfer Facility's systems may make book-entry delivery of the Old Notes
by causing the Book-Entry Transfer Facility to transfer such Old Notes into your
account in accordance with the Book-Entry Transfer Facility's procedure for such
transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Old Notes (or confirmation of book-entry transfer into your
account at the Book-Entry Transfer Facility) and any other documents delivered
or mailed to you by or for holders of the Old Notes to ascertain whether: (i)
the Letters of Transmittal and any such other documents are duly executed and
properly completed in accordance with instructions set forth therein; and (ii)
the Old Notes have otherwise been properly tendered. In each case where the
Letter of Transmittal or any other document has been improperly completed or
executed or any of the certificates for Old Notes are not in proper form for
transfer or some other irregularity in connection with the acceptance of the
Exchange Offer exists, you will endeavor to inform the presenters of the need
for fulfillment of all requirements and to take any other action as may be
reasonably necessary or advisable to cause such irregularity to be corrected.
4. With the approval of any of the following: Director, Vice
President(regardless of Vice Presidential designation), Chief Financial Officer,
Treasurer, Assistant Treasurer, Secretary, or Assistant Secretary of the Company
(each an "Officer of the Company") (such approval, if given orally, to be
promptly confirmed in writing) or any other party designated in writing, by such
an officer, you are authorized to waive any irregularities in connection with
any tender of Old Notes pursuant to the Exchange Offer.
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<PAGE> 3
5. Tenders of Old Notes may be made only as set forth in the
Letter of Transmittal and in the section of the Prospectus captioned ["The
Exchange Offer -- Procedures for Tendering Old Notes"], and Old Notes shall be
considered properly tendered to you only when tendered in accordance with the
procedures set forth therein.
Notwithstanding the provisions of this Section 5, Old Notes
which an Officer of the Company shall approve as having been properly tendered
shall be considered to be properly tendered (such approval, if given orally,
shall be promptly confirmed in writing).
6. You shall advise the Company with respect to any Old Notes
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Old Notes.
7. You shall accept tenders:
(a) in cases where the Old Notes are registered in two or
more names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the
Letter of Transmittal) is acting in a fiduciary or a representative capacity
only when proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old
Notes, provided that customary transfer requirements, including payment of any
applicable transfer taxes, are fulfilled.
You shall accept partial tenders of Old Notes where so
indicated and as permitted in the Letter of Transmittal and deliver certificates
for Old Notes to the registrar for split-up and return any untendered Old Notes
to the holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, the Company will notify you (such notice, if given orally, to be
promptly confirmed in writing) of its acceptance, promptly after the Expiration
Date, of all Old Notes properly tendered and you, on behalf of the Company, will
exchange such Old Notes for Exchange Notes and cause such Old Notes to be
cancelled. Delivery of Exchange Notes will be made on behalf of the Company by
you at the rate of $1,000 principal amount of Exchange Notes for each $1,000
principal amount of the corresponding series of Old Notes tendered promptly
after notice (such notice if given orally, to be promptly confirmed in writing)
of acceptance of said Old Notes by the Company; provided, however, that in all
cases, Old Notes tendered pursuant to the Exchange Offer will be exchanged only
after timely receipt by you of certificates for such Old Notes (or confirmation
of book-entry transfer into your account at the Book-Entry
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<PAGE> 4
Transfer Facility), a properly completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof) with any required signature guarantees
and any other required documents. You shall issue Exchange Notes only in
denominations of $1,000 or any integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable,
except that, subject to the terms and upon the conditions set forth in the
Prospectus and the Letter of Transmittal, Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Old Notes tendered
shall be given (if given orally, to be promptly confirmed in writing) by the
Company to you.
11. If, pursuant to the Exchange Offer, the Company does not
accept for exchange all or part of the Old Notes tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus
under the caption ["The Exchange Offer -- Conditions"] or otherwise, you shall
as soon as practicable after the expiration or termination of the Exchange
Offer return those certificates for unaccepted Old Notes (or effect appropriate
book-entry transfer), together with any related required documents and the
Letters of Transmittal relating thereto that are in your possession, to the
persons who deposited them.
12. All certificates, if any, for reissued Old Notes,
unaccepted Old Notes or for Exchange Notes shall be forwarded by first-class
mail.
13. You are not authorized to pay or offer to pay any
concessions, commissions or solicitation fees to any broker, dealer, bank or
other persons or to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall not be liable for any action or omission to act
unless the same constitutes your own negligence, willful misconduct or bad
faith, and in no event shall you be liable to a securityholder, the Company or
any third party for special, indirect or consequential damages, or lost profits,
arising in connection with this Agreement.
(b) shall have no duties or obligations other than those
specifically set forth in the section of the Prospectus entitled the "Exchange
Offer", the Letter of Transmittal or herein or as may be subsequently agreed to
in writing between you and the Company;
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<PAGE> 5
(c) will be regarded as making no representations and
having no responsibilities as to the validity, sufficiency, value or genuineness
of any of the certificates or the Old Notes represented thereby deposited with
you pursuant to the Exchange Offer, and will not be required to and will make no
representation as to the validity, value or genuineness of the Exchange Offer;
provided, however, that in no way will your general duty to act in good faith be
discharged by the foregoing;
(d) shall not be obligated to take any legal action
hereunder which might in your judgment involve any expense or liability, unless
you shall have been furnished with indemnity satisfactory to you;
(e) may conclusively rely on and shall be protected in
acting in reliance upon any certificate, instrument, opinion, notice, letter,
telegram or other document or security delivered to you and believed by you to
be genuine and to have been signed or presented by the proper person or persons;
(f) may act upon any tender, statement, request, document,
agreement, certificate or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which you shall in
good faith believe to be genuine or to have been signed or presented by the
proper person or persons;
(g) may conclusively rely on and shall be protected in
acting upon written or oral instructions from any authorized officer of the
Company;
(h) may consult with counsel of your selection which may,
in your discretion, be counsel to the Company with respect to any questions
relating to your duties and responsibilities and the advice or written opinion
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by you hereunder in
good faith and in accordance with the advice or written opinion of such counsel;
(i) shall not advise any person tendering Old Notes
pursuant to the Exchange Offer as to the advisability of making such tender or
as to the market value or decline or appreciation in market value of any Old
Notes; and
(j) shall act solely as agent of the Company, and shall
not assume any obligation, or relationship of agency or trust for or with any
of the owners or holders of the Old Notes or the Exchange Notes.
15. You shall take such action as may from time to time be
requested by the Company (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms
as may be approved from time to time by the Company, to all persons requesting
such documents and to accept and
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<PAGE> 6
comply with telephone requests for information relating to the Exchange Offer,
provided that such information shall relate only to the procedures for accepting
(or withdrawing from) the Exchange Offer. The Company will furnish you with
copies of such documents on your request. All other requests for information
relating to the Exchange Offer shall be directed to the Company, Attention:
Robert Huberty and Frank Gatto.
16. You shall advise by facsimile transmission Robert Huberty,
or Frank Gatto, the Comptroller and Chief Financial Officer, respectively, of
the Company (at the facsimile number (787)-783-2919), and such other person or
persons as the Company may request, daily (and more frequently during the week
immediately preceding the Expiration Date if requested) up to and including the
Expiration Date, as to the amount of Old Notes which have been tendered
pursuant to the Exchange Offer and the items received by you pursuant to this
Agreement, separately reporting and giving cumulative totals as to items
properly received and items improperly received. In addition, you will also
inform, and cooperate in making available to, the Company or any such other
person or persons upon oral request made from time to time prior to the
Expiration Date of such other information as they may reasonably request. Such
cooperation shall include, without limitation, the granting by you to the
Company and such person as the Company may request of access to those persons
on your staff who are responsible for receiving tenders, in order to ensure
that immediately prior to the Expiration Date the Company shall have received
information in sufficient detail to enable it to decide whether to extend the
Exchange Offer. You shall prepare a final list of all persons whose tenders
were accepted, the aggregate principal amount of Old Notes tendered, the
aggregate principal amount of Old Notes accepted and deliver said list to the
Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery
shall be stamped by you as to the date and, after the expiration of the Exchange
Offer, the time, of receipt thereof and shall be preserved by you for a period
of time at least equal to the period of time you preserve other records
pertaining to the transfer of securities. You shall dispose of unused Letters of
Transmittal and other surplus materials by returning them to the Company.
18. With respect to funds deposited with you by reason of
amounts, if any, borrowed from you by the Company or any of its subsidiaries or
affiliates pursuant to any loan or credit agreement, you hereby expressly waive
any lien, encumbrance or right of set-off that you may have with respect to such
amounts for the payment of transfer taxes or for compensation owed to you
hereunder.
19. For services rendered as Exchange Agent hereunder, you
shall be entitled to such compensation as set forth on Schedule I attached
hereto. The provisions of this section shall survive the termination of this
Agreement.
20. You hereby acknowledge receipt of the Prospectus and the
Letter of Transmittal. Any inconsistency between this Agreement, on the one
hand, and the
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<PAGE> 7
Prospectus and the Letter of Transmittal (as they may be amended from time
to time), on the other hand, shall be resolved in favor of the latter two
documents, except with respect to your duties, liabilities and indemnification
as Exchange Agent, which shall be controlled by this Agreement.
21. The Company covenants and agrees to fully indemnify and
hold you harmless against any and all loss, liability, cost or expense,
including reasonable attorneys' fees and expenses, incurred without negligence
or willful misconduct on your part, arising out of or in connection with any
act, omission, delay or refusal made by you arising out of this Agreement or the
Exchange Offer in reliance upon any signature, endorsement, assignment,
certificate, order, request, notice, instruction or other instrument or document
believed by you to be valid, genuine and sufficient and in accepting any tender
or effecting any transfer of Old Notes believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Old Notes. The Company shall not be liable under this
indemnity with respect to any claim against you unless the Company shall be
notified by you, by letter or facsimile transmission, of the written assertion
of a claim against you or of any other action commenced against you, promptly
after you shall have received any such written assertion or shall have been
served with a summons in connection therewith. The Company shall be entitled to
participate at its own expense in the defense of any such claim or other action
and, if the Company so elects, the Company shall assume the defense of any suit
brought to enforce any such claim. In the event that the Company shall assume
the defense of any such suit, the Company shall not be liable for the fees and
expenses of any additional counsel thereafter retained by you, so long as the
Company shall retain counsel satisfactory to you to defend such suit, and so
long as you have not determined, in your reasonable judgment, that a conflict of
interest exists between you and the Company. The provisions of this section
shall survive the termination of this Agreement.
22. You shall arrange to comply with all requirements under the
tax laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service.
23. You shall deliver or cause to be delivered, in a timely
manner to each governmental authority to which any transfer taxes are payable in
respect of the exchange of Old Notes, the Company's check in the amount of all
transfer taxes so payable; provided, however, that you shall reimburse the
Company for amounts refunded to you in respect of your payment of any such
transfer taxes, at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent
hereunder shall be construed and enforced in accordance with the laws of the
State of New York applicable to agreements made and to be performed entirely
within such state, and without regard to conflicts of law principles, and shall
inure to the benefit of, and the
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<PAGE> 8
obligations created hereby shall be binding upon, the successors and assigns of
each of the parties hereto.
25. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be
modified, amended, rescinded, cancelled or waived, in whole or in part, except
by a written instrument signed by a duly authorized representative of the party
to be charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and
other communications to any party hereunder shall be in writing (including
facsimile or similar writing) and shall be given to such party, addressed to it,
at its address or telecopy number set forth below:
If to the Company:
Telecomunicaciones de Puerto Rico
1515 Franklin D. Roosevelt Avenue
Guaynabo, P.R. 00968
Facsimile: (787)-783-2919
Attention: Comptroller/Chief Financial Officer
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
Attention: Corporate Trust Trustee
Administration
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<PAGE> 9
29. Unless terminated earlier by the parties hereto, this
Agreement shall terminate 90 days following the Expiration Date.
Notwithstanding the foregoing, Sections 19 and 21 shall survive the
termination of this Agreement. Upon any termination of this Agreement, you
shall promptly deliver to the Company any certificates for Securities, funds or
property then held by you as Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the
date hereof.
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<PAGE> 10
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
------------------------------
By:----------------------------
Name:
Title:
Accepted as of the date
first above written:
THE BANK OF NEW YORK, as Exchange Agent
By:------------------------------
Name:
Title:
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<PAGE> 11
SCHEDULE I
COMPENSATION OF EXCHANGE AGENT:
$4,000
PLUS OUT-OF POCKET EXPENSES, INCLUDING WITHOUT
LIMITATION, LEGAL FEES AND EXPENSES.
