<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
<TABLE>
<S> <C> <C>
1515 F.D. ROOSEVELT AVENUE COPIES TO: JOSE ARROYO, ESQ.
GUAYNABO, PUERTO RICO 00968 LAWRENCE GOODMAN, ESQ. 1515 F.D. ROOSEVELT AVENUE,
(787) 793-1818 CURTIS, MALLET-PREVOST, 12TH FLOOR
(ADDRESS, INCLUDING ZIP CODE, COLT & MOSLE LLP GUAYNABO, PUERTO RICO 00968
AND TELEPHONE NUMBER 101 PARK AVENUE (787) 793-8441
INCLUDING AREA CODE, OF NEW YORK, NEW YORK 10178 (NAME, ADDRESS, INCLUDING ZIP
REGISTRANTS' (212) 696-6000 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.
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6.15% Senior Notes due 2002....... $300,000,000 100% $300,000,000 $ 83,400
- --------------------------------------------------------------------------------------------------------------------------
6.65% Senior Notes due 2006....... $400,000,000 100% $400,000,000 $111,200
- --------------------------------------------------------------------------------------------------------------------------
6.80% Senior Notes due 2009....... $300,000,000 100% $300,000,000 $ 83,400
- --------------------------------------------------------------------------------------------------------------------------
Guarantees of 6.15% Senior Notes
due 2002(3)..................... (3) (3) (3)
- --------------------------------------------------------------------------------------------------------------------------
Guarantees of 6.65% Senior Notes
due 2006(3)..................... (3) (3) (3)
- --------------------------------------------------------------------------------------------------------------------------
Guarantees of 6.80% Senior Notes
due 2009(3)..................... (3) (3) (3)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee.
(2) Exclusive of accrued interest, if any.
(3) Pursuant to Rule 457(n), no registration fee is payable.
------------------------
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 the leading telecommunications company in Puerto Rico and one of the
ten largest local exchange carriers in the United States.
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 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;
- - You can withdraw the tender of your old notes at any time prior to 12:00
midnight New York City time on the expiration date of this exchange offer;
- - This exchange offer is subject to customary conditions;
- - We will exchange all old notes that are properly tendered and not validly
withdrawn;
- - We will not list the exchange notes on any exchange; and
- - We will not receive any proceeds from this exchange offer.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. YOU SHOULD CAREFULLY
CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 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.
August 18, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Forward-Looking Statements.................................. i
Note Regarding Market Share Data............................ ii
Broker Dealer Obligations................................... ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 11
The Exchange Offer.......................................... 15
Use of Proceeds............................................. 23
The Acquisition and Related Corporate Restructuring......... 23
Capitalization.............................................. 26
Selected Historical Financial and Operational Data.......... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 46
Business.................................................... 50
Management.................................................. 66
Shareholders and Shareholder Relationships.................. 71
Certain Relationships and Related Transactions.............. 76
Description of Some of Our Debt............................. 78
Description of Exchange Notes............................... 82
Plan of Distribution........................................ 97
Tax Considerations.......................................... 98
Legal Matters............................................... 103
Experts..................................................... 103
Index to Financial Statements............................... F-1
Annex A -- Commonwealth of Puerto Rico...................... A-1
Annex B -- Glossary of Certain Telecommunications Terms..... B-1
</TABLE>
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the U.S. Securities Act of 1933, as amended (the "Securities
Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended
(the "Exchange Act"), 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 "Risk Factors" 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.
We are not obligated, and do not intend, to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Consequently, 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.
i
<PAGE> 4
NOTE REGARDING MARKET SHARE DATA
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 PCS services as well
as traditional cellular services.
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. Telpri 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."
ii
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the exchange notes. You should also carefully
consider 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., which
we refer to as PRTC, and Celulares Telefonica, Inc. PRTC and Celulares
Telefonica currently offer the following services:
PRTC
- 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 PBX rentals and revenues from public
phones. PRTC 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 PRTC's
customers;
- ON-ISLAND LONG DISTANCE SERVICES -- consist primarily of direct dialing,
operator-assisted and calling card long distance services within Puerto
Rico. PRTC also provides wide area telecommunications services (WATS),
toll-free services and toll private line services. For the month of June
1999, PRTC had an estimated 63% share of the on-island long distance
market; and
- DIRECTORY AND OTHER SERVICES -- include PRTC'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 PRTC and sales of PBX,
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. This service is
included in Celulares Telefonica for regulatory purposes; however, the
results are reflected in the Wireline segment in the financial
information appearing elsewhere in this prospectus.
THE ACQUISITION AND RELATED CORPORATE RESTRUCTURING
- On April 7, 1997, the government of Puerto Rico announced a plan which
resulted in the privatization of PRTC and Celulares Telefonica, as
predecessors of our company, through a bidding process.
1
<PAGE> 6
- 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.
- Prior to the consummation of the acquisition, the Puerto Rico Telephone
Authority contributed 3% of our shares to our employee stock ownership
plan, which we refer to as the ESOP, and the GTE Group purchased an
additional 1% of our shares from the Puerto Rico Telephone Authority and
contributed them to the ESOP.
- 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 (Puerto Rico) LLC, which we refer to as GTE
Holdings, 9.99% to Popular, Inc. and an additional 3% to the ESOP. The
Puerto Rico Telephone Authority received gross proceeds of $2,040.0
million in cash and retained 43%, less one of our shares.
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.
In addition to these strategic initiatives, we have been implementing plans
to improve timely service delivery. Our progress in this area is demonstrated by
the:
- reduction of the number of lines out of service from approximately 82,600
lines as of December 31, 1998 to approximately 14,900 lines as of June
30, 1999; and
- installation of 21,600 new access lines for the six months ended June
1999.
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 issues, see "Risk Factors" beginning
on page .
2
<PAGE> 7
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> 8
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 Securities Act.
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 Exchange Act may not offer for
resale, resell or
4
<PAGE> 9
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 21 West
New York, NY 10286
Telephone: (212) 815-2588
Facsimile: (212) 815-5915
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 prospectus in connection with
any resales of those exchange notes. See "Plan
of Distribution."
5
<PAGE> 10
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> 11
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, Inc., which
we refer to as Telpri.
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......... PRTC, Celulares Telefonica and Telpri's other
subsidiaries will fully and unconditionally
guarantee the exchange notes. However, these
subsidiary guarantors will guarantee the
exchange notes only to the extent they
guarantee any of our credit facilities. For
additional information about the guarantee, 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 Telpri'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, Telpri 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 Telpri 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;
- enter into some types of sale and
leaseback transactions; and
- merge, consolidate or sell assets.
7
<PAGE> 12
The indenture will also limit the ability of
Telpri's non-guarantor subsidiaries to incur
debt during any period that Telpri'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> 13
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 consolidated financial statements and
notes thereto of Telpri and its predecessors as of and for the three year period
ended on December 31, 1998, which have been audited by Deloitte & Touche LLP and
from the unaudited consolidated financial statements as of June 30, 1999 and for
the six-month periods ended June 30, 1999 and 1998, of Telpri and its
predecessors, all of which are included elsewhere in this prospectus. 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 PERIOD PERIOD
SIX FROM FROM SIX
MONTHS MARCH 2 JANUARY 1 MONTHS
ENDED THROUGH THROUGH ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, MARCH 1, JUNE 30, PRO FORMA ------------------------------
1999 1999 1999 1998 1998 1998 1997 1996
--------- -------- --------- -------- --------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues and Sales............. $670.3 $447.0 $223.3 $639.0 $1,270.7 $1,270.7 $1,234.1 $1,201.4
Operating Costs and Expenses... 622.6 386.8 222.4 504.7 1,139.0 1,043.4 989.6 1,060.5
------ ------ ------ ------ -------- -------- -------- --------
Operating Income............... 47.7 60.2 .9 134.3 131.7 227.3 244.5 140.9
Interest Income (Expense),
Net.......................... (46.7) (29.3) .4 1.7 (100.4) 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........... (1.1) (11.7) -- -- (10.1) -- -- --
------ ------ ------ ------ -------- -------- -------- --------
Net Income, Before
Extraordinary Charge......... 1.7 20.4 1.9 135.9 15.8 224.4 245.8 141.7
Extraordinary Charge........... -- (60.5) -- -- -- -- -- --
------ ------ ------ ------ -------- -------- -------- --------
Net Income (Loss).............. $ 1.7 $(40.1) $ 1.9 $135.9 $ 15.8 $ 224.4 $ 245.8 $ 141.7
====== ====== ====== ====== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
Amortization................. $151.4 $ 99.5 $ 50.4 $145.7 $ 305.8 $ 296.5 $ 279.2 $ 254.6
Cash Flow from Operations...... 149.8 123.8 55.9 272.8 409.1 613.8 508.2 504.1
Capital Expenditures........... 104.3 71.1 33.2 110.6 288.0 288.0 362.2 391.4
Cash Flow from Financing....... (51.4) (65.6) 14.2 (166.9) (319.8) (319.8) (178.7) (103.5)
EBITDA(1)...................... 199.1 159.7 51.3 280.0 437.5 523.8 523.7 395.5
EBITDA Margin(2)............... 30% 36% 23% 44% 34% 41% 42% 33%
Total Debt to EBITDA
Ratio(3)..................... 3.8x 3.2x 3.5x
EBITDA to Interest Expense
Ratio........................ 4.3x 5.5x 4.4x
Ratio of Earnings to Fixed
Charges(4)................... 1.1 2.1 1.3
</TABLE>
- ---------------
(1) EBITDA represents operating income plus depreciation and amortization
expense. EBITDA is presented because management believes it is a widely
accepted financial indicator. 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. Our
calculation of EBITDA may be different from the calculation used by other
companies and therefore comparability may be affected.
9
<PAGE> 14
(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>
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>
<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 Revenue Per User
(ARPU)...................................... $ 48 $ 54 $ 49 $ 59 $ 71
</TABLE>
See the introductory paragraphs and notes to "Selected Historical Financial and
Operating Data."
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<PAGE> 15
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.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE AND WE FACE A SIGNIFICANT
INCREASE IN COMPETITION
The Puerto Rico telecommunications market has become increasingly
competitive as a result of the implementation of the Telecommunications Act of
1996 (the "1996 Federal Act") and the Puerto Rico Telecommunications Act of 1996
(the "Puerto Rico Act"). These laws opened the local telephone services market
to competition. 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
on-island long distance market share declined in the first two quarters of 1999,
as discussed below. Furthermore, primarily as a result of these laws, many new
competitors have entered the Puerto Rico telecommunications industry. Our
competitors include:
- AT&T Corp.;
- 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.
The on-island long distance market has been open to competition since
September 1996. We had a 98% on-island long distance market share as of December
31, 1998, largely because the selection of an alternate carrier required dialing
5 additional digits when making a call. However, competition has increased since
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. In addition, as of February 1, 1999, Telefonica Larga Distancia
("TLD"), a subsidiary of Telefonica Internacional S.A., began offering on-island
long distance services in addition to the off-island long distance services
which it has been offering since 1992. Some of our other competitors have also
benefited from the elimination of the need to dial additional numbers. Although
there was no formal "balloting" of customers in connection with the change to
dialing parity, our market share in the on-island long distance market has
decreased due to the increase in competition. 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 from some of
the competitors listed above, as well as from ClearComm L.P. which, through a
joint venture with TLD, is expected to enter the wireless market shortly. In
June 1999, AT&T entered the wireless market and began offering service under the
brand name SunCom. Licenses have been granted to eight companies (including
Celulares Telefonica) to provide wireless telephony services in all or part of
Puerto Rico. Our competitors may be able to use their substantial financial,
personnel and other resources, including their brand names, to compete
effectively with us in Puerto Rico.
WE COULD BE REQUIRED TO PROVIDE OTHER COMPETITORS WITH ACCESS TO OUR SERVICES
AND FACILITIES ON TERMS THAT WE CONSIDER UNFAVORABLE
The 1996 Federal Act and the Puerto Rico 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
11
<PAGE> 16
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 1996 Federal Act;
- provide for the reselling of all services offered on a retail basis; and
- 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
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.
The effects of Hurricane Georges on our operations continued into 1999. As
of December 31, 1998, we had approximately 82,600 lines classified as out of
service as compared with a month-end average of approximately 5,700 for the
first five months of 1998. By May 31, 1999 most of the lines affected by
Hurricane Georges were back in service with the exception of those associated
with drop wires in rural areas. As of June 30, 1999, we had approximately 14,900
lines classified as out of service, due mostly to the effects of three weeks of
heavy rain and thunderstorms and power outages during the month of June 1999.
The waiting list of orders for new installations increased to 24,600 at June 30,
1999 from 13,500 at May 31, 1998 because our efforts in late 1998 and early 1999
were devoted primarily to restoring service in the areas adversely affected by
Hurricane Georges. Substantially all of the damage caused by Hurricane Georges
has now been repaired. 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."
12
<PAGE> 17
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 AND COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS AND RESULTS OF OPERATIONS
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.
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 -- WE ARE REQUIRED TO OBTAIN AUTHORIZATIONS FROM THE FCC
AND THE TELECOMMUNICATIONS REGULATORY BOARD OF PUERTO RICO TO OFFER SOME OF OUR
TELECOMMUNICATIONS 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."
WE FACE RISKS ASSOCIATED WITH YEAR 2000 ISSUES -- IF OUR COMPUTER SYSTEMS AND
SOFTWARE FAIL TO COMPLY WITH YEAR 2000 REQUIREMENTS, THERE COULD BE A MATERIAL
ADVERSE EFFECT ON OUR COMPANY
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. 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 TRANSFER -- U.S. FEDERAL AND PUERTO RICO STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID SOME CLAIMS IN RESPECT OF THE EXCHANGE NOTES AND
REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of the Commonwealth of Puerto Rico fraudulent
transfer/conveyance law, claims in respect of the exchange notes
13
<PAGE> 18
could be avoided or subordinated, in whole or in part, to some or all of our
other debts in a bankruptcy or reorganization proceeding or a lawsuit by or on
behalf of our creditors if, among other things:
- we incurred the debt with the intent to hinder, delay or defraud a
present or future creditor; or
- we received less than reasonably equivalent fair value or fair
consideration; and
(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 would
incur, debts beyond our 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.
The measures of insolvency for the considerations listed above will vary
depending upon the law of the jurisdiction being applied. Generally, however, we
would be considered insolvent if:
- the sum of our debts, including probable contingent or unliquidated
liabilities, was greater than the fair saleable value of all of our
assets; or
- the fair saleable value of our assets was less than the amount that would
be required to pay the probable liabilities on our existing debts,
including contingent or unliquidated liabilities, as they become absolute
and mature.
Based upon our analysis of internal cash flow projections, recent operating
history, other financial information (including, but not limited to, our
probable contribution rights) and the estimated value of assets and probable
liabilities, net of the estimated value of probable contribution rights, we
believe that we were not, are not, nor will we be, rendered insolvent by the
issuance of the old notes or the exchange notes. 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 ours 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.
14
<PAGE> 19
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
15
<PAGE> 20
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 ("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 Telpri,
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.
16
<PAGE> 21
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 (in addition to the stated interest on 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
which is the number of days that rate of additional interest was applicable
during that period (determined on the basis of a 360-day year comprised of
twelve 30-day months), and the denominator of which 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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<PAGE> 22
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.
Telpri has agreed to pay all expenses incident to the exchange offer
(including expenses of one counsel for the holders of the old notes) other than
commissions or concessions of any broker-dealers. 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 sole 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 sole 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 OLD 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 the old
notes surrendered. Holders of old notes that are accepted for exchange will
receive, in cash, accrued
18
<PAGE> 23
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 ("DTC"), for the
purpose of facilitating the exchange offer. Subject to the establishment
thereof, any
19
<PAGE> 24
financial institution that is a participant in DTC'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 (as 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 (including time of
receipt), acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole 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 sole 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
(including 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
20
<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 sole 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 sole 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 sole discretion, deem necessary for the consummation of the
exchange offer as contemplated hereby.
21
<PAGE> 26
If we determine in our sole 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
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:
Bank of New York
101 Barclay Street
Floor 21 West
New York, NY 10286
Telephone: (212) 815-2588
Facsimile: (212) 815-5915
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 will pay the cash expenses to be incurred in connection with the
exchange offer, other than the commissions or concessions of any broker-dealers.
These expenses include fees and expenses of the exchange agent and trustee,
accounting and legal fees and printing costs, among others.
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 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;
22
<PAGE> 27
- 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,
Telpri was formed to hold the capital stock of PRTC and Celulares Telefonica.
On July 21, 1998, the GTE Group agreed to purchase from the Puerto Rico
Telephone Authority a controlling equity interest in Telpri. 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 ESOP of 7% of the outstanding
common stock of Telpri. 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 ESOP for the shares of Telpri and the payment of a special dividend
to the Puerto Rico Telephone Authority by Telpri of $1,570.2 million. In
addition, in exchange for its interest in Telpri, the Puerto Rico Telephone
Authority agreed to make capital contributions to Telpri 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.
23
<PAGE> 28
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 ESOP to purchase 3% of Telpri'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 Telpri's shares and the GTE Group purchased and contributed an additional
1% of Telpri's shares to the ESOP. As a result of these contributions and the
purchase of 3% of Telpri's shares using funds borrowed from Telpri, the ESOP
received a total of 7% of Telpri's shares. For more information regarding the
ESOP, 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%
(decreasing to 6%) of our earnings before deducting interest payments, taxes and
depreciation allowance (as defined in the relevant agreement). 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."
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 Telpri
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.
24
<PAGE> 29
The government may sell any or all of its Telpri 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."
25
<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 ESOP 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 Telpri's shares contributed by the GTE Group to the ESOP and (b) an
amount equal to $26.1 million representing the value of 3% of Telpri's
shares purchased by the ESOP with the proceeds of a $26.1 million loan from
Telpri.
(2) Represents the commitment by the Puerto Rico Telephone Authority to make
future contributions to Telpri 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 Telpri.
26
<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 Telpri and its
predecessors as of and for the five-year period ended December 31, 1998, and the
notes thereto and as of and for the six-month periods ended June 30, 1999 and
1998 and the notes thereto. 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 our historical
consolidated financial statements and notes thereto 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, and our
unaudited historical condensed consolidated financial statements and the notes
thereto as of and for the six-month periods ended June 30, 1999 and 1998, which
have been reviewed by Deloitte & Touche LLP, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
COMPANY PREDECESSORS PREDECESSORS
-------- -------------------- ---------------------------------------------------
PERIOD PERIOD
FROM FROM SIX
MARCH 2 JANUARY 1 MONTHS
THROUGH THROUGH ENDED YEAR ENDED DECEMBER 31,
JUNE 30, MARCH 1, JUNE 30, ---------------------------------------------------
1999 1999 1998 1998 1997 1996 1995 1994(1)
-------- --------- -------- -------- -------- -------- -------- -------
(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(2)............... (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(3)............... 71.1 33.2 110.6 288.0 362.2 391.4 383.9 282.6
Cash Flow from Financing.............. (65.6) 14.2 (166.9) (319.8) (178.7) (103.5) (34.6) (148.1)
EBITDA(4)............................. 159.7 51.3 280.0 523.8 523.7 395.5 487.0 416.6
EBITDA Margin(5)...................... 36% 23% 44% 41% 42% 33% 44% 42%
Ratio of Earnings to Fixed
Charges(6).......................... 2.1
</TABLE>
<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>
27
<PAGE> 32
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
--------------- -------------------------------------------
AS OF
JUNE 30, AS OF DECEMBER 31,
--------------- -------------------------------------------
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 Revenue Per User
(ARPU)(7).......................................... $ 48 $ 54 $ 49 $ 59 $ 71 $ 69 $ 74
</TABLE>
- ---------------
(1) The financial statements for the four years ended December 31, 1995 to 1998
were audited by Deloitte & Touche LLP and were prepared in conformity with
GAAP applicable to commercial entities. The 1994 financial statements were
audited by Deloitte & Touche LLP and 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) No. 87 and 88 and liabilities for other
postretirement benefits under SFAS No. 106.
(2) Prior to their acquisition by the GTE Group, PRTC 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.
(3) The 1997 figure includes $49.5 million for the acquisition of PCS licenses
and the 1998 figure includes $30.5 million for replacement of plant damaged
by Hurricane Georges.
(4) EBITDA represents operating income plus depreciation and amortization
expense. EBITDA is presented because management believes it is a widely
accepted financial indicator. 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. Our
calculation of EBITDA may be different from the calculation used by other
companies and therefore comparability may be affected.
(5) Determined by dividing EBITDA by Revenues and Sales.
(6) 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.
(7) ARPU is defined as service revenues (excluding equipment sales), including
those from prepaid subscribers, divided by the average subscribers for the
period. The average subscribers for the period is determined using the
beginning and ending number of subscribers for the period.
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<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 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 Telpri 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 Telpri 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 PRTC 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 proportional purchase accounting to
the acquisition of Telpri by the GTE Group and without discontinuing the
application of SFAS No. 71 regulatory accounting principles. We have restated
these financial statements to incorporate proportional purchasing accounting 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
proportional purchasing 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 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 Telpri 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.
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 consolidated financial
statements as of and for the year ended December 31, 1998 and Note 10 to the
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<PAGE> 34
unaudited condensed 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 PBX 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 PBX 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
ESOP 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
ESOP 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 ARPU.............................................. $ 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 20%, 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
ESOP 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 ESOP in connection with the acquisition of
control of Telpri. 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
Telpri 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 proportional 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
proportional purchase accounting 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 proportional purchase accounting. Amortization expense was also increased by
a non-recurring charge for the cost of a portion of a PCS 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 Telpri. 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 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 Telpri
through the acquisition of control of Telpri by the GTE Group.
Prior to the acquisition, PRTC rates were based upon the cost of providing
services including a return on capital deployed. Further competition in its
markets was restricted and PRTC 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 telecommunications services that resulted in a reduction in the
economic life of PRTC 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
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<PAGE> 38
Effects of Certain Types of Regulation." With the deregulation of the operations
of Telpri and the opening of Puerto Rico's telecommunications markets to
competition this assurance no longer exists. PRTC 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 Telpri 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 $38.7 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 ($40.1 million net loss for
the period March 2, through June 30, 1999) compared to net income of $135.9
million for the same period in 1998. 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 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.
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,
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<PAGE> 39
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 ("NECA"). 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 WATS
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 primarily
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
ARPU than regular customers due to lower average minutes of use per customer.
Monthly ARPU averaged $49 in 1998, a decrease of $10 from 1997. The decline in
average revenues 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.
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<PAGE> 40
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, PBX 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.
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.
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<PAGE> 41
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 ARPU, 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 ARPU 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 (PCS) 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 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.
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As part of the closing of the acquisition of Telpri 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 ESOP 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, we distributed to the Puerto
Rico Telephone Authority as a cash dividend 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 Telpri 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.
In connection with the acquisition, our shareholders agreed that the common
shares of Telpri 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.
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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
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 (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. 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 (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, 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.
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
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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 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 has not made any
ruling regarding Internet traffic, and had not approved, prior to the FCC
ruling, any agreement regarding how Internet traffic was to be compensated. 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 has filed a motion for the reconsideration of the Board
Resolution and Order approving the interconnection agreements.
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.
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. Among the issues subject to arbitration is the compensation
for Internet traffic. We are taking the position that Internet traffic is not
subject to reciprocal compensation because it is interstate in nature.
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 ESOP owning 7% of our shares;
- our obligation to pay management fees and a technology license royalty
(and related out of pocket expenses) 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 NECA-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;
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- our offering of off-island long distance service as a result of the
termination of certain mutual non-competition covenants with TLD;
- 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, PRTC 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 and to service the Puerto Rico Telephone Authority's debt. 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, which 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% (the average rate at the acquisition date), we
would have had approximately $100.4 million in interest expense in 1998.
We created the ESOP 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 ESOP were valued at $60.9 million. The ESOP 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;
- 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 ESOP 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 (as defined in the relevant
agreements), 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.
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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 NECA. 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 costs. When we exit the
pool, we will be able to charge interexchange carriers a pre-subscribed
interexchange common carrier line charge ("PICC") 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 PICC rates established by the FCC
for all local exchange carriers and our estimates of projected access lines, we
expect to receive annualized PICC 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 PRTC
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 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 TLD terminated their mutual non-competition covenants effective
February 1, 1999. As a result, we are offering off- island long distance
service, and TLD 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.
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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
(approximately $99.2 million) has been accounted for as a purchase price
adjustment in accordance with the provisions of proportional purchase 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 ($60.5 million net of 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. Through our system conversion, enhancement activities and
enterprise testing, we presently expect to be compliant by the end of October
1999. Enterprise testing of the wireless billing system is expected to be
complete in early November 1999. Therefore, we presently expect that our
Wireline and Wireless telecommunications businesses will be ready in sufficient
time for the millennium rollover.
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 coordinate Year 2000 compliance. Following standard industry procedures, we
have grouped our Year 2000 issues into several categories by order of priority.
The inventory of our Year 2000 issues is complete.
- Call routing is deemed to be most important and testing began in October
1998. This testing is presently expected to conclude by the end of August
1999.
- Operational support systems such as billing and customer care follow next
in priority. Remediation and testing of these systems are currently
expected to be complete by the end of August 1999 except for the wireless
operational support system, which is expected to be complete by the end
of October, 1999.
- System level testing of third-party supplier products and internally
maintained software applications is in progress and is expected to be
complete by the end of August 1999.
- With the exception of the new wireless billing system, major testing of
equipment, products, and all mission critical systems is presently
expected to be complete by the end of September 1999.
- Enterprise (i.e., total company) testing of all major processes began in
November 1998 and is expected to be complete by the end of October 1999,
with the exception of the wireless billing system, which is expected to
be complete in early November 1999.
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USE OF INDEPENDENT VERIFICATION AND VALIDATION
We have hired two independent contractors to perform a specialized scanning
program check on our mainframe applications programs which have already been
tested and remediated internally. We expect that this additional testing process
and any necessary remediation will be complete by the end of September 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 $17 million had been spent as of June 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 have begun to examine the risks associated with our "most reasonably
likely worst case Year 2000 scenarios." Our program and plans currently indicate
a compliant network infrastructure to be deployed by the end of October 1999. A
general, unspecific, schedule shift that would erode progress beyond January 1,
2000, cannot reasonably be calculated.
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.
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 by the end of October 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.
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 expected to
be completed by the end of August 1999, and tested (as appropriate) by the end
of September 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
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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. We do not
presently anticipate that business operations will be disrupted (assuming
Celulares Telefonica's new billing system is installed on time and performs
properly) 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.
(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.
45
<PAGE> 50
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 proportional purchase accounting which
establishes a new basis of valuation for the assets and liabilities
acquired in the acquisition and the effect of Telpri becoming a taxable
enterprise; and
(iii) the discontinuation of regulatory accounting.
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
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 ESOP, which charge is included in the pro forma
results for the six months ended June 30, 1999. The pro forma adjustments do not
include an anticipated net loss in revenues, estimated at approximately $58
million on an annualized basis in 2000, from losing the NECA long-term support
subsidies based on the adoption of a price cap mechanism for common line access
under applicable FCC regulations. This adjustment was not included since the
change is not expected to take effect until sometime in the first half of 2000.
The pro forma adjustments also 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.
46
<PAGE> 51
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
TELPRI OLD NOTES TELPRI
---------- ------------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues and Sales................................. $1,270,684 $ -- $1,270,684
---------- ---------- ----------
Operating Costs and Expenses, Excluding
Depreciation and Amortization.................... 746,890 52,000(1) 833,161
(3,729)(2)
38,000(3)
Depreciation and Amortization...................... 296,493 9,344(4) 305,837
---------- ---------- ----------
Operating Costs and Expenses....................... 1,043,383 95,615 1,138,998
---------- ---------- ----------
Operating Income................................... 227,301 (95,615) 131,686
Interest Income (Expense), net..................... 2,479 (800)(5) (100,371)
(101,350)(6)
(700)(7)
Other Income (Expense), net........................ (5,413) (5,413)
---------- ---------- ----------
Income Before Taxes................................ 224,367 (198,465) 25,902
Income Tax Provision............................... 10,102(8) 10,102
---------- ---------- ----------
Net Income......................................... $ 224,367 $ (208,567) $ 15,800
========== ========== ==========
</TABLE>
See accompanying Footnotes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
47
<PAGE> 52
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>
PRO FORMA
ADJUSTMENTS TO
HISTORICAL FOR THE 1999 PERIOD REFLECT THE
------------------------------ ACQUISITION AND
MARCH 2, TO JANUARY 1, TO THE OFFERING OF PRO FORMA
JUNE 30, MARCH 1, SUBTOTAL OLD NOTES TELPRI
------------ -------------- -------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues and Sales............... $446,983 $223,300 $670,283 $ -- $670,283
Operating Costs and Expenses,
Excluding Depreciation and
Amortization................... 287,274 172,032 459,306 8,700(1) 471,160
(746)(2) --
3,900(3) --
Depreciation and Amortization.... 99,484 50,393 149,877 1,558(4) 151,435
-------- -------- -------- -------- --------
Operating Costs and Expenses..... 386,758 222,425 609,183 13,412 622,595
-------- -------- -------- -------- --------
Operating Income................. 60,225 875 61,100 (13,412) 47,688
Interest (Income) Expense, net... 29,336 (407) 28,929 200(5) 46,729
16,900(6) --
700(7) --
Other Income, net................ 1,285 569 1,854 -- 1,854
-------- -------- -------- -------- --------
Income Before Taxes.............. 32,174 1,851 34,025 (31,212) 2,813
Income Tax Provision (Benefit)... 11,729 -- 11,729 (10,632)(8) 1,097
-------- -------- -------- -------- --------
Net Income Before Extraordinary
Charge......................... $ 20,445 $ 1,851 $ 22,296 $(20,580) $ 1,716
======== ======== ======== ======== ========
</TABLE>
See accompanying Footnotes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
48
<PAGE> 53
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
proportional purchase 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) Prior to the acquisition, PRTC 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, PRTC was not
required to pay municipal and property taxes or Puerto Rico income taxes.
As a result of the acquisition, PRTC is now responsible for the direct
payment of municipal and property taxes and income taxes.
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.
(2) 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 proportional purchase 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
proportional purchase accounting at the time of the acquisition.
(3) 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.
(4) The $9.3 million pro forma adjustment for the year ended December
31, 1998 and the $1.6 million pro forma adjustment for the six months ended
June 30, 1999 reflect the net effect of proportional purchase accounting
adjustments recorded at the time of the acquisition on March 2, 1999
(primarily goodwill amortization).
(5) Reflects the amortization of underwriting discounts and expenses
related to the offering of the old notes over a ten-year period.
(6) 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.
(7) Reflects fees associated with the ESOP that was established at the
time of the acquisition.
(8) The $10.1 million pro forma adjustment to the Income Tax Provision
for the year ended December 31, 1998 and the $10.6 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.
49
<PAGE> 54
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 TDMA 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.
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 telephony solutions and to position
Telpri 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.
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, long distance, cellular, paging 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.
50
<PAGE> 55
- 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 Telpri
ESOP 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.
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
51
<PAGE> 56
access lines in service, excluding public phones, direct inward dialing business
lines, WATS lines, PBX 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 telecommunications
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
52
<PAGE> 57
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 PCS operators and paging
companies for the origination and termination of calls to and from PRTC's local
customers. These operators pay an access fee to PRTC 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.
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.
53
<PAGE> 58
The long-term support subsidy relates to the Common Line pool, which is
managed by the NECA. The revenues received from NECA 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 NECA Common Line pool, but
instead generates common line revenues from several access elements. These
elements include explicit PICC 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, PRTC is required to exit the NECA 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 WATS, 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 or LATAs. Puerto Rico
has the status of a single LATA and, as such there is no inter-LATA
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 TLD. An agreement between the
Puerto Rico Telephone Authority and TLD 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."
54
<PAGE> 59
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 PRTC 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 TLD. 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.
Our primary competitors in the off-island long distance market include
AT&T, MCI Worldcom, Sprint and TLD. 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.
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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 ARPU was $49 for 1998. This
compares to mainland U.S. averages of 100-125 minutes per customer per month and
ARPU of $43. The significant decrease in ARPU 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
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 ("CCPR") under the CellularOne brand name. SBC and Telmex recently
announced their agreement to acquire CCPR 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 TDMA 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 TLD.
Celulares Telefonica and CellularOne have been migrating customers to our
TDMA digital networks in recent years. We also hold two 10-megahertz PCS
licenses which have not been developed; one for San Juan
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<PAGE> 61
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.
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 ARPU 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.
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<PAGE> 62
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 ("VNU"). 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 PRTC 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 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 PRTC'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 PBX 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 TLD, 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.
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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 PRTC
business and residential customers. PRTC 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 and Primary
Rate Interface. We have the capability to provide fractional T-1s and high speed
circuits. In addition, we expect to complete the implementation of an ATM
Network by the third quarter of 1999, which would provide us with the capability
to offer our customers high-speed data transmission on a more efficient and
reliable network.
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 TDMA digital technology; and
- is composed of 131 cells with digital capability and 18 microcells.
We will continue to deploy TDMA cell-sites and attempt to continue
attracting analog customers to digital service. As compared to analog service,
TDMA digital service allows for enhanced security, greater efficiency of
spectrum use, extended battery life and the ability to offer value-added
services such as text messaging, caller ID and call forwarding. Additional cells
are expected to be deployed this year. All newly deployed cells are digital and
the existing microcells are undergoing digital conversion.
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
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<PAGE> 64
us. The 1996 Federal Act is intended to promote competition in all sectors of
the telecommunications marketplace, while preserving and advancing universal
telephone service.
The 1996 Federal Act 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 1996 Federal Act, 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 Act in
September 1996, which reorganized the regulation of the telecommunications
sector in Puerto Rico. The Puerto Rico 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
Act also incorporates the pro-competitive and universal service features found
in the 1996 Federal Act. 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 1996 Federal Act, the FCC
Rules and the Puerto Rico Act, including disputes relating to access charges.
The unfavorable resolution of these matters may have an adverse effect on our
financial results.
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 1996 Federal Act amended the 1934 Federal Act to advance universal
service and open the telecommunications market to local competition by requiring
the incumbent local exchange carriers, which we refer to as ILEC's to enter into
agreements permitting other telecommunications carriers to access and utilize
the ILECs' network for the provision of competitive local services. The 1996
Federal Act also provides for the resale of ILEC 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 1996 Federal Act. 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,
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various other ILECs 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 1996
Act 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 1996 Act that govern which network elements ILECs 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 ILECs.
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 (i.e., access services). The
FCC rules also provide support to low income subscribers, public and non-profit
health care centers, schools and libraries. The 1996 Federal Act 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 1996 Federal Act 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 not offset
by universal service support, any unrecovered revenue requirement likely will
fall to the intra-state jurisdiction for recovery.
Regulation of CMRS Providers
In 1993, Congress preempted state regulation of market entry and rates
charged by CMRS providers such as Celulares Telefonica, including for
intra-state wireless calls, and the FCC has since deregulated CMRS 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 TELECOMMUNICATIONS ACT OF 1996
General Provisions
The Puerto Rico Act was signed into law on September 12, 1996. The Puerto
Rico 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
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cable companies to secure franchises under the Puerto Rico 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 CMRS 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 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 (as defined in the Puerto Rico Act) 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 Telpri
The Puerto Rico 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 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 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 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 Act against us to that extent.
Competitive Provisions
The Puerto Rico Act includes a number of competitive provisions that mirror
the Federal Act. In some instances, the Puerto Rico Act extends the Federal
Act's ILEC-specific obligations to non-ILEC's as well. Under the Puerto Rico
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 1996 Federal
Act. The Puerto Rico 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 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 Act duplicates the provisions of the 1996 Federal Act
regarding negotiation, arbitration, and approval of interconnection agreements.
In particular, the Puerto Rico Act follows the federal scheme of voluntary
interconnection negotiations supplemented by Telecommunications Board mediation
or arbitration
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of unresolved issues. All interconnection agreements must be submitted to the
Telecommunications Board for approval.
Universal Service
The Puerto Rico Act contains a provision on universal service that
complements the provisions in the 1996 Federal Act. 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. PRTC is already
certified to receive funds.
Filing of Prices and Charges
The Puerto Rico 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 Act.
Interconnection Arbitration Proceedings and Agreements
Pursuant to the local competition provisions of the 1934 Federal Act, as
amended by the 1996 Federal Act, ILECs 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 1996 Federal Act and
the Puerto Rico Act.
As a result of the proceedings, the initiating parties have executed
interconnection agreements with us. At present an arbitration order has been
appealed by an entity and 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 7,445 employees plus 442 temporary employees as of June
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; and
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- 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 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........................ 275 600 200
Estimated Program Cost.................... $83 million $30 $30 million -
million -
$45 million $45 million
</TABLE>
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.
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.
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. Accordingly, we do not insure against damage to our outside
plant. 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.
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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.
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 PRTC 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. Statements contained in this prospectus concerning the
provisions of any document are not necessarily complete. 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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MANAGEMENT
BOARD OF DIRECTORS
The directors of the Company as of June 30, 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
Ignacio Santillana 51 Professor of Economics and GTE Holdings (Puerto Rico) LLC
Consultant to GTE
Jon Slater 53 President and Chief GTE Holdings (Puerto Rico) LLC
Executive Officer of Telpri
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, GDB Puerto Rico Telephone Authority
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 Telpri. 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
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.
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<PAGE> 71
Ignacio Santillana is a professor of economics at the Autonomous University
of Madrid and a consultant to GTE Corporation. From March 1996 to July 1998, Mr.
Santillana served as Senior Vice President -- International Business Development
of GTE Corporation. Mr. Santillana served as Chief Executive Officer of
Telefonica Internacional from 1990 to 1996. During the same period, he was
Chairman of the Board of Directors of TLD Puerto Rico, Telefonica de Romania,
Cointel (Argentina) and Vice-president of Telefonica del Peru as well as a
member of the Board of Directors of CTC (Chile), CANTV, Cocelo (Colombia), TASA
(Argentina) and Unisource.
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 GDB since August 1998. From
1995 until her appointment as President, Ms. Rovira was Executive Vice President
and held other positions at the GDB. 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
GDB.
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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EXECUTIVE OFFICERS
The executive officers of the Company as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Jon Slater 53 President and Chief Executive Officer
Jorge R. Menendez 50 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
Joaquin Rivera 60 Vice President of Network Services, Engineering and
Technical Planning
Felipe Piazza 48 Treasurer
</TABLE>
Jorge R. Menendez was appointed Vice President of Finance and Chief
Financial Officer on March 17, 1999. He has 29 years of experience in
telecommunications and public accounting. Since joining PRTC in 1973, Mr.
Menendez has occupied various management positions, including Executive Vice
President, Senior Vice President of Finance and Administration, Assistant Vice
President of Information Systems, Comptroller, Director Treasury Operations and
Internal Audit Manager of PRTC. He also worked for four years as Senior Auditor
with KPMG Peat Marwick LLP. Mr. Menendez holds a bachelors degree in Business
Administration from the University of Puerto Rico.
Jose E. Arroyo was appointed Vice President of Legal and Regulatory Affairs
on March 17, 1999. He joined PRTC 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 Telpri, PRTC, and Celulares Telefonica,
and President of the Pension Committee of PRTC. Prior to joining PRTC, 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 PRTC'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-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.
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<PAGE> 73
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 PRTC, 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.
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 PRTC in 1993, he has held various management positions at PRTC,
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
PRTC. 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 PRTC since 1996 and Treasurer of Telpri
and Celulares Telefonica since March 17, 1999. Mr. Piazza has 26 years of
experience in the telecommunications industry. Since joining PRTC 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 Telpri. 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 Telpri 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 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, 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.
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<PAGE> 74
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Telpri pursuant
to the foregoing provisions, Telpri 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 Telpri.
<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.......... 147,507
Carmen Culpeper, President... 137,000
Juan Velazquez, VP Network... 128,743
Felipe Piazza, Treasurer..... 126,570
Ivan Lopez Roura............. 122,368
</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, which we refer to as the Retirement Plan. The Retirement
Plan 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. It provides a benefit based on
a participant's years of service and earnings. Our pension benefits and
contributions to the Retirement Plan are related to basic salary differentials,
exclusive of overtime, incentive compensation and other similar types of
payments. Under the Retirement Plan, 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.
Under federal law, an employee's benefits under a qualified pension plan,
such as the Retirement Plan, are limited to certain maximum amounts. We maintain
a supplemental executive retirement plan, which supplements the benefits of any
participant in the Retirement Plan in an amount by which any participant's
benefits under the Retirement Plan 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 ownership of our common stock, as of June 30,
1999:
<TABLE>
<CAPTION>
DIRECT OWNERSHIP
---------------------
SHAREHOLDER DESCRIPTION NUMBER PERCENTAGE
- ----------- ----------- ------- ----------
<S> <C> <C> <C>
GTE Holdings (Puerto Rico) LLC A 100% indirect subsidiary of GTE
Corporation 400,101 40.01
Puerto Rico Telephone
Authority A public corporation and governmental
instrumentality of Puerto Rico 429,999 43.00
Popular, Inc. A bank holding company incorporated in
Puerto Rico 99,900 9.99
Employee Stock Ownership Plan
(ESOP) A stock bonus plan created by Telpri 70,000 7.0(1)
</TABLE>
- ---------------
(1) Of these shares, 3% are unallocated and pledged to Telpri to secure its loan
to the ESOP.
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 Telpri 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 Telpri,
including the corporate governance thereof.
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 ESOP) (collectively, the "Puerto
Rico Entities") 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) (the "Government Directors"), 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
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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.
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 Telpri (other than
a merger in which Telpri is the survivor or a merger of Telpri into a
wholly-owned subsidiary of Telpri); and
- the sale of assets in any fiscal year representing 25% or more of our
total assets.
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 the
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.
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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
ESOP 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
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 ESOP. Pursuant to this tag-along agreement, through March 2,
2009, the ESOP 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 ESOP 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.
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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 ESOP, shall have the right to request
that Telpri 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, Telpri, GTE Corporation, GTE Holdings, GTE International,
Popular, Inc., the Puerto Rico Telephone Authority and GDB 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 (the "Restricted Activities") 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.
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.
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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
Telpri, PRTC 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 ("EBITDA") 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 Agreement with GTE Supply
We intend to seek approvals by our directors and shareholders for a
proposed multi-year agreement with GTE Supply in 1999. GTE Supply, an affiliate
of GTE Corporation, provides procurement, logistics and warehousing services to
GTE affiliates and other third parties. We believe that we will realize annual
savings in supply and inventory carrying costs beginning in 2000 which will be
equal to or greater than the amounts payable to GTE Supply.
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 PRTC 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 Telpri to the ESOP to finance the purchase by the
ESOP 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 PRTC 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, PRTC 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,
- 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
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other unsecured debt in the ordinary course of business aggregating for
each of PRTC 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 PRTC 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 Telpri; 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 PRTC and Celulares Telefonica provide
joint and several guaranties of our obligations.
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.
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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 Telpri, PRTC 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 Telpri, 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 PRTC and Celulares Telefonica is currently a subsidiary guarantor.
Holders of the exchange notes will only be creditors of Telpri and of those
subsidiaries that are subsidiary guarantors. The note holders, through Telpri,
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 those earnings as
dividends, loans or other payments to us. Certain laws restrict the ability of
our subsidiaries
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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 will be fully and unconditionally
guaranteed, jointly and severally, on a senior unsecured basis by the subsidiary
guarantors.
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 Telpri 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 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.
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"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 "Additional Amounts" 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 ("Taxes") imposed, levied, collected or
assessed by or on behalf of, or within Puerto Rico, or any taxing authority
thereof or therein ("Taxing Authority"), 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 ("Additional Amounts") as
may be necessary so that the net amount received by each holder and beneficial
owner of exchange notes (including Additional Amounts) after such withholding or
deduction or other payment of Taxes will not be less than the 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 share-
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holder, 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 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 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 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 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
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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
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 Telpri 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 (iii) 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;
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(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) (vii) 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, (i) 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 to include the amount and type of such Debt in one of the above
categories and (ii) 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
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(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 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 Telpri 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
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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 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 Telpri 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.
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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 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
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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.
"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 (i) current liabilities
(excluding current maturities of long-term debt and obligations under capital
leases) and (ii) 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: (i) all obligations for borrowed money; (ii) all obligations
evidenced by debentures, notes or other similar instruments; (iii) 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; (iv) all Capitalized Lease
Obligations of such Person, including Capitalized Rent; (v) 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); (vi) 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; (vii) any stock of such person that by its terms matures or
is mandatorily redeemable pursuant to a sinking fund obligation or otherwise;
and (viii) 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
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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 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 (and "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:
(i) Liens existing on the Issue Date;
(ii) 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;
(iii) the Refinancing of any such Lien or of any such agreement,
permitted by the foregoing clause (i) or (ii), or the replacement or
renewal (without increase in principal amount unless otherwise permitted
hereunder) of the Debt secured thereby;
(iv) 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
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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 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;
(v) 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);
(vi) Liens in favor of the Company or any subsidiary guarantor;
(vii) Liens to secure Capitalized Lease Obligations; provided that (a)
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 (b) such Capitalized Lease Obligation is otherwise
permitted under the indenture;
(viii) Liens to secure obligations under Swap Contracts; and
(ix) 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 (vii) of "-- Certain Covenants -- Limitation on Debt of
Non-Guarantor Subsidiaries" or pursuant to clause (ix) 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 (i) the covenants, events of default and other provisions
applicable to such financing shall be customary for such transactions and shall
be on market terms (as determined in good faith by the Board of Directors) at
the time such financing is entered into, (ii) the interest rate applicable to
such financing shall be a market interest rate (as determined in good faith by
the Board of Directors) at the time such financing is entered into and (iii)
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.
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"Receivables Subsidiary" means a bankruptcy-remote, special-purpose Wholly
Owned Subsidiary formed in connection with a Permitted Receivables Financing.
"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 (i) to any Subsidiary of the Company in contemplation of or in
connection with such arrangement or (ii) 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.
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"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.
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 ("DTC")
or its nominee.
Upon the issuance of a Global Security, DTC 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 DTC ("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 DTC
(with respect to participants' interests) and such participants (with respect to
the owners of beneficial interests in such Global Security other than
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 DTC 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. The
Company has been advised by DTC that upon receipt of any payment of principal of
or interest on any Global Security, DTC 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
DTC. 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 DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated exchange notes only if:
(a) DTC notifies the Company that it is unwilling or unable to
continue as a depositary for such Global Security or if at any time DTC
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 DTC 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 DTC 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
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(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.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC 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 DTC 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. The Company 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, DTC 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.
DTC has advised the Company that DTC 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. DTC 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. DTC'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 DTC. Access to DTC'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 DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, 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 DTC
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. Telpri 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, Telpri 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. Telpri 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) other than commissions or concessions of any broker-dealers and will
indemnify the holders of the old notes, including broker-dealers, against
specific liabilities, including liabilities under the Securities Act.
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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 (i) in the case of United States federal income tax
consequences, U.S. Holders (as defined below), and (ii) in the case of Puerto
Rico tax consequences, holders that are not Puerto Rico Holders (as defined
below). 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 (the "Code"), 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 "PR Code") the regulations issued under the PR 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, (i) 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, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States, or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States federal income tax
purposes regardless of source or (iv) 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, (i) an individual,
trust or estate resident of Puerto Rico, (ii) a Puerto Rico corporation or
partnership, (iii) an individual, trust or estate engaged in a trade or business
in Puerto Rico, or (iv) 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.
UNITED STATES FEDERAL INCOME 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 (i) in the case of United States federal income tax
consequences, U.S. Holders (as defined below), and (ii) in the case of Puerto
Rico tax consequences, holders that are not Puerto Rico Holders (as defined
below). 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 (the "Code"), 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 "PR Code") the regulations issued under the PR Code and its predecessor
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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, (i) 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, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States, or any political subdivision thereof, (iii) an estate the income
of which is included in gross income for United States federal income tax
purposes regardless of source or (iv) 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, (i) an individual,
trust or estate resident of Puerto Rico, (ii) a Puerto Rico corporation or
partnership, (iii) an individual, trust or estate engaged in a trade or business
in Puerto Rico, or (iv) 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 that holder.
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.
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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 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 the market discount (if any) previously included in
income by the U.S. Holder, and reduced by any amortized bond premium (if any).
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
100
<PAGE> 105
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 (a "Section 933 Holder") will not be subject to United States federal
income tax on payments of interest on the exchange notes provided that (i) for
the 3 year period ending with the close of the Company's taxable year
immediately preceding the payment of interest (or the part of that period as may
be applicable), less than 80% of the Company's 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 the Company, this
determination to be made under Section 884(f)(1)(A) of the Code, and (ii) 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.
Holders of exchange notes that are not U.S. Holders and not Section 933
Holders ("Non-U.S. 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 (i) such gain is effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in the
United States, or (ii) 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.
101
<PAGE> 106
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 (the "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 (a "Non-Puerto Rico
Holder").
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 the Company. For this purpose, a "related person" generally will be a person
that directly or indirectly owns 50% or more in value of the stock of the
Company, or a corporation or partnership 50% or more of the value of whose stock
or interests are owned directly or indirectly by the Company.
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
("original issue discount"). 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 (including retirement) 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.
102
<PAGE> 107
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 Company, 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 and certain other matters governed by
U.S. federal and New York state law will be passed upon for the Company by
Curtis, Mallet-Prevost, Colt & Mosle LLP, U.S. counsel to our company. Certain
matters governed by Puerto Rico law will be passed upon by O'Neill & Borges,
special Puerto Rico counsel to Telpri.
EXPERTS
Our financial statements and the related notes thereto as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998, incorporated in this prospectus, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
With respect to the unaudited interim financial information of
Telecomunicaciones de Puerto Rico Inc. and its subsidiaries as of June 30, 1999
and for the six-month periods ended June 30, 1999 and 1998, which are included
in this prospectus, Deloitte & Touche LLP has applied limited procedures in
accordance with professional standards for a review of such information.
However, they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the
review procedures applied.
103
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements for the years
ended December 31, 1998, 1997 and 1996.................... F-8
Independent Accountants' Report............................. F-19
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998......................... F-20
Condensed Consolidated Statements of Operations for the
six-month periods ended June 30, 1999 and 1998
(Unaudited)............................................... F-21
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the six-month periods ended June 30, 1999 and
1998 (Unaudited).......................................... F-22
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six-month periods ended June
30, 1999 and 1998 (Unaudited)............................. F-23
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1999 and 1998
(Unaudited)............................................... F-24
Notes to Condensed Consolidated Financial Statements for the
six-month periods ended June 30, 1999 and 1998
(Unaudited)............................................... F-25
</TABLE>
F-1
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Telecomunicaciones de Puerto Rico, Inc.:
We have audited the accompanying consolidated balance sheets of
Telecomunicaciones de Puerto Rico, Inc. and subsidiaries (the "Companies") as of
December 31, 1998 and 1997, and the related consolidated statements of income,
comprehensive income, changes in shareholders' 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 Company's 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 consolidated financial statements present fairly, in
all material respects, the financial position of Telecomunicaciones de Puerto
Rico, Inc. and subsidiaries as of December 31, 1998 and 1997, and the 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> 110
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED 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)
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share; authorized,
10,000,000 shares; issued and outstanding, 1,000,000
shares................................................. 10 10
Additional paid-in capital................................ 1,835,796 1,930,788
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 consolidated financial statements.
F-3
<PAGE> 111
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial statements.
F-4
<PAGE> 112
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial statements.
F-5
<PAGE> 113
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' 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............. $10 $1,824,600 $ -- $(12,916) $1,811,694
Net income........................... 141,729 141,729
Dividends and return of capital...... (361,335) (141,729) (503,064)
Capital contributions................ 400,085 400,085
Minimum pension liability
adjustment........................ 897 897
--- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1996............. 10 1,863,350 -- (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............. 10 1,930,788 -- (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............. $10 $1,835,796 $ -- $(23,122) $1,812,684
=== ========== ========= ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 114
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial statements.
F-7
<PAGE> 115
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Telecomunicaciones de Puerto Rico, Inc. (the "Company") is a Puerto Rico
corporation which, as more fully described in Note 13, on March 1, 1999 acquired
from Puerto Rico Telephone Authority (the "Authority") all of the stock of
Puerto Rico Telephone Company, Inc. ("PRTC") and Celulares Telefonica, Inc.
("CT"), also referred to as the Predecessors or the Companies. Prior to the
acquisitions of PRTC and CT, the Company had no operations, nor assets and
liabilities, and operated as a holding company, which was formed in connection
with the efforts to privatize the Predecessors and to consummate the sale of
these companies to a consortium led by GTE Corporation.
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.
PRTC 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company are
comprised of PRTC and CT (the Predecessors) 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
consolidation.
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.
F-8
<PAGE> 116
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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 Company periodically reviews 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 Company, if the rate setting process is deregulated so that
rates are no longer based upon the Company's cost of providing service and if
the Company's markets are opened to entry by competitors, the Company may need
to reassess its 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).
F-9
<PAGE> 117
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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 consolidated 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 Company 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 Company 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
Company does not currently utilize derivative instruments. Therefore, the
adoption of SFAS No. 133 is not expected to have a significant effect on the
Company's results of operations or its financial condition.
F-10
<PAGE> 118
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 Company's 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 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 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 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.
F-11
<PAGE> 119
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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
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
consolidated 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> 120
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 Company was 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 shareholders' 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.
PUERTO RICO EMPLOYEES' RETIREMENT SYSTEM
Some of the Company's 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.
F-13
<PAGE> 121
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company is 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> 122
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 consolidated financial statements of the
Company and its subsidiaries, all taxes and payments in lieu of taxes were the
responsibility of the Authority.
9. COMMITMENTS AND CONTINGENCIES
(A) CONSTRUCTION COMMITMENTS
The Company's construction program for 1999 amounts to approximately
$224,000,000, 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.
10. SHAREHOLDERS' EQUITY
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 Company's
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 Company recorded expenses amounting to
approximately $31.7 million related to the above losses and as other income
amounts received from
F-15
<PAGE> 123
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 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 Company's stock to the ESOP. The ESOP acquired an additional
three percent (3%) with funds borrowed from the Company.
- A subsidiary of GTE Corporation acquired 40.01% plus one share of the
Company's 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 Telecomunicaciones de Puerto Rico,
Inc.
- 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 Company 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 Company's employees
which participated in the Commonwealth of Puerto Rico Employees' Retirement
System discontinued participating in the plan and became participants of the
Company's 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 Company 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.
F-16
<PAGE> 124
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company has two reportable segments, its Wireline and Wireless
business, 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 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.
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 1. The Company accounts for intersegment sales of products and
services at current market prices. Intersegment revenues were not material in
1998, 1997 and 1996. The Company is 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
========== ========== ==========
</TABLE>
F-17
<PAGE> 125
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
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> 126
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors of
Telecomunicaciones de Puerto Rico, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Telecomunicaciones de Puerto Rico, Inc. and subsidiaries (the "Company") as of
June 30, 1999, and the related condensed 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 condensed
consolidated statements of operations, comprehensive income (loss), changes in
shareholders' equity, and cash flows of Puerto Rico Telephone Company, Inc. and
Celulares Telefonica, Inc. (the "Predecessors") for the period from January 1,
1999 through March 1, 1999 and the six months ended June 30, 1998. All
information included in these financial statements is the representation of the
management of the Company and the Predecessors.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Telecomunicaciones de Puerto Rico,
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated February 25, 1999 (March 2, 1999 as to Note 13), we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
San Juan, Puerto Rico
August 13, 1999
F-19
<PAGE> 127
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
------------- ------------
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 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 $60,227,000 and $56,003,000 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, par value $0.01 per share; authorized,
10,000,000 shares; issued and outstanding, 1,000,000
shares................................................. 10 10
Additional paid-in capital................................ 699,274 1,835,796
Deferred ESOP compensation................................ (34,800) --
Subscription receivable................................... (161,808) --
Retained 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 condensed consolidated financial statements.
F-20
<PAGE> 128
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-------- --------------------------
FOR THE 1999 PERIOD
---------------------
MARCH 2 JANUARY 1 FOR THE SIX
THROUGH THROUGH MONTHS ENDED
JUNE 30, MARCH 1, JUNE 30, 1998
-------- --------- -------------
(IN THOUSANDS)
(UNAUDITED)
<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 condensed consolidated financial statements.
F-21
<PAGE> 129
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-------- ---------------------------
FOR THE 1999 PERIOD
----------------------
MARCH 2 JANUARY 1 FOR THE SIX
THROUGH THROUGH MONTHS ENDED
JUNE 30, MARCH 1, JUNE 30, 1998
-------- ---------- -------------
(IN THOUSANDS)
(UNAUDITED)
<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 condensed consolidated financial statements.
F-22
<PAGE> 130
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED 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)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSORS:
BALANCE, DECEMBER 31 1997.......... $10 $ 1,930,788 $ -- $ -- $ -- $ (5,760) $ 1,925,038
Net income....................... 135,942 135,942
Dividends and return of
capital........................ (137,190) (135,942) (273,132)
Capital contributions............ 106,639 106,639
Minimum pension liability
adjustment..................... 3,344 3,344
--- ----------- -------- --------- --------- -------- -----------
BALANCE, JUNE 30, 1998............. $10 $ 1,900,237 $ -- $ -- $ -- $ (2,416) $ 1,897,831
=== =========== ======== ========= ========= ======== ===========
BALANCE, DECEMBER 31, 1998......... $10 $ 1,835,796 $ -- $ -- $ -- $(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) -- -- -- --
--- ----------- -------- --------- --------- -------- -----------
BALANCE, MARCH 1, 1999............. $10 $ 303,480 $(26,100) $ -- $ -- $(20,753) $ 256,637
=== =========== ======== ========= ========= ======== ===========
COMPANY:
BALANCE, MARCH 1, 1999............. $ $ -- $ -- $ -- $ -- $ -- $ --
Acquisition by GTE and Popular
Inc. and proportional purchase
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 condensed consolidated financial statements.
F-23
<PAGE> 131
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
----------- -------------------------------
FOR THE 1999 PERIOD
---------------------------- FOR THE SIX
MARCH 2, JANUARY 1 MONTHS
THROUGH THROUGH ENDED JUNE 30,
JUNE 30, MARCH 1, 1998
----------- -------------- --------------
(IN THOUSANDS)
(UNAUDITED)
<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 condensed consolidated financial statements.
F-24
<PAGE> 132
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
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.
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. Also, PRTA agreed to
contribute cash or stock worth a total of $200 million in exchange for
their investment in the Company in even installments over five years
beginning on March 2, 1999, to reduce 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).
- PRTA received approximately $2.040 billion from the transaction, a
portion of which was paid by the Company from a special dividend
amounting to approximately $1.570 billion.
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.
The condensed consolidated financial statements of the Company include all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows for each period shown. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The December 31, 1998 condensed consolidated balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
PROPORTIONAL PURCHASE ACCOUNTING
The Acquisition was accounted for following proportional purchase
accounting principles under the Accounting Principles Board Opinion (APB) No.
16, Business Combinations, 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
F-25
<PAGE> 133
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Predecessors maintaining only a minority interest in the new company.
Under the provisions of Emerging Issues Task Force Consensus (EITF) 88-16, Basis
in Leveraged Buyout Transactions, 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
proportional purchase accounting. Proportional purchase accounting records a
portion of the assets and liabilities of the Company at the amounts paid by the
GTE Group. The application of proportional purchase 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.................................................... $ 258,706
Deferred tax assets......................................... 171,356
Property, plant and equipment............................... (99,250)
Employee benefit plan liabilities........................... (116,426)
Other intangibles........................................... 13,000
---------
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 and EITF 94-10,
Accounting for Income Tax Effects at Transactions Among (and with) Stockholders
That Have Effects for the Company. 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, which is expected to occur by the end of 1999.
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
F-26
<PAGE> 134
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 proportional purchase 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 consolidated 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' consolidated financial statements. Accordingly,
the accompanying condensed consolidated
F-27
<PAGE> 135
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed 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 consolidated
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.
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.
F-28
<PAGE> 136
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 proportional purchase
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.
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 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 cashflows, 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.
F-29
<PAGE> 137
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.
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, which is
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.................................. $670,283 $1,270,684
-------- ----------
Income before income tax.................................. $ 2,813 $ 25,902
-------- ----------
Net income before extraordinary charge.................... $ 1,716 $ 15,800
======== ==========
</TABLE>
The pro forma amounts reflect the inclusion in expenses of pro forma
adjustments for the six months ended June 30, 1999 of $16.9 million of interest
expense, $8.7 million for property, municipal and unemployment taxes, $3.9
million of management and technology fees and $1.6 million of amortization
expense.
F-30
<PAGE> 138
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
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 reserve for depreciation was adjusted based on the
revaluation of the original cost balances of property, plant and equipment, as a
part of proportional purchase accounting as required by EITF 90-12, Allocating
Basis to Individual Assets and Liabilities for Transactions Within the Scope of
Issue No. 88-16.
5. INTANGIBLES
Intangibles consist of:
<TABLE>
<CAPTION>
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>
F-31
<PAGE> 139
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
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 92.5 basis points, approximately 6.24% 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 87.5 basis points
(approximately 6.19% 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>
7. 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.
F-32
<PAGE> 140
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADDITIONAL PAID IN CAPITAL
Prior to the Acquisition, PRTC paid a cash dividend to the PRTA in an
amount equal to its net income plus amortization and depreciation. Also a
special dividend amounting to $1.565 billion from additional paid in capital was
paid to PRTA on March 1, 1999, as part of the Acquisition. In connection with
the Acquisition, our shareholders agreed that the common shares of Telpri 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.
DEFERRED ESOP COMPENSATION
An Employee Stock Option Plan ("ESOP") was created, wherein the 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.
8. INCOME TAXES
PRTC and CT were wholly owned subsidiaries of PRTA until March 1, 1999. The
act authorizing the creation of the PRTA exempts the 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 the 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 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.
F-33
<PAGE> 141
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
non-current in nature, was as follows (amounts in thousands):
<TABLE>
<S> <C>
Goodwill.................................................. $ 71,479
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.
9. 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 in
June 1999 and 273 employees accepted early retirement in July 1999. A provision
of $83 million will be recorded in the third quarter of 1999 associated with
this program. The Company and its two unions have also reached terms on a
program. 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 offering 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 cash disbursements.
10. 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.
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.
F-34
<PAGE> 142
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
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
---------- ---------- ----------
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
========== ========== ==========
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>
F-35
<PAGE> 143
TELECOMUNICACIONES DE PUERTO RICO, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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 their 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 the 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-36
<PAGE> 144
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
A-1
<PAGE> 145
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 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.
A-2
<PAGE> 146
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 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.
A-3
<PAGE> 147
- 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 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.
A-4
<PAGE> 148
- 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.
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 (the "IRC").
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 IRC. 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 (i) 60% of
qualified possession wages as defined in the IRC, (ii) a specified percentage of
depreciation deductions, and (iii) 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 (i)
extend the availability of Section 30A indefinitely; (ii) make it available to
companies establishing operations in Puerto Rico after October 13, 1995; and
(iii) 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 IRC. 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 IRC. The government of the Commonwealth,
A-5
<PAGE> 149
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.
A-6
<PAGE> 150
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.
ARPU: Average Revenue per Unit.
ATM: Asynchronous Transfer Mode, a high speed
transmission technology. ATM 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.
CLEC: A competitive local exchange carrier, a company
that competes with ILECs in the local services
market.
CMRS: Commercial Mobile Radio Service, an FCC term
for cellular and PCS providers.
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.
B-1
<PAGE> 151
Hand-off: The act of switching a call in progress from
one weak-signal site to a strong-signal site
without disrupting the call. In current
cellular systems, this function is performed by
the MTSO, which monitors the signal strength of
ongoing calls continuously.
ILEC: Incumbent Local Exchange Carriers, a company
historically providing local telephone service.
IXC: Inter-exchange Carriers.
LATA: Local Access Transport Area, a geographic area
in the United States within which a local
telephone company may offer telecommunications
services.
Microwave: Electromagnetic waves in the radio frequency
spectrum generally above 890MHz and below
20GHz.
MTSO: Mobile Telephone Switching Office is the
computer-controlled system that controls the
operation of a cellular system. The MTSO
selects the appropriate path for the
transmission of a cellular call and monitors
the hand-off process.
NECA: National Exchange Carriers Association.
OC 48: A data communications circuit consisting of
forty-eight DS3s capable of transmitting data
at approximately 2.45 Gbps.
PBX (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 PBX also allows
for calling within an office by way of
four-digit extensions.
PCS: Personal communications service. In Canada and
the United States, PCS spectrum has been
allocated for use by public systems at the
1.9GHz frequency range. It is expected that PCS
will initially consist primarily of enhanced
voice, two-way data and text messaging
services. Such PCS applications are expected to
be followed over time by services offering
integrated voice, data, image and eventually
perhaps video capability. PCS 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.
PSTN: Public Switched Telephone Network generally
refers to the local wireline telephone company.
RBOC: Regional Bell Operating Company.
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.
SMR: Specialized Mobile Radio communications
services generally refers to a two-way radio
dispatch service.
B-2
<PAGE> 152
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.
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.
WATS: Wide Area Telephone Services.
Wireline Telephone: Conventional landline telephone which uses
cable for transmitting signals.
B-3
<PAGE> 153
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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> 154
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 Bank of New
York.
4.2 Purchase Agreement.
4.3 Registration Rights Agreement.
5.1* Opinion of Curtis, Mallet-Prevost, Colt & Mosle LLP.
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.
</TABLE>
II-1
<PAGE> 155
<TABLE>
<C> <S>
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 Shareholders Agreement, dated as of March 2, 1999, by and among GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated, and Popular, Inc.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 Stock Purchase Agreement, dated as of March 1, 1999, by and between Telecomunicaciones de Puerto Rico, Inc
and Puerto Rico Telephone Authority.
10.13* 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.
10.14 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.
10.15* 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.
10.16* 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.
10.17 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.
10.18* $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.
10.19* Letter Amendment to the Five-Year Credit Agreement, dated May 7, 1999.
</TABLE>
II-2
<PAGE> 156
<TABLE>
.20*0 $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.
<C> <S>
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 Consents of Deloitte & Touche LLP.
23.2* Consent of O'Neill & Borges.
23.3* Consent of Curtis, Mallet-Prevost, Colt & Mosle LLP.
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.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Tender Instructions.
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
Each undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes 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 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-3
<PAGE> 157
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 to be executed on their behalf by the undersigned, thereunto duly
authorized, in the City of Guaynabo, Commonwealth of Puerto Rico, on August 18,
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-4
<PAGE> 158
POWERS OF ATTORNEY
We, the undersigned directors and officers of Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
do hereby constitute and appoint Mr. Jon Slater and Mr. Felipe Piazza, and each
of them, our true and lawful attorneys and agents, to do any and all acts and
things in our names and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporations to comply with the
Securities Act of 1933 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities stated herein on August 16, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ JON SLATER Chief Executive Officer
- --------------------------------------------------------
Jon Slater
/s/ FELIPE PIAZZA Acting Principal Financial Officer
- --------------------------------------------------------
Felipe Piazza
/s/ ROBERT HUBERTY Principal Accounting Officer
- --------------------------------------------------------
Robert Huberty
/s/ FARES SALLOUM Director
- --------------------------------------------------------
Fares Salloum
/s/ ALFRED C. GIAMMARINO Director
- --------------------------------------------------------
Alfred C. Giammarino
/s/ MICHAEL T. MASIN Director
- --------------------------------------------------------
Michael T. Masin
/s/ IGNACIO SANTILLANA Director
- --------------------------------------------------------
Ignacio Santillana
/s/ JON SLATER Director
- --------------------------------------------------------
Jon Slater
/s/ RICHARD CARRION Director
- --------------------------------------------------------
Richard Carrion
</TABLE>
II-5
<PAGE> 159
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ ANGEL MOREY Director
- --------------------------------------------------------
Angel Morey
/s/ LOURDES M. ROVIRA Director
- --------------------------------------------------------
Lourdes M. Rovira
/s/ CARLOS VIVONI Director
- --------------------------------------------------------
Carlos Vivoni
</TABLE>
II-6
<PAGE> 160
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 August 18, 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> 161
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 August 18, 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> 162
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 August 18, 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> 163
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 Bank of New
York.
4.2 Purchase Agreement.
4.3 Registration Rights Agreement.
5.1* Opinion of Curtis, Mallet-Prevost, Colt & Mosle LLP.
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 Shareholders Agreement, dated as of
March 2, 1999, by and among GTE Holdings (Puerto Rico) LLC,
GTE International Telecommunications Incorporated, and
Popular, Inc.
10.7 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.
10.8 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.
10.9 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.
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
SEQUENTIALLY
ITEM NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<C> <S> <C>
10.10 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.
10.11 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.
10.12 Stock Purchase Agreement, dated as of March 1, 1999, by and
between Telecomunicaciones de Puerto Rico, Inc and Puerto
Rico Telephone Authority.
10.13* 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.
10.14 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.
10.15* 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.
10.16* 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.
10.17 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.
10.18* $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.
10.19* Letter Amendment to the Five-Year Credit Agreement, dated
May 7, 1999.
10.20* $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.
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 Consents of Deloitte & Touche LLP.
23.2* Consent of O'Neill & Borges.
23.3* Consent of Curtis, Mallet-Prevost, Colt & Mosle LLP.
24.1 Power of Attorney -- Included in signature page.
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
SEQUENTIALLY
ITEM NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<C> <S> <C>
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.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Tender Instructions.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 3.4
TELECOMUNICACIONES DE PUERTO RICO, INC.
BYLAWS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OFFICES................................................................................................. 1
Principal Office..................................................................................... 1
Other Offices........................................................................................ 1
MEETINGS OF STOCKHOLDERS................................................................................ 1
Annual Meetings...................................................................................... 1
Special Meetings..................................................................................... 1
Place of Meetings.................................................................................... 2
Notice of Meetings................................................................................... 2
List of Stockholders................................................................................. 2
Quorum............................................................................................... 3
Voting............................................................................................... 3
BOARD OF DIRECTORS...................................................................................... 4
General Powers....................................................................................... 4
Number, Qualifications and Term of Office............................................................ 4
Quorum............................................................................................... 5
Place of Meetings, etc............................................................................... 5
First Meetings....................................................................................... 5
Regular Meetings..................................................................................... 6
Special Meetings; Notice............................................................................. 6
Organization......................................................................................... 6
Action Without a Meeting............................................................................. 6
Meetings by Conference Telephone..................................................................... 7
Resignations......................................................................................... 7
Removal.............................................................................................. 7
Vacancies............................................................................................ 7
Compensation......................................................................................... 8
Committees........................................................................................... 8
OFFICERS................................................................................................ 9
Number and Election.................................................................................. 9
Term of Office and Removal........................................................................... 9
Salaries............................................................................................. 9
Delegation Of Officers' Duties....................................................................... 9
Vacancies............................................................................................ 10
Chairman of the Board and President.................................................................. 10
Vice Presidents...................................................................................... 11
The Secretary and Assistant Secretaries.............................................................. 11
The Treasurer and Assistant Treasurers............................................................... 12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
INDEMNIFICATION......................................................................................... 12
Indemnification of Officers and Directors, etc....................................................... 12
CHECKS, DRAFTS, ETC..................................................................................... 13
SHARES AND THEIR TRANSFER............................................................................... 13
Certificates of Stock................................................................................ 13
Transfers of Stock................................................................................... 14
Closing of Stock Transfer Books...................................................................... 14
Lost or Destroyed Stock Certificates................................................................. 15
Inspection of Books by Stockholders.................................................................. 15
Dividends............................................................................................ 15
NOTICES................................................................................................. 16
SEAL.................................................................................................... 16
FISCAL YEAR............................................................................................. 16
INTERESTED DIRECTORS.................................................................................... 17
Approval of Transactions............................................................................. 17
AMENDMENTS.............................................................................................. 18
</TABLE>
ii
<PAGE> 4
TELECOMUNICACIONES DE PUERTO RICO, INC.
* * * * * * * * * *
BYLAWS
* * * * * * * * * *
OFFICES
1. Principal Office. The registered office of TELECOMUNICACIONES DE
PUERTO RICO (hereinafter called the "Corporation"), in the Commonwealth of
Puerto Rico ("Puerto Rico") shall be at 361 San Francisco Street, Penthouse, San
Juan, Puerto Rico. The name of its registered agent therein is CT Corporation
System.
2. Other Offices. The Corporation may also have an office or offices at
such other place or places, either within or without Puerto Rico, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
MEETINGS OF STOCKHOLDERS
3. Annual Meetings. An annual meeting of stockholders shall be held at
11:00 a.m. local time, on the second Tuesday of [February] of each year,
beginning in the year [1999] if not a legal holiday and if a legal holiday then
on the next business day following, when they shall elect, by plurality vote, a
Board of Directors and transact such other business as may properly be brought
before the meeting.
4. Special Meetings. Special meetings of the stockholders for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board (if
there be one) or by the President, and shall be called by the Chairman of the
Board (if there be one) or the President or the Secretary or the Assistant
<PAGE> 5
Secretary at the request in writing of a majority of the Board of Directors, or
at the request in writing of stockholders owning a majority in number of shares
of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
5. Place of Meetings.
(a) All annual meetings of the stockholders for the election of
directors and all special meetings of stockholders held in lieu thereof, shall
be held at the principal office of the Corporation or at such other place either
within or without Puerto Rico as shall be fixed by the Board of Directors and
specified in the notice of the meeting.
(b) Special meetings of the stockholders for any other purpose or
purposes may be held at any place or places as shall be stated in the call or
notice of the meeting.
6. Notice of Meetings.
(a) Written notice of the annual meeting of stockholders shall be
served upon or mailed to each stockholder entitled to vote thereat, at such
address as appears on the stock books of the Corporation, at least ten (10) days
prior to the meeting.
(b) Written notice of a special meeting of the stockholders, stating
the time and place and purpose thereof, shall be served upon or mailed, postage
prepaid, at least ten (10) days before such meeting or such greater number of
days as may be prescribed by statute, to each stockholder entitled to vote
thereat at such address as appears on the books of the Corporation.
7. List of Stockholders. A complete list of stockholders entitled to
vote at every election of directors, arranged in alphabetical order with the
residence of each and the number of voting shares held by each, shall be
prepared and made by the Secretary and filed in a place in the city in which the
election is to be held, at least ten (10) days before every such election, and
2
<PAGE> 6
shall, at all times during the usual hours for business and during the whole
time of said election, be open to the examination of any stockholder.
8. Quorum. The holders of a majority of the stock issued and
outstanding, and entitled to vote thereat, present in person, or represented by
proxy, shall be requisite and shall constitute a quorum at all meetings of the
stockholders for the transaction of business except if otherwise provided by
statute, by the Certificate of Incorporation, or by these bylaws. If, however,
such majority shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until the requisite amount of voting
stock shall be present. At such adjourned meeting at which the requisite amount
of voting stock shall later be represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
Notwithstanding any other provision of these bylaws, any action required or
permitted to be taken at any meeting of the stockholders may be taken without a
meeting if all stockholders of record on the date of notice that such vote
without a meeting shall take place consent thereto in writing and the writing(s)
are filed with the minutes of the proceedings of the stockholders meetings.
9. Voting. At each meeting of the stockholders every stockholder having
the right to vote shall be entitled to vote in person or by proxy appointed by
an instrument in writing subscribed by such stockholder and bearing a date not
more than three (3) years prior to said meeting, unless said instrument provides
for a longer period. Each stockholder shall have one vote for each share of
stock having voting power, registered in his name on the books of the
Corporation and, except where the transfer books of the Corporation shall have
been closed or a date shall have been fixed as a record date for the
determination of its stockholders entitled to
3
<PAGE> 7
vote, no share of stock shall be voted on at any election for directors which
shall have been transferred on the books of the Corporation within twenty (20)
days next preceding such election of directors. Upon the demand of any
stockholder, the vote for directors and the vote upon any question before the
meeting shall be by ballot. All elections shall be by a plurality vote.
BOARD OF DIRECTORS
10. General Powers. The property and business of the Corporation shall
be managed by its Board of Directors. In addition to the powers and authorities
by these bylaws expressly conferred upon them, the Board may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute, by the Certificate of Incorporation, or by these bylaws directed or
required to be exercised or done by the stockholders.
11. Number, Qualifications and Term of Office.
(a) The number of directors which shall constitute the first Board
shall be at least nine (9). Thereafter the number of directors which shall
constitute the whole Board shall be such as from time to time shall be fixed by
the Board of Directors or by the stockholders at the annual meeting to be held
for the election of directors or at any special meeting held for that purpose,
provided that the number so fixed shall not be less than three (3).
(b) Directors need not be stockholders.
(c) Directors shall be elected at the annual meeting of the
stockholders and in the manner provided in these bylaws, and each directors
shall be elected to serve until the annual meeting held next after his election
or until his successor shall have been elected and shall qualify or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
12. Quorum.
4
<PAGE> 8
(a) At all meetings of the Board of Directors, the presence of at
least two-thirds of the total number of directors shall be requisite and shall
constitute a quorum for the transaction of business.
(b) If the requisite quorum is not present at a duly convened
meeting of the Board of Directors, a majority of those present may notify the
absent directors by phone or fax of their desire to reconvene the meeting at
least 24 hours after such notice. At the reconvened meeting, five (5) directors
shall constitute a quorum, and the majority of those present will constitute the
act of the Board.
(c) The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by the Certificate of
Incorporation, or by these bylaws.
13. Place of Meetings, etc. The Board of Directors may meet at such
place or places as shall be specified or fixed in the respective notices or
waivers of notice of meetings thereof; and may keep the books and records of the
Corporation at such place or places as it shall from time to time determine.
14. First Meetings. The newly elected Board of Directors may meet
immediately after the adjournment of the annual meeting of stockholders, for the
purpose of organization or otherwise, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present, or they may meet at such time and
place as may be fixed by the written consent of all the directors or as
specified in a notice in the manner provided for calling special meetings of the
Board.
15. Regular Meetings. Regular meetings of the Board of Directors shall
be held at such place and at such times as the Board shall from time to time by
resolution determine. If any
5
<PAGE> 9
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held on the next succeeding business day not a legal holiday.
Notices of regular meetings need not be given.
16. Special Meetings; Notice. Special meetings of the Board may be
called by the Chairman of the Board (if there be one) or the President or the
Secretary on forty-eight (48) hours notice to each director. Special meetings
shall be called by the Chairman of the Board (if there be one), the President or
the Secretary in like manner and on like notice on the written request of two
(2) directors.
17. Organization. At each meeting of the Board of Directors, the
Chairman of the Board or, if there be no Chairman of the Board or in his
absence, the President or, in the absence of the President, a director, chosen
by a majority of the directors present at the meeting, shall act as Chairman of
the meeting. The Secretary or, in his absence, an Assistant Secretary or, in the
absence of both the Secretary and Assistant Secretary or Secretaries, any person
appointed by the Chairman of the meeting shall act as Secretary of the meeting.
18. Action Without a Meeting. Notwithstanding any other provision of
these bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee of the Board of Directors, if there be
any, may be taken without a meeting if all members of the Board of Directors or
the committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board of Directors
or the committee.
19. Meetings by Conference Telephone. Any one or more members of the
Board of Directors or any committee thereof may participate in a meeting of such
board or committee by means of conference telephone or similar communications
equipment, by means of which all
6
<PAGE> 10
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
20. Resignations. Any director of the Corporation may resign at any
time by giving written notice to the President, to the Secretary, or to the
Board of Directors of the Corporation. Such resignation shall take effect when
accepted by the Board or as of the date specified in the resignation.
21. Removal. Any or all of the directors may be removed at any time and
from time to time, either with or without cause, by the affirmative vote of the
holders of record of a majority in interest of the outstanding stock of the
Corporation having voting power, at a special meeting of the stockholders called
for that purpose, and the resulting vacancy or vacancies may be filled at the
same meeting, and by like vote, of the stockholders.
22. Vacancies. Vacancies in the Board of Directors caused by death,
resignation, removal, disqualification, or any other cause shall be filled by
majority vote of a quorum of the remaining directors then in office, if there be
a quorum remaining, and if not, then by the majority vote of the remaining
directors, though less than a quorum, or by the voting stockholders of the
Corporation at a meeting duly held for the purpose, and directors so chosen
shall hold office until the next annual election and until their successors
shall be duly elected and qualified, unless sooner displaced.
23. Compensation. Directors as such shall not receive any stated salary
or emolument for their services, but, by resolution of the Board, a fixed sum
and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board; provided, that nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor
7
<PAGE> 11
24. Committees. The Board of Directors may, by resolution passed by a
majority of the whole board, designate an executive committee and other
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the bylaws of the Corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
OFFICERS
25. Number and Election. The elective officers of the Corporation shall
be chosen annually by the directors and shall be a President, one or more Vice
Presidents, a Secretary, and a Treasurer. The Board may also in its discretion
elect a Chairman of the Board and Assistant
8
<PAGE> 12
Secretaries or Assistant Treasurers. Any two offices may be held by the same
person, except the offices of President and Vice President, or President and
Secretary or Vice President and Secretary. The Board may also elect such other
officers and agents as it may deem necessary to hold office for such terms and
exercise such powers and perform such duties except as otherwise provided in the
bylaws as may be authorized from time to time by the Board.
26. Term of Office and Removal. The officers of the Corporation shall
hold office until their successors are chosen and qualify in their stead. Any
officer elected or appointed by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the whole Board of Directors.
27. Salaries. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
28. Delegation Of Officers' Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may delegate, for the time being, the powers or duties, or
any of them, of such officer to any other officer or to any director.
29. Vacancies. If the office of any officer or agent becomes vacant for
any reason, the vacancy shall be filled by the affirmative vote of a majority of
a quorum of the Board of Directors; provided, however, that the President shall
have power to fill all vacancies in the office of Assistant Secretary or
Assistant Treasurer, such appointee to hold office until the vacancy shall be
filled by the Board of Directors.
30. Chairman of the Board and President.
(a) The Chairman of the Board (if there be one) shall preside at all
meetings of the Board of Directors and of the stockholders and also act as
chairman of any standing or
9
<PAGE> 13
special committees of which he is a member. In respect to all affairs and
business of the Corporation (except where by statute it is provided otherwise)
he shall have the powers of the president, whether the president be absent or
present.
(b) If there be no Chairman of the Board or in his absence, the
President shall have all the powers and discharge all the duties of the Chairman
and shall preside at all meetings of the Board of Directors and stockholders and
any standing or special committees of which he is a member. The President shall
be the chief executive officer of the Corporation; he shall have general and
active management of the business of the Corporation, subject to the control of
the Chairman of the Board (if there be one) and the Board of Directors. He shall
see that all orders and resolutions of the Board are carried into effect;
subject, however, to the right of the directors to delegate any specific powers,
except such as may be by statute exclusively conferred on the President, to any
other officer or officers of the Corporation. He or one of the Vice Presidents
shall execute bonds, mortgages, and other contracts requiring a seal, under the
seal of the Corporation, and shall sign certificates of stock.
31. Vice Presidents. Any Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President, and shall perform such other duties as the Board of Directors shall
prescribe.
32. The Secretary and Assistant Secretaries. The Secretary shall attend
all meetings of the Board of Directors and all meetings of stockholders and
record all votes and the minutes of all proceedings in a book to be kept for the
purpose, and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and all meetings of the Board of Directors requiring notice and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose
10
<PAGE> 14
supervision he shall be. The Assistant Secretary or Secretaries shall assist the
Secretary in the performance of, and in the latter's absence perform the duties
of, the office of Secretary.
33. The Treasurer and Assistant Treasurers.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys, and other valuable effects, in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
(b) He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements.
(c) He shall give the Corporation a bond if required by the Board of
Directors in a sum, and with one or more sureties, satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement,
or removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his possession or under his control belonging to the
Corporation. The Assistant Treasurer or Treasurers shall assist the Treasurer in
the performance of, and in his absence perform, the duties of the office of
Treasurer.
INDEMNIFICATION
34. Indemnification of Officers and Directors, etc. To the extent
permitted by the General Corporation Law of Puerto Rico, as amended from time to
time, the Corporation shall indemnify its officers, directors, employees and
agents, and shall advance expenses (including attorneys' fees) incurred by any
such person in defending any action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such advancements if it
shall ultimately be determined that such person is not entitled to
indemnification.
11
<PAGE> 15
CHECKS, DRAFTS, ETC.
35. All checks, drafts, or other orders for the payment of money,
notes, or other evidences of indebtedness issued in the name of the Corporation
shall be signed by such officer or officers, employee or employees of the
Corporation as shall from time to time be determined by resolution of the Board
of Directors.
SHARES AND THEIR TRANSFER
36. Certificates of Stock. Certificates for shares of the stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors. Such certificates shall be numbered and shall be entered in the books
of the Corporation as they are issued. They shall exhibit the holder's name and
the number of shares and shall be signed by the President or Vice President and
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary; provided, however, if the Corporation is authorized to issue more
than one class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitation or
restrictions or such preferences and/or right shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock. If the Corporation has a
Transfer Agent or an Assistant Transfer Agent or a Transfer Clerk acting on its
behalf and a Registrar, the signature of any such officer may be facsimile. No
stock certificate shall be valid until the same shall be attested or certified
by the Registrar and Transfer Agent of the Corporation, provided the Board of
Directors shall have determined the necessity for them and shall have appointed
such Registrar and Transfer Agent.
37. Transfers of Stock. Transfers of stock shall be made only on the
books of the Corporation by the person named in the certificate or by attorneys
lawfully constituted in writing
12
<PAGE> 16
and upon surrender of the certificate therefor. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the Puerto Rico.
38. Closing of Stock Transfer Books. The Board of Directors shall have
power to close the stock transfer books of the Corporation for a period or, not
exceeding fifty (50) days preceding the date of any meeting of stockholders, or
the date of payment of any dividend, or the date for the allotment of rights or
the date when any change or conversion or exchange of capital stock shall go
into effect or for a period or not exceeding fifty (50) days in connection with
obtaining the consent of stockholders for any purpose; provided, however, that
in lieu of the closing of the stock transfer books as aforesaid, the Board of
Directors may fix in advance a date, not exceeding fifty (50) days preceding the
date for any dividend, or the date for the allotment of rights, or the date when
any change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion, or exchange of capital stock, or to give
such consent, and in such case such stockholders and only such stockholders as
shall be stockholders of record on the date so fixed, shall be entitled to such
notice of, and to vote at, such meeting, and any adjournment thereof, or to
receive payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, or to give such consent, as the case may be,
13
<PAGE> 17
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid.
39. Lost or Destroyed Stock Certificates. Any person claiming any
certificate of stock issued to him by the Corporation to be lost or destroyed
and desiring a new certificate to be issued in lieu thereof shall make an
affidavit or affirmation of that fact and shall advertise the same as, if and
when required by the President or a Vice President of the Corporation, and if
required, such person shall also give the Corporation a bond of indemnity in
form and amount sufficient, in the opinion of such officer, to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of any such certificate whereupon a new certificate may be issued
of the same tenor and for the same number of shares as the one alleged to be
lost or destroyed.
40. Inspection of Books by Stockholders. The Board of Directors shall
determine from time to time whether and if allowed, when and under what
condition and regulations the accounts and books of the Corporation (except such
as may by statute be specifically open to inspection) or any of them shall be
open to the inspection of the stockholders, and the stockholders' rights in this
respect are and shall be restricted and limited accordingly.
41. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of capital
stock of the Corporation, subject to the provision of the Certificate of
Incorporation.
NOTICES
14
<PAGE> 18
42. (a) Whenever under the provisions of these bylaws notice is
required to be given to any director, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given by telegram,
cablegram, or by mail by depositing the same in the post office or letter box,
in a post-paid sealed wrapper, addressed to such stockholder, officer or
director at such address as appears on the books of the Corporation and such
notice shall be deemed to be given at the time when the same shall be thus
mailed or the telegram or cablegram sent.
(b) Any stockholder, director or officer may waive any notice
required to be given under these bylaws.
SEAL
43. The Board of Directors shall provide a corporate seal which shall
be in the form of a circle and shall bear the corporate title of the
Corporation, the year of its organization, and the words "Corporate Seal, Puerto
Rico." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
FISCAL YEAR
44. The fiscal year of the Corporation shall be the calendar year.
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<PAGE> 19
INTERESTED DIRECTORS
45. Approval of Transactions.
(1) No contract or transaction between the Corporation and one or
more of its directors, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes or a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract is specifically approved in good
faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders.
(2) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
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AMENDMENTS
46. These bylaws may be amended or repealed or new bylaws adopted by
the stockholders at any annual meeting, or at any special meeting, if notice of
the proposed amendment or alteration or adoption of new bylaws is included in
the notice of such special meeting. These bylaws may be amended or repealed or
new bylaws adopted by the affirmative vote of a majority of the whole Board of
Directors given at any meeting, the notice whereof mentions the proposed
amendment or alteration or adoption of new bylaws as one of the purposes of such
meeting.
* * * * * * * * * *
17
<PAGE> 1
EXHIBIT 3.5
PUERTO RICO TELEPHONE COMPANY, INC.
BYLAWS
<PAGE> 2
TABLE OF CONTENTS
PAGE
OFFICES......................................................................1
Principal Office.........................................................1
Other Offices............................................................1
MEETINGS OF STOCKHOLDERS.....................................................1
Annual Meetings..........................................................1
Special Meetings.........................................................1
Place of Meetings........................................................2
Notice of Meetings.......................................................2
List of Stockholders.....................................................2
Quorum...................................................................3
Voting...................................................................3
BOARD OF DIRECTORS...........................................................4
General Powers...........................................................4
Number, Qualifications and Term of Office................................4
Quorum...................................................................5
Place of Meetings, etc...................................................5
First Meetings...........................................................5
Regular Meetings.........................................................6
Special Meetings; Notice.................................................6
Organization.............................................................6
Action Without a Meeting.................................................6
Meetings by Conference Telephone.........................................7
Resignations.............................................................7
Removal..................................................................7
Vacancies................................................................7
Compensation.............................................................8
Committees...............................................................8
OFFICERS.....................................................................9
Number and Election......................................................9
Term of Office and Removal...............................................9
Salaries.................................................................9
Delegation Of Officers' Duties...........................................9
Vacancies...............................................................10
Chairman of the Board and President.....................................10
Vice Presidents.........................................................11
The Secretary and Assistant Secretaries.................................11
The Treasurer and Assistant Treasurers..................................11
INDEMNIFICATION.............................................................12
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<PAGE> 3
Indemnification of Officers and Directors, etc..........................12
CHECKS, DRAFTS, ETC.........................................................12
SHARES AND THEIR TRANSFER...................................................12
Certificates of Stock...................................................12
Transfers of Stock......................................................13
Closing of Stock Transfer Books.........................................13
Lost or Destroyed Stock Certificates....................................14
Inspection of Books by Stockholders.....................................15
Dividends...............................................................15
NOTICES.....................................................................15
SEAL........................................................................16
FISCAL YEAR.................................................................16
INTERESTED DIRECTORS........................................................16
Approval of Transactions................................................16
AMENDMENTS..................................................................17
ii
<PAGE> 4
PUERTO RICO TELEPHONE COMPANY, INC.
* * * * * * * * * *
BYLAWS
* * * * * * * * * *
OFFICES
1. Principal Office. The registered office of the PUERTO RICO TELEPHONE
COMPANY (hereinafter called the "Corporation"), in the Commonwealth of Puerto
Rico ("Puerto Rico") shall be at 361 San Francisco Street, Penthouse, San Juan,
Puerto Rico. The name of its registered agent therein is CT Corporation System.
2. Other Offices. The Corporation may also have an office or offices at
such other place or places, either within or without Puerto Rico, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
MEETINGS OF STOCKHOLDERS
3. Annual Meetings. An annual meeting of stockholders shall be held at
11:00 a.m. local time, on the second Tuesday of [February] of each year,
beginning in the year [1999] if not a legal holiday and if a legal holiday then
on the next business day following, when they shall elect, by plurality vote, a
Board of Directors and transact such other business as may properly be brought
before the meeting.
4. Special Meetings. Special meetings of the stockholders for any purpose
or purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the Chairman of the Board (if there be one) or
by the President, and shall be called by
<PAGE> 5
the Chairman of the Board (if there be one) or the President or the Secretary or
the Assistant Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
number of shares of the entire capital stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
5. Place of Meetings.
(a) All annual meetings of the stockholders for the election of
directors and all special meetings of stockholders held in lieu thereof, shall
be held at the principal office of the Corporation or at such other place either
within or without Puerto Rico as shall be fixed by the Board of Directors and
specified in the notice of the meeting.
(b) Special meetings of the stockholders for any other purpose or
purposes may be held at any place or places as shall be stated in the call or
notice of the meeting.
6. Notice of Meetings.
(a) Written notice of the annual meeting of stockholders shall be
served upon or mailed to each stockholder entitled to vote thereat, at such
address as appears on the stock books of the Corporation, at least ten (10) days
prior to the meeting.
(b) Written notice of a special meeting of the stockholders, stating
the time and place and purpose thereof, shall be served upon or mailed, postage
prepaid, at least ten (10) days before such meeting or such greater number of
days as may be prescribed by statute, to each stockholder entitled to vote
thereat at such address as appears on the books of the Corporation.
7. List of Stockholders. A complete list of stockholders entitled to vote
at every election of directors, arranged in alphabetical order with the
residence of each and the number of
2
<PAGE> 6
voting shares held by each, shall be prepared and made by the Secretary and
filed in a place in the city in which the election is to be held, at least ten
(10) days before every such election, and shall, at all times during the usual
hours for business and during the whole time of said election, be open to the
examination of any stockholder.
8. Quorum. The holders of a majority of the stock issued and outstanding,
and entitled to vote thereat, present in person, or represented by proxy, shall
be requisite and shall constitute a quorum at all meetings of the stockholders
for the transaction of business except if otherwise provided by statute, by the
Certificate of Incorporation, or by these bylaws. If, however, such majority
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of voting stock shall be
present. At such adjourned meeting at which the requisite amount of voting stock
shall later be represented, any business may be transacted which might have been
transacted at the meeting as originally notified. Notwithstanding any other
provision of these bylaws, any action required or permitted to be taken at any
meeting of the stockholders may be taken without a meeting if all stockholders
of record on the date of notice that such vote without a meeting shall take
place consent thereto in writing and the writing(s) are filed with the minutes
of the proceedings of the stockholders meetings.
9. Voting. At each meeting of the stockholders every stockholder having
the right to vote shall be entitled to vote in person or by proxy appointed by
an instrument in writing subscribed by such stockholder and bearing a date not
more than three (3) years prior to said meeting, unless said instrument provides
for a longer period. Each stockholder shall have one
3
<PAGE> 7
vote for each share of stock having voting power, registered in his name on the
books of the Corporation and, except where the transfer books of the Corporation
shall have been closed or a date shall have been fixed as a record date for the
determination of its stockholders entitled to vote, no share of stock shall be
voted on at any election for directors which shall have been transferred on the
books of the Corporation within twenty (20) days next preceding such election of
directors. Upon the demand of any stockholder, the vote for directors and the
vote upon any question before the meeting shall be by ballot. All elections
shall be by a plurality vote.
BOARD OF DIRECTORS
10. General Powers. The property and business of the Corporation shall be
managed by its Board of Directors. In addition to the powers and authorities by
these bylaws expressly conferred upon them, the Board may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute, by the Certificate of Incorporation, or by these bylaws directed or
required to be exercised or done by the stockholders.
11. Number, Qualifications and Term of Office.
(a) The number of directors which shall constitute the first Board
shall be at least nine (9). Thereafter the number of directors which shall
constitute the whole Board shall be such as from time to time shall be fixed by
the Board of Directors or by the stockholders at the annual meeting to be held
for the election of directors or at any special meeting held for that purpose,
provided that the number so fixed shall not be less than three (3).
(b) Directors need not be stockholders.
(c) Directors shall be elected at the annual meeting of the
stockholders and in the manner provided in these bylaws, and each directors
shall be elected to serve until the annual
4
<PAGE> 8
meeting held next after his election or until his successor shall have been
elected and shall qualify or until his death or until he shall resign or shall
have been removed in the manner hereinafter provided.
12. Quorum.
(a) At all meetings of the Board of Directors, the presence of at
least two-thirds of the total number of directors shall be requisite and shall
constitute a quorum for the transaction of business.
(b) If the requisite quorum is not present at a duly convened meeting
of the Board of Directors, a majority of those present may notify the absent
directors by phone or fax of their desire to reconvene the meeting at least 24
hours after such notice. At the reconvened meeting, five (5) directors shall
constitute a quorum, and the majority of those present will constitute the act
of the Board.
(c) The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by the Certificate of
Incorporation, or by these bylaws.
13. Place of Meetings, etc. The Board of Directors may meet at such place
or places as shall be specified or fixed in the respective notices or waivers of
notice of meetings thereof; and may keep the books and records of the
Corporation at such place or places as it shall from time to time determine.
14. First Meetings. The newly elected Board of Directors may meet
immediately after the adjournment of the annual meeting of stockholders, for the
purpose of organization or otherwise, and no notice of such meeting shall be
necessary to the newly elected directors in
5
<PAGE> 9
order legally to constitute the meeting, provided a quorum shall be present, or
they may meet at such time and place as may be fixed by the written consent of
all the directors or as specified in a notice in the manner provided for calling
special meetings of the Board.
15. Regular Meetings. Regular meetings of the Board of Directors shall be
held at such place and at such times as the Board shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday at the place where the meeting is to be held, then the meeting which
would otherwise be held on that day shall be held on the next succeeding
business day not a legal holiday. Notices of regular meetings need not be given.
16. Special Meetings; Notice. Special meetings of the Board may be called
by the Chairman of the Board (if there be one) or the President or the Secretary
on forty-eight (48) hours notice to each director. Special meetings shall be
called by the Chairman of the Board (if there be one), the President or the
Secretary in like manner and on like notice on the written request of two (2)
directors.
17. Organization. At each meeting of the Board of Directors, the Chairman
of the Board or, if there be no Chairman of the Board or in his absence, the
President or, in the absence of the President, a director, chosen by a majority
of the directors present at the meeting, shall act as Chairman of the meeting.
The Secretary or, in his absence, an Assistant Secretary or, in the absence of
both the Secretary and Assistant Secretary or Secretaries, any person appointed
by the Chairman of the meeting shall act as Secretary of the meeting.
18. Action Without a Meeting. Notwithstanding any other provision of these
bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee of the Board of Directors, if there be any, may
be taken without a meeting if all
6
<PAGE> 10
members of the Board of Directors or the committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or the committee.
19. Meetings by Conference Telephone. Any one or more members of the Board
of Directors or any committee thereof may participate in a meeting of such board
or committee by means of conference telephone or similar communications
equipment, by means of which all persons participating in the meeting can hear
each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
20. Resignations. Any director of the Corporation may resign at any time
by giving written notice to the President, to the Secretary, or to the Board of
Directors of the Corporation. Such resignation shall take effect when accepted
by the Board or as of the date specified in the resignation.
21. Removal. Any or all of the directors may be removed at any time and
from time to time, either with or without cause, by the affirmative vote of the
holders of record of a majority in interest of the outstanding stock of the
Corporation having voting power, at a special meeting of the stockholders called
for that purpose, and the resulting vacancy or vacancies may be filled at the
same meeting, and by like vote, of the stockholders.
22. Vacancies. Vacancies in the Board of Directors caused by death,
resignation, removal, disqualification, or any other cause shall be filled by
majority vote of a quorum of the remaining directors then in office, if there be
a quorum remaining, and if not, then by the majority vote of the remaining
directors, though less than a quorum, or by the voting stockholders of the
Corporation at a meeting duly held for the purpose, and directors so chosen
7
<PAGE> 11
shall hold office until the next annual election and until their successors
shall be duly elected and qualified, unless sooner displaced.
23. Compensation. Directors as such shall not receive any stated salary or
emolument for their services, but, by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board; provided, that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor
24. Committees. The Board of Directors may, by resolution passed by a
majority of the whole board, designate an executive committee and other
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets,
8
<PAGE> 12
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the bylaws of the Corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provides,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
OFFICERS
25. Number and Election. The elective officers of the Corporation shall be
chosen annually by the directors and shall be a President, one or more Vice
Presidents, a Secretary, and a Treasurer. The Board may also in its discretion
elect a Chairman of the Board and Assistant Secretaries or Assistant Treasurers.
Any two offices may be held by the same person, except the offices of President
and Vice President, or President and Secretary or Vice President and Secretary.
The Board may also elect such other officers and agents as it may deem necessary
to hold office for such terms and exercise such powers and perform such duties
except as otherwise provided in the bylaws as may be authorized from time to
time by the Board.
26. Term of Office and Removal. The officers of the Corporation shall hold
office until their successors are chosen and qualify in their stead. Any officer
elected or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the whole Board of Directors.
27. Salaries. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
28. Delegation Of Officers' Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may delegate,
9
<PAGE> 13
for the time being, the powers or duties, or any of them, of such officer to any
other officer or to any director.
29. Vacancies. If the office of any officer or agent becomes vacant for
any reason, the vacancy shall be filled by the affirmative vote of a majority of
a quorum of the Board of Directors; provided, however, that the President shall
have power to fill all vacancies in the office of Assistant Secretary or
Assistant Treasurer, such appointee to hold office until the vacancy shall be
filled by the Board of Directors.
30. Chairman of the Board and President.
(a) The Chairman of the Board (if there be one) shall preside at all
meetings of the Board of Directors and of the stockholders and also act as
chairman of any standing or special committees of which he is a member. In
respect to all affairs and business of the Corporation (except where by statute
it is provided otherwise) he shall have the powers of the president, whether the
president be absent or present.
(b) If there be no Chairman of the Board or in his absence, the
President shall have all the powers and discharge all the duties of the Chairman
and shall preside at all meetings of the Board of Directors and stockholders and
any standing or special committees of which he is a member. The President shall
be the chief executive officer of the Corporation; he shall have general and
active management of the business of the Corporation, subject to the control of
the Chairman of the Board (if there be one) and the Board of Directors. He shall
see that all orders and resolutions of the Board are carried into effect;
subject, however, to the right of the directors to delegate any specific powers,
except such as may be by statute exclusively conferred on the President, to any
other officer or officers of the Corporation. He or one of the Vice Presidents
10
<PAGE> 14
shall execute bonds, mortgages, and other contracts requiring a seal, under the
seal of the Corporation, and shall sign certificates of stock.
31. Vice Presidents. Any Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President, and shall perform such other duties as the Board of Directors shall
prescribe.
32. The Secretary and Assistant Secretaries. The Secretary shall attend
all meetings of the Board of Directors and all meetings of stockholders and
record all votes and the minutes of all proceedings in a book to be kept for the
purpose, and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and all meetings of the Board of Directors requiring notice and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he shall be. The Assistant Secretary or
Secretaries shall assist the Secretary in the performance of, and in the
latter's absence perform the duties of, the office of Secretary.
33. The Treasurer and Assistant Treasurers.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys, and other valuable effects, in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
(b) He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements.
(c) He shall give the Corporation a bond if required by the Board of
Directors in a sum, and with one or more sureties, satisfactory to the Board of
Directors for the faithful
11
<PAGE> 15
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation. The
Assistant Treasurer or Treasurers shall assist the Treasurer in the performance
of, and in his absence perform, the duties of the office of Treasurer.
INDEMNIFICATION
34. Indemnification of Officers and Directors, etc. To the extent
permitted by the General Corporation Law of Puerto Rico, as amended from time to
time, the Corporation shall indemnify its officers, directors, employees and
agents, and shall advance expenses (including attorneys' fees) incurred by any
such person in defending any action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such advancements if it
shall ultimately be determined that such person is not entitled to
indemnification.
CHECKS, DRAFTS, ETC.
35. All checks, drafts, or other orders for the payment of money, notes,
or other evidences of indebtedness issued in the name of the Corporation shall
be signed by such officer or officers, employee or employees of the Corporation
as shall from time to time be determined by resolution of the Board of
Directors.
SHARES AND THEIR TRANSFER
36. Certificates of Stock. Certificates for shares of the stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors. Such certificates shall be numbered and shall be entered in the books
of the Corporation as they are issued. They shall exhibit the holder's name and
the number of shares and shall be signed by the President or Vice
12
<PAGE> 16
President and the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary; provided, however, if the Corporation is authorized to
issue more than one class of stock or more than one series of any class, the
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualification,
limitation or restrictions or such preferences and/or right shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock. If the
Corporation has a Transfer Agent or an Assistant Transfer Agent or a Transfer
Clerk acting on its behalf and a Registrar, the signature of any such officer
may be facsimile. No stock certificate shall be valid until the same shall be
attested or certified by the Registrar and Transfer Agent of the Corporation,
provided the Board of Directors shall have determined the necessity for them and
shall have appointed such Registrar and Transfer Agent.
37. Transfers of Stock. Transfers of stock shall be made only on the books
of the Corporation by the person named in the certificate or by attorneys
lawfully constituted in writing and upon surrender of the certificate therefor.
The Corporation shall be entitled to treat the holder of record of any share or
shares of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share on
the part of any other person, whether or not it shall have express or other
notice thereof, save as expressly provided by the laws of the Puerto Rico.
38. Closing of Stock Transfer Books. The Board of Directors shall have
power to close the stock transfer books of the Corporation for a period or, not
exceeding fifty (50) days preceding the date of any meeting of stockholders, or
the date of payment of any dividend, or the date for the allotment of rights or
the date when any change or conversion or exchange of capital
13
<PAGE> 17
stock shall go into effect or for a period or not exceeding fifty (50) days in
connection with obtaining the consent of stockholders for any purpose; provided,
however, that in lieu of the closing of the stock transfer books as aforesaid,
the Board of Directors may fix in advance a date, not exceeding fifty (50) days
preceding the date for any dividend, or the date for the allotment of rights, or
the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining such consent, as a record
date for the determination of the stockholders entitled to notice of, and to
vote at, any such meeting and any adjournment thereof, or entitled to receive
payment of any such dividend, or to any such allotment of rights, or to exercise
the rights in respect of any such change, conversion, or exchange of capital
stock, or to give such consent, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed, shall be
entitled to such notice of, and to vote at, such meeting, and any adjournment
thereof, or to receive payment of such dividend, or to receive such allotment of
rights, or to exercise such rights, or to give such consent, as the case may be,
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid.
39. Lost or Destroyed Stock Certificates. Any person claiming any
certificate of stock issued to him by the Corporation to be lost or destroyed
and desiring a new certificate to be issued in lieu thereof shall make an
affidavit or affirmation of that fact and shall advertise the same as, if and
when required by the President or a Vice President of the Corporation, and if
required, such person shall also give the Corporation a bond of indemnity in
form and amount sufficient, in the opinion of such officer, to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of any such certificate whereupon a new
14
<PAGE> 18
certificate may be issued of the same tenor and for the same number of shares as
the one alleged to be lost or destroyed.
40. Inspection of Books by Stockholders. The Board of Directors shall
determine from time to time whether and if allowed, when and under what
condition and regulations the accounts and books of the Corporation (except such
as may by statute be specifically open to inspection) or any of them shall be
open to the inspection of the stockholders, and the stockholders' rights in this
respect are and shall be restricted and limited accordingly.
41. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of capital
stock of the Corporation, subject to the provision of the Certificate of
Incorporation.
NOTICES
42. (a) Whenever under the provisions of these bylaws notice is required
to be given to any director, officer or stockholder, it shall not be construed
to mean personal notice, but such notice may be given by telegram, cablegram, or
by mail by depositing the same in the post office or letter box, in a post-paid
sealed wrapper, addressed to such stockholder, officer or director at such
address as appears on the books of the Corporation and such notice shall be
deemed to be given at the time when the same shall be thus mailed or the
telegram or cablegram sent.
(b) Any stockholder, director or officer may waive any notice required
to be given under these bylaws.
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<PAGE> 19
SEAL
43. The Board of Directors shall provide a corporate seal which shall be
in the form of a circle and shall bear the corporate title of the Corporation,
the year of its organization, and the words "Corporate Seal, Puerto Rico." Said
seal may be used by causing it or a facsimile thereof to be impressed or affixed
or otherwise reproduced.
FISCAL YEAR
44. The fiscal year of the Corporation shall be the calendar year.
INTERESTED DIRECTORS
45. Approval of Transactions.
(1) No contract or transaction between the Corporation and one or more
of its directors, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes or a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
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<PAGE> 20
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract is specifically approved in good
faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders.
(2) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
AMENDMENTS
46. These bylaws may be amended or repealed or new bylaws adopted by the
stockholders at any annual meeting, or at any special meeting, if notice of the
proposed amendment or alteration or adoption of new bylaws is included in the
notice of such special meeting. These bylaws may be amended or repealed or new
bylaws adopted by the affirmative vote of a majority of the whole Board of
Directors given at any meeting, the notice whereof mentions the proposed
amendment or alteration or adoption of new bylaws as one of the purposes of such
meeting.
* * * * * * * * * *
17
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EXHIBIT 3.6
CELULARES TELEFONICA, INC.
BYLAWS
<PAGE> 2
CELULARES TELEFONICA, INC.
* * * * * * * * * *
BYLAWS
* * * * * * * * * *
OFFICES
1. Principal Office. The registered office of CELULARES TELEFONICA, INC.
(hereinafter called the "Corporation"), in the Commonwealth of Puerto Rico
("Puerto Rico") shall be at 361 San Francisco Street, Penthouse, San Juan,
Puerto Rico. The name of its registered agent therein is CT Corporation System.
2. Other Offices. The Corporation may also have an office or offices at
such other place or places, either within or without Puerto Rico, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
MEETINGS OF STOCKHOLDERS
3. Annual Meetings. An annual meeting of stockholders shall be held at
11:00 a.m. local time, on the second Tuesday of [February] of each year,
beginning in the year [1999] if not a legal holiday and if a legal holiday then
on the next business day following, when they shall elect, by plurality vote, a
Board of Directors and transact such other business as may properly be brought
before the meeting.
4. Special Meetings. Special meetings of the stockholders for any purpose
or purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the Chairman of the Board (if there be one) or
by the President, and shall be called by the Chairman of the Board (if there be
one) or the President or the Secretary or the Assistant
<PAGE> 3
Secretary at the request in writing of a majority of the Board of Directors, or
at the request in writing of stockholders owning a majority in number of shares
of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
5. Place of Meetings.
(a) All annual meetings of the stockholders for the election of
directors and all special meetings of stockholders held in lieu thereof, shall
be held at the principal office of the Corporation or at such other place either
within or without Puerto Rico as shall be fixed by the Board of Directors and
specified in the notice of the meeting.
(b) Special meetings of the stockholders for any other purpose or
purposes may be held at any place or places as shall be stated in the call or
notice of the meeting.
6. Notice of Meetings.
(a) Written notice of the annual meeting of stockholders shall be
served upon or mailed to each stockholder entitled to vote thereat, at such
address as appears on the stock books of the Corporation, at least ten (10) days
prior to the meeting.
(b) Written notice of a special meeting of the stockholders, stating
the time and place and purpose thereof, shall be served upon or mailed, postage
prepaid, at least ten (10) days before such meeting or such greater number of
days as may be prescribed by statute, to each stockholder entitled to vote
thereat at such address as appears on the books of the Corporation.
7. List of Stockholders. A complete list of stockholders entitled to vote
at every election of directors, arranged in alphabetical order with the
residence of each and the number of voting shares held by each, shall be
prepared and made by the Secretary and filed in a place in the city in which the
election is to be held, at least ten (10) days before every such election, and
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<PAGE> 4
shall, at all times during the usual hours for business and during the whole
time of said election, be open to the examination of any stockholder.
8. Quorum. The holders of a majority of the stock issued and outstanding,
and entitled to vote thereat, present in person, or represented by proxy, shall
be requisite and shall constitute a quorum at all meetings of the stockholders
for the transaction of business except if otherwise provided by statute, by the
Certificate of Incorporation, or by these bylaws. If, however, such majority
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of voting stock shall be
present. At such adjourned meeting at which the requisite amount of voting stock
shall later be represented, any business may be transacted which might have been
transacted at the meeting as originally notified. Notwithstanding any other
provision of these bylaws, any action required or permitted to be taken at any
meeting of the stockholders may be taken without a meeting if all stockholders
of record on the date of notice that such vote without a meeting shall take
place consent thereto in writing and the writing(s) are filed with the minutes
of the proceedings of the stockholders meetings.
9. Voting. At each meeting of the stockholders every stockholder having
the right to vote shall be entitled to vote in person or by proxy appointed by
an instrument in writing subscribed by such stockholder and bearing a date not
more than three (3) years prior to said meeting, unless said instrument provides
for a longer period. Each stockholder shall have one vote for each share of
stock having voting power, registered in his name on the books of the
Corporation and, except where the transfer books of the Corporation shall have
been closed or a date shall have been fixed as a record date for the
determination of its stockholders entitled to
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vote, no share of stock shall be voted on at any election for directors which
shall have been transferred on the books of the Corporation within twenty (20)
days next preceding such election of directors. Upon the demand of any
stockholder, the vote for directors and the vote upon any question before the
meeting shall be by ballot. All elections shall be by a plurality vote.
BOARD OF DIRECTORS
10. General Powers. The property and business of the Corporation shall be
managed by its Board of Directors. In addition to the powers and authorities by
these bylaws expressly conferred upon them, the Board may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute, by the Certificate of Incorporation, or by these bylaws directed or
required to be exercised or done by the stockholders.
11. Number, Qualifications and Term of Office.
(a) The number of directors which shall constitute the first Board
shall be at least nine (9). Thereafter the number of directors which shall
constitute the whole Board shall be such as from time to time shall be fixed by
the Board of Directors or by the stockholders at the annual meeting to be held
for the election of directors or at any special meeting held for that purpose,
provided that the number so fixed shall not be less than three (3).
(b) Directors need not be stockholders.
(c) Directors shall be elected at the annual meeting of the
stockholders and in the manner provided in these bylaws, and each directors
shall be elected to serve until the annual meeting held next after his election
or until his successor shall have been elected and shall qualify or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
12. Quorum.
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(a) At all meetings of the Board of Directors, the presence of at
least two-thirds of the total number of directors shall be requisite and shall
constitute a quorum for the transaction of business.
(b) If the requisite quorum is not present at a duly convened
meeting of the Board of Directors, a majority of those present may notify the
absent directors by phone or fax of their desire to reconvene the meeting at
least 24 hours after such notice. At the reconvened meeting, five (5) directors
shall constitute a quorum, and the majority of those present will constitute the
act of the Board.
(c) The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by the Certificate of
Incorporation, or by these bylaws.
13. Place of Meetings, etc. The Board of Directors may meet at such place
or places as shall be specified or fixed in the respective notices or waivers of
notice of meetings thereof; and may keep the books and records of the
Corporation at such place or places as it shall from time to time determine.
14. First Meetings. The newly elected Board of Directors may meet
immediately after the adjournment of the annual meeting of stockholders, for the
purpose of organization or otherwise, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present, or they may meet at such time and
place as may be fixed by the written consent of all the directors or as
specified in a notice in the manner provided for calling special meetings of the
Board.
15. Regular Meetings. Regular meetings of the Board of Directors shall be
held at such place and at such times as the Board shall from time to time by
resolution determine. If any
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day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held on the next succeeding business day not a legal holiday.
Notices of regular meetings need not be given.
16. Special Meetings; Notice. Special meetings of the Board may be called
by the Chairman of the Board (if there be one) or the President or the Secretary
on forty-eight (48) hours notice to each director. Special meetings shall be
called by the Chairman of the Board (if there be one), the President or the
Secretary in like manner and on like notice on the written request of two (2)
directors.
17. Organization. At each meeting of the Board of Directors, the Chairman
of the Board or, if there be no Chairman of the Board or in his absence, the
President or, in the absence of the President, a director, chosen by a majority
of the directors present at the meeting, shall act as Chairman of the meeting.
The Secretary or, in his absence, an Assistant Secretary or, in the absence of
both the Secretary and Assistant Secretary or Secretaries, any person appointed
by the Chairman of the meeting shall act as Secretary of the meeting.
18. Action Without a Meeting. Notwithstanding any other provision of these
bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee of the Board of Directors, if there be any, may
be taken without a meeting if all members of the Board of Directors or the
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
the committee.
19. Meetings by Conference Telephone. Any one or more members of the Board
of Directors or any committee thereof may participate in a meeting of such board
or committee by means of conference telephone or similar communications
equipment, by means of which all
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persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
20. Resignations. Any director of the Corporation may resign at any time
by giving written notice to the President, to the Secretary, or to the Board of
Directors of the Corporation. Such resignation shall take effect when accepted
by the Board or as of the date specified in the resignation.
21. Removal. Any or all of the directors may be removed at any time and
from time to time, either with or without cause, by the affirmative vote of the
holders of record of a majority in interest of the outstanding stock of the
Corporation having voting power, at a special meeting of the stockholders called
for that purpose, and the resulting vacancy or vacancies may be filled at the
same meeting, and by like vote, of the stockholders.
22. Vacancies. Vacancies in the Board of Directors caused by death,
resignation, removal, disqualification, or any other cause shall be filled by
majority vote of a quorum of the remaining directors then in office, if there be
a quorum remaining, and if not, then by the majority vote of the remaining
directors, though less than a quorum, or by the voting stockholders of the
Corporation at a meeting duly held for the purpose, and directors so chosen
shall hold office until the next annual election and until their successors
shall be duly elected and qualified, unless sooner displaced.
23. Compensation. Directors as such shall not receive any stated salary or
emolument for their services, but, by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board; provided, that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor
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<PAGE> 9
24. Committees. The Board of Directors may, by resolution passed by a
majority of the whole board, designate an executive committee and other
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the bylaws of the Corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
OFFICERS
25. Number and Election. The elective officers of the Corporation shall be
chosen annually by the directors and shall be a President, one or more Vice
Presidents, a Secretary, and a Treasurer. The Board may also in its discretion
elect a Chairman of the Board and Assistant
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<PAGE> 10
Secretaries or Assistant Treasurers. Any two offices may be held by the same
person, except the offices of President and Vice President, or President and
Secretary or Vice President and Secretary. The Board may also elect such other
officers and agents as it may deem necessary to hold office for such terms and
exercise such powers and perform such duties except as otherwise provided in the
bylaws as may be authorized from time to time by the Board.
26. Term of Office and Removal. The officers of the Corporation shall hold
office until their successors are chosen and qualify in their stead. Any officer
elected or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the whole Board of Directors.
27. Salaries. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
28. Delegation Of Officers' Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may delegate, for the time being, the powers or duties, or any of
them, of such officer to any other officer or to any director.
29. Vacancies. If the office of any officer or agent becomes vacant for
any reason, the vacancy shall be filled by the affirmative vote of a majority of
a quorum of the Board of Directors; provided, however, that the President shall
have power to fill all vacancies in the office of Assistant Secretary or
Assistant Treasurer, such appointee to hold office until the vacancy shall be
filled by the Board of Directors.
30. Chairman of the Board and President.
(a) The Chairman of the Board (if there be one) shall preside at all
meetings of the Board of Directors and of the stockholders and also act as
chairman of any standing or
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special committees of which he is a member. In respect to all affairs and
business of the Corporation (except where by statute it is provided otherwise)
he shall have the powers of the president, whether the president be absent or
present.
(b) If there be no Chairman of the Board or in his absence, the
President shall have all the powers and discharge all the duties of the Chairman
and shall preside at all meetings of the Board of Directors and stockholders and
any standing or special committees of which he is a member. The President shall
be the chief executive officer of the Corporation; he shall have general and
active management of the business of the Corporation, subject to the control of
the Chairman of the Board (if there be one) and the Board of Directors. He shall
see that all orders and resolutions of the Board are carried into effect;
subject, however, to the right of the directors to delegate any specific powers,
except such as may be by statute exclusively conferred on the President, to any
other officer or officers of the Corporation. He or one of the Vice Presidents
shall execute bonds, mortgages, and other contracts requiring a seal, under the
seal of the Corporation, and shall sign certificates of stock.
31. Vice Presidents. Any Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President, and shall perform such other duties as the Board of Directors shall
prescribe.
32. The Secretary and Assistant Secretaries. The Secretary shall attend
all meetings of the Board of Directors and all meetings of stockholders and
record all votes and the minutes of all proceedings in a book to be kept for the
purpose, and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and all meetings of the Board of Directors requiring notice and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose
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supervision he shall be. The Assistant Secretary or Secretaries shall assist the
Secretary in the performance of, and in the latter's absence perform the duties
of, the office of Secretary.
33. The Treasurer and Assistant Treasurers.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys, and other valuable effects, in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
(b) He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements.
(c) He shall give the Corporation a bond if required by the Board of
Directors in a sum, and with one or more sureties, satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement,
or removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his possession or under his control belonging to the
Corporation. The Assistant Treasurer or Treasurers shall assist the Treasurer in
the performance of, and in his absence perform, the duties of the office of
Treasurer.
INDEMNIFICATION
34. Indemnification of Officers and Directors, etc. To the extent
permitted by the General Corporation Law of Puerto Rico, as amended from time to
time, the Corporation shall indemnify its officers, directors, employees and
agents, and shall advance expenses (including attorneys' fees) incurred by any
such person in defending any action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such advancements if it
shall ultimately be determined that such person is not entitled to
indemnification.
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CHECKS, DRAFTS, ETC.
35. All checks, drafts, or other orders for the payment of money, notes,
or other evidences of indebtedness issued in the name of the Corporation shall
be signed by such officer or officers, employee or employees of the Corporation
as shall from time to time be determined by resolution of the Board of
Directors.
SHARES AND THEIR TRANSFER
36. Certificates of Stock. Certificates for shares of the stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors. Such certificates shall be numbered and shall be entered in the books
of the Corporation as they are issued. They shall exhibit the holder's name and
the number of shares and shall be signed by the President or Vice President and
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary; provided, however, if the Corporation is authorized to issue more
than one class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitation or
restrictions or such preferences and/or right shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock. If the Corporation has a
Transfer Agent or an Assistant Transfer Agent or a Transfer Clerk acting on its
behalf and a Registrar, the signature of any such officer may be facsimile. No
stock certificate shall be valid until the same shall be attested or certified
by the Registrar and Transfer Agent of the Corporation, provided the Board of
Directors shall have determined the necessity for them and shall have appointed
such Registrar and Transfer Agent.
37. Transfers of Stock. Transfers of stock shall be made only on the books
of the Corporation by the person named in the certificate or by attorneys
lawfully constituted in writing
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and upon surrender of the certificate therefor. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the Puerto Rico.
38. Closing of Stock Transfer Books. The Board of Directors shall have
power to close the stock transfer books of the Corporation for a period or, not
exceeding fifty (50) days preceding the date of any meeting of stockholders, or
the date of payment of any dividend, or the date for the allotment of rights or
the date when any change or conversion or exchange of capital stock shall go
into effect or for a period or not exceeding fifty (50) days in connection with
obtaining the consent of stockholders for any purpose; provided, however, that
in lieu of the closing of the stock transfer books as aforesaid, the Board of
Directors may fix in advance a date, not exceeding fifty (50) days preceding the
date for any dividend, or the date for the allotment of rights, or the date when
any change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion, or exchange of capital stock, or to give
such consent, and in such case such stockholders and only such stockholders as
shall be stockholders of record on the date so fixed, shall be entitled to such
notice of, and to vote at, such meeting, and any adjournment thereof, or to
receive payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, or to give such consent, as the case may be,
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notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid.
39. Lost or Destroyed Stock Certificates. Any person claiming any
certificate of stock issued to him by the Corporation to be lost or destroyed
and desiring a new certificate to be issued in lieu thereof shall make an
affidavit or affirmation of that fact and shall advertise the same as, if and
when required by the President or a Vice President of the Corporation, and if
required, such person shall also give the Corporation a bond of indemnity in
form and amount sufficient, in the opinion of such officer, to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of any such certificate whereupon a new certificate may be issued
of the same tenor and for the same number of shares as the one alleged to be
lost or destroyed.
40. Inspection of Books by Stockholders. The Board of Directors shall
determine from time to time whether and if allowed, when and under what
condition and regulations the accounts and books of the Corporation (except such
as may by statute be specifically open to inspection) or any of them shall be
open to the inspection of the stockholders, and the stockholders' rights in this
respect are and shall be restricted and limited accordingly.
41. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of capital
stock of the Corporation, subject to the provision of the Certificate of
Incorporation.
NOTICES
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42. (a) Whenever under the provisions of these bylaws notice is required
to be given to any director, officer or stockholder, it shall not be construed
to mean personal notice, but such notice may be given by telegram, cablegram, or
by mail by depositing the same in the post office or letter box, in a post-paid
sealed wrapper, addressed to such stockholder, officer or director at such
address as appears on the books of the Corporation and such notice shall be
deemed to be given at the time when the same shall be thus mailed or the
telegram or cablegram sent.
(b) Any stockholder, director or officer may waive any notice
required to be given under these bylaws.
SEAL
43. The Board of Directors shall provide a corporate seal which shall be
in the form of a circle and shall bear the corporate title of the Corporation,
the year of its organization, and the words "Corporate Seal, Puerto Rico." Said
seal may be used by causing it or a facsimile thereof to be impressed or affixed
or otherwise reproduced.
FISCAL YEAR
44. The fiscal year of the Corporation shall be the calendar year.
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INTERESTED DIRECTORS
45. Approval of Transactions.
(1) No contract or transaction between the Corporation and one or
more of its directors, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes or a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract is specifically approved in good
faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders.
(2) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
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AMENDMENTS
46. These bylaws may be amended or repealed or new bylaws adopted by the
stockholders at any annual meeting, or at any special meeting, if notice of the
proposed amendment or alteration or adoption of new bylaws is included in the
notice of such special meeting. These bylaws may be amended or repealed or new
bylaws adopted by the affirmative vote of a majority of the whole Board of
Directors given at any meeting, the notice whereof mentions the proposed
amendment or alteration or adoption of new bylaws as one of the purposes of such
meeting.
* * * * * * * * * *
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OFFICES............................................................... 1
Principal Office.................................................... 1
Other Offices....................................................... 1
MEETINGS OF STOCKHOLDERS.............................................. 1
Annual Meetings..................................................... 1
Special Meetings.................................................... 1
Place of Meetings................................................... 2
Notice of Meetings.................................................. 2
List of Stockholders................................................ 2
Quorum.............................................................. 3
Voting.............................................................. 3
BOARD OF DIRECTORS.................................................... 4
General Powers...................................................... 4
Number, Qualifications and Term of Office........................... 4
Quorum.............................................................. 5
Place of Meetings, etc.............................................. 5
First Meetings...................................................... 5
Regular Meetings.................................................... 6
Special Meetings; Notice............................................ 6
Organization........................................................ 6
Action Without a Meeting............................................ 7
Meetings by Conference Telephone.................................... 7
Resignations........................................................ 7
Removal............................................................. 7
Vacancies........................................................... 7
Compensation........................................................ 8
Committees.......................................................... 8
OFFICERS.............................................................. 9
Number and Election................................................. 9
Term of Office and Removal.......................................... 9
Salaries............................................................ 9
Delegation Of Officers' Duties...................................... 10
Vacancies........................................................... 10
Chairman of the Board and President................................. 10
Vice Presidents..................................................... 11
The Secretary and Assistant Secretaries............................. 11
The Treasurer and Assistant Treasurers.............................. 12
INDEMNIFICATION....................................................... 12
Indemnification of Officers and Directors, etc...................... 12
</TABLE>
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<TABLE>
<S> <C>
CHECKS, DRAFTS, ETC................................................... 13
SHARES AND THEIR TRANSFER............................................. 13
Certificates of Stock............................................... 13
Transfers of Stock.................................................. 14
Closing of Stock Transfer Books..................................... 14
Lost or Destroyed Stock Certificates................................ 15
Inspection of Books by Stockholders................................. 15
Dividends........................................................... 15
NOTICES............................................................... 16
SEAL.................................................................. 16
FISCAL YEAR........................................................... 16
INTERESTED DIRECTORS.................................................. 17
Approval of Transactions............................................ 17
AMENDMENTS............................................................ 18
</TABLE>
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<PAGE> 1
EXHIBIT 4.1
TELECOMUNICACIONES DE PUERTO RICO, INC.
6.15% Senior Notes due 2002
6.65% Senior Notes due 2006
6.80% Senior Notes due 2009
PUERTO RICO TELEPHONE COMPANY, INC.
CELULARES TELEFONICA, INC.
Guarantors
--------------------
INDENTURE
Dated as of May 20, 1999
--------------------
THE BANK OF NEW YORK,
Trustee
<PAGE> 2
INDENTURE dated as of May 20, 1999, among
TELECOMUNICACIONES DE PUERTO RICO, INC., a Puerto Rico
corporation (the "Company"), PUERTO RICO TELEPHONE COMPANY,
INC., a Puerto Rico corporation, and CELULARES TELEFONICA, a
Puerto Rico corporation (together, the "Subsidiary
Guarantors"), and The Bank of New York, a New York banking
corporation (the "Trustee").
Each party agrees as follows for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Company's 6.15% Senior
Notes due 2002, 6.65% Senior Notes due 2006 and 6.80% Senior Notes due 2009,
each to be issued as separate series as in this Indenture provided
(collectively, the "Initial Securities") and, if and when issued pursuant to a
registered or private exchange for the Initial Securities, the Company's 6.15%
Senior Notes due 2002, 6.65% Senior Notes due 2006 and 6.80% Senior Notes due
2009 (collectively, the "Exchange Securities" and, together with the Initial
Securities, the "Securities"):
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. 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.
"Business Day" means each day that is not a Legal Holiday.
"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
<PAGE> 3
the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP. For
the purposes of Section 4.04, 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means the successor and, for purposes of any provision contained
herein and required by the TIA, each other obligor on the indenture securities.
"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 (i) current liabilities
(excluding current maturities of long-term debt and obligations under capital
leases) and (ii) 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: (i) all obligations for borrowed money; (ii) all
obligations evidenced by debentures, notes or other similar instruments; (iii)
all obligations to pay the deferred
<PAGE> 4
3
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; (iv) all Capitalized Lease Obligations of such Person,
including Capitalized Rent; (v) 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); (vi) 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; (vii) any
stock of such person that by its terms matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise; and (viii) 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.
"Event of Default" has the meaning set forth under Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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.
<PAGE> 5
4
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the Security register described in Section 2.03.
"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 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 (and "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.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Issue Date" means the date on which the Initial Securities are
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, any Vice President, the Treasurer 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.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Outstanding" means, subject to certain exceptions, all Securities
issued under this Indenture, except those theretofore canceled by the Trustee or
delivered to it for cancelation, defeased in accordance with this Indenture,
paid in full, or in respect of which substitute Securities have been
authenticated and delivered by the Trustee.
<PAGE> 6
5
"Permitted Liens" mean:
(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,
<PAGE> 7
6
restrictions on the use of real property or minor irregularities in title
thereto, which do not 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 pursuant to Section 7.07;
(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 (i)
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 (ii) such Capitalized Lease Obligation is
otherwise permitted under this Indenture;
(h) Liens to secure obligations under Swap Contracts; and
(i) Liens Incurred in connection with any Permitted Receivables
Financing.
<PAGE> 8
7
"Permitted Receivables Financing" means any financing not exceeding in
the aggregate, together with all other Permitted Receivables Financings Incurred
pursuant to Section 4.03(g) or 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 (a) the covenants, events of default and other provisions
applicable to such financing shall be customary for such transactions and shall
be on market terms (as determined in good faith by the Board of Directors) at
the time such financing is entered into, (b) the interest rate applicable to
such financing shall be a market interest rate (as determined in good faith by
the Board of Directors) at the time such financing is entered into and (c) 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" means 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.
"principal" of any Debt (including the Securities) means the principal
amount of such Debt plus the premium, if any, on such Debt.
"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.
"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
<PAGE> 9
8
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 (i) to any Subsidiary of the Company in contemplation of or in
connection with such arrangement or (ii) 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.
"SEC" means the Securities and Exchange Commission.
"Secured Debt" means Debt of the Company or any Subsidiary Guarantor
secured by any Lien (other than Permitted Liens and Liens with which the
Securities are secured in accordance with Section 4.04) on Property (including
Capital Stock) of the Company or such Subsidiary Guarantor.
"Significant Subsidiary" means any Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"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
this Indenture by a Subsidiary Guarantor of the Company's obligations with
respect to the Securities.
"Subsidiary Guarantor" means, unless released from their Subsidiary
Guaranties as permitted by this Indenture, Puerto Rico Telephone Company Inc.,
Celulares Telefonica, Inc. and any Person that becomes a Subsidiary Guarantor
pursuant to Section 4.06.
<PAGE> 10
9
"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 this Indenture.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. --
77aaa-77bbbb) as in effect on the date of this Indenture; provided, however,
that, in the event the TIA is amended after such date, "Trust Indenture Act"
means, to the extent required by any such amendments, the Trust Indenture Act of
1939 as so amended.
"Trustee" means the party named as such in this Indenture until a
successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means the successor.
"Trust Officer" means any officer within the corporate trust
department of the Trustee (or any successor group of the trustee) with direct
responsibility for the administration of this Indenture and also means, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of his knowledge of and familiarity with the
particular subject.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"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.
<PAGE> 11
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"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.
SECTION 1.02. Other Definitions.
Defined in
Term Section
---- -------
"Additional Amounts"................................ 4.07
"Bankruptcy Law".................................... 6.01
"covenant defeasance option"........................ 8.01
"Custodian"......................................... 6.01
"Event of Default".................................. 6.01
"Exchange Securities"............................... Appendix A
"Global Security"................................... Appendix A
"legal defeasance option"........................... 8.01
"Legal Holiday"..................................... 11.08
"Obligations"....................................... 10.01
"Obligor"........................................... 4.07
"Paying Agent"...................................... 2.03
"Registered Exchange Offer.......................... Appendix A
"Registrar"......................................... 2.03
"Shelf Registration statement....................... Appendix A
"Taxes"............................................. 4.07
"Taxing Authority".................................. 4.07
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. This
Indenture is subject to the mandatory provisions of the TIA, which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities and the Subsidiary
Guarantees.
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"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company, each
Subsidiary Guarantor and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Debt shall not be deemed to be subordinate or junior to
secured Debt merely by virtue of its nature as unsecured Debt;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP; and
(8) the principal amount of any preferred stock shall be the greater
of (i) the maximum liquidation value of such preferred stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with respect to
such preferred stock.
<PAGE> 13
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ARTICLE II
The Securities
SECTION 2.01. Form and Dating. Provisions relating to the Initial
Securities of each series and the Exchange Securities are set forth in Appendix
A, which is hereby incorporated in and expressly made part of this Indenture.
The Initial Securities of each series and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit 1 to Appendix A
which is hereby incorporated in and expressly made a part of this Indenture. The
Exchange Securities and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Indenture. The Securities of each series may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage, provided that any
such notation, legend or endorsement is in a form reasonably acceptable to the
Company. Each Security shall be dated the date of its authentication. The terms
of the Securities of each series set forth in Exhibit 1 to Appendix A and
Exhibit A are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall sign
the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities of any series executed by the
Company to the Trustee for authentication, together with a written order of the
Company in the form of an Officers' Certificate for the authentication and
delivery of such Securities, and the Trustee in accordance with such written
order of the Company shall authenticate and deliver such Securities.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Securities. Unless limited by the terms of
such appointment, an authenticating agent may authenticate Securities whenever
the Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes
<PAGE> 14
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authentication by such agent. An authenticating agent has the same rights as any
Registrar, Paying Agent or agent for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall maintain
in the City of New York an office or agency where Securities may be presented
for registration of transfer or for exchange (the "Registrar") and an office or
agency where Securities may be presented for payment (the "Paying Agent"). The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Registrar shall provide the Company a current copy of such
register from time to time upon written request of the Company. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.07. The
Company or any of its Wholly Owned Subsidiaries incorporated in the United
States, any state thereof or the Commonwealth of Puerto Rico may act as Paying
Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or prior to
11:00 a.m. eastern standard time on each due date of the principal and interest
on any Security, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal and interest when so becoming due. The Company
shall require each Paying Agent (other than the Trustee) to agree in writing
that the Paying Agent shall hold in trust for the benefit of Securityholders or
the Trustee all money held by the Paying Agent for the payment of principal of
or interest on the Securities and shall notify the Trustee of any default by the
Company in making any such payment. If the Company or a Wholly Owned Subsidiary
acts as Paying Agent, it shall segregate the money held by it as Paying Agent
and hold it as a separate trust fund. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee and to account for any
funds disbursed by the Paying Agent. Upon complying with this Section, the
Paying Agent shall have no further liability for the money delivered to the
Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall
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furnish to the Trustee, in writing at least five Business Days before each
interest payment date and at such other times as the Trustee may request in
writing, a list in such form and as of such date as the Trustee may reasonably
require of the names and addresses of Securityholders.
SECTION 2.06. Replacement Securities. If a mutilated Security is
surrendered to the Registrar or if the Holder of a Security claims that such
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. Such Holder shall furnish an
indemnity bond sufficient in the judgment of the Company and the Trustee to
protect the Company, the Trustee, the Paying Agent, the Registrar and any
co-registrar from any loss which any of them may suffer if a Security is
replaced. The Company and the Trustee may charge the Holder for their expenses
(including reasonable attorneys' fees and expenses and any applicable taxes) in
replacing a Security.
Every replacement Security is an additional obligation of the Company.
SECTION 2.07. Outstanding Securities. Securities outstanding at any
time are all Securities authenticated by the Trustee except for those canceled
by it, those delivered to it for cancelation and those described in this Section
as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.06, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
each of them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or maturity date money sufficient to pay
all principal and interest payable on that date with respect to the Securities
(or portions thereof) to be redeemed or maturing, as the case may be, then on
and after that date such Securities (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.08. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall, upon written
order of the Company in the form of an Officers' Certificate, authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall, upon written order of the Company in the
form of an Officers' Certificate, authenticate definitive Securities and deliver
them in exchange for temporary Securities.
<PAGE> 16
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SECTION 2.09. Cancelation. The Company at any time may deliver
Securities to the Trustee for cancelation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel and
dispose of in accordance with its customary procedures (subject to the record
retention requirements of the Exchange Act) all Securities surrendered for
registration of transfer, exchange, payment or cancelation to the Company;
provided that if such Securities are destroyed, the Trustee shall deliver a
certificate of such destruction to the Company unless the Company directs the
Trustee in writing to deliver canceled Securities to the Company. The Company
may not issue new Securities to replace Securities it has redeemed, paid or
delivered to the Trustee for cancelation. The Trustee shall provide the Company
with a list of all Securities that have been cancelled from time to time upon
written request of the Company.
SECTION 2.10. Defaulted Interest. If the Company defaults in a payment
of interest on the Securities, the Company shall pay the defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
SECTION 2.11. CUSIP Numbers. The Company in issuing the Securities may
use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use
"CUSIP" numbers in notices of redemption as a convenience to Holders; provided,
however, that neither the Company nor the Trustee shall have any responsibility
for any defect in the "CUSIP" number that appears on any Security, check, advice
of payment or redemption notice, and any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company shall promptly notify the Trustee of any
change in the "CUSIP" numbers.
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ARTICLE III
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to redeem
Securities pursuant to paragraph 6 or 7 of the Securities, it shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and that such redemption is being made pursuant to paragraph 6 or 7,
as applicable, of the Securities.
The Company shall give each notice to the Trustee provided for in this
Section at least 60 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer than
all the Securities are to be redeemed, the Trustee shall select the Securities
to be redeemed pro rata or by lot or by a method that complies with applicable
legal and securities exchange requirements, if any, and that the Trustee
considers fair and appropriate and in accordance with methods generally used at
the time of selection by fiduciaries in similar circumstances. The Trustee shall
make the selection from outstanding Securities not previously called for
redemption. The Trustee may select for redemption portions of the principal of
Securities that have denominations larger than $1,000. Securities and portions
of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of
$1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption. The
Trustee shall notify the Company promptly of the Securities or portions of
Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not more than
60 days before a date for redemption of Securities, the Company shall mail a
notice of redemption by first-class mail to each Holder of Securities to be
redeemed.
The notice shall identify the Securities (including CUSIP numbers) to
be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
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(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed,
the identification and principal amounts of the particular Securities to be
redeemed;
(6) that, unless the Company defaults in making such redemption
payment, interest on Securities (or portion thereof) called for redemption
ceases to accrue on and after the redemption date; and
(7) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section at least 45 days before the redemption date.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the related interest payment date that is on or prior to
the date of redemption). Failure to give notice or any defect in the notice to
any Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. On or prior to 11:00 a.m.
eastern standard time on the redemption date, the Company shall deposit with the
Paying Agent (or, if the Company or a Wholly Owned Subsidiary is the Paying
Agent, shall segregate and hold in trust) money sufficient to pay the redemption
price of and accrued interest (subject to the right of Holders of record on the
relevant record date to receive interest due on the related interest payment
date that is on or prior to the date of redemption) on all Securities to be
redeemed on that date other than Securities or portions of Securities called for
redemption that have been delivered by the Company to the Trustee for
cancelation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in principal amount to the unredeemed portion of the Security surrendered.
<PAGE> 19
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ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities. The Company shall promptly pay
the principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the rate borne by the Securities to the extent
lawful.
SECTION 4.02. SEC Reports. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the Commission and provide the Trustee and
Holders with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and reports to be so filed and provided at the times specified for the
filing of such information, documents and reports under such Sections; provided,
however, that the Company shall not be so obligated to file such information,
documents and reports with the Commission if the Commission does not permit such
filings. The Company shall also comply with the other provisions of TIA -
314(a).
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
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SECTION 4.03. Limitation on Debt of Non-Guarantor Subsidiaries. During
any period that a Credit Facility has a covenant restricting the Incurrence of
Debt by one or more Non-Guarantor Subsidiaries of the Company, the Company shall
not permit any such 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
Section 4.03(a) and not otherwise permitted pursuant to this Indenture does
not exceed 10% of Consolidated Net Tangible Assets;
(b) Debt of any Person existing at the time such Person becomes a
Subsidiary of the Company, 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 Section 4.03(c) and not
otherwise permitted pursuant to this Indenture, together with any Debt
Incurred in respect of this Section 4.03(c) pursuant to Section 4.03(f),
does not exceed 10% of Consolidated Net Tangible Assets;
(d) Debt owed to the Company or any Subsidiary of the Company;
(e) Debt of 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 Sections 4.03(b), 4.03(c) and 4.03(e) (to
the extent the aggregate principal amount of such Debt is not increased
unless otherwise permitted under this Section 4.03); 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).
<PAGE> 21
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For purposes of determining compliance with this Section 4.03, (a) in
the event that an item of Debt meets the criteria of more than one of the
categories of Debt described in this Section 4.03, the Company, in its sole
discretion, will classify such item of Debt and will only be required to include
the amount and type of such Debt in one of the categories in this Section 4.03
and (b) an item of Debt may be divided and classified in more than one of the
types of Debt described in this Section 4.03.
SECTION 4.04. Limitation on Liens. The Company shall not, and shall
not permit any Subsidiary Guarantor to, directly or indirectly, Incur or suffer
to exist, any Lien (other than Permitted Liens) upon any of its Property
(including Capital Stock), whether owned at the Issue Date or thereafter
acquired, or any interest therein or any income or profits therefrom, unless (a)
it has made or will make effective provision whereby the Securities or the
applicable Subsidiary Guaranty will be secured by such Lien equally and ratably
with (or prior to) all other Debt of the Company or any Subsidiary Guarantor
secured by such Lien or (b) immediately after the Incurrence or existence of
such Lien, giving effect to the application of any proceeds therefrom, 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 (other than Sale and Leaseback Transactions described in
clauses (a) to (d), inclusive, of the second paragraph of Section 4.05) would
not exceed 10% of Consolidated Net Tangible Assets.
For purposes of determining compliance with this Section 4.04, (a) in
the event that a Lien meets the criteria of more than one of the categories of
Liens described in this Section 4.04 or in the definition of "Permitted Liens",
the Company, in its sole discretion, will classify such Lien and only be
required to include the Lien in one of the categories of Liens in this Section
4.04 or one of the categories of Liens in the definition of "Permitted Liens"
and (b) a Lien may be divided and classified in more than one of the categories
of such Liens or Permitted Liens.
SECTION 4.05. 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 second paragraph of this Section 4.05),
plus the aggregate principal amount of Secured Debt then outstanding (without
duplication), would not exceed 10% of Consolidated Net Tangible Assets.
<PAGE> 22
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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 clause (a) or (b) above; 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
<PAGE> 23
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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 Securities, (ii) other Funded Debt of the Company
or a Subsidiary Guarantor which ranks prior to or on a parity with the
Securities 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 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 Securities 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 Securities so
delivered.
For purposes of determining compliance with this Section 4.05, (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 in this
Section 4.05, 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 of Sale and Leaseback
Transactions in this Section 4.05 and (ii) a Sale and Leaseback Transaction may
be divided and classified in more than one of the categories in this Section
4.05.
SECTION 4.06. 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 on or
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 Securities to the same extent as under the Credit
Facility.
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SECTION 4.07. Additional Amounts. (a) All payments made by the Company
under or with respect to the Securities or by any Subsidiary Guarantor under or
with respect to its Subsidiary Guarantee (the Company and any such Subsidiary
Guarantor being referred to for purposes of this Section 4.07 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 ("Taxes") imposed, levied, collected or assessed by or on behalf of, or
within Puerto Rico, or any taxing authority thereof or therein ("Taxing
Authority"), 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 (x) make any required withholding or deduction in
respect of any Taxes, (y) remit the full amount deducted or withheld to the
relevant Taxing Authority in accordance with applicable law, and (z) pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each holder and beneficial owner of Securities (including
Additional Amounts) after such withholding or deduction or other payment of
Taxes will not be less than the amounts that the holder and beneficial owner
would have received if such Taxes had not been withheld or deducted or paid;
provided that no Additional Amounts shall be so payable with respect to:
(i) 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 Securities;
(ii) 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 Security 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 Section 4.07(a)(ii),
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;
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(iii) any estate, inheritance, gift, sale, transfer, personal property or
similar tax, assessment or other governmental charge; or
(iv) any combination of Sections 4.07(a)(i), (ii) and (iii).
Such Additional Amounts shall also not be payable where, had the
beneficial owner of the Security been the holder of the Security, it would not
have been entitled to payment of Additional Amounts by reason of any of Sections
4.07(a)(i), (ii), (iii) or (iv).
(b) The applicable Obligor or any successor, as the case may be, will
furnish to the Trustee 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 Securities that are outstanding on the date
of such withholding or deduction for or on account of Taxes upon written request
to the Trustee.
(c) At least 30 days prior to each date on which any payment under or
with respect to the Securities 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 Securities is due and 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 Securities on the payment date. Whenever in this Indenture
there is mentioned, in any context, the payment of principal, interest, purchase
price in connection with a purchase of the Securities or any other amount
payable on or with respect to any of the Securities, such mention shall be
deemed to include mention of the payment of Additional Amounts provided for in
this Section 4.07 to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof.
(d) 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
<PAGE> 26
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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 Securities or any
documentation relating thereto.
(e) In the event that Additional Amounts actually paid with respect to
any Securities are based on Taxes in excess of the appropriate Taxes applicable
to the holder or beneficial owner of such Securities and, as a 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 Securities, 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 he right of each
holder or beneficial owner of a Security 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, reliefs, remissions or repayments to which it may be
entitled.
SECTION 4.08 Compliance Certificate. The Company and each Subsidiary
Guarantor shall deliver to the Trustee within 120 days after the end of each
fiscal year of the Company an Officers' Certificate stating that in the course
of the performance by the signers of their duties as Officers of the Company
they would normally have knowledge of any Default and whether or not the signers
know of any Default that occurred during such period. If they do, the
Certificate shall describe the Default, its status and what action the Company
is taking or proposes to take with respect thereto. The Company and the
Subsidiary Guarantors also shall comply with TIA - 314(a)(4).
SECTION 4.09. Further Instruments and Acts. Upon request of the
Trustee, the Company shall execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
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ARTICLE V
Successor Company
SECTION 5.01. When Company or any Subsidiary Guarantor May Merge or
Transfer Assets. Neither the Company nor any Subsidiary Guarantor shall
consolidate or amalgamate with or merge into any other Person or convey,
transfer, lease or otherwise dispose of its Property substantially as an
entirety to any Person or permit any Person to consolidate with or merge into or
convey, transfer or lease or amalgamate its Property substantially as an
entirety to the Company or the applicable Subsidiary Guarantor, unless:
(a) either the Company or such Subsidiary Guarantor, as applicable,
shall be the surviving Person or the Person formed by such consolidation or
into which the Company or any Subsidiary Guarantor is merged or the Person
which acquires by conveyance or transfer, or which leases, the Property of
the Company or any Subsidiary Guarantor substantially as an entirety shall
be a corporation, partnership, limited liability company or trust, shall be
organized and validly existing under the laws of the United States of
America, any State thereof, the District of Columbia or the Commonwealth of
Puerto Rico;
(b) the surviving person (if other than the Company or the applicable
Subsidiary Guarantor) shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, the due and punctual payment of the principal of and interest on
all the Securities and the performance or observance of every covenant of
this Indenture on the part of the Company or such Subsidiary Guarantor to
be performed or observed;
(c) immediately before and after giving effect to such transaction on
a pro forma basis, no Default shall have occurred and be continuing; and
(d) the Company or the applicable Subsidiary Guarantor has delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such consolidation, amalgamation, merger, conveyance,
transfer, lease or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture
comply with this Article and that all conditions precedent herein provided
for relating to such transaction have been complied with.
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SECTION 5.02. Successor Substituted. Upon any consolidation or
amalgamation by the Company or any Subsidiary Guarantor with, or merger of the
Company or any Subsidiary Guarantor into, any other Person or any conveyance,
transfer, lease or other disposition of the Property of the Company or any
Subsidiary Guarantor substantially as an entirety in accordance with Section
5.01, the successor Person formed by such consolidation or amalgamation or into
which the Company or any Subsidiary Guarantor is merged or to which such
conveyance, transfer, lease or disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company or the
applicable Subsidiary Guarantor, as the case may be, under this Indenture with
the same effect as if such successor Person had been named as the Company or the
applicable Subsidiary Guarantor herein, and thereafter, except in the case of a
conveyance, transfer, lease or disposition, the predecessor Person shall be
released from its obligations and covenants under this Indenture and the
Securities.
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default. The occurrence of the following
events with respect to the Securities of any series shall be "Events of Default"
with respect to the Securities of such series:
(1) failure for 30 business days to pay interest on the Securities of
such series when due;
(2) failure to pay principal or premium, if any, on the Securities of
such series when due, whether at maturity, upon redemption, by declaration
or otherwise;
(3) failure to observe or perform any other covenant in this Indenture
for 90 days after written notice has been given to the Company as specified
below;
(4) acceleration of, or failure by the Company or any Subsidiary of
the Company to pay at maturity after giving effect to any applicable grace
period, any Debt for money borrowed of the Company or such Subsidiary
having an aggregate principal amount at the time in excess of the greater
of (A) $25 million and (B) the lesser of 1% of Consolidated Net Tangible
Assets at such time and $50 million, if such acceleration is not annulled,
or such Debt is not discharged by the end of a period of 20 days after
written notice has been given to the Company as specified below;
<PAGE> 29
28
(5) any Subsidiary Guarantee ceases to be in full force and effect
(other than in accordance with the terms of this Indenture or such
Subsidiary Guarantee) or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guarantee;
(6) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to
insolvency; or
(7) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary; or
(D) grants any similar relief under any foreign laws;
and in each such case the order or decree remains unstayed and in effect
for 90 days.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
<PAGE> 30
29
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law (including any similar law of the Commonwealth of
Puerto Rico) for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator, custodian or similar official under any
Bankruptcy Law.
A Default under clause (3) or (4) is not an Event of Default until the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Outstanding Securities of such series notify the Company (and in the case of
such notice by Holders, the Company and the Trustee) of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 60 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default and any event that with the giving of notice or the lapse
of time would become an Event of Default, its status and what action the Company
is taking or proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default with respect to the
Securities of any series (other than an Event of Default specified in Section
6.01(6) or (7) with respect to the Company) occurs and is continuing, the
Trustee by written notice to the Company, or the Holders of at least 25% in
aggregate principal amount of the Outstanding Securities of such series by
written notice to the Company and the Trustee which notice shall set forth the
Event of Default, may declare the principal of and accrued and unpaid interest
on all the Securities of such series to be due and payable. Upon such a
declaration, such principal and interest shall be due and payable immediately.
If an Event of Default specified in Section 6.01(6) or (7) with respect to the
Company occurs, the principal of and accrued and unpaid interest on all the
Securities shall, automatically and without any action by the Trustee or any
Holder, become and be immediately due and payable. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of any series by
written notice to the Trustee and the Company may rescind any declaration of
acceleration in respect of such series if the rescission would not conflict with
any judgment or decree and if all existing Events of Default in respect of such
series have been cured or waived and a sum sufficient to pay all matured
installments of interest and principal (other than principal or interest that
has become due solely because of the acceleration) and any premium has been
deposited with the Trustee. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default with respect to
the Securities of any series occurs and is continuing, the Trustee may pursue
any
<PAGE> 31
30
available remedy to collect the payment of principal of or interest on the
Securities of such series or to enforce the performance of any provision of such
Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of a series by notice
to the Trustee may waive an existing Default in respect of such series and its
consequences except (i) a Default in the payment of the principal of or interest
on a Security of such series or (ii) a Default in respect of a provision that
under Section 9.02 cannot be amended without the consent of each Securityholder
affected. When a Default is waived, such Default shall be deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of a series may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or of exercising any trust or power conferred on the Trustee with
respect to the Securities of such series. However, the Trustee may refuse to
follow any direction that conflicts with law or this Indenture or, subject to
Section 7.01, that the Trustee determines is unduly prejudicial to the rights of
other Securityholders of such series or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to reasonable
indemnification against all losses and expenses caused by taking or not taking
such action.
SECTION 6.06. Limitation on Suits. A Holder of Securities of a series
may not pursue any remedy with respect to this Indenture or the Securities of
such series unless:
(1) such Holder shall have previously given to the Trustee written
notice of a continuing Event of Default in respect of such series;
(2) the Holders of at least 25% in aggregate principal amount of the
Outstanding Securities of such series shall have made a written request,
and such Holder of or Holders shall have offered indemnity reasonably
satisfactory to the Trustee, to the Trustee to pursue such proceeding as
trustee; and
<PAGE> 32
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(3) the Trustee has failed to institute such proceeding and has not
received from the Holders of at least a majority in aggregate principal
amount of the Outstanding Securities of such series a direction
inconsistent with such request, within 60 days after such notice, request
and offer.
The foregoing limitations on the pursuit of remedies by a
Securityholder shall not apply to a suit instituted by a Holder of Securities
for the enforcement of payment of the principal of or interest on such Security
on or after the applicable due date specified in such Security. A Securityholder
may not use this Indenture to prejudice the rights of another Securityholder or
to obtain a preference or priority over another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Securities held by such Holder, on
or after the respective due dates expressed in the Securities, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article VI, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
<PAGE> 33
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SECOND: to Securityholders for amounts due and unpaid on the
Securities of the applicable series for principal and interest, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Securities of such series for principal and interest,
respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 6.10. At least 15 days before such
record date, the Company shall mail to each Securityholder and the Trustee a
notice that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section 6.11 does not apply
to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit
by Holders of Securities of a series of more than 10% in aggregate principal
amount of the Securities of such series.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, that may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
<PAGE> 34
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ARTICLE VII
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. In the
case of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform
to the requirements of this Indenture (but need not confirm or investigate
the accuracy of mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section 7.01;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01.
<PAGE> 35
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(e) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law or as the Trustee may agree in
writing with the Company.
(g) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section 7.01 and to the provisions of the TIA
and the provisions of this Article VII shall apply to the Trustee in its role as
Registrar, Paying Agent and Security Custodian.
(i) The Trustee shall not be deemed to have notice of a Default or an
Event of Default unless (a) the Trustee has received written notice thereof from
the Company or any Holder or (b) a Trust Officer shall have actual knowledge
thereof.
SECTION 7.02. Rights of Trustee. (a) In the absence of bad faith on
its part, the Trustee may rely on any document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document. The Trustee may, however,
in its discretion make such further inquiry or investigation into such facts or
matters as it may see fit and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney subject
to its execution of a confidentiality agreement acceptable to both the Trustee
and the Company.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible
for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith that it reasonably believes to be authorized or within its
rights or powers;
<PAGE> 36
35
provided, however, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
(e) The Trustee may consult with counsel of its selection, and the
advice or opinion of counsel with respect to legal matters relating to this
Indenture and the Securities shall be full and complete authorization and
protection from liability in respect to any action taken, omitted or suffered by
it hereunder in good faith and in accordance with the advice or opinion of such
counsel.
(f) The permissive rights of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty unless so specified herein.
(g) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee security or indemnity satisfactory to the Trustee against
the costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction.
(h) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default is
received by the Trustee at the Corporate Trust Office of the Trustee, and such
notice references the Securities and this Indenture.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar or
co-registrar may do the same with like rights. However, the Trustee must comply
with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity, priority or
adequacy of this Indenture or the Securities, it shall not be accountable for
the Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement of the Company or any Subsidiary Guarantor in this
Indenture or in any document issued in connection with the sale of the
Securities or in the Securities other than the Trustee's certificate of
authentication.
SECTION 7.05. Notice of Defaults. If a Default or Event of Default
occurs and is continuing and if it is actually known to the Trustee, the Trustee
shall mail to each Securityholder notice of the Default or Event of Default
within 90 days after it is so known to a Trust Officer or written notice of it
is received by the Trustee. Except in
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36
the case of a Default or Event of Default in payment of principal of or interest
on any Security, the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with May 15, 2000, and in any event
prior to July 15 in each year, the Trustee shall mail to each Securityholder a
brief report dated as of May 15 each year that complies with TIA - 313(a), if
and to the extent required by such subsection. The Trustee shall also comply
with TIA - 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The Company agrees to notify promptly the Trustee
whenever the Securities become listed on any stock exchange and of any delisting
thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to the
Trustee from time to time such compensation as the Company and the Trustee shall
from time to time agree in writing for its services. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company shall reimburse the Trustee upon request for all reasonable
out-of-pocket expenses incurred or made by it, including costs of collection,
in addition to the compensation for its services. Such expenses shall include
the reasonable compensation and expenses, disbursements and advances of the
Trustee's agents, counsel, accountants and experts. The Company and each
Subsidiary Guarantor, jointly and severally, shall indemnify the Trustee against
any and all loss, damage, claim liability or expense (including reasonable
attorneys' fees and expenses) incurred by it in connection with the acceptance
and administration of this Indenture and the performance of its duties
hereunder. The Trustee shall notify the Company in writing promptly of any claim
for which it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company or any Subsidiary Guarantor of its obligations
hereunder, except to the extent the Company is prejudiced thereby. The Company
shall defend the claim and the Trustee may have separate counsel and the Company
and the Subsidiary Guarantors, as applicable, shall pay the fees and expenses of
such counsel. The Company need not reimburse any expense or indemnify against
any loss, liability or expense incurred by the Trustee through the Trustee's own
wilful misconduct, negligence or bad faith. The Company need not pay for any
settlement made by the Trustee without the Company's consent, such consent not
to be unreasonably withheld. All indemnifications and releases from liability
granted hereunder to the Trustee shall extend to its officers, directors,
employees, agents, successors and assigns.
<PAGE> 38
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To secure the Company's payment obligations in this Section 7.06, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the resignation or removal of the Trustee and the discharge of this
Indenture. When the Trustee incurs expenses after the occurrence of a Default
specified in Section 6.01(6) or (7) with respect to the Company, the expenses
are intended to constitute expenses of administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at any
time by so notifying the Company in writing. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of a series may remove
the Trustee by so notifying the Trustee and may appoint a successor Trustee with
respect to such series. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of
a majority in aggregate principal amount of the Outstanding Securities of a
series and such Holders do not reasonably promptly appoint a successor Trustee,
or if a vacancy exists in the office of Trustee for any reason (the Trustee in
such event being referred to herein as the retiring Trustee), the Company shall
promptly appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in
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aggregate principal amount of the Outstanding Securities of any series may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
who has been a bona fide Holder of a Security for at least six months may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section 7.08, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation or banking
association without any further act shall be the successor Trustee unless such
Trustee is unable to act in its capacity as Trustee due to a conflict of
interest or otherwise, and in such case the provisions of Section 7.08 shall
apply.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
such successor to the Trustee may authenticate such Securities either in the
name of any predecessor hereunder or in the name of the successor to the
Trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Securities or in this Indenture provided that the
certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all
times satisfy the requirements of TIA - 310(a). The Trustee shall have (or, in
the case of a corporation included in a bank holding company system, the related
bank holding company shall have) a combined capital and surplus of at least
$50,000,000 as set forth in its (or its related bank holding company's) most
recent published annual report of condition. The Trustee shall comply with TIA -
310(b), subject to the penultimate paragraph thereof; provided, however, that
there shall be excluded from the operation of TIA - 310(b)(1) any indenture or
indentures under which other securities or certificates of interest or
participation in other securities of the Company are outstanding if the
requirements for such exclusion set forth in TIA - 310(b)(1) are met.
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SECTION 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA - 311(a), excluding any creditor relationship
listed in TIA - 311(b). A Trustee who has resigned or been removed shall be
subject to TIA - 311(a) to the extent indicated.
SECTION 7.12. Appointment by Trustee of Authenticating Agents. Any
authenticating agent appointed by the Trustee pursuant to Section 2.02 shall at
all times be a corporation organized and doing business under the laws of the
United States of America, any State thereof, the District of Columbia or the
Commonwealth of Puerto Rico, authorized under such laws to act as an
authenticating agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by Federal or state
authority. If such authenticating agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this 7.12, the combined capital
and surplus of such authenticating agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an authenticating agent shall cease to be eligible in
accordance with the provisions of this Section 7.12 such authenticating agent
shall resign immediately in the manner and with the effect specified in this
Section 7.12.
Any corporation into which an authenticating agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such authenticating agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate agency or corporate trust business of an authenticating agent,
shall continue to be an authenticating agent, provided such corporation shall be
otherwise eligible under this Section 7.12, without the execution or filing of
any paper or any further act on the part of the Trustee or the authenticating
agent.
An authenticating agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an authenticating agent by giving written notice thereof
to such authenticating agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
authenticating agent shall cease to be eligible in accordance with the
provisions of this Section 7.12, the Trustee, with the approval of the Company,
may appoint a successor authenticating agent, and shall give notice of such
appointment to all Holders of Securities of the series with respect to which
such authenticating agent will serve, as their names and addresses appear in the
register. Any successor authenticating agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
authenticating agent. No successor authenticating agent shall be appointed
unless eligible under the provisions of this Section 7.12.
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If an appointment with respect to the Securities is made pursuant to
this Section 7.12, the Securities may have endorsed thereon, in lieu of the
Trustee's certificate of authentication, an alternate certificate of
authentication in the following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
The Bank of New York, as Trustee,
By:
--------------------------------
As Authenticating Agent
By:
--------------------------------
Authorized Officer
ARTICLE VIII
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a)
When (i) the Company delivers to the Trustee all Outstanding Securities of a
series (other than Securities of such series replaced pursuant to Section 2.06)
for cancelation or (ii) all Outstanding Securities of a series have become due
and payable, whether at maturity or as a result of the mailing of a notice of
redemption pursuant to Article III and the Company irrevocably deposits with the
Trustee funds sufficient to pay at maturity or upon redemption all Outstanding
Securities of such series, including interest thereon to maturity or such
redemption date (other than Securities of such series replaced pursuant to
Section 2.06), and if in either case the Company pays all other sums payable
hereunder by the Company, then this Indenture shall, subject to Section 8.01(c),
cease to be of further effect with respect to the Securities of such series. The
Trustee shall acknowledge satisfaction and discharge of this Indenture with
respect to the Securities of such series on demand of the Company accompanied by
an Officers' Certificate and an Opinion of Counsel and at the cost and expense
of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any time may
terminate (i) all of its obligations under the Securities of a series and this
Indenture with respect to such Securities ("legal defeasance option") or (ii)
its obligations with respect to the Securities of a series under Sections 4.02,
4.03, 4.04, 4.05 and 4.06 and the operation of Sections 6.01(3) (with respect
only to defaults under Article IV) 6.01(4), 6.01(5), 6.01(6) and 6.01(7) (but,
in the case of Sections 6.01(6) and (7), with respect only to
<PAGE> 42
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Significant Subsidiaries) ("covenant defeasance option"). The Company may
exercise its legal defeasance option notwithstanding its prior exercise of its
covenant defeasance option.
If the Company exercises its legal defeasance option with respect to
the Securities of a series, payment of the Securities of such series may not be
accelerated because of an Event of Default. If the Company exercises its
covenant defeasance option, payment of the Securities of such series may not be
accelerated because of an Event of Default specified in Sections 6.01(3) (with
respect to the covenants of Article IV identified in the immediately preceding
paragraph), 6.01(4), 6.01(5), 6.01(6) and 6.01(7)(with respect only to
Significant Subsidiaries in the case of Sections 6.01(6) and 6.01(7)). If the
Company exercises its legal defeasance option or its covenant defeasance option
with respect to the Securities of a series, each Subsidiary Guarantor, if any,
shall be released from all its obligations under its Subsidiary Guarantee with
respect to the Securities of such series.
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.04, 2.05, 2.06, , 4.07, 7.07, 7.08, 8.05 and 8.06
shall survive until the Securities have been paid in full. Thereafter, the
Company's obligations in Sections 7.07 and 8.05 shall survive.
SECTION 8.02. Conditions to Defeasance. The Company may exercise its
legal defeasance option or its covenant defeasance option with respect to the
Securities of a series only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal of and interest
on the Securities of such series to maturity or redemption, as the case may
be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Securities of such series to maturity or redemption, as the case
may be;
<PAGE> 43
42
(3) 123 days pass after the deposit is made and during the 123-day
period no Default specified in Section 6.01(6) or (7) with respect to the
Company occurs that is continuing at the end of the period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture there has been a
change in the applicable Federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm that,
the Holders of the Securities of such series will not recognize income,
gain or loss for Federal income tax purposes as a result of such defeasance
and will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Securities of such series will not recognize income, gain or
loss for Federal income tax purposes as a result of such covenant
defeasance and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities of such series as contemplated
by this Article VIII have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of the Securities of such series
at a future date in accordance with Article III.
SECTION 8.03. Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article VIII. It shall apply the deposited money and the money from U.S.
Government
<PAGE> 44
43
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Securities of a series in
respect of which the Company has exercised its legal defeasance option or its
covenant defeasance option.
SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent
shall promptly turn over to the Company upon written request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon written request any money held by
them for the payment of principal or interest on Securities of a series in
respect of which the Company has exercised its legal defeasance option or its
covenant defeasance option that remains unclaimed for two years, and,
thereafter, Holders of such Securities entitled to the money must look to the
Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The Company shall
pay and shall indemnify the Trustee against any tax, fee or other charge imposed
on or assessed against deposited U.S. Government Obligations or the principal
and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with this
Article VIII by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture in respect of the Securities of a series sought to be defeased and
such Securities shall be revived and reinstated as though no deposit had
occurred pursuant to this Article VIII until such time as the Trustee or Paying
Agent is permitted to apply all such money or U.S. Government Obligations in
accordance with this Article VIII; provided, however, that, if the Company has
made any payment of interest on or principal of any series of Securities because
of the reinstatement of its obligations, the Company shall be subrogated to the
rights of the Holders of such series of Securities to receive such payment from
the money or U.S. Government Obligations held by the Trustee or Paying Agent.
<PAGE> 45
44
ARTICLE IX
Amendments
SECTION 9.01. Without Consent of Holders. The Company, the Subsidiary
Guarantors and the Trustee may amend this Indenture with respect to the
Securities of a series or the Securities of a series without notice to or
consent of any Holder of Securities of such series:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article V;
(3) to provide for uncertificated Securities of a series in addition
to or in place of certificated Securities of such series; provided,
however, that the uncertificated Securities are issued in registered form
for purposes of Section 163(f) of the Code or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of the
Code;
(4) to add Guarantees with respect to the Securities of such series or
to secure the Securities of such series;
(5) to add to the covenants of the Company for the benefit of the
Holders of Securities of such series or to surrender any right or power
herein conferred upon the Company;
(6) to comply with any requirements of the SEC in connection with
qualifying, or maintaining the qualification of, this Indenture under the
TIA; or
(7) to make any change that does not adversely affect the rights of
any Holder of Securities of such series.
After an amendment under this Section becomes effective, the Company
shall mail to the Securityholders of the series affected by such amendment a
notice briefly describing such amendment. The failure to give such notice to all
such Securityholders, or any defect therein, shall not impair or affect the
validity of an amendment under this Section.
<PAGE> 46
45
SECTION 9.02. With Consent of Holders. The Company, the Subsidiary
Guarantors and the Trustee may amend this Indenture with respect to the
Securities of a series or the Securities of a series without notice to any
Holder of Securities of such series but with the written consent of the Holders
of at least a majority in aggregate principal amount of Outstanding Securities
of such series (including consents obtained in connection with a tender offer or
exchange offer for Securities of such series). However, without the consent of
each Securityholder of the series affected thereby, an amendment may not:
(1) reduce the percentage of Securities of such series whose Holders
must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security of such series;
(3) reduce the principal of or extend the fixed maturity of any
Security of such series;
(4) impair the right of any Holder of the Securities of such series to
receive payment of principal of and interest Holder's Securities of such on
or after the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such Holder's Securities of such series
or any Subsidiary Guaranty of such series;
(5) reduce the amount payable upon the redemption or repurchase of any
Security of such series under Article III;
(6) make any Security of such series payable in money other than that
stated in such Security;
(7) make any change in any Subsidiary Guarantee that would adversely
affect the Holders of the Securities of such series; or
(8) make any change in Section 6.04 or 6.07 or the second sentence of
this Section.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section 9.02 becomes effective, the
Company shall mail to Holders of Securities of the series affected by such
amendment a
<PAGE> 47
46
notice briefly describing such amendment. The failure to give such notice to all
Securityholders of such series, or any defect therein, shall not impair or
affect the validity of an amendment under this Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to
this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A consent
to an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation of
the consent or waiver is not made on the Security. However, any such Holder or
subsequent Holder may revoke the consent or waiver as to such Holder's Security
or portion of the Security if the Trustee receives the notice of revocation
before the date the amendment or waiver becomes effective. After an amendment or
waiver in respect of the Securities of a series becomes effective, it shall bind
every Securityholder of such series. An amendment or waiver becomes effective
upon the execution of such amendment or waiver by the Trustee.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Securityholders of a series entitled to give
their consent or take any other action described above or required or permitted
to be taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders of a series at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to give such consent or to
revoke any consent previously given or to take any such action, whether or not
such Persons continue to be Holders after such record date. No such consent
shall be valid or effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver such Security to the Trustee. The Trustee may place an
appropriate notation on the Security regarding the changed terms and return such
Security to the Holder. Alternatively, if the Company or the Trustee so
determines, the Company in exchange for the Security shall issue and the Trustee
shall authenticate a new Security that reflects the changed terms. Failure to
make the appropriate notation or to issue a new Security shall not affect the
validity of such amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article IX if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section
<PAGE> 48
47
7.01) shall be fully protected in relying upon, an Officers' Certificate and an
Opinion of Counsel stating that such amendment is authorized or permitted by
this Indenture.
SECTION 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities of a series unless such
consideration is offered to be paid to all Holders of such series that so
consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement.
ARTICLE X
Subsidiary Guarantees
SECTION 10.01. Subsidiary Guarantees. Each Subsidiary Guarantor hereby
unconditionally guarantees, jointly and severally, on a senior unsecured basis,
to each Holder and to the Trustee and its successors and assigns (a) the full
and punctual payment of principal of and interest on the Securities when due,
whether at maturity, by acceleration, by redemption or otherwise, and all other
monetary obligations of the Company under this Indenture and the Securities and
(b) the full and punctual performance within applicable grace periods of all
other obligations of the Company under this Indenture and the Securities (all
the foregoing being hereinafter collectively called the "Obligations"). Each
Subsidiary Guarantor further agrees that the Obligations may be extended or
renewed, in whole or in part, without notice or further assent from such
Subsidiary Guarantor, and that such Subsidiary Guarantor will remain bound under
this Article X notwithstanding any extension or renewal of any Obligation.
Each Subsidiary Guarantor waives presentation to, demand of, payment
from and protest to the Company of any of the Obligations and also waives notice
of protest for nonpayment. Each Subsidiary Guarantor waives notice of any
default under the Securities or the Obligations. The obligations of each
Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any right or
remedy against the Company or any other Person under this Indenture, the
Securities or any other agreement or otherwise; (b) any extension or renewal of
any thereof; (c) any rescission, waiver, amendment or modification of any of the
terms or provisions of this Indenture, the Securities or any other agreement;
(d) the release of any security held by any Holder or the Trustee for the
Obligations or any of them; (e) the failure of any Holder or the Trustee to
exercise any right or remedy against any other guarantor of the Obligations; or
(f) any change in the
<PAGE> 49
48
ownership of such Subsidiary Guarantor except as expressly set forth in Sections
5.01 and 5.02.
Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty
herein constitutes a guarantee of payment, performance and compliance when due
(and not a guarantee of collection) and waives any right to require that any
resort be had by any Holder or the Trustee to any security held for payment of
the Obligations.
Except as expressly set forth in Sections 4.06, 5.01, 5.02, 8.01(b)
and 10.07, the obligations of each Subsidiary Guarantor hereunder shall not be
subject to any reduction, limitation, impairment or termination for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to any defense of setoff, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or
unenforceability of the guaranteed Obligations or otherwise. Without limiting
the generality of the foregoing, the obligations of each Subsidiary Guarantor
herein shall not be discharged or impaired or otherwise affected by the failure
of any Holder or the Trustee to assert any claim or demand or to enforce any
remedy under this Indenture, the Securities or any other agreement, by any
waiver or modification of any thereof, by any default, failure or delay, willful
or otherwise, in the performance of the obligations, or by any other act or
thing or omission or delay to do any other act or thing which may or might in
any manner or to any extent vary the risk of such Subsidiary Guarantor or would
otherwise operate as a discharge of such Subsidiary Guarantor as a matter of law
or equity.
Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty
herein shall continue to be effective or be reinstated, as the case may be, if
at any time payment, or any part thereof, of principal of or interest on any
Obligation is rescinded or must otherwise be restored by any Holder or the
Trustee upon the bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any other
right which any Holder or the Trustee has at law or in equity against any
Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay
the principal of or interest on any Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Obligation, each Subsidiary Guarantor hereby
promises to and will, upon receipt of written demand by the Trustee, forthwith
pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal
to the sum of (i) the unpaid amount of such Obligations then due, (ii) accrued
and unpaid interest on such Obligations then due (but only to the extent not
prohibited by law) and (iii) all other monetary Obligations then due of the
Company to the Holders and the Trustee.
<PAGE> 50
49
Each Subsidiary Guarantor agrees that it shall not be entitled to any
right of subrogation in respect of any Obligations guaranteed hereby until
payment in full in cash of all Obligations. Each Subsidiary Guarantor further
agrees that, as between it, on the one hand, and the Holders and the Trustee, on
the other hand, (x) the maturity of the Obligations guaranteed hereby may be
accelerated as provided in Article VI for the purposes of such Subsidiary
Guarantor's Subsidiary Guaranty herein, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the Obligations
guaranteed hereby, and (y) in the event of any declaration of acceleration of
such Obligations as provided in Article VI, such Obligations (whether or not due
and payable) shall forthwith become due and payable by such Subsidiary Guarantor
for the purposes of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees) incurred by the Trustee or any
Holder in enforcing any rights under this Section 10.01.
SECTION 10.02. Contribution. Each of the Company and any Subsidiary
Guarantor (a "Contributing Party") agrees that, in the event a payment shall be
made by any other Subsidiary Guarantor under any Subsidiary Guaranty (the
"Claiming Guarantor"), the Contributing Party shall indemnify the Claiming
Guarantor in an amount equal to the amount of such payment multiplied by a
fraction, the numerator of which shall be the net worth of the Contributing
Party on the date hereof and the denominator of which shall be the aggregate net
worth of the Company and all the Subsidiary Guarantors on the date hereof (or,
in the case of any Subsidiary Guarantor becoming a party hereto pursuant to
Section 10.06, the date of the supplemental indenture executed and delivered by
such Subsidiary Guarantor).
SECTION 10.03. Successors and Assigns. This Article X shall be binding
upon each Subsidiary Guarantor and its successors and assigns and shall inure to
the benefit of the successors and assigns of the Trustee and the Holders and, in
the event of any transfer or assignment of rights by any Holder or the Trustee,
the rights and privileges conferred upon that party in this Indenture and in the
Securities shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions of this Indenture.
SECTION 10.04. No Waiver. Neither a failure nor a delay on the part of
either the Trustee or the Holders in exercising any right, power or privilege
under this Article X shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege. The rights, remedies and benefits of the Trustee and the
Holders herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article X at law,
in equity, by statute or otherwise.
<PAGE> 51
50
SECTION 10.05. Modification. No modification, amendment or waiver of
any provision of this Article X, nor the consent to any departure by any
Subsidiary Guarantor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Trustee, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given. No notice to or demand on any Subsidiary Guarantor in any case shall
entitle such Subsidiary Guarantor to any other or further notice or demand in
the same, similar or other circumstances.
SECTION 10.06. Execution of Supplemental Indenture for Future
Subsidiary Guarantors. Each Subsidiary which is required to become a Subsidiary
Guarantor pursuant to Section 4.06 shall promptly execute and deliver to the
Trustee a supplemental indenture in the form of Exhibit B hereto pursuant to
which such Subsidiary shall become a Subsidiary Guarantor under this Article X
and shall guarantee the Obligations. Concurrently with the execution and
delivery of such supplemental indenture, the Company shall deliver to the
Trustee an Opinion of Counsel to the effect that such supplemental indenture has
been duly authorized, executed and delivered by such Subsidiary and that,
subject to customary qualifications, including the application of bankruptcy,
insolvency, moratorium, fraudulent conveyance or transfer and other similar laws
relating to creditors' rights generally and to the principles of equity, whether
considered in a proceeding at law or in equity, the Subsidiary Guaranty of such
Subsidiary Guarantor is a legal, valid and binding obligation of such Subsidiary
Guarantor, enforceable against such Subsidiary Guarantor in accordance with its
terms.
SECTION 10.07. Release of Subsidiary Guarantees. Without any further
notice or action being required by any Person, any Subsidiary Guarantor shall be
fully and unconditionally released and discharged from all its obligations under
its Subsidiary Guarantee and this Indenture upon the release or termination of
all guarantees and other similar obligations provided by such Subsidiary
Guarantor under all Credit Facilities. Upon such release and discharge, the
Company, any remaining Subsidiary Guarantors and the Trustee shall execute a
supplemental indenture evidencing such release; provided that such release and
discharge shall not be affected in any manner by a failure of any party thereto
to execute such supplemental indenture.
ARTICLE XI
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies or conflicts with another provision that is required
to be included in this Indenture by the TIA, the required provision shall
control.
<PAGE> 52
51
SECTION 11.02. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail or sent by
facsimile (with a hard copy delivered in person or by mail promptly thereafter)
and addressed as follows:
if to the Company or any Subsidiary
Guarantor:
Telecomunicaciones de Puerto Rico, Inc.
1500 Roosevelt Avenue
Guaynabo, Puerto Rico 00968
Attention of: General Counsel
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention of:
Corporate Trust Trustee Administration
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
to the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it shall be deemed duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA - 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA - 312(c) and may
<PAGE> 53
52
not be held accountable by reason of disclosure of information as to the names
and addresses of the Securityholders pursuant to TIA Section 3.12(b).
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish upon the
request of and to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
Opinions of Counsel required to be delivered to the Trustee may have
qualifications customary for opinions of the type required and counsel
delivering such Opinions of Counsel may rely on certificates of the Company, a
Subsidiary Guarantor or government or other officials customary for opinions of
the type required, including certificates certifying as to matters of fact.
<PAGE> 54
53
SECTION 11.06. When Securities Disregarded. In determining whether the
Holders of the required principal amount of Securities of a series have
concurred in any direction, waiver or consent, Securities owned by the Company,
any Subsidiary Guarantor or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or any
Subsidiary Guarantor shall be disregarded and deemed not to be Outstanding,
except that, for the purpose of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
that a Trust Officer of the Trustee actually knows are so owned shall be so
disregarded. Also, subject to the foregoing, only Securities Outstanding at the
time shall be considered in any such determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Securityholders.
The Registrar and the Paying Agent or co-registrar may make reasonable rules for
their functions.
SECTION 11.08. Legal Holidays. A "Legal Holiday" is a Saturday, a
Sunday or a day on which banking institutions are not required to be open in the
State of New York. If a payment date is a Legal Holiday, payment shall be made
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period. If a regular record date is a Legal Holiday,
the record date shall not be affected.
SECTION 11.09. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO
THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
SECTION 11.10. No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company or any Subsidiary Guarantor
shall not have any liability for any obligations of the Company or the
applicable Subsidiary Guarantor under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
SECTION 11.11. Successors. All agreements of the Company and each
Subsidiary Guarantor in this Indenture and the Securities shall bind its
successors. All agreements of the Trustee in this Indenture shall bind its
successors.
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54
SECTION 11.12. Multiple Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 11.13. Separability. Each provision of this Indenture shall be
considered separable and if for any reason any provision which is not essential
to the effectuation of the basic purpose of this Indenture or the Securities
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.
SECTION 11.14. Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be
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55
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
TELECOMUNICACIONES DE PUERTO
RICO, INC.,
by:
---------------------------
Name:
Title:
PUERTO RICO TELEPHONE
COMPANY, INC.,
by:
---------------------------
Name:
Title:
CELULARES TELEFONICA, INC.,
by:
---------------------------
Name:
Title:
<PAGE> 57
56
THE BANK OF NEW YORK, as Trustee
by:
---------------------------
Name:
Title:
<PAGE> 58
APPENDIX A
FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO RULE 144A, TO
CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S AND,
SUBJECT TO THE APPLICABLE PURCHASE AGREEMENT, TO INSTITUTIONAL ACCREDITED
INVESTORS.
PROVISIONS RELATING TO INITIAL SECURITIES
AND EXCHANGE SECURITIES
1. Definitions
1.1 Definitions
For the purposes of this Appendix A the following terms shall have the
meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Temporary Regulation S Global Security or beneficial
interest therein, the rules and procedures of the Depository, Euroclear and
Cedel for such a Temporary Regulations S Global Security, in each case to the
extent applicable to such transaction and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Definitive Security" means a certificated Initial Security or
Exchange Security or Private Exchange Security bearing, if required, the
restricted securities legend set forth in Section 2.3(d).
"Depository" means The Depository Trust Company, its nominees and
their respective successors.
"Distribution Compliance Period", with respect to any Securities,
means the period of 40 consecutive days beginning on and including the later of
(i) the day on which such Securities are first offered to persons other than
distributors (as defined in Regulation S under the Securities Act) in reliance
on Regulation S and (ii) the Issue Date with respect to such Securities.
"Exchange Securities" means the Exchange Securities due 2002, the
Exchange Securities due 2006 and the Exchange Securities due 2009.
"Exchange Securities due 2002" means the 6.15% Senior Notes due 2002
to be issued pursuant to this Indenture in connection with a Registered Exchange
Offer pursuant to the Registration Agreement.
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"Exchange Securities due 2006" means the 6.65% Senior Notes due 2006
to be issued pursuant to this Indenture in connection with a Registered Exchange
Offer pursuant to the Registration Agreement.
"Exchange Securities due 2009" means the 6.80% Senior Notes due 2009
to be issued pursuant to this Indenture in connection with a Registered Exchange
Offer pursuant to the Registration Agreement.
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"IAI" means an institutional "accredited investor" as described in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchasers" means Salomon Smith Barney Inc., Chase Securities
Inc., J.P. Morgan Securities Inc., NationsBanc Montgomery Securities LLC and
Popular Securities, Inc.
"Initial Securities" means the Initial Securities due 2002, the
Initial Securities due 2006 and the Initial Securities due 2009.
"Initial Securities due 2002" means the 6.15% Senior Notes due 2002 to
be originally issued, excluding Exchange Securities due 2002 and Private
Exchange Securities due 2002, as provided for in this Indenture.
"Initial Securities due 2006" means the 6.65% Senior Notes due 2006 to
be originally issued, excluding Exchange Securities due 2006 and Private
Exchange Securities due 2006, as provided for in this Indenture.
"Initial Securities due 2009" means the 6.80% Senior Notes due 2009 to
be originally issued, excluding Exchange Securities due 2009 and Private
Exchange Securities due 2009, as provided for in this Indenture.
"Private Exchange" means the offer by the Company, pursuant to Section
2 of the Registration Agreement, to issue and deliver to certain purchasers, in
exchange for the Initial Securities held by such purchasers as part of their
initial distribution, a like aggregate principal amount of Private Exchange
Securities.
"Private Exchange Securities" means the Private Exchange Securities
due 2002, the Private Exchange Securities due 2006 and the Private Exchange
Securities due 2009.
"Private Exchange Securities due 2002" means the 6.15% Senior Notes
due 2002 to be issued pursuant to this Indenture in connection with a Private
Exchange pursuant to the Registration Agreement.
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"Private Exchange Securities due 2006" means the 6.65% Senior Notes
due 2006 to be issued pursuant to this Indenture in connection with a Private
Exchange pursuant to the Registration Agreement.
"Private Exchange Securities due 2009" means the 6.80% Senior Notes
due 2009 to be issued pursuant to this Indenture in connection with a Private
Exchange pursuant to the Registration Agreement.
"Purchase Agreement" means the Purchase Agreement dated May 13, 1999,
among the Company, the Subsidiary Guarantors and the Initial Purchasers relating
to the Initial Securities.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registered Exchange Offer" means the offer by the Company, pursuant
to the Registration Agreement, to certain Holders of Initial Securities, to
issue and deliver to such Holders, in exchange for the Initial Securities, a
like aggregate principal amount of the applicable series of Exchange Securities
registered under the Securities Act.
"Registration Agreement" means the Registration Rights Agreement dated
May 13, 1999 , among the Company, the Subsidiary Guarantors and the Initial
Purchasers.
"Securities" means the Securities due 2002, the Securities due 2006
and the Securities due 2009.
"Securities due 2002" means the Initial Securities due 2002, the
Exchange Securities due 2002 and the Private Exchange Securities due 2002,
treated as a single class.
"Securities due 2006" means the Initial Securities due 2006, the
Exchange Securities due 2006 and the Private Exchange Securities due 2006,
treated as a single class.
"Securities due 2009" means the Initial Securities due 2009, the
Exchange Securities due 2009 and the Private Exchange Securities due 2009,
treated as a single class.
"Securities Act" means the Securities Act of 1933, as amended.
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"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depository) or any successor person thereto, who
shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement issued
by the Company in connection with the offer and sale of Initial Securities or
Private Exchange Securities pursuant to the Registration Agreement.
1.2 Other Definitions
Defined in
Term Section:
---- --------
"Agent Members".....................................................2.1(b)
"Global Security"...................................................2.1(a)
"IAI Global Security" ..............................................2.1(a)
"Regulation S" ......................................................2.1
"Rule 144A"..........................................................2.1
"Rule 144A Global Security" ........................................2.1(a)
"Permanent Regulation S Global Security" ...........................2.1(a)
"Temporary Regulation S Global Security" ...........................2.1(a)
2. The Securities
2.1 Form and Dating
The Initial Securities will be offered and sold by the Company
pursuant to the Purchase Agreement. The Initial Securities will be resold
initially only to QIBs in reliance on Rule 144A under the Securities Act ("Rule
144A") and in reliance on Regulation S under the Securities Act ("Regulation
S"). Initial Securities may thereafter be transferred to, among others, QIBs,
purchasers in reliance on Regulation S and IAIs under Rule 501(a)(1), (2), (3)
or (7) under the Securities Act, subject to the restrictions on transfer set
forth herein.
(a) Global Securities. Initial Securities initially resold pursuant to
Rule 144A shall be issued initially in the form of one or more permanent global
Securities in definitive, fully registered form (collectively, the "Rule 144A
Global Security"), Initial Securities initially resold pursuant to Regulation S
shall be issued initially in the form of one or more temporary global securities
(collectively, the "Temporary Regulation S Global Security") and, subject to
Section 2.4 hereof, Initial Securities transferred subsequent to the initial
resale thereof to IAIs shall be issued initially in the form of one or more
permanent global securities in definitive, fully registered form (collectively,
the "IAI Global Security"), in each case
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without interest coupons and with the global securities legend and restricted
securities legend set forth in Exhibit 1 hereto, which shall be deposited on
behalf of the purchasers of the Initial Securities represented thereby with the
Securities Custodian, and registered in the name of the Depository or a nominee
of the Depository, duly executed by the Company and authenticated by the Trustee
as provided in this Indenture. Beneficial ownership interests in the Temporary
Regulation S Global Security will not be exchangeable for interests in the Rule
144A Global Security, a permanent global security (the "Permanent Regulation S
Global Security"), or any other Security without a legend containing
restrictions on transfer of such Security prior to the expiration of the
Distribution Compliance Period and then only upon certification in form
reasonably satisfactory to the Trustee that beneficial ownership interests in
such Temporary Regulation S Global Security are owned either by non-U.S. persons
or U.S. persons who purchased such interests in a transaction that did not
require registration under the Securities Act. The Rule 144A Global Security,
Temporary Regulation S Global Security, IAI Global Security and Permanent
Regulation S Global Security are collectively referred to herein as "Global
Securities." The aggregate principal amount of the Global Securities may from
time to time be increased or decreased by adjustments made on the records of the
Trustee and the Depository or its nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Security deposited with or on behalf of the Depository.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(b) and pursuant to an order of the Company, authenticate and
deliver initially one or more Global Securities that (a) shall be registered in
the name of the Depository for such Global Security or Global Securities or the
nominee of such Depository, (b) shall be delivered by the Trustee to such
Depository or pursuant to such Depository's instructions or held by the Trustee
as Securities Custodian and (c) shall bear legends as otherwise required by this
Appendix A.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depository or by the Trustee as Securities Custodian or
under such Global Security, and the Depository may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee from giving effect to any written certification, proxy or
other authorization furnished by the Depository or impair, as between the
Depository and its Agent Members, the operation of customary practices of such
Depository governing the exercise of the rights of a holder of a beneficial
interest in any Global Security.
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(c) Definitive Securities. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Securities will not be entitled to
receive physical delivery of Definitive Securities.
2.2 Authentication. The Trustee shall authenticate and deliver: (1) Initial
Securities for original issue representing $300,000,000 in aggregate principal
amount of the Initial Securities due 2002, $400,000,000 in aggregate principal
amount of the Initial Securities due 2006 and $300,000,000 in aggregate
principal amount of the Initial Securities due 2009 and (2) the Exchange
Securities or Private Exchange Securities of each series for issue only in a
Registered Exchange Offer or a Private Exchange, respectively, pursuant to the
Registration Agreement, for a like principal amount of Initial Securities or
Private Exchange Securities of such series, as applicable, in each case upon a
written order of the Company signed by two Officers or by an Officer and either
an Assistant Treasurer or an Assistant Secretary of the Company. Such order
shall specify the amount of the Securities to be authenticated and the date (if
other than the Issue Date) on which the original issue of Securities is to be
authenticated and in the case of Securities other than the Initial Securities,
whether the Securities are to be Exchange Securities or Private Exchange
Securities. The aggregate principal amount of Securities outstanding at any time
may not exceed $300,000,000 for the Initial Securities due 2002, $400,000,000
for the Initial Securities due 2006 and $300,000,000 for the Initial Securities
due 2009, except as provided in Section 2.07 of this Indenture.
2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive
Securities. When Definitive Securities are presented to the Registrar or a
co-registrar with a request:
(x) to register the transfer of such Definitive Securities; or
(y) to exchange such Definitive Securities for an equal principal
amount of Definitive Securities of other authorized denominations,
the Registrar or co-registrar shall register the transfer or make the exchange
as requested if its reasonable requirements for such transaction are met;
provided, however, that the Definitive Securities surrendered for transfer or
exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar
or co-registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
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(ii) if such Definitive Securities bear a restricted securities
legend, they are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act or pursuant to clause (A),
(B) or (C) below, and are accompanied by the following additional
information and documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect; or
(B) if such Definitive Securities are being transferred to the
Company, a certification to that effect; or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act, (i) a certification to that effect and (ii) if the
Company so requests, an opinion of counsel or other evidence
reasonably satisfactory to it as to the compliance with the
restrictions set forth in the legend set forth in Section 2.3(d)(i).
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(b) Transfer and Exchange of Global Securities. (i) The transfer and
exchange of Global Securities or beneficial interests therein shall be effected
through the Depository, in accordance with this Indenture (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depository therefor. A transferor of a beneficial interest in a Global Security
shall deliver a written order given in accordance with the Depository's
procedures containing information regarding the participant account of the
Depository to be credited with a beneficial interest in the Global Security and
such account shall be credited in accordance with such instructions with a
beneficial interest in the Global Security and the account of the Person making
the transfer shall be debited by an amount equal to the beneficial interest in
the Global Security being transferred. In the case of a transfer of a beneficial
interest in a Global Security to an IAI, the transferee must furnish a signed
letter to the Trustee containing certain representations and agreements in the
form of Exhibit C hereto.
(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Security to a beneficial interest in another Global Security,
the Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security to which such
interest is being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall reflect on its
books and records the date and a corresponding decrease in the principal
amount of the Global Security from which such interest is being
transferred.
(iii) Notwithstanding any other provisions of this Appendix A (other
than the provisions set forth in Section 2.4), a Global Security may not be
transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(iv) In the event that a Global Security is exchanged for Definitive
Securities pursuant to Section 2.4 prior to the consummation of a
Registered Exchange Offer or the effectiveness of a Shelf Registration
Statement with respect to such Securities, such Securities may be exchanged
only in accordance with such procedures as are substantially consistent
with the provisions of this Section 2.3 (including the certification
requirements set forth on the reverse of the Initial Securities intended to
ensure that such transfers comply with Rule 144A, Regulation S or such
other applicable exemption from registration under the Securities Act, as
the case may be) and such other procedures as may from time to time be
adopted by the Company.
(c) Restrictions on Transfer of Temporary Regulation S Global
Securities. During the Distribution Compliance Period, beneficial ownership
interests in Temporary Regulation S Global Securities may only be sold, pledged
or transferred through Euroclear or
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Cedel in accordance with the Applicable Procedures and only (i) to the Company,
(ii) so long as such Security is eligible for resale pursuant to Rule 144A, to a
person whom the selling holder reasonably believes is a QIB that purchases for
its own account or for the account of a QIB to whom notice is given that the
resale, pledge or transfer is being made in reliance on Rule 144A, (iii) in an
offshore transaction in accordance with Regulation S or (iv) pursuant to an
exemption from registration under the Securities Act provided by Rule 144 (if
applicable) under the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States. During the
Distribution Compliance Period, interests in the Temporary Regulation S Global
Security may not be transferred to institutions that are IAIs (other than IAIs
that are also QIBs).
(d) Legend.
(i) Except as permitted by the following paragraphs (ii), (iii) and
(iv), each certificate evidencing the Global Securities and the Definitive
Securities (and all Securities issued in exchange therefor or in
substitution thereof) shall bear a legend in substantially the following
form:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE
ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER
THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING
OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE,
PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE
OF THIS NOTE), (4) IN MINIMUM AGGREGATE PRINCIPAL AMOUNTS OF $100,000 TO AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1),
(2),
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(3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE) THAT
IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION,
AND A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND TRUSTEE (PROVIDED THAT
CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE
PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40-DAY
DISTRIBUTION COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE 903(b)(3) OF
REGULATION S UNDER THE SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE)
UNDER THE SECURITIES ACT, OR (6) 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. AN
INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES THAT IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY
IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER
HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF
THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A OR (2) PURCHASING FROM A PERSON NOT PARTICIPATING IN
THE INITIAL DISTRIBUTION OF THIS SECURITY (OR ANY PREDECESSOR SECURITY),
THAT IT IS AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS
HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A
NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN
ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2)(i) OF RULE 902
UNDER) REGULATION S UNDER THE SECURITIES ACT."
Each Definitive Security will also bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION
AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."
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(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global
Security) pursuant to Rule 144 under the Securities Act:
(A) in the case of any Transfer Restricted Security that is a
Definitive Security, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Security that does
not bear the legends set forth above and rescind any restriction on
the transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security that is
represented by a Global Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Security that does not bear the legends set forth above and rescind
any restriction on the transfer of such Transfer Restricted Security,
in either case, if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such certification
to be in the form set forth on the reverse of the Initial Security).
(iii) After a transfer of any Initial Securities or Private Exchange
Securities, as the case may be, during the period of the effectiveness of a
Shelf Registration Statement with respect to such Initial Securities or
Private Exchange Securities, all requirements pertaining to restricted
legends on such Initial Security or such Private Exchange Security will
cease to apply, and an Initial Security or Private Exchange Security, as
the case may be, in global form without restricted legends will be
available to the transferee of the beneficial interests of such Initial
Securities or Private Exchange Securities. Upon the occurrence of any of
the circumstances described in this paragraph, the Company will deliver an
Officers' Certificate to the Trustee instructing the Trustee to issue
Securities without restricted legends.
(iv) Upon the consummation of a Registered Exchange Offer with respect
to the Initial Securities pursuant to which certain Holders of such Initial
Securities are offered Exchange Securities in exchange for their Initial
Securities, Exchange Securities in global form without the restricted
legends will be available to Holders or beneficial owners that exchange
such Initial Securities (or beneficial interests therein) in such
Registered Exchange Offer. Upon the occurrence of any of the circumstances
described in this paragraph, the Company will deliver an Officers'
Certificate to the Trustee instructing the Trustee to issue Securities
without restricted legends.
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(e) Cancelation or Adjustment of Global Security. At such time as all
beneficial interests in a Global Security have either been exchanged for
Definitive Securities, redeemed, repurchased or canceled, such Global Security
shall be returned by the Depository to the Trustee for cancelation or retained
and canceled by the Trustee. At any time prior to such cancelation, if any
beneficial interest in a Global Security is exchanged for Definitive Securities,
redeemed, repurchased or canceled, the principal amount of Securities
represented by such Global Security shall be reduced and an adjustment shall be
made on the books and records of the Trustee (if it is then the Securities
Custodian for such Global Security) with respect to such Global Security, by the
Trustee or the Securities Custodian, to reflect such reduction.
(f) Obligations with Respect to Transfers and Exchanges of Securities.
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee shall authenticate Definitive Securities and
Global Securities at the Registrar's or co-registrar's request.
(ii) No service charge shall be made for any registration of transfer
or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax, assessments, or similar governmental charge payable
in connection therewith (other than any such transfer taxes, assessments or
similar governmental charge payable upon exchange or transfer pursuant to
Sections 3.06 and 9.05 of this Indenture).
(iii) The Registrar or co-registrar shall not be required to register
the transfer of or exchange of any Security for a period beginning 15 days
before the mailing of a notice of redemption or an offer to repurchase
Securities or 15 days before an interest payment date.
(iv) Prior to the due presentation for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of
receiving payment of principal of and interest on such Security and for all
other purposes whatsoever, whether or not such Security is overdue, and
none of the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar shall be affected by notice to the contrary.
(v) All Securities issued upon any transfer or exchange pursuant to
the terms of this Indenture shall evidence the same debt and shall be
entitled to the same benefits under this Indenture as the Securities
surrendered upon such transfer or exchange.
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(g) No Obligation of the Trustee.
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant in the
Depository or any other Person with respect to the accuracy of the records
of the Depository or its nominee or of any participant or member thereof,
with respect to any ownership interest in the Securities or with respect to
the delivery to any participant, member, beneficial owner or other Person
(other than the Depository) of any notice (including any notice of
redemption or repurchase) or the payment of any amount, under or with
respect to such Securities. All notices and communications to be given to
the Holders and all payments to be made to Holders under the Securities
shall be given or made only to the registered Holders (which shall be the
Depository or its nominee in the case of a Global Security). The rights of
beneficial owners in any Global Security shall be exercised only through
the Depository subject to the applicable rules and procedures of the
Depository. The Trustee may rely and shall be fully protected in relying
upon information furnished by the Depository with respect to its members,
participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Security (including any transfers between
or among Depository participants, members or beneficial owners in any
Global Security) other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and to do so
if and when expressly required by, the terms of this Indenture, and to
examine the same to determine substantial compliance as to form with the
express requirements hereof.
2.4 Definitive Securities
(a) A Global Security deposited with the Depository or with the
Trustee as Securities Custodian pursuant to Section 2.1 shall be transferred to
the beneficial owners thereof in the form of Definitive Securities in an
aggregate principal amount equal to the principal amount of such Global
Security, in exchange for such Global Security, only if such transfer complies
with Section 2.3 and (i) the Depository notifies the Company that it is
unwilling or unable to continue as a Depository for such Global Security or if
at any time the Depository ceases to be a "clearing agency" registered under the
Exchange Act, and a successor Depository is not appointed by the Company within
90 days of such notice, or (ii) a Default or an Event of Default has occurred
and is continuing or (iii) the Company, in its sole discretion, notifies the
Trustee in writing that it elects to cause the issuance of Definitive Securities
under this Indenture.
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(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depository to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of Definitive Securities of authorized denominations. Definitive
Securities issued in exchange for any portion of a Global Security transferred
pursuant to this Section shall be executed, authenticated and delivered only in
denominations of $1,000 and any integral multiple thereof and registered in such
names as the Depository shall direct. Any Definitive Security delivered in
exchange for an interest in the Global Security shall, except as otherwise
provided by Section 2.3(d), bear the restricted securities legend set forth in
Exhibit 1 hereto.
(c) The registered Holder of a Global Security may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action that a Holder is
entitled to take under this Indenture or the Securities.
(d) In the event of the occurrence of any of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to
the Trustee a reasonable supply of Definitive Securities in definitive, fully
registered form without interest coupons.
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EXHIBIT 1
to APPENDIX A
[FORM OF FACE OF INITIAL SECURITY]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO DTC, NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL
BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE
HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN
AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE
OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS
THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A, PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX
CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
<PAGE> 73
2
TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX
CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
NOTE), (4) IN MINIMUM AGGREGATE PRINCIPAL AMOUNTS OF $100,000 TO AN INSTITUTION
THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING
THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A
CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED
BY THE TRANSFEREE TO THE COMPANY AND TRUSTEE (PROVIDED THAT CERTAIN HOLDERS
SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT TO THIS CLAUSE
(4) PRIOR TO THE EXPIRATION OF THE "40-DAY DISTRIBUTION COMPLIANCE PERIOD"
(WITHIN THE MEANING OF RULE 903(b)(3) OF REGULATION S UNDER THE SECURITIES
ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) 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. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES THAT IT
WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT
OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT
IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR
(2) PURCHASING FROM A PERSON NOT PARTICIPATING IN THE INITIAL DISTRIBUTION OF
THIS SECURITY (OR ANY PREDECESSOR SECURITY), THAT IT IS AN INSTITUTION THAT IS
AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER
THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND
NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN
THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH
(k)(2)(i) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT.
[Temporary Regulation S Global Security Legend]
BENEFICIAL OWNERSHIP INTERESTS IN THIS TEMPORARY REGULATION S GLOBAL
NOTE WILL NOT BE EXCHANGEABLE FOR INTERESTS
<PAGE> 74
3
IN THE RULE 144A GLOBAL NOTE OR THE PERMANENT REGULATION S GLOBAL NOTE OR ANY
OTHER NOTE REPRESENTING AN INTEREST IN THE NOTES REPRESENTED HEREBY WHICH DO NOT
CONTAIN A LEGEND CONTAINING RESTRICTIONS ON TRANSFER, UNTIL THE EXPIRATION OF
THE "40-DAY DISTRIBUTION COMPLIANCE PERIOD" (WITHIN THE MEANING OF RULE
903(b)(3) OF REGULATION S UNDER THE SECURITIES ACT) AND THEN ONLY UPON
CERTIFICATION IN FORM REASONABLY SATISFACTORY TO THE TRUSTEE THAT SUCH
BENEFICIAL INTERESTS ARE OWNED EITHER BY NON-U.S. PERSONS OR U.S. PERSONS WHO
PURCHASED SUCH INTERESTS IN A TRANSACTION THAT DID NOT REQUIRE REGISTRATION
UNDER THE SECURITIES ACT. DURING SUCH 40-DAY DISTRIBUTION COMPLIANCE PERIOD,
BENEFICIAL OWNERSHIP INTERESTS IN THIS TEMPORARY REGULATION S GLOBAL NOTE MAY
ONLY BE SOLD, PLEDGED OR TRANSFERRED THROUGH THE EUROCLEAR SYSTEM OR CEDEL S.A.
AND ONLY (A) TO THE ISSUER, THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, OTHER THAN IN CANADA OR TO OR FOR THE BENEFIT
OF A RESIDENT OF CANADA PURSUANT TO A PROSPECTUS QUALIFYING THE NOTES FOR SALE
UNDER THE SECURITIES LAW IN ANY PROVINCE OR TERRITORY OF CANADA IN WHICH THE
PURCHASER RESIDES OR AN EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF SUCH LAWS,
(D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE), OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT. DURING SUCH 40-DAY DISTRIBUTION COMPLIANCE
PERIOD, INTERESTS IN THIS TEMPORARY REGULATION S GLOBAL NOTE MAY NOT BE
TRANSFERRED TO INSTITUTIONS THAT ARE "ACCREDITED INVESTORS" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT BUT NOT QUALIFIED
INSTITUTIONAL BUYERS AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT. HOLDERS
OF INTERESTS IN THIS TEMPORARY REGULATION S GLOBAL NOTE WILL NOTIFY ANY
PURCHASER OF SUCH RESALE RESTRICTIONS, IF THEN APPLICABLE.
[Definitive Securities Legend]
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
<PAGE> 75
[FORM OF FACE OF INITIAL SECURITY]
No. [up to ]*****$__________
6.15% Senior Note due 2002*
6.65% Senior Note due 2006**
6.80% Senior Note due 2009***
CUSIP No. ______
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation,
promises to pay to [Cede & Co.]*****, or registered assigns, the principal sum
[of Dollars]**** [as set forth on the Schedule of Increases or
Decreases annexed hereto]***** on May 15, [2002]* [2006]** [2009]***.
Interest Payment Dates: May 15 and November 15.
Record Dates: May 1 and November 1.
- ----------------
* Insert for 6.15% Senior Note due 2002
** Insert for 6.65% Senior Note due 2006
*** Insert for 6.80% Senior Note due 2009
**** Insert for Definitive Securities
***** Insert for Global Securities
<PAGE> 76
2
Additional provisions of this Security are set forth on the other side
of this Security.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
TELECOMUNICACIONES DE PUERTO
RICO, INC.
by:
--------------------------
Name:
Title:
by:
--------------------------
Name:
Title:
[CORPORATE SEAL]
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
Dated:
THE BANK OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
by:
-----------------------------
Authorized Signatory
<PAGE> 77
3
- -------------------------
<PAGE> 78
[FORM OF REVERSE SIDE OF INITIAL SECURITY]
6.15% Senior Note due 2002*
6.65% Senior Note due 2006**
6.80% Senior Note due 2009***
1. Interest
(a) Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Company"), promises to pay
interest on the principal amount of this Security at the rate per annum shown
above. The Company will pay interest semiannually on May 15 and November 15 of
each year, commencing November 15, 1999. Interest on the Securities will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from May 20, 1999. Interest shall be computed on the basis of a
360-day year of twelve 30-day months. The Company shall pay interest on overdue
principal at the rate borne by the Securities represented hereby plus 1% per
annum, and it shall pay interest on overdue installments of interest at the rate
borne by the Securities represented hereby to the extent lawful.
(b) Special Interest. The holder of this Security is entitled to the
benefits of a Registration Rights Agreement, dated May 13, 1999 (the
"Registration Agreement"), among the Company, Puerto Rico Telephone Company,
Inc. and Celulares Telefonica, Inc., and the Initial Purchasers named therein.
Capitalized terms used in this paragraph (b) but not defined herein have the
meanings assigned to them in the Registration Agreement. In the event that (i)
neither the Exchange Offer Registration Statement nor the Shelf Registration
Statement has been filed with the Commission on or prior to the 90th day
following the date of the original issuance of the Securities, (ii) neither the
Exchange Offer Registration Statement nor the Shelf Registration Statement has
been declared effective on or prior to the 150th day following the date of the
original issuance of the Securities, (iii) the Registered Exchange Offer has not
been consummated or the Shelf Registration Statement has not been declared
effective on or prior to the 180th day following the date of the original
issuance of the Securities, or (iv) after either the Shelf Registration
Statement or the Exchange Offer Registration Statement has been declared
effective, such Registration Statement thereafter ceases to be effective or
usable in connection with resales of the Securities or Exchange Securities at
any time that the Company is obligated to maintain the effectiveness thereof
pursuant to the Registration Agreement (each such event referred to in clauses
(i) through (iv) above being referred to herein as a "Registration Default"),
interest (the "Special Interest") shall accrue (in addition to stated interest
on the Securities) from and including the date on which the first such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured, at a rate per annum equal to 0.25% of the
<PAGE> 79
2
principal amount of the Securities; provided, however, that such rate per annum
shall increase by 0.25% per annum from and including the 91st day after the
first such Registration Default (and each successive 91st day thereafter) unless
and until all Registration Defaults have been cured; provided further, however,
that in no event shall the Special Interest accrue at a rate in excess of 1.00%
per annum. The Special Interest will be payable in cash semiannually in arrears
each May 15 and November 15. Whenever in the Indenture there is mentioned, in
any context, the payment of principal, interest, purchase price in connection
with a purchase of the Securities or any other amount payable on or with respect
to any of the Securities, such mention shall be deemed to include mention of the
payment of Special Interest provided for in this Section 1(b) to the extent
that, in such context, Special Interest is, was or would be payable in respect
thereof.
2. Additional Amounts.
(a) All payments made by the Company under or with respect to the
Securities or by any Subsidiary Guarantor under or with respect to its
Subsidiary Guarantee (the Company and any such Subsidiary Guarantor being
referred to for purposes of this section 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
("Taxes") imposed, levied, collected or assessed by or on behalf of, or within
Puerto Rico, or any taxing authority thereof or therein ("Taxing Authority"),
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 (x) make any required withholding or deduction in respect of any Taxes,
(y) remit the full amount deducted or withheld to the relevant Taxing Authority
in accordance with applicable law, and (z) pay such additional amounts
("Additional Amounts") as may be necessary so that the net amount received by
each holder and beneficial owner of Securities (including Additional Amounts)
after such withholding or deduction or other payment of Taxes will not be less
than the amounts that the holder and beneficial owner would have received if
such Taxes had not been withheld or deducted or paid; provided that no
Additional Amounts shall be so payable with respect to:
(i) 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 Securities;
(ii) 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 Security to comply with any reasonable request
by the applicable
<PAGE> 80
3
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 Section 2(a)(ii), 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;
(iii) any estate, inheritance, gift, sale, transfer, personal property or
similar tax, assessment or other governmental charge; or
(iv) any combination of (i), (ii) and (iii) above.
Such Additional Amounts shall also not be payable where, had the
beneficial owner of the Security been the holder of the Security, it would not
have been entitled to payment of Additional Amounts by reason of any of (i),
(ii), (iii) or (iv) above.
(b) The applicable Obligor or any successor, as the case may be, will
furnish to the Trustee 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 Securities that are outstanding on the date
of such withholding or deduction for or on account of Taxes upon request to the
Trustee.
(c) At least 30 days prior to each date on which any payment under or
with respect to the Securities 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 Securities is due and 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
<PAGE> 81
4
Securities on the payment date. Whenever in this Indenture there is mentioned,
in any context, the payment of principal, interest, purchase price in connection
with a purchase of the Securities or any other amount payable on or with respect
to any of the Securities, such mention shall be deemed to include mention of the
payment of Additional Amounts provided for in this Section 2 to the extent that,
in such context, Additional Amounts are, were or would be payable in respect
thereof.
(d) 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 Securities or any documentation relating thereto.
(e) In the event that Additional Amounts actually paid with respect to
any Securities are based on Taxes in excess of the appropriate Taxes applicable
to the holder or beneficial owner of such Securities and, as a 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 Securities, 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 Security 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, reliefs, remissions or repayments to which it may be
entitled.
(f) The foregoing obligations shall survive any defeasance of the
Indenture.
<PAGE> 82
5
3. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the May 1 or November 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States of America that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Securities
represented by a Global Security (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments in
respect of a Definitive Security (including principal, premium and interest), by
mailing a check to the registered address of each Holder thereof; provided,
however, that payments on the Securities may also be made, in the case of a
Holder of at least $1,000,000 aggregate principal amount of Securities, by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
United States if such Holder elects payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 30 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
4. Paying Agent and Registrar
Initially, The Bank of New York, a New York banking corporation (the
"Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
5. Indenture
The Company issued the Securities under an Indenture dated as of May
[], 1999 (the "Indenture"), among the Company, the Subsidiary Guarantors and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. -- 77aaa-77bbbb) as in effect on the date of the Indenture (the
"TIA"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Securityholders are referred to the Indenture and the TIA for a statement of
those terms.
The [Securities due 2002]* [Securities due 2006]** [Securities due
2009]*** are senior unsecured obligations of the Company limited to
$[300,000,000]*
<PAGE> 83
6
$[400,000,000]** $[300,000,000]*** aggregate principal amount at any one time
outstanding (subject to Section 2.07 of the Indenture). This Security is one of
the [Initial Securities due 2002]* [Initial Securities due 2006]** [Initial
Securities due 2009]*** referred to in the Indenture. The Indenture imposes
certain limitations on the ability of the Company and the Subsidiary Guarantors,
to, among other things, create or incur Liens and enter into Sale and Leaseback
Transactions. The Indenture also imposes limitations on Non-Guarantor
Subsidiaries to Incur Debt. In addition, the Indenture imposes limitations on
the ability of the Company and the Subsidiary Guarantors to consolidate or merge
with or into any other Person or sell, transfer, assign, lease, convey or
otherwise dispose of all or substantially all of the Property of the Company or
the applicable Subsidiary Guarantor.
To guarantee the due and punctual payment of the principal and
interest on the Securities and all other amounts payable by the Company under
the Indenture and the Securities when and as the same shall be due and payable,
whether at maturity, by acceleration or otherwise, according to the terms of the
Securities and the Indenture, the Subsidiary Guarantors have jointly and
severally unconditionally guaranteed the Guaranteed Obligations on a senior
basis pursuant to the terms of the Indenture.
6. Optional Redemption
[The [Securities due 2006]** [Securities due 2009]*** will be
redeemable, in whole or in part, at the option of the Company at any time at a
redemption price equal to the greater of (i) 100% of the principal amount of
such Securities and (ii) as determined by a Quotation Agent, the sum of the
present values 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 semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Adjusted
Treasury Rate, plus 15 basis points. In the case of each of clause (i) and (ii),
accrued interest will be payable 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 Securities, 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 Securities.
<PAGE> 84
7
"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 the
Company.
"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 York City (a "Primary
Treasury Dealer"), the Company shall substitute therefor another Primary
Treasury Dealer; and (ii) other Primary Treasury Dealers, if any, selected by
the Company.]
"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.(1)
[Except as provided in Section 7 below, the Securities due 2002 are
not redeemable prior to May 15, 2002.](2)
- ----------------
(1) Insert for 6.65% Senior Notes due 2006 and 6.80% Senior Notes
due 2009.
(2) Insert for 6.15% Senior Notes due 2002.
<PAGE> 85
8
7. 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 change or amendment becomes effective on or
after the Issue Date, it is determined by the Company or by any Subsidiary
Guarantor under or with respect to its Subsidiary Guarantee (the Company and any
such Subsidiary Guarantor being referred to for purposes of this section
individually as "Obligor" and collectively as "Obligors") that such Obligor or
successor would be required to pay any Additional Amounts pursuant to Section
4.07 of the Indenture and Section 2 hereof or the terms of the Securities 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) the Securities of such series, 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 Securities 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, the
Company 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 Company is 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 the Company to the Trustee, will be irrevocable.
8. Sinking Fund
The Securities are not subject to any sinking fund.
<PAGE> 86
9
9. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued interest on all Securities (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent on or before the redemption
date and certain other conditions are satisfied, on and after such date interest
ceases to accrue on such Securities (or such portions thereof) called for
redemption.
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. Upon any transfer or exchange, the
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes required by
law or permitted by the Indenture. The Registrar need not register the transfer
of or exchange any Securities selected for redemption (except, in the case of a
Security to be redeemed in part, the portion of the Security not to be redeemed)
or to transfer or exchange any Securities for a period of 15 days prior to the
mailing of a notice of redemption of Securities to be redeemed or 15 days before
an interest payment date.
11. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
12. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its written request unless an abandoned property law designates
another Person. After any such payment, Holders entitled to the money must look
only to the Company and not to the Trustee for payment.
<PAGE> 87
10
13. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some of or all its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities represented hereby may be amended without prior
notice to any Securityholder but with the written consent of the Holders of at
least a majority in aggregate principal amount of the outstanding Securities
represented hereby and (ii) any default or noncompliance with any provision may
be waived with the written consent of the Holders of at least a majority in
principal amount of the outstanding Securities represented hereby. Subject to
certain exceptions set forth in the Indenture, without the consent of any Holder
of Securities, the Company and the Trustee may amend the Indenture or the
Securities (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to
comply with Article V of the Indenture; (iii) to provide for uncertificated
Securities in addition to or in place of certificated Securities; (iv) to add
Guarantees with respect to the Securities; (v) to add additional covenants or to
surrender rights and powers conferred on the Company; (vi) to comply with the
requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the TIA; or (vii) to make any change that does not adversely
affect the rights of any Securityholder.
15. Defaults and Remedies
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the Securities of the
series represented hereby then outstanding, subject to certain limitations, may
declare all the Securities of the series represented hereby to be immediately
due and payable. Certain events of bankruptcy or insolvency are Events of
Default and shall result in the Securities being immediately due and payable
upon the occurrence of such Events of Default without any further act of the
Trustee or any Holder.
Holders of Securities may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in aggregate principal
amount of the Securities of the series represented hereby then outstanding may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in aggregate principal amount of the Securities of the
series represented hereby then outstanding, by written notice to the Company and
the Trustee, may rescind any declaration of acceleration and its consequences if
the rescission
<PAGE> 88
11
would not conflict with any judgment or decree, and if all existing Events of
Default have been cured or waived and a sum sufficient to pay all matured
installments of interest and principal (other than principal or interest that
has become due solely because of the acceleration) and any premium has been
deposited with the Trustee.
16. Trustee Dealings with the Company
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company
or any Subsidiary Guarantor shall not have any liability for any obligations of
the Company under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The waiver
and release are part of the consideration for the issue of the Securities.
18. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
19. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE> 89
12
21. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE COMPANY WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT
THE TEXT OF THIS SECURITY.
<PAGE> 90
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the
books of the Company. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
---------------- ---------------------
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security.
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act after the later of the date of original issuance
of such Securities and the last date, if any, on which such Securities were
owned by the Company or any Affiliate of the Company, the undersigned confirms
that such Securities are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) - to the Company; or
(2) - pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) - inside the United States to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act of 1933) that
purchases for its
<PAGE> 91
own account or for the account of a qualified institutional buyer
to whom notice is given that such transfer is being made in
reliance on Rule 144A, in each case pursuant to and in compliance
with Rule 144A under the Securities Act of 1933; or
(4) - outside the United States in an offshore transaction within the
meaning of Regulation S under the Securities Act in compliance
with Rule 904 under the Securities Act of 1933; or
(5) - to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933) that
has furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee or the Company); or
(6) - pursuant to another available exemption from registration
provided by Rule 144 under the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any
of the Securities evidenced by this certificate in the name of any person
other than the registered holder thereof; provided, however, that if box
(4), (5) or (6) is checked, the Trustee may require, prior to registering
any such transfer of the Securities, such legal opinions, certifications
and other information as the Company has reasonably requested to confirm
that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933.
---------------------------------------
Your Signature
Signature Guarantee:
Date:
---------------------------- ---------------------------------------
Signature must be guaranteed Signature of Signature
by a participant in a Guarantee
recognized signature guaranty
medallion program or other
signature guarantor acceptable
to the Trustee
- --------------------------------------------------------------------------------
<PAGE> 92
3
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated:
------------------------- ----------------------------------------
NOTICE: To be executed by an executive
officer
<PAGE> 93
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $[ ]. The
following increases or decreases in this Global Security have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
</TABLE>
<PAGE> 94
EXHIBIT A
[FORM OF FACE OF SECURITY]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO DTC, NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL
BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Definitive Securities Legend]
[IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.]
<PAGE> 95
[FORM OF FACE OF SECURITY]
No. [up to ]*****$__________
6.15% Senior Note due 2002(1)
6.65% Senior Note due 2006(2)
6.80% Senior Note due 2009(3)
CUSIP No. ______
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation,
promises to pay to [Cede & Co.]*****, or registered assigns, the principal sum
[of Dollars](4) [as set forth on the Schedule of Increases or Decreases
annexed hereto](5) on May 15, [2002]* [2006]** [2009]***.
Interest Payment Dates: May 15 and November 15.
Record Dates: May 1 and November 1.
- --------------
(1) Insert for 6.15% Senior Note due 2002
(2) Insert for 6.65% Senior Note due 2006
(3) Insert for 6.80% Senior Note due 2009
(4) Insert for Definitive Securities
(5) Insert for Global Securities
<PAGE> 96
2
Additional provisions of this Security are set forth on the other side
of this Security.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
TELECOMUNICACIONES DE PUERTO
RICO, INC.
by:
------------------------
Name:
Title:
by:
------------------------
Name:
Title:
[CORPORATE SEAL]
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
Dated:
THE BANK OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
by:
------------------------------
Authorized Signatory
<PAGE> 97
[FORM OF REVERSE SIDE OF SECURITY]
6.15% Senior Note due 2002*
6.65% Senior Note due 2006**
6.80% Senior Note due 2009***
1. Interest
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Company"), promises to pay
interest on the principal amount of this Security at the rate per annum shown
above. The Company will pay interest semiannually on May 15 and November 15 of
each year, commencing November 15, 1999. Interest on the Securities will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from May 20, 1999. Interest shall be computed on the basis of a
360-day year of twelve 30-day months. The Company shall pay interest on overdue
principal at the rate borne by the Securities represented hereby plus 1% per
annum, and it shall pay interest on overdue installments of interest at the rate
borne by the Securities represented hereby to the extent lawful.
2. Additional Amounts.
<PAGE> 98
(a) All payments made by the Company under or with respect to the
Securities or by any Subsidiary Guarantor under or with respect to its
Subsidiary Guarantee (the Company and any such Subsidiary Guarantor being
referred to for purposes of this section 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
("Taxes") imposed, levied, collected or assessed by or on behalf of, or within
Puerto Rico, or any taxing authority thereof or therein ("Taxing Authority"),
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 (x) make any required withholding or deduction in respect of any Taxes,
(y) remit the full amount deducted or withheld to the relevant Taxing Authority
in accordance with applicable law, and (z) pay such additional amounts
("Additional Amounts") as may be necessary so that the net amount received by
each holder and beneficial owner of Securities (including Additional Amounts)
after such withholding or deduction or other payment of Taxes will not be less
than the amounts that the holder and beneficial owner would have received if
such Taxes had not been withheld or deducted or paid; provided that no
Additional Amounts shall be so payable with respect to:
(i) 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 Securities;
(ii) 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 Security 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 Section 2(a)(ii), 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;
(iii) any estate, inheritance, gift, sale, transfer, personal property or
similar tax, assessment or other governmental charge; or
(iv) any combination of (i), (ii) and (iii) above.
Such Additional Amounts shall also not be payable where, had the
beneficial owner of the Security been the holder of the Security, it would not
have been entitled to payment of Additional Amounts by reason of any of (i),
(ii), (iii) or (iv) above.
<PAGE> 99
3
(b) The applicable Obligor or any successor, as the case may be, will
furnish to the Trustee 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 Securities that are outstanding on the date
of such withholding or deduction for or on account of Taxes upon request to the
Trustee.
(c) At least 30 days prior to each date on which any payment under or
with respect to the Securities 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 Securities is due and 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 Securities on the payment date. Whenever in this Indenture
there is mentioned, in any context, the payment of principal, interest, purchase
price in connection with a purchase of the Securities or any other amount
payable on or with respect to any of the Securities, such mention shall be
deemed to include mention of the payment of Additional Amounts provided for in
this Section 2 to the extent that, in such context, Additional Amounts are, were
or would be payable in respect thereof.
(d) 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 Securities or any documentation relating thereto.
(e) In the event that Additional Amounts actually paid with respect to
any Securities are based on Taxes in excess of the appropriate Taxes applicable
to the holder or beneficial owner of such Securities and, as a 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 Securities, 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
<PAGE> 100
4
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 Security 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, reliefs, remissions or repayments to which it may be entitled.
(f) The foregoing obligations shall survive any defeasance of the
Indenture.
3. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the May 1 or November 1 next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States of America that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Securities
represented by a Global Security (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments in
respect of a Definitive Security (including principal, premium and interest), by
mailing a check to the registered address of each Holder thereof; provided,
however, that payments on the Securities may also be made, in the case of a
Holder of at least $1,000,000 aggregate principal amount of Securities, by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
United States if such Holder elects payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 30 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
4. Paying Agent and Registrar
Initially, The Bank of New York, a New York banking corporation (the
"Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
5. Indenture
<PAGE> 101
5
The Company issued the Securities under an Indenture dated as of May
[], 1999 (the "Indenture"), among the Company, the Subsidiary Guarantors and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. -- 77aaa-77bbbb) as in effect on the date of the Indenture (the
"TIA"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Securityholders are referred to the Indenture and the TIA for a statement of
those terms.
The [Securities due 2002]* [Securities due 2006]** [Securities due
2009]*** are senior unsecured obligations of the Company limited to
$[300,000,000]* $[400,000,000]** $[300,000,000]*** aggregate principal amount at
any one time outstanding (subject to Section 2.07 of the Indenture). This
Security is one of the [Initial Securities due 2002]* [Initial Securities due
2006]** [Initial Securities due 2009]*** referred to in the Indenture. The
Indenture imposes certain limitations on the ability of the Company and the
Subsidiary Guarantors, to, among other things, create or incur Liens and enter
into Sale and Leaseback Transactions. The Indenture also imposes limitations on
Non-Guarantor Subsidiaries to Incur Debt. In addition, the Indenture imposes
limitations on the ability of the Company and the Subsidiary Guarantors to
consolidate or merge with or into any other Person or sell, transfer, assign,
lease, convey or otherwise dispose of all or substantially all of the Property
of the Company or the applicable Subsidiary Guarantor.
To guarantee the due and punctual payment of the principal and
interest on the Securities and all other amounts payable by the Company under
the Indenture and the Securities when and as the same shall be due and payable,
whether at maturity, by acceleration or otherwise, according to the terms of the
Securities and the Indenture, the Subsidiary Guarantors have jointly and
severally unconditionally guaranteed the Guaranteed Obligations on a senior
basis pursuant to the terms of the Indenture.
6. Optional Redemption
[The [Securities due 2006]** [Securities due 2009]*** will be
redeemable, in whole or in part, at the option of the Company at any time at a
redemption price equal to the greater of (i) 100% of the principal amount of
such Securities and (ii) as determined by a Quotation Agent, the sum of the
present values 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 semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Adjusted
Treasury Rate, plus 15 basis points. In the case of each of clause (i) and (ii),
accrued interest will be payable 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.
<PAGE> 102
6
"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 Securities, 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 Securities.
"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 the
Company.
"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 York City (a "Primary
Treasury Dealer"), the Company shall substitute therefor another Primary
Treasury Dealer; and (ii) other Primary Treasury Dealers, if any, selected by
the Company.](1)
[Except as provided in Section 7 below, the Securities due 2002 are
not redeemable prior to May 15, 2002.](2)
"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.
- -----------------
(1) Insert for 6.65% Senior Notes due 2006 and 6.80% Senior Notes
due 2009
(2) Insert for 6.15% Senior Notes due 2002
<PAGE> 103
7. 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 change or amendment becomes effective on or
after the Issue Date, it is determined by the Company or by any Subsidiary
Guarantor under or with respect to its Subsidiary Guarantee (the Company and any
such Subsidiary Guarantor being referred to for purposes of this section
individually as "Obligor" and collectively as "Obligors") that such Obligor or
successor would be required to pay any Additional Amounts pursuant to Section
4.07 of the Indenture and Section 2 hereof or the terms of the Securities 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) the Securities of such series, 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 Securities 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, the
Company 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 Company is 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 the Company to the Trustee, will be irrevocable.
8. Sinking Fund
The Securities are not subject to any sinking fund.
9. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued interest on all Securities (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent on or before the redemption
date and certain other conditions are satisfied, on and after such date interest
ceases to accrue on such Securities (or such portions thereof) called for
redemption.
<PAGE> 104
8
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. Upon any transfer or exchange, the
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes required by
law or permitted by the Indenture. The Registrar need not register the transfer
of or exchange any Securities selected for redemption (except, in the case of a
Security to be redeemed in part, the portion of the Security not to be redeemed)
or to transfer or exchange any Securities for a period of 15 days prior to the
mailing of a notice of redemption of Securities to be redeemed or 15 days before
an interest payment date.
11. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
12. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its written request unless an abandoned property law designates
another Person. After any such payment, Holders entitled to the money must look
only to the Company and not to the Trustee for payment.
13. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some of or all its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
14. Amendment, Waiver
<PAGE> 105
9
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities represented hereby may be amended without prior
notice to any Securityholder but with the written consent of the Holders of at
least a majority in aggregate principal amount of the outstanding Securities
represented hereby and (ii) any default or noncompliance with any provision may
be waived with the written consent of the Holders of at least a majority in
principal amount of the outstanding Securities represented hereby. Subject to
certain exceptions set forth in the Indenture, without the consent of any Holder
of Securities, the Company and the Trustee may amend the Indenture or the
Securities (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to
comply with Article V of the Indenture; (iii) to provide for uncertificated
Securities in addition to or in place of certificated Securities; (iv) to add
Guarantees with respect to the Securities; (v) to add additional covenants or to
surrender rights and powers conferred on the Company; (vi) to comply with the
requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the TIA; or (vii) to make any change that does not adversely
affect the rights of any Securityholder.
15. Defaults and Remedies
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the Securities of the
series represented hereby then outstanding, subject to certain limitations, may
declare all the Securities of the series represented hereby to be immediately
due and payable. Certain events of bankruptcy or insolvency are Events of
Default and shall result in the Securities being immediately due and payable
upon the occurrence of such Events of Default without any further act of the
Trustee or any Holder.
Holders of Securities may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in aggregate principal
amount of the Securities of the series represented hereby then outstanding may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in aggregate principal amount of the Securities of the
series represented hereby then outstanding, by written notice to the Company and
the Trustee, may rescind any declaration of acceleration and its consequences if
the rescission would not conflict with any judgment or decree, and if all
existing Events of Default have been cured or waived and a sum sufficient to pay
all matured installments of interest and principal (other than principal or
interest that has become due solely because of the acceleration) and any premium
has been deposited with the Trustee.
<PAGE> 106
10
16. Trustee Dealings with the Company
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company
or any Subsidiary Guarantor shall not have any liability for any obligations of
the Company under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The waiver
and release are part of the consideration for the issue of the Securities.
18. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
19. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE> 107
11
21. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE COMPANY WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT
THE TEXT OF THIS SECURITY.
<PAGE> 108
1
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the
books of the Company. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
---------------- ---------------------
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security.
<PAGE> 109
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $[ ]. The
following increases or decreases in this Global Security have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Security following signatory of Trustee or
Global Security Global Security such decrease or increase Securities Custodian
</TABLE>
<PAGE> 110
EXHIBIT B
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated
as of , among [GUARANTOR] (the "New Subsidiary
Guarantor"), a subsidiary of Telecomunicaciones de Puerto Rico,
Inc. (or its successor), a Puerto Rico corporation (the
"Company"), Telecomunicaciones de Puerto Rico, Inc. on behalf of
itself and the Subsidiary Guarantors (the "Existing Subsidiary
Guarantors") under the indenture referred to below, and The Bank
of New York, a New York banking corporation, as trustee under the
indenture referred to below (the "Trustee").
W I T N E S S E T H :
WHEREAS the Company and the Existing Subsidiary Guarantors have
heretofore executed and delivered to the Trustee an Indenture (the "Indenture")
dated as of May [], 1999, providing for the issuance of, among other
securities, an aggregate principal amount of $[ ] of [ ]% Senior Notes due
[ ] (the "Securities");
WHEREAS Section 4.06 of the Indenture provides that under certain
circumstances the Company is required to cause the New Subsidiary Guarantor to
execute and deliver to the Trustee a supplemental indenture pursuant to which
the New Subsidiary Guarantor shall unconditionally guarantee all the Company's
obligations under the Securities pursuant to a Subsidiary Guaranty on the terms
and conditions set forth herein; and
WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee, the
Company and the Existing Subsidiary Guarantors are authorized to execute and
deliver this Supplemental Indenture;
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the New
Subsidiary Guarantor, the Company, the Existing Subsidiary Guarantors and the
Trustee mutually covenant and agree for the equal and ratable benefit of the
holders of the Securities as follows:
1. Agreement to Guarantee. The New Subsidiary Guarantor hereby agrees,
jointly and severally with all other Subsidiary Guarantors, to unconditionally
guarantee the Company's obligations under the Securities on the terms and
subject to the conditions set forth in Article X of the Indenture and to be
bound by all other applicable provisions of the Indenture.
<PAGE> 111
2. Ratification of Indenture; Supplemental Indentures Part of
Indenture. Except as expressly amended hereby, the Indenture is in all respects
ratified and confirmed and all the terms, conditions and provisions thereof
shall remain in full force and effect. This Supplemental Indenture shall form a
part of the Indenture for all purposes, and every holder of Securities
heretofore or hereafter authenticated and delivered shall be bound hereby.
3. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
4. Trustee Makes No Representation. The Trustee makes no
representation as to the validity or sufficiency of this Supplemental Indenture.
5. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section headings herein are for convenience
only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
[NEW SUBSIDIARY GUARANTOR],
by:
--------------------------------
Name:
Title:
TELECOMUNICACIONES DE PUERTO
RICO, INC., [on behalf of itself and
the Existing Subsidiary Guarantors,]
by:
--------------------------------
Name:
Title:
<PAGE> 112
3
[[EXISTING SUBSIDIARY GUARANTORS],
by:
--------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee,
by:
--------------------------------
Name:
Title:
<PAGE> 113
EXHIBIT C
Form of
Transferee Letter of Representation
Telecomunicaciones de Puerto Rico, Inc.
In care of
[ ]
[ ]
[ ]
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $[ ] principal
amount of the [ ]% Senior Notes due [] (the "Securities") of Telecomunicaciones
de Puerto Rico, Inc. (the "Company").
Upon transfer, the Securities would be registered in the name of the
new beneficial owner as follows:
Name:
-------------------------
Address:
----------------------
Taxpayer ID Number:
-----------
The undersigned represents and warrants to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")), purchasing for our own account or for the account of such an
institutional "accredited investor" at least $100,000 principal amount of the
Securities, and we are acquiring the Securities not with a view to, or for offer
or sale in connection with, any distribution in violation of the Securities Act.
We have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Securities,
and we invest in or purchase securities similar to the Securities in the normal
course of our business. We, and any accounts for which we are acting, are each
able to bear the economic risk of our or its investment.
<PAGE> 114
2
2. We understand that the Securities have not been registered under
the Securities Act and, unless so registered, may not be sold except as
permitted in the following sentence. We agree on our own behalf and on behalf of
any investor account for which we are purchasing Securities to offer, sell or
otherwise transfer such Securities prior to the date that is two years after the
later of the date of original issue and the last date on which the Company or
any affiliate of the Company was the owner of such Securities (or any
predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the
Company, (b) pursuant to a registration statement that has been declared
effective under the Securities Act, (c) in a transaction complying with the
requirements of Rule 144A under the Securities Act ("Rule 144A"), to a person we
reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB")
that is purchasing for its own account or for the account of a QIB and to whom
notice is given that the transfer is being made in reliance on Rule 144A, (d)
pursuant to offers and sales that occur outside the United States within the
meaning of Regulation S under the Securities Act, (e) to an institutional
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act that is purchasing for its own account or for the
account of such an institutional "accredited investor," in each case in a
minimum principal amount of Securities of $100,000, or (f) pursuant to any other
available exemption from the registration requirements of the Securities Act,
subject in each of the foregoing cases to any requirement of law that the
disposition of our property or the property of such investor account or accounts
be at all times within our or their control and in compliance with any
applicable state securities laws. The foregoing restrictions on resale will not
apply subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Securities is proposed to be made pursuant to clause (e)
above prior to the Resale Restriction Termination Date, the transferor shall
deliver a letter from the transferee substantially in the form of this letter to
the Company and the Trustee, which shall provide, among other things, that the
transferee is an institutional "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring
such Securities for investment purposes and not for distribution in violation of
the Securities Act. Each purchaser acknowledges that the Company and the Trustee
reserve the right prior to the offer, sale or other transfer prior to the Resale
Restriction Termination Date of the Securities pursuant to clause (d), (e) or
(f) above to require the delivery of an opinion of counsel, certifications or
other information satisfactory to the Company and the Trustee.
TRANSFEREE: ,
----------------------
by:
-----------------------------
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions....................................................................1
-----------
SECTION 1.02. Other Definitions..............................................................8
-----------------
SECTION 1.03. Incorporation by Reference of Trust Indenture Act..............................9
-------------------------------------------------
SECTION 1.04. Rules of Construction..........................................................9
---------------------
ARTICLE II
The Securities
--------------
SECTION 2.01. Form and Dating...............................................................10
----------------
SECTION 2.02. Execution and Authentication..................................................10
-----------------------------
SECTION 2.03. Registrar and Paying Agent....................................................10
---------------------------
SECTION 2.04. Paying Agent To Hold Money in Trust...........................................11
------------------------------------
SECTION 2.05. Securityholder Lists..........................................................11
---------------------
SECTION 2.06. Replacement Securities........................................................11
-----------------------
SECTION 2.07. Outstanding Securities........................................................12
-----------------------
SECTION 2.08. Temporary Securities..........................................................12
---------------------
SECTION 2.09. Cancelation...................................................................12
------------
SECTION 2.10. Defaulted Interest............................................................12
-------------------
SECTION 2.11. CUSIP Numbers.................................................................12
--------------
ARTICLE III
Redemption
----------
SECTION 3.01. Notices to Trustee............................................................13
-------------------
SECTION 3.02. Selection of Securities To Be Redeemed........................................13
---------------------------------------
SECTION 3.03. Notice of Redemption..........................................................13
---------------------
SECTION 3.04. Effect of Notice of Redemption................................................14
-------------------------------
SECTION 3.05. Deposit of Redemption Price...................................................14
----------------------------
SECTION 3.06. Securities Redeemed in Part...................................................14
----------------------------
ARTICLE IV
Covenants
---------
SECTION 4.01. Payment of Securities.........................................................15
---------------------
SECTION 4.02. SEC Reports...................................................................15
-----------
SECTION 4.03. Limitation on Debt of Non-Guarantor Subsidiaries..............................15
------------------------------------------------
SECTION 4.04. Limitation on Liens...........................................................16
-------------------
SECTION 4.05. Limitation on Sale and Leaseback Transactions.................................17
---------------------------------------------
</TABLE>
i
<PAGE> 116
<TABLE>
<S> <C> <C>
SECTION 4.06. Future Subsidiary Guarantors..................................................18
----------------------------
SECTION 4.07. Additional Amounts............................................................18
------------------
SECTION 4.08 Compliance Certificate........................................................21
----------------------
SECTION 4.09. Further Instruments and Acts..................................................21
----------------------------
ARTICLE V
Successor Company
-----------------
SECTION 5.01. When Company or any Subsidiary Guarantor May Merge or Transfer Assets.........21
---------------------------------------------------------------------
SECTION 5.02. Successor Substituted.........................................................22
---------------------
ARTICLE VI
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default.............................................................22
-----------------
SECTION 6.02. Acceleration..................................................................24
------------
SECTION 6.03. Other Remedies................................................................24
---------------
SECTION 6.04. Waiver of Past Defaults.......................................................24
------------------------
SECTION 6.05. Control by Majority...........................................................25
--------------------
SECTION 6.06. Limitation on Suits...........................................................25
--------------------
SECTION 6.07. Rights of Holders to Receive Payment..........................................25
-------------------------------------
SECTION 6.08. Collection Suit by Trustee....................................................25
---------------------------
SECTION 6.09. Trustee May File Proofs of Claim..............................................25
---------------------------------
SECTION 6.10. Priorities....................................................................26
-----------
SECTION 6.11. Undertaking for Costs.........................................................26
----------------------
SECTION 6.12. Waiver of Stay or Extension Laws..............................................26
---------------------------------
ARTICLE VII
Trustee
-------
SECTION 7.01. Duties of Trustee.............................................................27
------------------
SECTION 7.02. Rights of Trustee.............................................................28
------------------
SECTION 7.03. Individual Rights of Trustee..................................................29
-----------------------------
SECTION 7.04. Trustee's Disclaimer..........................................................29
---------------------
SECTION 7.05. Notice of Defaults............................................................29
-------------------
SECTION 7.06. Reports by Trustee to Holders.................................................29
------------------------------
SECTION 7.07. Compensation and Indemnity....................................................29
---------------------------
SECTION 7.08. Replacement of Trustee........................................................30
-----------------------
SECTION 7.09. Successor Trustee by Merger...................................................31
----------------------------
SECTION 7.10. Eligibility; Disqualification.................................................31
------------------------------
SECTION 7.11. Preferential Collection of Claims Against Company.............................31
--------------------------------------------------
SECTION 7.12. Appointment by Trustee of Authenticating Agents...............................32
-----------------------------------------------
ARTICLE VIII
</TABLE>
ii
<PAGE> 117
<TABLE>
<S> <C> <C>
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities; Defeasance..............................33
-------------------------------------------------
SECTION 8.02. Conditions to Defeasance......................................................34
-------------------------
SECTION 8.03. Application of Trust Money....................................................35
---------------------------
SECTION 8.04. Repayment to Company..........................................................35
---------------------
SECTION 8.05. Indemnity for Government Obligations..........................................35
-------------------------------------
SECTION 8.06. Reinstatement.................................................................35
--------------
ARTICLE IX
Amendments
----------
SECTION 9.01. Without Consent of Holders....................................................36
---------------------------
SECTION 9.02. With Consent of Holders.......................................................36
------------------------
SECTION 9.03. Compliance with Trust Indenture Act...........................................37
------------------------------------
SECTION 9.04. Revocation and Effect of Consents and Waivers.................................37
----------------------------------------------
SECTION 9.05. Notation on or Exchange of Securities.........................................38
--------------------------------------
SECTION 9.06. Trustee To Sign Amendments....................................................38
---------------------------
SECTION 9.07. Payment for Consent...........................................................38
--------------------
ARTICLE X
Subsidiary Guarantees
---------------------
SECTION 10.01. Subsidiary Guarantees........................................................38
----------------------
SECTION 10.02. Contribution.................................................................40
-------------
SECTION 10.03. Successors and Assigns.......................................................40
-----------------------
SECTION 10.04. No Waiver....................................................................40
----------
SECTION 10.05. Modification.................................................................40
-------------
SECTION 10.06. Execution of Supplemental Indenture for Future Subsidiary Guarantors.........41
---------------------------------------------------------------------
SECTION 10.07. Release of Subsidiary Guarantees.............................................41
---------------------------------
ARTICLE XI
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls.................................................41
-----------------------------
SECTION 11.02. Notices......................................................................42
--------
SECTION 11.03. Communication by Holders with Other Holders..................................42
--------------------------------------------
SECTION 11.04. Certificate and Opinion as to Conditions Precedent...........................43
---------------------------------------------------
SECTION 11.05. Statements Required in Certificate or Opinion................................43
----------------------------------------------
SECTION 11.06. When Securities Disregarded..................................................43
----------------------------
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.................................44
---------------------------------------------
SECTION 11.08. Legal Holidays...............................................................44
---------------
SECTION 11.09. Governing Law................................................................44
--------------
SECTION 11.10. No Recourse Against Others...................................................44
---------------------------
SECTION 11.11. Successors...................................................................44
-----------
SECTION 11.12. Multiple Originals...........................................................44
-------------------
SECTION 11.13. Separability.................................................................44
-------------
</TABLE>
iii
<PAGE> 118
<TABLE>
<S> <C> <C>
SECTION 11.14. Table of Contents; Headings..................................................44
----------------------------
</TABLE>
iv
<PAGE> 119
Appendix A - Provisions Relating to Initial Securities and Exchange Securities
Exhibit 1 to Appendix A - Form of Initial Security
Exhibit A - Form of Exchange Security
Exhibit B - Form of Supplemental Indenture
Exhibit C - Form of Transferee Letter of Representation
vi
<PAGE> 120
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- ------- -------
<S> <C>
310 (a)(1).........................................................................7.10
(a)(2)............................................................................7.10
(a)(3)............................................................................N.A.
(a)(4)............................................................................N.A.
(b) ............................................................................7.08;
7.10
(c) ............................................................................N.A.
311(a) ...........................................................................7.11
(b) ............................................................................7.11
(c) ............................................................................N.A.
312(a) ...........................................................................2.05
(b) ............................................................................10.03
(c) ............................................................................10.03
313(a) ...........................................................................7.06
(b)(1)............................................................................N.A.
(b)(2)............................................................................7.06
(c) ............................................................................10.02
(d) ............................................................................7.06
314(a) ...........................................................................4.02;
10.02
(b) ............................................................................N.A.
(c)(1)............................................................................10.04
(c)(2)........................................................................... 10.04
(c)(3)............................................................................N.A.
(d) ............................................................................N.A.
(e) ............................................................................10.05
(f) .................................................................................
315 (a) .........................................................................7.01
(b) ............................................................................7.05;
10.02
(c) ............................................................................7.01
(d) ............................................................................7.01
(e) ............................................................................6.11
316 (a)
(last
sentence) .........................................................................10.06
(a)(1)(A).........................................................................6.05
(a)(1)(B).........................................................................6.04
(a)(2)............................................................................N.A.
(b) ............................................................................6.07
317 (a)(1).........................................................................6.08
</TABLE>
<PAGE> 121
<TABLE>
<S> <C>
(a)(2)............................................................................6.09
(b) ............................................................................2.04
318 (a) ........................................................................10.01
</TABLE>
N.A. Means Not Applicable.
Note: This Cross-Reference Table shall not, for any purposes, be deemed to be
part of this Indenture.
<PAGE> 1
EXHIBIT 4.2
EXECUTION COPY
TELECOMUNICACIONES DE PUERTO RICO, INC.
$1,000,000,000
$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
Purchase Agreement
New York, New York
May 13, 1999
Salomon Smith Barney Inc.
Chase Securities Inc.
J.P. Morgan Securities Inc.
NationsBanc Montgomery Securities LLC
Popular Securities, Inc.
As Representatives of the Initial Purchasers
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Telecomunicaciones de Puerto Rico, Inc., a corporation organized
under the laws of Puerto Rico (the "Company"), proposes upon the terms and
conditions set forth herein to issue and sell to the several parties named in
Schedule I hereto (the "Initial Purchasers"), for whom you (the
"Representatives") are acting as representatives, $300,000,000 principal amount
of its 6.15% Senior Notes Due 2002, $400,000,000 principal amount of its 6.65%
Senior Notes Due 2006 and $300,000,00 principal amount of its 6.80% Senior
Notes Due 2009 (collectively, the "Securities") each guaranteed by the Puerto
Rico Telephone Company, Inc., a Puerto Rico corporation and wholly owned
subsidiary of the Company and Celulares Telefonica, Inc., a Puerto Rico
corporation and wholly owned subsidiary of the Company (together, the
"Subsidiary Guarantors"). The Securities are to be issued under an indenture
(the "Indenture"), dated as of May 20, 1999, among the Company, the subsidiary
guarantors party thereto (the "Subsidiary Guarantors") and The Bank of New
York, as trustee (the "Trustee"). The Securities have the
<PAGE> 2
benefit of a Registration Rights Agreement (the "Registration Rights
Agreement"), dated May 13, 1999, among the Company, the Subsidiary Guarantors
and the Initial Purchasers, pursuant to which the Company has agreed to
register the Securities under the Act subject to the terms and conditions
therein specified. To the extent there are no additional parties listed on
Schedule I other than you, the term Representatives as used herein shall mean
you as the Initial Purchasers, and the terms Representatives and Initial
Purchasers shall mean either the singular or plural as the context requires.
The use of the neuter in this Agreement shall include the feminine and
masculine wherever appropriate. Certain terms used herein are defined in
Section 17 hereof.
The sale of the Securities to the Initial Purchasers will be
made without registration of the Securities under the Act in reliance upon
exemptions from the registration requirements of the Act.
In connection with the sale of the Securities, the Company has
prepared a preliminary offering memorandum, dated May 5, 1999 (as amended or
supplemented at the Execution Time, the "Preliminary Memorandum"), and a final
offering memorandum, dated May 13, 1999 (as amended or supplemented at the
Execution Time, the "Final Memorandum"). Each of the Preliminary Memorandum and
the Final Memorandum sets forth certain information concerning the Company and
the Securities. The Company hereby confirms that it has authorized the use of
the Preliminary Memorandum and the Final Memorandum in the manner set forth
herein, and any amendment or supplement thereto, in connection with the offer
and sale of the Securities by the Initial Purchasers.
1. Representations and Warranties. The Company and each of the
Subsidiary Guarantors jointly and severally represent and warrant to each
Initial Purchaser as set forth below in this Section 1.
(1) The Preliminary Memorandum, at the date thereof, did not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. At the
Execution Time and on the Closing Date (as defined in Section 3
hereof), the Final Memorandum did not, and will not (and any amendment
or supplement thereto, at the date thereof and at the Closing Date will
not), contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the Company and the Subsidiary Guarantors make
no representation or warranty as to the information contained in or
omitted from the Preliminary Memorandum or the Final Memorandum, or any
amendment or supplement thereto, in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of
the Initial Purchasers through the Representatives specifically for
inclusion therein.
(2) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company and the Subsidiary Guarantors make
no representation) has made offers or sales of any security,
<PAGE> 3
or solicited offers to buy any security, under circumstances that would
require the registration of the Securities under the Act.
(3) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company and the Subsidiary Guarantors make
no representation) has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D) in connection
with any offer or sale of the Securities in the United States.
(4) Subject to the compliance by the Initial Purchasers with
the representations and warranties set forth in Section 4 hereof, the
Securities satisfy the eligibility requirements of Rule 144A(d)(3)
under the Act.
(5) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company and the Subsidiary Guarantors make
no representation) has engaged in any directed selling efforts with
respect to the Securities, and each of them (other than the Initial
Purchasers, as to whom the Company and the Subsidiary Guarantors make
no representation) has complied with the offering restrictions
requirements of Regulation S. Terms used in this paragraph have the
meanings given to them by Regulation S.
(6) The Company has been advised by The Portal Market of the
NASD that the Securities have been designated Portal-eligible
securities in accordance with the rules and regulations of the NASD.
(7) The Company is not, and after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Final Memorandum will not be, an
"investment company" within the meaning of the Investment Company Act,
without taking account of any exemption arising out of the number of
holders of the Company's securities.
(8) The Company has not paid or agreed to pay to any person
any compensation for soliciting another to purchase any securities of
the Company (except as contemplated by this Agreement and except in
connection with the privatization of the Company and the transactions
relating thereto).
(9) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which might reasonably be expected to cause or result in, under the
Exchange Act or otherwise, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(10) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease,
3
<PAGE> 4
as the case may be, and to operate its properties and conduct its
business as described in the Final Memorandum, and is duly qualified to
do business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which the conduct of its business as
presently conducted requires such qualification except where the
failure to so qualify or to be in good standing would not have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole.
(11) All the outstanding shares of capital stock of each
subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in the
Final Memorandum, all outstanding shares of capital stock of the
subsidiaries are owned by the Company either directly or through wholly
owned subsidiaries free and clear of any perfected security interest or
any other security interests, claims, liens or encumbrances.
(12) The Company's authorized equity capitalization is as set
forth in the Final Memorandum.
(13) The statements in the Final Memorandum under the
headings "The Acquisition and Related Corporate Restructuring",
"Shareholders and Shareholder Relationships", "Description of Certain
Debt", "Business--Regulatory Environment in Puerto Rico",
"Business--Legal Proceedings", "Certain Tax Considerations",
"Description of Notes" and "Exchange Offer; Registration Rights" fairly
summarize the matters therein described in all material respects.
(14) This Agreement has been duly authorized, executed and
delivered by the Company and the Subsidiary Guarantors; the Indenture
has been duly authorized and, assuming due authorization, execution and
delivery thereof by the Trustee, when executed and delivered by the
Company and the Subsidiary Guarantors, will constitute a legal, valid
and binding instrument enforceable against the Company and the
Subsidiary Guarantors in accordance with its terms (subject, as to the
enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors' rights
generally from time to time in effect and to general principles of
equity and to the extent that rights to indemnity may be limited by
federal or state securities laws or the public policy underlying such
laws); the Securities have been duly authorized, and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Initial Purchasers in accordance with
the terms hereof, will have been duly executed and delivered by the
Company and will constitute the legal, valid and binding obligations of
the Company entitled to the benefits of the Indenture (subject, as to
the enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium or other laws affecting creditors' rights generally from
time to time in effect and to general principles of equity and to the
extent that rights to indemnity may be limited by federal or state
securities laws or the public policy underlying such laws); and the
Registration Rights Agreement has been duly authorized, executed and
delivered by the Company and constitutes a legal, valid and binding
instrument
4
<PAGE> 5
enforceable against the Company in accordance with its terms (subject,
as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity and to the extent that rights to indemnity may be
limited by federal or state securities laws or the public policy
underlying such laws).
(15) No consent, approval, authorization, filing with or
order of any court or governmental agency or body is required to be
obtained by the Company in connection with the performance of its
obligations contemplated herein or in the Indenture or the Registration
Rights Agreement, except such as will be obtained under the Act, the
Exchange Act and the Trust Indenture Act in connection with the
transactions contemplated by the Registration Rights Agreement, such as
may be required under the blue sky laws of any jurisdiction in
connection with the transactions contemplated by this Agreement and the
Registration Rights Agreement.
(16) Neither the execution and delivery of the Indenture,
this Agreement or the Registration Rights Agreement, the issue and sale
of the Securities, nor the consummation of any other of the
transactions herein or therein contemplated, will conflict with, result
in a breach or violation of, or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or
any of its subsidiaries; (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which any
of their respective properties is subject; or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the Company
or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company, any of its subsidiaries or any of
their respective properties except, in the case of clauses (ii) and
(iii) of this paragraph, for those that could not reasonably be
expected to have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries taken as a whole.
(17) The consolidated historical financial statements,
together with the notes thereto of the Company and its consolidated
subsidiaries included in the Final Memorandum present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form in all material respects with the
applicable accounting requirements of the Act and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise
noted therein); the selected financial data set forth under the caption
"Selected Consolidated Financial and Operating Data" in the Final
Memorandum fairly present, on the basis stated in the Final Memorandum,
the information included therein; the pro forma financial information
included in the Final Memorandum fairly presents the information shown
therein and has been compiled on the bases described therein; the
5
<PAGE> 6
assumptions used in the preparation thereof are reasonable, and the pro
forma adjustments reflect the proper application of those adjustments
to the historical financial statement amounts in the pro forma
financial information included in the Final Memorandum; the pro forma
financial information included in the Final Memorandum comply as to
form in all material respects with the applicable accounting
requirements of Regulation S-X under the Act; and the pro forma
adjustments have been properly applied to the historical amounts in the
compilation of those statements.
(18) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator to which the
Company or any of its subsidiaries is a party or its or their property
is subject is pending or, to the knowledge of the Company, threatened
that (i) could reasonably be expected to have a material adverse effect
on the performance of this Agreement, the Indenture or the Registration
Rights Agreement, or the consummation of any of the transactions
contemplated hereby or thereby; or (ii) could reasonably be expected to
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Final Memorandum (exclusive of any amendment or
supplement thereto).
(19) The Company and each of its subsidiaries own or lease
all such properties as are necessary to the conduct of their respective
operations as presently conducted.
(20) Neither the Company nor any subsidiary is in violation
or default of (i) any provision of its charter or bylaws; (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject; or (iii) any statute, law, governmental rule or
regulation, judgment or court decree to which the Company or any of its
subsidiaries is subject except, in the case of clauses (ii) and (iii)
of this paragraph, for any such default or violation which would not
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries taken as a whole.
(21) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Final Memorandum,
are independent public accountants with respect to the Company within
the meaning of the Act and the applicable published rules and
regulations thereunder.
(22) Except as described in the Final Memorandum, there are
no stamp or other issuance or transfer taxes or duties or other similar
fees or charges required to be paid in connection with the execution
and delivery of this Agreement or the issuance or sale by the Company
of the Securities.
6
<PAGE> 7
(23) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, except as set forth in or
contemplated in the Final Memorandum (exclusive of any amendment or
supplement thereto) and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any
such assessment, fine or penalty that is currently being contested in
good faith or as would not have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
except as set forth in or contemplated in the Final Memorandum
(exclusive of any amendment or supplement thereto).
(24) No labor problem or dispute with the employees of the
Company or any of its subsidiaries exists or is threatened or imminent,
and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or its subsidiaries' that
could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
except as set forth in or contemplated in the Final Memorandum
(exclusive of any amendment or supplement thereto).
(25) Except as described in the Final Memorandum, the Company
and each of its subsidiaries carry or are covered by insurance in such
amounts and covering such risks as is customary for companies engaged
in similar businesses in similar industries.
(26) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from
the Company or from transferring any of such subsidiary's property or
assets to the Company or any other subsidiary of the Company, except as
described in or contemplated by the Final Memorandum.
(27) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state, local or foreign regulatory authorities and
has made all declarations and filings with such authorities, necessary
or required to own, lease, license and use their properties and assets
and to conduct their respective businesses except where the failure to
possess such licenses, certificates, permits and other authorizations
or to make such declarations and filings would not have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth or contemplated in the
Final Memorandum (exclusive of any amendment or supplement thereto),
and neither the Company nor any such subsidiary has received any notice
of proceedings relating to the revocation or modification of any such
certificate,
7
<PAGE> 8
authorization or permit which could reasonably be expected to have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, except as set forth in or contemplated
in the Final Memorandum (exclusive of any amendment or supplement
thereto).
(28) The Company and its subsidiaries are implementing a
comprehensive, detailed program to analyze and address the risk that
the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year
2000 Problem") and, except as disclosed in the Final Memorandum,
believes, based on its evaluation of its systems, remedial activities
and readiness plans, that such risk will be substantially remedied on a
timely basis without material expense (except for expenses disclosed in
the Final Memorandum) and will not have a material adverse effect upon
the financial condition and results of operations of the Company and
its subsidiaries, taken as a whole; and the Company believes, after due
inquiry, that each significant supplier, vendor or customer used or
serviced by the Company and its subsidiaries and whose systems,
services and products are important to the operations of the Company
and its subsidiaries, has remedied or will remedy on a timely basis the
Year 2000 Problem, except to the extent that a failure to remedy by any
such supplier, vendor or customer would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole. The
Company is in compliance with the Commission's staff legal bulletin No.
5 dated January 12, 1998, as amended to date, related to Year 2000
compliance.
Any certificate signed by any officer of the Company or any
Subsidiary Guarantor and delivered to the Representatives or counsel for the
Initial Purchasers in connection with the offering of the Securities shall be
deemed a representation and warranty by the Company or such Subsidiary
Guarantor, as to matters covered thereby, to each Initial Purchaser.
2. Purchase and Sale. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to each Initial Purchaser, and each Initial Purchaser agrees,
severally and not jointly, to purchase from the Company, (i) at a purchase
price of 99.577% of the principal amount thereof, plus accrued interest, if
any, from May 20, 1999, to the Closing Date, the principal amount of 6.15%
Senior Notes Due 2002, (ii) at a purchase price of 99.338% of the principal
amount thereof, plus accrued interest, if any, from May 20, 1999, to the
Closing Date, the principal amount of 6.65% Senior Notes due 2006 and (iii) at
a purchase price of 99.294% of the principal amount thereof, plus accrued
interest, if any, from May 20, 1999, to the Closing Date, the principal amount
of 6.80% Senior Notes due 2009, in each case as set forth opposite such Initial
Purchaser's name on Schedule I hereto.
3. Delivery and Payment. Delivery of and payment for the
Securities shall be made at 10:00 A.M., New York City time, on May 20, 1999,
which date and time may be postponed by agreement between the Representatives
and the Company or as provided in Section 9 hereof (such date and time of
delivery and payment for the Securities being herein
8
<PAGE> 9
called the "Closing Date"). Delivery of the Securities shall be made to the
Representatives for the respective accounts of the several Initial Purchasers
against payment by the several Initial Purchasers through the Representatives
of the purchase price thereof to or upon the order of the Company by wire
transfer payable in same-day funds to the account specified by the Company.
Delivery of the Securities shall be made through the facilities of The
Depository Trust Company unless the Representatives shall otherwise instruct in
writing.
4. Offering by Initial Purchasers. Each Initial Purchaser,
severally and not jointly, represents and warrants to and agrees with the
Company that:
(1) It has not offered or sold, and will not offer or sell,
any Securities except (i) to those persons it reasonably believes to be
qualified institutional buyers (as defined in Rule 144A under the Act)
and that, in connection with each such sale, it has taken or will take
reasonable steps to ensure that the purchaser of such Securities is
aware that such sale is being made in reliance on Rule 144A; or (ii) in
accordance with the restrictions set forth in Exhibit A hereto.
(2) Neither it nor any person acting on its behalf has made
or will make offers or sales of the Securities in the United States by
means of any form of general solicitation or general advertising
(within the meaning of Regulation D) in the United States.
5. Agreements. The Company and each of the Subsidiary
Guarantors jointly and severally agree with each Initial Purchaser that:
(1) The Company will furnish to each Initial Purchaser and
to counsel for the Initial Purchasers, without charge, during the
period referred to in paragraph (c) below, as many copies of the Final
Memorandum and any amendments and supplements thereto as you may
reasonably request.
(2) The Company will not amend or supplement the Final
Memorandum without the consent of the Representatives.
(3) If at any time prior to the completion of the sale of
the Securities by the Initial Purchasers (as determined by the
Representatives and notified to the Company), any event occurs as a
result of which the Final Memorandum, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
or if it shall be necessary to amend or supplement the Final Memorandum
to comply with applicable law, the Company promptly (i) will notify the
Representatives of any such event; (ii) subject to the requirements of
paragraph (b) of this Section 5, will prepare an amendment or
supplement that will correct such statement or omission or effect such
compliance; and (iii) will supply any supplemented or amended Final
Memorandum to the several Initial Purchasers and counsel for the
Initial Purchasers without charge in such quantities as you may
reasonably request.
9
<PAGE> 10
(4) The Company will use its best efforts in cooperation
with the Initial Purchasers to qualify the Securities for offering and
sale under the applicable securities laws of such jurisdictions as the
Representatives may reasonably designate and to maintain such
qualifications in effect as long as required for the sale of the
Securities provided that such period shall not exceed one year;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so
subject. The Company will promptly advise the Representatives of the
receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose.
(5) The Company will not, and will not permit any of its
Affiliates (other than the Initial Purchasers as to whom the Company
and the Subsidiary Guarantors make no representation or agreement) to,
resell any Securities which constitute "restricted securities" under
Rule 144 under the Act that have been acquired by any of them.
(6) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial Purchasers
as to whom the Company and the Subsidiary Guarantors make no
representation or agreement) will, directly or indirectly, make offers
or sales of any security, or solicit offers to buy any security, under
circumstances that would require the registration of the Securities
under the Act.
(7) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial Purchasers
as to whom the Company and the Subsidiary Guarantors make no
representation or agreement) will engage in any form of general
solicitation or general advertising (within the meaning of Regulation
D) in connection with any offer or sale of the Securities in the United
States.
(8) So long as any of the Securities are "restricted
securities" within the meaning of Rule 144(a)(3) under the Act, the
Company will, during any period in which it is not subject to and in
compliance with Section 13 or 15(d) of the Exchange Act or it is not
exempt from such reporting requirements pursuant to and in compliance
with Rule 12g3-2(b) under the Exchange Act, provide to each holder of
such restricted securities and to each prospective purchaser (as
designated by such holder) of such restricted securities, upon the
request of such holder or prospective purchaser, any information
required to be provided by Rule 144A(d)(4) under the Act. This covenant
is intended to be for the benefit of the holders, and the prospective
purchasers designated by such holders, from time to time of such
restricted securities.
(9) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf (other than the Initial Purchasers
as to whom the Company and the Subsidiary Guarantors make no
representation or agreement) will engage in any directed
10
<PAGE> 11
selling efforts with respect to the Securities, and each of them will
comply with the offering restrictions requirements of Regulation S.
Terms used in this paragraph have the meanings given to them by
Regulation S.
(10) The Company will cooperate with the Representatives and
use its best efforts to permit the Securities to be eligible for
clearance and settlement through The Depository Trust Company.
(11) The Company will not offer, sell, contract to sell,
grant any other option to purchase or otherwise dispose of, directly or
indirectly, or announce the offering of, or file a registration
statement for, any (i) debt securities issued or guaranteed by the
Company or any of its direct or indirect subsidiaries or (ii) any
shares of capital stock of any of the Company's direct or indirect
subsidiaries which are preferred as to payment of dividends or as to
distribution upon liquidation over any other class of capital stock, or
enter into any agreement to do any of the foregoing (other than (w) the
Securities and the New Securities (as defined in the Registration
Rights Agreement), (x) issued pursuant to any credit facility or
commercial paper program permitted under the Indenture, (y)
constituting purchase money debt permitted under the Indenture and (z)
Permitted Receivables Financings (as defined in the Indenture)) for a
period of 90 days from the date the Securities are issued without the
prior written consent of Salomon Smith Barney Inc.
(12) The Company will not take, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which might reasonably be expected to cause or result in, under the
Exchange Act or otherwise, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(13) The Company will not, for so long as the Securities are
outstanding, be or become, an open-end investment company, unit
investment trust or face-amount certificate company that is or is
required to be registered under Section 8 of the Investment Company
Act, and will not be or become a closed-end investment company required
to be registered but not registered thereunder.
(14) The Company and the Subsidiary Guarantors agree to pay
the costs and expenses relating to the following matters: (i) the fees
of the Trustee; (ii) the preparation, printing or reproduction of the
Preliminary Memorandum and Final Memorandum and each amendment or
supplement to either of them; (iii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for
counting and packaging) of such copies of the Preliminary Memorandum
and Final Memorandum, and all amendments or supplements to either of
them, as may, in each case, be reasonably requested for use in
connection with the offering and sale of the Securities; (iv) the
preparation, printing, authentication, issuance and delivery of
certificates for the Securities, including any stamp or transfer taxes
in connection with the original issuance and sale of the Securities;
(v) the printing (or reproduction) and delivery of this
11
<PAGE> 12
Agreement, any blue sky memorandum and all other agreements or
documents printed (or reproduced) and delivered in connection with the
offering of the Securities; (vi) any registration or qualification of
the Securities for offer and sale under the securities or blue sky laws
of the several states (including filing fees and the reasonable fees
and expenses of counsel for the Initial Purchasers relating to such
registration and qualification); (vii) admitting the Securities for
trading in The Portal Market, if such admission is required; (viii) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective
purchasers of the Securities; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including
local and special counsel) for the Company; and (x) except as set forth
herein, all other costs and expenses incurred by the Company in
connection with its obligations hereunder.
6. Conditions to the Obligations of the Initial Purchasers.
The obligations of the Initial Purchasers to purchase the Securities shall be
subject to the accuracy of the representations and warranties on the part of
the Company and each of the Subsidiary Guarantors contained herein at the
Execution Time and the Closing Date, to the accuracy of the statements of the
Company and each of the Subsidiary Guarantors made in any certificates pursuant
to the provisions hereof, to the performance by the Company and each of the
Subsidiary Guarantors of its obligations hereunder and to the following
additional conditions:
(1) The Company shall have requested and caused Curtis,
Mallet-Prevost, Colt & Mosle, counsel for the Company, to furnish to
the Representatives its opinion, dated the Closing Date and addressed
to the Representatives, to the effect that:
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<PAGE> 13
(1) assuming due authorization, execution and
delivery thereof by the Company and each Subsidiary Guarantor in
accordance with the laws of Puerto Rico and assuming due
authorization, execution and delivery by the Trustee, the
Indenture constitutes a legal, valid and binding instrument
enforceable against the Company and each Subsidiary Guarantor in
accordance with its terms (subject, as to enforceability, (a) 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 equity), (b) to the discretion of the court
before which any proceeding therefor may be brought, (c) to the
extent that exculpation provisions and rights to indemnity may
be limited by United States federal or state securities laws or
the public policy underlying such laws, and (d) to the extent
that any waiver of rights or defenses contained in such
agreement or obligation may be limited by applicable law, and
public policy considerations, and of judicial application of
foreign laws or foreign governmental actions affecting
creditors' rights); assuming due authorization, execution and
delivery thereof by the Company in accordance with the laws of
Puerto Rico and when executed and authenticated in accordance
with the provisions of the Indenture and delivered to and paid
for by the Initial Purchasers under this Agreement, the
Securities will constitute legal, valid and binding obligations
of the Company entitled to the benefits of the Indenture
(subject, as to enforceability, (a) 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 equity), (b) to the discretion of the court
before which any proceeding therefor may be brought, (c) to the
extent that exculpation provisions and rights to indemnity may
be limited by United States federal or state securities laws or
the public policy underlying such laws, and (d) to the extent
that any waiver of rights or defenses contained in such
agreement or obligation may be limited by applicable law, and
public policy considerations, and of judicial application of
foreign laws or foreign governmental actions affecting
creditors' rights); assuming due authorization, execution and
delivery thereof by the Company and each Subsidiary Guarantor in
accordance with the laws of Puerto Rico and assuming due
authorization, execution and delivery by the Initial Purchasers,
the Registration Rights Agreement constitutes a legal, valid and
binding instrument enforceable against the Company and each
Subsidiary Guarantor in accordance with its terms (subject, as
to enforceability, (a) 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
13
<PAGE> 14
(including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, regardless of
whether enforcement is sought in a proceeding at law or equity),
(b) to the discretion of the court before which any proceeding
therefor may be brought, (c) to the extent that exculpation
provisions and rights to indemnity may be limited by United
States federal or state securities laws or the public policy
underlying such laws, and (d) to the extent that any waiver of
rights or defenses contained in such agreement or obligation may
be limited by applicable law, and public policy considerations,
and of judicial application of foreign laws or foreign
governmental actions affecting creditors' rights); and the
statements set forth under the heading "Description of Notes"
and "Exchange Offer; Registration Rights" in the Final
Memorandum, insofar as such statements purport to summarize
certain provisions of the Securities, the Indenture and the
Registration Rights Agreement, fairly summarize such provisions
in all material respects;
(2) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any United States federal court located in the State of New York
or any New York State Court or governmental agency, authority or
body or any arbitrator involving the Company or any of its
subsidiaries or its or their property that is not adequately
disclosed in the Final Memorandum, except in each case for such
proceedings that would not reasonably be expected to result in a
material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties or
results of operations of the Company and its subsidiaries, taken
as a whole; and the statements in the Final Memorandum under the
headings "The Acquisition and Related Corporate Restructuring"
and "Description of Certain Debt" (insofar as they purport to
describe certain agreements governed by New York law relating to
the privatization of the Company and the related financings),
and "Certain Tax Considerations - United States Federal Income
Tax Considerations" fairly summarize the matters therein
described in all material respects;
(3) such counsel has no reason to believe that at the
Execution Time and on the Closing Date the Final Memorandum
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading (in each case, other than
the financial statements, the schedules and notes thereto, and
other financial, accounting and statistical information and data
contained therein, and the information and data with respect to
the Commonwealth of Puerto Rico contained in Annex A to the
Final Memorandum, as to which such counsel need express no
opinion);
(4) no consent, approval, authorization, filing with
or order of any United States federal court located in the State
of New York or any New York State Court or governmental agency
or body is required to be obtained by the Company or the
Subsidiary Guarantors in connection with the performance of
14
<PAGE> 15
their obligations contained herein or in the Indenture and the
Registration Rights Agreement, except such as may be required
under the Act, the Exchange Act and the Trust Indenture Act in
connection with the transactions contemplated by the
Registration Rights Agreement and such as may be required under
the blue sky laws of any jurisdiction in connection with the
transactions contemplated by this Agreement and the Registration
Rights Agreement and such other approvals (specified in such
opinion) as have been obtained;
(5) neither the execution and delivery of the
Indenture, this Agreement or the Registration Rights Agreement,
the issue and sale of the Securities, nor the performance by the
Company and the Subsidiary Guarantors of their obligations
contained herein or therein, nor the fulfillment of the terms
hereof or thereof will conflict with, result in a breach or
violation of, or imposition of any lien, charge or encumbrance
upon any property or asset of the Company or any of its
subsidiaries pursuant to any New York or United States Federal
statute, law, rule, regulation, judgment, order or decree known
to such counsel to be applicable to the Company or any of its
subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company, any of its subsidiaries or any of
their respective properties;
(6) assuming the accuracy of the representations and
warranties and compliance with the agreements contained herein,
no registration of the Securities under the Act, and no
qualification of an indenture under the Trust Indenture Act, is
required for the offer and sale by the Initial Purchasers of the
Securities in the manner contemplated by this Agreement, it
being understood that no opinion is expressed as to any
subsequent reoffer or resale of any Security; and
(7) the Company is not and, after giving effect to
the offering and sale of the Securities and the application of
the proceeds thereof as described in the Final Memorandum, will
not be an "investment company" as defined in the Investment
Company Act without taking account of any exemption arising out
of the number of holders of the Company's securities.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
State of New York or the Federal laws of the United States, as applicable, to
the extent they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Initial Purchasers; and (B) as to matters of
fact, to the extent they deem proper, on certificates of responsible officers
of the Company and the Subsidiary Guarantors and public officials. References
to the Final Memorandum in this Section 6(a) include any amendment or
supplement thereto at the Closing Date.
15
<PAGE> 16
(2) The Company shall have requested and caused O'Neill &
Borges, Puerto Rico counsel for the Company, to furnish to the Representatives
its opinion, dated the Closing Date and addressed to the Representatives, to
the effect that:
(1) each of the Company, Puerto Rico Telephone
Company, Inc. and Celulares Telefonica, Inc. (individually, a
"Subsidiary" and collectively, the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the Commonwealth of Puerto Rico, with
full corporate power and authority to own or lease, as the case
may be, and to operate its properties and conduct its business
as described in the Final Memorandum;
(2) all the outstanding shares of capital stock of
the Company and each Subsidiary have been duly and validly
authorized and issued and are fully paid and nonassessable, and,
except as otherwise set forth in the Final Memorandum, all
outstanding shares of capital stock of the Subsidiaries are, to
the knowledge of such counsel, owned by the Company either
directly or through wholly owned subsidiaries free and clear of
any security interest, claims, liens or encumbrances;
(3) the Company's authorized equity capitalization is
as set forth in the Final Memorandum;
(4) the Indenture, the Securities and the
Registration Rights Agreement have each been duly authorized,
executed and delivered;
(5) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries or
its or their property that is not adequately disclosed in the
Final Memorandum, except in each case for such proceedings that
would not reasonably be expected to result in a material adverse
change in the condition (financial or otherwise), prospects,
earnings, business or properties or results of operations of the
Company and its subsidiaries, taken as a whole; and the
statements in the Final Memorandum under the headings "The
Acquisition and Related Corporate Restructuring" and
"Description of Certain Debt" (insofar as they purport to
describe certain agreements governed by Puerto Rico law relating
to the privatization of the Company and the related financings),
"Certain Tax Considerations - Puerto Rico Tax Considerations",
and "Business--Regulatory Environment in Puerto Rico--Puerto
Rico Telecommunications Act of 1996" fairly summarize the
matters therein described in all material respects;
(6) such counsel has no reason to believe that at the
Execution Time and on the Closing Date the Final Memorandum
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading (in each case, other than
the financial statements, the
16
<PAGE> 17
schedules and notes thereto, and other financial, accounting and
statistical information and data contained therein, and the
information and data with respect to the Commonwealth of Puerto
Rico contained in Annex A to the Final Memorandum, as to which
such counsel need express no opinion);
(7) this Agreement has been duly authorized, executed
and delivered by the Company and each of the Subsidiary
Guarantors;
(8) no consent, approval, authorization, filing with
or order of any court located in Puerto Rico or any Puerto Rico
court or governmental agency or body is required to be obtained
by the Company or the Subsidiary Guarantors in connection with
the performance of their obligations contained herein or in the
Indenture and the Registration Rights Agreement, except such as
may be required under the blue sky laws of any jurisdiction in
connection with the transactions contemplated by this Agreement
and the Registration Rights Agreement; and
(9) neither the execution and delivery of the
Indenture, this Agreement or the Registration Rights Agreement,
the issue and sale of the Securities, nor the performance by the
Company and the Subsidiary Guarantors of their obligations
contained herein or therein, nor the fulfillment of the terms
hereof or thereof will conflict with, result in a breach or
violation of, or imposition of any lien, charge or encumbrance
upon any property or asset of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the
Company or any of its subsidiaries; or (ii) any Puerto Rico or
United States Federal statute, law, rule or regulation,
judgment, order or decree known to such counsel to be applicable
to the Company or any of its subsidiaries of any court,
regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the
Company, any of its subsidiaries or any of their respective
properties.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
Commonwealth of Puerto Rico or the Federal laws of the United States, as
applicable, to the extent they deem proper and specified in such opinion, upon
the opinion of other counsel of good standing whom they believe to be reliable
and who are satisfactory to counsel for the Initial Purchasers; and (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and the Subsidiary Guarantors and public officials.
References to the Final Memorandum in this Section 6(b) include any amendment
or supplement thereto at the Closing Date.
17
<PAGE> 18
(3) The Company shall have requested and caused Jose Arroyo,
Esq., Vice-President for Legal and Regulatory Affairs and General
Counsel of the Company, to furnish to the Representatives his opinion,
dated the Closing Date and addressed to the Representatives, to the
effect that:
(i) each of the Company and its subsidiaries is duly
qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification;
(ii) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries or
its or their property that is not adequately disclosed in the
Final Memorandum, except in each case for such proceedings that
would not reasonably be expected to result in a material adverse
change in the condition (financial or otherwise), prospects,
earnings, business or properties or results of operations of the
Company and its subsidiaries, taken as a whole; and the
statements in the Final Memorandum under the headings "The
Acquisition and Related Corporate Restructuring", "Shareholders
and Shareholder Relationships", "Description of Certain Debt",
"Certain Tax Considerations", "Business--Regulatory Environment
in Puerto Rico" and "Business--Legal Proceedings" fairly
summarize the matters therein described in all material
respects;
(iii) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the transactions contemplated herein or in the
Indenture and the Registration Rights Agreement, except such as
may be required under the Act, the Exchange Act and the Trust
Indenture Act in connection with the transactions contemplated
by the Registration Rights Agreement and such as may be required
under the blue sky laws of any jurisdiction in connection with
the transactions contemplated by this Agreement and the
Registration Rights Agreement and such other approvals
(specified in such opinion) as have been obtained;
(iv) such counsel has no reason to believe that at the
Execution Time and on the Closing Date the Final Memorandum
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading (in each case, other than
the financial statements and other financial information
contained therein, as to which such counsel need express no
opinion); and
(v) neither the execution and delivery of the Indenture,
this Agreement or the Registration Rights Agreement, the issue
and sale of the Securities, nor the consummation of any other of
the transactions herein or therein contemplated, nor the
fulfillment of the terms hereof or thereof will conflict with,
result in a breach
18
<PAGE> 19
or violation of, or imposition of any lien, charge or
encumbrance upon any property or asset of the Company or any of
its subsidiaries pursuant to, (i) the charter or by-laws of the
Company or any of its subsidiaries; (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of
its subsidiaries is a party or bound or to which any of their
respective properties is subject; or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the
Company or any of its subsidiaries of any court, regulatory
body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company, any of its
subsidiaries or any of their respective properties.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
Commonwealth of Puerto Rico or the Federal laws of the United States, as
applicable, to the extent he deems proper and specified in such opinion, upon
the opinion of other counsel of good standing whom he believes to be reliable
and who are satisfactory to counsel for the Initial Purchasers; and (B) as to
matters of fact, to the extent he deems proper, on certificates of responsible
officers of the Company and the Subsidiary Guarantors and public officials.
References to the Final Memorandum in this Section 6(c) include any amendment
or supplement thereto at the Closing Date.
(4) The Company shall have requested and caused Jose Arroyo,
Esq., Vice-President for Legal and Regulatory Affairs and General
Counsel of the Company, to furnish to the Representatives his opinion,
dated the Closing Date and addressed to the Representatives, to the
effect that:
(1) the Company and its subsidiaries possess all
licenses, certificates, permits and authorizations required by
the Federal Communications Commission ("FCC") and comparable
regulatory agencies with direct regulatory jurisdiction over
telecommunications matters in the states and United States
territories, including the Commonwealth of Puerto Rico, in which
the Company and its subsidiaries provide telecommunications
services (the "Regulatory Agencies") for the provision of
telecommunications services by the Company and its subsidiaries,
where the failure to obtain or hold such license, certificate,
permit or authorization would have a material adverse effect on
the ability of the Company or its subsidiaries to provide such
services, and none of the Company or any subsidiary has received
any notice of proceedings relating to the revocation or
modification of any such license, certificate, permit or
authorization which could reasonably be expected to have a
material adverse effect on the Company or such subsidiary, in
connection with the provision of such services;
(2) to the knowledge of such counsel, neither the
Company nor any of its subsidiaries is subject to any pending or
threatened proceeding, complaint or investigation before the FCC
or any Regulatory Agency based on any alleged violation by the
Company or its subsidiaries in connection with the provision of
19
<PAGE> 20
or failure to provide telecommunications services, of a
character that would be required to be disclosed in the Final
Memorandum, which is not adequately disclosed in the Final
Memorandum;
(3) the statements included in the Final Memorandum
under the headings "Risk Factors--We Face a Significant Increase
in Competition" and "Risk Factors--The Local and Long Distance
Industries are Subject to Significant Government Regulation", to
the extent such statements relate to regulatory matters, fairly
summarize the matters therein described in all material
respects;
(4) no consent, approval, authorization, license,
certificate, permit or order of the FCC or any Regulatory Agency
is required for the issuance and sale of the Securities or in
connection with the transactions contemplated herein or in the
Indenture and the Registration Rights Agreement;
(5) the execution and delivery of this Agreement,
the Indenture and the Registration Rights Agreement, the
issuance and sale of the Securities, the consummation of any
other of the transactions herein or therein contemplated and the
fulfillment of the terms hereof or thereof will not conflict
with or result in a breach or violation of the Communications
Act of 1934, as amended, the Puerto Rico Telecommunications Act
of 1996, any order or regulation of the FCC or any Regulatory
Agency applicable to the Company or any of its subsidiaries or
cause the suspension, revocation, impairment, forfeiture,
nonrenewal or termination of any FCC license or other
authorization of the FCC; and
(6) such counsel has no reason to believe that at
the Execution Time and on the Closing Date the Final Memorandum
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading.
Such counsel's opinions may be based solely on the
Communications Act of 1934, as amended, the Puerto Rico Telecommunications Act
of 1996, decisions of the FCC and FCC rules and regulations, comparable state
statutes governing telecommunications, and the rules and regulations of the
Regulatory Agencies. References to the Final Memorandum in this Section 6(d)
include any amendment or supplement thereto at the Closing Date.
(5) The Representatives shall have received from
Cravath, Swaine & Moore, counsel for the Initial Purchasers, such
opinion or opinions, dated the Closing Date and addressed to the
Representatives, with respect to the issuance and sale of the
Securities, the Indenture, the Registration Rights Agreement, the Final
Memorandum (as amended or supplemented at the Closing Date) and other
related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
20
<PAGE> 21
(6) The Company shall have furnished to the Representatives
a certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Final Memorandum, any amendment
or supplement to the Final Memorandum and this Agreement and that to
their knowledge:
(1) the representations and warranties of the Company
and each Subsidiary Guarantor in this Agreement are true
and correct in all material respects on and as of the Closing
Date with the same effect as if made on the Closing Date, and
the Company and each Subsidiary Guarantor has complied with all
the agreements and satisfied all the conditions on its part to
be performed or satisfied hereunder at or prior to the Closing
Date; and
(2) since the date of the most recent financial
statements included in the Final Memorandum (exclusive
of any amendment or supplement thereto), there has been no
material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated by the Final Memorandum
(exclusive of any amendment or supplement thereto).
(7) At the Execution Time and at the Closing Date, the
Company shall have requested and caused Deloitte & Touche LLP to
furnish to the Representatives letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange
Act and the respective applicable rules and regulations adopted by the
Commission thereunder, that they have performed a review of the
unaudited interim financial information of the Company for the three
month period ended March 31, 1999 and as at March 31, 1999, and stating
in effect that:
(1) in their opinion the audited financial
statements and financial statement schedules and any pro forma
financial statements included in the Final Memorandum and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Exchange Act
and the related rules and regulations adopted by the Commission
thereunder that would apply to the Final Memorandum if the Final
Memorandum were a prospectus included in a registration
statement on Form S-1 under the Act;
21
<PAGE> 22
(2) on the basis of a reading of the latest
unaudited financial statements made available by the Company and
its subsidiaries; their limited review, in accordance with the
standards established under Statement on Auditing Standards No.
71, of the unaudited interim financial information for the three
month period ended March 31, 1999 , and as at March 31, 1999, as
indicated in their reports included in the Final Memorandum;
carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the
directors of the Company and the Subsidiaries; and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company and its
subsidiaries as to transactions and events subsequent to
December 31, 1998, nothing came to their attention which caused
them to believe that:
(1) any unaudited financial statements
included in the Final Memorandum do not comply in form in
all material respects with applicable accounting
requirements and with the related rules and regulations
adopted by the Commission with respect to financial
statements included or incorporated in quarterly reports
on Form 10-Q under the Exchange Act; and said unaudited
financial statements are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited
financial statements included in the Final Memorandum;
(2) with respect to the period subsequent
to March 31, 1999, there were any changes, at a specified
date not more than five days prior to the date of the
letter, in the long-term debt of the Company and its
subsidiaries or capital stock of the Company or decreases
in the stockholders' equity of the Company as compared
with the amounts shown on the March 31, 1999 consolidated
balance sheet included in the Final Memorandum, or for
the period from April 1, 1999 to such specified date
there were any decreases, as compared with the
corresponding period in the preceding year in net
revenues, sales, operating income, EBITDA, or in total or
per share amounts of net income of the Company and its
subsidiaries, except in all instances for changes or
decreases set forth in such letter, in which case the
letter shall be accompanied by an explanation by the
Company as to the significance thereof unless said
explanation is not deemed necessary by the
Representatives;
(3) the information included in response to
Regulation S-K, Item 301 (Selected Financial Data) and
Item 503(d) (Ratio of Earnings to Fixed Charges) is not
in conformity with the disclosure requirements of
Regulation S-K; or
22
<PAGE> 23
(3) they have performed certain other
specified procedures as a result of which they determined that
certain information of an accounting, financial or statistical
nature (which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Final Memorandum,
including the information set forth under the captions
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" in the Final Memorandum,
agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation;
(4) on the basis of a reading of the
unaudited pro forma financial statements (the "pro forma
financial statements") included in the Final Memorandum;
carrying out certain specified procedures; inquiries of certain
officials of the Company who have responsibility for financial
and accounting matters; and proving the arithmetic accuracy of
the application of the pro forma adjustments to the historical
amounts in the pro forma financial statements, nothing came to
their attention which caused them to believe that the pro forma
financial statements do not comply in form in all material
respects with the applicable accounting requirements of Rule
11-02 of Regulation S-X or that the pro forma adjustments have
not been properly applied to the historical amounts in the
compilation of such statements.
References to the Final Memorandum in this Section 6(g) include
any amendment or supplement thereto at the date of the applicable
letter.
(8) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Final Memorandum
(exclusive of any amendment or supplement thereto), there shall not
have been (i) any change or decrease specified in the letter or letters
referred to in paragraph (g) of this Section 6; or (ii) any change, or
any development involving a prospective change, in or affecting the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
except as set forth in or contemplated in the Final Memorandum
(exclusive of any amendment or supplement thereto) the effect of which,
in any case referred to in clause (i) or (ii) above, is, in the sole
judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to market the Securities as contemplated by
the Final Memorandum (exclusive of any amendment or supplement
thereto).
(9) The Securities shall be eligible for clearance and
settlement through The Depository Trust Company.
(10) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of any of the Company's debt securities
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act), any notice given of
any intended or potential decrease in any such rating (including notice
23
<PAGE> 24
of an adverse change in the outlook for such rating) or of a possible
change in any such rating that does not indicate the direction of the
possible change.
(11) In connection with the closing of the purchase and sale
of the Securities, the net proceeds therefrom will be applied to reduce
borrowings under the 364-day Credit Agreement dated as of March 2,
1999, among the Company, the Subsidiary Guarantors and the lenders and
agents named therein.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Initial Purchasers, this Agreement and all obligations of the Initial
Purchasers hereunder may be canceled at, or at any time prior to, the Closing
Date by the Representatives. Notice of such cancelation shall be given to the
Company in writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 will be
delivered at the office of counsel for the Initial Purchasers, at Cravath,
Swaine & Moore, 825 Eighth Avenue, New York, NY 10019, on the Closing Date.
7. Reimbursement of Expenses. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Initial Purchasers set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Subsidiary
Guarantor to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Initial Purchasers, the Company
and the Subsidiary Guarantors will reimburse the Initial Purchasers severally
through Salomon Smith Barney Inc. on demand for all reasonable and duly
documented out-of-pocket expenses (including reasonable fees and disbursements
of counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company and each of
the Subsidiary Guarantors jointly and severally agree to indemnify and hold
harmless each Initial Purchaser, the directors, officers, employees and agents
of each Initial Purchaser and each person who controls any Initial Purchaser
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Preliminary Memorandum, the Final Memorandum (or
in any supplement or amendment thereto) or any information provided by the
Company to any holder or prospective purchaser of Securities pursuant to
Section 5(h), or in any amendment thereof or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
24
<PAGE> 25
the statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company and the Subsidiary
Guarantors will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof
or supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Initial Purchasers
through the Representatives specifically for inclusion therein and provided
further, however, that with respect to any untrue statement or omission of a
material fact made in the Preliminary Memorandum, the indemnity agreement
contained in this Section 8(a) shall not inure to the benefit of any Initial
Purchaser from whom the person asserting any such loss, claim, damage or
liability purchased the Securities concerned in any initial resale of the
Securities by the Initial Purchaser, to the extent that any such loss, claim,
damage or liability of such Initial Purchaser occurs under the circumstance
where it shall have been determined by a court of competent jurisdiction by
final and nonappealable judgment that (i) the untrue statement or omission of a
material fact contained in the Preliminary Memorandum was corrected in the
Final Memorandum, (ii) the Company previously furnished copies of the Final
Memorandum to the Initial Purchasers and (iii) such loss, claim, damage or
liability results from the fact that there was not sent or given to such person
at or prior to the written confirmation of the sale of such Securities to such
person, a copy of the Final Memorandum. This indemnity agreement will be in
addition to any liability that the Company and the Subsidiary Guarantors may
otherwise have.
(b) Each Initial Purchaser severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers, and each person who controls the Company within the meaning of either
the Act or the Exchange Act, to the same extent as the foregoing indemnity from
the Company to each Initial Purchaser, but only with reference to written
information relating to such Initial Purchaser furnished to the Company by or
on behalf of such Initial Purchaser through the Representatives specifically
for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any
amendment or supplement thereto). This indemnity agreement will be in addition
to any liability which any Initial Purchaser may otherwise have. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page regarding the delivery of the Securities and, under the heading "Plan of
Distribution", (i) the list of Initial Purchasers and their respective
participation in the sale of the Securities; (ii) the sentences related to
concessions and reallowances; and (iii) the paragraph related to stabilization,
syndicate covering transactions and penalty bids in the Preliminary Memorandum
and the Final Memorandum, constitute the only information furnished in writing
by or on behalf of the Initial Purchasers for inclusion in the Preliminary
Memorandum or the Final Memorandum (or in any amendment or supplement thereto).
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will
25
<PAGE> 26
not relieve it from liability under paragraph (a) or (b) above unless and to
the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses;
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be
entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ one firm of separate counsel (in addition to local
counsel), and the indemnifying party shall bear the reasonable fees, costs and
expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such
counsel with a conflict of interest; (ii) the actual or potential defendants
in, or targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party; (iii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the institution of
such action; or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party although within the scope thereof, the Company, each
Subsidiary Guarantor and the Initial Purchasers severally agree to contribute to
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the Initial
Purchasers may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Subsidiary Guarantors on the
one hand and by the Initial Purchasers on the other from the offering of the
Securities; provided, however, that in no case shall any Initial Purchaser
(except as may be provided in any agreement among the Initial Purchasers
relating to the offering of the Securities) be responsible for any amount in
excess of the purchase discount or commission applicable to the Securities
purchased by such Initial Purchaser hereunder. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, the Company, each
Subsidiary Guarantor and the Initial Purchasers severally shall contribute in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Subsidiary Guarantors on the one
hand and of the Initial Purchasers on the
26
<PAGE> 27
other in connection with the statements or omissions which resulted in such
Losses, as well as any other relevant equitable considerations. Benefits
received by the Company and the Subsidiary Guarantors shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by the Company, and benefits received by the Initial Purchasers shall
be deemed to be equal to the total purchase discounts and commissions in each
case set forth on the cover of the Final Memorandum. Relative fault shall be
determined by reference to, among other things, whether any untrue or any
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information provided by the Company on the
one hand or the Initial Purchasers on the other, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company, each Subsidiary
Guarantor and the Initial Purchasers agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls an Initial Purchaser within the meaning of either the
Act or the Exchange Act and each director, officer, employee and agent of an
Initial Purchaser shall have the same rights to contribution as such Initial
Purchaser, and each person who controls the Company within the meaning of either
the Act or the Exchange Act and each officer and director of the Company shall
have the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
9. Default by an Initial Purchaser. If any one or more Initial
Purchasers shall fail to purchase and pay for any of the Securities agreed to
be purchased by such Initial Purchaser hereunder and such failure to purchase
shall constitute a default in the performance of its or their obligations under
this Agreement, the remaining Initial Purchasers shall be obligated severally
to take up and pay for (in the respective proportions which the principal
amount of Securities set forth opposite their names on Schedule I hereto bears
to the aggregate principal amount of Securities set forth opposite the names of
all the remaining Initial Purchasers) the Securities which the defaulting
Initial Purchaser or Initial Purchasers agreed but failed to purchase;
provided, however, that in the event that the aggregate principal amount of
Securities which the defaulting Initial Purchaser or Initial Purchasers agreed
but failed to purchase shall exceed 10% of the aggregate principal amount of
Securities set forth on Schedule I hereto, the remaining Initial Purchasers
shall have the right to purchase all, but shall not be under any obligation to
purchase any, of the Securities, and if such nondefaulting Initial Purchasers
do not purchase all the Securities, this Agreement will terminate without
liability to any nondefaulting Initial Purchaser or the Company. In the event
of a default by any Initial Purchaser as set forth in this Section 9, the
Closing Date shall be postponed for such period, not exceeding five Business
Days, as the Representatives shall determine in order that the required changes
in the Final Memorandum or in any other documents or arrangements may be
effected. Nothing contained in this Agreement shall relieve any defaulting
Initial Purchaser of its liability, if any, to the Company or any nondefaulting
Initial Purchaser for damages occasioned by its default hereunder.
27
<PAGE> 28
10. Termination. This Agreement shall be subject to termination
in the absolute discretion of the Representatives, by notice given to the
Company prior to delivery of and payment for the Securities, if at any time
prior to such time (i) trading in securities generally on the New York Stock
Exchange shall have been suspended or limited or minimum prices shall have been
established on such Exchange; (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities; or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or crisis the
effect of which on financial markets of the United States is such as to make
it, in the sole judgment of the Representatives, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Final Memorandum (exclusive of any amendment or supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of
the Company or its officers and of the Initial Purchasers set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Initial Purchasers or the Company
or any of the officers, directors, employees, agents or controlling persons
referred to in Section 8 hereof, and will survive delivery of and payment for
the Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancelation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no. (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc. at 388 Greenwich Street, New York, New York 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
Jose Arroyo, Esq., Vice-President of Legal and Regulatory Affairs and General
Counsel of the Company (fax no. (787) 782-9545) and confirmed to it at
Telecomunicaciones de Puerto Rico, Inc., 1500 Roosevelt Avenue, Guaynabo,
Puerto Rico 00968, Attention: General Counsel.
13. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and, except as expressly set forth in Section 5(h) hereof, no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
28
<PAGE> 29
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Affiliate" shall have the meaning specified in Rule 501(b) of
Regulation D.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in The City of New York.
"Commission" shall mean the Securities and Exchange Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Investment Company Act" shall mean the Investment Company Act
of 1940, as amended, and the rules and regulations of the Commission
promulgated thereunder.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"Regulation D" shall mean Regulation D under the Act.
"Regulation S" shall mean Regulation S under the Act.
"Trust Indenture Act" shall mean the Trust Indenture Act of
1939, as amended, and the rules and regulations of the Commission promulgated
thereunder.
29
<PAGE> 30
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this Agreement and your acceptance shall represent a binding
agreement between the Company, the Subsidiary Guarantors and the several
Initial Purchasers.
Very truly yours,
Telecomunicaciones de Puerto Rico, Inc.
by
----------------------------------
Name:
Title:
Puerto Rico Telephone Company, Inc.,
by
----------------------------------
Name:
Title:
Celulares Telefonica, Inc.,
by
----------------------------------
Name:
Title:
30
<PAGE> 31
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Chase Securities Inc.
J.P. Morgan Securities Inc.
NationsBanc Montgomery Securities LLC
Popular Securities, Inc.
By: Salomon Smith Barney Inc.
by
----------------------
Name:
Title:
For themselves and the other several Initial
Purchasers named in Schedule I to
the foregoing Agreement.
31
<PAGE> 32
SCHEDULE I
<TABLE>
<CAPTION>
Principal Principal Principal
Amount of Amount of Amount of
6.15% Senior 6.65% Senior 6.80% Senior
Notes Due Notes Due Notes Due
2002 to be 2006 to be 2009 to be
Initial Purchasers Purchased Purchased Purchased
------------------
<S> <C> <C> <C>
Salomon Smith Barney Inc.................... $147,000,000 $196,000,000 $147,000,000
Chase Securities Inc........................ $49,500,00 $66,000,000 $49,5000,00
J.P. Morgan Securities Inc............... $49,500,000 $66,000,000 $49,500,000
NationsBanc Montgomery Securities LLC $49,500,000 $66,000,000 $49,500,000
Popular Securities, Inc..................... $4,500,000 $6,000,000 $4,500,000
-------- -------- --------
Total....................................... $300,000,000 $400,000,000 $300,000,000
</TABLE>
32
<PAGE> 33
EXHIBIT A
Selling Restrictions for Offers and
Sales outside the United States
(1)(a) The Securities have not been and will not be registered
under the Act and may not be offered or sold within the United States or to, or
for the account or benefit of, U.S. persons except in accordance with
Regulation S under the Act or pursuant to an exemption from the registration
requirements of the Act. Each Initial Purchaser represents and agrees that,
except as otherwise permitted by Section 4(a)(i) of the Agreement to which this
is an exhibit, it has offered and sold the Securities, and will offer and sell
the Securities, (i) as part of their distribution at any time; and (ii)
otherwise until 40 days after the later of the commencement of the offering and
the Closing Date, only in accordance with Rule 903 of Regulation S under the
Act. Accordingly, each Initial Purchaser represents and agrees that neither it,
nor any of its Affiliates nor any person acting on its or their behalf has
engaged or will engage in any directed selling efforts with respect to the
Securities, and that it and they have complied and will comply with the
offering restrictions requirement of Regulation S. Each Initial Purchaser
agrees that, at or prior to the confirmation of sale of Securities (other than
a sale of Securities pursuant to Section 4(a)(i) of the Agreement to which this
is an exhibit), it shall have sent to each distributor, dealer or person
receiving a selling concession, fee or other remuneration that purchases
Securities from it during the distribution compliance period a confirmation or
notice to substantially the following effect:
"The Securities covered hereby have not been registered under
the U.S. Securities Act of 1933 (the "Act") and may not be
offered or sold within the United States or to, or for the
account or benefit of, U.S. persons (i) as part of their
distribution at any time or (ii) otherwise until 40 days after
the later of the commencement of the offering and May 20, 1999,
except in either case in accordance with Regulation S or Rule
144A under the Act. Terms used above have the meanings given to
them by Regulation S."
(b) Each Initial Purchaser also represents and agrees that it
has not entered and will not enter into any contractual arrangement
with any distributor with respect to the distribution of the
Securities, except with its Affiliates or with the prior written
consent of the Company.
(c) Terms used in this section have the meanings given to them
by Regulation S.
(2) Each Initial Purchaser represents and agrees that (i) it has
not offered or sold, and will not offer or sell, any Securities in the United
Kingdom, by means of any document, other than to persons whose ordinary
business it is to buy, hold, manage or dispose of investments, whether as
principal or as agent, for the purpose of their businesses or in circumstances
which do not constitute an offer to the public within the meaning of the
Companies Act 1989 of Great Britain; (ii) it has complied and will comply with
all applicable
A-1
<PAGE> 34
provisions of the Financial Services Act 1986 of the United Kingdom with
respect to anything done by it in relation to the Securities in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issue of the Securities to a person who is of a
kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.
A-2
<PAGE> 1
EXHIBIT 4.3
EXECUTION COPY
TELECOMUNICACIONES DE PUERTO RICO, INC.
6.15% Senior Notes due 2002
6.65% Senior Notes due 2006
6.80% Senior Notes due 2009
REGISTRATION RIGHTS AGREEMENT
New York, New York
May 13, 1999
Salomon Smith Barney Inc.
Chase Securities Inc.
J.P. Morgan Securities Inc.
NationsBanc Montgomery Securities LLC
Popular Securities, Inc.
As Representatives of the Initial Purchasers
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
<PAGE> 2
Telecomunicaciones de Puerto Rico, Inc., a corporation organized
under the laws of Puerto Rico (the "Company"), proposes to issue and sell to
certain purchasers (the "Initial Purchasers"), upon the terms set forth in a
purchase agreement of even date herewith (the "Purchase Agreement"),
$300,000,000 principal amount of its 6.15% Senior Notes Due 2002, $400,000,000
principal amount of its 6.65 % Senior Notes Due 2006 and $ 300,000,000
principal amount of its 6.80% Senior Notes Due 2009 (collectively, the
"Securities") each guaranteed by the Puerto Rico Telephone Company, Inc., a
Puerto Rico corporation and wholly owned subsidiary of the Company and
Celulares Telefonica, Inc., a Puerto Rico corporation and wholly owned
subsidiary of the Company (together, the "Subsidiary Guarantors"), relating to
the initial placement of the Securities (the "Initial Placement"). To induce
the Initial Purchasers to enter into the Purchase Agreement and to satisfy a
condition of your obligations thereunder, the Company and the Subsidiary
Guarantors (as defined in the Purchase Agreement) agree with you for your
benefit and the benefit of the holders from time to time of the Securities
(including the Initial Purchasers) (each a "Holder" and, together, the
"Holders"), as follows:
1. Definitions. Capitalized terms used herein without definition
shall have the respective meanings set forth in the Purchase Agreement. As used
in this Agreement, the following capitalized defined terms shall have the
following meanings:
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person shall mean any other person
that, directly or indirectly, is in control of, is controlled by, or is under
common control with, such specified person. For purposes of this definition,
control of a person shall mean the power, direct or indirect, to direct or
cause the direction of the management and policies of such person whether by
contract or otherwise; and the terms "controlling" and "controlled" shall have
meanings correlative to the foregoing.
"Broker-Dealer" shall mean any broker or dealer registered as
such under the Exchange Act.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Exchange Offer Prospectus" shall mean the prospectus included
in the Exchange Offer Registration Statement, as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the New Securities covered by such
<PAGE> 3
Exchange Offer Registration Statement, and all amendments and supplements
thereto and all material incorporated by reference therein.
"Exchange Offer Registration Period" shall mean the one-year
period following the consummation of the Registered Exchange Offer, exclusive
of any period during which any stop order shall be in effect suspending the
effectiveness of the Exchange Offer Registration Statement.
"Exchange Offer Registration Statement" shall mean a
registration statement of the Company on an appropriate form under the Act with
respect to the Registered Exchange Offer, all amendments and supplements to
such registration statement, including post-effective amendments thereto, in
each case including the Exchange Offer Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"Exchanging Dealer" shall mean any Holder (which may include any
Initial Purchaser) that is a Broker-Dealer and elects to exchange for New
Securities any Securities that it acquired for its own account as a result of
market-making activities or other trading activities (but not directly from the
Company or any Affiliate of the Company).
"Holder" shall have the meaning set forth in the preamble
hereto.
"Indenture" shall mean the Indenture relating to the Securities,
dated as of May 20, 1999, among the Company, the Subsidiary Guarantors and The
Bank of New York, as trustee, as the same may be amended from time to time in
accordance with the terms thereof.
"Initial Placement" shall have the meaning set forth in the
preamble hereto.
"Initial Purchaser" shall have the meaning set forth in the
preamble hereto.
"Losses" shall have the meaning set forth in Section 6(d)
hereof.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Securities registered under a
Registration Statement.
"Managing Underwriters" shall mean the investment banker or
investment bankers and manager or managers that shall administer an
underwritten offering.
"New Securities" shall mean debt securities of the Company
identical in all material respects to the Securities (except that the interest
rate step-up provisions and the transfer restrictions shall be modified or
eliminated, as appropriate and interest shall accrue from the last date on
which interest was paid or duly provided for on the Securities or if no such
interest has been paid, from the date of original issue) and to be issued under
the Indenture or the New Securities Indenture.
3
<PAGE> 4
"New Securities Indenture" shall mean an indenture among the
Company, the Subsidiary Guarantors and the New Securities Trustee, identical in
all material respects to the Indenture (except that the interest rate step-up
provisions will be modified or eliminated, as appropriate).
"New Securities Trustee" shall mean the Trustee or a bank or
trust company reasonably satisfactory to the Initial Purchasers, as trustee
with respect to the New Securities under the New Securities Indenture.
"Prospectus" shall mean the prospectus included in any
Registration Statement (including, without limitation, a prospectus that
discloses information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A under the Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Securities or the New Securities covered
by such Registration Statement, and all amendments and supplements thereto and
all material incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the
preamble hereto.
"Registered Exchange Offer" shall mean the proposed offer of the
Company to issue and deliver to the Holders of the Securities that are not
prohibited by any law or policy of the Commission from participating in such
offer, in exchange for the Securities, a like aggregate principal amount of the
New Securities.
"Registration Statement" shall mean any Exchange Offer
Registration Statement or Shelf Registration Statement that covers any of the
Securities or the New Securities pursuant to the provisions of this Agreement,
any amendments and supplements to such registration statement, including
post-effective amendments (in each case including the Prospectus contained
therein), all exhibits thereto and all material incorporated by reference
therein.
"Securities" shall have the meaning set forth in the preamble
hereto.
"Shelf Registration" shall mean a registration effected pursuant
to Section 3 hereof.
"Shelf Registration Period" has the meaning set forth in Section
3(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 3 hereof which
covers some or all of the Securities or New Securities, as applicable (except
Securities which the Holders have elected not to include in such Shelf
Registration Statement or the Holders of which have not complied with their
obligations under Section 4(o) hereof), on an appropriate form under Rule 415
under the Act, or any similar rule that may be adopted by the Commission,
amendments and supplements to such registration statement, including
post-effective amendments, in each case including the
4
<PAGE> 5
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Trustee" shall mean the trustee with respect to the Securities
under the Indenture.
"underwriter" shall mean any underwriter of Securities in
connection with an offering thereof under a Shelf Registration Statement.
2. Registered Exchange Offer. (a) The Company and the Subsidiary
Guarantors shall prepare and, not later than 90 days following the date of the
original issuance of the Securities, shall file with the Commission the
Exchange Offer Registration Statement with respect to the Registered Exchange
Offer. The Company and the Subsidiary Guarantors shall cause the Exchange Offer
Registration Statement to become effective under the Act within 150 days of the
date of the original issuance of the Securities.
(b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer,
it being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for New Securities (assuming that such Holder
is not an Affiliate of the Company, acquires the New Securities in the ordinary
course of such Holder's business, has no arrangements or understanding with any
person to participate in the distribution of the New Securities and is not
prohibited by any law or policy of the Commission from participating in the
Registered Exchange Offer) to trade such New Securities from and after their
receipt without any limitations or restrictions under the Act and without
material restrictions under the securities laws of a substantial proportion of
the several states of the United States.
(c) In connection with the Registered Exchange Offer, the
Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Registered Exchange Offer open for not less than
20 Business Days and not more than 40 Business Days after the date
notice thereof is mailed to the Holders (or, in each case, longer if
required by applicable law);
(iii) use its commercially reasonable efforts to keep the
Exchange Offer Registration Statement continuously effective,
supplemented and amended as required, under the Act to ensure that it
is available for sales of New Securities by Exchanging Dealers during
the Exchange Offer Registration Period;
(iv) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan in New York
City, which may be the Trustee, the New Securities Trustee or an
Affiliate of either of them;
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<PAGE> 6
(v) permit Holders to withdraw tendered Securities at any time
prior to the close of business, New York time, on the last Business Day
on which the Registered Exchange Offer is open;
(vi) prior to effectiveness of the Exchange Offer Registration
Statement, if requested or required by the Commission, provide a
supplemental letter to the Commission (A) stating that the Company is
conducting the Registered Exchange Offer in reliance on the position of
the Commission in Exxon Capital Holdings Corporation (pub. avail. May
13, 1988) and Morgan Stanley and Co., Inc. (pub. avail. June 5, 1991);
and (B) including a representation that the Company has not entered
into any arrangement or understanding with any person to distribute the
New Securities to be received in the Registered Exchange Offer and
that, to the best of the Company's information and belief, each Holder
participating in the Registered Exchange Offer is acquiring the New
Securities in the ordinary course of business and has no arrangement or
understanding with any person to participate in the distribution of the
New Securities; and
(vii) comply in all material respects with all applicable laws.
(d) As soon as practicable after the close of the Registered
Exchange Offer, the Company shall:
(i) accept for exchange all Securities duly tendered and not
validly withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver or cause to be delivered to the Trustee for
cancelation in accordance with Section 4(s) all Securities so accepted
for exchange; and
(iii) cause the New Securities Trustee promptly to authenticate
and deliver to each Holder of Securities a principal amount of New
Securities equal to the principal amount of the Securities of such
Holder so accepted for exchange.
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<PAGE> 7
(e) Each Holder hereby acknowledges and agrees that any such
Holder using the Registered Exchange Offer to participate in a distribution of
the New Securities (x) could not under Commission policy as in effect on the
date of this Agreement rely on the position of the Commission in Morgan Stanley
and Co., Inc. (pub. avail. June 5, 1991) and Exxon Capital Holdings Corporation
(pub. avail. May 13, 1988), as interpreted in the Commission's letter to
Shearman & Sterling dated July 2, 1993 and similar no-action letters; and (y)
must comply with the registration and prospectus delivery requirements of the
Act in connection with any secondary resale transaction which must be covered
by an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K under
the Act if the resales are of New Securities obtained by such Holder in
exchange for Securities acquired by such Holder directly from the Company or
one of its Affiliates. Accordingly, each Holder participating in the Registered
Exchange Offer shall be required to represent to the Company that, at the time
of the consummation of the Registered Exchange Offer:
(i) any New Securities received by such Holder will be acquired
in the ordinary course of business;
(ii) such Holder will have no arrangement or understanding with
any person to participate in the distribution of the Securities or the
New Securities within the meaning of the Act; and
(iii) such Holder is not an Affiliate of the Company.
(f) If in the reasonable opinion of an Initial Purchaser, such
Initial Purchaser is not eligible to participate in the Registered Exchange
Offer with respect to the exchange of Securities constituting any portion of an
unsold allotment, at the request of such Initial Purchaser, the Company shall
issue and deliver to such Initial Purchaser or the person purchasing Securities
registered under a Shelf Registration Statement as contemplated by Section 3
hereof from such Initial Purchaser, in exchange for such Securities, a like
principal amount of New Securities. The Company shall use its commercially
reasonable efforts to cause the CUSIP Service Bureau to issue the same CUSIP
number for such New Securities as for New Securities issued pursuant to the
Registered Exchange Offer.
3. Shelf Registration. (a) If (i) due to any change in law or
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its outside counsel that it is not permitted to effect
the Registered Exchange Offer as contemplated by Section 2 hereof; (ii) for any
other reason the Exchange Offer Registration Statement is not declared effective
within 150 days of the date of original issuance of the Securities or the
Registered Exchange Offer is not consummated within 180 days of the date of
original issuance of the Securities; (iii) based on its reasonable opinion, any
Initial Purchaser so requests with respect to Securities that are not eligible
to be exchanged for New Securities in the Registered Exchange Offer and that are
held by it following consummation of the Registered Exchange Offer, such request
to be in writing and delivered to the Company; (iv) any Holder (other than an
Initial Purchaser) is not eligible to participate in the Registered Exchange
Offer or participates in
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<PAGE> 8
the Registered Exchange Offer but does not receive freely tradeable New
Securities in the Registered Exchange Offer other than by reason of such Holder
being an Affiliate of the Company; or (v) in the case of any Initial Purchaser
that participates in the Registered Exchange Offer or acquires New Securities
pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely
tradeable New Securities in exchange for Securities constituting any portion of
an unsold allotment (it being understood that (x) the requirement that an
Initial Purchaser deliver a Prospectus containing the information required by
Item 507 or 508 of Regulation S-K under the Act in connection with sales of New
Securities acquired in exchange for such Securities shall result in such New
Securities being not "freely tradeable"; and (y) the requirement that an
Exchanging Dealer deliver an Exchange Offer Prospectus in connection with sales
of New Securities acquired in the Registered Exchange Offer in exchange for
Securities acquired as a result of market-making activities or other trading
activities shall not result in such New Securities being not "freely
tradeable"), the Company and the Subsidiary Guarantors shall effect a Shelf
Registration Statement in accordance with subsection (b) below.
(b) (i) The Company and the Subsidiary Guarantors shall as
promptly as practicable (but in no event more than 45 days after so required or
requested pursuant to this Section 3), file with the Commission and thereafter
shall cause to be declared effective under the Act a Shelf Registration
Statement relating to the offer and sale of the Securities or the New
Securities, as applicable, by the Holders thereof from time to time in
accordance with the methods of distribution elected by the Majority Holders
participating in the Shelf Registration and set forth in such Shelf
Registration Statement; provided, however, that no Holder (other than an
Initial Purchaser) shall be entitled to have the Securities held by it covered
by such Shelf Registration Statement unless such Holder agrees in writing to be
bound by all of the provisions of this Agreement applicable to such Holder and
complies with the provisions of Section 4(o) hereof; and provided further, that
with respect to New Securities received by an Initial Purchaser in exchange for
Securities constituting any portion of an unsold allotment, the Company and the
Subsidiary Guarantors may, if permitted by current interpretations by the
Commission's staff, file a post-effective amendment to the Exchange Offer
Registration Statement containing the information required by Item 507 or 508
of Regulation S-K, as applicable, in satisfaction of its obligations under this
subsection with respect thereto, and any such Exchange Offer Registration
Statement, as so amended, shall be referred to herein as, and governed by the
provisions herein applicable to, a Shelf Registration Statement.
(ii) The Company and the Subsidiary Guarantors shall use their
best efforts to keep the Shelf Registration Statement continuously effective,
supplemented and amended as required by the Act, in order to permit the
Prospectus forming part thereof to be usable by Holders for a period of two
years from the date the Shelf Registration Statement is declared effective by
the Commission or such shorter period that will terminate when all the
Securities or New Securities, as applicable, covered by the Shelf Registration
Statement have been sold pursuant to the Shelf Registration Statement or cease
to be outstanding (in any such case, such period being called the "Shelf
Registration Period"). The Company and the Subsidiary Guarantors shall be
deemed not to have used their best efforts to keep the Shelf Registration
Statement effective during the requisite period if it voluntarily takes any
action that would result in Holders of Securities covered thereby not being
able to offer and sell such Securities during
8
<PAGE> 9
that period, unless (A) such action is required by applicable law; or (B) such
action is taken by the Company in good faith and for valid business reasons
(not including avoidance of the Company's and the Subsidiary Guarantors'
obligations hereunder), including but not limited to the acquisition or
divestiture of assets, so long as the Company and the Subsidiary Guarantors
promptly thereafter comply with the requirements of Section 4(k) hereof, if
applicable.
4. Additional Registration Procedures. In connection with any
Shelf Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply.
(a) The Company shall:
(i) furnish to you, not less than five Business Days prior to
the filing thereof with the Commission, a copy of any Exchange Offer
Registration Statement and any Shelf Registration Statement, and each
amendment thereof and each amendment or supplement, if any, to the
Prospectus included therein (including all documents incorporated by
reference therein after the initial filing) and shall use its best
efforts to reflect in each such document, when so filed with the
Commission, such comments as you reasonably propose;
(ii) include the information set forth in Annex A hereto on the
facing page of the Exchange Offer Registration Statement, in Annex B
hereto in the forepart of the Exchange Offer Registration Statement in
a section setting forth details of the Exchange Offer, in Annex C
hereto in the underwriting or plan of distribution section of the
Prospectus contained in the Exchange Offer Registration Statement, and
in Annex D hereto in the letter of transmittal delivered pursuant to
the Registered Exchange Offer;
(iii) if requested by an Initial Purchaser, include the
information required by Item 507 or 508 of Regulation S-K, as
applicable, in the Prospectus contained in the Exchange Offer
Registration Statement; and
(iv) in the case of a Shelf Registration Statement, include the
names of the Holders that propose to sell Securities pursuant to the
Shelf Registration Statement as selling security holders.
(b) The Company shall ensure that:
(i) any Registration Statement and any amendment thereto and any
Prospectus forming part thereof and any amendment or supplement thereto
complies in all material respects with the Act and the rules and
regulations thereunder;
(ii) any Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and
9
<PAGE> 10
(iii) any Prospectus forming part of any Registration Statement,
and any amendment or supplement to such Prospectus, does not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) The Company shall advise you, the Holders of Securities
covered by any Shelf Registration Statement and any Exchanging Dealer under any
Exchange Offer Registration Statement that has provided in writing to the
Company a telephone or facsimile number and address for notices, and, if
requested by you or any such Holder or Exchanging Dealer, shall confirm such
advice in writing (which notice pursuant to clauses (iii) through (v) hereof
shall be accompanied by an instruction to suspend the use of the Prospectus
until the Company shall have remedied the basis for such suspension):
(i) when a Shelf Registration Statement and any amendment
thereto has been filed with the Commission and when any Registration
Statement or any post-effective amendment thereto has become effective;
(ii) of any request by the Commission for any amendment or
supplement to the Registration Statement or the Prospectus or for
additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation of any
proceeding for such purpose; and
(v) of the happening of any event that requires any change in
the Registration Statement or the Prospectus so that, as of such date,
the statements therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary to make the
statements therein (in the case of the Prospectus, in the light of the
circumstances under which they were made) not misleading.
In addition, the Company shall advise you and your counsel when
an Exchange Offer Registration Statement and any amendment thereto has
been filed with the Commission.
(d) The Company and the Subsidiary Guarantors shall use their
best efforts to obtain the withdrawal of any order suspending the effectiveness
of any Registration Statement or the qualification of the securities therein
for sale in any jurisdiction at the earliest possible time.
(e) The Company shall furnish to each Holder of Securities
covered by any Shelf Registration Statement, without charge, at least one copy
of such Shelf Registration Statement
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<PAGE> 11
and any post-effective amendment thereto, including all material incorporated
therein by reference, and, if the Holder so requests in writing, all exhibits
thereto (including exhibits incorporated by reference therein).
(f) The Company shall, during the Shelf Registration Period,
deliver to each Holder of Securities covered by any Shelf Registration
Statement, without charge, as many copies of the Prospectus (including each
preliminary Prospectus) included in such Shelf Registration Statement and any
amendment or supplement thereto as such Holder may reasonably request. The
Company and the Subsidiary Guarantors consent to the use of the Prospectus or
any amendment or supplement thereto by each of the selling Holders of
Securities in connection with the offering and sale of the Securities covered
by the Prospectus, or any amendment or supplement thereto, included in the
Shelf Registration Statement.
(g) The Company shall furnish to each Exchanging Dealer which so
requests, without charge, at least one copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including all material
incorporated by reference therein, and, if the Exchanging Dealer so requests in
writing, all exhibits thereto (including exhibits incorporated by reference
therein).
(h) The Company shall promptly deliver to each Initial
Purchaser, each Exchanging Dealer and each other person required to deliver a
Prospectus during the Exchange Offer Registration Period, without charge, as
many copies of the Prospectus included in such Exchange Offer Registration
Statement and any amendment or supplement thereto as any such person may
reasonably request. The Company and the Subsidiary Guarantors consent to the
use of the Prospectus or any amendment or supplement thereto by any Initial
Purchaser, any Exchanging Dealer and any such other person that may be required
to deliver a Prospectus following the Registered Exchange Offer in connection
with the offering and sale of the New Securities covered by the Prospectus, or
any amendment or supplement thereto, included in the Exchange Offer
Registration Statement, for the Exchange Offer Registration Period or, if
earlier, when all New Securities received by the Broker-Dealer have been
disposed of by such Broker Dealer.
(i) Prior to the Registered Exchange Offer or any other offering
of Securities pursuant to any Registration Statement, the Company and the
Subsidiary Guarantors shall arrange, if necessary, for the qualification of the
Securities or the New Securities for sale under the laws of such jurisdictions
as any Holder shall reasonably request and will maintain such qualification in
effect so long as required; provided that in no event shall the Company or the
Subsidiary Guarantors be obligated to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action that would
subject it to service of process in suits or taxes, other than those arising
out of the Initial Placement, the Registered Exchange Offer or any offering
pursuant to a Shelf Registration Statement, in any such jurisdiction where it
is not then so subject.
(j) The Company and the Subsidiary Guarantors shall cooperate
with the Holders of Securities to facilitate the timely preparation and
delivery of certificates representing New
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<PAGE> 12
Securities or Securities to be issued or sold pursuant to any Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as Holders may request at least two Business Days
prior to such sale of Securities or New Securities.
(k) Upon the occurrence of any event contemplated by subsections
(c)(ii) through (v) above, the Company and the Subsidiary Guarantors shall
promptly prepare a post-effective amendment to the applicable Registration
Statement or an amendment or supplement to the related Prospectus or file any
other required document so that, as thereafter delivered to Initial Purchasers
of the securities included therein, the Prospectus will not include at the time
of such delivery an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. In such
circumstances, the period of effectiveness of the Exchange Offer Registration
Statement provided for in Section 2 and the Shelf Registration Statement
provided for in Section 3(b) shall each be extended by the number of days from
and including the date of the giving of a notice of suspension pursuant to
Section 4(c) to and including the date when the Initial Purchasers, the Holders
of the Securities and any known Exchanging Dealer shall have received such
amended or supplemented Prospectus pursuant to this Section.
(l) Not later than the effective date of any Registration
Statement, the Company shall provide a CUSIP number for the Securities or the
New Securities, as the case may be, registered under such Registration
Statement and provide the Trustee with printed certificates for such Securities
or New Securities, in a form eligible for deposit with The Depository Trust
Company.
(m) The Company and the Subsidiary Guarantors shall comply with
all applicable rules and regulations of the Commission and shall make generally
available to its security holders as reasonably soon as practicable after the
effective date of the applicable Registration Statement an earnings statement
satisfying the provisions of Section 11(a) of the Act.
(n) The Company and the Subsidiary Guarantors shall cause the
Indenture or the New Securities Indenture, as the case may be, to be qualified
under the Trust Indenture Act in a timely manner.
(o) The Company may require each Holder of Securities to be sold
pursuant to any Shelf Registration Statement to furnish to the Company such
information regarding the Holder and the distribution of such Securities as the
Company may from time to time reasonably require for inclusion in such
Registration Statement. The Company may exclude from such Shelf Registration
Statement the Securities of any Holder that unreasonably fails to furnish such
information within a reasonable time after receiving such request.
(p) In the case of any Shelf Registration Statement, the Company
and the Subsidiary Guarantors shall enter into such agreements (including if
requested an underwriting agreement in customary form) and take all other
appropriate actions in order to expedite or facilitate the registration or the
disposition of the Securities, and in connection therewith, if an
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<PAGE> 13
underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures no less favorable than those set
forth in Section 6 (or such other provisions and procedures acceptable to the
Majority Holders participating in the Shelf Registration and the Managing
Underwriters, if any) with respect to all parties to be indemnified pursuant to
Section 6.
(q) In the case of any Shelf Registration Statement, the Company
and the Subsidiary Guarantors, as applicable, shall:
(i) make reasonably available for inspection by the Holders of
Securities to be registered thereunder, any underwriter participating
in any disposition pursuant to such Registration Statement, one firm of
legal counsel (in addition to local counsel), one firm of accountants
or other agent retained by the Holders or any such underwriter all
relevant financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries; provided, however,
that, if any such records, documents or other information relate to
pending or proposed acquisitions or dispositions, or otherwise relate
to matters reasonably considered by the Company to constitute sensitive
or proprietary information, the Company need not provide such records,
documents or information unless the foregoing parties enter into a
confidentiality agreement in customary form and reasonably acceptable
to such parties and the Company;
(ii) cause the Company's officers, directors and employees to
supply all relevant information reasonably requested by the Holders or
any such underwriter, legal counsel, accountant or agent in connection
with any such Registration Statement as is customary for similar due
diligence examinations; provided, however, that such information may
not be used for any purpose other than due diligence and provided
further, however, that any information that is designated in writing by
the Company, in good faith, as confidential at the time of delivery of
such information shall be kept confidential by the Holders or any such
underwriter, attorney, accountant or agent, unless such disclosure is
made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a
third party without an accompanying obligation of confidentiality;
(iii) make such representations and warranties to the Holders of
Securities registered thereunder and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters
in primary underwritten offerings and covering reasonably requested
matters including, but not limited to, those set forth in the Purchase
Agreement;
(iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the Managing Underwriters, if any)
addressed to each selling Holder and the underwriters, if any, covering
such matters as are customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably
requested by such Holders and underwriters; provided, however, that all
of such opinions
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<PAGE> 14
shall be dated as of a single date and no updates thereof shall be
required; and provided, further, that except as set forth in this
paragraph (iv), the Company shall have no obligation to deliver any
legal opinions (excluding opinions delivered under Section 4(r)) under
or in connection with this Agreement;
(v) obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data are, or are required
to be, included in the Registration Statement) or, if not available
under applicable accounting pronouncements or standards, procedures
letters and updates thereto, addressed to each selling Holder of
Securities registered thereunder and the underwriters, if any (provided
that such letters need not be addressed to any Holder to whom, in the
reasonable opinion of the Company's independent public accountants,
addressing such letters is not permissible under applicable accounting
standards), in customary form and covering matters of the type
customarily covered in "cold comfort" letters or procedures in
connection with primary underwritten offerings; provided, however, that
except as set forth in this Section 4(q)(v) or Section 4(r)(v), the
Company shall have no obligation to deliver any "cold comfort" or
"procedures" letters or any updates thereto under or in connection with
this Agreement; and
(vi) deliver such documents and certificates as may be
reasonably requested by the Majority Holders participating in the Shelf
Registration and the Managing Underwriters, if any, including those to
evidence compliance with Section 4(k) and with any customary conditions
contained in the underwriting agreement or other agreement entered into
by the Company and the Subsidiary Guarantors.
The actions set forth in clauses (iii), (iv), (v) and (vi) of this subsection
shall be performed at (A) the effectiveness of such Registration Statement and
each post-effective amendment thereto; and (B) each closing under any
underwriting or similar agreement as and to the extent required thereunder.
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<PAGE> 15
(r) In the case of any Exchange Offer Registration Statement,
upon the request of any Initial Purchaser on behalf of any broker-dealer
participating in the Registered Exchange Offer, the Company and the Subsidiary
Guarantors, as applicable, shall:
(i) make reasonably available for inspection by such Initial
Purchaser, and one firm of legal counsel (in addition to local
counsel), one firm of accountants or other agent retained by such
Initial Purchaser, all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries;
provided, however, that, if any such records, documents or other
information relate to pending or proposed acquisitions or dispositions,
or otherwise relate to matters reasonably considered by the Company to
constitute sensitive or proprietary information, the Company need not
provide such records, documents or information unless the foregoing
parties enter into a confidentiality agreement in customary form and
reasonably acceptable to such parties and the Company;
(ii) cause the Company's officers, directors and employees to
supply all relevant information reasonably requested by such Initial
Purchaser or any such legal counsel, accountant or agent in connection
with any such Registration Statement as is customary for similar due
diligence examinations; provided, however, that such information may
not be used for any purpose other than due diligence and provided
further, however, that any information that is designated in writing by
the Company, in good faith, as confidential at the time of delivery of
such information shall be kept confidential by such Initial Purchaser
or any such attorney, accountant or agent, unless such disclosure is
made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a
third party without an accompanying obligation of confidentiality;
(iii) make such representations and warranties to such Initial
Purchaser, in form, substance and scope as are customarily made by
issuers to underwriters in primary underwritten offerings and covering
reasonably requested matters including, but not limited to, those set
forth in the Purchase Agreement;
(iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to such Initial Purchaser and its
counsel, addressed to such Initial Purchaser, covering such matters as
are customarily covered in opinions requested in underwritten offerings
and such other matters as may be reasonably requested by such Initial
Purchaser or its counsel;
(v) obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data are, or are required
to be, included in the Registration Statement) or, if not available
under applicable accounting pronouncements or standards, procedures
letters and updates
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<PAGE> 16
thereto, addressed to such Initial Purchaser (provided that such
letters need not be addressed to any Initial Purchaser to whom, in the
reasonable opinion of the Company's independent public accountants,
addressing such letters is not permissible under applicable accounting
standards), in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
primary underwritten offerings, or if requested by such Initial
Purchaser or its counsel in lieu of a "cold comfort" letter, an
agreed-upon procedures letter under Statement on Auditing Standards No.
35, covering matters requested by such Initial Purchaser or its
counsel; and
(vi) deliver such documents and certificates as may be
reasonably requested by such Initial Purchaser or its counsel,
including those to evidence compliance with Section 4(k) and with
conditions customarily contained in underwriting agreements.
The foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this
subsection shall be performed at the close of the Registered Exchange Offer and
the effective date of any post-effective amendment to the Exchange Offer
Registration Statement.
(s) If a Registered Exchange Offer is to be consummated, upon
delivery of the Securities by Holders to the Company (or to such other person
as directed by the Company) in exchange for the New Securities, the Company
shall mark, or cause to be marked, on the Securities so exchanged that such
Securities are being canceled in exchange for the New Securities. In no event
shall the Securities be marked as paid or otherwise satisfied.
(t) The Company will use its best efforts (i) if the Securities
have been rated prior to the initial sale of such Securities, to confirm such
ratings will apply to the Securities or the New Securities, as the case may be,
covered by a Registration Statement; or (ii) if the Securities were not
previously rated, to cause the Securities covered by a Registration Statement
to be rated with at least one nationally recognized statistical rating agency,
if so requested by Majority Holders with respect to the related Registration
Statement or by any Managing Underwriters.
(u) In the event that any Broker-Dealer shall underwrite any
Securities or participate as a member of an underwriting syndicate or selling
group or "assist in the distribution" (within the meaning of the Rules of Fair
Practice and the By-Laws of the National Association of Securities Dealers,
Inc.) thereof, whether as a Holder of such Securities or as an underwriter, a
placement or sales agent or a broker or dealer in respect thereof, or
otherwise, assist such Broker-Dealer in complying with the requirements of such
Rules and By-Laws, including, without limitation, by:
(i) if such Rules or By-Laws shall so require, engaging a
"qualified independent underwriter" (as defined in such Rules) to
participate in the preparation of the Registration Statement, to
exercise usual standards of due diligence with respect thereto and, if
any portion of the offering contemplated by such Registration Statement
is an underwritten offering or is made through a placement or sales
agent, to recommend the yield of such Securities;
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<PAGE> 17
(ii) indemnifying any such qualified independent underwriter to
the extent of the indemnification of underwriters provided in Section 6
hereof; and
(iii) providing such information to such Broker-Dealer as may be
required in order for such Broker-Dealer to comply with the
requirements of such Rules.
(v) Holders of Securities or New Securities shall not use any
Registration Statement during a period when a stop order has been issued by the
Commission in respect thereof or use the Prospectus during a period when the
use of the Prospectus has been suspended in accordance with instructions of the
Company because of the discovery of any untrue statement or omission of a
material fact therein, provided that all Holders of Securities received prior
written notice of such stop order or suspension.
(w) The Company and the Subsidiary Guarantors shall use
reasonable efforts to take all other steps necessary to effect the registration
of the Securities or the New Securities, as the case may be, covered by a
Registration Statement.
5. Registration Expenses. The Company and the Subsidiary
Guarantors shall bear all expenses incurred in connection with the performance
of its obligations under Sections 2, 3 and 4 hereof and, in the event of any
Shelf Registration Statement, will reimburse the Holders for the reasonable
fees and disbursements of one firm or counsel designated by the Majority
Holders participating in the Shelf Registration to act as counsel for the
Holders in connection therewith, and, in the case of any Exchange Offer
Registration Statement, will reimburse the Initial Purchasers for the
reasonable fees and disbursements of counsel acting in connection therewith.
Each Holder shall pay all underwriting discounts and commissions and transfer
taxes, if any, relating to the sale or disposition of such Holder's Securities
pursuant to the Shelf Registration Statement.
6. Indemnification and Contribution. (a) The Company and the
Subsidiary Guarantors, jointly and severally, agree to indemnify and hold
harmless each Holder of Securities or New Securities, as the case may be,
covered by any Registration Statement (including each Initial Purchaser and,
with respect to any Prospectus delivery as contemplated in Section 4(h) hereof,
each Exchanging Dealer), the directors, officers, employees and agents of each
such Holder and each person who controls any such Holder within the meaning of
either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement as originally filed or in any amendment
thereof, or in any preliminary Prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they are made, not misleading, and agrees to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
17
<PAGE> 18
defending any such loss, claim, damage, liability or action; provided, however,
that the Company and the Subsidiary Guarantors will not be liable in any case
to the extent that any such loss, claim, damage or liability arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any such Holder
specifically for inclusion therein and provided further, however, that with
respect to any untrue statement or omission of a material fact made in any
preliminary Prospectus, the indemnity agreement contained in this Section 6(a)
shall not inure to the benefit of any Holder from whom the person asserting any
such loss, claim, damage or liability purchased the Securities or New
Securities, as the case may be, concerned, to the extent that any such loss,
claim, damage or liability of such Holder occurs under the circumstance where
it shall have been determined by a court of competent jurisdiction by final and
nonappealable judgment that (i) the untrue statement or omission of a material
fact contained in the preliminary Prospectus was corrected in the Prospectus,
(ii) the Company had previously furnished copies of the Prospectus to such
Holder and (iii) such loss, claim, damage or liability results from the fact
that there was not sent or given to such person at or prior to the written
confirmation of the sale of such Securities or New Securities, as the case may
be, to such person, a copy of the Prospectus; and provided, further, however,
that the Company shall not be liable to an indemnified party with respect to
any Prospectus or Registration Statement or any amendment or supplement to any
thereof to the extent that any such loss, claim, damage, liability or action of
such indemnified party arises out of, or is based upon, (a) the use of any
Registration Statement during a period when a stop order has been issued by the
Commission in respect thereof or (b) from the use of the Prospectus during a
period when the use of the Prospectus has been suspended in accordance with
instructions of the Company because of the discovery of any untrue statement or
omission of a material fact therein, provided that all Holders of Securities
received prior written notice of such stop order or suspension and such
indemnified party, knowingly and voluntarily continued to use such Prospectus
ro Registration Statement. The indemnity agreement will be in addition to any
liability which the Company and the Subsidiary Guarantors may otherwise have.
The Company and the Subsidiary Guarantors, jointly and
severally, also agree to indemnify or contribute as provided in Section 6(d) to
Losses of each underwriter of Securities or New Securities, as the case may be,
registered under a Shelf Registration Statement, their directors, officers,
employees or agents and each person who controls such underwriter on
substantially the same basis as that of the indemnification of the Initial
Purchasers and the selling Holders provided in this Section 6(a) and shall, if
requested by any Holder, enter into an underwriting agreement reflecting such
agreement, as provided in Section 4(p) hereof.
(b) Each Holder of securities covered by a Registration
Statement (including each Initial Purchaser and, with respect to any Prospectus
delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer)
severally and not jointly agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who signs such Registration
Statement and each person who controls the Company within the meaning of either
the Act or the Exchange Act, to the same extent as the foregoing indemnity from
the Company to each such Holder, but only with reference to written information
relating to such Holder furnished to the Company by or on behalf of such Holder
specifically for inclusion in the documents referred to in the
18
<PAGE> 19
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses; and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party shall
be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest; (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party; (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action; or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise
or consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section is unavailable to or insufficient to hold harmless an
indemnified party for any reason although within the scope thereof, then each
applicable indemnifying party shall, in lieu of indemnifying such indemnified
party, have a joint and several obligation to contribute to the aggregate
losses, claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which such indemnified party may be subject in such
proportion as is appropriate to reflect the relative benefits received by such
indemnifying party, on the one hand, and such indemnified party, on the other
hand, from the Initial Placement and the Registration Statement which resulted
in such
19
<PAGE> 20
Losses; provided, however, that in no case shall any Initial Purchaser or any
subsequent Holder of any Security or New Security be responsible, in the
aggregate, for any amount in excess of the purchase discount or commission
applicable to such Security, or in the case of a New Security, applicable to
the Security that was exchangeable into such New Security, as set forth on the
cover page of the Final Memorandum, nor shall any underwriter be responsible
for any amount in excess of the underwriting discount or commission applicable
to the securities purchased by such underwriter under the Registration
Statement which resulted in such Losses. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, the indemnifying
party and the indemnified party shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of such indemnifying party, on the one hand, and such indemnified party,
on the other hand, in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company and the Subsidiary Guarantors shall be deemed
to be equal to the sum of (x) the total net proceeds from the Initial Placement
(before deducting expenses) as set forth on the cover page of the Final
Memorandum and (y) the total amount of additional interest which the Company
was not required to pay as a result of registering the securities covered by
the Registration Statement which resulted in such Losses. Benefits received by
the Initial Purchasers shall be deemed to be equal to the total purchase
discounts and commissions as set forth on the cover page of the Final
Memorandum, and benefits received by any other Holders shall be deemed to be
equal to the value of receiving Securities or New Securities, as applicable,
registered under the Act. Benefits received by any underwriter shall be deemed
to be equal to the total underwriting discounts and commissions, as set forth
on the cover page of the Prospectus forming a part of the Registration
Statement which resulted in such Losses. Relative fault shall be determined by
reference to, among other things, whether any alleged untrue statement or
omission relates to information provided by the indemnifying party, on the one
hand, or by the indemnified party, on the other hand, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such untrue statement or omission. The parties agree that it would
not be just and equitable if contribution were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section, each person who controls a Holder within the meaning of either
the Act or the Exchange Act and each director, officer, employee and agent of
such Holder shall have the same rights to contribution as such Holder, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (d).
(e) The provisions of this Section will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder or
the Company or any of the directors, officers, employees, agents or controlling
persons referred to in this Section hereof, and will survive the sale by a
Holder of securities covered by a Registration Statement.
20
<PAGE> 21
7. Underwritten Registrations. (a) If any of the Securities or
New Securities, as the case may be, covered by any Shelf Registration Statement
are to be sold in an underwritten offering, the Managing Underwriters shall be
selected by the Majority Holders participating in the underwritten offering.
(b) No person may participate in any underwritten offering
pursuant to any Shelf Registration Statement, unless such person (i) agrees to
sell such person's Securities or New Securities, as the case may be, on the
basis reasonably provided in any underwriting arrangements approved by the
persons entitled hereunder to approve such arrangements; and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.
8. No Inconsistent Agreements. Neither the Company nor any
Subsidiary Guarantor has, as of the date hereof, entered into, nor shall it, on
or after the date hereof, enter into, any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders herein
or otherwise conflicts with the provisions hereof.
9. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Holders of at least a majority of the then outstanding aggregate
principal amount of Securities (or, after the consummation of any Registered
Exchange Offer in accordance with Section 2 hereof, of New Securities);
provided that, with respect to any matter that directly or indirectly affects
the rights of any Initial Purchaser hereunder, the Company shall obtain the
written consent of each such Initial Purchaser against which such amendment,
qualification, supplement, waiver or consent is to be effective.
Notwithstanding the foregoing (except the foregoing proviso), a waiver or
consent to departure from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders whose Securities or New
Securities, as the case may be, are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect the rights of other
Holders may be given by the Majority Holders, determined on the basis of
Securities or New Securities, as the case may be, being sold rather than
registered under such Registration Statement.
10. Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, telex,
telecopier or air courier guaranteeing overnight delivery:
(a) if to a Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this Section, which
address initially is, with respect to each Holder, the address of such Holder
maintained by the Registrar under the Indenture, with a copy in like manner to
Salomon Smith Barney Inc.
21
<PAGE> 22
(b) if to you, initially at the respective addresses set forth
in the Purchase Agreement; and
(c) if to the Company or any Subsidiary Guarantor, initially at
its address set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have been
duly given when received.
The Initial Purchasers or the Company by notice to the other
parties may designate additional or different addresses for subsequent notices
or communications.
11. Successors. This Agreement shall inure to the benefit of and
be binding upon the successors, assigns and transferees of each of the parties,
including, without the need for an express assignment or any consent by the
Company and the Subsidiary Guarantors thereto, subsequent Holders of Securities
and the New Securities. The Company and the Subsidiary Guarantors hereby agree
to extend the benefits of this Agreement to any Holder of Securities and the
New Securities, and any such Holder may specifically enforce the provisions of
this Agreement as if an original party hereto.
12. Counterparts. This Agreement may be in signed counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same agreement.
13. Headings. The headings used herein are for convenience only
and shall not affect the construction hereof.
14. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York.
15. Severability. In the event that any one of more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
16. Securities Held by the Company, etc. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Securities
or New Securities is required hereunder, Securities or New Securities, as
applicable, held by the Company or its Affiliates (other than in their capacity
as Initial Purchasers) shall be disregarded and deemed not to be outstanding in
determining whether such consent or approval was given by the Holders of such
required percentage.
22
<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, the Subsidiary Guarantors and the several Initial
Purchasers.
Very truly yours,
Telecomunicaciones de Puerto Rico, Inc.
by
-------------------------------
Name:
Title:
Puerto Rico Telephone Company, Inc.,
by
-------------------------------
Name:
Title:
Celulares Telefonica, Inc.,
by
-------------------------------
Name:
Title:
23
<PAGE> 24
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Chase Securities Inc.
J.P. Morgan Securities Inc.
NationsBanc Montgomery Securities LLC
Popular Securities, Inc.
By: Salomon Smith Barney Inc.
by
----------------------
Name:
Title:
For themselves and the other several Initial
Purchasers named in Schedule I to
the Purchase Agreement.
<PAGE> 25
ANNEX A
Each Broker-Dealer that receives New Securities for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. 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 New
Securities received in exchange for Securities where such Securities were
acquired by such Broker-Dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration
Date (as defined herein) 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 such resale. See "Plan of Distribution".
25
<PAGE> 26
ANNEX B
Each Broker-Dealer that receives New Securities for its own account in exchange
for Securities, where such Securities were acquired by such 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
such New Securities. See "Plan of Distribution".
26
<PAGE> 27
ANNEX C
PLAN OF DISTRIBUTION
Each Broker-Dealer that receives New Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Securities. 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 New Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. The Company 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 such
resale. In addition, until __________, 199__, all dealers effecting transactions
in the New Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New
Securities by brokers-dealers. New Securities received by 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 New Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale 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 such Broker-Dealer and/or the purchasers of any such New
Securities. Any Broker-Dealer that resells New Securities 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 such New Securities may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit
resulting from any such resale of New Securities and any commissions or
concessions received by any such 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, a
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, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Broker-Dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Securities (including any
Broker-Dealers) against certain liabilities, including liabilities under the
Securities Act.
[If applicable, add information required by Regulation S-K Items 507 and/or
508. S-K 502(b) legend must appear on the back cover.]
27
<PAGE> 28
ANNEX D
Rider A
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
--- ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
-------------------------------------
Address:
-------------------------------------
Rider B
If the undersigned is not a Broker-Dealer, the undersigned represents that it
acquired the New Securities in the ordinary course of its business, it is not
engaged in, and does not intend to engage in, a distribution of New Securities
and it has no arrangements or understandings with any person to participate in
a distribution of the New Securities. If the undersigned is a Broker-Dealer
that will receive New Securities for its own account in exchange for
Securities, it represents that the Securities to be exchanged for New
Securities were acquired by it as a result of market-making activities or other
trading activities and acknowledges that it will deliver a prospectus in
connection with any resale of such New Securities; however, by so acknowledging
and by delivering a prospectus, the undersigned will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
28
<PAGE> 1
Exhibit 10.1
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
dated as of
May 27, 1998
amended and restated as of
July 21, 1998
among
PUERTO RICO TELEPHONE AUTHORITY
PUERTO RICO TELEPHONE COMPANY
GTE HOLDINGS (PUERTO RICO) LLC
and
GTE INTERNATIONAL TELECOMMUNICATIONS INCORPORATED
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I PURCHASE AND SALE OF SHARES..........................................4
1.01 Purchase and Sale.......................................................4
1.02 Closing.................................................................4
1.03 Actions at Closing......................................................5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY.....................6
2.01 Existence and Power.....................................................6
2.02 Corporate Authorization.................................................6
2.03 Governmental Authorization..............................................7
2.04 Non-Contravention.......................................................7
2.05 Capitalization..........................................................8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY
AS TO THE COMPANY .............................................................9
3.01 Existence and Power.....................................................9
3.02 Corporate Authorization................................................10
3.03 Governmental Authorization.............................................10
3.04 Non-Contravention......................................................11
3.05 Financial Statements...................................................12
3.06 Absence of Certain Changes.............................................12
3.07 Properties.............................................................14
3.08 Licenses...............................................................16
3.09 No Undisclosed Material Liabilities....................................16
3.10 Litigation.............................................................17
3.11 Taxes..................................................................17
3.12 Employee Benefits/Employment Matters...................................18
3.13 Material Contracts.....................................................22
3.14 Insurance Coverage.....................................................24
3.15 Compliance with Laws...................................................24
3.16 Finders' Fees..........................................................25
3.17 Authority Debt.........................................................25
3.18 Environmental Matters..................................................25
3.19 Intellectual Property..................................................27
3.20 Transactions with Affiliates...........................................28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND STRATEGIC PURCHASER ......................................................28
4.01 Organization and Existence; Capitalization.............................28
4.02 Corporate Authorization................................................29
4.03 Governmental Authorization.............................................29
4.04 Non-Contravention......................................................30
4.05 Finders' Fees..........................................................30
4.06 Financing..............................................................31
4.07 Purchase for Investment................................................31
4.08 Ability to Complete the Transaction....................................31
4.09 Certain Understandings of Strategic Purchaser and Purchaser............32
4.10 Legal Compliance.......................................................32
ARTICLE V COVENANTS OF THE AUTHORITY..........................................33
5.01 Conduct of Business....................................................33
5.02 Access to Information..................................................38
5.03 Notices of Certain Events..............................................39
5.04 Release of the Authority Debt..........................................40
(i)
<PAGE> 3
5.05 No Solicitation; Competing Transactions................................40
5.06 Interim Actions by Authority...........................................42
ARTICLE VI COVENANTS OF PURCHASER AND STRATEGIC PURCHASER.....................42
6.01 Confidentiality........................................................42
6.02 Access.................................................................43
6.03 Notice of Certain Events...............................................43
6.04 Conduct................................................................44
6.05 Other Purchasers.......................................................44
6.06 Discount For Educational Institutions..................................46
6.07 Telephone Tariffs......................................................46
6.08 Transfer of Shares.....................................................46
ARTICLE VII COVENANTS OF THE PARTIES.........................................47
7.01 Satisfaction of Closing Conditions.....................................47
7.02 Certain Filings........................................................47
7.03 Execution of Agreements................................................48
7.04 Public Announcements...................................................48
ARTICLE VIII CONDITIONS TO CLOSING...........................................48
8.01 Conditions to the Obligations of Each Party............................48
8.02 Conditions to Obligations of Purchaser and Strategic Purchaser.........51
8.03 Conditions to Obligation of the Authority..............................55
ARTICLE IX EMPLOYEE BENEFITS.................................................56
9.01 Retirement Benefits of Company Employees...............................56
9.02 Involuntary Termination of Employees...................................62
9.03 Voluntary Separation Program...........................................62
9.04 Capital Contribution by Authority......................................62
9.05 Act No. 54 Compliance..................................................67
ARTICLE X INDEMNIFICATION.....................................................67
10.01 Indemnification by Authority..........................................67
10.02 Indemnification for Purchaser's Breach................................68
10.03 Indemnification by Affiliated Group...................................69
10.04 Limitation on Obligations.............................................69
10.05 Indemnification Claim.................................................71
10.06 Notice of Claim.......................................................71
10.07 Indemnitor's Obligations..............................................73
10.08 Date of Notice of Claim...............................................73
10.09 Consent of Indemnification............................................73
10.10 Subrogation...........................................................74
10.11 Limitation on Liability...............................................74
10.12 Calculation Methodology...............................................74
ARTICLE XI TERMINATION.......................................................75
11.01 Grounds for Termination...............................................75
11.02 Effect of Termination.................................................77
ARTICLE XII MISCELLANEOUS....................................................78
12.01 Survival..............................................................78
12.02 Notices...............................................................78
12.03 Amendments; No Waivers................................................80
12.04 Expenses..............................................................80
12.05 Successors and Assigns................................................81
12.06 Governing Law.........................................................81
12.07 Counterparts..........................................................81
12.08 Entire Agreement......................................................81
12.09 Captions; Definitions.................................................82
12.10 Jurisdiction and Immunity.............................................82
12.11 Third Party Beneficiaries; Parties Bound..............................83
(ii)
<PAGE> 4
12.12 INTENTIONALLY OMITTED.................................................83
12.13 Additional Signatories................................................83
(iii)
<PAGE> 5
EXHIBITS
Exhibit A - $50 Million Payment Bond
Exhibit B - $40 Million Payment Bond
Exhibit C-1 - GDB Newco Guaranty for Purchase Agreement
Exhibit C-2 - GDB Newco Guaranty for Other Agreements
Exhibit D - Companion Legislation
Exhibit E - Management Agreement
Exhibit F - Non-Competition Agreement
Exhibit G - Option Agreement
Exhibit H - Other Legislation
Exhibit I - Shareholders Agreement
Exhibit J - Technology Transfer Agreement
(iv)
<PAGE> 6
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT dated as of May 27, 1998, as
amended and restated as of July 21, 1998, by and among Puerto Rico Telephone
Authority (the "Authority" or "Seller"), a public corporation and government
instrumentality of the Commonwealth of Puerto Rico ("Puerto Rico"), Puerto Rico
Telephone Company, a Delaware corporation (the "Company"), GTE Holdings (Puerto
Rico) LLC, a Delaware limited liability company ("Purchaser"), and GTE
International Telecommunications Incorporated, a Delaware corporation
("Strategic Purchaser").
WHEREAS, the Authority is the owner of 100% of the issued and outstanding
shares of common stock, $10 par value (the "Company Shares"), of the Company,
constituting the only capital stock of the Company;
WHEREAS, Act No. 54 of the Legislature of Puerto Rico, approved on August
4, 1997 ("Act No. 54") authorizes the Negotiating Committee for the Sale of the
Assets of the Authority (the "Negotiating Committee") to negotiate the sale of
its assets including the Company Shares and, in connection therewith, to
organize one or more private corporations for the purpose of transferring to it
the Company Shares;
WHEREAS, prior to the Closing (as defined herein), in order to comply with
requirements imposed upon the Company by the Federal Communications Commission
(the "FCC"), the Authority will reorganize the Company into two separate Puerto
Rico corporations, each of which will be a wholly owned subsidiary of the
Authority (each an "Operating Subsidiary," and together with the New Company (as
defined below), collectively, the "Affiliated Group"), and will transfer, by
assignment, merger or otherwise,
<PAGE> 7
all assets and liabilities of the Company relating to its wireless business to
one corporation ("Wireless") (the "Wireless Drop Down") and all remaining assets
and liabilities to the other corporation ("Wireline") (collectively with the
Wireless Drop Down, the "Drop Downs");
WHEREAS, pursuant to authority granted under Act No. 54, the Authority
intends to organize a new Puerto Rico corporation ("New Company") for the
purpose of transferring to the New Company prior to the Closing, all the shares
of capital stock of the Operating Subsidiaries in exchange for shares of common
stock of the New Company representing 100% of the issued and outstanding capital
stock of the New Company (the "New Company Transfer" and together with the Drop
Downs, the "Reorganization");
WHEREAS, in accordance with the requirements of Act No. 54, the
Negotiating Committee conducted a prequalification process to select, from among
all interested bidders, those companies having the required commercial and
financial reputation and financial and technical capacity to conduct the
telecommunications business and provide a telecommunications system that is
technologically advanced and efficient, and invited various companies to
participate in the process of privatizing the Company;
WHEREAS, pursuant to the prequalification process, Strategic Purchaser was
one of the companies selected to participate in the privatization;
WHEREAS, Strategic Purchaser has organized Purchaser for the purpose of
entering into the transactions contemplated herein, and owns and will own at the
Closing all of the total issued and outstanding capital stock of Purchaser;
WHEREAS, in accordance with the requirements of Act No. 54 and the
procedures adopted by the Negotiating Committee,
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Purchaser has been selected by the Negotiating Committee and the Governing Board
of the Authority to purchase an ownership interest in the Company by, subject to
Section 6.05 hereof, purchasing from the Authority that number of shares of
common stock, par value $0.01 per share, of the New Company constituting 51%
plus one (1) New Company Share (the "Purchased Shares") of the outstanding New
Company Shares on the Closing Date;
WHEREAS, Purchaser, subject to Section 6.05 hereof, desires to purchase
the Purchased Shares and the Authority, subject to Section 6.05 hereof, desires
to sell the Purchased Shares to Purchaser (the "Stock Purchase"), in accordance
with the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, the Authority and Purchaser desire to make certain
representations, warranties, covenants and agreements in connection with the
Reorganization and the Stock Purchase, and to set forth the conditions to
closing of the Stock Purchase;
WHEREAS, the parties hereto entered into a Stock Purchase Agreement, dated
as of May 27, 1998, related to the Stock Purchase;
WHEREAS, subsequent to the Act No. 54 Approvals, Purchaser proposed, and
the Authority accepted, amendments to the Stock Purchase Agreement to improve in
material respects the terms and conditions hereof and the benefits to the
Authority, the employees of PRTC and the people of Puerto Rico.
WHEREAS, Popular, Inc. intends to acquire an additional one percent (1%)
of the outstanding Shares of the New Company and to contribute at no cost such
Shares to a trust organized for the benefit of the employees of the New Company
or to contribute $8.7 million to such trust in order that the trust may purchase
such additional one percent.
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WHEREAS, the parties hereto desire to amend and restate such Stock
Purchase Agreement in full;
WHEREAS, Purchaser recognizes the importance of, and is committed after
the Closing Date to maintain, a telecommunications system in Puerto Rico that is
technologically advanced and efficient in serving Puerto Rico, as contemplated
by Act No. 54.
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
Authority, the Company, Purchaser and Strategic Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.01 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, the Authority agrees to sell to Purchaser, and Purchaser agrees
to purchase from the Authority, the Purchased Shares at the Closing. The
purchase price for the Purchased Shares is Four Hundred Forty Three Million and
Seven Hundred Thousand Dollars ($443,700,000) (the "Purchase Price"), which
shall be paid as provided in Section 1.03(e).
1.02 Closing. The closing of the Stock Purchase (the "Closing") shall take
place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison
Avenue, 20th Floor, New York, New York 10022, as soon as possible, but in no
event later than 5 business days after satisfaction or waiver of the conditions
set forth in Article VIII, or such other time or place, after satisfaction or
waiver of the conditions set forth in Article VIII, as Purchaser and the
Authority may agree (the date of the Closing being hereinafter called the
"Closing Date").
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1.03 Actions at Closing. At the Closing, unless effected prior thereto,
the parties shall take the following actions in the following order:
(a) The Authority shall effect the Reorganization.
(b) The New Company shall complete the Financing.
(c) The New Company will pay a dividend to the Authority in the
aggregate amount equal to the Dividend Amount, net of any taxes payable on (i)
the dividends received by the New Company from the Operating Subsidiaries to
fund such dividend, and (ii) the making of such dividend to the Authority (the
"Special Dividend").
(d) The Authority shall cause the New Company and its subsidiaries
to be released from all obligations and Liens under outstanding debts of the
Authority, including those identified in Section 1.03 of the Authority
Disclosure Schedule delivered by the Authority to Purchaser upon execution of
this Agreement (the "Disclosure Schedule").
(e) Purchaser shall deliver to the Authority, the Purchase Price in
immediately available funds by wire transfer to an account of the Authority with
a bank in New York City designated by the Authority at least three (3) business
days prior to the Closing Date.
(f) The Authority shall deliver to Purchaser (and any other direct
purchaser thereof in accordance with the terms of this Agreement) certificates
for the Purchased Shares purchased by such Persons, duly endorsed or accompanied
by stock powers duly endorsed in blank, with any required transfer stamps
affixed thereto.
(g) Popular Inc. (or Purchaser) shall contribute one percent (1%) of
the issued and outstanding shares of the New
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Company on the Closing Date to the stock bonus plan or employee stock ownership
plan and trust referred to in Section 8.02(l)(i) hereof or to contribute $8.7
million to such trust in order that the trust may purchase such additional one
percent.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY
The Authority hereby represents and warrants to Purchaser that:
2.01 Existence and Power. The Authority is validly existing as a public
corporation under the laws of Puerto Rico and has all requisite power, authority
and legal right to conduct its affairs as currently conducted. The Authority has
heretofore made available to Purchaser true and complete copies, as currently in
effect, of the official act creating the Authority (the "Authority Act") and the
bylaws of the Authority.
2.02 Corporate Authorization.
(a) The execution, delivery and performance by the Authority of this
Agreement and the documents to be delivered in connection herewith are within
the Authority's powers and have been duly authorized by the Governing Board of
the Authority and, upon execution thereof, will be duly executed and delivered
by the Authority. All requirements established by Act No. 54 in order for the
transactions contemplated hereby to be consummated have been met, including the
approval of the Stock Purchase by the Governor of Puerto Rico and the
Legislature of Puerto Rico (such approvals by the Legislature and the Governor
being collectively the "Act No. 54 Approval").
(b) This Agreement constitutes the valid and binding agreement of
the Authority, enforceable against it in accordance with its terms, except as
such enforceability may be limited by
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bankruptcy, insolvency, reorganization, moratorium and similar laws relating to
or affecting creditors generally, by general equity principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
or by an implied covenant of good faith and fair dealing.
(c) The Authority entered into the Financing Letter on July 21,
1998.
2.03 Governmental Authorization. The execution, delivery and performance
by the Authority of this Agreement and the documents to be delivered in
connection herewith require no approval or other action by or in respect of, or
filing with, any Puerto Rico or United States Governmental Authority other than:
(i) compliance with any applicable requirements of the Communications Act of
1934, as amended (the "Communications Act") and any rules, regulations,
practices and policies ("FCC Rules") promulgated by the FCC, including those
relating to the transfer of control of the licenses, permits, authorizations and
certificates (the "FCC Licenses") granted by the FCC listed in Section 3.08 of
the Disclosure Schedule; (ii) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"); (iii) compliance with any applicable requirements of the
Telecommunications Regulatory Board of Puerto Rico; (iv) any filings required in
connection with the Authority taking the actions referred to in Sections
1.03(a), (b) and (d) above; and (v) such other actions, consents or filings,
which the failure to obtain or undertake would not have a Material Adverse
Effect on the Affiliated Group taken as a whole.
2.04 Non-Contravention. The execution, delivery and performance by the
Authority of this Agreement and the documents
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<PAGE> 13
to be delivered in connection herewith (other than with respect to the Financing
as to which no representations are made) do not and will not (i) contravene or
conflict with (a) Act No. 54, or (b) the Authority Act or the bylaws of the
Authority, (ii) assuming compliance with the requirements referred to in Section
2.03(i) - (iv), contravene or conflict with or constitute a violation of any
provision of any Puerto Rico or United States law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Authority; (iii)
except as set forth in Section 2.04 of the Disclosure Schedule, contravene,
constitute a default under or breach of, or result in or permit the termination
or suspension of, any Material Contract, material Company Benefit Arrangement,
material Company Employee Plan or other material instrument, binding upon the
Authority or any material license, franchise, permit or other similar
authorization held by the Authority, or (iv) result in the creation or
imposition of any Lien (other than Permitted Liens) on any asset of the
Authority, except Liens that (1) would not have a Material Adverse Effect on the
Affiliated Group, taken as a whole, or (2) occur as a result of the identity or
specific legal or regulatory status of Strategic Purchaser or Purchaser or any
other facts that specifically relate to the business or activities in which
Strategic Purchaser or Purchaser is or proposes to be engaged (other than the
business or activities of the Company as presently conducted).
2.05 Capitalization. The Authority (i) is currently the record and
beneficial owner of all the issued and outstanding Company Shares and (ii) at
the Closing will be the direct or indirect record and beneficial owner of all
the issued and outstanding capital stock of all members of the Affiliated Group,
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<PAGE> 14
in each case, free and clear of any Lien whatsoever. The Authority will transfer
and deliver to Purchaser (and Popular, Inc., to the extent it acquires Shares
directly from the Authority in accordance with Section 6.05 hereof) at the
Closing valid title to the Purchased Shares free and clear of any Lien.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY
AS TO THE COMPANY
The Authority hereby represents and warrants to Purchaser as to the
Company (which for purposes of this Article III shall be deemed to include,
unless the context requires otherwise, the New Company and the Operating
Subsidiaries upon and as of consummation of the Reorganization) that:
3.01 Existence and Power.
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, and
has all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in every jurisdiction where such qualification is required, except
where the failure to so qualify would not have a Material Adverse Effect on the
Affiliated Group, taken as a whole. The Company has made available to Purchaser
true and complete copies, as currently in effect, of the certificate of
incorporation and bylaws of the Company.
(b) Each of the New Company and the Operating Subsidiaries will be a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction
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of incorporation, and will have on the Closing Date all corporate powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business. On such date, the New Company and the Operating
Subsidiaries will be duly qualified to do business as foreign corporations and
will be in good standing in every jurisdiction where such qualification is
required, except where the failure to so qualify would not have a Material
Adverse Effect on the Affiliated Group, taken as a whole. The certificate of
incorporation and bylaws of the New Company and the Operating Subsidiaries as of
the Closing Date shall be reasonably satisfactory to the Purchaser.
3.02 Corporate Authorization.
(a) The execution, delivery and performance by the Company of this
Agreement and the documents to be delivered in connection herewith are within
the Company's powers and have been duly authorized by the Board of Directors of
the Company and, upon execution thereof, will be duly executed and delivered by
the Company.
(b) This Agreement constitutes the valid and binding agreement of
the Company, enforceable against it in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors generally, by
general equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) or by an implied covenant of
good faith and fair dealing.
3.03 Governmental Authorization. The execution, delivery and performance
by the Company of this Agreement and the documents to be delivered in connection
herewith require no action by or in respect of, or filing with, any Governmental
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<PAGE> 16
Authority other than (i) compliance with any applicable requirements of the
Communications Act and any FCC Rules, including those relating to the transfer
of control of the FCC Licenses listed in Section 3.08 of the Disclosure
Schedule; (ii) compliance with any applicable requirements of the HSR Act; (iii)
compliance with any applicable requirements of the Telecommunications Regulatory
Board of Puerto Rico; (iv) filings with Governmental Authorities in connection
with the Reorganization and the Financing; and (v) such actions, consents or
filings, the failure to obtain or undertake would not have a Material Adverse
Effect on the Affiliated Group, taken as a whole.
3.04 Non-Contravention. The execution, delivery and performance by the
Company of this Agreement and the documents to be delivered in connection
herewith (other than with respect to the Financing as to which no
representations are made) do not and will not (i) contravene or conflict with
(a) Act No. 54, or (b) the certificate of incorporation or bylaws of the
Company, (ii) assuming compliance with the requirements referred to in Section
3.03(i) - (iv), contravene or conflict with or constitute a violation of any
provision of any Puerto Rico or United States law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company; (iii)
except as set forth in Section 3.04 of the Disclosure Schedule, contravene,
constitute a default under or breach of, or result in or permit the termination
or suspension of, any Material Contract, material Company Benefit Arrangement,
material Company Employee Plan or other material instrument binding upon the
Company or any material license, franchise, permit or other similar
authorization held by the Company, or (iv) result in the creation
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<PAGE> 17
or imposition of any Lien (other than Permitted Liens) on any asset of the
Company except Liens that (1) would not have a Material Adverse Effect on the
Affiliated Group, taken as a whole, or (2) occur as a result of the identity or
specific legal or regulatory status of Strategic Purchaser or Purchaser or any
other facts that specifically relate to the business or activities in which
Strategic Purchaser or Purchaser is or proposes to be engaged (other than the
business or activities of the Company as presently conducted).
3.05 Financial Statements. The audited financial statements of the
Authority as of and for the fiscal years ended December 31, 1997, 1996 and 1995,
appended hereto as Schedule 3.05A, 3.05B and 3.05C, respectively, and the
unaudited financial statements of the Company as of and for the fiscal years
ended December 31, 1997, 1996 and 1995, appended hereto as Schedule 3.05D, 3.05E
and 3.05F, respectively, in each case solely to the extent the same relate to
the Company (the "Financial Statements"), and the interim financial statements
of the Company as of and for the period ended March 31, 1998, appended hereto as
Schedule 3.05G (the "Interim Financial Statements"), fairly present, in all
material respects, in conformity with GAS (except as may be indicated in the
notes thereto and except, as to Interim Financial Statements, the lack of notes
and subject to normal year end adjustments), the financial position of the
Company as of the dates thereof and the results of operations of the Company for
those periods.
3.06 Absence of Certain Changes. Since the Balance Sheet Date and except
for (i) matters set forth or reflected in the Interim Financial Statements, (ii)
matters otherwise set forth in Section 3.06 or 3.13 of the Disclosure Schedule,
(iii) matters
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consented to by Purchaser and (iv) matters expressly contemplated or permitted
by this Agreement, the Company has conducted its business in the ordinary course
and there has not been:
(a) any Material Adverse Change in the Affiliated Group, taken as a
whole, other than changes in the Affiliated Group arising from any strike, labor
disturbance or work stoppage by employees of the Affiliated Group between May
27, 1998 and July 21, 1998;
(b) any incurrence, assumption or guarantee by the Company of any
indebtedness for borrowed money other than in the ordinary course of business
but in no event for an aggregate amount in excess of $10,000,000;
(c) any creation or assumption by the Company of any Lien on any
material asset other than any Permitted Lien;
(d) any making by the Company of any loan, advance or capital
contributions to or investment in, any Persons in an aggregate amount in excess
of $10,000,000;
(e) any damage, destruction or other casualty loss affecting the
business or assets of the Company which, after giving effect to payments to the
Company under applicable insurance policies, has had or will have a Material
Adverse Effect on the Affiliated Group, taken as a whole;
(f) except as contemplated in the Capital Budget or the Final
Budget, any transaction or commitment made, or any contract or agreement entered
into, by the Company relating to its assets or business or any relinquishment by
the Company of any contract or other right, in each case material to the
Affiliated Group, taken as a whole, other than transactions and commitments made
on an arm's length basis in the ordinary course of business in an amount not
exceeding $5,000,000 individually or
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in a series of related transactions and those contemplated by this Agreement;
(g) any change in any material method of financial accounting or
financial accounting practice by the Company except for any such change required
by reason of a concurrent change in GAS or regulations under the Communications
Act;
(h) (i) except in the ordinary course of business consistent with
past practice or as required by law, collective bargaining agreements or
existing contracts, any hiring of employees or entering into any employment,
deferred compensation or other agreement (or any amendment to any such existing
agreements) with any director, officer or key employee of the Company, or
increase in compensation, bonus or other benefits payable to directors, officers
or key employees of the Company, or (ii) except as required by law, collective
bargaining agreements or existing contracts, any increase in benefits payable
under existing, or any institution of any, severance or termination pay policies
or employment agreements of the Company; or
(i) any dividend or other distribution by the Company in respect of
its capital stock or redemption, return of capital or similar transactions
except as required by the Indenture and the proceeds of which were applied as
required or permitted by the Indenture other than to the voluntary prepayment of
the principal amount of the debt issued under the Indenture.
3.07 Properties.
(a) Except as disclosed on Schedule 3.07 hereto, the Company has
good and marketable title to, or in the case of leased property has valid
leasehold interests in, all material properties and assets (whether real,
personal, tangible or
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intangible) reflected on the Balance Sheet or acquired after the Balance Sheet
Date free and clear of any Liens (i) except for properties and assets sold since
such Balance Sheet Date in the ordinary course of business on an arm's length
basis, and (ii) other than Liens listed, or not required to be listed, in
Section 3.07(c) of the Disclosure Schedule and Permitted Liens. Section 3.07(a)
of the Disclosure Schedule contains a list of certain real property owned by the
Company including any real property having an estimated fair market value in
excess of $2,000,000. The plant, machinery and equipment owned by the Company,
taken as a whole, are in good operating condition and repair (ordinary wear and
tear excepted).
(b) Except as set forth in Section 3.07(b) of the Disclosure
Schedule: (i) no violation of any law, regulation, ordinance, permit, order or
license (including, without limitation, laws, regulations or ordinances relating
to zoning, city planning or similar matters) relating to any of the properties
or assets of the Company currently exists or has existed at any time since
January 1, 1995, except for violations which have been cured or have not had and
will not have, individually or in the aggregate, a Material Adverse Effect on
the Affiliated Group, taken as a whole; and (ii) there are no developments
affecting any of such properties or assets pending or, to the knowledge of the
Authority or the Company, threatened, which might materially detract from the
value of such property or assets, materially interfere with any present or
intended use of any such property or assets or materially adversely affect the
marketability of such properties or assets.
(c) Section 3.07(c) of the Disclosure Schedule contains a list of
all Liens (other than Liens arising in
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connection with the Financing or by operation of law) on assets of the Company
securing obligations in excess of $1,000,000.
3.08 Licenses. Section 3.08 of the Disclosure Schedule lists:
(a) all FCC Licenses and other material licenses held by the Company
and used in the operation of its business. Such licenses have been granted by
the FCC, Puerto Rico or other Governmental Authority and are in full force and
effect, and the Company is the authorized holder of each such license. Such
licenses constitute all the material licenses and material authorizations
required for the Company to operate its business as currently conducted; and
(b) all pending applications of the Company to the FCC, Puerto Rico
or other Governmental Authority for a material license for use in the operation
of the Company's business.
3.09 No Undisclosed Material Liabilities. Except as disclosed in Sections
3.09 and 3.10 of the Disclosure Schedule, there are no liabilities of the
Company other than:
(a) liabilities disclosed or provided for in the Financial
Statements or the Interim Financial Statements;
(b) liabilities incurred under this Agreement or expressly
contemplated in this Agreement to be incurred;
(c) liabilities or obligations of the Company under contracts to
which the Company is, or prior to the Closing Date becomes, a party;
(d) liabilities incurred in the ordinary course of business which,
individually or in the aggregate, excluding liabilities referred to in the
foregoing clauses (a) through (c), would not have a Material Adverse Effect on
the Affiliated Group, taken as a whole; and
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<PAGE> 22
(e) liabilities with respect to Tax matters, which are covered only
by the representations and warranties set forth in Section 3.11 hereof.
3.10 Litigation. Except as set forth in Section 3.10 or 3.12 of the
Disclosure Schedule, and except with respect to claims, grievances,
arbitrations, actions, suits, investigations or proceedings brought or
threatened after May 27, 1998 with respect to matters, facts or circumstances
listed or referred to in such Section 3.10 of the Disclosure Schedule, there is
no claim, grievance, arbitration, action, suit, investigation or proceeding
pending before any Governmental Authority against, or to the knowledge of the
Authority or the Company, threatened against the Company or any of its
properties (including, without limitation, the licenses described in Section
3.08) which if adversely determined or resolved, could reasonably be expected to
result in uninsured liability in excess of $1,000,000 to the Company; provided
that representations with respect to Tax matters are covered only by Section
3.11 hereof.
3.11 Taxes. (i) The Company has filed proper and accurate Tax returns and
estimates for all years and periods (and portions thereof) for which any such
returns were due and all such returns and estimates were prepared in the manner
required by applicable law; (ii) any and all amounts shown on such returns and
reports to be due and payable have been paid in full; (iii) the Company has no
liability for Taxes, other than Taxes accrued in the ordinary course of business
since January 1, 1998, which the Company has paid on a timely basis, and accrued
appropriate reserves for Taxes not yet due in 1998 and other than Taxes being
contested in good faith the liability for which is properly reserved for in the
Financial Statements; (iv) the Company and
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<PAGE> 23
the Affiliated Group have not incurred and will not incur any liability for
Taxes with respect to the Reorganization; (v) there is no action, suit,
proceeding, audit or claim now pending, or to the knowledge of the Authority or
the Company, proposed, against or with respect to the Company in respect of any
Tax payable in respect of periods on or prior to the Closing Date; and (vi) no
assessment of any Taxes has been made, or to the knowledge of the Authority or
the Company, is contemplated against the Authority or Company or any related
trust on the basis of a failure of a qualification or exemption referred to in
the last sentence of Section 3.12(c).
3.12 Employee Benefits/Employment Matters.
(a) Section 3.12 of the Disclosure Schedule identifies each
"employee benefit plan", as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") which is maintained,
administered or contributed to by the Company and covers any officer, director,
employee or former officer, director or employee of the Company with the
exception of (i) the Retirement System and (ii) any disability benefits mandated
by the laws of Puerto Rico. Copies of the plans identified in Section 3.12 of
the Disclosure Schedule (and, if applicable, related trust agreements) and all
amendments thereto and written interpretations thereof have been made available
to Purchaser together with (i) the most recent annual report, if any, prepared
in connection with any such plan (Forms 5500 Series and all Schedules and
Exhibits to such reports including, if applicable, Schedule B thereto and
Department of Treasury Form 480.70 (OE)) and (ii) the most recent actuarial
valuation report, if any, prepared in connection with any such plan which is a
"defined benefit plan," as defined in Section 3(35) of ERISA.
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<PAGE> 24
Such plans are hereinafter referred to collectively as the "Company Employee
Plans". No Company Employee Plan is a multiemployer plan (as defined in Section
3(37) of ERISA) (a "Multiemployer Plan") or a multiple employer plan (described
in Section 413(c) of the United States Internal Revenue Code of 1986, as amended
(the "Code"))(a "Multiple Employer Plan"). The Company has not, since 1980,
participated in or contributed to any Multiemployer Plan or Multiple Employer
Plan, and there are no outstanding withdrawal, termination or other liabilities
associated with such plans.
(b) Each Company Employee Plan that is intended to be qualified
under Section 401(a) of the Code or Section 1165(a) of the Puerto Rico Internal
Revenue Code of 1994, as amended (the "PR Code") has been determined by the
United States Internal Revenue Service and the Puerto Rico Department of the
Treasury, respectively, to be so qualified and no event has occurred since the
date of such determination that would adversely affect such qualification; each
trust created under any such Company Employee Plan is exempt from tax under
Section 501(a) of the Code and Section 1165(a) of the PR Code and has been so
exempt during the period from creation to date. The Authority has made available
to Purchaser the most recent determination letters of the Internal Revenue
Service and Puerto Rico Department of the Treasury relating to each such Company
Employee Plan. Notwithstanding that the Company may be characterized as a
government agency or instrumentality under Section 3(32) of ERISA, each Company
Employee Plan has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA, the Code and the
19
<PAGE> 25
PR Code, which would be applicable to such Company Employee Plans if the
Authority or the Company were not considered governmental agencies or
instrumentalities. Except as disclosed in Section 3.12 of the Disclosure
Schedule, all required annual reports (Form 5500 Series) for Company Employee
Plans have been timely filed. With respect to any reporting deficiency disclosed
in Section 3.12, the Company shall file all required annual reports on or before
the Closing Date, and the Authority shall pay any penalty (with interest, if
applicable) that is assessed with respect to any such filing.
(c) Section 3.12 of the Disclosure Schedule identifies each
employment, director, severance or similar contract, arrangement or policy
(exclusive of any such contract which is terminable by the Company within 30
days without liability to the Company and is individually immaterial to the
Company), and each material plan or arrangement, including any such plan or
arrangement mandated by Puerto Rico or other applicable law, providing for
severance benefits, insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits or for deferred
compensation, profit-sharing, bonuses, stock options, or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
(including post-retirement medical, life insurance or death benefits) that (i)
is not a Company Employee Plan, (ii) is entered into, maintained, or contributed
to, as the case may be, by the Company and (iii) covers any employee, director,
or former employee or director, of the Company. Such contracts, plans and
arrangements, copies or descriptions of all of which previously have been made
available to Purchaser, are hereinafter referred
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to collectively as the "Company Benefit Arrangements". Each Company Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Benefit Arrangements. No investigation,
audit or review by the Internal Revenue Service ("IRS"), the Department of Labor
("DOL") or the Puerto Rico Treasury Department is currently pending, or to the
knowledge of the Authority and Company, is contemplated in which, on one hand,
the IRS or DOL, under Section 401(a) or Section 501 of the Code, or the Puerto
Rico Treasury Department, under Section 1165(a) of the PR Code, has asserted
that any plan intended to be qualified, is not qualified or that any related
trust is not exempt.
(d) Except for any voluntary separation program referred to in
Section 9.03, neither the Closing of this Agreement nor consummation of any
related transactions contemplated by this Agreement, including the
Reorganization, will trigger any severance or separation pay liabilities,
accelerated or increased bonus payments, accelerated vesting of stock options or
increased or accelerated payments under any Company Employee Plan or Company
Benefit Arrangement.
(e) Except as set forth in Section 3.12 of the Disclosure Schedule,
the Company is in material compliance with all laws, regulations, orders and
permits which relate to employment matters or the use of temporary employees,
independent contractors and consultants, including, but not limited to, those
governing wages, hours, and benefits and those prohibiting discrimination and
unfair labor practices.
(f) Except as set forth in Section 3.10 of the Disclosure Schedule,
no litigation or administrative proceeding
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is pending, or to the knowledge of the Company is threatened (other than with
respect to routine claims for benefits in accordance with terms of the Company
Employee Plans), by any participants, beneficiaries (including former
participants and beneficiaries) or other Persons in connection with the Company
Employee Plans or Company Benefit Plan Arrangements.
3.13 Material Contracts.
(a) Except for agreements, contracts, plans, leases, arrangements or
commitments (x) entered into after May 27, 1998 in compliance with this
Agreement or (y) disclosed in Section 3.08, 3.12 or 3.13 of the Disclosure
Schedule, the Company is not a party to:
(i) any lease that (x) has a remaining term, as of May 27,
1998, of over one year in length of obligation on the part of the Company or
which is not terminable by the Company within one year without penalty, and (y)
provides for annual rentals of $1,000,000 or more;
(ii) any contract for the purchase of materials, supplies,
goods, services, equipment or other assets that (x)(A) has a remaining term, as
of May 27, 1998, of over one year in length of obligation on the part of the
Company or which is not terminable by the Company within one year without
penalty, and (B) provides for a payment by the Company in any year of $1,000,000
or more, or (y) provides for aggregate payments by the Company of $2,500,000 or
more;
(iii) any sales, distribution, services or other similar
agreement providing for the sale by the Company of materials, supplies, goods,
services, equipment or other assets that (x) has a remaining term, as of May 27,
1998, of over one year in length of obligation on the part of the Company and
which
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is not terminable by the Company within one year without penalty, and (y)
provides for a payment to the Company in any year of $1,000,000 or more;
(iv) any material partnership, joint venture or other similar
contract, arrangement or agreement;
(v) any material contract relating to indebtedness for
borrowed money or the deferred purchase price of property (whether incurred,
assumed, guaranteed or secured by any asset), except contracts relating to
indebtedness incurred in the ordinary course of business in an amount not
exceeding $1,000,000;
(vi) any material license agreement, franchise agreement or
agreement in respect of similar rights granted to or held by the Company or
granted by the Company;
(vii) any contract or other document that substantially
limits, or may substantially limit, the freedom of the Company to compete in any
line of business or with any Person or in any area or which would so limit, or
may substantially limit, the freedom of the Company after the Closing Date, or
that binds, or may bind, the Company to material exclusive purchase, sales or
distribution arrangements;
(viii) any material contract relating to the pooling, sharing
or division of costs, revenue or income;
(ix) any collective bargaining or other material labor
agreement; or
(x) interconnection, correspondent, settlement, resale or
other material telecommunications agreements with telecommunications carriers.
(b) Each agreement, contract, plan, lease, arrangement and
commitment described in Section 3.13(a)(i) through (x) above
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(the "Material Contracts") is, except as disclosed in Section 3.13 of the
Disclosure Schedule, a valid and binding agreement of the Company and is in full
force and effect, and neither the Company nor, to the knowledge of the Authority
or the Company, any other party thereto is in default in any material respect
under the terms of any such Material Contract.
(c) Except as disclosed in Section 3.13 of the Disclosure Schedule
and except for agreements, contracts, plans, leases, arrangements or commitments
entered into after the date of this Agreement in compliance with this Agreement,
the Authority is not a party to any contracts or agreements affecting the
business of the Company which are material to the business of the Company.
3.14 Insurance Coverage. Section 3.14 of the Disclosure Schedule lists all
material insurance policies and fidelity bonds, currently in effect, covering
the assets, business, equipment, properties, operations, employees, officers and
directors of the Company. There is no material claim by the Company pending
under any of such policies or bonds as to which the Company has received notice
that coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. The Authority does not know of any threatened
termination of, or premium increase with respect to, any of such policies or
bonds.
3.15 Compliance with Laws. The Company has been since January 1, 1995, and
is, in material compliance with all applicable provisions of all applicable
laws, statutes, ordinances, regulations, orders, permits, authorizations,
licenses and any other legal requirements, except: (a) those identified in
Section 3.15 of the Disclosure Schedule; (b) where
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such noncompliance has been cured; and (c) those relating to Taxes, ERISA and
Environmental Laws which are governed by other sections of this Article III.
3.16 Finders' Fees. Except for Morgan Stanley & Co. Incorporated, whose
fees will be paid by the Government Development Bank for Puerto Rico ("GDB"),
and the GDB, whose fees shall be paid by the Authority, there is no investment
banker, broker, finder or other intermediary which has been retained by or is
authorized to act on behalf of Puerto Rico, GDB, the Authority, or the Company
who might be entitled to any fee or commission from Purchaser, the Company, or
any of their respective affiliates upon consummation of the transactions
contemplated herein.
3.17 Authority Debt. Except for the Authority Debt or as disclosed in
Section 3.13 of the Disclosure Schedule, the Company has no outstanding
obligations for borrowed money or any guarantees of any such obligation of any
other Person.
3.18 Environmental Matters.
(a) Except as set forth in Section 3.18 of the Disclosure Schedule,
the Company is in material compliance with all applicable Environmental Laws and
permits related to environmental matters. All material permits and other
governmental authorizations currently held by the Company pursuant to applicable
Environmental Laws are identified in Section 3.18 of the Disclosure Schedule.
The permits so identified are all of the material environmental permits required
for the current operations and activities of the Company. The Company is in
compliance in all material respects with such permits and authorizations, and
neither the Reorganization nor
25
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the Closing shall result in or permit the termination of, or give rise to any
limitation on, any such permit or authorization.
(b) Except as set forth in Section 3.18 of the Disclosure Schedule,
the Company has not received any communication (written or oral), whether from a
Governmental Authority, citizens group, employee or otherwise, that alleges that
the Company is not in compliance with applicable Environmental Laws or
environmental permits.
(c) Except as set forth in Section 3.18 of the Disclosure Schedule,
there is no Environmental Claim pending or, to the knowledge of the Authority or
the Company, threatened against the Company.
(d) Except as set forth in Section 3.18 of the Disclosure Schedule,
there are no past or present actions, activities, circumstances, conditions,
events or incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Regulated Substance that is reasonably
likely, to the knowledge of the Authority and the Company, to form the basis of
any Environmental Claim against the Company.
(e) Except as set forth in Section 3.18 of the Disclosure Schedule,
the Company has not disposed of or released any Regulated Substances at any
off-site location, except in compliance with all applicable Environmental Laws.
(f) Except as set forth in Section 3.18 of the Disclosure Schedule,
the Company has not disposed of or released Regulated Substances on any property
owned, operated or leased by the Company, except in compliance with all
applicable Environmental Laws.
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(g) Without in any way limiting the generality of the foregoing: (i)
all on-site and off-site locations where the Company has since January 1, 1995
stored, disposed or arranged for the disposal of Regulated Substances are
identified in Section 3.18 of the Disclosure Schedule; (ii) all underground
storage tanks located on property owned, operated or leased by the Company, are
identified in Section 3.18 of the Disclosure Schedule 3.18; (iii) except as set
forth in Section 3.18 of the Disclosure Schedule, there is no asbestos contained
in or forming part of any building, building component, structure or office
space owned, operated or leased by the Company except in compliance with
applicable Environmental Laws; and (iv) except as set forth in Section 3.18 of
the Disclosure Schedule, no polychlorinated biphenyls (PCBs) are used or stored
at any property owned, operated or leased by the Company, except in compliance
with applicable Environmental Laws.
3.19 Intellectual Property. Section 3.19 of the Disclosure Schedule lists
or identifies all pending or issued registrations of Intellectual Property owned
or used by the Company in the Company's business as currently conducted. The
Company is the sole and exclusive owner of all such Intellectual Property stated
to be owned by it in such Schedule and is not a licensor in respect of any such
Intellectual Property or rights or interests therein. The Company owns or
possesses adequate licenses or other rights to use all Intellectual Property of
any Person required for the Company's business as currently conducted and there
are no Liens on such Intellectual Property. Except as set forth in Section 3.19
of the Disclosure Schedule, no claim is pending or, to the knowledge of the
Authority or the Company, threatened or contemplated to the effect that (i) the
current or
27
<PAGE> 33
past operations of the Company infringe or conflict with the asserted rights of
any Person in respect of any Intellectual Property of any Person, or (ii) any
Intellectual Property is invalid, unenforceable, or not owned solely and
exclusively by the Company (other than rights or licenses in Intellectual
Property of any Person as set forth in Section 3.19 of the Disclosure Schedule).
No Intellectual Property shall terminate or be amended as a result of the
Reorganization or the Closing.
3.20 Transactions with Affiliates. Except as set forth in Sections 3.12,
3.13 and 3.20 of the Disclosure Schedule, (i) there are no arrangements,
contracts or agreements between the Company, on the one hand, and the Authority
or the GDB, on the other hand, other than in the ordinary course of business
relating to the provision of telecommunications services, (ii) there are no
material arrangements, contracts or agreements between the Company, on the one
hand, and any of the Puerto Rico Entities, on the other hand, other than those
entered into in the ordinary course of business, and (iii) there are no material
contracts or agreements between the Company, on the one hand, and the officers,
directors or key employees of the Company or the GDB, on the other hand, which
in any case under clauses (i), (ii) and (iii) will survive the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND STRATEGIC PURCHASER
Purchaser and Strategic Purchaser each hereby jointly and severally
represent and warrant to the Authority that:
4.01 Organization and Existence; Capitalization. Each of Purchaser and
Strategic Purchaser is a Person duly incorporated or formed, validly existing
and in good standing under the laws
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of its jurisdiction of incorporation or formation. Purchaser's authorized
capitalization consists of one hundred (100) units, all of which are owned by
the Strategic Purchaser. True and correct copies of the constitutive documents
of Purchaser are attached hereto as Schedule 4.01.
4.02 Corporate Authorization.
(a) The execution, delivery and performance by each of Purchaser and
Strategic Purchaser of this Agreement and the consummation by each of them of
the transactions contemplated herein are within the corporate or other powers of
each of them and have been duly authorized by all necessary corporate or other
action on the part of each of them.
(b) This Agreement constitutes a valid and binding agreement of each
of Purchaser and Strategic Purchaser, enforceable against each in accordance
with its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or affecting
creditors generally, by general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
4.03 Governmental Authorization. The execution, delivery and performance
by Purchaser and Strategic Purchaser of this Agreement require no action by or
in respect of, or filing with, or consent of any Governmental Authority, by
Purchaser or Strategic Purchaser other than (i) compliance with any applicable
requirements of the HSR Act; (ii) compliance with any applicable requirements of
the Communications Act or FCC Rules, including those relating to the transfer of
control of the FCC Licenses listed in Section 3.08 of the Disclosure Schedule,
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(iii) compliance with any applicable requirements of the Telecommunications
Regulatory Board of Puerto Rico; and (iv) compliance with any applicable
requirements imposed by the laws, rules or regulations of the Governmental
Authorities, as set forth in Section 4.03 of the Disclosure Schedule.
4.04 Non-Contravention. The execution, delivery and performance by each of
Purchaser and Strategic Purchaser of this Agreement do not and will not (i)
contravene or conflict with the certificate of incorporation or bylaws or other
formation documents of Purchaser and Strategic Purchaser, or (ii) assuming
compliance with the matters referred to in Section 4.03, contravene or conflict
with any provision of any law, regulation, judgment, injunction, order or decree
binding upon Purchaser or Strategic Purchaser or (iii) constitute a default of
Purchaser or Strategic Purchaser under any provision of any agreement, contract
or other instrument binding upon Purchaser or Strategic Purchaser which would
adversely affect the ability of the Purchaser or Strategic Purchaser to meet its
obligations hereunder or which would reasonably likely result in any liability
to the Authority or the Company. The execution, delivery and performance of this
Agreement require no action or filing by the Affiliated Group, the Authority or
the Puerto Rico Entities with, nor incurrence of any obligation on the part
thereof to, any foreign Governmental Authority having jurisdiction by reason of
the status of Purchaser or Strategic Purchaser.
4.05 Finders' Fees. There is no investment banker, broker, finder or other
intermediary acting for or on behalf of Purchaser or Strategic Purchaser or any
of Purchaser's or Strategic Purchaser's affiliates, partners, agents or
representatives who
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might be entitled to any fee or commission from the Authority or the Affiliated
Group or Puerto Rico or any instrumentality thereof upon consummation of the
transactions contemplated herein.
4.06 Financing. Purchaser has binding commitments from Strategic Purchaser
for, and will on the Closing Date have, sufficient funds available to purchase
the Purchased Shares, and Strategic Purchaser has entered into the Financing
Letter on July 21, 1998. Purchaser and Strategic Purchaser have secured a
commitment letter with respect to the Financing in the amount of $1.5 billion.
4.07 Purchase for Investment. Purchaser is purchasing the Purchased Shares
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof, except as permitted under the
Shareholders Agreement in compliance with applicable securities laws.
4.08 Ability to Complete the Transaction. To the knowledge of Purchaser
and Strategic Purchaser, assuming the accuracy of the representations and
warranties of the Authority contained in this Agreement, there is no fact or
circumstance which might reasonably be expected to result in Purchaser's or
Strategic Purchaser's inability to (a) obtain any licenses, authorizations,
consents or approvals from third Persons or Governmental Authorities required in
order for Purchaser or Strategic Purchaser to consummate the transactions
contemplated by this Agreement, (b) comply with any applicable requirements set
forth in clauses (i) through (iv) of Section 4.03 hereof, or (c) comply with the
conditions set forth in Sections 8.01(b), (c), (d), (e), (f), (g) and (h) and
Section 8.03 of this Agreement.
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4.09 Certain Understandings of Strategic Purchaser and Purchaser.
Strategic Purchaser and Purchaser acknowledge that they have had sufficient
opportunity to make whatever investigation they have deemed necessary and
advisable for purposes of determining whether or not to enter into this
Agreement and consummate the transactions contemplated herein, and acknowledge
and agree that, except to the extent of the express representations, warranties,
agreements and covenants contained in this Agreement, and the agreements entered
into in connection herewith, Purchaser and Strategic Purchaser have executed and
delivered this Agreement and are consummating the transactions contemplated by
this Agreement solely in reliance upon their own investigation and without any
other express or implied warranties whatsoever. Strategic Purchaser and
Purchaser acknowledge that, except as provided herein (including the Companion
Legislation) or the agreements entered into in connection herewith, no
representations or warranties are made by the Authority as to any announced or
future changes in any Governmental Authority statutes, rules, regulations,
programs, plans or constraints (collectively, "Governmental Action") which are
or may become applicable to or have an effect upon the businesses, operations,
or financial condition of any members of the Affiliated Group.
4.10 Legal Compliance. Purchaser and Strategic Purchaser each represents
that it has complied with the requirements of Article 8(e) of Act No. 54 and
each certifies that:
(a) (i) any tax returns, statements, reports and forms which were
required to be filed with any Puerto Rico taxing authority by the Strategic
Purchaser, GTE Corporation and its consolidated subsidiaries within the past
five years with respect
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to its activities in Puerto Rico (collectively, the "Returns") have been filed
or will be filed on or before the Closing Date in accordance with any applicable
laws; (ii) all of such companies have timely paid taxes payable to any Puerto
Rico Governmental Authority (including payments in respect of unemployment
benefits, workmen's compensation, social security for chauffeurs and withholding
of employee taxes), if any, shown as due and payable on the Returns that have
been filed; and (iii) there is no action, suit, proceeding, audit or claim now
pending or, to the knowledge of Purchaser and Strategic Purchaser, proposed
against or with respect to any of such companies in respect of any tax payable
to any Puerto Rico Governmental Authority.
(b) It has not paid and it will not pay any commission or bonus, and
it has not granted any direct or indirect financial benefit, to any public
official or employee, nor to any former public official or employee,
participating in the privatization process while discharging his/her public
service duties.
ARTICLE V
COVENANTS OF THE AUTHORITY
The Authority agrees that:
5.01 Conduct of Business. From May 27, 1998 until the Closing Date, the
Authority has caused and shall cause the Affiliated Group to conduct its
business in the ordinary course and to use commercially reasonable efforts to
maintain or improve its customer service performance levels and to preserve
intact its business organization and relationships with customers and other
third parties, to the extent the officers of the Affiliated Group deem such
preservation to be in the best interests of the Affiliated Group.
Notwithstanding the foregoing, from May 27, 1998 until the Closing Date, except
as contemplated in this
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Agreement (including but not limited to the Reorganization) or the Capital
Budget or the Final Budget, or except with the written consent of Purchaser,
which consent will not be unreasonably withheld (which consent will be deemed
given upon approval by Purchaser of the request-for-bid-package to be
promulgated by the Affiliated Group with respect to contracts subject to
applicable procurement laws, rules or regulations), the Authority will not
permit any of the members of the Affiliated Group to:
(a) adopt or propose any change in its certificate of incorporation
or bylaws;
(b) acquire a material amount of assets other than pursuant to
existing contracts or commitments or as permitted pursuant to this Section 5.01;
(c) sell, lease, license or otherwise dispose of any material assets
or property except (i) pursuant to existing contracts or commitments, (ii) in
the ordinary course of business not to exceed $1,000,000 in any single
transaction or series of related transactions or $7,000,000 in the aggregate in
any calendar quarter, or (iii) in connection with the Reorganization or pursuant
to Section 5.05 hereof;
(d) except as to agreements required to be entered into, amended or
modified, by applicable laws, regulations or decrees, (i) enter into, terminate
or materially amend (x) the Indenture or (y) any Material Contract or any other
arrangement or contract (other than Material Contracts or other arrangements or
contracts for the sale of telecommunication services in the ordinary course of
business consistent with past practice) not terminable on less than 180 days'
notice or requiring the payment by any Person of more than $1,000,000
individually or in a series
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of related transactions or $7,000,000 in the aggregate in any calendar quarter
or (ii) enter into, renew or extend any contract heretofore identified in
writing by Strategic Purchaser to the Authority or enter into any new consulting
contract providing for compensation in excess of $1 million;
(e) (i) except as to agreements required to be entered into,
amended, modified or extended by applicable laws, regulations or decrees, enter
into any, or extend or amend or modify in any material respect any
interconnection, correspondent, settlement, resale or other material
telecommunications agreements with telecommunications carriers including any
interconnection or sales agreement between the New Company and the Operating
Subsidiary; provided that, the Company shall provide notice to Purchaser prior
to entering into any such material agreements, or (ii) engage in the provision
of interstate or international telecommunications services into and from Puerto
Rico;
(f) enter into or extend the maturity date of any agreement for
borrowed money or declare, pay or set aside funds for the payment of dividends
or other distributions in respect of the Company's capital stock (other than the
Dividend Amount) not required by the Indenture, or voluntarily fail to make any
material investment or reserve equivalent funds to make the material investments
provided for in the Capital Budget (other than any investment identified by
Strategic Purchaser in writing on or prior to May 27, 1998) unless such
investment is not permitted by the Indenture;
(g) enter into, terminate or materially amend any collective
bargaining agreement or other agreements concerning
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one or more classes of employees, including the Company Benefit Arrangements;
(h) forgive liabilities or debts of or make any gift or donation or
other charitable or political contribution to the Puerto Rico Entities of more
than $500,000 in the aggregate other than with respect to charitable
contributions, donations or gifts as provided in the Capital Budget or in the
ordinary course of business consistent with past practice;
(i) except as required by applicable law, regulation or decree, make
a material adverse change in the Company's tariffs offered to the public
generally for the provision of wireline residential or business local or
intra-island long distance service;
(j) increase the net number of full time employees of the Affiliated
Group more than 2% above the number of full time employees of the Affiliated
Group on May 27, 1998 or increase substantially the number of temporary
employees or independent contractors used by the Company as of May 27, 1998;
(k) change the collection or payment policies or procedures with
respect to accounts receivable or payable; or fail to use commercially
reasonable efforts to collect accounts receivable and pay accounts payable in
the ordinary course of business consistent with past practice;
(l) enter into, extend, amend or modify in any material respect any
agreement relating to (i) the development of the network for the PCS license
recently acquired by the Company, or (ii) reconfiguring or upgrading (other than
ordinary maintenance) of the network operations center of the Company;
(m) enter into, extend, amend or modify in any material respect any
agreement relating to new or major upgrades
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(other than ordinary maintenance) to management information systems, network
operating systems and network support systems, in each case which are material
to the operations of the business;
(n) enter into, renew, extend, amend or modify, in any material
respect, consulting agreements in excess of $250,000 relating to consulting
services with respect to the provision of telecommunications services by the
Company;
(o) purchase switches, network equipment, or new products or
technologies which are material to the operation of the Company's network other
than from existing suppliers or from suppliers providing equipment, products or
technologies compatible with the Company's existing equipment, products or
technologies or other than purchases of commodities or services which are not
material to the Company's operations or pursuant to purchase orders cancelable
on notice of 180 days or less;
(p) fail to use commercially reasonable efforts to (i) implement A
and B Priority Year 2000 testing and compliance work on or prior to December 31,
1998, (ii) complete other material steps necessary to complete the Company's
Year 2000 compliance plan and (iii) retain key employees necessary to complete
the foregoing work;
(q) fail to renew or replace, or permit to lapse before the Closing
Date, any material insurance policy with substantially the same coverage as
currently held by the Company;
(r) fail to enter into a lease agreement providing for rental and
other terms on fair market terms with the relevant Puerto Rico Entity for the
continued placement of the Company's equipment located on the property of such
Puerto Rico Entity, whether or not the Company already has a use permit
authorizing
37
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it to locate such equipment on the property of such Puerto Rico Entity;
(s) agree or commit to do any of the foregoing; or
(t) take or agree or commit to take any action (nor will the
Authority permit the Affiliated Group to take or agree to take any such action)
that would make any representation and warranty of the Authority hereunder
(whether or not relating specifically to May 27, 1998 or any other date other
than with respect to facts or circumstances occurring after May 27, 1998
permitted by this Agreement to occur after May 27, 1998) inaccurate in any
material respect at, or as of any time prior to, the Closing Date, or that
hinders or prevents the performance by the Authority of any of its obligations
under this Agreement; provided, however, that, notwithstanding anything to the
contrary contained in this Agreement, the Company shall be entitled to take any
actions with respect to those matters listed in Section 10.01 of the Disclosure
Schedule, including settlement thereof through payment of monetary damages prior
to Closing, other than those actions that would have a Material Adverse Effect
on the Affiliated Group, taken as a whole.
5.02 Access to Information. From May 27, 1998 until the Closing Date, the
Authority will (a) give, and will cause the Company to give, Purchaser, its
counsel, financial advisors, auditors and other authorized representatives
reasonable access during normal business hours to the offices, properties, books
and records of the Affiliated Group, to the extent that such access would not
violate the terms of any agreement to which the Authority or the Affiliated
Group is bound or any applicable law, order or regulation, (b) furnish, and will
cause the Affiliated Group to furnish, to Purchaser, its counsel, financial
advisors,
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auditors and other authorized representatives such financial and operating data
and other information relating to the Affiliated Group as such Persons may
reasonably request and (c) instruct the employees, counsel and financial
advisors of the Authority and the Company to cooperate with Purchaser in its
investigation of the Affiliated Group, and to the extent permitted by law,
consult with Purchaser and its employees and advisors with respect to the
business and affairs of the Company. Notwithstanding the foregoing, the
Authority will not be required to provide Purchaser access to information if
doing so would effectively waive any attorney-client or attorney work product
privilege.
5.03 Notices of Certain Events. The Authority shall notify Purchaser
(promptly as to (a), (b) and (c) and not less than once each thirty day period
after the date of execution hereof as to (d)) of:
(a) any material notice or other communication from any Person
(other than those specified in Section 2.03 or 3.03) alleging that the consent
of such Person is or may be required in connection with the transactions
contemplated herein;
(b) any material notice or other communication from any Governmental
Authority in connection with the transactions contemplated herein;
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or involving the
Authority or the Affiliated Group which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
3.10 or which materially relate to the consummation of the transactions
contemplated herein; and
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(d) any fact, action or circumstance that would require disclosure
under this Agreement if existing as of May 27, 1998.
5.04 Release of the Authority Debt. At the Closing, substantially
simultaneously with the receipt of the Dividend Amount and prior to or
simultaneously with the receipt of the Purchase Price, the Authority shall cause
the Affiliated Group to be released from any and all obligations, covenants and
Liens arising out of the Authority Debt.
5.05 No Solicitation; Competing Transactions.
(a) From the date hereof until the earlier of (i) the Closing, or
(ii) the date this Agreement shall terminate in accordance with its terms (the
"Non-Solicitation Period"), neither the members of the Affiliated Group nor the
Authority nor Company Representatives nor representatives of the Authority
acting on the authorization of the Authority shall, directly or indirectly,
solicit or initiate discussions with any Person or group (other than the
Purchaser Group) concerning, or make any public announcements inviting or
seeking, any proposal (an "Acquisition Proposal") for a merger, sale of all or
any significant portion of the assets of, sale of at least 20% of the shares of
capital stock of, recapitalization or other business combination transactions
involving the Authority or the Affiliated Group, excluding (x) the
Reorganization or the transactions contemplated hereby with the Affiliated
Group, or (y) any transaction solely involving its ownership interests in
Telefonica Larga Distancia de Puerto Rico, Inc. ("TLD") and/or
Telecomunicaciones Ultramarinas de Puerto Rico, Inc. (a "Competing
Transaction"). The Authority further agrees that it will immediately cease and
cause to be terminated any existing
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activities, discussions or negotiations with any Person conducted heretofore
with respect to any Competing Transaction; and the Authority will instruct the
respective officers, directors, employees, advisors, affiliates, counsel and
agents of the Affiliated Group (collectively, the "Company Representatives") not
to take any action contrary to the provisions of the previous sentence;
provided, however, that the Authority and Company Representatives shall not be
prohibited from entering into any negotiations (or entering into an agreement
resulting from such negotiations) which were not so solicited or initiated.
(b) The Negotiating Committee may recommend to the Company or the
Authority acceptance of a Competing Transaction only if it has disclosed the
terms thereof to Purchaser at least five (5) business days prior to making such
recommendation and if it concludes in its sole judgment that such Competing
Transaction has a reasonable likelihood of being completed, taking into account
all legal, financial, regulatory and other aspects of the Acquisition Proposal
and the Person making the Acquisition Proposal. The Company agrees that if,
during the Non-Solicitation Period, but only after receipt of all Act No. 54
Approvals, either Company Representatives or representatives of the Authority,
in either instance if acting under due authorization of the Authority, or the
Authority negotiates with any Person other than the Purchaser Group regarding,
or enter into any agreement with any Person other than the Purchaser Group
relating to, a Competing Transaction, and during the Non-Solicitation Period or
within one (1) year after the date hereof, the Authority or the Company
consummates a transaction of a kind that would constitute a Competing
Transaction with any other Person other than the Purchaser Group, and the
Closing
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hereunder has not occurred, then the Authority and the Company shall be jointly
and severally liable to pay to Purchaser, as liquidated damages (and not as a
penalty), and as Purchaser and Strategic Purchaser's sole right and remedy under
this Agreement or any documents executed and delivered in connection herewith,
other than the Financing Letter, to compensate Purchaser for the effort and
expense which Purchaser will be expending in entering into and performing this
Agreement and for its lost opportunity, the sum of $25,000,000, which shall be
paid contemporaneously with consummation of the Competing Transaction.
5.06 Interim Actions by Authority. Between May 27, 1998 and the Closing
Date, the Authority shall comply with, and shall not take any action prohibited
by, the provisions of Section 2.3 of the Non-Competition Agreement or pay,
settle, or compromise any such claim or demand relating thereto without the
prior written consent of the Strategic Purchaser, which may be withheld in its
sole discretion.
ARTICLE VI
COVENANTS OF PURCHASER AND STRATEGIC PURCHASER
Each of the Purchaser and Strategic Purchaser covenants and agrees that:
6.01 Confidentiality. Prior to the Closing Date, the Purchaser Group will
comply with the provisions of the Confidentiality Agreement; provided, however,
that prior to the Closing Date, Purchaser Group may: (i) engage in discussions
with representatives of the labor unions representing the employees of the
Company; (ii) engage in discussions with and provide information to, any
Governmental Authority, including the Puerto Rico Telecommunications Regulatory
Board, to the extent required for the purpose of obtaining any required
approvals by a
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Governmental Authority for the transactions contemplated herein; (iii) in
response to a request therefor, appear before any committee of the Puerto Rico
Legislature to discuss its participation in the transactions contemplated
herein; (iv) provide such information and in such form as is required in the
judgment of its counsel under applicable securities laws; and (v) after prior
consultation with the GDB and subject to Section 7.04 below, issue press
releases concerning its participation in the transactions contemplated herein.
For five years after May 27, 1998, the Purchaser Group will comply with the
provisions of paragraphs 1 and 3 of the Confidentiality Agreement and until
September 16, 2000, the Purchaser will comply with the provisions of paragraph 7
of the Confidentiality Agreement.
6.02 Access. Purchaser will cause the Affiliated Group, on and after the
Closing Date, to afford promptly to the Authority and any other Puerto Rico
Entities and their agents reasonable access to the properties, books, records,
officers, employees and auditors of the Affiliated Group with respect to periods
ending before or on the Closing Date, and to the extent required by law or in
connection with any indemnification obligations of the Authority in this
Agreement or any document executed in connection herewith, with respect to the
period after the Closing Date.
6.03 Notice of Certain Events. Purchaser shall promptly notify the
Authority of:
(a) any material notice or other communication from any Person
alleging that the consent of such Person is or may be required in connection
with the transactions contemplated herein;
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(b) any material notice or other communication from any Governmental
Authority in connection with the transactions contemplated herein; and
(c) any material notice or other communication from any Person
alleging Purchaser's or Strategic Purchaser's inability to consummate the
transactions contemplated herein.
6.04 Conduct. Without the consent of the Authority, neither Purchaser nor
Strategic Purchaser will take or agree to commit to take any action that would
make the representations and warranties of Purchaser and Strategic Purchaser
(whether or not related specifically to May 27, 1998 or any other date)
inaccurate in any material respect at, or as of any time prior to the Closing
Date or that hinders or prevents the performance by the Purchaser or Strategic
Purchaser of any of its obligations under this Agreement.
6.05 Other Purchasers.
(a) It is contemplated that (i) at the Closing, at Purchaser's
election, the Authority shall directly sell and transfer 6.0% of the New Company
Shares to Popular, Inc. in lieu of transferring such Purchaser Shares to
Purchaser, it being understood that at the Closing Popular shall contribute one
percent (1%) of the New Company Shares as provided in Section 1.03(g), or shall
purchase 5.0% of the New Company Shares and contribute $8.7 million as provided
in Section 1.03(g) and (ii) up to 5.0% of the New Company Shares will be sold by
the New Company promptly after, but not later than six (6) months after, the
Closing Date to other Person or Persons, which may consist of or include
Popular, Inc. (collectively, with Popular, Inc., the "Minority Partners") at a
price not less favorable to the Minority Partner per New Company Share than paid
by Purchaser for
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the Purchased Shares on the Closing Date; provided, that, each Minority Partner
(x) shall deliver to the Authority (or the New Company, as applicable), the
purchase price for the New Company Shares it is to acquire in immediately
available funds by wire transfer to the account designated by the Authority (or
the New Company, as applicable) not less than 3 business days prior to the date
of purchase, and (y) shall execute and deliver the Shareholders Agreement and
the Non-Competition Agreement. The terms, conditions and method of sale of such
New Company Shares to such other Persons shall be subject to the approval of the
Authority, which approval shall not be unreasonably withheld, provided, that, in
any event Popular, Inc. shall be an acceptable Minority Partner. The Authority
shall use its commercially reasonable efforts to cause the Company to cooperate
in the closing of offering of Shares to Minority Partners promptly after the
Closing Date.
(b) It is understood and agreed that neither Popular, Inc. nor any
other Minority Partner shall be a party to this Agreement and neither Popular,
Inc. nor any other Minority Partner shall be entitled to bring any independent
or direct action or claim against the Authority or any Puerto Rico Entity
relating to this Agreement or the transactions contemplated hereby (other than
the Shareholders Agreement), except for claims arising for breaches of the
Authority's representations in Article II hereof. Popular, Inc. shall be deemed
to have relied upon the representations, warranties and covenants of the
Authority to Purchaser hereunder in purchasing the New Company Shares to be
purchased by it from the Authority as if such representations, warranties and
covenants were made directly to it. Purchaser shall be entitled to bring (x) an
action or claim
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on its behalf based on any breach of a representation or warranty of the
Authority in Article II relating to Shares owned by Purchaser and (y) all
actions and claims on behalf of the Purchaser Group based on any breach of a
representation, warranty, covenant or agreement other than a breach of a
representation or warranty in Article II.
6.06 Discount For Educational Institutions. The Purchaser shall, from and
after the Closing Date and until the date which is the fifth anniversary of the
receipt of the FCC Final Order, cause the New Company to provide to non-profit
secondary (grades 7th to 12th) and post-secondary educational institutions in
Puerto Rico access to the Internet at a discount of 35% of the average price for
such service offered to the Company's other customers.
6.07 Telephone Tariffs. The Purchaser shall cause the New Company not to
increase the tariffs for basic residential service for three (3) years after the
Closing Date, unless the New Company is required to do so pursuant to applicable
law.
6.08 Transfer of Shares. Notwithstanding anything to the contrary provided
in this Agreement, each of Purchaser and Strategic Purchaser agrees that it will
neither take, nor fail to take, any action nor transfer Shares to any Person, if
such action or omission or such Person's ownership of Shares would delay or
impede the issuance or approval of the consents, actions, waivers or conditions
required pursuant to Section 8.01 of this Agreement.
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ARTICLE VII
COVENANTS OF THE PARTIES
The parties hereto agree that:
7.01 Satisfaction of Closing Conditions. Subject to the terms and
conditions of this Agreement, each party will use its commercially reasonable
efforts to take or cause to be taken, all actions and to do, or cause to be
done, all things necessary or desirable, under applicable laws and regulations
to consummate the transactions contemplated herein, including but not limited to
arranging and closing the Financing, but subject to the conditions contained in
Article VIII hereof. The Authority, Strategic Purchaser and Purchaser each
agree, and the Authority, prior to the Closing, and Purchaser and Strategic
Purchaser, after the Closing, agree to cause the Affiliated Group to execute and
deliver such other documents, certificates, agreements and other writings and to
take such other actions as may be necessary or desirable in order to consummate
the transactions contemplated hereby.
7.02 Certain Filings. The Authority, Strategic Purchaser and Purchaser
shall cooperate with one another (a) in determining whether any action by or in
respect of, or filing with, any Governmental Authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any Material Contracts, in connection with the consummation of the
transactions contemplated herein, (b) in taking such actions or making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such actions, consents, approvals or waivers including,
without limitation, any such matters required under the Communications Act, FCC
Rules and the HSR Act, (c) in promptly opposing any
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modification or revocation of the Act No. 54 Approval and the Companion
Legislation and (d) in seeking the approval of the Other Legislation.
7.03 Execution of Agreements. The parties shall execute and deliver at the
Closing, and Purchaser shall use commercially reasonable efforts to cause
Popular, Inc. (and prior to any sale to the other Minority Partners, such other
Minority Partners) to so execute and deliver (to the extent it is contemplated
that they will be parties thereto) the documents and agreements referred to in
Sections 8.01(h), 8.02(j), 8.02(m), 8.02(n) and 8.03(e) below.
7.04 Public Announcements. Except as otherwise required by law, the
Authority and Purchaser Group shall: (a) prior to issuance of any press release
relating to the transactions contemplated by this Agreement, submit such press
release to the other parties, and obtain the approval thereof, which approval
shall not be unreasonably withheld; and (b) use best efforts to characterize the
other parties, in any other public statements made by the party making such
statement about the other parties, on substantially the same basis as in any
press release made by the party making such statement.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01 Conditions to the Obligations of Each Party. The obligations of the
parties to consummate the Closing are subject to the satisfaction, or waiver
subject to Section 12.03 below, of the following conditions:
(a) Purchaser and Strategic Purchaser shall have received a
Certification, if required, to provide telecommunication services in Puerto Rico
from the Puerto Rico
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Telecommunications Regulatory Board (the "Board"); provided that Purchaser's
obligations shall be subject to the further condition that (i) no materially
burdensome conditions or limitations shall have been imposed, whether by order,
decree or regulation, in connection therewith on the Strategic Purchaser (in the
reasonable judgment of the Strategic Purchaser) or (ii) no conditions or
limitations shall be imposed that would reasonably be likely to have a Material
Adverse Effect on the Affiliated Group. For the purposes of this Section
8.01(b), a Certification of the Puerto Rico Telecommunications Regulatory Board
shall mean an order no longer subject to an appeal of a court or reconsideration
by the Board or which can not be unilaterally modified by the Board;
(b) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired; provided that, Purchaser's
obligations shall be subject to the further condition that (i) no materially
burdensome conditions or limitations shall have been imposed in connection
therewith on the Strategic Purchaser (in the reasonable judgment of Strategic
Purchaser) or (ii) no conditions or limitations shall be imposed that would
reasonably be likely to have a Material Adverse Effect on the Affiliated Group;
(c) No other provision of any applicable law or regulation and no
judgment, injunction, order or decree, shall prohibit the consummation of the
Closing;
(d) All actions or filings under the Communications Act required to
permit the consummation of the Closing, including but not limited to FCC
approval, shall have been obtained or made and not revoked or suspended. Such
FCC approval shall be a Final Order provided that Purchaser's obligations shall
be subject to
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the further condition that such Final Order shall neither (i) require or be
conditioned upon Strategic Purchaser's, its parent's or any of their affiliates'
agreement to or compliance with any term, condition or restriction that would
have a Material Adverse Effect on the business or results of operations of the
Affiliated Group nor (ii) impose any term, condition or restriction on the
business or operations of GTE Corporation or its affiliates (other than the
Affiliated Group) or result in any waiver of rights asserted by any of the
foregoing;
(e) All actions by or in respect of the applicable laws, rules and
regulations of any Governmental Authority having jurisdiction over the
transactions contemplated in this Agreement shall have been taken; provided that
(i) Purchaser's obligations shall be subject to the further condition that (x)
no materially burdensome conditions or limitations shall have been imposed in
connection therewith on the Strategic Purchaser (in the reasonable judgment of
Strategic Purchaser) or (y) no conditions or limitations shall be imposed that
would have a Material Adverse Effect on the Affiliated Group, and (ii) the only
actions by a Puerto Rico Governmental Authority which shall affect the
Authority's obligations are listed in Section 2.03(i), (iv) and (v);
(f) Approval by any other applicable Governmental Authority shall
have been obtained and not revoked or suspended; provided that (i) Purchaser's
obligations shall be subject to the further condition that (x) no materially
burdensome conditions or limitations shall have been imposed in connection
therewith on the Strategic Purchaser (in the reasonable judgment of Strategic
Purchaser) or (y) no conditions or limitations shall be imposed that would have
a Material Adverse Effect on the Affiliated
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Group, and (ii) the only actions by a Puerto Rico Governmental Authority which
shall affect the Authority's obligations are listed in Section 2.03(i), (iv) and
(v);
(g) The Management Agreement, the Technology Transfer Agreement and
the Option Agreement shall have been executed and delivered by the other parties
thereto; and
(h) The payment of the Dividend Amount shall have been consummated;
8.02 Conditions to Obligations of Purchaser and Strategic Purchaser. The
obligation of Purchaser and Strategic Purchaser to consummate the Closing is
subject to the satisfaction of the following further conditions:
(a) (i) The Authority shall have performed in all material respects
all of its obligations hereunder required to be performed by it at or prior to
the Closing Date, (ii) the representations and warranties of the Authority
contained in this Agreement and in any certificate or other writing delivered by
the Authority pursuant hereto shall be true without reference to any exception
for failure to have a Material Adverse Effect at and as of May 27, 1998 and at
and as of the Closing Date, as if made at and as of such time (except for
changes in facts and circumstances after May 27, 1998 permitted by this
Agreement to occur after May 27, 1998), unless any misrepresentation or breach
of any warranty, or the cumulative effect of all such misrepresentations and
breaches of warranties, does not have a Material Adverse Effect on the
Affiliated Group, and (iii) Purchaser shall have received a certificate signed
by the Executive Director of the Authority to the foregoing effect;
(b) Purchaser shall have received one or more opinions of counsel to
the Authority, dated the Closing Date, reasonably
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satisfactory to the Purchaser. In rendering such opinions, such counsel may rely
upon certificates of public officers as to matters governed by the laws of
jurisdictions other than Puerto Rico or the federal laws of the United States of
America, and upon opinions of counsel reasonably satisfactory to Purchaser,
copies of which opinions shall be contemporaneously delivered to Purchaser, and
as to matters of fact, upon certificates of officers of the Authority and the
Affiliated Group;
(c) Purchaser shall have received all documents it may reasonably
request relating to the existence of the Authority and the Affiliated Group and
the authority of the Authority to execute, deliver and consummate this
Agreement, all in form and substance reasonably satisfactory to Purchaser;
(d) Evidence reasonably satisfactory to Purchaser that the Authority
has complied with Section 5.04;
(e) Since the Balance Sheet Date, there shall have occurred no
Material Adverse Change in the Affiliated Group, taken as a whole, other than
changes (i) permitted by this Agreement, (ii) occurring prior to May 27, 1998
disclosed in Section 3.06 of Disclosure Schedule, and (iii) in the Affiliated
Group arising from any strike, labor disturbance or work stoppage by employees
of the Affiliated Group between May 27, 1998 and July 21, 1998.
(f) No action, suit or proceeding having a reasonable likelihood of
success shall have been commenced by any Governmental Authority or third party,
seeking to obtain from the Purchaser, Strategic Purchaser or the Affiliated
Group in connection with the transactions contemplated hereby any damages that
are material in relation to the Affiliated Group or require Purchaser or
Strategic Purchaser to divest any material portion
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of the assets of either of them, their affiliates or the Affiliated Group;
(g) The Authority shall have delivered to Purchaser a certificate of
good standing for each member of the Affiliated Group issued by the jurisdiction
of its incorporation. Such certificate of good standing shall be dated no more
than ten (10) business days prior to the Closing Date;
(h) The New Company shall have received resignations of each of the
directors of each company in the Affiliated Group requested by Purchaser;
(i) The Authority shall have (i) assigned to the New Company its
rights under the agreements listed in Section 8.02(i) of the Disclosure Schedule
and (ii) agreed in writing to enforce strictly the confidentiality agreements
entered into in connection with the sale of the Affiliated Group for the benefit
of the New Company, and assigned to the Company the right to receive any damages
collected by the Authority with respect thereto;
(j) The Authority shall have delivered to the Purchaser Group, the
Payment Bonds of the GDB and Guarantees of GDB Newco if GDB Newco is formed, in
substantially the forms attached hereto as Exhibits A, B and C-1 and C-2 hereto;
(k) The Reorganization shall be consummated on a basis which has not
resulted in and will not result in any liability for any Tax to the Affiliated
Group, except for such Taxes which have been paid by the Authority or for which
the Authority has given a complete and unconditional indemnity, and the Revenue
Ruling shall have been obtained;
(l) (i) Subject to any applicable contribution and deduction limits
under the Code and the PR Code, the Authority
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shall have caused three percent (3%) of the issued and outstanding shares of the
New Company on the Closing Date to be contributed to a stock bonus plan or an
employee stock ownership plan and trust. The Authority and the Strategic
Purchaser shall agree prior to the Closing Date on a form of stock bonus plan or
employee stock ownership plan and trust that meets the following specifications:
(i) it satisfies the applicable requirements of Title I of ERISA, (ii) it
qualifies for favorable tax treatment under the PR Code, (iii) if practicable,
it qualifies for favorable tax treatment under Section 401(a) of the U.S.
Internal Revenue Code, (iv) it provides that the Affiliated Group may terminate
the employee stock ownership plan and distribute the New Company Shares (or an
equivalent amount of cash) to the participants at any time after the New Company
Shares have been fully allocated to participants and all participants' accounts
have become fully vested, and (v) it contains other terms and conditions
specified by the Strategic Purchaser and consented to by the Authority, which
shall not unreasonably withhold its consent. To the extent that any portion of
the contribution described in the preceding sentence cannot be made to the plan
on or before the Closing Date as a result of any applicable contribution and
deduction limits under the Code or the PR Code, the Authority shall cause such
portion of the contribution to be made to the plan as soon as practicable,
subject to the applicable limits under the Code and the PR Code;
(ii) The Authority shall have offered to sell at the Closing three
percent (3%) of the issued and outstanding shares of the New Company to an
employee stock ownership plan and trust or other trust or entity reasonably
acceptable to Purchaser
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for the benefit of the Company's employees for an amount per Share equal to the
per Share equivalent of the Purchase Price;
(m) The Authority shall have executed and delivered to the Purchaser
the Non-Competition Agreement and the Shareholders Agreement;
(n) The Authority or GDB Newco shall have executed and delivered the
Escrow Agreement;
(o) The Act No. 54 Approval shall not have been revoked or modified
in any material respect; and
(p) The Companion Legislation shall not have been revoked or
suspended.
8.03 Conditions to Obligation of the Authority. The obligation of the
Authority to consummate the Closing is subject to the satisfaction of the
following further conditions:
(a) (i) Purchaser and Strategic Purchaser shall have performed in
all material respects all of its obligations hereunder required to be performed
by it at or prior to the Closing Date, (ii) the representations and warranties
of Purchaser and Strategic Purchaser contained in this Agreement and in any
certificate or other writing delivered by Purchaser pursuant hereto shall be
true in all material respects at and as of the Closing Date, as if made at and
as of such time and (iii) the Authority shall have received a certificate signed
by the President of Purchaser and Strategic Purchaser to the foregoing effect;
(b) The Authority shall have received an opinion of counsel to
Purchaser and Strategic Purchaser, dated the Closing Date, reasonably
satisfactory to the Authority. In rendering such opinion, such counsel may rely
upon certificates of public officers as to matters governed by the laws of
jurisdictions
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other than Puerto Rico, New York and corporate laws of Delaware or the federal
laws of the United States of America, and upon opinions of counsel reasonably
satisfactory to the Authority, copies of which shall be contemporaneously
delivered to the Authority, and as to matters of fact, upon certificates of
officers of Purchaser and Strategic Purchaser;
(c) The Authority shall have received all documents it may
reasonably request relating to the existence of Strategic Purchaser and
Purchaser and the authority of Strategic Purchaser and Purchaser to execute,
deliver and consummate this Agreement, all in form and substance reasonably
satisfactory to the Authority;
(d) Since December 31, 1997 (or, with respect to the Purchaser, such
later date as the Purchaser shall have been organized), there shall have
occurred no Material Adverse Change in Purchaser or Strategic Purchaser other
than as a result of obligations incurred hereunder or in connection with the
Financing; and
(e) The members of the Purchaser Group who directly or indirectly
acquire Shares on the Closing Date shall have executed and delivered to the
Authority the Non-Competition Agreement and the Shareholders Agreement.
ARTICLE IX
EMPLOYEE BENEFITS
9.01 Retirement Benefits of Company Employees.
(a) Retirement Benefits of Company Employees that Participate in the
Retirement System.
(i) Certain Company employees participate on the date of this
Agreement in the Retirement System (the "Retirement System Participants"). The
Retirement System will remain solely
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liable for and responsible for the payment of all benefits of Retirement System
Participants under the Retirement System based on service, compensation and
applicable contributions accrued under the Retirement System by such Retirement
System Participants as of the Closing Date, which benefits shall be paid solely
from assets of the Retirement System. No assets will be transferred from the
Affiliated Group to the Retirement System to pay any such liabilities. Effective
as of the Closing Date, the Retirement System shall permit any Retirement System
Participant whose employer-provided retirement benefit has not vested to receive
a refund of the Retirement System Participant's contributions to the Retirement
System in accordance with the terms of the Retirement System for such refunds.
(ii) From and after the Closing Date and through the Benefits
Maintenance Period (as hereinafter defined), the Retirement System Participants
shall participate in either the Retirement Plan for Salaried Employees of Puerto
Rico Telephone Company (the "Salaried Plan") or The Puerto Rico Telephone
Company Pension Plan for Hourly Employees (the "Hourly Plan"), each as amended
from time to time in accordance with this Agreement or applicable law (such plan
or plans hereinafter referred to as the "Replacement Plan"). The Affiliated
Group shall designate whether each Retirement System participant shall
participate in the Salaried Plan or the Hourly Plan. Each Retirement System
Participant's service with the Company, and its predecessor, prior to the
Closing Date will be recognized under the Replacement Plan for purposes of
eligibility (including eligibility for early retirement, subsidized early
retirement and death benefits), vesting and benefit accrual to the same extent
as such service was recognized for the corresponding purpose
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under the Retirement System. In addition, in the case of any Retirement System
Participant who was not vested on the Closing Date, the Replacement Plan shall
recognize the Retirement System Participant's service in accordance with the
preceding sentence as if he or she had been vested on the Closing Date. The
Replacement Plan shall calculate an "Offset Amount" for each Retirement System
Participant, which shall be based on the greater of (i) the benefit that the
Retirement System Participant had accrued under the Retirement System at the
Closing Date, or (ii) such benefit adjusted to include cost-of-living increases
or other improvements applicable to Retirement System Participants under the
Retirement System after the Closing Date which calculation shall be confirmed by
the Retirement System's then current actuary. The Offset Amount shall be
expressed as a single-life annuity commencing at age 65 (regardless of whether
the Retirement System Participant's benefit under the Retirement System actually
commences at that time or is paid in that form), determined without regard to
any reduction for Social Security or other benefits as provided under the terms
of the Retirement System, and without any reduction for prior payments under the
Retirement System. In the case of any Retirement System Participant who was not
vested on the Closing Date, the Offset Amount shall be based on the amount of
the Retirement System Participant's contributions with interest accrued through
the Closing Date converted to an equivalent single-life annuity commencing at
age 65. The Replacement Plan shall calculate the gross amount (before any
reduction for Social Security or other benefits) of each Retirement System
Participant's accrued benefit payable under the Replacement Plan as a
single-life annuity commencing at age 65, and then shall reduce the Retirement
System
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Participant's gross benefit under the Replacement Plan by the Offset Amount
attributable to the Retirement System benefit. The Replacement Plan shall apply
any actuarial adjustment to reflect the time or form of payment under the
Replacement Plan to the Retirement System Participant's net benefit determined
after the Offset Amount has been subtracted. The Replacement Plan shall use a
comparable procedure to calculate any disability, survivor or death benefit
payable on behalf of a Retirement System Participant under the Replacement Plan.
The Authority shall promptly provide any information that the Affiliated Group
shall reasonably request in order to determine the Offset Amount. The
administrator of the Replacement Plan shall have discretionary authority to
adjust the net benefit provided under the Replacement Plan to reflect the intent
of the offset provision described in this Section 9.01(a)(ii); and the
administrator's determination of the benefit under the Replacement Plan for any
Retirement System Participant shall be final and binding on all parties (subject
to the regular benefit claims procedure under the Replacement Plan). No period
of service or compensation by any current Retirement System Participant with the
Affiliated Group after the Closing Date shall be taken into account for purposes
of determining the retirement benefits available under the Retirement System.
(iii) Neither Puerto Rico, the Authority nor any Puerto Rico
Governmental Authority will be liable for any claim by a Retirement System
Participant regarding any alleged noncompliance with the terms and conditions of
the Replacement Plan.
(iv) The Authority shall indemnify the Affiliated Group and
Purchaser for any liability that exists or may arise
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under the Retirement System or as a consequence of the transfer of a Retirement
System Participant to the Replacement Plan.
(b) Benefits of Company Employees Under Other Plans
(i) The Company currently maintains four retirement plans: the
Salaried Plan, the Hourly Plan, the Puerto Rico Telephone Company Lump Sum
Retirement Plan (the "Lump Sum Plan") and the Puerto Rico Telephone Company
Supplemental Retirement Plan (the "Supplemental Plan" and all of such plans,
collectively, the "Plans"). The Company also maintains the Dependents Benefits
Plan of the Puerto Rico Telephone Company (the "Dependent Plan").
(ii) The Affiliated Group will maintain the Salaried Plan and
the Hourly Plan for the period commencing on the Closing Date and ending on the
first anniversary of the Closing Date or, with respect to any collectively
bargained plan, the expiration of the applicable collective bargaining
agreement, whichever is earlier (the "Benefits Maintenance Period"). During the
Benefits Maintenance Period, the Affiliated Group will provide to the active
employees (including employees on authorized leave of absence, military service
or layoff with recall rights) of the Affiliated Group who remain employees
thereof immediately after the Closing Date and who on the Closing Date
participated in such plans (the "Participating Employees"), benefits and
entitlements under the Salaried Plan and the Hourly Plan which are identical to
or more favorable than the benefits such Participating Employees were entitled
to under the terms of the Salaried Plan and the Hourly Plan as such plans were
in effect immediately preceding the Closing Date; provided, however, that the
Affiliated Group shall not be required to preserve any benefit that would
violate any tax qualification provision that
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is applicable to such plan under Section 401(a) of the Code or Section 1165(a)
of the PR Code.
(iii) During the Benefits Maintenance Period, the Affiliated
Group will maintain without amendment except as set forth below the Dependent
Plan, the Lump Sum Plan and the Supplemental Plan. The Affiliated Group may
amend the Supplemental Plan and the Lump Sum Plan to freeze the accrual of
benefits after the Closing Date but, during the Benefits Maintenance Period,
must continue to maintain, fund and pay benefits under such plans as required
under the terms of the Supplemental Plan and the Lump Sum Plan and to comply
with provisions of applicable laws, regulations and orders.
(iv) (A) During the Benefits Maintenance Period, the
Affiliated Group will maintain without amendment the post-retirement health
insurance program for the benefits of all employees who retired on or before the
Closing Date based on the programs maintained by the New Company immediately
preceding the Closing Date.
(B) After the Benefits Maintenance Period and until the
fifth anniversary of the Closing Date, the Affiliated Group will maintain a
post-retirement health insurance program for employees of the Affiliated Group.
(v) After the expiration of the Benefits Maintenance Period,
the Purchaser, Strategic Purchaser and Affiliated Group shall have the right to
amend or terminate any plan described in this subsection (b) other than as set
forth in Section 9.01(b)(iv)(B) above, in any manner permitted by applicable
law.
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(vi) Nothing in the post-retirement health plans (including
summary descriptions) prevents payment of benefits on the basis that Medicare is
the primary coverage.
9.02 Involuntary Termination of Employees. Purchaser agrees that the
Company will not make any involuntary termination, except for Cause, of any
employees employed on May 27, 1998. For purposes of this Article 9.02, "Cause"
shall mean (i) for non-union employees, as such term is defined in Law 80 of May
30, 1976 at 29 L.P.R.A. ss. 185 et seq., as amended and interpreted by the
courts from time to time, and (ii) for employees represented by a union, as such
term is further defined by the applicable collective bargaining agreement.
9.03 Voluntary Separation Program. The Purchaser agrees to cause the
Affiliated Group to establish, within 180 days after the Closing Date, a
voluntary separation program on the terms and conditions which may be approved
by the Board of Directors of the New Company.
9.04 Capital Contribution by Authority.
(a) The Authority shall make capital contributions to the New
Company, in respect of New Company Shares then owned by it and without any
increase in outstanding New Company Shares, in an aggregate amount of $200
million (the "Capital Contribution"). The parties agree that in consideration of
the making of the Capital Contribution, neither the Authority nor any other
Puerto Rico Governmental Authority shall have any liability with respect to (i)
the increased liability under the Replacement Plan attributable to the grant of
past service credit to Retirement System Participants, and (ii) all of the
Company's unfunded pension liabilities under the Plans and post-employment
benefit liabilities for post-employment health and life insurance
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benefits under the Plans as of the Closing Date (together, the "Unfunded
Liabilities"), even if the actual Unfunded Liabilities of such employee plans
are determined to be greater than such aggregate Capital Contributions and the
Authority shall have no right to a refund or offset if the Unfunded Liabilities
are less than such aggregate Capital Contributions.
(b) The Authority shall make the Capital Contribution in five (5)
annual installments (each an "Installment"), on each anniversary of the Closing
Date, commencing on the first anniversary of the Closing Date and ending on the
fifth anniversary of the Closing Date as follows:
<TABLE>
<S> <C>
First Anniversary $40,000,000
Second Anniversary $40,000,000
Third Anniversary $40,000,000
Fourth Anniversary $40,000,000
Fifth Anniversary $40,000,000
</TABLE>
Each Installment shall be due whether or not the Authority or any Puerto Rico
Entity then owns any New Company Shares. Notwithstanding any provision hereof or
of the Shareholders Agreement or the Option Agreement, the Authority shall
retain one Share until the fifth anniversary of the Closing Date. Other than as
provided in Section 9.04(h), no interest shall accrue or be payable with respect
to any Installment.
(c) Each Installment shall be paid by the Authority, at its option:
(i) in cash by wire transfer of immediately available funds to an account
designated by the New Company; (ii) by surrendering to the New Company such
number of New Company Shares owned by the Authority which when multiplied by the
applicable Price Per Share (as defined in (d) below) will equal the amount of
such Installment; provided however, that the
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<PAGE> 69
Authority shall own thereafter sufficient New Company Shares to perform all of
its obligations under the Option Agreement and satisfy any pending claim by the
Purchaser Group hereunder; (iii) by surrendering the Dividend Note for reduction
of the obligations thereunder in the amount of such Installment, applied in the
following order: (w) first, to any fees and expenses due to the Authority under
the Dividend Note, (x) second, to accrued and unpaid interest, and (z) third, to
the principal sum and other amounts due under the Dividend Note; or (iv) by a
combination of cash, New Company Shares or reducing obligations under the
Dividend Note; provided, however, that no New Company Shares shall be used to
satisfy any Installment, until all obligations under the Dividend Note are
satisfied in full.
(d) The Authority shall provide the New Company written notice, at
least thirty (30) business days prior to the Installment due date (the "Notice
Date"), as to whether the Installment will be paid in cash, New Company Shares,
through a reduction in obligations under the Dividend Note, or a combination
thereof, and if in New Company Shares (in whole or in part), the Authority's
proposed calculation of the Price Per Share and basis therefor. Price Per Share
for purposes of this Section shall mean the average of the closing prices of the
New Company Shares if traded on the New York Stock Exchange or another national
stock exchange, and if not, the last quoted mean between the bid and asked for
the New Company Shares if traded over the counter, in each instance for the
twenty trading days preceding the Notice Date for the payment of such
Installment, or if not so publicly traded, the fair market value of the New
Company Shares in an arm's length transaction between a willing buyer and a
willing seller. In determining the fair market value
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for purposes of the Price Per Share, no discount shall be applied by virtue of
the fact that such New Company Shares may represent a minority interest or by
virtue of the fact that there is no public market for the New Company Shares.
Within five (5) Business Days after the Notice Date, the Purchaser shall notify
the Authority if the Purchaser disagrees with the Authority's calculation of the
Price Per Share. If the Authority and the Purchaser are unable to agree on a
Price Per Share within ten (10) Business Days thereafter, then the Authority and
the Purchaser shall mutually select a nationally recognized investment banking
firm to determine the Price Per Share. The investment banking firm shall be
instructed to complete its determination of the Price Per Share by no later than
thirty (30) days after its appointment. The Price Per Share as determined by the
investment banking firm shall be final and conclusive on the Authority,
Purchaser and the New Company. The costs of any such investment banking firm
shall be borne 50% by the Authority and 50% by the Purchaser.
(e) Upon receipt of each Installment from the Authority (in cash or
upon receipt of the New Company Shares or through a reduction of obligations
under the Dividend Note) the New Company shall promptly make a capital
contribution to each Operating Subsidiary, in proportion to such subsidiaries'
respective then estimated Unfunded Liabilities, in immediately available funds
in an aggregate amount equal to the Installment.
(f) Immediately upon receipt of the capital contribution from the
New Company referred to in paragraph (e) above, the Operating Subsidiaries will
contribute to payment of Unfunded Liabilities in immediately available funds to
one or more funding arrangements (which may include pension trusts,
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rabbi trusts, secular trusts, insurance contracts, voluntary employees'
beneficiary associations or Code section 401(h) accounts) the amounts listed
below, to be used for the benefit of such Operating Subsidiaries' current and
former employees and their spouses and dependents:
<TABLE>
<S> <C>
First Installment $65,573,770
Second Installment $65,573,770
Third Installment $65,573,770
Fourth Installment $65,573,770
Fifth Installment $65,573,770
</TABLE>
(g) The New Company and the Operating Subsidiaries shall provide to
the Authority, not later than thirty (30) business days after the date on which
the Authority paid the Installment, a written acknowledgment by the trustees of
the applicable employee plans of receipt of the amounts contributed pursuant to
Section 9.04(f).
(h) The obligation of the Authority to make an Installment payment
shall be deferred, in the case of payment in whole or in part in New Company
Shares, until five (5) business days after final agreement on the determination
of the Price Per Share and if not paid immediately thereafter, the Installment
shall accrue interest at an annual rate of 10% per annum. In the event that the
Price Per Share is determined by an investment banking firm pursuant to clause
(d) above, the Authority shall have the right to pay the Installment in cash in
lieu of in New Company Shares, in which event the Authority shall pay 100% of
the investment banking firm fees pursuant to Section 9.04(d).
(i) For purposes of this Section 9.04, in the event of any
reclassification, reorganization or other transaction wherein New Company Shares
are converted into or exchanged for other
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securities, "New Company Shares" shall be deemed to include such other
securities.
(j) The Authority shall make all scheduled, required contributions
after May 27, 1998 to the Plans for the periods from April 15 through the
Closing Date at the times when due consistent with past practice.
9.05 Act No. 54 Compliance.
(a) As mandated by Act No. 54, Purchaser will cause the Affiliated
Group to:
(i) recognize the unions that represent the union employees on
the Closing Date, and assume the collective bargaining agreements in effect on
that date;
(ii) not reduce the employees' or retirees' accrued vested
retirement benefits as of the Closing Date, under the Company Employee Plans;
and
(iii) establish the plan and trust described in Section
8.02(l) hereof;
(b) Purchaser will cause the Affiliated Group to guarantee at least
one year (commencing on the date of the FCC Consent) of employment to all
regular management employees who choose not to participate in any voluntary
separation plan adopted by the New Company, as defined in Article IX hereof,
with the same salary and fringe benefits (to the extent permitted by law)
enjoyed by such employees as of the Closing Date, subject, however, to the right
of the employer to terminate any such employment for cause.
ARTICLE X
INDEMNIFICATION
10.01 Indemnification by Authority. Subject to Section 10.12 below, the
Authority agrees to indemnify, defend and hold
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Strategic Purchaser, Purchaser and the Affiliated Group (the "Purchaser
Indemnitees") harmless, from and after the Closing Date, from and against any
and all loss (other than loss of profit or incidental, special or consequential
damages suffered by the Affiliated Group or the Purchaser Indemnitees), cost,
liability, damage and expenses (including reasonable attorneys fees and other
expenses incident thereto) (the "Adverse Consequences"): (i) resulting from
breach of the Authority's representations, warranties, covenants and agreements
contained in this Agreement; provided, however, that any claim for a breach of a
representation or warranty shall have been made prior to the expiration date
thereof, if any, determined in accordance with Section 12.01 hereof; (ii)
resulting from or relating to the matters which are the subject of the cases or
claims listed in Section 10.01(ii) of the Disclosure Schedule; (iii) resulting
from or relating to the claims or matters described in Section 10.01(iii) of the
Disclosure Schedule; and (iv) resulting or relating to the claims or matters
described in Section 10.01(iv) of the Disclosure Schedule. The Authority agrees
to indemnify, defend and hold Popular, Inc. harmless, from and after the Closing
Date, from and against any and all Adverse Consequences resulting from a breach
of the Authority's representations, warranties, covenants and agreements
contained in Article II of this Agreement with respect to Popular, Inc.'s
purchase of Shares pursuant to Section 6.05(a) hereof.
10.02 Indemnification for Purchaser's Breach. Strategic Purchaser and
Purchaser, jointly and severally, agree to indemnify, defend and hold the
Authority and the Puerto Rico Entities (the "Authority Indemnitees") harmless,
from and after the Closing Date, from and against any Adverse Consequences the
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<PAGE> 74
Authority Indemnitees may suffer resulting from Strategic Purchaser's or
Purchaser's breach of any of its representations, warranties, covenants and
agreements under this Agreement; provided, however, that any such claim for
breach of a representation or warranty shall have been made prior to the
expiration date thereof, if any, determined in accordance with Section 12.01
hereof.
10.03 Indemnification by Affiliated Group. The New Company and its
subsidiaries (including the Operating Subsidiaries) shall, jointly and
severally, indemnify, defend and hold harmless the Authority Indemnitees from
and against any Adverse Consequences (other than in its capacity as a
shareholder of the New Company) the Authority Indemnitees may suffer resulting
from any obligations of or liabilities resulting from the operations of the
Affiliated Group and its subsidiaries prior to and after the Closing Date, other
than those liabilities for which Purchaser Indemnitees are entitled to
indemnification pursuant to Section 10.01 or Section 9.01(a)(iv) above.
10.04 Limitation on Obligations. Notwithstanding anything to the contrary
in Section 10.01 above, the Authority shall not be obligated to make any
payments under Section 10.01 (other than with respect to Section 10.01(ii))
above with respect to a breach of a representation or warranty or the covenants
in Section 5.01(t) or Sections 10.01(iii) and (iv), (a) unless, with respect to
any individual claim or series of related claims, the amount of Adverse
Consequences (not otherwise indemnified) resulting therefrom exceeds $40,000
(the "Included Claims") and unless the aggregate amounts of Adverse Consequences
(not otherwise indemnified) resulting from all Included Claims equals or exceeds
$50 million, whereupon Purchaser shall be entitled to
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indemnification for Adverse Consequences (not otherwise indemnified) resulting
from Included Claims in excess of $50 million or (b) in excess of $200 million
in the aggregate other than with respect to indemnities pursuant to Section 3.18
(Environmental Matters); provided, however, that the provisions and limitations
of this Section 10.04 shall not apply (i) to the breach by the Authority of its
covenants and agreements under this Agreement other than Section 5.01(t),
Section 10.01(iii) or (iv); (ii) to breaches of representations and warranties
in which actual fraud of the Authority or senior officers of the Company is
proved, and (iii) to liabilities or indemnities relating to Article II, Sections
3.11 (Taxes), 3.16 (Finders' Fees) or Section 10.01(a)(ii); and provided,
further, that notwithstanding such provisions and limitations, the Authority
shall be obligated to make all payments under Section 10.01(iii) above when the
aggregate of all Adverse Consequences arising thereunder shall exceed $5
million, and the Authority shall be obligated to make all payments if and to the
extent that the Adverse Consequences (in the case of 10.01(iv)(3), in excess of
any amount expensed or reserved against by the Affiliated Group on or prior to
December 31, 1997) arising under Section 10.01(iv) above shall exceed the net
amounts received in connection therewith under the Company's existing insurance
policies, including any excess liability or umbrella insurance policies, plus $1
million. In calculating any Adverse Consequences for the purposes of determining
whether the $50 million threshold in clause (a) above has been exceeded, Adverse
Consequences shall be calculated without regard to any exception in a
representation or warranty for failure to have a Material Adverse Effect or
satisfy any other standard or
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threshold of materiality under any representation, warranty or covenant.
10.05 Indemnification Claim. Upon obtaining knowledge of any claim or
demand which has given rise to, or could reasonably give rise to, a claim for
indemnification hereunder, the party seeking indemnification ("Indemnitee")
shall promptly give written notice (the "Notice of Claim") of such claim or
demand to the other party from whom it seeks indemnification ("Indemnitor").
Indemnitee shall furnish to Indemnitor in reasonable detail such information as
Indemnitee may have with respect to such indemnification claim (including, to
the extent determinable, an estimate of any Adverse Consequences that Indemnitee
may suffer as a result thereof) and copies of any summons, complaint or other
pleading which may have been served upon it and any written claim, demand,
invoice, billing or other document evidencing or asserting the same. Subject to
the limitations set forth in Section 12.01 hereof, no failure or delay by
Indemnitee in the performance of the foregoing or delay in providing notice that
the total of all claims exceeds the threshold in Section 10.04(a) shall reduce
or otherwise affect the obligation of Indemnitor to indemnify and hold
Indemnitee harmless, except to the extent that such failure or delay shall have
adversely affected Indemnitor's ability to defend against, settle or satisfy any
liability, damage, loss, claim or demand for which Indemnitee is entitled to
indemnification hereunder.
10.06 Notice of Claim. If the claim or demand set forth in the Notice of
Claim given by Indemnitee pursuant to Section 10.05 hereof is a claim or demand
asserted by a third party, Indemnitor shall have fifteen (15) business days
after the Date of Notice of Claim to notify Indemnitee in writing of its
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election to defend such third party claim or demand on behalf of the Indemnitee.
If Indemnitor elects to defend such third party claim or demand, Indemnitee
shall make available to Indemnitor and its agents and representatives all
records and other materials which are reasonably required in the defense of such
third party claim or demand (and which will not result in any waiver of any
available privilege or defense) and shall otherwise cooperate with, and assist
Indemnitor in the defense of, such third party claim or demand, and so long as
Indemnitor is defending such third party claim in good faith, Indemnitee shall
not pay, settle or compromise such third party claim or demand. If Indemnitor
elects to defend such third party claim or demand, Indemnitee shall have the
right to participate in the defense of such third party claim or demand, at
Indemnitee's own expense. In the event, however, that Indemnitee reasonably
determines that representation by counsel to Indemnitor of both Indemnitor and
Indemnitee may present such counsel with a potential conflict of interest that
would make separate representation advisable under generally accepted standards
of professional conduct, or where non-monetary relief is being sought against
Indemnitee by a third party, then such Indemnitee may elect to defend such third
party claim or demand and employ separate counsel to represent or defend it in
any such action or proceeding at Indemnitee's own expense; provided, however,
that Indemnitee's defense of such action or proceeding shall not limit
Indemnitee's right to indemnification under this Article X if it is ultimately
determined that indemnification is due from Indemnitor. If Indemnitor does not
elect to defend such third party claim or demand or does not defend such third
party claim or demand in good faith, Indemnitee shall have the right, in
addition to any
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other right or remedy it may have hereunder, at Indemnitor's expense, to defend
such third party claim or demand; provided, however, that (a) Indemnitee shall
not have any obligation to participate in the defense of, or defend, any such
third party claim or demand; and (b) Indemnitee's defense of or its
participation in the defense of any such third party claim or demand shall not
in any way diminish or lessen the obligations of Indemnitor under the agreements
of indemnification set forth in this Article X. Notwithstanding the foregoing,
the New Company, as Indemnitee, shall be entitled to defend (i) any third party
action or proceeding brought by any Puerto Rico Entity and (ii) any unaffiliated
third party action or proceeding where the damages sought therein (together with
all other such actions and proceedings) are less than the then remaining amounts
not then incurred by the Affiliated Group pursuant to Section 10.04(a); provided
that, the Authority shall be entitled to participate in the defense of any such
claim at its expense.
10.07 Indemnitor's Obligations. Except for third party claims being
defended in good faith, each Indemnitor shall satisfy its obligations hereunder
in cash within thirty (30) days after the Date of Notice of Claim.
10.08 Date of Notice of Claim. The term "Date of Notice of Claim" shall
mean the date the Notice of Claim is given pursuant to Section 10.05 hereof.
10.09 Consent of Indemnification. No claim giving rise to a Notice of
Claim shall be compromised or settled (unless such claim has been made by a
Person other than a Puerto Rico Entity and Indemnitee has been fully and
unconditionally released from and against any liability and other obligations
with respect to such Claim and no further recourse with respect to the subject
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matter of the Claim exists against Indemnitee) except with the prior written
consent of the Indemnitee, which consent shall not be unreasonably withheld.
10.10 Subrogation. In the event that an Indemnitor makes any payment to
any Indemnitee for indemnification for which such Indemnitee could have
collected on a claim against a third party, the Indemnitor shall be entitled to
pursue claims and conduct litigations on behalf of such Indemnitee and any of
its successors, to pursue and collect on any indemnification or other remedy
available to such Indemnitee thereunder with respect to such claim and generally
to be subrogated to the rights of such Indemnitee.
10.11 Limitation on Liability. The parties hereto acknowledge and agree
that from and after the Closing, the sole and exclusive remedy with respect to
any and all claims made under this Agreement (other than any claims relating to
a breach of a covenant or agreement under this Agreement which by its terms
contemplates (x) performance after the Closing or (y) equitable remedies with
respect to Articles VI and Article IX) shall be made pursuant to the provisions
of this Article X and the Guarantees referred to in Section 8.02(j).
10.12 Calculation Methodology. The parties recognize that in certain
events a representation, warranty or covenant of the Authority may be breached
that may not entail an actual, direct "loss" suffered by the Purchaser or
Strategic Purchaser but would result in an actual loss by the New Company and an
indirect loss by the Purchaser of the New Company. However, for purposes of the
indemnification obligations under Section 10.01, Adverse Consequences suffered,
sustained or incurred by the Purchaser shall be deemed to be those that would
have been sustained by a
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purchaser of 100% of the stock of the New Company in reliance on such
representations, warranties and covenants (it being understood, however, that
indemnification in respect of such indirect Adverse Consequences pursuant to
Section 10.01 shall be payable to the New Company as opposed to Purchaser or
Strategic Purchaser).
ARTICLE XI
TERMINATION
11.01 Grounds for Termination.
(a) This Agreement may be terminated at any time prior to the
Closing:
(i) by mutual written agreement of the Authority and
Purchaser;
(ii) by either the Authority or Purchaser if the transactions
contemplated herein shall not have been consummated on or before December 31,
1998, or such other date, if any, as the Authority and Purchaser shall agree in
writing; provided that no party may terminate this Agreement pursuant to this
clause if such party's failure to fulfill any of its obligations under this
Agreement shall have been the reason that the Closing shall not have been
consummated on or before such date;
(iii) by either the Authority or Purchaser if consummation of
the transactions contemplated herein would violate any nonappealable final
order, decree or judgment of any court or Governmental Authority having
competent jurisdiction which the parties have used commercially reasonable
efforts to oppose and cause to be dismissed;
(iv) (x) By the Authority pursuant to, and subject to
Purchaser's rights under, Section 5.05 hereof, in the
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event the Authority enters into a definitive agreement with respect to a
Competing Transaction;
(y) without prejudice to Section 5.05, by Purchaser, if
the Authority or GDB publicly recommends a Competing Transaction, signs any
purchase or sale agreement relating to a Competing Transaction or any approval
constituting part of the Act No. 54 Approval is granted for a Competing
Transaction;
(v) By either the Authority or Purchaser if after July 21,
1998 such other party is then in material breach of this Agreement, and the
terminating party is not then in material breach of this Agreement; or
(vi) By either the Authority or Purchaser if, after July 21,
1998 and prior to the Closing, any condition set forth herein for the benefit of
such party (a) shall not have been timely met, (b) cannot be met on or before
the Closing Date and (c) has not been waived.
The party desiring to terminate this Agreement pursuant to clauses (ii),
(iii), (iv), (v), or (vi), shall give two (2) business days notice of such
termination to the other party.
(b) (i) Notwithstanding the provisions of Sections 11.01(a)(ii),
11.01(a)(v) and 11.01(a)(vi), if a default by any party hereto can be cured or a
condition satisfied within thirty (30) business days after the time initially
fixed for Closing as set forth herein, then the Closing Date shall be extended
for the period (not to exceed thirty (30) business days) but no later than
January 31, 1999 required for such party to make such cure or satisfaction. If
such cure or satisfaction cannot be, or is not, completed within thirty (30)
business days after such initial time, then the rights of the parties shall be
governed by
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the applicable provisions of this Agreement without regard to this Section
11.01(b).
Notwithstanding anything to the contrary contained herein, in the event
that the FCC Consent shall have been obtained but the FCC Consent shall not have
become a Final Order within the meaning of the FCC Rules on or prior to December
31, 1998, then the date set forth in Section 11.01(a)(ii) shall be extended
until the first to occur of five (5) business days after receipt of a Final
Order and March 31, 1999.
11.02 Effect of Termination.
(a) Mutual Consent. If this Agreement is terminated as permitted by
Section 11.01, such termination shall be without liability of any party (or any
shareholder, director, officer, employee, agent, consultant or representative of
such party) to any other party to this Agreement except for the liability of a
party as provided in Section 11.02(b) below; provided that if such termination
shall be pursuant to Section 11.01(a)(v) or (vi) as the result of the willful
failure of any party to fulfill its obligations under Section 7.01 (except where
the Authority has exercised its rights under Section 5.05 to negotiate with a
third party or recommend acceptance of a Competing Proposal or Purchaser
terminates this Agreement pursuant to Section 11.01(a)(iv)(y)) or to perform a
material covenant of this Agreement or from a willful misrepresentation by any
party to this Agreement, such party shall be fully liable for any and all
damages, costs and expenses (including, but not limited to, reasonable counsel
fees) sustained or incurred by the other parties as a result of such failure,
breach or misrepresentation. The provisions of Sections 5.05, 6.01, 7.04 and
11.02(b) and Articles X and XII shall survive any termination hereof.
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(b) Failure to Close.
(i) In the event that the Closing does not occur, and no
payment has been made or is due Purchaser under Section 5.05, Purchaser shall be
entitled to receive from the Company $1 million in the aggregate upon
termination of this Agreement to reimburse Purchaser, in part, for its
out-of-pocket expenses in connection with the transactions contemplated hereby.
(ii) In the event that the transactions are terminated
pursuant to Section 11.01(a)(iv) above, the Authority and the Company shall be
jointly and severally liable to pay to Purchaser the amounts, if any, provided
for in Section 5.05.
ARTICLE XII
MISCELLANEOUS
12.01 Survival. Except as specifically provided in Schedule 12.01 or the
last sentence of Section 11.02(a), the representations, warranties, covenants
and agreements contained herein shall survive the Closing and expire on March
31, 2000.
12.02 Notices. All notices, requests and other communications to each
party hereunder shall be in writing (including telecopy or similar writing, with
confirmation of receipt) and shall be given:
if to the Authority, to:
Puerto Rico Telephone Authority
1515 Roosevelt Avenue
Caparra, Puerto Rico 00920
Telephone:_____________________
Telecopy:______________________
Attention: Governing Board
Executive Director
with a copy to:
Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
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Telephone: (787) 728-9200
Telecopy: (787) 268-5496
Attention: President
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
290 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
if to Purchaser, to:
GTE Holdings (Puerto Rico) LLC
One Stamford Forum
Stamford, Connecticut 06901-3500
Telephone: (203) 965-2105
Telecopy: (203) 965-2332
Attention: Marianne Drost
with a copy to:
GTE International Telecommunications Incorporated
One Stamford Forum
Stamford, Connecticut 06901-3500
Telephone: (203) 965-2105
Telecopy: (203) 965-2332
Attention: Marianne Drost
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
if to Strategic Purchaser, to:
GTE International Telecommunications Incorporated
One Stamford Forum
Stamford, Connecticut 06901-3500
Telephone: (203) 965-2105
Telecopy: (203) 965-2332
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Attention: Marianne Drost
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
12.03 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived subject
to the requirements of applicable law if, and only if, such amendment or waiver
is in writing and signed, in the case of an amendment, by Purchaser and the
Authority, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
12.04 Expenses. Except as otherwise expressly provided in this Agreement
or the Financing Letter, all costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense; provided
that, expenses with respect to services requested by the Authority in connection
with the privatization shall be paid by the Authority. Costs and expenses
incurred by the Affiliated Group in connection with the Reorganization or the
Financing shall be borne by the Company. Stamp taxes, transfer and recording
fees assessed in connection with the Stock Purchase shall be paid by the
Authority. One half of all expenses due with respect to any filing under the HSR
Act
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shall be borne and paid by the Authority and one half shall be paid by the
Purchaser.
12.05 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of the other parties hereto and compliance with applicable laws and
regulations, except that (i) Purchaser may (subject to applicable laws and
regulations) transfer or assign, in whole or from time to time in part, to one
or more of its wholly owned subsidiaries, the right to purchase all of the
Purchased Shares and (ii) Purchaser may transfer Shares as provided in Section
4.2(b) of the Shareholders Agreement, but in each case no such transfer or
assignment will relieve Purchaser or Strategic Purchaser of its obligations
hereunder.
12.06 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of Puerto Rico without giving effect to principles of
conflicts of laws.
12.07 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
12.08 Entire Agreement. Subject to applicable laws and regulations, this
Agreement, as amended and restated, including the Schedules, the Financing
Letter, the Disclosure Schedule and Exhibits hereto and the Confidentiality
Agreement, constitutes the entire agreement between the parties with respect to
the
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subject matter hereof and supersedes all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to the
subject matter of this Agreement, including the Confidentiality Agreement
(except as provided in Section 6.01 hereof). No representation, inducement,
promise, understanding, condition or warranty not set forth herein has been made
or relied upon by either party hereto.
12.09 Captions; Definitions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof. All capitalized terms used in this Agreement which are
not defined in the text of the Agreement shall have the meanings assigned
thereto in Appendix A hereto.
12.10 Jurisdiction and Immunity. Purchaser and the Authority hereby
irrevocably and unconditionally submit to the jurisdiction of the United States
District Court for the District of Puerto Rico and, if such court shall not have
subject matter jurisdiction, in any court of Puerto Rico having subject matter
jurisdiction for purposes of any suit, action or proceeding seeking to enforce
any provision of, or based on any right arising out of, this Agreement, and
Purchaser, Strategic Purchaser and the Authority agree not to commence any such
suit, action or proceeding except in the United States District Court for the
District of Puerto Rico or, if such court shall not have subject matter
jurisdiction, in any court of Puerto Rico having subject matter jurisdiction.
Purchaser, Strategic Purchaser and the Authority hereby irrevocably and
unconditionally waive any objection to the laying of venue of any such suit,
action or proceeding in the United States District Court for the District of
Puerto Rico or, if such court shall not have subject matter
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jurisdiction, in any court of Puerto Rico having subject matter jurisdiction and
hereby further and irrevocably waive and agree not to plead or claim in any such
court that any such suit, action or proceeding has been brought in an
inconvenient forum.
12.11 Third Party Beneficiaries; Parties Bound.
(a) No provision of this Agreement shall create any third party
beneficiary rights in any person (including without limitation, any employee or
former employee of the Company (or any beneficiary or dependent thereof) in
respect of continued employment or resumed employment, or in respect of any
benefits that may be provided, directly or indirectly, under any employee
benefit plan or arrangement), nor shall any provision of this Agreement modify
any rights of any third party under any existing law, regulation or contract
with any third party; provided, that, the Authority acknowledges and agrees that
Popular, Inc. is and will be a third-party beneficiary of this Agreement
(including possibly as a Minority Partner) with the right to enforce the rights
granted to it directly under this Agreement directly against the Authority.
(b) Purchaser, Strategic Purchaser, the Authority and the Affiliated
Group are entering into the Agreement in their capacity as corporations or
limited liability companies only and no officer, director or other individual
associated therewith shall have any personal liability under this Agreement.
12.12 INTENTIONALLY OMITTED
12.13 Additional Signatories. Upon consummation of the Reorganization, the
Authority shall cause the New Company and the Operating Subsidiaries to execute
and deliver counterparts of this Agreement to each of the other parties.
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<PAGE> 89
IN WITNESS WHEREOF, the parties hereto here caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:
By:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:________________________________
By:
PUERTO RICO TELEPHONE AUTHORITY
By:
PUERTO RICO TELEPHONE COMPANY
By:________________________________
<PAGE> 90
APPENDIX A
"Acquisition Proposal" has the meaning set forth in Section 5.05(a)
hereof.
"Act No. 54" has the meaning set forth in the recitals hereto.
"Act No. 54 Approval" has the meaning set forth in Section 2.02(a) hereof.
"Adverse Consequences" shall have the meaning set forth in Section 10.01
hereof.
"Affiliated Group" shall have the meaning set forth in the recitals
hereto.
"Agreement" means this Agreement and all Exhibits and Schedules hereto.
"Authority" has the meaning set forth in the recitals hereto.
"Authority Act" has the meaning set forth in Section 2.01 hereof.
"Authority Debt" shall mean the debt of the Authority as set forth in
Section 1.03 of the Disclosure Schedule.
"Authority Indemnitees" has the meaning set forth in Section 10.02 hereof.
"Balance Sheet" shall mean the balance sheet of the Company as of December
31, 1997 attached as Schedule 3.05D.
"Balance Sheet Date" means December 31, 1997.
"Benefits Maintenance Period" has the meaning set forth in Section
9.01(b)(ii) hereof.
"Board" has the meaning set forth in Section 8.01(b) hereof.
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"Capital Budget" means Section C-3 of the 1997 Report on Telephone
Operations prepared by Complan Associates, Inc. with respect to the 1998
Construction Program of the Company dated February 1998 in the form delivered to
Purchaser on May 27, 1998.
"Capital Contribution" has the meaning set forth in Section 9.04(a)
hereof.
"Closing" has the meaning set forth in Section 1.02 hereof.
"Closing Date" has the meaning set forth in Section 1.02 hereof.
"Code" has the meaning set forth in Section 3.12(a) hereof.
"Communications Act" has the meaning set forth in Section 2.03(ii) hereof.
"Companion Legislation" means legislation enabling or enacting those
matters described on Exhibit D hereto and enacted prior to July 21, 1998.
"Company" shall mean Puerto Rico Telephone Company, a Delaware
corporation.
"Company Benefit Arrangements" has the meaning set forth in Section
3.12(c) hereof.
"Company Employee Plans" has the meaning set forth in Section 3.12(a)
hereof.
"Company Representatives" has the meaning set forth in Section 5.05(a)
hereof.
"Company Shares" has the meaning set forth in the recitals hereto.
"Competing Transaction" has the meaning set forth in Section 5.05(a)
hereof.
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"Confidentiality Agreement" means the Confidentiality Agreement dated
September 16, 1997 between Strategic Purchaser and the Negotiating Committee.
"Date of Notice of Claim" has the meaning set forth in Section 10.08
hereof.
"Dependent Plan" has the meaning set forth in Section 9.01(b) hereof.
"Disclosure Schedule" has the meaning set forth in Section 1.03(d) hereof.
"Dividend Amount" means $1.565 billion plus any other cash or cash
equivalents of the Affiliated Group on hand on the Closing Date, less the
transaction costs of the Financing and an amount reasonably estimated to pay any
Taxes of the Affiliated Group accrued since January 1, 1998 to the Closing Date
which have not yet been paid (other than any amounts being contested in good
faith for which the Company has created a reserve in the Financial Statements);
provided, that, up to $150 million of the Dividend Amount, or such greater
amount as the Authority may elect as provided in the Financing Letter, may
consist of the Dividend Note.
"Dividend Note" means a promissory note as provided in the Financing
Letter.
"DOL" has the meaning set forth in Section 3.12(c) hereof.
"Drop Downs" has the meaning set forth in the recitals hereto.
"Environmental Claims" means any claim, action, cause of action,
investigation or notice (written or oral) by any person or entity alleging
potential liability in a material amount (including, without limitation,
potential liability for
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<PAGE> 93
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (a) the presence, or release into the
environment, of any Regulated Substance at any location, whether or not owned or
operated by Seller or (b) circumstances forming the basis of any violation, or
alleged violation, of any applicable Environmental Law.
"Environmental Laws" means all federal, state, Puerto Rico, local and
foreign laws and regulations relating to pollution or protection of human health
or the environment, (including, without limitation, air, surface water, ground
water, land surface, and subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Regulated Substances; or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transportation or
handling of Regulated Substances.
"ERISA" has the meaning set forth in Section 3.12(a) hereof.
"Escrow Agreement" means an Escrow Agreement among an escrow agent to be
agreed upon by Purchaser and the Authority, the Authority and the New Company in
such form and substance agreed to by the Authority and Strategic Purchaser,
pursuant to which, at the Closing, the Authority will escrow $100 million in
cash, in aggregate principal amount of Dividend Note, or a combination thereof
to satisfy a portion of its obligations pursuant to Section 9.04 hereof.
"FCC" has the meaning set forth in the recitals hereto.
"FCC Consent" means the initial order of the FCC staff approving the
acquisition by Purchaser of the Purchased Shares.
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"FCC Licenses" has the meaning set forth in Section 2.03(ii) hereof.
"FCC Rules" has the meaning set forth in Section 2.03(ii) hereof.
"Final Budget" means the 1998 Final Budget with respect to the Company
prepared by the Company and included in the Puerto Rico Telephone Authority &
Subsidiaries Business Plan: 1998 - 2002 dated October 1997 in the form delivered
to Purchaser on or about May 27, 1998.
"Final Order" means an order of the FCC granting its approval, to the
extent required by law, to the transactions contemplated herein to occur at the
Closing, which order has become final. For purposes of this Agreement, "final"
shall mean action by the FCC: (a) which has not been vacated, reversed, stayed,
set aside, annulled or suspended; (b) with respect to which no timely appeal,
timely request for stay, or timely petition for rehearing, reconsideration or
review by any Person or governmental entity or by the FCC on its motion, is
pending; and (c) as to which the time for filing any such timely appeal, timely
request, timely petition or for the reconsideration or review by the FCC on its
own motion, has expired.
"Financial Statements" has the meaning set forth in Section 3.05 hereof.
"Financing" means the borrowing on a medium or long-term basis of not less
than $1.25 billion at the Closing by the New Company and/or its subsidiaries
without recourse to any of the shareholders of the New Company.
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"Financing Letter" means the letter dated July 21, 1998 among GTE
Corporation, Strategic Purchaser, Purchaser and the Authority relating to the
Financing.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GAS" means governmental accounting standards as in effect from time to
time, as promulgated by the Governmental Accounting Standards Board.
"GDB" has the meaning set forth in Section 3.16 hereof.
"GDB Newco" shall mean a newly formed Puerto Rico corporation organized
for the sole purpose of owning Shares and Dividend Notes, if any, after the
Closing Date.
"Governmental Action" has the meaning set forth in Section 4.09 hereof.
"Governmental Authority" means any foreign, federal, state, Puerto Rico,
municipal, local or other government or governmental agency, authority, court,
department, commission, board, agency or instrumentality, including but not
limited to the European Union, or any employee or agent thereof.
"Hourly Plan" has the meaning set forth in Section 9.01(a) hereof.
"HSR Act" has the meaning set forth in Section 2.03(iii) hereof.
"Included Claims" has the meaning set forth in Section 10.04 hereof.
"Indemnitee" has the meaning set forth in Section 10.05 hereof.
"Indemnitor" has the meaning set forth in Section 10.05 hereof.
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<PAGE> 96
"Indenture" means the Trust Agreement dated as of January 1, 1974 between
the Authority and the Chase Manhattan Bank, as amended as of May 27, 1998.
"Installment" has the meaning set forth in Section 9.04(b) hereof.
"Intellectual Property" means (i) all patents, patent rights, patent
applications, trademarks, trademark applications, service marks, service mark
applications, tradenames and copyrights licensed to, owned by or registered in
the name of the Company or in which the Company has any rights, or used by the
Company in the conduct of its business, which are material to its business and
(ii) all other proprietary and intellectual property rights (other than the
Company's customer lists) that the Company uses and that are not within the
general knowledge of the industry, which are material to the business of the
Company, including, but not limited to rights and licenses to use intellectual
property of any Person.
"Interim Financial Statements" has the meaning set forth in Section 3.05
hereof.
"IRS" has the meaning set forth in Section 3.12(c) hereof.
"knowledge" means the actual knowledge of any member of the Board of
Directors or senior executive officers with the rank of Senior Vice President or
higher of the Person, and in the case of the Company, Vice Presidents of the
Company with responsibility for finance, accounting, legal, environmental and
human resources matters and the Treasurer.
"Lien" shall mean, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
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"Lump Sum Plan" has the meaning set forth in Section 9.01(b) hereof.
"Management Agreement" means the Management Agreement to be dated as of
the Closing Date, substantially in the form attached hereto as Exhibit E.
"Material Adverse Change" means any change, event or circumstance that is
or is reasonably likely to be materially adverse to the business, operations,
financial condition or results of operations of such entity and its subsidiaries
taken as a whole, other than any change or circumstance relating to (i) the
economy in general, or (ii) the industries in which the entity operates.
"Material Adverse Effect" means, with respect to any entity, any effect
that is or is reasonably likely to be materially adverse to the business,
operations, financial condition or results of operations of such Person and its
subsidiaries taken as a whole, other than any effect relating to (i) the economy
in general, or (ii) the industries in which such entity operates.
"Material Contracts" has the meaning set forth in Section 3.13(b) hereof.
"Minority Partners" means those Persons referred to in Section 6.05
hereof.
"Multiemployer Plan" has the meaning set forth in Section 3.12(a) hereof.
"Multiple Employer Plan" has the meaning set forth in Section 3.12(a)
hereof.
"Negotiating Committee" has the meaning set forth in the recitals hereto.
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<PAGE> 98
"New Company" has the meaning set forth in the recitals hereto.
"New Company Shares" means the common stock, par value $0.01 per share, of
the New Company.
"New Company Transfer" has the meaning set forth in the recitals hereto.
"Non-Competition Agreement" means the Non-Competition Agreement or
Agreements dated the Closing Date among the New Company, Purchaser, the
Authority, GTE Corporation, Strategic Purchaser, the Minority Partners and the
other parties named therein substantially in the form attached hereto as Exhibit
F.
"Non-Solicitation Period" has the meaning set forth in Section 5.05
hereof.
"Notice Date" has the meaning set forth in Section 9.04(d) hereof.
"Notice of Claim" has the meaning set forth in Section 10.05 hereof.
"Offset Amount" has the meaning set forth in Section 9.01(a) hereof.
"Operating Subsidiary" has the meaning set forth in the recitals hereto.
"Option Agreement" means the Option Agreement dated as of the Closing Date
between the Authority and the Purchaser, substantially in the form attached
hereto as Exhibit G.
"Other Legislation" means legislation described in Exhibit H, without any
material change that has not been accepted by Purchaser.
"Participating Employees" has the meaning set forth in Section 9.01(b)(ii)
hereof.
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<PAGE> 99
"Permitted Liens" means any (a) mechanic's, materialmen's, utility and
similar Liens, (b) Liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money Liens and Liens securing rental payments under capital lease
arrangements, (d) any liens incurred in connection with the Financing and (e)
other Liens arising in the ordinary course of business and not incurred in
connection with the borrowing of money (which other Liens do not materially
interfere with the present use or value of the assets subject thereto).
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a body corporate, a limited liability
company, an unlimited company, an unlimited liability company, a trust, a joint
venture, an unincorporated organization, or a Governmental Authority.
"Plans" has the meaning set forth in Section 9.01(b)(i) hereof.
"PR Code" has the meaning set forth in Section 3.12(b) hereof.
"Puerto Rico Entity" shall mean any Governmental Authority of Puerto Rico.
"Purchased Shares" has the meaning set forth in the recitals hereto.
"Purchase Price" has the meaning set forth in Section 1.01 hereof.
"Purchaser" has the meaning set forth in the recitals hereto.
"Purchaser Group" means Strategic Purchaser, Purchaser, Popular, Inc., to
the extent it is sold New Company Shares
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<PAGE> 100
pursuant to Section 6.05 hereof, and any Person to whom the New Company or
Purchaser is permitted to sell Purchased Shares pursuant to Section 6.05 hereof
or the Shareholders Agreement, and their respective affiliates and
representatives.
"Purchaser Indemnitees" shall have the meaning set forth in Article 10.01
hereof.
"Regulated Substance" means (1) any "hazardous substance" or "pollutant"
or "contaminant," as said terms are defined in the Comprehensive Environmental
Response, Compensation and Liability Act (Title 42 United States Code Section
9601 et seq.), or Title 40 Code of Federal Regulations Part 302; (2) any
"hazardous waste" as said term is defined in the Puerto Rico Environmental
Quality Board Regulation for the Control of Hazardous and Non-Hazardous Solid
Waste, as amended; (3) any toxic or hazardous substance, material or waste
(whether solid, liquid or gaseous); (4) "petroleum," as that term is defined in
the Resource Conservation and Recovery Act, as amended (Title 42 United States
Code Section 6991 et seq.), or Title 40 Code of Federal Regulations ss. 280.1;
or (5) any other substance or waste which is regulated under any applicable
Environmental Law with respect to its collection, storage, transportation for
disposal, treatment, or disposal.
"Reorganization" has the meaning set forth in the recitals hereto.
"Replacement Plan" has the meaning set forth in Section 9.01(a) hereof.
"Retirement System" shall mean the Retirement System of the Government of
Puerto Rico and its instrumentalities.
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<PAGE> 101
"Retirement System Participants" has the meaning set forth in Section
9.01(a) hereof.
"Returns" has the meaning set forth in Section 4.10 hereof.
"Revenue Ruling" means rulings of the Puerto Rico taxing authorities
providing for deductibility of contributions to employee plans of the New
Company to fund Unfunded Liabilities as contemplated in Section 9.04 hereof.
"Salaried Plan" has the meaning set forth in Section 9.01(a) hereof.
"Seller" has the meaning set forth in the recitals hereto.
"Shareholders Agreement" means the Shareholders Agreement dated as of the
Closing Date among the Authority, New Company and Purchaser, among others,
substantially in the form of Exhibit I hereto.
"Special Dividend" has the meaning set forth in Section 1.03(c) hereof.
"Stock Purchase" has the meaning set forth in the recitals hereof.
"Strategic Purchaser" has the meaning set forth in the recital hereof.
"Supplemental Plan" has the meaning set forth in Section 9.01(b) hereof.
"Tax" or "Taxes" means any tax, imposition, charge, fee or levy or other
assessment, including without limitation, payments in lieu of tax required under
the Authority Act or otherwise, income, gross receipts, sales, use, ad valorem,
goods and services, capital, transfer, franchise, profits, license, withholding,
payroll, employment, employer health, excise, estimated, severance, stamp,
occupation, property or other taxes,
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customs duties, fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority, including but not limited to federal, Puerto
Rico, municipal and local tax authorities.
"Technology Transfer Agreement" means the Technology Transfer Agreement to
be dated as of the Closing Date, substantially in the form of Exhibit J attached
hereto.
"TLD" has the meaning set forth in Section 5.05(a) hereof.
"Unfunded Liabilities" has the meaning set forth in Section 9.04.
"Wireless" has the meaning set forth in the recitals hereto.
"Wireless Drop Down" has the meaning set forth in the recitals hereto.
"Wireline" has the meaning set forth in the recitals hereto.
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<PAGE> 103
Schedule 12.01
Survival of Representations, Warranties and Covenants
<TABLE>
<CAPTION>
Section Section Survival Period
------- ------- ---------------
<S> <C> <C>
Article II Representations and Warranties of the Authority:
2.01 Existence and Power............................ Statute*
2.02 Corporate Authorization........................ Statute
2.03 Governmental Authorization..................... Statute
2.04 Non-Contravention.............................. Statute
2.05 Capitalization Statute
Article III Representations and Warranties of the Authority
as to the Company:
3.01 Existence and Power............................ Statute
3.02 Corporate Authorization........................ Statute
3.03 Governmental Authorization..................... Statute
3.11 Taxes.......................................... Statute
3.12 Employee Benefits.............................. Statute
3.16 Finders' Fees Statute
3.17 The Authority Debt............................. Statute
3.18 Environmental Matters.......................... Statute
Article IV Representations and Warranties of Purchaser and
Strategic Purchaser:
4.01 Organization and Existence..................... Statute
4.02 Corporate Authorization........................ Statute
4.03 Governmental Authorization..................... Statute
4.04 Non-Contravention.............................. Statute
4.05 Finders' Fees Statute
4.06 Financing...................................... N/A**
4.07 Purchase for Investment........................ Statute
4.08 Ability to Complete the Transaction............ N/A**
4.09 Certain Understandings......................... Statute
4.10 Legal Compliance............................... Statute
Article V Covenants of the Authority:
5.02 Access to Information.......................... Statute
5.03 Notices of Certain Events...................... N/A**
5.04 Release of the Authority Debt.................. Statute
</TABLE>
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<PAGE> 104
<TABLE>
<CAPTION>
Section Section Survival Period
------- ------- ---------------
<S> <C> <C>
5.05 No Solicitation; Competing Transactions........... Statute
Article VI Covenants of Purchaser and Strategic Purchaser:
6.01 Confidentiality: .............................. Statute
6.02 Access......................................... Statute
6.03 Notice of Certain Events....................... N/A**
6.04 Conduct........................................ Statute
6.07 Telephone Tariffs.............................. Indefinite
Article IX Employee Benefits:
9.01 Retirement Benefits of Company Employees....... Statute
9.02 Involuntary Termination of Employees........... Indefinite
9.03 Voluntary Separation Program................... 2 years
9.04 Capital Contribution by Authority.............. 7 years
9.05 Act No. 54 Compliance.......................... Statute
Article XII
12.04 Expenses ...................................... Statute
</TABLE>
- ----------
* In each case Statute means the applicable statute of limitations of the
applicable jurisdictions for the subject matter of such section determined
by reference to the later of the occurrence or discovery of claim.
** Does not survive the Closing.
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EXHIBIT D
MATTERS COVERED BY COMPANION LEGISLATION
All of the following shall have an effective date on or prior to the
Closing Date.
1. Property that has been acquired prior to the Closing Date by the
Affiliated Group through eminent domain will continue to be categorized as
having public utility after the Closing Date.
2. The Affiliated Group will be relieved of any and all liability to the
Employee Retirement System.
3. Establishment of formula to be utilized by CRIM for the valuation of
"outside plant" for the assessment of property taxes, which shall provide
for an aggregate valuation as of December 31, 1997 of not more than
$472,000,000.
4. The establishment of a formula to be utilized for allocation among
municipalities of municipal license taxes and property taxes related to
"outside plant."
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Exhibit 10.2
FIRST AMENDMENT TO
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT, dated as of January 4, 1999 by and among GTE
Holdings (Puerto Rico) LLC ("Purchaser"), GTE International Telecommunications
Incorporated ("Strategic Purchaser"), Puerto Rico Telephone Authority (the
"Authority") and Puerto Rico Telephone Company (the "Company" and collectively
with Purchaser, Strategic Purchaser and the Authority, the "Parties").
WITNESSETH:
WHEREAS, Purchaser, Strategic Purchaser, the Authority and the Company are
parties to that certain Amended and Restated Stock Purchase Agreement dated as
of July 21, 1998 (the "Purchase Agreement"); and
WHEREAS, the Parties desire to modify certain provisions of the Purchase
Agreement.
NOW, THEREFORE, the Parties hereby covenant and agree as follows:
Section 1. Termination. Section 11.01 of the Purchase Agreement is hereby
amended and restated in its entirety to read:
"11.01 Grounds for Termination.
(a) This Agreement may be terminated at any time prior to the
Closing:
(i) by mutual written agreement of the Authority and
Purchaser;
(ii) by either the Authority or Purchaser if the transactions
contemplated herein shall not have been consummated on or before January
31, 1999, or such other date, if any, as the Authority and Purchaser shall
agree in writing; provided that no party may terminate this Agreement
pursuant to this clause if such party's failure to fulfill any of its
obligations under this Agreement shall have been the reason that the
Closing shall not have been consummated on or before such date;
(iii) by either the Authority or Purchaser if consummation of
the transactions contemplated
- 1 -
<PAGE> 2
herein would violate any nonappealable final order, decree or judgment of
any court or Governmental Authority having competent jurisdiction which
the parties have used commercially reasonable efforts to oppose and cause
to be dismissed;
(iv) (x) By the Authority pursuant to, and subject to
Purchaser's rights under, Section 5.05 hereof, in the event the Authority
enters into a definitive agreement with respect to a Competing
Transaction;
(y) without prejudice to Section 5.05, by Purchaser, if
the Authority or GDB publicly recommends a Competing Transaction, signs
any purchase or sale agreement relating to a Competing Transaction or any
approval constituting part of the Act No. 54 Approval is granted for a
Competing Transaction;
(v) By either the Authority or Purchaser if after July 21,
1998 such other party is then in material breach of this Agreement, and
the terminating party is not then in material breach of this Agreement; or
(vi) By either the Authority or Purchaser if, after July 21,
1998 and prior to the Closing, any condition set forth herein for the
benefit of such party (a) shall not have been timely met, (b) cannot be
met on or before the Closing Date and (c) has not been waived.
The party desiring to terminate this Agreement pursuant to clauses
(ii), (iii), (iv), (v), or (vi), shall give two (2) business days notice
of such termination to the other party.
(b) (i) Notwithstanding the provisions of Sections 11.01(a)(ii),
11.01(a)(v) and 11.01(a)(vi), if a default by any party hereto can be
cured or a condition satisfied within thirty (30) business days after the
time initially fixed for Closing as set forth herein, then the Closing
Date shall be extended for the period (not to exceed thirty (30) business
days) but no later than March 1, 1999 required for such party to make such
cure or satisfaction. If such cure or satisfaction cannot be, or is not,
completed within thirty (30) business days after such initial time, then
the rights of the parties shall be governed by the applicable provisions
of this Agreement without regard to this Section 11.01(b).
Notwithstanding anything to the contrary contained herein, in the
event that the FCC Consent
- 2 -
<PAGE> 3
shall have been obtained but the FCC Consent shall not have become a Final
Order within the meaning of the FCC Rules on or prior to January 31, 1999,
then the date set forth in Section 11.01(a)(ii) shall be extended until
the first to occur of five (5) business days after receipt of a Final
Order and March 31, 1999."
Section 2. No Other Amendments. Except as expressly provided in this First
Amendment, all of the terms and conditions of the Purchase Agreement remain
unchanged.
Section 3. Authority; Binding Effect. Each party hereto represents and
warrants that the execution, delivery and performance by such party of this
First Amendment are within such party's powers, have been duly authorized by
such party and, upon execution hereof by such party, will be duly executed and
will constitute a valid and binding obligation of such party.
Section 4. Counterparts. This First Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. This First Amendment shall
become effective when each party hereto has received a counterpart signed by the
other parties hereto.
Section 5. Governing Law. This First Amendment shall be construed in
accordance with and governed by the laws of Puerto Rico without giving effect to
principles of conflicts of law.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the Parties hereto have caused this First Amendment to
the Stock Purchase Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:
---------------------------------------
By:
---------------------------------------
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
---------------------------------------
By:
---------------------------------------
PUERTO RICO TELEPHONE AUTHORITY
By:
---------------------------------------
PUERTO RICO TELEPHONE COMPANY
By:
---------------------------------------
- 4 -
<PAGE> 1
Exhibit 10.3
SECOND AMENDMENT TO
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT, dated as of January 29, 1999 by and among GTE
Holdings (Puerto Rico) LLC ("Purchaser"), GTE International Telecommunications
Incorporated ("Strategic Purchaser"), Puerto Rico Telephone Authority (the
"Authority") and Puerto Rico Telephone Company (the "Company" and collectively
with Purchaser, Strategic Purchaser and the Authority, the "Parties").
WITNESSETH:
WHEREAS, Purchaser, Strategic Purchaser, the Authority and the Company are
parties to that certain Amended and Restated Stock Purchase Agreement dated as
of July 21, 1998, as amended as of January 4, 1999 (the "Purchase Agreement");
and
WHEREAS, the Parties desire to modify certain provisions of the Purchase
Agreement.
NOW, THEREFORE, the Parties hereby covenant and agree as follows:
Section 1. Termination. Section 11.01 of the Purchase Agreement is hereby
amended and restated in its entirety to read:
"11.01 Grounds for Termination.
(a) This Agreement may be terminated at any time prior to the
Closing:
(i) by mutual written agreement of the Authority and
Purchaser;
(ii) by either the Authority or Purchaser if the transactions
contemplated herein shall not have been consummated on or before February
26, 1999, or such other date, if any, as the Authority and Purchaser shall
agree in writing; provided that no party may terminate this Agreement
pursuant to this clause if such party's failure to fulfill any of its
obligations under this Agreement shall have been the reason that the
Closing shall not have been consummated on or before such date;
(iii) by either the Authority or Purchaser if consummation of
the transactions contemplated herein would violate any nonappealable final
order, decree or judgment of any court or Governmental Authority having
competent jurisdiction which the
<PAGE> 2
parties have used commercially reasonable efforts to oppose and cause to
be dismissed;
(iv) (x) By the Authority pursuant to, and subject to
Purchaser's rights under, Section 5.05 hereof, in the event the Authority
enters into a definitive agreement with respect to a Competing
Transaction;
(y) without prejudice to Section 5.05, by Purchaser, if
the Authority or GDB publicly recommends a Competing Transaction, signs
any purchase or sale agreement relating to a Competing Transaction or any
approval constituting part of the Act No. 54 Approval is granted for a
Competing Transaction;
(v) By either the Authority or Purchaser if after July 21,
1998 such other party is then in material breach of this Agreement, and
the terminating party is not then in material breach of this Agreement; or
(vi) By either the Authority or Purchaser if, after July 21,
1998 and prior to the Closing, any condition set forth herein for the
benefit of such party (a) shall not have been timely met, (b) cannot be
met on or before the Closing Date and (c) has not been waived.
The party desiring to terminate this Agreement pursuant to clauses
(ii), (iii), (iv), (v), or (vi), shall give two (2) business days notice
of such termination to the other party.
(b) (i) Notwithstanding the provisions of Sections 11.01(a)(ii),
11.01(a)(v) and 11.01(a)(vi), if a default by any party hereto can be
cured or a condition satisfied within thirty (30) business days after the
time fixed for Closing as set forth herein, then the Closing Date shall be
extended for the period (not to exceed thirty (30) business days) but no
later than March 31, 1999 required for such party to make such cure or
satisfaction. If such cure or satisfaction cannot be, or is not, completed
within thirty (30) business days after such initial time, then the rights
of the parties shall be governed by the applicable provisions of this
Agreement without regard to this Section 11.01(b).
Notwithstanding anything to the contrary contained herein, in the
event that the FCC Consent shall have been obtained but the FCC Consent
shall not have become a Final Order within the meaning of the FCC Rules on
or prior to February 26, 1999, then the
- 2 -
<PAGE> 3
date set forth in Section 11.01(a)(ii) shall be extended until the first
to occur of five (5) business days after receipt of a Final Order and
March 31, 1999."
Section 2. No Other Amendments. Except as expressly provided in this
Second Amendment, all of the terms and conditions of the Purchase Agreement
remain unchanged.
Section 3. Authority; Binding Effect. Each party hereto represents and
warrants that the execution, delivery and performance by such party of this
Second Amendment are within such party's powers, have been duly authorized by
such party and, upon execution hereof by such party, will be duly executed and
will constitute a valid and binding obligation of such party.
Section 4. Counterparts. This Second Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. This Second Amendment
shall become effective when each party hereto has received a counterpart signed
by the other parties hereto.
Section 5. Governing Law. This Second Amendment shall be construed in
accordance with and governed by the laws of Puerto Rico without giving effect to
principles of conflicts of law.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the Parties hereto have caused this Second Amendment
to the Stock Purchase Agreement to be duly executed by their respective
authorized officers as of the day and year first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:
----------------------------------------
By:
----------------------------------------
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
----------------------------------------
By:
----------------------------------------
PUERTO RICO TELEPHONE AUTHORITY
By:
----------------------------------------
PUERTO RICO TELEPHONE COMPANY
By:
----------------------------------------
- 4 -
<PAGE> 1
Exhibit 10.4
EXECUTION COPY
THIRD AMENDMENT TO
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
THIS THIRD AMENDMENT, dated as of March 2, 1999 by and among GTE xHoldings
(Puerto Rico) LLC ("Purchaser"), GTE International Telecommunications
Incorporated ("Strategic Purchaser"), Puerto Rico Telephone Authority (the
"Authority"), Telecomunicaciones de Puerto Rico, Inc. (the "New Company"),
Celulares Telefonica, Inc. ("Wireless") and Puerto Rico Telephone Company, Inc.
("Wireline" and collectively with Purchaser, Strategic Purchaser, the Authority,
the New Company and Wireless, the "Parties").
WITNESSETH:
WHEREAS, Purchaser, Strategic Purchaser, the Authority and Puerto Rico
Telephone Company, the predecessor by merger of Wireline, are parties to that
certain Amended and Restated Stock Purchase Agreement dated as of July 21, 1998,
as amended on January 4, 1999 and January 29, 1999 (the "Purchase Agreement");
and
WHEREAS, the Parties desire to modify certain provisions of the Purchase
Agreement.
NOW, THEREFORE, the Parties hereby covenant and agree as follows:
Section 1. Reorganization. The fourth recital of the Purchase Agreement is
hereby amended and restated in its entirety to read:
"WHEREAS, pursuant to authority granted under Act No. 54, the Authority
organized a new Puerto Rico corporation (the "New Company") for the
purpose of transferring to the New Company prior to the Closing all the
issued and outstanding shares of capital stock of the Operating
Subsidiaries in consideration for shares of common stock of the New
Company representing 100% of the issued and outstanding capital stock of
the New Company and $100,000, which the New Company has received from the
Strategic Purchaser in consideration for the issuance of a demand
promissory note in an original principal amount of $100,000 (the "New
Company Transfer" and together with the Drop Downs, the
"Reorganization");"
- 1 -
<PAGE> 2
Section 2. Purchasers' Contribution to Employee Plan. The thirteenth
recital of the Purchase Agreement is hereby amended and restated in its entirety
to read:
"WHEREAS, Purchaser and Popular, Inc. intend to jointly contribute on the
Closing Date to a trust organized for the benefit of the employees of the
Affiliated Group at no cost to such trust such number of Purchased Shares
representing one percent (1%) of the outstanding New Company Shares."
Section 3. Actions at Closing. Section 1.03(g) of the Purchase Agreement
is hereby amended and restated in its entirety to read:
"(g) Purchaser and Popular, Inc. shall jointly contribute such number of
Purchased Shares representing one percent (1%) of the issued and outstanding
shares of the New Company on the Closing Date to the stock bonus plan or
employee stock ownership plan and trust referred to in Section 8.02(l)(i)
hereof."
Section 4. Other Purchasers.
(a) Section 6.05(a) of the Purchase Agreement is hereby amended and
restated in its entirety to read:
"(i) It is contemplated that at the Closing, at Purchaser's
election, the Authority shall directly sell and transfer 1% of the New
Company Shares to Purchaser and Popular, Inc. jointly (in lieu of
transferring such New Company Shares to Purchaser), and that Purchaser and
Popular, Inc. shall jointly contribute such New Company Shares on the
Closing Date to the stock bonus plan or employee stock ownership plan and
trust referred to in Section 8.02(l)(i) hereof; provided, that, Purchaser
and Popular, Inc. shall deliver to the Authority the purchase price for
the New Company Shares they are to acquire jointly in immediately
available funds by wire transfer to an account of the Authority with a
bank in New York City designated by the Authority at least three (3)
business days prior to the Closing Date.
(ii) It is contemplated that at the Closing, at Purchaser's
election, the Authority shall directly sell and transfer 9.99% of the New
Company Shares to Popular, Inc. (in lieu of transferring such Purchased
Shares to Purchaser); provided, that, Popular, Inc. (x) shall deliver to
the Authority the purchase price for the New Company Shares it is to
acquire in immediately available funds by wire transfer to an account of
the Authority with a bank in New York City designated by the Authority at
least three (3) business days prior to the Closing Date, and (y) shall
- 2 -
<PAGE> 3
execute and deliver the Shareholders Agreement and the Non-Competition
Agreement."
(b) The first sentence of Section 6.05(b) of the Purchase Agreement is
hereby amended and restated in its entirety to read:
"It is understood and agreed that Popular, Inc. shall not be a party
to this Agreement and Popular, Inc. shall not be entitled to bring any
independent or direct action or claim against the Authority or any Puerto
Rico Entity relating to this Agreement or the transactions contemplated
hereby (other than the Shareholders Agreement), except for claims arising
for breaches of the Authority's representations in Article II hereof."
Section 5. Execution of Agreements. Section 7.03 of the Purchase Agreement
is hereby amended and restated in its entirety to read:
"The parties shall execute and deliver at the Closing, and Purchaser
shall use commercially reasonable efforts to cause Popular, Inc. to so
execute and deliver (to the extent it is contemplated that it will be a
party thereto) the documents and agreements referred to in Sections
8.01(h), 8.02(j), 8.02(m), 8.02(n) and 8.03(e) below."
Section 6. Conditions to the Obligations of Each Party. The second
sentence of Section 8.01(d) of the Purchase Agreement is hereby amended and
restated in its entirety to read:
"FCC Consent shall constitute FCC approval for the purposes hereof,
provided that Purchaser's obligations shall be subject to the further
condition that such FCC Consent shall neither (i) require or be
conditioned upon Strategic Purchaser's, its parent's or any of their
affiliates' agreement to or compliance with any term, condition or
restriction that would have a Material Adverse Effect on the business or
results of operations of the Affiliated Group nor (ii) impose any term,
condition or restriction on the business or operations of GTE Corporation
or its affiliates (other than the Affiliated Group) or result in any
waiver of rights asserted by any of the foregoing;"
Section 7. Successors and Assigns. Clause (ii) of Section 12.05 of the
Purchase Agreement is hereby amended and restated in its entirety to read:
"(ii) all of the rights of the Authority under this Agreement and
under all other agreements and
- 3 -
<PAGE> 4
instruments executed by the Authority in connection with the transactions
contemplated hereby shall be enforceable both by the Authority and by GDB
(whether or not the Authority is then in existence)."
Section 8. Third Party Beneficiaries; Parties Bound. The proviso to
Section 12.11(a) of the Purchase Agreement is hereby amended and restated in its
entirety to read:
"provided, that, the Authority acknowledges and agrees that Popular, Inc.
is and will be a third-party beneficiary of this Agreement with the right
to enforce the rights granted to it directly under this Agreement directly
against the Authority."
Section 9. Appendix A: Definitions.
(a) The definition of "FCC Consent" in Schedule A to the Purchase
Agreement is hereby amended and restated in its entirety to read:
""FCC Consent" means the initial order of the FCC approving the
acquisition by Purchaser of the Purchased Shares."
(b) The definition of "Management Agreement" in Schedule A to the Purchase
Agreement is hereby amended and restated in its entirety to read:
""Management Agreement" means collectively the Management Agreements
dated as of the Closing Date, substantially in the forms attached hereto
as Exhibit E-1 (the "Puerto Rico Management Agreement") and Exhibit E-2
(the U.S. Management Agreement)."
(c) The definition of "Minority Partners" in Schedule A to the Purchase
Agreement is hereby deleted in its entirety.
(d) The definition of "Non-Competition Agreement" in Schedule A to the
Purchase Agreement is hereby amended by deleting the words "the Minority
Partners".
(e) The definition of "Purchaser Group" in Schedule A to the Purchase
Agreement is hereby amended and restated in its entirety to read:
""Purchaser Group" means Strategic Purchaser, Purchaser and Popular,
Inc., to the extent it is sold New Company Shares pursuant to Section 6.05
hereof, and their respective affiliates and representatives."
Section 10. Exhibits. Exhibits A, B, C-1, C-2, E, F, G, I and J to the
Purchase Agreement are being amended primarily to supply information as of the
Closing as contemplated at signing
- 4 -
<PAGE> 5
and are hereby replaced in their entirety by Exhibits A, B, C-1, C-2, E-1 and
E-2, F, G, I and J hereto.
Section 11. Disclosure Schedule. Schedule 10.01 to the Purchase Agreement
is hereby amended and restated in its entirety and replaced by Schedule 10.01
hereto.
Section 12. Radio Trunking. The parties agree that the equipment and other
assets relating to radio trunking (wireless communication systems used for fire,
police, civil defense and other governmental security agencies) will be
transferred to the appropriate Puerto Rico governmental agencies on or after the
Closing Date at no cost.
Section 13. No Other Amendments. Except as expressly provided in this
Third Amendment, all of the terms and conditions of the Purchase Agreement
remain unchanged.
Section 14. Additional Signatories. By executing this Third Amendment,
each of the New Company, Wireless and Wireline hereby becomes a party to, and
agrees to be bound by the terms of, the Purchase Agreement, as amended, pursuant
to Section 12.13 of the Purchase Agreement.
Section 15. Authority; Binding Effect. Each party hereto represents and
warrants that the execution, delivery and performance by such party of this
Third Amendment are within such party's powers, have been duly authorized by
such party and, upon execution hereof by such party, will be duly executed and
will constitute a valid and binding obligation of such party.
Section 16. Counterparts. This Third Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. This Third Amendment shall
become effective when each party hereto has received a counterpart signed by the
other parties hereto.
Section 17. Governing Law. This Third Amendment shall be construed in
accordance with and governed by the laws of Puerto Rico without giving effect to
principles of conflicts of law.
- 5 -
<PAGE> 6
IN WITNESS WHEREOF, the Parties hereto have caused this Third Amendment to
the Stock Purchase Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:
-----------------------------------------
By:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
-----------------------------------------
By:
-----------------------------------------
PUERTO RICO TELEPHONE AUTHORITY
By:
-----------------------------------------
TELECOMUNICACIONES DE PUERTO RICO,
INC.
By:
-----------------------------------------
CELULARES TELEFoNICA, INC.
By:
-----------------------------------------
<PAGE> 7
PUERTO RICO TELEPHONE COMPANY,
INC.
By:
-----------------------------------------
<PAGE> 1
Exhibit 10.5
EXECUTION COPY
SHAREHOLDERS AGREEMENT
Dated as of March 2, 1999
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTIES......4
1.1 Existence and Power; Due Authorization, Etc.; Governmental
Authorization; Non-Contravention....................................4
1.2 Intentionally omitted...............................................5
1.3 Legal Compliance....................................................5
1.4 Covenants...........................................................6
1.5 Bylaws..............................................................6
1.6 Purchaser...........................................................6
1.7 Confidentiality.....................................................6
ARTICLE II CORPORATE GOVERNANCE..........................................7
2.1 Election of Directors...............................................7
2.2 Supermajority Requirements for Certain Actions by the Corporation..10
2.3 Supermajority Requirements for Certain Actions by Shareholders.....11
2.4 Resolution of Deadlock.............................................12
ARTICLE III DECLARATION OF DIVIDENDS.....................................12
ARTICLE IV RESTRICTION ON DISPOSITION OF SHARES AND PURCHASER INTERESTS.13
4.1 General Restriction................................................13
4.2 Permitted Transfers by Purchaser...................................14
4.3 Permitted Transfers by Purchaser Group.............................15
4.4 Tag-Along Rights...................................................15
4.5 Purchaser Group's Right of First Refusal...........................19
ARTICLE V OPTION.......................................................21
5.1 Option to Acquire Shares...........................................21
ARTICLE VI REGISTRATION RIGHTS..........................................21
6.1 Definitions........................................................21
6.2 Required Registration..............................................22
6.3 Corporation Registration...........................................25
6.4 Registration Procedures............................................25
ARTICLE VII MISCELLANEOUS................................................34
7.1 Financial Statements...............................................34
7.2 Books, Records and Inspections.....................................34
7.3 Endorsement of Stock Certificates..................................34
7.4 Products and Services..............................................35
(ii)
<PAGE> 3
ARTICLE VIII TERMINATION..................................................35
8.1 Termination........................................................35
8.2 Survival...........................................................36
ARTICLE IX INTENTIONALLY OMITTED........................................36
ARTICLE X GENERAL PROVISIONS...........................................36
10.1 Notices............................................................36
10.2 No Waiver..........................................................38
10.3 Agreement to Perform Necessary Acts................................38
10.4 Modification.......................................................38
10.5 Counterparts.......................................................39
10.6 Severability.......................................................39
10.7 Entire Agreement...................................................39
10.8 Governing Law......................................................39
10.9 Headings...........................................................39
10.10 Construction.......................................................39
10.11 Binding Effect; Assignment.........................................39
10.12 Equitable Relief...................................................40
10.13 Fees; Expenses.....................................................40
10.14 Submission to Jurisdiction; Venue..................................41
10.15 Subsequent Parties.................................................42
10.16 Initial Public Offering............................................42
10.17 FCC Compliance.....................................................43
(iii)
<PAGE> 4
DEFINED TERMS
<TABLE>
<CAPTION>
Defined Term Section Where Defined
------------ ---------------------
<S> <C>
Acceptance .......................................... 4.5(b)
Act.................................................. 6.1(a)
1934 Act............................................. 6.4(f)(i)
Act No. 54........................................... Recitals
Additional Purchase Election......................... 4.4(b)
Affiliate............................................ 2.2(d)
Authorizing Legislation.............................. Recitals
Board................................................ 2.1(a)
comfort.............................................. 6.4(a)(vii)
control.............................................. 2.2(d)
Preamble and Corporation............................. Section 2.1(a)
Directors............................................ 2.1(a)
Dividend Policy...................................... Article III
GDB.................................................. 10.11
Government Directors................................. 2.1(b)
Government Nominee................................... 2.1(c)
GTE Permitted Transferees............................ 2.1(b)
Holder............................................... 6.1(c)
Indemnitee........................................... 6.4(f)(i)
Initial Ownership Interests.......................... Recitals
Market Stand-Off Agreement........................... 6.4(g)
Minimum Number....................................... 6.2(c)
NASDAQ............................................... 6.4(h)
Offer................................................ 4.5(a)
Offered Shares....................................... 4.4(a)
Offer Notice......................................... 4.5(a)
Option............................................... 5.1
Permitted Transferees................................ 4.3(a)
Person............................................... 2.2(d)
Piggy Back Registration.............................. 6.3
Pre-Acquisition Exercise............................. 4.2(e)
Proposed Transferee.................................. 4.5(a)
pro rata portion..................................... 4.4(b)
PRTA................................................. Preamble
PRTC................................................. Recitals
Puerto Rico.......................................... Preamble
Puerto Rico Entities................................. 2.1(b)
Purchaser............................................ Preamble
Purchaser Directors.................................. 2.1(b)
</TABLE>
(iv)
<PAGE> 5
DEFINED TERMS
<TABLE>
<CAPTION>
Defined Term Section Where Defined
------------ ---------------------
<S> <C>
Purchaser Group...................................... Preamble
Purchaser Interests.................................. Recitals
register............................................. 6.1(a)
Registered Securities................................ 6.1(b)
Returns.............................................. 1.3(a)
SEC.................................................. 6.1(d)
Seller............................................... 4.4(a)
Selling Holder....................................... 6.4(b)
Shareholder.......................................... Recitals
Shares............................................... Recitals
Stock Purchase Agreement............................. Recitals
Strategic Purchaser.................................. Preamble
Tag-Along Notice..................................... 4.4(a)
Tag-Along Transaction................................ 4.4(b)
Total PR Shares...................................... 4.4(b)
Transfer............................................. 4.1
Violation............................................ 6.4(f)(i)
</TABLE>
(v)
<PAGE> 6
SHAREHOLDERS AGREEMENT
AGREEMENT dated as of March 2, 1999 among Telecomunicaciones de Puerto
Rico, Inc. (the "Corporation"), a Puerto Rico corporation, GTE Holdings (Puerto
Rico) LLC, a Delaware limited liability company ("Purchaser"), GTE International
Telecommunications Incorporated, a Delaware corporation and the sole holder of
equity interests of Purchaser ("Strategic Purchaser"), Popular, Inc., a Puerto
Rico corporation (together with Purchaser and Strategic Purchaser, the
"Purchaser Group"), and Puerto Rico Telephone Authority ("PRTA"), a public
corporation and government instrumentality of the Commonwealth of Puerto Rico
("Puerto Rico"), and the shareholders of the Corporation who or which shall from
time to time be parties hereto as provided herein.
WITNESSETH
WHEREAS, pursuant to Act No. 54 of August 4, 1997 ("Act No. 54") and Joint
Resolution No. 209 of June 24, 1998 (collectively, the "Authorizing
Legislation"), PRTA organized the Corporation for the purpose of transferring to
the Corporation all of the issued and outstanding shares of the common stock of
Puerto Rico Telephone Company, Inc. ("PRTC") and Celulares Telefonica, Inc.
("CTI"), each a Puerto Rico corporation, in exchange for shares of common stock
of the Corporation and a cash payment of $100,000;
WHEREAS, on March 1, 1999 PRTA became the owner of all the capital stock
of the Corporation, which in turn became the owner of all the capital stock of
PRTC and CTI;
WHEREAS, PRTA was, prior to the date hereof, the owner of all the issued
and outstanding shares, par value $0.01 per share, of the Corporation (the
"Shares");
<PAGE> 7
WHEREAS, Purchaser was formed by Strategic Purchaser, which owns 100% of
the issued and outstanding equity interests of Purchaser (the "Purchaser
Interests"), for the specific purpose of purchasing Shares;
WHEREAS, Purchaser, Strategic Purchaser, PRTA and the Puerto Rico
Telephone Company, a Delaware corporation ("PRTC"), entered into an Amended and
Restated Stock Purchase Agreement dated as of July 21, 1998, (as amended, the
"Stock Purchase Agreement"), whereby Purchaser, subject to Section 6.05 thereof,
agreed to purchase from PRTA Shares representing 51% plus one (1) share of the
total issued and outstanding Shares, pursuant to the terms and subject to the
conditions set forth therein;
WHEREAS, at the closing under the Stock Purchase Agreement the Authority
sold 10,000 Shares, constituting 1.0% of the outstanding Shares, to Purchaser
and Popular, Inc. jointly, and Purchaser and Popular, Inc. jointly contributed
such Shares to the employee stock ownership plan and trust referred to in
Section 8.02(l)(i) of the Stock Purchase Agreement;
WHEREAS, at the closing under the Stock Purchase Agreement the Authority
contributed 30,000 Shares, constituting 3.0% of the outstanding Shares, to the
employee stock ownership plan and trust referred to in Section 8.02(l)(i) of the
Stock Purchase Agreement;
WHEREAS, at the closing under the Stock Purchase Agreement the Authority
sold 30,000 Shares, constituting 3.0% of the outstanding Shares, to the employee
stock ownership plan and trust referred to in Section 8.02(l)(ii) of the Stock
Purchase Agreement;
WHEREAS, at the closing under the Stock Purchase Agreement the Authority
sold 99,900 Shares, constituting 9.99% of the outstanding Shares, to Popular,
Inc.;
2
<PAGE> 8
WHEREAS, PRTA, Purchaser and Popular, Inc. (hereinafter, each referred to
individually as a "Shareholder" and collectively as the "Shareholders") are the
registered and beneficial owners of 43% less 1 share, 40.01% plus one share, and
9.99%, respectively, of the total issued and outstanding Shares (such respective
initial ownership interests being referred to as the "Initial Ownership
Interests");
WHEREAS, each Shareholder desires to enter into this Agreement and legally
bind itself, its successors, and assigns, to provide for the stability of the
Corporation and to promote the continuity of its management and policies;
WHEREAS, the Shareholders desire to restrict the sale, assignment,
transfer, encumbrance and other disposition of the Shares and provide for
certain rights and obligations in respect thereto as hereinafter provided; and
WHEREAS, as one of the conditions imposed by PRTA in the Stock Purchase
Agreement and in consideration for PRTA's willingness to sell Shares pursuant to
the Stock Purchase Agreement, the members of the Purchaser Group are willing to
restrict the sale, assignment, transfer, encumbrance and other disposition of
their Shares and Purchaser Interests.
NOW, THEREFORE, it is agreed by and among the parties hereto as follows:
ARTICLE I
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTIES
1.1 Existence and Power; Due Authorization, Etc.; Governmental
Authorization; Non-Contravention.
(a) Existence and Power.
(i) PRTA represents and warrants to the other parties that PRTA is
validly existing as a public corporation under the laws of Puerto Rico and has
all requisite power, authority and legal right to conduct its affairs as
currently conducted.
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(ii) Each member, if an entity, of the Purchaser Group represents
and warrants to the other parties hereto that it is a Person duly incorporated
or formed, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation.
(b) Due Authorization, Etc. Each of the parties hereto represents and
warrants to each other that: (i) it has full right, power and authority to
execute, deliver and perform this Agreement; (ii) all actions necessary or
required to be taken by or on its part to execute, deliver and perform this
Agreement have been duly authorized and approved by all necessary or required
corporate or company action and have been validly taken; and (iii) this
Agreement has been duly executed and delivered by it and is a valid and binding
agreement enforceable in accordance with its terms, except to the extent that
its enforceability may be subject to applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
(c) Governmental Authorization. Each of the parties hereto represents and
warrants to each other that the execution, delivery and performance by it of
this Agreement requires no action by or in respect of, or filing with, any
Puerto Rico or United States Governmental Authority other than: (i) those which
have been obtained as of the date hereof; (ii) compliance with any applicable
requirements of the Communications Act of 1934, as amended, and any rules,
regulations, practices and policies promulgated by the United States Federal
Communications Commission; (iii) compliance with any applicable requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"); (iv) compliance with any applicable requirements of the
Telecommunications Regulatory Board of
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Puerto Rico; and (v) the approval, if required, of the Board of Governors of the
Federal Reserve System with respect to Popular, Inc.
(d) Non-Contravention. Each of the parties hereto represents and warrants
to the other parties hereto that the execution, delivery and performance by it
of this Agreement do not and will not (i) contravene or conflict with (x) Act
No. 54, or (y) its governance documents, or (ii) assuming compliance with the
requirements referred to in Section 1.01(c)(i) - (v), contravene or conflict
with or constitute a violation of any provision of any Puerto Rico or United
States law, regulation, judgment, injunction, order or decree binding upon or
applicable to it.
1.2 Intentionally omitted.
1.3 Legal Compliance. Each member of the Purchaser Group represents that
it has complied with the requirements of Article 8(e) of Act No. 54 and each
certifies that:
(a) Except as described in writing to the Authority (i) any tax returns,
statements, reports and forms which were required to be filed by it and its
affiliates within the past five years with respect to its activities in Puerto
Rico (collectively, the "Returns") have been filed in accordance with any
applicable laws; (ii) it and its affiliates have timely paid taxes payable to
any Puerto Rico taxing authority (including payments in respect of unemployment
benefits, workmen's compensation, social security for chauffeurs and withholding
taxes), if any, shown as due and payable on the Returns that have been filed;
and (iii) there is no action, suit, proceeding, audit or claim pending or, to
the knowledge of such party, proposed against or with respect to it or its
affiliates in respect of any tax payable to any Puerto Rico taxing authority.
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(b) It has not paid and it will not pay any commission or bonus, and it
has not granted any direct or indirect financial benefit, to any public official
or employee, nor to any former public official or employee, participating in the
privatization process of the Corporation while discharging his/her public
service duties.
1.4 Covenants. Each party agrees to comply with the provisions of this
Agreement and agrees, to the extent within its power, to cause the Corporation
to comply with its obligations hereunder.
1.5 Bylaws. On the date hereof, the Bylaws of the Corporation and its
subsidiaries shall be amended to reflect the covenants, agreements and rights of
the parties contained in this Agreement.
1.6 Purchaser. Any representation, warranty, covenant or agreement
contained in this Agreement made by Purchaser is also made by Strategic
Purchaser on behalf of Purchaser.
1.7 Confidentiality. The parties hereto agree to maintain the
confidentiality of all non-public information concerning the Corporation and its
subsidiaries acquired by the parties hereto in the course of their exercising
their respective rights and performing their obligations under this Agreement;
provided, that, such information may be disclosed (i) to the employees,
directors, agents, attorneys, accountants and other professional advisors of the
parties who shall also be bound by the provision of this Section 1.7, (ii) upon
the request or demand of a Governmental Authority (as defined in the Stock
Purchase Agreement) having jurisdiction over such party, (iii) in respect to any
court order, (iv) which has been publicly disclosed other than in breach of this
Agreement, or (v) in connection with the exercise of any remedy hereunder.
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ARTICLE II
CORPORATE GOVERNANCE
2.1 Election of Directors.
(a) Election. The Shareholders shall elect members ("Directors") of the
Board of Directors of the Corporation (the "Board") in accordance with the
Bylaws of the Corporation and this Agreement. As used in this Article, the term
"Corporation" shall include all subsidiaries of the Corporation.
(b) Nominees. So long as PRTA and other entities of the Government of
Puerto Rico (excluding trusts that hold or own Shares for the benefit of the
employees of the Corporation or its subsidiaries) (collectively, the "Puerto
Rico Entities") collectively own (excluding Shares acquired after the date
hereof other than directly from the Corporation, its successors or any other
Puerto Rico Entity) at least 4% of the issued and outstanding Shares: (i) the
Board will have nine (9) Directors; (ii) the Puerto Rico Entities will
collectively be entitled to nominate, or take such action as shall be necessary
to cause the nomination of, three (3) Directors, so long as the Puerto Rico
Entities collectively own (excluding Shares acquired after the date hereof other
than directly from the Corporation, its successors or any other Puerto Rico
Entity) at least 25% of the issued and outstanding Shares, two (2) Directors so
long as the Puerto Rico Entities collectively own (excluding Shares acquired
after the date hereof other than directly from the Corporation, its successors
or any other Puerto Rico Entity) at least 15% of the issued and outstanding
Shares and one (1) Director so long as the Puerto Rico Entities collectively own
at least 4% (excluding Shares acquired after the date hereof other than directly
from the Corporation, its successors or any other Puerto Rico Entity) of the
issued and outstanding Shares (the "Government Directors"); and (iii) Purchaser
will be entitled to
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nominate, or take such action as shall be necessary to cause the nomination of,
five (5) Directors (the "Purchaser Directors") so long as Strategic Purchaser
and any wholly owned subsidiaries of GTE Corporation ("GTE Permitted
Transferees") own directly or indirectly collectively more than 20% of the
outstanding Shares.
(c) Ex Officio. For so long as the Puerto Rico Entities are entitled to
nominate at least (i) two (2) Directors, the Government Directors will include
or be, ex-officio, the President of the Government Development Bank for Puerto
Rico and a member of the Board of Directors of the Government Development Bank
for Puerto Rico (each a "Government Nominee") and (ii) one (1) Director, the
Government Director shall be a Government Nominee.
(d) Committees. For so long as the Puerto Rico Entities are entitled to
nominate at least one (1) Director, at least one of the Government Directors
will also be a member of the Audit and Finance Committees of the Board of the
Corporation to the extent such committees exist and except as otherwise required
by law or rules or listing requirements of stock exchanges or national market
systems on which Shares are listed or traded.
(e) Shareholder Action. Promptly upon the execution and delivery of this
Agreement, if requested by Strategic Purchaser, the Shareholders shall each
execute a written shareholders consent for purposes of electing the Directors at
a special shareholders' meeting called for such purpose. The Shareholders will
vote all Shares held by them in favor of, and the Corporation will take all
actions necessary (including calling special meetings of the Shareholders) to
cause the election of, the Government Directors and the Purchaser Directors
pursuant to the provisions of this Section 2.1 at such shareholders' meeting and
all subsequent shareholder and director meetings during the term of this
Agreement. The remaining Directors will be elected
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by majority vote of the Shares voted at any shareholder meetings at which
Directors are elected, or the Board to the extent then permitted by law.
(f) Vacancies. In the event of any vacancy on the Board, whether caused by
a Director's resignation, removal, death or otherwise, the successor to the
Director whose absence from the Board caused such vacancy shall be a person
nominated by the Shareholder who originally nominated such Director, if
applicable, unless a different allocation of Directors is required by Section
2.1(b), and the parties hereto agree to vote in favor of such successor.
(g) Removals. Any Government Director or Purchaser Director may be removed
only for cause, or with the consent of the Shareholder then entitled to such
Director.
(h) Negative Controls. Each of the Strategic Purchaser, Purchaser and the
Corporation agrees that it shall not grant, directly or indirectly, to any
Person (including but not limited to the members of the Purchaser Group), other
than Purchaser or Strategic Purchaser, any supermajority Director or shareholder
voting rights (or other governance rights disproportionate, compared to Shares
owned by Puerto Rico Entities, to the amount of Shares such other Person owns,
directly or indirectly) with respect to the Corporation other than those
disclosed in writing to the PRTA prior to the date hereof.
2.2 Supermajority Requirements for Certain Actions by the Corporation. The
Corporation may not take any of the following actions without approval by the
Board and without unanimous approval by the Government Directors for so long as
the Puerto Rico Entities collectively continue to own at least 10% of the
outstanding Shares:
(a) Any acquisition, strategic alliance or joint venture involving a
dollar amount equal to, or in excess of, 15% of the
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total assets of the Corporation or enter into any agreement with respect
thereto;
(b) The issuance of equity securities or securities exercisable or
exchangeable for or convertible into equity securities;
(c) Any amendment to the dividend policy established in Article III of
this Agreement or the declaration of dividends or other distributions to
shareholders if such dividend or distribution is not consistent with such
policy;
(d) Except for agreements in effect prior to the date hereof to which the
Corporation is a party, transactions between the Corporation or any of its
subsidiaries, on the one hand and any member of the Purchaser 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 such member and its
Affiliates (as used in this Agreement, the term "Affiliate" means, with respect
to any Person, any other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with such specified Person;
"Person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or other
department, agency or subdivision thereof; "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise); and
(e) Any amendment to the Corporation's Certificate of Incorporation or
Bylaws adversely affecting the rights of the
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Puerto Rico Entities as shareholders of the Corporation or the rights of the
Government Directors.
The above matters may not be delegated to any Committee of the Board.
2.3 Supermajority Requirements for Certain Actions by Shareholders. The
following Shareholder actions require approval by PRTA for so long as the Puerto
Rico Entities collectively continue to own at least 10% of the issued and
outstanding Shares:
(a) Any amendment to the Certificate of Incorporation of the Corporation
adversely affecting the rights of any Puerto Rico Entity as a shareholder of the
Corporation or the rights of the Government Directors;
(b) The liquidation, merger, consolidation or split up of the Corporation
(other than any merger in which the Corporation is the survivor or any merger of
the Corporation into any wholly-owned subsidiary of the Corporation; provided,
that, in either instance such transaction does not result in a Transfer of
Shares not otherwise permitted by this Agreement); and
(c) The sale of assets in any fiscal year representing 25% or more of the
total assets of the Corporation. 2.4 Resolution of Deadlock. If there is a
deadlock at the Shareholder or Board level on an issue subject to the above
supermajority provisions, consultations shall take place among the Directors,
senior management of Purchaser and, if requested by Purchaser, senior management
of the Corporation to attempt to resolve the deadlock.
ARTICLE III
DECLARATION OF DIVIDENDS
From the time of the Closing until such time as the Board chooses to
modify the Corporation's dividend policy pursuant to Section 2.2(c) of this
Agreement, the Shareholders agree to the
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following dividend policy (the "Dividend Policy"): the Shares shall bear a
dividend, payable on a quarterly basis, to the extent funds are legally
available therefor and subject to any restrictions in the documents relating to
the Financing (as defined in the Stock Purchase Agreement), other financings to
which the Corporation may become a party or refinancings thereof, that is at
least equal to the product of the Corporation's consolidated net income,
calculated in accordance with generally accepted accounting principles in the
United States consistently applied, multiplied by 50% divided by the number of
issued and outstanding Shares. Dividends shall be payable quarterly and shall be
paid by the Corporation within 30 days after the approval of the corresponding
quarterly financial statements (the audited annual financial statements in the
case of the fiscal year's last quarter) by the Board. The Shareholders will take
all actions necessary to cause the Corporation to pay a dividend consistent with
such Dividend Policy.
ARTICLE IV
RESTRICTION ON DISPOSITION OF SHARES AND PURCHASER INTERESTS
4.1 General Restriction. During the term of this Agreement, (i) no
Shareholder shall, directly or indirectly, voluntarily or involuntarily, sell,
assign, transfer, pledge, hypothecate or in any other way dispose of or
encumber, by gift, operation of law, bankruptcy, or otherwise, any Shares or
Purchaser Interests, in each instance owned on the date hereof or hereafter
acquired other than in open market purchases after the initial public offering
of the Shares (each such event, a "Transfer"), (ii) nor may Purchaser directly
or indirectly issue any Purchaser Interests, in each case except as expressly
permitted by the terms of this Agreement and except for the sale and transfer of
Shares by the Authority upon the exercise of the
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Option (as defined below) pursuant to Sections 1.01 through 1.04 of the Option
Agreement (as defined below). No Transfer shall be valid, effective, entitled to
recognition for any purpose, including dividend rights, or made on the books of
the Corporation or Purchaser, respectively, if made in violation of the
provisions of this Agreement, and the transferor shall continue to be the owner
of such Shares or Purchaser Interests, as applicable, for all purposes. In the
event the Corporation or Purchaser is a party to any permitted reorganization,
recapitalization, reclassification, readjustment or other change in its capital
structure wherein any other stock or securities of the Corporation or Purchaser
are to be issued in respect of the Shares or Purchaser Interests, respectively,
then such other stock or securities shall likewise be subject to all of the
terms and provisions of this Agreement. The formation documents and agreements
between Purchaser and Strategic Purchaser shall contain provisions consistent
with this Article IV, which provisions may not be amended without the prior
written consent of PRTA.
4.2 Permitted Transfers by Purchaser.
(a) After the fifth anniversary of the date hereof, Purchaser and its
permitted successors and assigns will be permitted to Transfer any and all
Shares;
(b) Any Transfer to any GTE Permitted Transferee shall be permitted at any
time; and
(c) After the third anniversary of the date hereof, and provided Purchaser
shall continue to own after giving effect to such Transfer at least 35% of the
Shares, Purchaser shall be entitled to Transfer (i) Shares owned by Purchaser on
the date hereof plus (ii) a number of Shares equal to the greater of (x) 331/3%
of the Shares acquired by Purchaser upon exercises of the Option and (y) 5% of
the total outstanding Shares of the Company
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if no Shares are issued to any Person other than Purchaser upon exercise of the
Option, in either case only in a widely distributed private placement or public
offering (or if the Corporation is publicly traded, in open market
transactions).
4.3 Permitted Transfers by Purchaser Group.
(a) Prior to the third anniversary of the date hereof, members of the
Purchaser Group (other than Strategic Purchaser, Purchaser and GTE Permitted
Transferees) will be permitted to: (i) Transfer Shares to any other member of
the Purchaser Group or to any wholly owned subsidiaries of such member
(collectively, the "Permitted Transferees"); or (ii) Transfer Shares by will or
devise or by operation of law.
(b) At any time after the third anniversary of the date hereof, members of
the Purchaser Group (other than Purchaser, Strategic Purchaser and GTE Permitted
Transferees) will be permitted to Transfer any or all of their Shares.
(c) After the fifth anniversary of the date hereof, Strategic Purchaser,
and its respective permitted successors and assigns, will be permitted to
Transfer their Purchaser Interests, and Purchaser will be permitted to issue
additional Purchaser Interests.
(d) At any time after an initial public offering of the Shares of the
Corporation and prior to the third anniversary of the date hereof, Popular, Inc.
shall be entitled to sell not more than an aggregate of 1/3 of its Initial
Ownership Interests of Shares in one or more registered public offerings
pursuant to Section 6.2(e)(ii) or 6.3, but subject to Section 6.2(f) hereof, or
in transactions permitted by Rule 144 of the Securities Act of 1933, as amended.
4.4 Tag-Along Rights.
(a) In the event that Purchaser, Popular, Inc., Strategic Purchaser and/or
their GTE Permitted Transferees or Permitted
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Transferees, as applicable (each a "Seller"), proposes to Transfer, directly or
indirectly, any Shares or Purchaser Interests, as applicable, other than to GTE
Permitted Transferees or to Permitted Transferees and other than in public
offerings or widely distributed private placements (the "Offered Shares") in one
or a series of related transactions permitted under this Article IV, which (i)
in the aggregate comprise (directly or indirectly) over 7.5% of the total number
of outstanding Shares of the Corporation, or (ii) would result in the transferee
owning, directly or indirectly, over 20% of the Shares, such Sellers shall
promptly give written notice to PRTA at least twenty (20) days prior to the
closing of such proposed sale. The notice (the "Tag-Along Notice") shall
describe in reasonable detail the proposed Transfer including, without
limitation, the name of, and the number of Shares to be directly or indirectly
Transferred by the Seller, the per Share sale price, any other significant terms
of such sale and the date such proposed sale will be consummated.
(b) The Puerto Rico Entities shall have the right, exercisable upon
written notice to the Sellers, within fifteen days after receipt of the
Tag-Along Notice, to participate in such sale, by selling the applicable pro
rata portion of the aggregate number of Shares then owned (excluding any Shares
not acquired or received from the Corporation, its successor or any other Puerto
Rico Entity) by all of them (the "Total PR Shares") to the buyer on the same
terms and conditions as set forth in the Tag-Along Notice, as determined in
accordance with the calculation set forth below (a "Tag-Along Transaction"). If
the Puerto Rico Entities elect to participate in the sale described in the
Tag-Along Notice, they shall indicate in their notice of election to the
Sellers, as applicable, the maximum number of Shares they desire to sell in
connection with such sale. To the
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extent the Puerto Rico Entities exercise such right of participation in
accordance with the terms and conditions set forth in this Section 4.4(b), and
the buyer agrees to purchase the additional Shares indicated by the Puerto Rico
Entities in their notice of election (an "Additional Purchase Election"), the
Puerto Rico Entities may sell the same percentage of their Shares as the Sellers
are selling (the "pro rata portion"). In the event there is no Additional
Purchase Election, the number of Shares or Purchaser Interests, as applicable,
that the Sellers may sell, in the transaction shall be correspondingly reduced
by the number of shares entitled to be sold by the Puerto Rico Entities. For
purposes of this Section 4.4(b), in the event of the failure by the Buyer to
exercise the Additional Purchase Election, "pro rata portion" of the Puerto Rico
Entities shall be the Total PR Shares multiplied by a fraction, (i) the
numerator of which is the number of Shares proposed to be, directly or
indirectly, sold by Sellers in the Tag-Along Notice and (ii) the denominator of
which is the sum of (A) the total number of Shares, directly or indirectly,
owned by the Sellers immediately prior to the sale proposed in the Tag-Along
Notice and (B) the Total PR Shares. In the event that the Tag-Along transaction
involves the sale of Purchaser Interests, the Puerto Rico Entities shall be
entitled to sell to the buyer thereunder that number of Shares constituting its
pro rata share calculated in accordance with the preceding sentence as if
immediately prior thereto Purchaser was liquidated, each equity holder thereof
received a total distribution of Shares and each such equity holder was the
Seller for purposes of this Section. Not later than five (5) days prior to the
date scheduled for such sale, Sellers, as applicable shall provide notice to
each Puerto Rico Entity of the "pro rata portion" of Shares to be sold by such
Puerto Rico Entity in such sale. If the Puerto
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Rico Entities would own 5% or less of the Shares after giving effect to their
participation in a Tag-Along Transaction, the Purchaser shall have the
additional option (exercisable within 15 days of receipt of notice from the
Puerto Rico Entities to participate in the Tag-Along Transaction) of (i)
requiring that the Puerto Rico Entities sell all their remaining Shares to the
buyer, providing the buyer is willing to purchase such Shares, or (ii) requiring
that the Puerto Rico Entities sell to the buyer such number of Shares owned by
the Puerto Rico Entities as the buyer is willing to purchase and sell the
remaining Shares owned by the Puerto Rico Entities to Purchaser; such sale in
either instance to be on the same price, terms and conditions and to close at
the same time, as the Tag-Along Transaction.
(c) The Puerto Rico Entities shall effect their participation in the sale
by delivering, on the date scheduled for such sale, to Seller, for its own
account or for delivery to the prospective transferee, as applicable, one or
more certificates, in proper form for transfer, which represent the number of
Shares which each Puerto Rico Entity is entitled to sell in accordance with
Section 4.4(b). Such stock certificate or certificates shall be delivered on
such date to such transferee in consummation of the sale of the Offered Shares
pursuant to the terms and conditions specified in the Tag-Along Notice (provided
that the Puerto Rico Entities shall not be required to make any representations,
warranties or indemnities that are broader than those made or given by the
Sellers) and the Sellers shall concurrently therewith remit to the Puerto Rico
Entities that portion of the sale proceeds to which the Puerto Rico Entities are
entitled by reason of their participation in such sale. Sellers' sale of Shares
or Purchaser Interests, as applicable, in any sale proposed in a Tag-Along
Notice shall be effected on the terms and conditions set forth
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in such Tag-Along Notice. In no event shall any Seller receive special
consideration or a control premium in such sale.
(d) The exercise or non-exercise of the right of the Puerto Rico Entities
to participate in one or more sales subject to this Section 4.4 shall not
adversely affect the Puerto Rico Entities' right to participate in subsequent
sales of Shares or Purchaser Interests subject to this Section 4.4.
(e) In the event that the buyer of Offered Shares fails or refuses to
purchase the Shares which the Puerto Rico Entities are entitled to sell pursuant
to this Section 4.4, and if the transaction giving rise to such right closes,
then the Sellers shall be obligated to purchase the same, simultaneously with
the closing of the Tag-Along Transaction, for the same per Share price as that
received by the Sellers in the Tag-Along Transaction.
4.5 Purchaser Group's Right of First Refusal.
(a) Any time during the term of this Agreement, each of the Puerto Rico
Entities may Transfer any or all of its Shares other than Shares whose Transfer
is restricted by the Option; provided, that, if any of the Puerto Rico Entities
proposes to Transfer any Shares in one or more transactions, by any means (other
than through a widely disseminated private placement or a public offering
pursuant to Article VI or private placements on or after the 180th day after the
date hereof of not more than an aggregate of 5% of the outstanding Shares to any
Person other than a Person primarily engaged in the telecommunications industry,
such Persons to be subject to the reasonable approval of Purchaser or a Transfer
to any other Puerto Rico Entity), the Puerto Rico Entities shall promptly
provide a written notice (an "Offer Notice") to the Purchaser Group and the
Purchaser Group shall have the first refusal rights with respect to such Shares
set forth below. The Offer Notice shall contain (i) the number
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of Shares that the Puerto Rico Entities desire to Transfer, (ii) the proposed
purchase price and other material terms and conditions of the proposed Transfer,
including such information as may be reasonably necessary to analyze any
non-cash component of the proposed purchase price, and (iii) if at the time of
providing the Offer Notice, the Puerto Rico Entities have a bona fide offer from
an unaffiliated third party (the "Proposed Transferee") to acquire such Shares,
a copy of the written offer received from the Proposed Transferee, including its
identity and address. The Offer Notice shall be deemed to contain an irrevocable
offer (an "Offer") to sell the Shares at a price equal to the price and
substantially upon the same terms as the terms contained in the Offer Notice.
(b) The Purchaser Group shall have the irrevocable right and option,
exercisable as provided below, to accept the Offer, as to all but not less than
all of the Shares described in the Offer Notice (the "Acceptance"). If the
Purchaser Group desires to exercise such option, it will provide the Puerto Rico
Entities with irrevocable written notice within twenty (20) business days after
the date the Offer Notice is given and shall purchase the Shares subject to the
Offer Notice within twenty (20) business days after the date of Acceptance, or
immediately after the receipt of all required legal and regulatory approvals or
the satisfaction of the terms and conditions contained in the Offer Notice.
(c) In the event the Purchaser Group does not exercise its rights under
this Section 4.5, or fails to purchase the Shares as provided in this Section
4.5, the Puerto Rico Entities shall have the right for a period of 180 days
thereafter to sell the Shares subject to the Offer Notice on terms no less
favorable to the Puerto Rico Entities than those set forth in the Offer Notice.
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ARTICLE V
OPTION
5.1 Option to Acquire Shares. PRTA has granted Purchaser an option (the
"Option") pursuant to the Option Agreement dated as of the dated hereof among
PRTA, the Corporation, Purchaser and Strategic Purchaser (the "Option
Agreement").
ARTICLE VI
REGISTRATION RIGHTS
6.1 Definitions. For purposes of this Article VI:
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the United States Securities Act of 1933, as
amended (the "Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registered Securities" means any Shares which have been
included in an effective registration statement pursuant to the terms hereof;
(c) The term "Holder" means any Person owning Shares or any assignee
thereof in accordance with this Agreement; and
6.2 Required Registration.
(a) At any time on or after the 550th day after Closing, if any Puerto
Rico Entities propose to dispose of at least the Minimum Number (as defined in
Paragraph 6.2(c)) of Shares in a registered offering, they may request the
Corporation in writing to effect the registration of such Shares (other than
Shares subject to the Option, which may not be so disposed of until expiration
or termination of the Option with respect to any such Shares, except with the
prior consent of Purchaser, which Purchaser may withhold in its sole
discretion), stating the
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number of Shares to be disposed of and the intended method of disposition of
such Shares. The Corporation will use all commercially reasonable efforts to
effect promptly the registration under the Act of all Shares specified in the
request of Puerto Rico Entities. The managing underwriters that will place the
Registered Securities shall be those mutually acceptable to the (i) PRTA, if it
owns Shares, or GDB otherwise, and (ii) the Corporation.
(b) If a majority of the Board determines, in response to a request for
registration of Shares pursuant to Section 6.2(a), that the filing of a
registration statement under the Act would not be in the best interests of the
Corporation, it may delay acting upon such request for a period (not to exceed
180 days from the Corporation's receipt of such request) that the Board deems
reasonable so as to be in the best interests of the Corporation.
(c) The "Minimum Number" shall mean the Shares having an aggregate
estimated disposition price (before deduction of underwriting discounts and
expenses of sales) of at least $50 million (but in no event in an initial public
offering less than an amount to create a viable public trading market).
(d) The Corporation shall not be required to effect more than three
registrations pursuant to Section 6.2(a). For purposes of the foregoing
sentence, in the event that the Corporation shall have filed a registration
statement upon the request of the Puerto Rico Entities, and thereafter such
request shall have been withdrawn by the Puerto Rico Entities other than after a
delay caused by the Corporation pursuant to Section 6.2(b), such withdrawn
registration shall be considered to be a registration.
(e) (i) The Corporation shall not be required to cause a registration
statement requested pursuant to Section 6.2(a) to
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become effective prior to 180 days following the effective date of the most
recent registration by the Corporation of equity or equity-linked securities
under the Act (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 of the Securities and
Exchange Commission (the "SEC") is applicable); provided, however, that the
Corporation shall use all commercially reasonable efforts to achieve such
effectiveness promptly following such 180 day period if the request pursuant to
Section 6.2(a) has been made prior to the expiration of such 180 day period.
(ii) Except as set forth in Sections 4.3(d) and 6.2(f) hereof, prior
to the fifth anniversary hereof so long as the Puerto Rico Entities continue to
own at least 15% of the outstanding Shares, the Corporation shall not: (x)
register equity or equity-linked securities for sale for its own account or for
the account of any other Person, in either case in any registration requested
pursuant to Section 6.2(a) unless permitted to do so by the written consent of
PRTA; or (y) grant rights to Persons (other than as set forth in Section 6.2(a))
to register equity or equity-linked securities of the Corporation which would
constitute an initial public offering other than offerings to occur after the
fifth anniversary hereof. Notwithstanding the foregoing, the Corporation may
grant "piggy back" registration rights (A) to Popular, Inc. for offerings to
occur (i) prior to the third anniversary hereof, subject to Sections 4.3(d) and
6.2(f) below and (ii) after the third anniversary hereof, subject to Section
6.2(f) below and (B) after the third anniversary hereof, subject to Section
6.2(f) below, to the trusts or plans referred to in Section 8.02(l) of the Stock
Purchase Agreement. The Corporation may not cause any other registration of
equity or equity-linked securities for
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sale for its own account (other than a registration effected solely to implement
an employee benefit plan or a transaction to which Rule 145 of the SEC is
applicable) to become effective less than 90 days after the effective date of
any registration requested pursuant to Section 6.2(a).
(f) The Corporation shall not grant any Person any "piggy back"
registration rights with respect to the first registration pursuant to this
Section 6.2(a) which results in an initial public offering closing; and if
"piggy back" registration rights are granted and exercised with respect to any
other registration pursuant to Section 6.2(a) prior to the fifth anniversary
hereof, any required reduction in the total number of Shares offered thereunder
shall first apply to such "piggy back" registration rights Shares and no
reduction shall be made in the number of Shares to be registered by the Puerto
Rico Entities until all the Shares being offered pursuant to such "piggy back"
registration rights have been excluded from the sale.
6.3 Corporation Registration. Subject to Sections 6.2(e)(ii) and 6.2(f),
if at any time the Corporation determines to register any Shares under the Act
in connection with the public offering of such securities by the Corporation
solely for cash (other than a registration relating solely to the sale of
securities to participants in a Corporation employee benefit plan or a
transaction to which Rule 145 of the SEC applies, or a registration on any form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of the Shares other
than information on selling shareholders), the Corporation shall, at such time,
promptly give each Shareholder written notice of its intention to effect such
registration. Upon the written request of each Shareholder given within twenty
(20) days after mailing of such notice by the Corporation in
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accordance with Section 6.4, the Corporation shall use commercially reasonable
efforts, subject to the provisions of Section 6.4, to cause to be registered
under the Act all of the Shares that each Shareholder has requested to be
registered (a "Piggy Back Registration"); provided that the Corporation shall
have the right to postpone or withdraw any such registration effected pursuant
to this subsection without obligation to any Shareholder; and provided further,
that any such sale of Shares by Purchaser and Popular, Inc. shall comply with
Article IV of this Agreement.
6.4 Registration Procedures.
(a) Obligations of the Corporation. Whenever required under this Agreement
to use all commercially reasonable efforts to effect the registration of any
Shares, the Corporation shall, as expeditiously as reasonably possible:
(i) Prepare and file with the SEC a registration statement with
respect to such Shares and use all commercially reasonable efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Shares registered thereunder, keep such registration
statement effective for up to one hundred twenty (120) days.
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(iii) Furnish to the holders of Registered Securities such numbers
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as they may
reasonably request in order to
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facilitate the disposition of Registered Securities owned by them.
(iv) Use all commercially reasonable efforts to register and qualify
the Registered Securities under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holders thereof, provided
that the Corporation shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(vi) Notify each Holder covered by such registration statement in
the event the Corporation has delivered preliminary or final prospectuses to any
such Holder and, after having done so, such prospectus is amended to comply with
the requirements of the Act. Upon such notification, such Holders shall
immediately cease making offers of Registered Securities and return all
prospectuses to the Corporation. The Corporation shall promptly provide such
Holders with revised prospectuses and, following receipt of the revised
prospectuses such Holders shall be free to resume making offers of the
Registered Securities.
(vii) Furnish, at the request of any Holder requesting registration
of Shares pursuant to this Agreement, on the date that such Shares are delivered
to the underwriters for sale in connection with a registration pursuant to this
Agreement, if such securities are being sold through
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underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (1) an opinion, dated such date, of the counsel representing the
Corporation for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders of such Registered Securities
and (2) a "comfort" letter dated such date, from the independent certified
public accountants of the Corporation, in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters, if any, and, to the
extent customary to address such letters to selling security Holders, to the
Holders of such Registered Securities; provided, however, the Corporation shall
not be required to include projections for the business of the Corporation in
any prospectus or offering memorandum.
(b) Furnish Information. It shall be a condition precedent to the
obligations of the Corporation to take any action pursuant to this Agreement
with respect to the Shares of any selling Holder (the "Selling Holder") that
such Selling Holder shall furnish to the Corporation such information regarding
itself, the Shares held by it, and the intended method of disposition of such
securities as shall be required to effect the registration of such Selling
Holder's Shares.
(c) Expenses of Corporation Registration. The Corporation shall bear and
pay all expenses incurred in connection with the registration, filing or
qualification of Shares with respect to all Piggy Back Registrations pursuant to
Section 6.3(a) and required registrations pursuant to Section 6.2(a) for each
Holder (which right may be assigned as provided in this
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<PAGE> 32
Agreement), including (without limitation) all registration, filing and
qualification fees, printing and accounting fees relating or apportionable
thereto, and the fees and disbursements of one counsel for the Selling Holders
(provided it shall be counsel to the Corporation), but excluding underwriting
discounts and commissions relating to Shares which shall be paid pro rata by the
Selling Holders.
(d) Underwriting Requirements for Piggy Back Registrations. In connection
with any offering involving an underwriting of Shares, the Corporation shall not
be required under Section 6.3(a) above to include any of the Holders' Shares in
such underwriting unless they accept the terms of the underwriting as agreed
upon between the Corporation and the underwriters, and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Corporation. If the total amount
of Shares requested by Holders to be included in such offering exceeds the
amount of Shares sold other than by the Corporation that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Corporation shall be required to include in the offering only
that number of Shares which the underwriters determine in their sole discretion
will not jeopardize the success of the offering (the Shares so included to be
apportioned pro rata among the Selling Holders according to the total amount of
Shares entitled to be included therein owned by each Selling Holder or in such
other proportions as shall mutually be agreed to by such Selling Holders).
(e) Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy
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<PAGE> 33
that might arise with respect to the interpretation or implementation of this
Agreement.
(f) Indemnification. In the event any Shares are included in a
registration statement under this Agreement:
(i) To the extent permitted by law, the Corporation will indemnify
and hold harmless each Selling Holder of Shares and such Selling Holder's
officers and directors, any underwriter (as defined in the Act) for such Selling
Holder and each person, if any, who controls such Selling Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934 (the "1934
Act") (each, an "Indemnitee"), against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the Act,
or the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations (collectively a
"Violation"): (A) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (B) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (C) any violation or alleged violation by the
Corporation of the Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Act, or the 1934 Act or any state securities
law; and the Corporation will pay to each such Indemnitee, as incurred, any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided; however, that the indemnity agreement contained in this Subsection
6.4(f) shall not apply to amounts paid in
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settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Corporation (which consent
shall not be unreasonably withheld), nor shall the Corporation be liable in any
such case for any such loss, claim, damage, liability or action to the extent
that it arises out of or is based upon a Violation which occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by any such Indemnitee.
(ii) To the extent permitted by law, each Selling Holder will
indemnify and hold harmless the Corporation, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Corporation within the meaning of the Act, any underwriter, any
other Selling Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Selling Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Act, or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Selling Holder expressly for use in connection with such registration; and each
such Selling Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
Subsection 6.4(f)(ii), in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Subsection 6.4(f)(ii) shall not apply to amounts
paid in
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settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Selling Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this Subsection 6.4(f)(ii) exceed the gross proceeds from the
offering received by such Selling Holder.
(iii) Promptly after receipt by an indemnified party under this
Subsection 6.4(f) of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Subsection 6.4(f),
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties, provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Subsection 6.4(f) to the extent of such prejudice, but the omission so to
deliver written notice to the indemnifying party will not relieve it of any
liability that
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it may have to any indemnified party otherwise that under this Subsection
6.4(f).
(iv) The obligations of the Corporation and the Selling Holders
under this Subsection 6.4(f) shall survive the completion of any offering of
Shares under this Agreement and termination of this Agreement.
(g) "Market Stand-Off" Agreement. Each party to this Agreement hereby
agrees that, during the period of duration specified by the Corporation and an
underwriter of Shares or other equity and equity-linked securities of the
Corporation (which period shall not exceed 180 days), following the effective
date of a registration statement of the Corporation filed under the Act, it
shall not, to the extent requested by the Corporation and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to those who agree to be similarly bound) any equity
and equity-linked securities of the Corporation held by it at any time during
such period (except: (v) Transfers between or among the parties to the
Shareholders Agreement; (w) Shares included in such registration; (x) Shares
subject to the Option; (y) Transfers by Purchaser to GTE Permitted Transferees;
and (z) Transfers among Puerto Rico Entities).
In order to enforce the foregoing covenant, the Corporation may impose
stop-transfer instructions with respect to the Shares of each such Holder until
the end of such period.
(h) Listing. In connection with a registration pursuant to Section 6.2,
the Corporation will use all commercially reasonable efforts to qualify Shares
sold pursuant to such registration to trade on a United States national
securities exchange or on the National Association of Securities Dealers
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Automated Quotation ("NASDAQ") system and to maintain the inclusion of such
Shares on a United States national securities exchange or the NASDAQ system for
a period of four years after the effective date of a registration statement
filed with the SEC pursuant to Section 6.2. The NASDAQ system shall mean the
NASDAQ National Market.
ARTICLE VII
MISCELLANEOUS
7.1 Financial Statements. As soon as available and in any event within
four months after the close of each fiscal year of the Corporation, the
Corporation shall deliver to each Shareholder of at least 2% of the Shares the
consolidated balance sheet of the Corporation and its subsidiaries as at the end
of such fiscal year and the related consolidated statements of income and
retained earnings and statement of cash flows for such fiscal year, in each case
setting forth comparative figures for the preceding fiscal year (if applicable)
in each case certified by independent public accountants.
7.2 Books, Records and Inspections. The Corporation shall, and shall cause
its subsidiaries to, keep proper books of record and account in which full, true
and correct entries in conformity with generally accepted accounting principles
and all requirements of law shall be made of all dealings and transactions in
relation to its business and activities.
7.3 Endorsement of Stock Certificates.
(a) Each of the certificates representing the Shares, or any of them,
shall contain the following legends for the term of this Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ISSUED, ACCEPTED AND
HELD SUBJECT TO THE TERMS OF A CERTAIN SHAREHOLDERS AGREEMENT DATED
AS OF MARCH 2, 1999. A COPY OF F SUCH AGREEMENT MAY BE INSPECTED AT
THE PRINCIPAL OFFICE OF THIS
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<PAGE> 38
CORPORATION. NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED
HEREBY ARE SUBJECT TO SALE, TRANSFER OR OTHER DISPOSITION OR
ENCUMBRANCE EXCEPT AS PERMITTED IN SAID AGREEMENT. THE HOLDER OF
THIS CERTIFICATE, BY THE ACCEPTANCE HEREOF, AGREES TO ALL THE TERMS
OF SAID AGREEMENT WHICH ARE INCORPORATED HEREIN."
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES
LAWS OF ANY STATE OR THE COMMONWEALTH OF PUERTO RICO, AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS EXCEPT PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF
AVAILABLE) OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT."
(b) A copy of this Agreement shall be delivered to the Secretary of the
Corporation, kept with the corporate records of the Corporation and shall be
shown by him to any person making inquiry concerning it and having a proper
business purpose.
(c) The Corporation agrees that it will not cause or permit the transfer
of any Shares to be made on its books unless the transfer is permitted by this
Agreement and has been made in accordance with the terms hereof.
7.4 Products and Services. The parties hereto agree that all products sold
and services provided to the Corporation by Purchaser, holders of Purchaser
Interests, Popular, Inc. or any Affiliate thereof shall be provided on terms
that are fair to the Corporation and no less favorable to the Corporation than
on an arm's length basis and subject to customary commercial terms.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement shall terminate, and the certificates
representing the Shares shall be released from the terms of this Agreement upon
the earliest of: (a) the written
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agreement of all parties hereto; (b) the ownership in the aggregate by the
Puerto Rico Entities of less than 4% of the Shares; and (c) 10 years from the
date hereof.
8.2 Survival. Notwithstanding the termination of this Agreement, the
provisions of Sections 1.7, 4.1, 4.2 and 4.3 as they apply to Purchaser and
Strategic Purchaser, Article V and Section 7.4 (so long as the Puerto Rico
Entities own any Shares) hereof shall survive such termination and shall remain
in effect during the applicable periods provided therein.
ARTICLE IX
INTENTIONALLY OMITTED
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. Any notice or other communication under this Agreement shall
be in writing and shall be considered given when delivered in person, sent by
telefax transmission or mailed by certified mail, return receipt requested, to
the parties at the following addresses or telefax numbers (or at such other
address or telefax number as a party may specify by notice to the others):
If to the Corporation at:
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, Puerto Rico 00968
Telephone: (787) 793-1818
Telecopy: (787) 792-9830
Attention: President
with a copy to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
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Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
If to PRTA, at:
Puerto Rico Telephone Authority
c/o Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
with a copy to:
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to Purchaser or Strategic Purchaser, at:
GTE Holdings (Puerto Rico) LLC
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
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with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
If to Popular, Inc., at:
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone: (787) 765-9800
Telecopy: (787) 756-3983
Attention: Carlos J. Vazquez
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telephone: (212) 558-4000
Telecopy: (212) 558-3588
Attention: Donald J. Toumey
10.2 No Waiver. No waiver of any provision of this Agreement in any
instance shall be, or for any purpose be deemed to be, a waiver of the right of
any party hereto to enforce strict compliance with the provisions hereof in any
subsequent instance.
10.3 Agreement to Perform Necessary Acts. Each party hereto and its
successors and assigns shall perform any further acts and execute and deliver
any documents or procure any court order which may reasonably be necessary to
carry out the provisions of this Agreement.
10.4 Modification. No provision of this Agreement may be amended, modified
or waived without the written approval of the parties hereto, excluding any
party which owns, directly or indirectly, less than 2% of the Shares; provided,
that, no such amendment, modification or waiver may adversely affect the
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<PAGE> 42
rights under this Agreement of such excluded party without such party's written
consent.
10.5 Counterparts. This Agreement may be executed in multiple
counterparts, subject to the execution of at least one of such counterparts by
each of the parties hereto.
10.6 Severability. Every provision of this Agreement is intended to be
severable and if any term or all or part of any provision hereof is held by
judicial decision to be invalid, such invalidity shall not affect the validity
of the remainder of this Agreement.
10.7 Entire Agreement. This Agreement is intended by the parties hereto as
a final expression of their agreement and understanding with respect to the
subject matter hereof and supersedes any and all prior and contemporary
agreements and understandings. To the extent this Agreement contradicts any
provisions of any agreements entered into among or between any of the
Shareholders, holders of Purchaser Interests and the Corporation, the provisions
of this Agreement shall govern.
10.8 Governing Law. This Agreement shall be construed and interpreted in
accordance with the laws of Puerto Rico without giving effect to the principles
of conflicts of laws thereof.
10.9 Headings. The headings of the several articles and sections of this
Agreement are inserted solely for convenience of reference and are not a part of
and are not intended to govern, limit or aid in the construction of any term or
provision hereof.
10.10 Construction. When necessary, the masculine shall include the
feminine or neuter and the singular shall include the plural and vice versa.
10.11 Binding Effect; Assignment. This Agreement shall be binding upon and
shall inure to the benefit of, the parties hereto. None of the rights or
obligations of the parties
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hereunder may be assigned (other than to a GTE Permitted Transferee or a
Permitted Transferee and subject to Section 10.15 hereof); provided, that (i)
PRTA may assign its rights hereunder to the Government Development Bank for
Puerto Rico ("GDB") and that no such assignment shall have the effect of being a
delegation of duties or an assumption of any obligations of PRTA, (ii) the
rights granted to the PRTA hereunder shall be assignable to Puerto Rico Entities
in connection with a Transfer of Shares thereto, and (iii) the provisions of
Article VI shall be assignable with any permitted Transfer of any Shares other
than a public offering, a widely distributed private placement, or a market
transaction permitted by Rule 144 of the Securities Act of 1933, as amended.
10.12 Equitable Relief. Each of the parties hereto acknowledges that the
other parties will be irreparably damaged and will have no adequate remedy at
law in the event of a breach or threatened breach of obligations hereunder and
shall be entitled to such equitable and injunctive relief as may be available to
restrain a violation of, or threatened violation of, or to specifically enforce,
this Agreement. Nothing herein shall be deemed to preclude any party from
pursuing any other remedies available under this Agreement or otherwise to such
party for such breach or threatened breach, including the recovery of damages.
10.13 Fees; Expenses. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel, financial
advisers and accountants.
10.14 Submission to Jurisdiction; Venue.
(a) Any legal action or proceeding with respect to this Agreement or any
party's investment in the Shares shall be
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brought in the United States District Court for the District of Puerto Rico (by
way of summary judgment in lieu of complaint if procedure so permits) or, if
such court lacks subject matter jurisdiction, in the courts of Puerto Rico
situated in San Juan. By execution and delivery of this Agreement, each of the
parties hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts. Each of
the Shareholders, each member of the Purchaser Group and the Corporation further
irrevocably consents to the service of process out of any of the aforementioned
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth in Section 10.1, such service to become effective 30 days after such
mailing. Nothing herein shall affect the right of any party hereto to serve
process in any other manner permitted by law.
(b) Each of the parties hereto hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Agreement brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.
(c) It is understood and agreed that the Shares owned by Puerto Rico
Entities shall be owned by entities from and after the date hereof which either
do not have, or have irrevocably waived, to the fullest extent permitted by law,
all sovereign immunity to which they or their properties may be entitled,
including but not limited to sovereign immunity from process, suit, jurisdiction
and judgment, but not immunity from prejudgment attachment. The Puerto Rico
Entities party hereto
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to whom Shares are proposed to be Transferred who own Shares shall provide to
the Corporation an opinion of counsel reasonably satisfactory to the Corporation
as to such status of such entities.
10.15 Subsequent Parties. Notwithstanding any provision of this Agreement
to the contrary, no Shares shall be Transferred to any Puerto Rico Entity, GTE
Permitted Transferee or Permitted Transferee, as applicable, or (other than with
respect to a transfer in a registered public offering, a widely distributed
private placement or in a transaction permitted by Rule 144 of the Securities
Act of 1933) to any other Person, unless such Puerto Rico Entity, GTE Permitted
Transferee, Permitted Transferee or other Person (and its private equity
owners), as the case may be, expressly agrees in writing to be bound by all the
provisions of this Agreement.
10.16 Initial Public Offering. The parties hereto, acknowledge that, in
connection with the initial public offering of the Shares, it may be necessary
to amend certain provisions of this Agreement and, consequently, PRTA or its
successor (on behalf of the Puerto Rico Entities), Strategic Purchaser,
Purchaser and Popular, Inc. hereby agree that they shall negotiate in good faith
in an attempt to effect modifications to this Agreement that will facilitate
consummation of such initial public offering.
10.17 FCC Compliance. Notwithstanding any provision in this Agreement to
the contrary, no action will be taken pursuant to this Agreement which requires
the prior approval of the Federal Communications Commission or the
Telecommunications Board of Puerto Rico without the receipt of such required
approval.
40
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PUERTO RICO TELEPHONE AUTHORITY
By:
--------------------------------------
Name:
Title:
GTE HOLDINGS (PUERTO RICO) LLC
By:
--------------------------------------
Name:
Title:
TELECOMUNICACIONES DE PUERTO RICO, INC.
By:
--------------------------------------
Name:
Title:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
--------------------------------------
Name:
Title:
<PAGE> 47
POPULAR, INC.
By:
--------------------------------------
Name:
Title:
Prior to the fifth anniversary of the date of this Agreement, GTE
Corporation agrees 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 Strategic Purchaser, and its GTE Permitted
Transferees to whom Shares or Purchaser Interests have been Transferred, unless
otherwise consented to by the Government Development Bank for Puerto Rico, which
consent shall not be unreasonably withheld.
GTE CORPORATION
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.7
EXECUTION COPY
AMENDED AND RESTATED
PUERTO RICO MANAGEMENT AGREEMENT
Dated as of March 2, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE I APPOINTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.01 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II GENERAL SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.01 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.02 Management and Operating Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.01 Responsibility of GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.02 Strategic Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.03 Organizational Structure and Designation of Personnel . . . . . . . . . . . . . . . . . . . . 6
3.04 Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.01 Fee for Management Expertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.02 Reimbursable Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.03 Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V ADDITIONAL SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.01 Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.02 Fees and Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE VI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.01 Indemnification by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.02 Indemnification by GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.03 Disclaimer of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.04 Limitation on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII DURATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.01 Initial Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.02 Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.03 Use of Management Expertise After Termination . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8.01 Termination by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8.02 Termination by GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.03 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.04 Non-fulfillment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9.01 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9.02 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9.03 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.04 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.05 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.06 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.07 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.08 Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.09 No Authority to Bind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.10 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.11 Director Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.13 Effect of Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED
PUERTO RICO MANAGEMENT AGREEMENT
AMENDED AND RESTATED PUERTO RICO MANAGEMENT AGREEMENT dated as of
March 2, 1999 by and among TELECOMUNICACIONES DE PUERTO RICO, INC., a Puerto
Rico corporation ("Company"), PUERTO RICO TELEPHONE COMPANY, INC., a Puerto
Rico corporation ("PRTC"), and GITI SERVICES PUERTO RICO INCORPORATED, a Puerto
Rico corporation ("GTE").
W I T N E S S E T H:
WHEREAS, GTE Holdings (Puerto Rico) LLC ("Purchaser"), a limited
liability company organized under the laws of Delaware, the Company, GTE
International Telecommunications Incorporated, a Delaware corporation ("GITI"),
and the Puerto Rico Telephone Authority ("PRTA"), a public corporation and
government instrumentality of the Commonwealth of Puerto Rico ("Puerto Rico"),
have entered into an Amended and Restated Stock Purchase Agreement dated July
21, 1998, as amended from time to time (the "Stock Purchase Agreement"),
pursuant to which Purchaser initially acquired 40.01% plus one share of the
Company's issued and outstanding shares of common stock;
WHEREAS, the Company owns 100% of the capital stock of CELULARES
TELEFONICA, INC., a Puerto Rico corporation ("CTI") and PRTC;
WHEREAS, GITI owns 100% of the capital stock of Purchaser;
WHEREAS, GTE has the management, technical and financial capability,
and is committed, to develop and maintain the Company's telecommunications
system as a technologically advanced, efficient system for the benefit of
Puerto Rico and its citizens;
<PAGE> 5
WHEREAS, the Company, PRTC and its Affiliates desire to benefit from,
and GTE desires to provide the Company, PRTC and its Affiliates with, access to
management, policy, operational and marketing experience, of GTE and its
affiliates, including GITI (collectively, the "Management Expertise"), insofar
as such Management Expertise is necessary or beneficial for the Company and
Purchaser to meet their commitment to the development and maintenance of the
Company's telecommunications system; and
WHEREAS, the Management Expertise to be provided pursuant to this
Agreement will be provided by GTE and its affiliates and received by the
Company, PRTC and its Affiliates in Puerto Rico.
NOW THEREFORE, in consideration of the foregoing, it is agreed by and
among the parties hereto as follows:
ARTICLE I
APPOINTMENT
1.01 Appointment. PRTC hereby appoints GTE to manage and advise,
and provide proprietary and other Management Expertise within Puerto Rico on
all significant aspects of the operations and administration of the businesses
of PRTC and its Affiliates, subject to the terms and conditions hereof, the
Stock Purchase Agreement, the Shareholders Agreement of even date herewith
among the Company and its shareholders (the "Shareholders Agreement"), the
Certificates of Incorporation and Bylaws of the Company and each such Affiliate
of the Company, and the general authority, supervision and control of the
Company acting through its Board of Directors.
It is understood that GTE's services are limited to offering advisory
assistance, direction and provision of knowledge and experience, while the
Company, PRTC and its Affiliates shall be
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<PAGE> 6
responsible for developing and implementing activities. No provision of this
Agreement shall be read to require GTE or its affiliates to make monetary
contributions or loans to the Company, PRTC or its Affiliates.
1.02 Acceptance. GTE hereby accepts its appointment hereunder and
agrees to make available within Puerto Rico such skills, services and
Management Expertise, to work in good faith and in close cooperation with PRTC
and its Affiliates, and to strengthen the strategic position of PRTC and its
Affiliates in the telecommunications and related industries with the goal of
making it a more business-driven, customer-oriented and technologically
advanced telecommunications operator, capable of providing a broad range of
telecommunications products and services to its customers. GTE agrees that the
businesses of PRTC and its Affiliates are to be operated in a modern and
efficient manner applying Management Expertise in a manner no less favorable to
PRTC and its Affiliates than that which GTE's ultimate parent company
("Parent") applies to such Parent's own wholly owned operations and businesses
in its principal place of business.
ARTICLE II
GENERAL SERVICES
2.01 Services.
(a) GTE agrees to make available to PRTC and its
Affiliates GTE's (and, if necessary, its affiliates') management advice and
services and general legal and regulatory advice.
(b) All the inventions, improvements, discoveries,
software programs and other forms of technology or industrial property carried
out, conceived or developed, during the duration
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<PAGE> 7
of this Agreement, whether in fact or implicitly, as a result of any work
effected by PRTC and its Affiliates, shall be and continue to be the property
of PRTC and its Affiliates.
2.02 Management and Operating Experience. GTE will provide its
services by coordination with Company management and by means of making GTE's
(and, if necessary, its affiliates) management personnel available to PRTC and
its Affiliates, as more fully described in this Agreement, as well as assisting
in the training of existing and future personnel of PRTC and its Affiliates,
including management, technical, sales, marketing, customer service and
administrative personnel.
ARTICLE III
MANAGEMENT
3.01 Responsibility of GTE.
(a) GTE shall be responsible for providing advice and
direction regarding the management, operations, and business of PRTC and its
Affiliates, including, but not limited to, the development and implementation
of general performance policies, the organizational structure, annual budgets
and the business and strategic plans ("Strategic Plans"), as described in
Section 3.02. To this end, PRTC and its Affiliates shall provide to GTE all
the information requested by GTE and unrestricted access to books, records and
other data that GTE deems advisable for exercising its management advisory
responsibilities.
(b) GTE shall make available (or cause to be made
available) to PRTC and its Affiliates experience and information and
theoretical and practical knowledge owned or used by GTE (or its affiliates, as
applicable), in its capacity as a telecommunications provider and service
operator, including those
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<PAGE> 8
methods and procedures GTE (or its affiliates, as applicable), presently knows
and uses, as well as all those resulting from the future development of GTE's
(and, if appropriate, its affiliates') knowledge and experience, with the aim
of improving and enhancing the operations, business and value of the Company
through the application of operating strategies and management policies and
practices.
(c) For the purpose of fulfilling its obligations under
this Article III, GTE shall make (or cause to be made) experienced
representatives of the management of each of its existing organizational areas
and those of its affiliates available to PRTC and its Affiliates and shall
offer to PRTC and its Affiliates, the tangible and intangible benefits arising
from the relationship with GTE and its affiliates including, among other
things, economies of scale in the purchase of equipment and expansion and
modernization of networks. GTE (and, if appropriate, its affiliates) shall
provide follow up and counseling relating both to traffic and operations, as
well as to the commercial aspects and organization of PRTC and its Affiliates.
At all times PRTC and its Affiliates may consult with GTE (and, if appropriate,
its affiliates) and may request advice of GTE on any question relating to its
business activities.
(d) Upon mutual agreement of the Company and GTE, GTE
(or, if appropriate, its affiliates) shall assist in the negotiations for the
Company and its Affiliates to obtain certain technology from outside sources
other than GTE or any Affiliate thereof.
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<PAGE> 9
3.02 Strategic Plans.
(a) Within one hundred twenty (120) days of Closing and,
for each subsequent year, at least thirty (but not more than ninety) days prior
to the beginning of the Company's fiscal year, GTE shall use its (and, if
necessary, its affiliates') management expertise and experience to develop a
Strategic Plan for PRTC and its Affiliates and for the approval of the
Company's Board of Directors. GTE shall assist (or cause its affiliates to
assist, if necessary) PRTC and its Affiliates in implementing such Strategic
Plan. Such Strategic Plan shall include:
(i) Business strategies; planning (including
technical, commercial, acquisitions, information systems and real property) and
short, medium and long term timetables for the fulfillment of the plans;
(ii) Financial aspects, with particular emphasis on
the analysis of the financing needs and the utilization of the most suitable
financing sources; improving the Company's return on capital invested; and
assistance regarding the relationship with financial institutions and entities
in order to obtain optimal financing; and
(iii) Administration and human resources, with
particular reference to the adoption of the most advisable administrative,
accounting, tax, budgetary and fiscal practices, methods and controls.
(b) Each Strategic Plan shall be developed by GTE and
presented to the Board of Directors of the Company (the "Board") for its
approval if required by the Shareholders Agreement.
3.03 Organizational Structure and Designation of Personnel.
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<PAGE> 10
(a) GTE shall be responsible for advising the Company on
any restructuring of the organizational structure of the Company and its
Affiliates (the "Organizational Structure") which GTE deems advisable and
proposing to the Company, from time to time, the personnel to occupy positions
within the Company and its Affiliates. At any time, GTE may propose
modifications to the Organizational Structure and propose the replacement of
personnel at any level, including management; provided, however, that any such
action shall strictly comply with all pertinent labor laws, regulations, and
agreements (including the Stock Purchase Agreement and the Shareholders
Agreement). The designation and/or ratification of senior management and
changes in the Organizational Structure shall be subject, where appropriate, to
the approval of the Board in accordance with the Company's By-laws; and
(b) The officers and management employees proposed by GTE
shall, to the knowledge of GTE, have the professional and technical
qualifications to perform the functions that in each case are assigned to them.
GTE shall assess such qualifications on the basis of objective evaluation
methods. Such persons may come from GTE and its affiliates, from the Company
or its Affiliates through internal promotion or from unaffiliated third
parties.
3.04 Legal Compliance. GTE represents that it has complied with the
requirements of Article 8(e) of Act No. 54 and certifies that:
It has not paid and it will not pay any commission or bonus, and it
has not granted any direct or indirect financial benefit, to any public
official or employee, nor to any former public
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<PAGE> 11
official or employee, participating in the privatization process of PRTC while
discharging his/her public service duties.
ARTICLE IV
PAYMENTS
4.01 Fee for Management Expertise. PRTC shall pay GTE as the
exclusive compensation for the services referred to in this Agreement (other
than pursuant to Section 4.02 or Article V), an annual fee (the "Fee") equal to
the amounts set forth in column 1 on Exhibit A; provided, however, that in no
event will the Fee, together with the fee payable for the corresponding period
by PRTC under the U.S. Management Agreement by and among the Company, PRTC, and
GITI, dated as of the date hereof (the "U.S. Management Agreement"), exceed
the Applicable Percentage set forth in Column 2 on Exhibit A of the Company's
EBITDA (as defined in the Technology License Agreement and taking into account
the provision of Section 3.2(b) of the Technology License Agreement) for the
applicable year. The Fee will be paid quarterly on the dates the Royalty is
payable under the Technology License Agreement, and shall be paid to the
account and in the manner set forth in the Technology License Agreement
(including Section 3.2(b) in respect of the Royalty thereunder).
4.02 Reimbursable Expenses. GTE shall be entitled to be reimbursed
from time to time for transportation expenses, meals and lodging expenses
incurred by its personnel in performing its obligations hereunder.
4.03 Withholding Taxes. All payments shall be made after
reduction for any tax required to be withheld by PRTC, provided that the
parties shall consult with each other as to the amount of any such tax required
to be withheld. PRTC shall furnish GTE
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<PAGE> 12
with such proof of payment of such tax as is required by the United States
Internal Revenue Code (and regulations) to support a claim for a credit for
taxes paid.
ARTICLE V
ADDITIONAL SERVICES
5.01 Additional Services. It is expressly understood that GTE
shall, at the request of PRTC, make available (or cause its affiliates to make
available, if necessary) for sale to PRTC and its Affiliates such additional
services (the "Additional Services") that PRTC deems necessary to accomplish
the objectives set forth in this Agreement and that GTE or GITI is capable of
providing subject to the provisions of the Shareholders Agreement.
5.02 Fees and Form of Payment. Any agreement to provide such
Additional Services shall be subject to customary arm's length commercial terms
which are fair to PRTC and subject to the provisions of the Shareholders
Agreement.
ARTICLE VI
INDEMNIFICATION
6.01 Indemnification by Company. The Company shall indemnify GTE,
its directors, officers, employees and affiliates from and against any
liability, loss (excluding incidental, special and consequential damages and
loss of profit), damage, claim, action or other cost or expense (including
without limitation, reasonable attorneys fees and expenses) (collectively,
"Losses"), arising out of GTE performing its obligations hereunder, except to
the extent of GTE's willful misconduct.
-9-
<PAGE> 13
6.02 Indemnification by GTE. GTE shall indemnify and hold each of
the Company, PRTC and their Affiliates harmless from and against any Losses
which the Company or its affiliates may suffer as a result of any material
breach of any agreement or undertaking by GTE in this Agreement to the extent
of third party claims against the Company, PRTC or its Affiliates with respect
thereto.
6.03 Disclaimer of Warranties. It is expressly understood that GTE
makes no warranty to the Company or its Affiliates with respect to the
performance or fitness for any purpose of the products or services contemplated
by this Agreement. GTE expressly disclaims all warranties including, without
limitation, the implied warranties of merchantability and fitness for a
particular purpose.
6.04 Limitation on Liability. Notwithstanding any other section
hereof, the parties agree that the Company's and PRTC's sole and exclusive
remedy for any breach or alleged breach by GTE of this Agreement (other than
Article V as to which the separate arrangements with respect thereto shall
govern) other than any breach or alleged breach by GTE of Sections 6.02 and
9.04 shall be to terminate this Agreement and any obligation to make any and
all future payments hereunder.
ARTICLE VII
DURATION
7.01 Initial Term. This Agreement shall become effective as of the
date hereof, and shall have an initial duration of five (5) years.
7.02 Extension. Not less than six months before the expiration of
this Agreement, the parties shall commence bona
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<PAGE> 14
fide negotiations to extend its term. In the event agreement is reached on any
such extension, such extension shall be subject to approval of the Board and
the Board of Directors of PRTC.
7.03 Use of Management Expertise After Termination. Upon
expiration or termination of this Agreement for any reason, PRTC and its
Affiliates may continue utilizing all knowledge or know-how received from
delivery of Management Expertise made available to them by GTE or its
affiliates pursuant to this Agreement without the payment of any additional
compensation to GTE or any of its Affiliates.
ARTICLE VIII
TERMINATION
The parties hereto expressly agree that this Agreement may not be
terminated except by mutual agreement of the Company, GTE and PRTA or as
follows:
8.01 Termination by the Company. The Company may terminate this
Agreement:
(a) upon liquidation or bankruptcy of GTE;
(b) upon material breach of this Agreement by GTE (other
than agreements entered into pursuant to Article V hereof), as covered in
Section 8.04 of this Agreement;
(c) upon revocation or suspension of any material license
of the Company or any of its subsidiaries as a result of the willful misconduct
of GTE;
(d) should GTE Corporation cease to own, directly or
indirectly, more than 50% of GTE International Telecommunications Incorporated
or GITI Services Puerto Rico Incorporated;
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<PAGE> 15
(e) should GITI or GTE Corporation fail to directly or
indirectly have beneficial and economic ownership of more than 20% of the
capital stock of the Company; or
(f) upon termination of the Technology License Agreement
or the U.S. Management Agreement.
8.02 Termination by GTE. GTE may terminate this Agreement upon:
(a) a delay of more than 20 business days in the payment
of the undisputed portion of any Fee; or
(b) non-fulfillment of this Agreement by the Company, as
covered in Section 8.04 of this Agreement.
8.03 Effect of Termination. Except as provided in Section 8.04
below, termination shall be effective immediately upon the occurrence of any
event described in Sections 8.01 and 8.02 above.
8.04 Non-fulfillment. Should any of the parties breach, refuse or
fail to comply with, or shall violate, any material terms or conditions of this
Agreement, said failure, omission or violation shall constitute a breach of
this Agreement. In such case the party not in breach shall notify the other
party of the breach in writing providing a detailed description of the alleged
breach and shall grant the other party a period of ninety (90) days to remedy
said breach, if such breach is capable of being so remedied. Should the
breaching party not remedy said breach within said ninety (90) days, or if such
breach is not capable of being so remedied, the notifying party shall have the
right to terminate this Agreement.
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<PAGE> 16
ARTICLE IX
GENERAL PROVISIONS
9.01 Amendments. This Agreement may be amended only with the prior
written agreement of all the parties hereto, and no course of action by or on
behalf of any party shall be construed as an explicit or implicit amendment of
this Agreement or any of its provisions. No amendment shall be made hereto
which materially adversely affects the economic rights of the Company or PRTC
except with the prior written consent of the PRTA.
9.02 Jurisdiction. The parties hereby irrevocably and
unconditionally submit to the jurisdiction of the United States District Court
for the District of Puerto Rico or, if such court does not have subject matter
jurisdiction, in any court of Puerto Rico having subject matter jurisdiction
for purposes of any suit, action or proceeding seeking to enforce any provision
of, or based on any right arising out of, this Agreement, and the parties agree
not to commence any such suit, action or proceeding except in such courts. Each
party hereby agrees that service of any process, summons, notice or document by
U.S. registered mail addressed to it shall be effective service of process for
any such action, suit or proceeding. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any such suit,
action or proceeding in the United States District Court for the District of
Puerto Rico or any court of Puerto Rico having subject matter jurisdiction and
hereby further and irrevocably waive and agree not to plead or claim in any
such court that any such suit, action or proceeding has been brought in an
inconvenient forum.
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<PAGE> 17
9.03 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the written consent of the other party hereto and compliance with
applicable laws and regulations; provided, however, that PRTA may assign its
rights hereunder to the Government Development Bank for Puerto Rico ("GDB") and
that no such assignment shall have the effect of being a delegation of duties
or an assumption of any obligations of PRTA. The Company's and PRTC's consent
to the assignment of this Agreement by GTE to any of GTE Corporation's direct
or indirect wholly owned subsidiaries may not be unreasonably withheld;
provided, that, no such assignment shall relieve GTE of any of its obligations
hereunder.
9.04 Confidentiality.
(a) (i) All non-public documentation, information and
Management Expertise of GTE (the "GTE Information") made available to the
Company or its Affiliates by GTE in order to fulfill its obligations under this
Agreement shall be kept strictly confidential by the Company and its Affiliates
and their personnel and any other person who has had access to such GTE
Information through the Company, and such GTE Information shall not be
disclosed to third parties without GTE's express written consent. All such GTE
Information shall continue to be owned by GTE but this shall not affect the
receiving party's right to continue using such GTE Information on a
non-exclusive, confidential basis after termination of this Agreement pursuant
to Section 7.03 hereof;
-14-
<PAGE> 18
(ii) All non-public documentation and information of
the Company and its subsidiaries (the "Company Information") obtained by GTE in
the course of performing its obligations hereunder shall be treated as strictly
confidential and shall not be disclosed to third parties without the Company's
express written consent. All such Company Information shall continue to be
owned by the Company; and
(iii) This section shall continue in full force and
effect for five (5) years after the expiration of this Agreement.
(b) In the event that any party or an affiliate thereof
is requested pursuant to, or required by, applicable law, regulation or legal
process to disclose any GTE Information or Company Information, as the case may
be, the other parties shall immediately be informed of the matter in advance.
Only that portion of the GTE Information or Company Information, as the case
may be, that is, upon the advice of counsel, legally required shall be
furnished, and all reasonable efforts shall be made to obtain reliable
assurance (in the form of a court order or other reasonable assurance) that, to
the maximum extent possible under the circumstances, confidential treatment
will be accorded to such portion of GTE Information or Company Information, as
the case may be, required to be disclosed.
9.05 Applicable Law. This Agreement is subject to and shall be
construed in accordance with the internal laws of Puerto Rico applicable to
contracts made and to be performed in Puerto Rico.
9.06 Severability. Every provision of this Agreement is intended
to be severable and if any term or all or part of any provision hereof is held
by judicial decision to be invalid, such
-15-
<PAGE> 19
invalidity shall not affect the validity of the remainder of this Agreement.
9.07 Notices. Any notice or other communication under this
Agreement shall be in writing and shall be considered given when delivered in
person, sent by telefax transmission or mailed by certified mail, return
receipt requested, or nationally recognized overnight deliver service, to the
parties at the following addresses or telefax numbers (or at such other address
or telefax number as a party may specify by notice to the others in accordance
with this provision):
If to the Company or PRTC, at:
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, PR 00968
Telephone:
Telecopy:
Attention: President
with a copy to (for so long as PRTA or any other Puerto Rico
Entity is a party beneficiary of this Agreement):
Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
-16-
<PAGE> 20
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to GTE, at:
GITI Services Puerto Rico Incorporated
P.O. Box 9022946
San Juan Puerto Rico 00902-2946
Telephone: 787-282-6666
Telecopy: 787-282-8880
Attention: Mark Johnson
with a copy to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, TX 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Mr. Fares Salloum
9.08 Third Party Beneficiaries. Except as specifically stated
herein, nothing in this Agreement shall be deemed to create any right with
respect to any person that is not a party to this Agreement; provided, that,
any subsidiary of the Company may enforce the Company's rights hereunder;
provided, further, that, so long as the PRTA or any other instrumentality of
the Government of Puerto Rico (a "Puerto Rico Entity") owns or controls at
least 10% of the shares of capital stock of the Company (owned as of the date
hereof or acquired hereafter directly from the Company or its successors), such
Puerto Rico Entities shall be deemed third party beneficiaries of this
Agreement and shall be entitled to enforce the provisions hereof
-17-
<PAGE> 21
for the benefit of the Company, including but not limited to Article VIII
hereof, directly, without first making demand upon the Company to do so; and
provided, further, that GDB may enforce the rights of PRTA hereunder as
provided in Section 12.05 of the Stock Purchase Agreement.
9.09 No Authority to Bind. GTE shall have no authority to enter
into contracts or otherwise incur obligations on behalf of or bind the Company
or any of its subsidiaries, except as otherwise expressly approved by the
Board.
9.10 Defined Terms.
(a) Unless otherwise defined herein, capitalized terms
used in this Agreement shall have the meanings ascribed to such terms in the
Stock Purchase Agreement or as set forth in Section 8.14 of the Technology
License Agreement.
(b) "Affiliates" when used in reference to the Company or
PRTC shall mean the Company and subsidiaries of the Company.
9.11 Director Approval. Any action or decision required or
permitted to be taken or not taken by the Company or any of its subsidiaries
pursuant to Section 7.02 and Article VIII may only be taken or not taken by the
Company or such subsidiary (as applicable) upon the approval thereof by a
majority of the disinterested directors of the Company.
9.12 Counterparts. This Agreement may be signed in multiple
counterparts, subject to the execution of at least one of such counterparts by
each of the parties hereto.
9.13 Effect of Amendment. This Amended and Restated Puerto Rico
Management Agreement supersedes the Puerto Rico Management Agreement signed on
March 2, 1999.
-18-
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By:________________________________
Name:_________________________________________
_______________________________
Title:________________________________________
_______________________________
PUERTO RICO TELEPHONE COMPANY, INC.
By:___________________________________________
_______________________________
Name:_________________________________________
_______________________________
Title:________________________________________
_______________________________
GITI SERVICES PUERTO RICO INCORPORATED
By:___________________________________________
_______________________________
Name:_________________________________________
_______________________________
Title:________________________________________
_______________________________
By:___________________________________________
_______________________________
Name:_________________________________________
_______________________________
Title:________________________________________
_______________________________
-19-
<PAGE> 23
GTE International Telecommunications Incorporated agrees to cause GTE Services
Puerto Rico Incorporated to supply the Management Expertise (if necessary, by
supplying such Management Expertise to GTE Services Puerto Rico Incorporated) on
the terms and conditions provided in Article II hereof and otherwise
unconditionally guarantee all of the obligations of GTE Services Puerto Rico
Incorporated hereunder.
GTE INTERNATIONAL TELECOMMUNICATIONS
INCORPORATED
By:___________________________________________
_______________________________
Name:_________________________________________
_______________________________
Title:________________________________________
_______________________________
-20-
<PAGE> 24
EXHIBIT A
(Puerto Rico)
<TABLE>
<CAPTION>
Column 1 Column 2
------------------ ----------------
Applicable
Percentage
Year Fee of EBITDA
----------- ------------------ ----------------
<S> <C> <C>
1 $9,860,000 8%
2 $8,259,000 8%
3 $7,425,000 7%
4 $7,989,000 7%
5 $6,878,000 6%
</TABLE>
-21-
<PAGE> 1
EXHIBIT 10.8
EXECUTION COPY
AMENDED AND RESTATED
U.S. MANAGEMENT AGREEMENT
Dated as of March 2, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I APPOINTMENT............................................................................................2
1.01 Appointment...........................................................................................2
1.02 Acceptance............................................................................................3
ARTICLE II GENERAL SERVICES......................................................................................4
2.01 Services..............................................................................................4
2.02 Management and Operating Experience...................................................................4
ARTICLE III MANAGEMENT...........................................................................................4
3.01 Responsibility of GTE.................................................................................4
3.02 Strategic Plans.......................................................................................6
3.03 Organizational Structure and Designation of Personnel.................................................7
3.04 Legal Compliance......................................................................................8
ARTICLE IV PAYMENTS..............................................................................................8
4.01 Fee for Management Expertise..........................................................................8
4.02 Reimbursable Expenses.................................................................................8
4.03 Withholding Taxes.....................................................................................9
ARTICLE V ADDITIONAL SERVICES....................................................................................9
5.01 Additional Services...................................................................................9
5.02 Fees and Form of Payment..............................................................................9
ARTICLE VI INDEMNIFICATION.......................................................................................9
6.01 Indemnification by Company............................................................................9
6.02 Indemnification by GTE...............................................................................10
6.03 Disclaimer of Warranties.............................................................................10
6.04 Limitation on Liability..............................................................................10
ARTICLE VII DURATION............................................................................................11
7.01 Initial Term.........................................................................................11
7.02 Extension............................................................................................11
7.03 Use of Management Expertise After Termination........................................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII TERMINATION........................................................................................11
8.01 Termination by the Company...........................................................................11
8.02 Termination by GTE...................................................................................12
8.03 Effect of Termination................................................................................12
8.04 Non-fulfillment......................................................................................12
ARTICLE IX GENERAL PROVISIONS...................................................................................13
9.01 Amendments...........................................................................................13
9.02 Jurisdiction.........................................................................................13
9.03 Successors and Assigns...............................................................................14
9.04 Confidentiality......................................................................................14
9.05 Applicable Law.......................................................................................15
9.06 Severability.........................................................................................16
9.07 Notices..............................................................................................16
9.08 Third Party Beneficiaries............................................................................17
9.09 No Authority to Bind.................................................................................18
9.10 Defined Terms........................................................................................18
9.11 Director Approval....................................................................................18
9.12 Counterparts.........................................................................................18
9.13 Effect of Amendment..................................................................................18
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
U.S. MANAGEMENT AGREEMENT
AMENDED AND RESTATED MANAGEMENT AGREEMENT dated as of March 2, 1999 by and
among TELECOMUNICACIONES DE PUERTO RICO, INC., a Puerto Rico corporation
("Company"), PUERTO RICO TELEPHONE COMPANY, INC., a Puerto Rico corporation
("PRTC"), and GTE INTERNATIONAL TELECOMMUNICATIONS INCORPORATED, a Delaware
corporation ("GTE").
W I T N E S S E T H:
WHEREAS, GTE Holdings (Puerto Rico) LLC ("Purchaser"), a limited liability
company organized under the laws of Delaware, the Company, GTE and the Puerto
Rico Telephone Authority ("PRTA"), a public corporation and government
instrumentality of the Commonwealth of Puerto Rico ("Puerto Rico"), have entered
into an Amended and Restated Stock Purchase Agreement dated July 21, 1998, as
amended from time to time (the "Stock Purchase Agreement"), pursuant to which
Purchaser initially acquired 40.01% plus one share of the Company's issued and
outstanding shares of common stock;
WHEREAS, the Company owns 100% of the capital stock of CELULARES
TELEFONICA, INC., a Puerto Rico corporation ("CTI") and PRTC;
WHEREAS, GTE owns 100% of the capital stock of Purchaser;
WHEREAS, GTE has the management, technical and financial capability, and is
committed, to develop and maintain the Company's telecommunications system as a
technologically advanced, efficient system for the benefit of Puerto Rico and
its citizens;
<PAGE> 5
WHEREAS, the Company, PRTC and its Affiliates desire to benefit from, and
GTE desires to provide the Company, PRTC and its Affiliates with, access to
management, policy, operational and marketing experience, of GTE and its
affiliates (collectively, the "Management Expertise"), insofar as such
Management Expertise is necessary or beneficial for the Company and Purchaser to
meet their commitment to the development and maintenance of the Company's
telecommunications system; and
WHEREAS, the Management Expertise to be provided pursuant to this Agreement
will be provided by GTE and its affiliates and received by the Company, PRTC and
its Affiliates in the United States outside of Puerto Rico.
NOW THEREFORE, in consideration of the foregoing, it is agreed by and among
the parties hereto as follows:
ARTICLE I
APPOINTMENT
1.01 Appointment. PRTC hereby appoints GTE to manage and advise, and
provide proprietary and other Management Expertise in the United States or
elsewhere outside of Puerto Rico on all significant aspects of the operations
and administration of the businesses of PRTC and its Affiliates, subject to the
terms and conditions hereof, the Stock Purchase Agreement, the Shareholders
Agreement of even date herewith among the Company and its shareholders (the
"Shareholders Agreement"), the Certificates of Incorporation and Bylaws of the
Company and each such Affiliate of the Company, and the general authority,
supervision and control of the Company acting through its Board of Directors.
2
<PAGE> 6
It is understood that GTE's services are limited to offering advisory
assistance, direction and provision of knowledge and experience, while the
Company, PRTC and its Affiliates shall be responsible for developing and
implementing activities. No provision of this Agreement shall be read to require
GTE or its affiliates to make monetary contributions or loans to the Company,
PRTC or its Affiliates.
1.02 Acceptance. GTE hereby accepts its appointment hereunder and agrees to
make available in the United States or elsewhere outside of Puerto Rico such
skills, services and Management Expertise, to work in good faith and in close
cooperation with PRTC and its Affiliates, and to strengthen the strategic
position of PRTC and its Affiliates in the telecommunications and related
industries with the goal of making it a more business-driven, customer-oriented
and technologically advanced telecommunications operator, capable of providing a
broad range of telecommunications products and services to its customers. GTE
agrees that the businesses of PRTC and its Affiliates are to be operated in a
modern and efficient manner applying Management Expertise in a manner no less
favorable to PRTC and its Affiliates than that which GTE's ultimate parent
company ("Parent") applies to such Parent's own wholly owned operations and
businesses in its principal place of business.
3
<PAGE> 7
ARTICLE II
GENERAL SERVICES
2.01 Services.
(a) GTE agrees to make available to PRTC and its Affiliates GTE's
management advice and services and general legal and regulatory advice.
(b) All the inventions, improvements, discoveries, software programs
and other forms of technology or industrial property carried out, conceived or
developed, during the duration of this Agreement, whether in fact or implicitly,
as a result of any work effected by PRTC and its Affiliates, shall be and
continue to be the property of PRTC and its Affiliates.
2.02 Management and Operating Experience. GTE will provide its services by
coordination with Company management and by means of making GTE's management
personnel available to PRTC and its Affiliates, as more fully described in this
Agreement, as well as assisting in the training of existing and future personnel
of PRTC and its Affiliates, including management, technical, sales, marketing,
customer service and administrative personnel.
ARTICLE III
MANAGEMENT
3.01 Responsibility of GTE.
(a) GTE shall be responsible for providing advice and direction
regarding the management, operations, and business of PRTC and its Affiliates,
including, but not limited to, the development and implementation of general
performance policies, the organizational structure, annual budgets and the
business and strategic plans ("Strategic Plans"), as described in Section
4
<PAGE> 8
3.02. To this end, PRTC and its Affiliates shall provide to GTE all the
information requested by GTE and unrestricted access to books, records and other
data that GTE deems advisable for exercising its management advisory
responsibilities.
(b) GTE shall make available to PRTC and its Affiliates its experience
and information and theoretical and practical knowledge owned or used by GTE, in
its capacity as a telecommunications provider and service operator, including
those methods and procedures GTE presently knows and uses, as well as all those
resulting from the future development of GTE's knowledge and experience, with
the aim of improving and enhancing the operations, business and value of the
Company through the application of operating strategies and management policies
and practices available.
(c) For the purpose of fulfilling its obligations under this Article
III, GTE shall make experienced representatives of the management of each of its
existing organizational areas and those of its affiliates available to PRTC and
its Affiliates and shall offer to PRTC and its Affiliates, the tangible and
intangible benefits arising from the relationship with GTE including, among
other things, economies of scale in the purchase of equipment and expansion and
modernization of networks. GTE shall provide follow up and counseling relating
both to traffic and operations, as well as to the commercial aspects and
organization of PRTC and its Affiliates. At all times PRTC and its Affiliates
may consult with GTE and may request advice of GTE on any question relating to
its business activities.
5
<PAGE> 9
(d) Upon mutual agreement of the Company and GTE, GTE shall assist in
the negotiations for the Company and its Affiliates to obtain certain technology
from outside sources other than GTE or any Affiliate thereof.
3.02 Strategic Plans.
(a) Within one hundred twenty (120) days of Closing and, for each
subsequent year, at least thirty (but not more than ninety) days prior to the
beginning of the Company's fiscal year, GTE shall use its management expertise
and experience to develop a Strategic Plan for PRTC and its Affiliates and for
the approval of the Company's Board of Directors. GTE shall assist PRTC and its
Affiliates in implementing such Strategic Plan. Such Strategic Plan shall
include:
(i) Business strategies; planning (including technical,
commercial, acquisitions, information systems and real property) and short,
medium and long term timetables for the fulfillment of the plans;
(ii) Financial aspects, with particular emphasis on the analysis
of the financing needs and the utilization of the most suitable financing
sources; improving the Company's return on capital invested; and assistance
regarding the relationship with financial institutions and entities in order to
obtain optimal financing; and
(iii) Administration and human resources, with particular
reference to the adoption of the most advisable administrative, accounting, tax,
budgetary and fiscal practices, methods and controls.
6
<PAGE> 10
(b) Each Strategic Plan shall be developed by GTE and presented to the
Board of Directors of the Company (the "Board") for its approval if required by
the Shareholders Agreement.
3.03 Organizational Structure and Designation of Personnel.
(a) GTE shall be responsible for advising the Company on any
restructuring of the organizational structure of the Company and its Affiliates
(the "Organizational Structure") which GTE deems advisable and proposing to the
Company, from time to time, the personnel to occupy positions within the Company
and its Affiliates. At any time, GTE may propose modifications to the
Organizational Structure and propose the replacement of personnel at any level,
including management; provided, however, that any such action shall strictly
comply with all pertinent labor laws, regulations, and agreements (including the
Stock Purchase Agreement and the Shareholders Agreement). The designation and/or
ratification of senior management and changes in the Organizational Structure
shall be subject, where appropriate, to the approval of the Board in accordance
with the Company's By-laws; and
(b) The officers and management employees proposed by GTE shall, to
the knowledge of GTE, have the professional and technical qualifications to
perform the functions that in each case are assigned to them. GTE shall assess
such qualifications on the basis of objective evaluation methods. Such persons
may come from GTE and its affiliates, from the Company or its Affiliates through
internal promotion or from unaffiliated third parties.
7
<PAGE> 11
3.04 Legal Compliance. GTE represents that it has complied with the
requirements of Article 8(e) of Act No. 54 and certifies that:
It has not paid and it will not pay any commission or bonus, and it has not
granted any direct or indirect financial benefit, to any public official or
employee, nor to any former public official or employee, participating in the
privatization process of PRTC while discharging his/her public service duties.
ARTICLE IV
PAYMENTS
4.01 Fee for Management Expertise. PRTC shall pay GTE as the exclusive
compensation for the services referred to in this Agreement (other than pursuant
to Section 4.02 or Article V), an annual fee (the "Fee") equal to the amounts
set forth in column 1 on Exhibit A; provided, however, that in no event will the
Fee, together with the fee payable for the corresponding period by PRTC under
the Puerto Rico Management Agreement by and among the Company, PRTC, and GTE,
dated as of the date hereof (the "Puerto Rico Management Agreement"), exceed the
Applicable Percentage set forth in Column 2 on Exhibit A of the Company's EBITDA
(as defined in the Technology License Agreement and taking into account the
provision of Section 3.2(b) of the Technology License Agreement) for the
applicable year. The Fee will be paid quarterly on the dates the Royalty is
payable under the Technology License Agreement, and shall be paid to the account
and in the manner set forth in the Technology License Agreement (including
Section 3.2(b) in respect of the Royalty thereunder).
4.02 Reimbursable Expenses. GTE shall be entitled to be reimbursed from
time to time for transportation expenses, meals
8
<PAGE> 12
and lodging expenses incurred by its personnel in performing its obligations
hereunder.
4.03 Withholding Taxes. All payments shall be made after reduction for any
tax required to be withheld by PRTC, provided that the parties shall consult
with each other as to the amount of any such tax required to be withheld. PRTC
shall furnish GTE with such proof of payment of such tax as is required by the
United States Internal Revenue Code (and regulations) to support a claim for a
credit for taxes paid.
ARTICLE V
ADDITIONAL SERVICES
5.01 Additional Services. It is expressly understood that GTE shall, at the
request of PRTC, make available for sale to PRTC and its Affiliates such
additional services (the "Additional Services") that PRTC deems necessary to
accomplish the objectives set forth in this Agreement and that GTE is capable of
providing subject to the provisions of the Shareholders Agreement.
5.02 Fees and Form of Payment. Any agreement to provide such Additional
Services shall be subject to customary arm's length commercial terms which are
fair to PRTC and subject to the provisions of the Shareholders Agreement.
ARTICLE VI
INDEMNIFICATION
6.01 Indemnification by Company. The Company shall indemnify GTE, its
directors, officers, employees and affiliates from and against any liability,
loss (excluding incidental, special and consequential damages and loss of
profit), damage, claim, action or other cost or expense (including without
limitation, reasonable attorneys fees and expenses)
9
<PAGE> 13
(collectively, "Losses"), arising out of GTE performing its obligations
hereunder, except to the extent of GTE's willful misconduct.
6.02 Indemnification by GTE. GTE shall indemnify and hold each of the
Company, PRTC and their Affiliates harmless from and against any Losses which
the Company or its affiliates may suffer as a result of any material breach of
any agreement or undertaking by GTE in this Agreement to the extent of third
party claims against the Company, PRTC or its Affiliates with respect thereto.
6.03 Disclaimer of Warranties. It is expressly understood that GTE makes no
warranty to the Company or its Affiliates with respect to the performance or
fitness for any purpose of the products or services contemplated by this
Agreement. GTE expressly disclaims all warranties including, without limitation,
the implied warranties of merchantability and fitness for a particular purpose.
6.04 Limitation on Liability. Notwithstanding any other section hereof, the
parties agree that the Company's and PRTC's sole and exclusive remedy for any
breach or alleged breach by GTE of this Agreement (other than Article V as to
which the separate arrangements with respect thereto shall govern) other than
any breach or alleged breach by GTE of Sections 6.02 and 9.04 shall be to
terminate this Agreement and any obligation to make any and all future payments
hereunder.
10
<PAGE> 14
ARTICLE VII
DURATION
7.01 Initial Term. This Agreement shall become effective as of the date
hereof, and shall have an initial duration of five (5) years.
7.02 Extension. Not less than six months before the expiration of this
Agreement, the parties shall commence bona fide negotiations to extend its term.
In the event agreement is reached on any such extension, such extension shall be
subject to approval of the Board and the Board of Directors of PRTC.
7.03 Use of Management Expertise After Termination. Upon expiration or
termination of this Agreement for any reason, PRTC and its Affiliates may
continue utilizing all knowledge or know-how received from delivery of
Management Expertise made available to them by GTE pursuant to this Agreement
without the payment of any additional compensation to GTE or any of its
Affiliates.
ARTICLE VIII
TERMINATION
The parties hereto expressly agree that this Agreement may not be
terminated except by mutual agreement of the Company, GTE and PRTA or as
follows:
8.01 Termination by the Company. The Company may terminate this Agreement:
(a) upon liquidation or bankruptcy of GTE;
(b) upon material breach of this Agreement by GTE (other than
agreements entered into pursuant to Article V hereof), as covered in Section
8.04 of this Agreement;
11
<PAGE> 15
(c) upon revocation or suspension of any material license of the
Company or any of its subsidiaries as a result of the willful misconduct of GTE;
(d) should GTE Corporation cease to own, directly or indirectly,
more than 50% of GTE International Telecommunications Incorporated;
(e) should GTE or GTE Corporation fail to directly or indirectly have
beneficial and economic ownership of more than 20% of the capital stock of the
Company; or
(f) upon termination of the Technology License Agreement or the Puerto
Rico Management Agreement.
8.02 Termination by GTE. GTE may terminate this Agreement upon:
(a) a delay of more than 20 business days in the payment of the
undisputed portion of any Fee; or
(b) non-fulfillment of this Agreement by the Company, as covered in
Section 8.04 of this Agreement.
8.03 Effect of Termination. Except as provided in Section 8.04 below,
termination shall be effective immediately upon the occurrence of any event
described in Sections 8.01 and 8.02 above.
8.04 Non-fulfillment. Should any of the parties breach, refuse or fail to
comply with, or shall violate, any material terms or conditions of this
Agreement, said failure, omission or violation shall constitute a breach of this
Agreement. In such case the party not in breach shall notify the other party of
the breach in writing providing a detailed description of the alleged breach and
shall grant the other party a period of ninety (90) days to remedy said breach,
if such breach is capable of being so
12
<PAGE> 16
remedied. Should the breaching party not remedy said breach within said ninety
(90) days, or if such breach is not capable of being so remedied, the notifying
party shall have the right to terminate this Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.01 Amendments. This Agreement may be amended only with the prior written
agreement of all the parties hereto, and no course of action by or on behalf of
any party shall be construed as an explicit or implicit amendment of this
Agreement or any of its provisions. No amendment shall be made hereto which
materially adversely affects the economic rights of the Company or PRTC except
with the prior written consent of the PRTA.
9.02 Jurisdiction. The parties hereby irrevocably and unconditionally
submit to the jurisdiction of the United States District Court for the District
of Puerto Rico or, if such court does not have subject matter jurisdiction, in
any court of Puerto Rico having subject matter jurisdiction for purposes of any
suit, action or proceeding seeking to enforce any provision of, or based on any
right arising out of, this Agreement, and the parties agree not to commence any
such suit, action or proceeding except in such courts. Each party hereby agrees
that service of any process, summons, notice or document by U.S. registered mail
addressed to it shall be effective service of process for any such action, suit
or proceeding. The parties hereby irrevocably and unconditionally waive any
objection to the laying of venue of any such suit, action or proceeding in the
United States District Court for the District of Puerto Rico or any court of
Puerto Rico having subject matter jurisdiction and hereby further and
13
<PAGE> 17
irrevocably waive and agree not to plead or claim in any such court that any
such suit, action or proceeding has been brought in an inconvenient forum.
9.03 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
written consent of the other party hereto and compliance with applicable laws
and regulations; provided, however, that PRTA may assign its rights hereunder to
the Government Development Bank for Puerto Rico ("GDB") and that no such
assignment shall have the effect of being a delegation of duties or an
assumption of any obligations of PRTA. The Company's and PRTC's consent to the
assignment of this Agreement by GTE to any of GTE Corporation's direct or
indirect wholly owned subsidiaries may not be unreasonably withheld; provided,
that, no such assignment shall relieve GTE of any of its obligations hereunder.
9.04 Confidentiality.
(a) (i) All non-public documentation, information and Management
Expertise of GTE (the "GTE Information") made available to the Company or its
Affiliates by GTE in order to fulfill its obligations under this Agreement shall
be kept strictly confidential by the Company and its Affiliates and their
personnel and any other person who has had access to such GTE Information
through the Company, and such GTE Information shall not be disclosed to third
parties without GTE's express written consent. All such GTE Information shall
continue to be owned by
14
<PAGE> 18
GTE but this shall not affect the receiving party's right to continue using such
GTE Information on a non-exclusive, confidential basis after termination of this
Agreement pursuant to Section 7.03 hereof;
(ii) All non-public documentation and information of the Company and
its subsidiaries (the "Company Information") obtained by GTE in the course of
performing its obligations hereunder shall be treated as strictly confidential
and shall not be disclosed to third parties without the Company's express
written consent. All such Company Information shall continue to be owned by the
Company; and
(iii) This section shall continue in full force and effect for five
(5) years after the expiration of this Agreement.
(b) In the event that any party or an affiliate thereof is requested
pursuant to, or required by, applicable law, regulation or legal process to
disclose any GTE Information or Company Information, as the case may be, the
other parties shall immediately be informed of the matter in advance. Only that
portion of the GTE Information or Company Information, as the case may be, that
is, upon the advice of counsel, legally required shall be furnished, and all
reasonable efforts shall be made to obtain reliable assurance (in the form of a
court order or other reasonable assurance) that, to the maximum extent possible
under the circumstances, confidential treatment will be accorded to such portion
of GTE Information or Company Information, as the case may be, required to be
disclosed.
9.05 Applicable Law. This Agreement is subject to and shall be construed in
accordance with the internal laws of Puerto Rico
15
<PAGE> 19
applicable to contracts made and to be performed in Puerto Rico. The obligations
of GTE are subject to its obligations to comply with applicable laws and
regulations.
9.06 Severability. Every provision of this Agreement is intended to be
severable and if any term or all or part of any provision hereof is held by
judicial decision to be invalid, such invalidity shall not affect the validity
of the remainder of this Agreement.
9.07 Notices. Any notice or other communication under this Agreement shall
be in writing and shall be considered given when delivered in person, sent by
telefax transmission or mailed by certified mail, return receipt requested, or
nationally recognized overnight deliver service, to the parties at the following
addresses or telefax numbers (or at such other address or telefax number as a
party may specify by notice to the others in accordance with this provision):
If to the Company or PRTC, at:
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, PR 00968
Telephone:
Telecopy:
Attention: President
with a copy to (for so long as PRTA or any other Puerto Rico
Entity is a party beneficiary of this Agreement):
Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
16
<PAGE> 20
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to GTE, at:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, TX 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Mr. Fares Salloum
9.08 Third Party Beneficiaries. Except as specifically stated herein,
nothing in this Agreement shall be deemed to create any right with respect to
any person that is not a party to this Agreement; provided, that, any subsidiary
of the Company may enforce the Company's rights hereunder; provided, further,
that, so long as the PRTA or any other instrumentality of the Government of
Puerto Rico (a "Puerto Rico Entity") owns or controls at least 10% of the shares
of capital stock of the Company (owned as of the date hereof or acquired
hereafter directly from the Company or its successors), such Puerto Rico
Entities shall be deemed third party beneficiaries of this Agreement and shall
be entitled to enforce the provisions hereof for the benefit of the Company,
including but not limited to Article VIII hereof, directly, without first making
demand upon
17
<PAGE> 21
the Company to do so; and provided, further, that GDB may enforce the rights of
PRTA hereunder as provided in Section 12.05 of the Stock Purchase Agreement.
9.09 No Authority to Bind. GTE shall have no authority to enter into
contracts or otherwise incur obligations on behalf of or bind the Company or any
of its subsidiaries, except as otherwise expressly approved by the Board.
9.10 Defined Terms.
(a) Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings ascribed to such terms in the Stock Purchase
Agreement or as set forth in Section 8.14 of the Technology License Agreement.
(b) "Affiliates" when used in reference to the Company or PRTC shall
mean the Company and subsidiaries of the Company.
9.11 Director Approval. Any action or decision required or permitted to be
taken or not taken by the Company or any of its subsidiaries pursuant to Section
7.02 and Article VIII may only be taken or not taken by the Company or such
subsidiary (as applicable) upon the approval thereof by a majority of the
disinterested directors of the Company.
9.12 Counterparts. This Agreement may be signed in multiple counterparts,
subject to the execution of at least one of such counterparts by each of the
parties hereto.
9.13 Effect of Amendment. This Amended and Restated U.S. Management
Agreement supersedes the U.S. Management Agreement signed on March 2, 1999.
18
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
PUERTO RICO TELEPHONE COMPANY, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
19
<PAGE> 23
EXHIBIT A
(U.S.)
<TABLE>
<CAPTION>
Column 1 Column 2
-------- --------
Applicable
Percentage
Year Fee of EBITDA
---- --- -----------
<S> <C> <C>
1 $3,287,000 8%
2 $8,259,000 8%
3 $7,425,000 7%
4 $7,989,000 7%
5 $6,878,000 6%
</TABLE>
20
<PAGE> 1
EXHIBIT 10.9
EXECUTION COPY
AMENDED AND RESTATED TECHNOLOGY LICENSE AGREEMENT
This AMENDED AND RESTATED TECHNOLOGY LICENSE AGREEMENT, dated as of this
2nd day of March, 1999 (the "Agreement"), is entered into by and between
TELECOMUNICACIONES DE PUERTO RICO, INC. a corporation incorporated under the
laws of the Commonwealth of Puerto Rico (the "Company"), with an address at 1515
Franklin D. Roosevelt Avenue, Guaynabo, Puerto Rico, 00968, PUERTO RICO
TELEPHONE COMPANY, INC. a Puerto Rico corporation with an address at 1515
Franklin D. Roosevelt Avenue, Guaynabo, Puerto Rico, 00968 ("PRTC"), and GTE
INVESTMENTS INCORPORATED, a Delaware corporation ("GTE"), with an address at
5221 North O'Connor Boulevard, Irving, Texas, 75089.
W I T N E S S E T H:
WHEREAS, GTE has (or has access to) valuable intellectual property used in
the operation of telecommunications systems, including wireline, cellular and
PCS telecommunications systems and in the construction, operations, marketing
and management of such systems; and
WHEREAS, GTE International Telecommunications Incorporated ("GITI"), an
Affiliate of GTE, the Company and certain other parties are parties to the
Amended and Restated Stock Purchase Agreement, dated as of July 21, 1998 (as
amended from time to time, the "Stock Purchase Agreement"), pursuant to which
GTE Holdings (Puerto Rico) LLC, a wholly-owned subsidiary of GITI ("Purchaser"),
has purchased certain shares of the capital stock of the Company; and
WHEREAS, GITI indirectly owns 40% or more of the shares of capital stock of
the Company; and
WHEREAS, as of even date herewith the parties (or their Affiliates) have
entered into an Amended and Restated Puerto Rico Management Agreement (the
"Puerto Rico Management
<PAGE> 2
Agreement") pursuant to which an Affiliate of GTE will provide certain
management services within Puerto Rico to PRTC and its Affiliates;
WHEREAS, as of even date herewith the parties (or their Affiliates) have
entered into an Amended and Restated U.S. Management Agreement (together with
the Puerto Rico Management Agreement, the "Management Agreements") pursuant to
which GITI will provide certain management services in the United States outside
of Puerto Rico to PRTC and its Affiliates; and
WHEREAS, the Company, PRTC and its Affiliates desire to benefit from, and
GTE desires to provide PRTC and its Affiliates with, non-exclusive access to all
technology, processes, planning resources, designs, drawings, inventions,
developments, systems, applications, brands, patents, know-how and other
technical knowledge and intellectual and industrial property of GTE and its
Affiliates insofar as such technology and knowledge is necessary or beneficial
for the Company and Purchaser to meet their commitment to the development and
maintenance of the Company's telecommunications system; and
WHEREAS, the Company and GTE wish to enter into an agreement whereby GTE
shall grant to PRTC and its Affiliates, on and after the Effective Time (as
defined below), the right to use certain telecommunications technology and
certain operations know-how to assist the Company in pursuit of its business.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants herein contained, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS; EFFECTIVE TIME
1.1 Defined Terms.
(a) Unless otherwise defined herein, capitalized terms used in
this Agreement shall have the meanings ascribed to such terms in the Stock
Purchase Agreement or as set forth in Section 8.14.
-2-
<PAGE> 3
(b) "Affiliates" when used in reference to the Company or PRTC
shall mean the Company and the subsidiaries of the Company.
1.2 Effective Time. This Agreement shall be effective on the Closing
Date as of the Closing (the "Effective Time").
ARTICLE II
GRANT OF RIGHTS TO TECHNOLOGY
2.1 Grant of Rights to the Company. GTE hereby grants to PRTC and its
Affiliates for a term of twenty (20) years an unrestricted right to use any of
GTE's Unrestricted Technology, to the extent of GTE's or GITI's interest
therein, provided by GTE to PRTC and its Affiliates during the term of this
Agreement, including but not limited to any Unrestricted Technology described in
Exhibit A hereto. In further consideration for the Royalty paid hereunder GTE
hereby also grants to PRTC and its Affiliates a nonexclusive, irrevocable,
nontransferable license, subject to the terms and limitations of this Agreement,
to use in the Territory any other Technology or know-how ("Know-How") owned by
GTE or its Affiliates provided to PRTC or its Affiliates in the course of
providing the services covered by the Management Agreements, including the
Proprietary Information. In addition to such Technology license, GTE shall
provide PRTC and its Affiliates with any auxiliary information as may be agreed
upon by PRTC and its Affiliates and GTE for the full use, understanding and
application of the Technology. GTE shall also provide, or shall cause its
Affiliates to provide, pursuant to the Management Agreements, general training
necessary to allow PRTC and its Affiliates to fully utilize such Technology.
Additionally, GTE may offer to PRTC and its Affiliates certain other Technology
under the same terms and conditions as such Technology becomes available to GTE
or GITI. No rights under GTE patents (other than the license referred to herein)
and trademarks are granted under this Agreement. The grants and offers in this
Section 2.1 are all as of the Effective Time.
2.2 Provision of Technology; Cooperation. GTE shall grant to PRTC and
its Affiliates expeditiously and effectively any and all rights held by GTE or
GITI to the use of the
-3-
<PAGE> 4
Technology and Know-How. GTE shall otherwise perform its obligations under this
Agreement to provide Technology and Know-How and related services to the
reasonable satisfaction of PRTC.
2.3 R&D Projects. PRTC and GTE shall work together on R&D projects in
telecommunications technologies and related technologies in the Commonwealth of
Puerto Rico. In addition, GTE may allow PRTC and its Affiliates to participate
in telecommunications R&D projects controlled by GTE or any Affiliate thereof,
as such reasonable opportunities arise and subject to the mutual agreement of
PRTC and GTE.
2.4 Additional Technology. It is expressly understood that GTE shall,
at the request of PRTC, make available for sale to PRTC and its Affiliates such
additional technology and systems that PRTC deems necessary to accomplish the
objectives set forth in this Agreement and that GTE or GITI, if necessary, by
license or assignment to GTE from GITI, is capable of providing subject to the
provisions of the Shareholders Agreement.
2.5 Independence of the Venture.
(a) PRTC and its Affiliates shall have the right to develop
technology, independent of or as an enhancement to the Proprietary Information
and Technology provided by GTE under this Agreement, as it deems appropriate for
its business ("Company Technology"). PRTC and its Affiliates intend to utilize
GTE as the exclusive outside source of the Technology. However, PRTC and its
Affiliates shall have the right in their discretion to purchase, license or
otherwise obtain technology that is not purchased, licensed or otherwise granted
by GTE or any Affiliate thereof to the Company, PRTC or its Affiliates pursuant
to this Agreement from outside sources other than GTE or an Affiliate thereof.
(b) GTE shall perform its obligations under this Agreement in
recognition of the intention of the Company to develop within the Company's
organization the ability to carry out, control and supervise all aspects of its
business and affairs.
-4-
<PAGE> 5
(c) PRTC and its Affiliates shall have all proprietary and
ownership rights to Company Technology, but such rights shall not extend to any
underlying Proprietary Information provided by GTE.
ARTICLE III
ROYALTY
3.1 Royalty. PRTC shall pay GTE as the exclusive compensation for the
use of Technology and Know-How referred to in this Agreement (and other rights
to use Technology granted under Article II) a royalty (the "Royalty") equal to
(i) 8% of the Company's EBITDA (as defined below) for each of years 1 and 2 of
this Agreement, 7% of the Company's EBITDA for each of years 3 and 4 of this
Agreement, and 6% for year 5 of this Agreement (each such percentage, the
"Applicable Percentage"), less (ii) the total Fees (as defined in the Management
Agreements) payable under the Management Agreements for such year (together, the
"Management Fees"). No Royalty shall be payable after year 5 of this Agreement.
For purposes hereof, EBITDA means consolidated earnings before interest, taxes,
depreciation, amortization, the Royalty, and the Management Fees, calculated in
accordance with generally accepted accounting principles in the United States
consistently applied.
3.2 Payment Terms
(a) The Royalty shall be payable in arrears in quarterly installments,
within thirty (30) days after the approval of the corresponding quarterly
financial statements (the audited annual financial statements in the case of the
fiscal year's last quarter) by the Board. The Royalty payment at the end of each
fiscal year shall be calculated by multiplying the final full year EBITDA based
upon the audited financial statements of the Company by the applicable
percentage referred to in Section 3.1, and subtracting therefrom all prior
Royalty installment payments made with respect to such fiscal year. Any excess
payments shall be deducted from subsequent installments, or at PRTC's option
shall be promptly refunded by GTE.
(b) Inasmuch as each year of this Agreement (each, an "Agreement
Year") runs over portions of two calendar years, the Royalty shall be calculated
by multiplying the Applicable Percentage for such Agreement Year by the sum of
(i) the full year EBITDA for the
-5-
<PAGE> 6
calendar year during which the Agreement Year begins multiplied by a fraction,
the numerator of which shall be the number of days of such Agreement Year in
such calendar year and the denominator of which shall be 365, and (ii) the full
year EBITDA for the calendar year during which the Agreement Year ends
multiplied by a fraction, the numerator of which shall be the number of days of
such Agreement Year in such calendar year and the denominator of which shall be
365.
(c) All payments shall be made after reduction for any tax required to
be withheld by PRTC, provided that the parties shall consult with each other as
to the amount of any such tax required to be withheld. PRTC shall furnish GTE
with such proof of payment of such tax as is required by the United States
Internal Revenue Code (and regulations) to support a claim for a credit for
taxes paid.
(d) All payments to GTE pursuant to this Agreement shall be made in
U.S. dollars to a bank account designated by GTE.
ARTICLE IV
CERTAIN REPRESENTATIONS, ETC.
4.1 Representations, Warranties of GTE. GTE represents that it has
complied with the requirements of Article 8(e) of Act No. 54 and certifies that:
(a) It has not paid and it will not pay any commission or bonus,
and it has not granted any direct or indirect financial benefit, to any public
official or employee, nor to any former public official or employee,
participating in the privatization process of the Company and its subsidiaries
while discharging his/her public service duties.
(b) It has the right to transfer, license or grant a right of use
for all Technology referred to herein.
-6-
<PAGE> 7
ARTICLE V
INDEMNIFICATION
5.1 Indemnification by Company. The Company shall indemnify GTE, its
directors, officers, employees and Affiliates from and against any liability,
loss (excluding consequential damages and loss of profit), damage, claim, action
or other cost or expense (including without limitation, reasonable attorneys
fees and expenses) (collectively, "Losses"), arising out of GTE performing its
obligations hereunder, except to the extent of GTE's willful misconduct.
5.2 Indemnification by GTE. GTE shall indemnify and hold each of the
Company, PRTC and their Affiliates harmless from and against any Losses which
the Company, PRTC or their Affiliates may suffer as a result of (a) any material
breach of any agreement or undertaking by GTE in this Agreement, or (b) any
intellectual property violation or infringement claims by third parties relating
to any property, Technology or Know-How transferred or licensed or other
intellectual property right granted by GTE or any of its Affiliates, to the
Company, PRTC or their Affiliates as contemplated by this Agreement or either of
the Management Agreements.
ARTICLE VI
DURATION
6.1 Initial Term. This Agreement shall become effective as of the date
hereof, and shall have an initial duration of five (5) years.
6.2 Extension. Not less than six months before the expiration of this
Agreement, the parties shall commence bona fide negotiations to extend its term.
In the event agreement is reached on any such extension, such extension shall be
subject to approval of the Board of Directors of the Company and PRTC.
6.3 Use of Know How After Termination. Upon expiration or termination
of this Agreement for any reason, the Company and its subsidiaries may continue
utilizing all Know
-7-
<PAGE> 8
How made available to them by GTE or its Affiliates pursuant to this Agreement
without the payment of any additional compensation to GTE or any of its
Affiliates.
ARTICLE VII
TERMINATION
The parties hereto expressly agree that this Agreement may not be
terminated except by mutual agreement of the Company, GTE and PRTA or as
follows:
7.1 Termination by the Company
The Company may terminate this Agreement:
(a) upon liquidation or bankruptcy of GTE;
(b) upon material breach of this Agreement by GTE, as covered in
Section 7.4 of this Agreement;
(c) upon revocation or suspension of any material license of the
Company or any of its subsidiaries as a result of the willful misconduct of GTE;
(d) should GTE Corporation cease to own, directly or indirectly,
more than 50% of GTE International Telecommunications Incorporated or GTE
Investments Incorporated;
(e) should GTE or GTE Corporation fail to directly or indirectly
have beneficial and economic ownership of more than 20% of the capital stock of
the Company; or
(f) upon termination of either of the Management Agreements.
7.2 Termination by GTE. GTE may terminate this Agreement upon:
(a) a delay of more than 20 business days in the payment of the
undisputed portion of the Royalty; or
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<PAGE> 9
(b) non-fulfillment of this Agreement by the Company, as covered
in Section 7.4 of this Agreement.
7.3 Effect of Termination. Except as provided in Section 7.4 below,
termination shall be effective immediately upon the occurrence of any event
described in Sections 7.1 and 7.2 above.
7.4 Non-fulfillment. Should any of the parties breach, refuse or fail
to comply with, or shall violate, any material terms or conditions of this
Agreement, said failure, omission or violation shall constitute a breach of this
Agreement. In such case, the party not in breach shall notify the other party of
the breach in writing providing a detailed description of the alleged breach and
shall grant the other party a period of ninety (90) days to remedy said breach,
if such breach is capable of being so remedied. Should the breaching party not
remedy said breach within said ninety (90) days, or if such breach is not
capable of being so remedied, the notifying party shall have the right to
terminate this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Amendments. This Agreement may be amended only with the prior
written agreement of all the parties hereto, and no course of action by or on
behalf of any party shall be construed as an explicit or implicit amendment of
this Agreement or any of its provisions. No amendment shall be made hereto which
materially adversely affects the economic rights of the Company or PRTC except
with the prior written consent of the PRTA, so long as the Puerto Rico Entities
collectively own at least 10% of the outstanding Shares of the Company.
8.2 Jurisdiction. The parties hereby irrevocably and unconditionally
submit to the jurisdiction of the United States District Court for the District
of Puerto Rico or, if such court does not have subject matter jurisdiction, in
any court of Puerto Rico having subject matter jurisdiction for purposes of any
suit, action or proceeding seeking to enforce any provision of, or based on any
right arising out of, this Agreement, and the parties agree not to commence any
-9-
<PAGE> 10
such suit, action or proceeding except in such courts. The parties hereby agree
that service of any process, summons, notice or document by U.S. registered mail
addressed to any party, as the case may be, shall be effective service of
process for any such action, suit or proceeding. The parties hereby irrevocably
and unconditionally waive any objection to the laying of venue of any such suit,
action or proceeding in the United States District Court for the District of
Puerto Rico or any court of Puerto Rico having subject matter jurisdiction and
hereby further and irrevocably waive and agree not to plead or claim in any such
court that any such suit, action or proceeding has been brought in an
inconvenient forum.
8.3 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
written consent of the other parties hereto and compliance with applicable laws
and regulations; provided, however, that PRTA may assign its rights hereunder to
the Government Development Bank for Puerto Rico ("GDB") and that no such
assignment shall have the effect of being a delegation of duties or an
assumption of any obligations of PRTA. The Company's and PRTC's consent to the
assignment of this Agreement by GTE to any of GTE Corporation's direct or
indirect wholly owned subsidiaries may not be unreasonably withheld; provided,
that, no such assignment shall relieve GTE of any of its obligations hereunder.
8.4 Confidentiality.
(a) (i) All non-public documentation and information of GTE (the
"GTE Information") made available to the Company or its Affiliates by GTE in
order to fulfill its obligations under this Agreement shall be kept strictly
confidential by the Company and its Affiliates and their personnel and any other
Person who has had access to such GTE Information through the Company, and such
GTE Information shall not be disclosed to third parties without GTE's express
written consent. All such GTE Information shall continue to be owned by GTE but
this shall not affect the receiving parties' right after termination to continue
using such GTE
-10-
<PAGE> 11
Information on a non-exclusive, confidential basis of this Agreement pursuant to
Section 6.3 hereof;
(ii) All non-public documentation and information of the
Company and its subsidiaries (the "Company Information") obtained by GTE in the
course of its performing its obligations hereunder shall be treated as strictly
confidential and shall not be disclosed to third parties without the Company's
express written consent. All such Company Information shall continue to be owned
by the Company; and
(iii) This section shall continue in full force and effect
for five (5) years after the expiration of this Agreement.
(b) In the event that any party or an Affiliate thereof is
requested pursuant to, or required by, applicable law, regulation or legal
process to disclose any GTE Information or Company Information, as the case may
be, the other parties shall immediately be informed of the matter in advance.
Only that portion of the GTE Information or Company Information, as the case may
be, that is, upon the advice of counsel, legally required shall be furnished,
and all reasonable efforts shall be made to obtain reliable assurance (in the
form of a court order or other reasonable assurance) that, to the maximum extent
possible under the circumstances, confidential treatment will be accorded to
such portion of GTE Information or Company Information, as the case may be,
required to be disclosed.
(c) The confidentiality agreements of this section shall not
apply to GTE Information or Company Information which is or becomes
independently learned or developed by the party obligated with respect thereto.
8.5 Applicable Law. This Agreement is subject to and shall be
construed in accordance with the internal laws of Puerto Rico applicable to
contracts made and to be performed in Puerto Rico.
-11-
<PAGE> 12
8.6 Severability. Every provision of this Agreement is intended to be
severable and if any term or all or part of any provision hereof is held by
judicial decision to be invalid, such invalidity shall not affect the validity
of the remainder of this Agreement.
8.7 Notices. Any notice or other communication under this Agreement
shall be in writing and shall be considered given when delivered in person, sent
by telefax transmission or mailed by certified mail, return receipt requested,
or nationally recognized overnight deliver service, to the parties at the
following addresses or telefax numbers (or at such other address or telefax
number as a party may specify by notice to the others in accordance with this
provision):
If to the Company or PRTC, at:
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, PR 00968
Telephone:
Telecopy:
Attention:
With a copy to (for so long as PRTA or any other Puerto Rico
Entity is a third party beneficiary of this Agreement):
Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
-12-
<PAGE> 13
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to GTE, at:
GTE Investments Incorporated
5221 North O'Connor Boulevard
Irving, TX 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Mr. Fares Salloum
8.8 Third Party Beneficiaries. Except as specifically stated herein,
nothing in this Agreement shall be deemed to create any right with respect to
any person that is not a party to this Agreement; provided, that, any subsidiary
of the Company may enforce the Company's rights hereunder; and provided,
further, that so long as the PRTA or any other instrumentality of the Government
of Puerto Rico (a "Puerto Rico Entity") owns or controls at least 10% of the
shares of capital stock of the Company (owned as of the date hereof or acquired
hereafter directly from the Company or its successors), such Puerto Rico
Entities shall be deemed third party beneficiaries of this Agreement and shall
be entitled to enforce the provisions hereof for the benefit of the Company,
including but not limited to Article VII hereof, directly, without first making
demand upon the Company to do so; and provided, further, that GDB may enforce
the rights of PRTA hereunder as provided in Section 12.05 of the Stock Purchase
Agreement.
8.9 No Authority to Bind. GTE shall have no authority to enter into
contracts or otherwise incur obligations on behalf of or bind the Company or any
of its subsidiaries, except as otherwise expressly approved by the Board.
8.10 Effect of this Agreement. The Company and PRTC acknowledge and
agree that the Company does not acquire, by virtue of this Agreement or
otherwise, any proprietary or ownership rights (or rights to sublicense) with
respect to any Proprietary Information. The Company and PRTC further acknowledge
and agree that the Company and its
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<PAGE> 14
Affiliates do not acquire, by virtue of this Agreement or otherwise, the right
to use the Proprietary Information outside of the Territory without GTE's prior
written consent.
8.11 Notification of Infringement. The Company and PRTC agree that as
soon as possible after the Company or PRTC becomes aware of same, it shall
promptly notify GTE in writing of any infringement of GTE's rights in the
Technology. The parties shall take all mutually agreed upon actions necessary to
stop any such infringement. The expenses of such actions as to infringements in
the Territory shall be shared equally by GTE and PRTC. Nothing contained herein
shall prevent GTE from taking any actions it considers necessary to protect its
rights in Technology held by it.
8.12 Disclaimer of Warranties. It is expressly understood that GTE
makes no warranty to the Company, PRTC or their Affiliates with respect to the
performance or fitness for any purpose of the products or services contemplated
this Agreement. GTE expressly disclaims all warranties including, without
limitation, the implied warranties or merchantability and fitness for a
particular purpose.
8.13 Limitation on Liability. Notwithstanding any other section
hereof, the Parties agree that the Company's and PRTC's sole and exclusive
remedy for any breach or alleged breach by GTE of this Agreement (other than any
breach or alleged breach of Section 8.4) shall be to terminate this Agreement
and any obligation to make any and all future payments hereunder.
8.14 Certain Definitions.
8.14.1 "Affiliate" means, subject to Section 1.1(b), as to any
Person, (i) an entity at least a majority of the voting capital stock of which
is owned directly or indirectly by such Person, (ii) an entity that directly or
indirectly owns at least a majority of the voting capital stock of such Person,
and (iii) an entity a majority of the voting capital stock of which is directly
or indirectly owned by an entity of the type described is clause (ii) above.
-14-
<PAGE> 15
8.14.2 "Bankruptcy" means, with respect to either of the parties, (i)
such party making an assignment for the benefit of creditors or admitting in
writing its inability to pay its debt when due; (ii) the commencement by or
against such party of any liquidation, dissolution, bankruptcy, reorganization,
insolvency or other proceeding for the relief of financially distressed debtors;
or the appointment for such party, or a substantial part of such party's assets,
of a receiver, liquidator, custodian or trustee; and, if any of the events
referred to in this clause (ii) occur involuntarily, the failure of same to be
dismissed, stayed or discharged within sixty (60) days; or (iii) the entry of an
order for relief against such party under the Puerto Rican Company
Reorganization Act (or any successor or equivalent law) or the bankruptcy laws
of any relevant jurisdiction.
8.14.3 "Proprietary Information" means any Technology which is treated
as confidential by GTE.
8.14.4 "R&D" means research and development which has or is reasonably
designed to have useful applications in telecommunications systems and services.
8.14.5 "Technology" means any technical or business information,
inventions, software programs, systems, trade secrets, know-how, and other
technological or industrial property or information of GTE Corporation or its
Affiliates related to telecommunications systems and services existing at the
Effective Time or becoming available to GTE or GITI and licensed or assigned, as
necessary, to GTE by GITI during the term of this Agreement.
8.14.6 "Territory" means the Commonwealth of Puerto Rico.
8.14.7 "Unrestricted Technology" means any Technology not covered by
patent, copyright or Proprietary Information protection.
8.15 Relationship. This Agreement does not create an employer-employee,
partnership or agency relationship between the Company and GTE or the Company
and GTE's
-15-
<PAGE> 16
employees. The parties acknowledge and agree that GTE is an independent
contractor to the Company and PRTC under this Agreement. No party has the
authority to bind any other party.
8.16 Director Approval. Any action or decision required or permitted
to be taken or not taken by the Company or any of its subsidiaries pursuant to
Section 6.2 and Article VII may only be taken or not taken by the Company or
such subsidiary (as applicable) upon the approval thereof by a majority of the
disinterested directors of the Company.
8.17 Counterparts. This Agreement may be executed in multiple
counterparts, subject to the execution of at least one of such counterparts by
each of the parties hereto.
8.18 Effect of Amendment. This Amended and Restated Technology License
Agreement supersedes the Technology Transfer Agreement signed on March 2, 1999.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By:
--------------------------------------
Name:
Title:
Date:
PUERTO RICO TELEPHONE COMPANY, INC.
By:
--------------------------------------
Name:
Title:
Date:
-16-
<PAGE> 17
GTE INVESTMENTS INCORPORATED
By:
--------------------------------------
Name:
Title:
Date:
GTE Corporation agrees to cause GTE
Investments Incorporated to supply the
Technology on the terms and conditions
provided in Article II hereof.
GTE CORPORATION
By:
--------------------------------------
Name:
Title:
Date:
GTE International Telecommunications Incorporated agrees to cause GTE
Investments Incorporated to supply the Technology and Know-How (if necessary, by
transferring or licensing such Technology or Know-How to GTE Investments
Incorporated) on the terms and conditions provided in Article II hereof and
otherwise unconditionally guarantee all of the obligations of GTE Investments
Incorporated hereunder.
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
--------------------------------------
Name:
Title:
Date:
-17-
<PAGE> 18
EXHIBIT A
Pricing and tariffs
Marketing strategy/product packaging
Billing system design and operation
Network and system design
System operation (including technical operations, repair and maintenance)
Supply and procurement (including technology and vendor assessment)
Engineering services
Agent and distributor network and compensation
Finance, accounting and information management
Technical training of personnel in related areas
-18-
<PAGE> 1
Exhibit 10.10
EXECUTION COPY
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (the "Agreement"), dated as of March 2,
1999 among Telecomunicaciones de Puerto Rico, Inc. (the "Corporation"), a Puerto
Rico corporation, GTE Holdings (Puerto Rico) LLC, a limited liability company
organized under the Laws of Delaware ("Purchaser"), GTE Corporation, a New York
corporation ("GTE"), GTE International Telecommunications Incorporated, a
Delaware corporation and sole shareholder of Purchaser ("Strategic Purchaser"),
Popular, Inc. (together with Purchaser, GTE, and Strategic Purchaser the
"Purchaser Group"), and Puerto Rico Telephone Authority ("PRTA"), a public
corporation and government instrumentality of the Commonwealth of Puerto Rico
("Puerto Rico"), and the Government Development Bank for Puerto Rico ("GDB").
WITNESSETH
WHEREAS, Strategic Purchaser, Purchaser, Puerto Rico Telephone Company,
Inc., a Puerto Rico corporation ("PRTC"), and PRTA have entered into an Amended
and Restated Stock Purchase Agreement, dated as of July 21, 1998 (as amended
from time to time, the "Purchase Agreement"); and
WHEREAS, members of the Purchaser Group and PRTA have substantial
knowledge and expertise in the telecommunications industry and with respect to
the Corporation and its
<PAGE> 2
subsidiaries and the Strategic Purchaser will obtain ongoing knowledge of the
Corporation and its subsidiaries in connection with the performance of its
obligations under the Management Agreement, dated as of the date hereof, among
the Corporation, PRTC and Strategic Purchaser (the "Management Agreement"); and
WHEREAS, as a condition to Closing, the Purchase Agreement requires the
parties hereto to enter into this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties agree as follows:
1. Definitions.
1.1 General. Unless otherwise defined herein, each capitalized term
used herein and not otherwise defined shall have the meaning set forth in the
Purchase Agreement.
1.2 "Affiliate" means, as to any Person (i) an entity at least a
majority of the voting capital stock of which is owned directly or indirectly by
such Person, (ii) an entity that directly or indirectly owns at least a majority
of the voting capital stock of such Person, and (iii) an entity a majority of
the voting capital stock of which is directly or indirectly owned by an entity
of the type described in clause (ii) above.
2. Non-Compete; Non-Disclosure.
2.1 Restricted Activity. For the purposes of this Agreement,
"Restricted Activity" means the development, acquisition, construction,
management, ownership or operation of
- 2 -
<PAGE> 3
wireline or wireless telecommunications, 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 or appropriate for any of the
foregoing, and which systems and businesses are primarily for service in or from
Puerto Rico.
2.2 Covenant Not to Compete.
(a) Each member of the Purchaser Group (other than Popular,
Inc. in the case of Section 2.2(a)(i)), GDB and PRTA (each a "Restricted Party")
agree that they shall not:
(i) Until the earlier to occur of the following: (x) the
date when PRTA and any other Puerto Rico Entity ceases to continue to own or
control, in the aggregate, at least 5% of the shares of capital stock of the
Corporation, and (y) the later of (A) seven years and (B) one year after a sale
of Shares by any Puerto Rico Entity in a public offering of Shares on behalf of
any Puerto Rico Entity by the Corporation (the "Non-Competition Expiration
Date"), engage, directly or indirectly, including without limitation through any
Affiliate (other than the Corporation and its subsidiaries), in any manner
(including, without limitation, as a shareholder, owner, investor, partner,
joint venturer, independent contractor, consultant or advisor, or in any other
capacity as principal or
- 3 -
<PAGE> 4
agent), in any Restricted Activity. Notwithstanding the above, the foregoing
covenant shall not be deemed to prohibit (i) any member of the Purchaser Group
and its Affiliates on the one hand and PRTA and its Affiliates on the other hand
from acquiring as an investment not more than two percent (2%), in the
aggregate, of the capital stock of a corporation engaged, directly or
indirectly, in a Restricted Activity, whose stock is traded on a national
securities exchange or over-the-counter; (ii) activities of GTE or its
subsidiaries, divisions and Affiliates described on Schedule 1; (iii) activities
of Puerto Rico Entities of the nature conducted on the date hereof (including
ownership of interests in Telecomunicaciones Ultramarinas de Puerto Rico, Inc.
and TLD) other than the provision of local telephone service or intra-island,
national or international long distance telecommunication service, which
activities are ancillary to the primary function of such entities; and private
network services and activities among the Puerto Rico Entities; (iv) ownership
of Shares of the Corporation; (v) the provision of services or technology to the
Corporation and its subsidiaries pursuant to the Management Agreement, the U.S.
Management Agreement, the Technology Transfer Agreement or similar agreements;
or (vi) exercising any of its rights or complying with any of its obligations
under the Shareholders Agreement or the Option Agreement; provided, however,
that the
- 4 -
<PAGE> 5
foregoing shall not prohibit the provision of local telephone service or
intra-island, national or international long distance service by TLD or the
ownership of interests therein for so long as the Puerto Rico Entities do not
increase their investment therein or control the management of TLD;
(ii) At any time prior to 180 days after consummation of
the initial public offering or widely disseminated private placement by the
Puerto Rico Entities or the Corporation of Shares, call upon or otherwise
solicit any Person who is, at that time, a director, officer or key employee of
the Corporation or its subsidiaries for the purpose or with the intent of
enticing or otherwise influencing such employee away from or out of the employ
of the Corporation or its subsidiaries other than by solicitations in newspapers
or media made available to the general public.
(b) During the period specified in Section 4.10(b), (i)
Popular, Inc. will comply with the requirements of the Bank Holding Company Act
of 1956 restricting the non-banking activities of bank holding companies and
shall comply with any restrictions imposed in respect of its investments or
activities by applicable law, and (ii) in no event will Popular, Inc. make an
investment in the equity of a company (other than the Corporation) engaged in
providing substantial telecommunications services in Puerto Rico, except for
investments of not more than
- 5 -
<PAGE> 6
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 business (other
than the Corporation) with substantial telecommunications operations in Puerto
Rico.
(c) It is agreed by the parties that the foregoing covenants
in this Section 2 impose a reasonable restraint on each of the parties hereto in
light of the activities and business of the Corporation and/or its Affiliates on
the date of the execution of this Agreement.
2.3 International and National Long Distance. Certain of the parties
and TLD have entered into an Agreement and Release dated August 1, 1998 (the
"Related Agreements"), with respect to the mutual waiver of non-competition
covenants.
2.4 Subsequent Acquisitions. The parties agree that the acquisition
by a party or any of its Affiliates of an interest in any Person that would
cause such party to be in breach of Section 2.2 will not be a breach if (i) such
breach is waived by Purchaser and PRTA or (ii) immediately upon the consummation
of such acquisition such party or Affiliate provides the Corporation with a
written offer to sell the portion of the acquired Person relating to the
Restricted Activity to the Corporation for the same price as the party or
Affiliate paid for such competing business (including any cost of funds for
acquiring such competing business). If the
- 6 -
<PAGE> 7
Corporation, acting through the disinterested directors of the Board of
Directors of the Corporation, does not accept such offer within 120 days of
receiving the offer and if the Corporation has not arranged the financing
thereof within 180 days of receiving the offer, the acquiring party or its
Affiliate shall, except as provided in the following subsection, (A) promptly
and in any event within one year after the consummation of the acquisition of
such competing business dispose of such competing business to an unaffiliated
third party and (B) during the time prior to the consummation of such sale, not
act in any way that would be materially detrimental to the Corporation, such as
sharing any confidential information of the Corporation or promote, conduct
business or make investments in such competing business in a manner which would
materially strengthen, improve or expand the competing activities of such
competing business.
2.5 Confidentiality.
(a) (i) All non-public documentation and information of the
Purchaser Group (the "GTE Information") made available to the Corporation by the
Purchaser Group in the course of performing their obligations under, or in
connection with entering into, the Purchase Agreement and the documents to be
entered into in connection therewith, shall be treated as strictly confidential
by the Corporation, PRTA, their respective
- 7 -
<PAGE> 8
Affiliates and their personnel and any other Person who may have access to such
GTE Information, and such GTE Information shall not be disclosed to third
parties without Strategic Purchaser's express written consent.
(ii) All non-public documentation and information of the
Corporation, PRTA and their respective subsidiaries (the "Company Information")
obtained by the Purchaser Group in the course of their performing their
obligations under, or in connection with entering into, the Purchase Agreement
shall be treated as strictly confidential by the Purchaser Group, their
respective Affiliates and their personnel and any other Person who has had
access to such Company Information through the Corporation, and such Company
Information shall not be disclosed to third parties without the Corporation's
and PRTA's express written consent, and all such Company Information shall
continue to be owned by the Corporation; and
(b) In the event that any party or an Affiliate of any party
is requested pursuant to, or required by, applicable law, regulation or legal
process to disclose any GTE Information or Company Information, as the case may
be, the other party shall immediately be informed of the matter in advance. Only
that portion of the GTE Information or Company Information, as the case may be,
that is, upon the advice of
- 8 -
<PAGE> 9
counsel, legally required shall be furnished, and all reasonable efforts shall
be made to obtain reliable assurance (in the form of a court order or other
reasonable assurance) that, to the maximum extent possible under the
circumstances, confidential treatment will be accorded to such portion of GTE
Information or Company Information, as the case may be, required to be
disclosed.
(c) The provisions of Sections 2.5(a) and (b) shall not apply
to the provision by Popular, Inc. or its subsidiaries of GTE Information or
Company Information to regulatory authorities having jurisdiction over it or its
subsidiaries, to the extent required by law or regulation.
2.6 Independence of Covenants. Each of the covenants in this Section
2 shall be construed as an agreement independent of any other provision of this
Agreement or the Purchase Agreement, and the existence of any claim or cause of
action by any Restricted Party against the Corporation or any other party
hereto, whether predicated on this Agreement or the Purchase Agreement, or
otherwise, shall not constitute a defense to the enforcement by any other party
of such covenants. The covenants contained in this Section 2 shall not be
affected by any breach of any other provision hereof by any party hereto.
- 9 -
<PAGE> 10
3. Representations and Warranties.
3.1 Due Authorization, Etc.
(a) Each of the parties hereto represents and warrants to each
other that: (i) it has full right, power and authority to execute, deliver and
perform this Agreement; (ii) all actions necessary or required to be taken by or
on its part to execute, deliver and perform this Agreement have been duly
authorized and approved by all necessary or required corporate action and have
been validly taken; and (iii) this Agreement has been duly executed and
delivered by it and is a valid and binding agreement enforceable in accordance
with its terms, except to the extent that its enforceability may be subject to
applicable bankruptcy, reorganization, insolvency, moratorium and similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity.
(b) PRTA shall not be liable for any independent conduct of
other Puerto Rico Entities (excluding GDB) which violates the terms and
conditions hereof.
3.2 Covenants. Each party agrees to comply with the provisions of
this Agreement and agrees, to the extent within its power, to cause the
Corporation and its subsidiaries to comply with its obligations hereunder.
3.3 Purchaser. Any representation, warranty, covenant or agreement
contained in this Agreement made by
- 10 -
<PAGE> 11
Purchaser is also made by Strategic Purchaser on behalf of Purchaser.
4. General Provisions.
4.1 Notices. Any notice or other communication under this Agreement
shall be in writing and shall be considered given when delivered in person, sent
by telefax transmission or mailed by certified mail, return receipt requested,
to the parties at the following addresses or telefax numbers (or at such other
address or telefax number as a party may specify by notice to the others):
If to the Corporation at:
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, Puerto Rico 00968
Telephone: (787) 793-1818
Telecopy: (787) 792-9830
Attention: President
with a copy to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
- 11 -
<PAGE> 12
If to PRTA, at:
Puerto Rico Telephone Authority
c/o Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
with a copy to:
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to GTE, Purchaser or Strategic Purchaser, at:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
- 12 -
<PAGE> 13
If to Popular, Inc., at:
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone: (787) 765-9800
Telecopy: (787) 756-3983
Attention: Carlos J. Vazquez
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telephone: (212) 558-4000
Telecopy: (212) 558-3588
Attention: Donald J. Toumey
4.2 No Waiver. No waiver of any provision of this Agreement in any
instance shall be, or for any purpose be deemed to be, a waiver of the right of
any party hereto to enforce strict compliance with the provisions hereof in any
subsequent instance.
4.3 Agreement to Perform Necessary Acts. Each party hereto and its
successors and assigns shall perform any further acts and execute and deliver
any documents or procure any court order which may reasonably be necessary to
carry out the provisions of this Agreement.
4.4 Modification. No provision of this Agreement may be amended,
modified or waived without the written approval of the parties hereto.
4.5 Counterparts. This Agreement may be executed in multiple
counterparts, subject to the execution of at least one of such counterparts by
each of the parties hereto.
- 13 -
<PAGE> 14
4.6 Severability. Every provision of this Agreement is intended to
be severable and if any term or all or part of any provision hereof is held by
judicial decision to be invalid, such invalidity shall not affect the validity
of the remainder of this Agreement.
4.7 Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and understanding with respect to the
subject matter hereof and supersedes any and all prior and contemporary
agreements and understandings. To the extent this Agreement and the Related
Agreements are inconsistent with any provisions of any other agreements entered
into among or between any of the parties hereto, the provisions of this
Agreement and the Related Agreements (as in effect on the date hereof) shall
govern.
4.8 Governing Law. This Agreement shall be construed and interpreted
in accordance with the laws of Puerto Rico.
4.9 Headings. The headings of the several articles and sections of
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
4.10 Termination.
(a) This Agreement shall terminate on the first anniversary
after the date on which the Puerto Rico Entities no
- 14 -
<PAGE> 15
longer continue to own, in the aggregate, 5% of the outstanding Shares of the
Corporation, or, if earlier, on the tenth anniversary of this Agreement. The
provisions of Section 2.5 and this Section 4.10 shall survive for two (2) years
after termination of this Agreement.
(b) The obligations of any party other than the Corporation,
GTE, Strategic Purchaser and Purchaser and GDB shall terminate on the first
anniversary of the date on which such party ceases to own, directly or
indirectly, more than 2% of the outstanding Shares of the Corporation, except
that such party shall continue to be bound by the provisions of Section 2.5
until the first anniversary of the date on which the party ceases to own any
Shares of the Corporation.
4.11 Construction. When necessary, the masculine shall include the
feminine or neuter and the singular shall include the plural and vice versa.
4.12 Binding Effect; Successors and Assigns; Third-Party
Beneficiaries.
(a) The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided that no party may assign, delegate or transfer by merger or
otherwise any of its rights or obligations under this Agreement without the
written consent of the other parties hereto and compliance with
- 15 -
<PAGE> 16
applicable laws and regulations; provided, however, that such restriction shall
not prohibit either GTE or Popular, Inc. from engaging in a merger with any
third party; provided further, however, that PRTA may assign its rights
hereunder to GDB and that no such assignment shall have the effect of being a
delegation of duties or an assumption of any obligations of PRTA.
(b) Nothing in this Agreement shall be deemed to create any
right with respect to any Person that is not a party to this Agreement;
provided, that, any subsidiary of the Corporation may enforce the Corporation's
rights hereunder; and provided, further, that, so long as PRTA or any other
Puerto Rico Entity owns or controls at least 10% of the shares of capital stock
of the Corporation, PRTA or such Puerto Rico Entity shall be deemed third-party
beneficiaries of this Agreement and shall be entitled to enforce the provisions
hereof for the benefit of the Corporation, including but not limited to Section
2 hereof, directly, without first making demand upon the Corporation to do so.
4.13 Equitable Relief. Each of the parties hereto acknowledges that
the other parties will be irreparably damaged and will have no adequate remedy
at law in the event of a breach or threatened breach of obligations hereunder
and shall be entitled to such equitable and injunctive relief as may be
- 16 -
<PAGE> 17
available to restrain a violation of, or threatened violation of, or to
specifically enforce, this Agreement. Nothing herein shall be deemed to preclude
any party from pursuing any other remedies available under this Agreement or
otherwise to such party for such breach or threatened breach, including the
recovery of damages.
4.14 Fees; Expenses. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel, financial
advisers and accountants.
4.15 Submission to Jurisdiction; Venue.
(a) Any legal action or proceeding with respect to this
Agreement shall be brought in the United States District Court for the District
of Puerto Rico (by way of summary judgment in lieu of complaint if procedure so
permits) or, if such court lacks subject matter jurisdiction, in the courts of
Puerto Rico situated in San Juan. By execution and delivery of this Agreement,
each of the parties hereto hereby irrevocably accepts for itself and in respect
of its property, generally and unconditionally, the jurisdiction of the
aforesaid courts. Each of the parties hereto further irrevocably consents to the
service of process out of any of the aforementioned courts in any such action or
proceeding by the delivery of copies thereof
- 17 -
<PAGE> 18
by private courier or delivery service to such party at its address set forth in
Section 4.1, such service to become effective 5 days after sending such copies.
Nothing herein shall affect the right of any party hereto to serve process in
any other manner permitted by law.
(b) Each of the parties hereby irrevocably waives any
objection that it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Agreement brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.
(c) Neither PRTA nor GDB are entitled to sovereign immunity in
connection with any dispute under this Agreement, including but not limited to
sovereign immunity from process, suit, jurisdiction, judgment and execution,
with the exception of immunity from prejudgment attachment. PRTA shall provide
to the Corporation an opinion of counsel reasonably satisfactory to the
Corporation as to such status.
4.16 Right to Enforce. This Agreement shall be enforceable by (i)
the Corporation, (ii) the Purchaser on behalf of the Purchaser Group, and (iii)
PRTA and GDB on behalf of the Puerto Rico Entities.
- 18 -
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
TELECOMUNICACIONES DE PUERTO RICO,
INC.
By:
-----------------------------------------
Name:
Title:
GTE HOLDINGS (PUERTO RICO) LLC
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
GTE CORPORATION
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
<PAGE> 20
POPULAR, INC.
By:
-----------------------------------------
Name:
Title:
GOVERNMENT DEVELOPMENT BANK FOR
PUERTO RICO
By:
-----------------------------------------
Name:
Title:
PUERTO RICO TELEPHONE AUTHORITY
By:
-----------------------------------------
Name:
Title:
<PAGE> 21
SCHEDULE 1
PUERTO RICO
EXISTING OPERATIONS AND EXCLUDED ACTIVITIES
1. Provision of air to ground and ground to air communications services by
GTE Airfone(R) and other related services provided pursuant to any
agreement or alliance between GTE Airfone (or its successors and assigns)
and any airline.
2. Sales and services to U.S. government and U.S. governmental agencies,
including U.S. military authorities.
3. Technical, engineering, supply and other services, including network
monitoring, provided by subsidiaries, divisions and Affiliates of GTE
Corporation, including without limitation GTE Government Systems, GTE
Intelligent Network Systems, GTE Supply, GTE Laboratories and BCT.Telus
Communications, Inc.
4. Data processing, systems sales, installation and related services provided
by subsidiaries, divisions and Affiliates of GTE Corporation, including
without limitation GTE Network Systems, GTE Communications Corporation and
GTE Data Systems, excluding data transmission.
5. Provision of call delivery roaming services, roamer administration
services, fraud identification and control services, anti-cloning and
related services incidental to the operation of wireless communications
systems including without limitation by GTE Telecommunication Services
Incorporated, but not operating a wireless business.
6. Performance of obligations relating to cable television broadcasting and
content under contracts with Americast, DIRECTV and USSB as in effect on
the date of the Purchase Agreement.
7. Internet service offered by GTE's subsidiaries, divisions and Affiliates,
including without limitation GTE Internetworking and its Affiliates,
including dial up service (excluding dial up service for businesses and
residences located in Puerto Rico), Web-hosting, network security, virtual
private networks and other value-added services related to the Internet.
<PAGE> 22
8. Continuation, to the extent of scope and size on the date of the Stock
Purchase Agreement of CODETEL business activities in Puerto Rico.
9. Investment in, and provision of services to and by, a joint venture of the
Corporation (or PRTC), VNU World Directories and GTE Directories to
publish yellow pages and white pages directories.
10. Delivery of long distance calls to Puerto Rico by GTE Corporation and its
subsidiaries, divisions and Affiliates, including without limitation,
CODETEL (Dominican Republic), CANTV (Venezuela), CTI Holdings S.A.
(Argentina) and BC TEL and Quebec Telephone (Canada) and BCT.Telus
Communications, Inc.'s Affiliate Stentor.
11. Card services, including prepaid calling cards and affinity credit cards
provided by GTE Corporation, its subsidiaries, divisions and Affiliates
and not targeted specifically or exclusively to Puerto Rico.
12. Ownership of shares of the Corporation or its Affiliates in pension
trusts.
13. The rendering of any international or national long distance services in
order to meet the needs of a residential or business customer seeking
services from Puerto Rico or global network services so long as such
activities are initiated only upon the specific request of such customer
and are rendered exclusively to such customer and GTE Corporation has made
commercially reasonable efforts to encourage such customer to utilize the
Company.
14. Such other activities as may be mutually agreed by Purchaser and PRTA.
2
<PAGE> 1
Exhibit 10.11
EXECUTION COPY
SHARE OPTION AGREEMENT
dated as of
March 2, 1999
among
PUERTO RICO TELEPHONE AUTHORITY
TELECOMUNICACIONES DE PUERTO RICO, INC.
GTE HOLDINGS (PUERTO RICO) LLC
and
GTE INTERNATIONAL TELECOMMUNICATIONS INCORPORATED
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I GRANT OF OPTION...............................................3
1.01 Option..............................................................3
1.02 Manner of Exercise..................................................4
1.03 Closing.............................................................5
1.04 Actions at Closing..................................................6
1.05 Adjustments.........................................................6
ARTICLE II REPRESENTATIONS AND WARRANTIES AND COVENANTS OF
THE AUTHORITY................................................10
2.01 Existence and Power................................................10
2.02 Corporate Authorization............................................11
2.03 Governmental Authorization.........................................11
2.04 Non-Contravention..................................................12
2.05 Title..............................................................13
2.06 Finders' Fees......................................................13
2.07 Restrictions on Option Shares......................................14
2.08 Savings Clause.....................................................15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER AND STRATEGIC
PURCHASER....................................................15
3.01 Organization and Existence; Capitalization.........................15
3.02 Corporate Authorization............................................15
3.03 Governmental Authorization.........................................16
3.04 Non-Contravention..................................................16
3.05 Finders' Fees......................................................17
3.06 Available Funds; Strategic Purchaser...............................17
3.07 Purchase for Investment............................................17
3.08 Ability to Complete the Transaction................................18
3.09 Certain Understandings of Strategic Purchaser and Purchaser........18
3.10 Legal Compliance...................................................19
ARTICLE IV COVENANTS OF THE PARTIES.....................................20
4.01 Further Actions....................................................20
4.02 Certain Filings....................................................21
4.03 Public Announcements...............................................21
ARTICLE V CONDITIONS TO CLOSING........................................22
5.01 Conditions to the Obligations of Each Party........................22
5.02 Conditions to Obligations of Purchaser and Strategic Purchaser.....24
5.03 Conditions to Obligation of the Authority..........................25
(i)
<PAGE> 3
ARTICLE VI INDEMNIFICATION..............................................27
6.01 Indemnification by Authority.......................................27
6.02 Indemnification by Purchaser and Strategic Purchaser...............27
6.03 Indemnification Claim..............................................28
6.04 Notice of Claim....................................................29
6.05 Indemnitor's Obligations...........................................30
6.06 Date of Notice of Claim............................................31
6.07 Consent of Indemnitee..............................................31
6.08 Subrogation........................................................31
ARTICLE VII TERMINATION..................................................31
7.01 Grounds for Termination............................................31
7.02 Effect of Termination..............................................33
ARTICLE VIII MISCELLANEOUS................................................33
8.01 Survival...........................................................33
8.02 Notices............................................................34
8.03 Amendments; No Waivers.............................................36
8.04 Expenses...........................................................36
8.05 Successors and Assigns.............................................37
8.06 Governing Law......................................................37
8.07 Counterparts; Effectiveness........................................37
8.08 Entire Agreement...................................................38
8.09 Captions; Definitions..............................................38
8.10 Jurisdiction and Immunity..........................................38
8.11 Third Party Beneficiaries; Parties Bound...........................39
8.12 Endorsement of Stock Certificates..................................40
(ii)
<PAGE> 4
SHARE OPTION AGREEMENT
SHARE OPTION AGREEMENT dated as of March 2, 1999 by and among Puerto Rico
Telephone Authority (the "Authority"), a public corporation and government
instrumentality of the Commonwealth of Puerto Rico ("Puerto Rico"),
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the
"Company"), GTE Holdings (Puerto Rico) LLC, a Delaware limited liability company
("Purchaser") and GTE International Telecommunications Incorporated, a Delaware
corporation (the "Strategic Purchaser").
WHEREAS, Act No. 54 of the Legislature of Puerto Rico, approved on August
4, 1997 ("Act No. 54") authorized the Negotiating Committee for the Sale of the
Assets of the Authority (the "Negotiating Committee") to negotiate the sale of
the Authority's assets;
WHEREAS, pursuant to an Amended and Restated Stock Purchase Agreement
dated as of July 21, 1998 among the Authority, Purchaser and Strategic
Purchaser, to which the Company became a party on March 2, 1999(as amended, the
"Stock Purchase Agreement"), approved by Joint Resolution No. 209 of June 24,
1998 (the "Joint Resolution," and together with Act No. 54, the "Authorizing
Legislation"), Purchaser acquired 400,101 shares of the Common Stock, par value
$0.01 per share (the "Shares"), of
<PAGE> 5
the Company from the Authority constituting 40.01% plus one share of the
outstanding Shares;
WHEREAS, Purchaser and Popular, Inc. jointly acquired 10,000 Shares from
the Authority constituting 1.0% of the outstanding Shares, and jointly
contributed such Shares on the date hereof to the Trust;
WHEREAS, on the date hereof, the Authority contributed 30,000 Shares,
constituting 3.0% of the outstanding Shares, to the Trust;
WHEREAS, on the date hereof, the Authority sold 30,000 Shares,
constituting 3.0% of the outstanding Shares, to the Trust;
WHEREAS, on the date hereof, Popular, Inc. acquired 99,900 Shares from the
Authority constituting 9.99% of the outstanding Shares;
WHEREAS, the Authority remains the owner of 429,999 Shares, constituting
all of the remaining outstanding Shares;
WHEREAS, the Stock Purchase Agreement contemplates, and the Joint
Resolution approved, the Authority granting to Purchaser an option to acquire an
additional 150,000 Shares, constituting 15% of the outstanding Shares on the
Stock Purchase Agreement Closing Date (respectively, the "Option" and, as
adjusted pursuant to Section 1.05 hereof, the "Option Shares");
WHEREAS, Strategic Purchaser organized Purchaser for the purpose of
entering into the transactions contemplated herein
2
<PAGE> 6
and in the Stock Purchase Agreement and is the owner of 100% of the equity
interest in Purchaser (the "Purchaser Interests");
WHEREAS, the Authority and Purchaser desire to set forth the terms and
conditions of the Option;
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
Authority, the Company, Purchaser and Strategic Purchaser agree as follows:
ARTICLE I
GRANT OF OPTION
1.01 Option. Upon the terms and subject to the conditions of this
Agreement, the Authority hereby grants to Purchaser the irrevocable option to
acquire from the Authority up to 150,000 Shares, at any time on or before the
third anniversary of the date hereof (the "Expiration Date") at an exercise
price of $1,148.40 per Share, as adjusted pursuant to Section 1.05 (the
"Exercise Price"). With respect to each Option exercise, Purchaser may designate
that an amount of Option Shares, in the aggregate not to exceed the Pro Rata
Portion of Option Shares otherwise issuable to Purchaser upon such exercise, be
issued at the Closing to Popular, Inc. (the "Minority Shareholder"), in the
amounts designated in the Option Notice (as defined below). In addition, from
the period 30 days prior to, and concluding on, the Expiration Date, the
Purchaser
3
<PAGE> 7
shall be entitled to exercise the Option (a "Minority Shareholder Exercise"), on
behalf of the Minority Shareholder, with respect to that number of Option Shares
equal to the Pro Rata Portion of Option Shares, if any, then subject to the
unexercised portion of the Option. A Minority Shareholder Exercise shall
preclude any further exercises with respect to the Option.
1.02 Manner of Exercise.
(a) Other than with respect to the Minority Shareholder Exercise,
the Option may be exercised, in whole or in part at any time on or prior to the
Expiration Date, by delivery by Purchaser of written notice (the "Option
Notice") thereof (the date of receipt thereof being the "Exercise Date" for such
exercise) to the other parties hereto not less than 60 days prior to the
Expiration Date on not more than three occasions, each exercise to be for not
less than the lesser of 1/3 of the initial number of Option Shares and the
remaining Option Shares subject to the Option.
(b) In the case of the Minority Shareholder Exercise, the Option may
be exercised by delivery of written notice thereof to the other parties hereto
not less than twenty (20) days prior to the Expiration Date.
(c) In the event that transactions contemplated therein shall not
have been consummated within five (5) business
4
<PAGE> 8
days, or such other date, if any, as the Authority and Purchaser shall agree in
writing, after the conditions to a Closing have been met or waived, due to a
breach of this Agreement by the Purchaser, then, by notice given by the
Authority to the Purchaser, the Option shall expire as to the Option Shares
scheduled to be purchased at such Closing and such Option Shares shall no longer
be subject to the Option or this Agreement; it being understood that if the
Minority Shareholder does not consummate, within such five (5) business day
period, the purchase of Option Shares it has elected to purchase, (i) at the
election of Purchaser, the Purchaser may decide to purchase some or all of such
Option Shares and (ii) the Option shall expire only as to such Option Shares not
purchased by Purchaser pursuant to clause (i) above.
1.03 Closing. The closing of each Option exercise (each a "Closing") shall
take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590
Madison Avenue, 20th Floor, New York, New York 10022, within five (5) business
days after satisfaction or waiver of the conditions set forth in Article V, or
such other time or place, after satisfaction or waiver of the conditions set
forth in Article V, as Purchaser and the Authority may agree (the date of each
Closing being hereinafter called a "Closing Date").
5
<PAGE> 9
1.04 Actions at Closing. At each Closing, the parties shall take the
following actions in the following order:
(a) The parties shall deliver the documents referred to in Article
V;
(b) Purchaser and, if applicable, the Minority Shareholder shall
deliver to the Authority, the Exercise Price for the Option Shares being
acquired by such Person in immediately available funds by wire transfer to an
account of the Authority with a bank in New York City designated by the
Authority prior to such Closing Date.
(c) The Authority shall deliver to Purchaser (and the Minority
Shareholder if so designated in the Option Notice) certificates for the Option
Shares then being acquired, duly endorsed or accompanied by stock powers duly
endorsed in blank, with any required transfer stamps affixed thereto.
1.05 Adjustments.
(a) Any dividend or other distribution (whether in cash, stock or
otherwise) on the Option Shares to be sold pursuant hereto with a record date
after the date of this Agreement and prior to the applicable Closing Date for
such Option Shares shall be delivered by the Authority to the purchaser of such
Option Shares on the Closing Date (or as soon as practicable thereafter if the
payment or distribution date
6
<PAGE> 10
occurs subsequent to the applicable Closing Date), except for the Company's
regular quarterly dividend.
(b) The number of Option Shares and the per Share exercise price
hereunder shall be appropriately adjusted in the event of any stock dividends,
split-ups, recapitalizations, combinations, exchanges of shares or the like or
any other action occurring prior to each Closing Date that would have the effect
of changing or diluting the respective rights and obligations hereunder, it
being understood that the Option Shares constitute, as of the date hereof, 15%
of the issued and outstanding Shares.
(c) In the event that, within 180 days after a Closing Date, any of
Purchaser, holders of Purchaser Interests or their respective affiliates or any
member of the Purchaser Group who directly or indirectly acquires Option Shares
in connection with an exercise of the Option (the "Purchaser Entities"), shall,
directly or indirectly (i) sell, assign, transfer or in any other fashion
voluntarily or involuntarily dispose of, by merger, consolidation or otherwise
(other than a merger of the ultimate parent of such Purchaser Entity), or (ii)
enter into a definitive sales agreement or arrangement with respect to any such
disposition, in any transaction or series of related transactions to an
unaffiliated third party, any Shares or Purchaser Interests acquired directly
from the Authority, the
7
<PAGE> 11
Purchaser or any other member of the Purchaser Group (any such event, agreement
or arrangement being a "Transfer"), upon the closing of such Transfer (the
"Transfer Closing Date"), the Exercise Price with respect to any previously
exercised Option within such 180-day period shall be increased, and, if the
selling Purchaser Entity does not pay, the Purchaser shall pay to the Authority
in immediately available federal funds on the Transfer Closing Date, the
Supplemental Exercise Price multiplied by the number of Option Shares previously
acquired by the Purchaser Group within such 180-day period. The Supplemental
Exercise Price shall be the per Share amount, if any, by which the per Share
consideration received (directly or indirectly) in the Transfer (the "Transfer
Price") exceeds 110% of the Exercise Price (subject to adjustment thereof
pursuant to Section 1.05(b) above in the case of events described therein
occurring after the Closing Date with respect thereto as if such events had
occurred prior to the Closing Date and Section 1.05(d) hereof). Notwithstanding
any other provision of this Section 1.05(c), (i) an Option Share received upon
exercise of an Option may be subject to payment of a Supplemental Exercise Price
on but one occasion, and (ii) a Transfer shall result in the application of a
Supplemental Exercise Price, if any, to not more than the number of Option
Shares that is equal to the number of Shares involved in such Transfer. Not less
than 15
8
<PAGE> 12
days prior to any such Transfer Closing Date, or five days after execution of
definitive agreements with respect to a Transfer, whichever shall first occur,
the Purchaser shall notify the Authority of the Transfer, the Transfer Price and
form of consideration, the Transfer Closing Date and all other material terms
and conditions of the Transfer. In the event that the Authority and Purchaser
disagree as to the Transfer Price or the Supplemental Exercise Price (due to the
Transfer Price being paid other than solely in cash, the Transfer being an
indirect disposition of Shares or otherwise), then the Authority and Purchaser
shall select a mutually acceptable investment banking firm to determine the
appropriate Transfer Price and the Supplemental Exercise Price, failing which
the Authority and the Purchaser shall each select an investment banking firm,
which investment banking firm shall select a third investment banking firm which
shall determine the appropriate Transfer Price and the Supplemental Exercise
Price. The costs of the third investment banking firm shall be borne 50% by each
of the Authority and the Purchaser.
(d) The per Share Exercise Price hereunder shall be reduced by a
fraction not exceeding one (1), (i) the numerator of which is (x) the amount of
any Adverse Consequences from Included Claims (each as defined in the Stock
Purchase Agreement) which are not paid to Purchaser or the Affiliated
9
<PAGE> 13
Group by reason of the limitations imposed by Section 10.04 of the Stock
Purchase Agreement (but only to the extent such Adverse Consequences have been
agreed to in good faith in writing by the Purchaser and the Authority or
determined by a final non-appealable order of a court of competent jurisdiction,
in either case on or prior to the applicable Exercise Date) multiplied by (y)
the percentage of the outstanding Shares then owned by the Purchaser Group and
(ii) the denominator of which is the Purchase Price (as defined in the Stock
Purchase Agreement) paid at the Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE AUTHORITY
The Authority hereby represents, warrants and covenants to Purchaser,
Strategic Purchaser and the Minority Shareholder that:
2.01 Existence and Power. The Authority is validly existing as a public
corporation under the laws of Puerto Rico and has all requisite power, authority
and legal right to conduct its affairs as currently conducted. The Authority has
heretofore made available to Purchaser true and complete copies, as currently in
effect, of the official act creating the Authority (the "Authority Act") and the
bylaws of the Authority.
10
<PAGE> 14
2.02 Corporate Authorization.
(a) The execution, delivery and performance by the Authority of this
Agreement are within the Authority's powers and have been duly authorized by the
Governing Board of the Authority and, upon execution thereof, will be duly
executed and delivered by the Authority. All requirements established by the
Authorizing Legislation in order for the transactions contemplated hereby to be
consummated have been met.
(b) This Agreement constitutes the valid and binding agreement of
the Authority, enforceable against it in accordance with its terms except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors generally, by
general equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) or by an implied covenant of
good faith and fair dealing.
2.03 Governmental Authorization. The execution, delivery and performance
by the Authority of this Agreement require no action by or in respect of, or
filing with, any Puerto Rico or United States Governmental Authority other than:
(i) compliance with any applicable requirements of the Communications Act of
1934, as amended (the "Communications Act") and any rules, regulations,
practices and policies ("FCC Rules") promulgated by the FCC, including those
relating to the transfer of control of
11
<PAGE> 15
the licenses, permits, authorizations and certificates (the "FCC Licenses")
granted by the FCC; (ii) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"); (iii) compliance with any applicable requirements of the
Telecommunications Regulatory Board of Puerto Rico; and (iv) such other actions,
consents or filings, the failure to obtain or undertake would not materially
hinder or restrict the practical realization by Purchaser of its rights
hereunder.
2.04 Non-Contravention. The execution, delivery and performance by the
Authority of this Agreement do not and will not: (i) contravene or conflict with
(a) the Authorizing Legislation, (b) the Authority Act or the bylaws of the
Authority or the Company; (ii) assuming compliance with the requirements
referred to in Section 2.03(i) - (iii), contravene or conflict with or
constitute a violation of any provision of any Puerto Rico or United States law,
regulation, judgment, injunction, order or decree binding upon or applicable to
the Authority; (iii) contravene, constitute a default under or breach of, or
result in the termination or suspension of, any material agreement, contract or
other instrument binding upon the Authority or the Affiliated Group or any
material license, franchise, permit or other similar authorization held by the
Authority or the Affiliated Group; or (iv) result in the
12
<PAGE> 16
creation or imposition of any Lien other than as provided in this Agreement on
any asset of the Authority or the Affiliated Group, except, with respect to
matters referred to in (ii), (iii) and (iv) above, such contraventions,
conflicts, violations, defaults, breaches, terminations, suspensions or Liens
that occur as a result of the identity or specific legal or regulatory status of
Strategic Purchaser or Purchaser or any other facts that specifically relate to
the business or activities in which Strategic Purchaser or Purchaser is or
proposes to be engaged (other than the business or activities of the Affiliated
Group as presently conducted) or the financing documents of the Affiliated
Group.
2.05 Title. After giving effect to the transactions contemplated in the
Stock Purchase Agreement, the Authority is the record and beneficial owner of
429,999 Shares. The Authority will transfer and deliver to each purchaser of
Option Shares at each Closing valid title to the Option Shares being then
purchased free and clear of any Lien.
2.06 Finders' Fees. There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Puerto Rico, the Government Development Bank for Puerto Rico, GDB Holdings
Corporation, the Affiliated Group or the Authority, who might be entitled to any
fee or commission from Purchaser, Strategic Purchaser, the
13
<PAGE> 17
Affiliated Group, or any of their respective affiliates upon consummation of the
transactions contemplated herein.
2.07 Restrictions on Option Shares. During the term of this Agreement, the
Authority agrees that it will not sell, assign, pledge or otherwise dispose of,
or grant any proxies (other than to the Purchaser) with respect to, any Option
Shares then subject to the Option, or enter into any contract, option or other
arrangement or understanding with respect to the sale, pledge, assignment or
other disposition, directly or indirectly (all the foregoing being a
"Disposition"), of any Option Shares (other than pursuant to this Agreement or
other than any such Disposition or other arrangement or understanding that is
subject to Purchaser's rights hereunder). It is understood and agreed that the
Option Shares then subject to the Option owned by Puerto Rico Entities shall be
owned by entities from and after the date hereof which either do not have, or
have irrevocably waived, to the fullest extent permitted by law, all sovereign
immunity to which they or their properties may be entitled, including but not
limited to sovereign immunity from process, suit, jurisdiction, judgment,
attachment in aid of execution, and execution, but not immunity from prejudgment
attachment. The Puerto Rico Entities party hereto which own Option Shares then
subject to the Option shall provide to Purchaser an opinion of counsel
reasonably satisfactory to
14
<PAGE> 18
Purchaser as to such status of such entities, and such an opinion will be
provided to Purchaser prior to the Transfer of Option Shares then subject to the
Option to another Puerto Rico Entity.
2.08 Savings Clause. The Transfer of the Option Shares to the Purchaser
pursuant to, and in accordance with, the GDB Holdings Corporation Guaranty of
Option Agreement or the GDB Holdings Corporation Guaranty of the Stock Purchase
Agreement of even date herewith shall not constitute a breach of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
PURCHASER AND STRATEGIC PURCHASER
Purchaser and Strategic Purchaser each hereby, jointly and severally,
represent and warrant to the Authority that:
3.01 Organization and Existence; Capitalization. Each of Purchaser and
Strategic Purchaser is a Person duly incorporated or formed, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
formation.
3.02 Corporate Authorization.
(a) The execution, delivery and performance by each of Purchaser and
Strategic Purchaser of this Agreement are within the corporate or other powers
of each of them and have
15
<PAGE> 19
been duly authorized by all necessary corporate or other action on the part of
each of them.
(b) This Agreement constitutes a valid and binding agreement of each
of Purchaser and Strategic Purchaser, enforceable against each in accordance
with its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or affecting
creditors generally, by general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
3.03 Governmental Authorization. The execution, delivery and performance
by Purchaser and Strategic Purchaser of this Agreement require no action by or
in respect of, or filing with, or consent of any Governmental Authority, other
than: (i) compliance with any applicable requirements of the HSR Act; (ii)
compliance with any applicable requirements of the Communications Act or FCC
Rules; and (iii) compliance with any applicable requirements of the
Telecommunications Regulatory Board of Puerto Rico.
3.04 Non-Contravention. The execution, delivery and performance by each of
Purchaser and Strategic Purchaser of this Agreement do not and will not (i)
contravene or conflict with the certificate of incorporation or bylaws or other
formation
16
<PAGE> 20
documents of Purchaser and Strategic Purchaser, or (ii) assuming compliance with
the matters referred to in Section 3.03, contravene or conflict with any
provision of any law, regulation, judgment, injunction, order or decree binding
upon Purchaser or Strategic Purchaser.
3.05 Finders' Fees. There is no investment banker, broker, finder or other
intermediary acting for or on behalf of Purchaser, Strategic Purchaser or any of
their respective affiliates, partners, agents or representatives other than the
Affiliated Group who might be entitled to any fee or commission from any member
of the Authority or the Affiliated Group or Puerto Rico or any instrumentality
thereof upon consummation of the transactions contemplated herein.
3.06 Available Funds; Strategic Purchaser. Purchaser will on each Closing
Date have sufficient funds available to purchase the Option Shares and to
fulfill all of its financial obligations arising under this Agreement. The
Authority shall have the right to require Strategic Purchaser to pay any
Exercise Price then due in the event Purchaser fails to timely pay the same.
3.07 Purchase for Investment. Purchaser is purchasing the Option Shares
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Any Option Shares purchased by
Purchaser pursuant
17
<PAGE> 21
hereto shall be deemed part of Purchaser's "Initial Ownership Interest" for
purposes of the Shareholders Agreement, and shall become subject to the terms
and conditions of the Shareholders Agreement.
3.08 Ability to Complete the Transaction. To the knowledge of Purchaser
and Strategic Purchaser, there is no fact or circumstance which might reasonably
be expected to result in Purchaser's or Strategic Purchaser's inability to (a)
obtain any licenses, authorizations, consents or approvals from third Persons or
Governmental Authorities required in order for Purchaser or Strategic Purchaser
to consummate the transactions contemplated by this Agreement, (b) comply with
any applicable requirements or conditions set forth in Section 3.03 hereof, or
(c) otherwise comply with this Agreement.
3.09 Certain Understandings of Strategic Purchaser and Purchaser.
Strategic Purchaser and Purchaser acknowledge that they have had sufficient
opportunity to make whatever investigation they have deemed necessary and
advisable for purposes of determining whether or not to enter into this
Agreement and consummate the transactions contemplated herein, and acknowledge
and agree that, except to the extent of the express representations, warranties,
agreements and covenants contained in this Agreement, Purchaser and Strategic
Purchaser have executed and delivered this Agreement and are consummating
18
<PAGE> 22
the transactions contemplated by this Agreement solely in reliance upon their
own investigation and without any other express or implied warranties
whatsoever. Strategic Purchaser and Purchaser acknowledge that no
representations or warranties are made by the Authority as to any announced or
future changes in any Governmental Authority statutes, rules, regulations,
programs, plans or constraints (collectively, "Governmental Action") which are
or may become applicable to or have an effect upon the businesses, operations,
or financial condition of any members of the Affiliated Group.
3.10 Legal Compliance. Purchaser and Strategic Purchaser each represents
that it has complied with the requirements of Article 8(e) of Act No. 54 and
each certifies that as of the date hereof:
(a) All tax returns, statements, reports and forms which were
required to be filed by the Strategic Purchaser, GTE Corporation and/or GTE
Corporation's consolidated subsidiaries (the "GTE Companies") within the past
five years with respect to their respective activities in Puerto Rico
(collectively, the "Returns") have been filed in accordance with any applicable
Puerto Rican laws. All the GTE Companies have timely paid taxes payable to any
Puerto Rico Governmental Authority (including payments in respect of
unemployment benefits, workmen's compensation, social security for chauffeurs
and withholding of
19
<PAGE> 23
employee taxes), if any, shown as due and payable on the Returns that have been
filed, except as described in writing to the Authority. There is no action,
suit, proceeding, audit or claim now proposed or pending, or to the knowledge of
Purchaser and Strategic Purchaser, proposed, against or with respect to any of
the GTE Companies in respect of any tax payable to any Puerto Rico Governmental
Authority.
(b) It has not paid and it will not pay any commission or bonus, and
it has not granted any direct or indirect financial benefit, to any public
official or employee, nor to any former public official or employee,
participating in the privatization process contemplated in the Authorizing
Legislation while discharging his/her public service duties.
ARTICLE IV
COVENANTS OF THE PARTIES
The parties hereto agree that:
4.01 Further Actions. Subject to the terms and conditions of this
Agreement, each party will use commercially reasonable efforts, upon exercise of
the Option, to take or cause to be taken, all actions and to do, or cause to be
done, all things necessary or desirable, under applicable laws and regulations
to consummate the transactions contemplated herein. The Company, the Authority,
Strategic Purchaser and Purchaser each agree to execute and deliver, and to
cause the Affiliated
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Group to execute and deliver, such other documents, certificates, agreements and
other writings and to take such other actions as may be necessary or desirable
in order to consummate the transactions contemplated hereby.
4.02 Certain Filings. The Company, the Authority, Strategic Purchaser and
Purchaser shall cooperate with one another, and will cause the Affiliated Group
to cooperate (a) in determining whether any action by or in respect of, or
filing with, any Governmental Authority is required, or any actions, consents,
approvals or waivers are required to be obtained from parties to any third party
contracts, in connection with the consummation of the transactions contemplated
herein and (b) in taking such actions or making any such filings, furnishing
information required in connection therewith and seeking timely to obtain any
such actions, consents, approvals or waivers including, without limitation, any
such matters required under the Communications Act, FCC Rules and the HSR Act.
4.03 Public Announcements. Except as otherwise required by law, the
Company, the Authority and Purchaser Group shall: (a) prior to issuance of any
press release relating to the transactions contemplated by this Agreement,
submit such press release to the other parties, and obtain the approval thereof,
which approval shall not be unreasonably withheld; and (b) use best efforts to
characterize the other parties, in any other
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public statements made by the party making such statement about the other
parties, on substantially the same basis as in any press release made by the
party making such statement.
ARTICLE V
CONDITIONS TO CLOSING
5.01 Conditions to the Obligations of Each Party. The obligations of the
parties to consummate each Closing are subject to the satisfaction, or waiver
subject to Section 8.03 below, of the following conditions:
(a) Purchaser and Strategic Purchaser shall have received any
required approvals of the Puerto Rico Telecommunications Regulatory Board;
provided that, Purchaser's obligations shall be subject to the further condition
that no burdensome conditions or limitations shall have been imposed in
connection therewith, in the reasonable judgment of Purchaser, on the GTE
Companies, Purchaser or Strategic Purchaser or on the Affiliated Group;
(b) Any applicable waiting period under the HSR Act relating to the
transactions contemplated at such Closing shall have expired; provided that,
Purchaser's obligations shall be subject to the further condition that no
burdensome conditions or limitations shall have been imposed in connection
therewith, in the reasonable judgment of Purchaser, on the GTE Companies,
Purchaser or Strategic Purchaser or on the Affiliated Group;
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(c) No other provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of such
Closing;
(d) All actions or filings under the Communications Act required to
permit the consummation of such Closing, including, but not limited to, FCC
approval, shall have been obtained or made and not revoked or suspended;
provided that, Purchaser's obligations shall be subject to the further condition
that such FCC approval shall neither (i) require or be conditioned upon
Strategic Purchaser's, GTE Corporation's or any of its affiliates' agreement to
or compliance with any term, condition or restriction, in the reasonable
judgment of Strategic Purchaser, that would have an adverse effect on the
business or results of operations of the Affiliated Group or (ii) impose any
term, condition or restriction on the business or operations of GTE Corporation
or its affiliates or result in any waiver of any rights asserted by any of the
foregoing;
(e) All actions by or in respect of the applicable laws, rules and
regulations of any Governmental Authority having jurisdiction over the
transactions contemplated in this Agreement shall have been taken; provided
that, (i) Purchaser's obligations shall be subject to the further condition that
no burdensome conditions or limitations shall have been imposed, in the
reasonable judgment of Purchaser, in connection therewith on
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the GTE Companies, Purchaser or Strategic Purchaser or on the Affiliated Group
and (ii) the only actions by a Puerto Rico Governmental Authority which shall
affect the Authority's obligations are listed in Section 2.03(i) and (iv) of the
Stock Purchase Agreement; and
(f) Approval by any other applicable Governmental Authority shall
have been obtained and not revoked or suspended; provided that, (i) Purchaser's
obligations shall be subject to the further condition that no burdensome
conditions or limitations shall have been imposed, in the reasonable judgment of
Purchaser, in connection therewith on the GTE Companies, Purchaser or Strategic
Purchaser or on the Affiliated Group; and (ii) the only actions by a Puerto Rico
Governmental Authority which shall affect the Authority's obligations are listed
in Section 2.03(i) and (iv) of the Stock Purchase Agreement.
5.02 Conditions to Obligations of Purchaser and Strategic Purchaser. The
obligation of Purchaser and Strategic Purchaser to consummate the Closing is
subject to the satisfaction of the following further conditions:
(a) the representations and warranties of the Authority contained in
this Agreement and in any certificate or other writing delivered by the
Authority pursuant hereto shall be true in all material respects at and as of
the Closing Date, as if made at and as of such time and Purchaser shall have
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received a certificate signed by the Executive Director of the Authority to the
foregoing effect.
(b) the representations and warranties of the Authority set forth in
the Stock Purchase Agreement shall have been true in all material respects as of
the date hereof (but not as of the applicable Closing Date) except to the extent
waived by Purchaser at or prior to the Closing under the Stock Purchase
Agreement.
(c) Purchaser shall have received one or more opinions of counsel to
the Authority, dated the Closing Date, in form and substance reasonably
acceptable to Purchaser. In rendering such opinions, such counsel may rely upon
certificates of public officers as to matters governed by the laws of
jurisdictions other than Puerto Rico or the federal laws of the United States of
America, and upon opinions of counsel reasonably satisfactory to Purchaser,
copies of which opinions shall be contemporaneously delivered to Purchaser, and
as to matters of fact, upon certificates of officers of the Authority and the
Affiliated Group.
5.03 Conditions to Obligation of the Authority. The obligation of the
Authority to consummate each Closing is subject to the satisfaction of the
following further conditions:
(a) the representations and warranties of Purchaser and Strategic
Purchaser contained in this Agreement and in any
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certificate or other writing delivered by Purchaser pursuant hereto shall be
true in all material respects at and as of such Closing Date (except, with
respect to Section 3.10, as otherwise disclosed in writing to the Authority on
such Closing Date), as if made at and as of such time and the Authority shall
have received a certificate signed by the President of Purchaser and the
President (or manager) of Strategic Purchaser to the foregoing effect.
(b) The Authority shall have received an opinion of counsel to
Purchaser and Strategic Purchaser, dated the applicable Closing Date in form and
substance reasonably acceptable to Purchaser. In rendering such opinion, such
counsel may rely upon certificates of public officers as to matters governed by
the laws of jurisdictions other than Puerto Rico, New York and corporate laws of
Delaware or the federal laws of the United States of America, and upon opinions
of counsel reasonably satisfactory to the Authority, copies of which shall be
contemporaneously delivered to the Authority, and as to matters of fact, upon
certificates of officers of Purchaser and Strategic Purchaser.
(c) The Authority shall have received all documents it may
reasonably request relating to the existence of Purchaser and the authority of
Purchaser to execute, deliver and
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consummate the applicable transactions at such Closing, all in form and
substance reasonably satisfactory to the Authority.
ARTICLE VI
INDEMNIFICATION
6.01 Indemnification by Authority. The Authority agrees to indemnify,
defend and hold Strategic Purchaser, Purchaser and the Minority Shareholder (the
"Purchaser Indemnitees") harmless from and after each Closing Date from and
against any and all loss (other than loss of profit or consequential damages
suffered by the Purchaser Indemnitees), cost, liability, damage and expenses
(including reasonable attorneys fees and other expenses incident thereto) (the
"Adverse Consequences") resulting from breach of the Authority's
representations, warranties, covenants and agreements contained in this
Agreement; provided, that, the Authority's liability hereunder shall in no event
exceed $40,000,000. Nothing herein shall preclude Purchaser from seeking
specific performance or other equitable remedies hereunder.
6.02 Indemnification by Purchaser and Strategic Purchaser. Strategic
Purchaser and Purchaser, jointly and severally, agree to indemnify, defend and
hold the Authority and the Puerto Rico Governmental Authorities (the "Authority
Indemnitees") harmless from and against any Adverse Consequences the Authority
Indemnitees may suffer resulting from Strategic
27
<PAGE> 31
Purchaser's or Purchaser's breach of any of its representations, warranties,
covenants and agreements under this Agreement.
6.03 Indemnification Claim. Upon obtaining knowledge of any claim or
demand which has given rise to, or could reasonably give rise to, a claim for
indemnification hereunder, the party seeking indemnification ("Indemnitee")
shall promptly give written notice (the "Notice of Claim") of such claim or
demand to the other party it is seeking indemnification from ("Indemnitor").
Indemnitee shall furnish to Indemnitor in reasonable detail such information as
Indemnitee may have with respect to such indemnification claim (including, to
the extent determinable, an estimate of any Adverse Consequences that Indemnitee
may suffer as a result thereof) and copies of any summons, complaint or other
pleading which may have been served upon it and any written claim, demand,
invoice, billing or other document evidencing or asserting the same. No failure
or delay by Indemnitee in the performance of the foregoing shall reduce or
otherwise affect the obligation of Indemnitor to indemnify and hold Indemnitee
harmless, except to the extent that such failure or delay shall have adversely
affected Indemnitor's ability to defend against, settle or satisfy any
liability, damage, loss claim or demand for which Indemnitee is entitled to
indemnification hereunder.
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6.04 Notice of Claim. If the claim or demand set forth in the Notice of
Claim given by Indemnitee pursuant to Section 6.03 hereof is a claim or demand
asserted by a third party, Indemnitor shall have fifteen business (15) days
after the Date of Notice of Claim to notify Indemnitee in writing of its
election to defend such third party claim or demand on behalf of the Indemnitee.
If Indemnitor elects to defend such third party claim or demand, Indemnitee
shall make available to Indemnitor and its agents and representatives all
records and other materials which are reasonably required in the defense of such
third party claim or demand and shall otherwise cooperate with, and assist
Indemnitor in the defense of, such third party claim or demand, and so long as
Indemnitor is defending such third party claim in good faith, Indemnitee shall
not pay, settle or compromise such third party claim or demand. If Indemnitor
elects to defend such third party claim or demand, Indemnitee shall have the
right to participate in the defense of such third party claim or demand, at
Indemnitee's own expense. In the event, however, that Indemnitee reasonably
determines that representation by counsel to Indemnitor of both Indemnitor and
Indemnitee may present such counsel with a potential conflict of interest that
would make separate representation inadvisable under generally accepted
standards of professional conduct, or where non-monetary relief is being sought
against Indemnitee by
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a third party, then such Indemnitee may elect to defend such third party claim
or demand and employ separate counsel to represent or defend it in any such
action or proceeding at Indemnitee's own expense; provided, however, that
Indemnitee's defense of such action or proceeding shall not limit Indemnitee's
right to indemnification under this Section 6 if it is ultimately determined
that indemnification is due from Indemnitor. If Indemnitor does not elect to
defend such third party claim or demand or does not defend such third party
claim or demand in good faith, Indemnitee shall have the right, in addition to
any other right or remedy it may have hereunder, at Indemnitor's expense, to
defend such third party claim or demand; provided, however, that (a) Indemnitee
shall not have any obligation to participate in the defense of, or defend, any
such third party claim or demand; and (b) Indemnitee's defense of or its
participation in the defense of any such third party claim or demand shall not
in any way diminish or lessen the obligations of Indemnitor under the agreements
of indemnification set forth in this Section 6.
6.05 Indemnitor's Obligations. Except for third party claims being
defended in good faith, each Indemnitor shall satisfy its obligations hereunder
in cash within thirty (30) days after the Date of Notice of Claim.
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6.06 Date of Notice of Claim. The term "Date of Notice of Claim" shall
mean the date the Notice of Claim is effective pursuant to Section 6.03 hereof.
6.07 Consent of Indemnitee. No claim giving rise to a Notice of Claim
shall be compromised or settled except with the prior written consent of the
Indemnitee, which consent shall not be unreasonably withheld.
6.08 Subrogation. In the event that an Indemnitor makes any payment to any
Indemnitee for indemnification for which such Indemnitee could have collected on
a claim against a third party, the Indemnitor shall be entitled to pursue claims
and conduct litigations on behalf of such Indemnitee and any of its successors,
to pursue and collect on any indemnification or other remedy available to such
Indemnitee thereunder with respect to such claim and generally to be subrogated
to the rights of such Indemnitee.
ARTICLE VII
TERMINATION
7.01 Grounds for Termination.
(a) This Agreement may be terminated at any time:
(i) By mutual written agreement of the Authority and
Purchaser;
(ii) By either the Authority or Purchaser if consummation of
the transactions contemplated herein would
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violate any nonappealable final order, decree or judgment of any court or
Governmental Authority having competent jurisdiction which the parties have used
commercially reasonable efforts to oppose and cause to be dismissed;
(iii) By either the Authority or Purchaser if such other party
is then in material breach of this Agreement, and the terminating party is not
then in material breach of this Agreement; provided, that, the Authority's sole
remedy for Purchaser's failure to purchase Option Shares in accordance with this
Agreement after a given Exercise Date shall be as set forth in Section 1.02(c)
hereof;
(iv) By the Authority to the extent the Option has not been
exercised in full on or prior to the Expiration Date; or
(v) By any party ninety-one (91) days after the Expiration
Date; provided, that, the party terminating this Agreement is not then in
material breach of this Agreement.
The party desiring to terminate this Agreement shall give notice of such
termination to the other parties.
(b) Notwithstanding anything to the contrary contained herein, in
the event that any condition to a Closing set forth in Section 5.01 shall not
have been obtained by the third anniversary of the date hereof, Purchaser's (or
the Minority Shareholder's) right to acquire any Option Shares with
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respect to any previously exercised but unclosed Option shall be extended until
the first to occur of five (5) business days after satisfaction or waiver of
such conditions and 90 days after the Exercise Date.
7.02 Effect of Termination. If this Agreement is terminated as permitted
by Section 7.01, such termination shall be without liability of either party (or
any shareholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall be pursuant to Section 7.01(a)(ii) or (iii) as
the result of the willful failure of any party to fulfill a condition to the
performance of the obligations of the other party or to perform a covenant of
this Agreement or from a willful breach by any party to this Agreement, such
party shall be fully liable for any and all Adverse Consequences (including, but
not limited to, reasonable counsel fees) sustained or incurred by the other
parties as a result of such failure or breach, subject to the limitations set
forth in Article VI hereof.
ARTICLE VIII
MISCELLANEOUS
8.01 Survival. Notwithstanding anything to the contrary contained herein,
Section 1.05(c), Article II, Article III, Article IV, Article VI, Section 8.02,
Section 8.04, Section
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8.06, Section 8.10 and Section 8.11 shall survive each Closing and termination
of this Agreement.
8.02 Notices. All notices, requests and other communications to each party
hereunder shall be in writing and shall be considered given when delivered in
person, sent by telefax transmission or mailed by certified mail, return receipt
requested, to the parties at the following addresses or telefax numbers (or at
such other address or telefax number as a party may specify by notice to the
others):
if to the Authority, to:
Puerto Rico Telephone Authority
c/o Government Development Bank
for Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
with a copy to:
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
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if to the Company, to:
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, Puerto Rico 00968
Telephone: (787) 793-1818
Telecopy: (787) 792-9830
Attention: President
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
if to Purchaser, to:
GTE Holdings (Puerto Rico) LLC
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
with a copy to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
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if to Strategic Purchaser, to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
8.03 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived subject
to the requirements of applicable law if, and only if, such amendment or waiver
is in writing and signed, in the case of an amendment, by Purchaser and the
Authority, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
8.04 Expenses. Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense. The Authority shall bear all
transfer and
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other taxes related to the transfer of the Option Shares to Purchaser and the
Minority Shareholder.
8.05 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the prior
written consent of the other parties hereto and compliance with applicable laws
and regulations, except that (i) Purchaser may (subject to applicable laws and
regulations) transfer or assign, in whole or from time to time in part, to one
or more of its wholly owned subsidiaries, its rights and obligations to purchase
the Option Shares, but no such transfer or assignment will relieve Purchaser or
Strategic Purchaser of its obligations hereunder, and (ii) the Authority may
assign its rights hereunder to the Government Development Bank for Puerto Rico
("GDB") and no such assignment shall have the effect of being a delegation of
duties or an assumption of any obligations of the Authority.
8.06 Governing Law. This Agreement shall be construed in accordance with
and governed by the internal laws of Puerto Rico applicable to contracts made
and to be performed in Puerto Rico.
8.07 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an
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original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement shall become effective when each party
hereto shall have received a counterpart hereof signed by the other party
hereto.
8.08 Entire Agreement. Subject to applicable laws and regulations, this
Agreement, constitutes the entire agreement between the parties with respect to
the subject matter hereof and supersedes all prior agreements, understandings
and negotiations, both written and oral, between the parties with respect to the
subject matter of this Agreement. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has been made or
relied upon by either party hereto.
8.09 Captions; Definitions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof. All capitalized terms used in this Agreement which are
not defined in the text of the Agreement shall have the meanings assigned
thereto in Appendix A hereto.
8.10 Jurisdiction and Immunity. Purchaser and the Authority hereby
irrevocably and unconditionally submit to the jurisdiction of the United States
District Court for the District of Puerto Rico and, if such court shall not have
subject matter jurisdiction, in any court of Puerto Rico having
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<PAGE> 42
subject matter jurisdiction for purposes of any suit, action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement, and Purchaser, Strategic Purchaser and the Authority agree not to
commence any such suit, action or proceeding except in the United States
District Court for the District of Puerto Rico or, if such court shall not have
subject matter jurisdiction, in any court of Puerto Rico having subject matter
jurisdiction. Purchaser, Strategic Purchaser and the Authority hereby
irrevocably and unconditionally waive any objection to the laying of venue of
any such suit, action or proceeding in the United States District Court for the
District of Puerto Rico or, if such court shall not have subject matter
jurisdiction, in any court of Puerto Rico having subject matter jurisdiction and
hereby further and irrevocably waive and agree not to plead or claim in any such
court that any such suit, action or proceeding has been brought in an
inconvenient forum.
8.11 Third Party Beneficiaries; Parties Bound.
(a) No provision of this Agreement shall create any third party
beneficiary rights in any person, nor shall any provision of this Agreement
modify any rights of any third party under any existing law, regulation or
contract with any third party; provided, that, the Authority acknowledges and
agrees that the Minority Shareholder is and will be a third-party beneficiary of
this Agreement with the right to enforce the
39
<PAGE> 43
rights granted to it directly under this Agreement directly against the
Authority; provided further, that GDB may enforce the rights of the Authority
hereunder as provided in Section 12.05 of the Stock Purchase Agreement.
(b) Purchaser, Strategic Purchaser and the Authority are entering
into the Agreement in their corporate capacity only and no officer, director or
other individual associated therewith or otherwise shall have any personal
liability under this Agreement.
8.12 Endorsement of Stock Certificates.
(a) Each of the certificates representing the Option Shares, or any
of them, shall contain the following legend, in addition to those contained in
Section 7.3 of the Shareholders Agreement, for the term of this Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ISSUED, ACCEPTED AND
HELD SUBJECT TO THE TERMS OF A CERTAIN SHARE OPTION AGREEMENT DATED
AS OF MARCH 2, 1999. A COPY OF SUCH AGREEMENT MAY BE INSPECTED AT
THE PRINCIPAL OFFICE OF THIS CORPORATION. NEITHER THIS CERTIFICATE
NOR THE SHARES REPRESENTED HEREBY ARE SUBJECT TO SALE, TRANSFER OR
OTHER DISPOSITION OR ENCUMBRANCE EXCEPT AS PERMITTED IN SAID
AGREEMENT. THE HOLDER OF THIS CERTIFICATE, BY THE ACCEPTANCE HEREOF,
AGREES TO ALL THE TERMS OF SAID AGREEMENT WHICH ARE INCORPORATED
HEREIN."
(b) A copy of this Agreement shall be delivered to the Secretary of
the Company, kept with the corporate records of the Company and shall be shown
by him to any person making inquiry concerning it and having a proper business
purpose.
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<PAGE> 44
(c) The Company agrees that it will not cause or permit the transfer
of any Option Shares to be made on its books unless the transfer is permitted by
this Agreement and has been made in accordance with the terms hereof.
41
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto here caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:____________________________________
Name:
Title:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:____________________________________
Name:
Title:
PUERTO RICO TELEPHONE AUTHORITY
By:____________________________________
Name:
Title:
TELECOMUNICACIONES DE PUERTO RICO, INC.
By:____________________________________
Name:
Title:
<PAGE> 46
APPENDIX A
"Act No. 54" has the meaning set forth in the recitals hereto.
"Adverse Consequences" shall have the meaning set forth in Section 6.01
hereof.
"Affiliated Group" shall mean the Company and its subsidiaries.
"Agreement" means this Agreement and all Exhibits and Schedules hereto.
"Authority" has the meaning set forth in the recitals hereto.
"Authority Act" has the meaning set forth in Section 2.01 hereof.
"Authority Indemnitees" has the meaning set forth in Section 6.02 hereof.
"Authorizing Legislation" has the meaning set forth in the recitals
hereto.
"Closing" has the meaning set forth in Section 1.03 hereof.
"Closing Date" has the meaning set forth in Section 1.03 hereof.
"Communications Act" has the meaning set forth in Section 2.03(i) hereof.
"Company" has the meaning set forth in the preamble hereto.
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<PAGE> 47
"Date of Notice of Claim" has the meaning set forth in Section 6.07
hereof.
"Disposition" has the meaning set forth in Section 2.07 hereof.
"Exercise Date" has the meaning set forth in Section 1.02 hereof.
"Exercise Price" has the meaning set forth in Section 1.01 hereof.
"Expiration Date" has the meaning set forth in the Section 1.01 hereof.
"FCC" means the United States Federal Communications Commission.
"FCC Licenses" has the meaning set forth in Section 2.03(i) hereof.
"FCC Rules" has the meaning set forth in Section 2.03(i) hereof.
"GDB" means the Government Development Bank for Puerto Rico.
"Governmental Action" has the meaning set forth in Section 3.09 hereof.
"Governmental Authority" means any foreign, federal, state, Puerto Rico,
municipal, local or other government or governmental agency, authority, court,
department, commission,
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board, agency or instrumentality, including but no limited to the European
Union, or any employee or agent thereof.
"GTE Companies" has the meaning set forth in Section 3.10(a) hereof.
"HSR Act" has the meaning set forth in Section 2.03(ii) hereof.
"Indemnitee" has the meaning set forth in Section 6.03 hereof.
"Indemnitor" has the meaning set forth in Section 6.03 hereof.
"Joint Resolution" has the meaning set forth in the recitals hereto.
"knowledge" means the actual knowledge of any member of the Board of
Directors or senior executive officers with the rank of Senior Vice President or
higher of the Person, and in the case of the Company, Vice Presidents of the
Company with responsibility for finance, accounting, legal, environmental and
human resources matters, and the Treasurer.
"Lien" shall mean, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
"Minority Shareholder" has the meaning set forth in Section 1.01 hereof.
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<PAGE> 49
"Minority Shareholder Exercise" has the meaning set forth in Section 1.01
hereof.
"Negotiating Committee" has the meaning set forth in the recitals hereto.
"Notice of Claim" has the meaning set forth in Section 6.03 hereof.
"Option" has the meaning set forth in the recitals hereto.
"Option Notice" has the meaning set forth in Section 1.02(a) hereof.
"Option Shares" has the meaning set forth in the recitals hereto.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a body corporate, a limited liability
company, an unlimited company, an unlimited liability company, a trust, a joint
venture, an unincorporated organization, or a Governmental Authority.
"Pro Rata Portion of Option Shares" means that number of Option Shares
equal to the number of Option Shares multiplied by a fraction, the numerator of
which is the aggregate number of Shares owned by the Minority Shareholder and
the denominator of which is the number of Shares acquired by the Purchaser Group
on the date hereof.
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<PAGE> 50
"Purchaser" has the meaning set forth in the preamble hereto.
"Purchaser Entities" has the meaning set forth in Section 1.05(c) hereof.
"Purchaser Group" means Purchaser, Strategic Purchaser, Popular, Inc. and
any of their respective affiliates, partners, agents and representatives other
than the Affiliated Group.
"Purchaser Indemnitees" shall have the meaning set forth in Article 6.01
hereof.
"Purchaser Interests" has the meaning set forth in the recitals hereto.
"Returns" has the meaning set forth in Section 3.10(a) hereto.
"Shareholders Agreement" means the Shareholders Agreement dated as of the
date hereof among the Authority, the Company, Purchaser, Strategic Purchaser and
the Minority Shareholder.
"Shares" has the meaning set forth in the recitals hereto.
"Stock Purchase Agreement" has the meaning set forth in the recitals
hereof.
"Strategic Purchaser" has the meaning set forth in the preamble hereto.
"Supplemental Exercise Price" has the meaning set forth in Section 1.05(c)
hereof.
5
<PAGE> 51
"Transfer" has the meaning set forth in Section 1.05(c) hereof.
"Transfer Closing Date" has the meaning set forth in Section 1.05(c)
hereof.
"Transfer Price" has the meaning set forth in Section 1.05(c) hereof.
"Trust" means the employee plan and trust contemplated in Section 8.02(l)
in the Stock Purchase Agreement.
6
<PAGE> 1
Exhibit 10.12
================================================================================
STOCK PURCHASE AGREEMENT
Dated as of
March 1, 1999
between
PUERTO RICO TELEPHONE AUTHORITY
and
TELECOMUNICACIONES DE PUERTO RICO, INC.
================================================================================
<PAGE> 2
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement") dated as of March 1, 1999, by
and between Puerto Rico Telephone Authority (the "Authority" or "Seller"), a
public corporation and government instrumentality of the Commonwealth of Puerto
Rico ("Puerto Rico"), and Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico
corporation ("TELPRI" or "Buyer").
WHEREAS, the Authority, Puerto Rico Telephone Company (the "Company"), GTE
Holdings (Puerto Rico) LLC and GTE International Telecommunications Incorporated
entered into an Amended and Restated Stock Purchase Agreement dated as of July
21, 1998 (as amended from time to time, the "Stock Purchase Agreement"),
pursuant to which the Authority agreed to sell a majority interest in the
Company;
WHEREAS, in order to comply with requirements imposed by the Federal
Communications Commission, and pursuant to authority granted under Act No. 54 of
August 4, 1997 and Joint Resolution No. 209 of June 24, 1998 (collectively, the
"Authorizing Legislation"), the Authority organized two Puerto Rico
corporations, Puerto Rico Telephone Company, Inc. ("PRTC") and Celulares
Telefonica, Inc. ("CTI"), and transferred all assets and liabilities of the
Company relating to its wireless business to CTI and then merged the Company
into PRTC;
WHEREAS, pursuant to authority granted under the Authorizing Legislation,
the Authority organized TELPRI for the purpose of transferring to TELPRI all of
the shares of common stock, $0.01 par value per share, of PRTC (the "PRTC
Shares") and all of the shares of common stock, $0.01 par value per share, of
CTI (the
<PAGE> 3
"CTI Shares") in exchange for shares of common stock of TELPRI and a cash
payment of $100,000; and
WHEREAS, the Authority is the owner of 589,000 PRTC Shares, representing
100% of the issued and outstanding capital stock of PRTC, and 411,000 CTI
Shares, representing 100% of the issued and outstanding capital stock of CTI
(collectively, the "Shares").
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase of Shares. The Authority hereby agrees to sell, assign,
transfer, convey and deliver to Buyer, and Buyer agrees to purchase, from the
Authority, the Shares. In full consideration therefor, Buyer agrees to (i) issue
1,000,000 shares of its common stock (the "TELPRI Shares"), representing all of
its issued and outstanding capital stock, and (ii) deliver such TELPRI shares to
the Authority and pay the Authority $100,000 in cash or in immediately available
funds by wire transfer to an account designated in writing by the Authority
(together with the TELPRI Shares, the "Purchase Price").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY
The Authority hereby represents and warrants to Buyer that:
2.01 Existence and Power. The Authority is validly existing as a public
corporation under the laws of Puerto Rico and has all requisite power, authority
and legal right to conduct its affairs as currently conducted.
2.02 Corporate Authorization.
2
<PAGE> 4
(a) The execution, delivery and performance by the Authority of this
Agreement and the documents to be delivered in connection herewith are within
the Authority's powers and have been duly authorized by the Governing Board of
the Authority and, upon execution thereof, will be duly executed and delivered
by the Authority.
(b) This Agreement constitutes the valid and binding agreement of
the Authority, enforceable against it in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors generally, by
general equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) or by an implied covenant of
good faith and fair dealing.
2.03 Capitalization. The Authority is currently the record and beneficial
owner of all the issued and outstanding PRTC Shares and CTI Shares.
2.04 No Broker. The Authority has not authorized any broker, dealer, agent
or finder to act on its behalf nor does Seller have any knowledge of any broker,
dealer, agent or finder purporting to act on its behalf with respect to this
transaction.
2.05 Title to Shares. Upon delivery of the Purchase Price to the
Authority, in accordance with the terms of this Agreement, the Shares will be
validly issued, fully paid, and non-assessable and free of preemptive rights,
and upon delivery of the Shares to Buyer, Buyer will acquire good and
indefeasible title to the Shares, free and clear of any and all liens, claims or
encumbrances of any kind, other than liens, claims or encumbrances created by or
through the Authority.
ARTICLE III
3
<PAGE> 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Authority that:
3.01 Existence and Power; Capitalization. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of Puerto
Rico and has all requisite power, authority and legal right to conduct its
affairs as currently conducted. Buyer's authorized capitalization consists of
10,000,000 shares of common stock, none of which are issued and outstanding.
3.02 Corporate Authorization.
(a) The execution, delivery and performance by Buyer of this
Agreement and the documents to be delivered in connection herewith are within
Buyer's powers and have been duly authorized by the Board of Directors of Buyer
and, upon execution thereof, will be duly executed and delivered by Buyer.
(b) This Agreement constitutes the valid and binding agreement of
Buyer, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors generally, by
general equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) or by an implied covenant of
good faith and fair dealing.
3.03 Investment Intent. Buyer understands that the Shares have not been
registered under the Securities Act of 1933, as amended, or any other applicable
state or federal securities law. Buyer is purchasing the Shares for investment,
for its own account, and with no present intention of reselling, directly or
indirectly participating in any distribution of or otherwise
4
<PAGE> 6
disposing of the Shares, except in compliance with applicable securities laws.
3.04 No General Solicitation. The Shares were not offered to Buyer by
means of general solicitations, publicly disseminated advertisements or sales
literature.
3.05 No Brokers. Buyer has not authorized any broker, dealer, agent or
finder to act on its behalf nor does Buyer have any knowledge of any broker,
dealer, agent or finder purporting to act on its behalf with respect to this
transaction.
3.06 Issuance of and Title to TELPRI Shares. Upon delivery of the Shares
to Buyer, in accordance with the terms of this Agreement, Buyer shall issue and
register in the name of the Authority one or more certificates evidencing the
TELPRI Shares being issued in connection herewith. Upon issuance, the TELPRI
Shares will be validly issued, fully paid, and non-assessable and free of
preemptive rights, and upon delivery of the TELPRI Shares to the Authority, the
Authority will acquire good and indefeasible title to the TELPRI Shares, free
and clear of any and all liens, claims or encumbrances of any kind, other than
liens, claims or encumbrances created by or through the Authority.
ARTICLE IV
CROSS-RECEIPT
4.1 Receipt of Shares. By execution and delivery of this Agreement, Buyer
hereby acknowledges the receipt of the Shares.
4.2 Receipt of Purchase Price. By execution and delivery of this
Agreement, the Authority hereby acknowledges receipt of the Purchase Price
(including the TELPRI Shares).
ARTICLE V
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
5
<PAGE> 7
5.1 Survival. The representations and warranties of the parties contained
in this Agreement shall survive the execution and delivery of this Agreement.
5.2 Indemnification by Buyer. Buyer shall indemnify and hold harmless the
Authority from and against any and all claims, losses, liabilities and damages,
including, without limitation, amounts paid in settlement, reasonable costs of
investigation and reasonable fees and disbursements of counsel, arising out of
or resulting from the inaccuracy of any Buyer representation or warranty, or the
breach by Buyer of any covenant or agreement, contained herein or in any
instrument or certificate delivered pursuant hereto.
5.3 Indemnification by the Authority. The Authority shall indemnify and
hold harmless Buyer from and against any and all claims, losses, liabilities and
damages, including, without limitation, amounts paid in settlement, reasonable
costs of investigation and reasonable fees and disbursements of counsel, arising
out of or resulting from the inaccuracy of any representation or warranty by the
Authority, or the breach by the Authority of any covenant or agreement,
contained herein or in any instrument or certificate delivered pursuant hereto.
ARTICLE VI
MISCELLANEOUS
6.1 Notices. All notices, requests and other communications to each party
hereunder shall be in writing (including telecopy or similar writing, with
confirmation of receipt) and shall be given:
If to the Authority, to:
Puerto Rico Telephone Authority
c/o Government Development Bank
for Puerto Rico
6
<PAGE> 8
Minillas Government Center
San Juan, Puerto Rico 00940
Telephone: (787) 722-8460
Telecopy: (787) 721-1443
Attention: President
With a copy to
Pietrantoni, Mendez & Alvarez
Banco Popular Center
Suite 1901
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 274-4912
Telecopy: (787) 274-1470
Attention: Manuel R. Pietrantoni
Akin, Gump, Strauss, Hauer & Feld L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
Telephone: (202) 887-4000
Telecopy: (202) 887-4288
Attention: Russell W. Parks, Jr.
If to Buyer, to:
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
12th Floor
Guaynabo, Puerto Rico 00968
Telephone: (787) 793-1818
Telecopy: (787) 792-9830
Attention: President
With a copy to:
GTE International Telecommunications Incorporated
One Stamford Forum
Stamford, Connecticut 06901-3500
Telephone: (203) 965-2105
Telecopy: (203) 965-2332
Attention: Marianne Drost
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
7
<PAGE> 9
6.2 Amendment and Modification. This Agreement may be amended, modified,
or supplemented only by written agreement of both of the parties hereto.
6.3 Waiver of Compliance; Consents. Any failure of a party to comply with
any obligation, covenant, agreement, or condition herein may be waived by the
other party; provided, however, that any such waiver may be made only by a
written instrument signed by the party granting such waiver, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement, or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be given
in writing in a manner consistent with the requirements for a waiver of
compliance as set forth in this Section 6.3, with appropriate notice in
accordance with Section 6.1 of this Agreement.
6.4 Expenses. All fees and expenses (including all fees of counsel and
accountants) incurred by any party in connection with the negotiation, execution
and consummation of this Agreement shall be borne by the party who incurred
them.
6.5 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of Puerto Rico without giving effect to principles of
conflicts of laws.
6.6 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
8
<PAGE> 10
6.7 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein has been made or relied upon by either party hereto.
6.8 Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
6.9 Severability. If any one or more provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or, unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
9
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto here caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
PUERTO RICO TELEPHONE AUTHORITY
By:
-------------------------------------
Name:
Title:
TELECOMUNICACIONES DE PUERTO
RICO, INC.
By:
-------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.14
ESOP LOAN AGREEMENT
THIS ESOP LOAN AGREEMENT (the "Loan Agreement"), executed and delivered
this 2nd day of March 1999, by and between the TRUST OF THE EMPLOYEE STOCK
OWNERSHIP PLAN OF TELECOMUNICACIONES DE PUERTO RICO, INC. (the "Borrower"), and
Telecomunicaciones de Puerto Rico, Inc., a corporation organized and existing
under the laws of Puerto Rico (the "Company").
W I T N E S S E T H:
WHEREAS, U.S. Trust Company, National Association ("UST") is trustee of
Borrower pursuant to the terms of a Trust Agreement dated as of March 2, 1999 by
and between the Company and UST; and
WHEREAS, the Borrower wishes to borrow from the Company and the Company has
agreed to lend to the Borrower the principal sum of Twenty Six Million and One
Hundred Thousand Dollars (U.S. $26,100,000.00) in order to finance the
acquisition of securities of the Company for the benefit of the participants and
beneficiaries of the Employee Stock Ownership Plan of Telecomunicaciones de
Puerto Rico, Inc. ("ESOP").
NOW, THEREFORE, in consideration of the agreements, covenants,
representations and warranties set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Company hereby agree as follows:
ARTICLE I
THE LOAN
Section 1.01. The Loan. Upon the terms and subject to the conditions
contained herein, the Company shall lend to the Borrower, and the Borrower shall
borrow from the Company, the principal amount of $26,100,000.00 (the "Loan").
The proceeds of the Loan shall be used by the Borrower solely for the purpose of
acquiring shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Company for the Borrower in such a manner that the Loan shall
constitute an Exempt Loan as defined in the trust agreement which established
the Borrower. The Loan shall be evidenced by, and repayable in accordance with,
a promissory note of the Borrower substantially in the form of Exhibit A hereto,
with the blanks appropriately filled in (the "Note").
Section 1.02. Interest Rate. Interest shall accrue on the outstanding
principal balance of the Loan at a rate equal to (i) LIBOR plus 2.25 percent
(2.25%) per annum, or (ii) in the event that LIBOR for any period shall not be
available, then the Prime Rate. For purposes hereof: "LIBOR" shall mean the
London Interbank Offered Rate, as quoted from time to time in the Wall Street
Journal, for funds borrowed for an interest period of one (1) year. The "Prime
Rate" shall mean the Prime Rate as quoted from time to time in the Wall Street
Journal. The
<PAGE> 2
interest rate applicable to the Loan shall be determined for each year,
commencing on the date of borrowing hereunder and on each successive anniversary
thereof. In the case of LIBOR, such rate shall be determined as of the close of
business on the second Business Day preceding the date of determination. The
Prime Rate shall be the Prime Rate as quoted from time to time for each day
during the period for which such rate is applicable. Interest shall be
calculated based on a year of 365 days or 366 days (as the case may be) and the
actual number of days elapsed.
Section 1.03. Installment Payments. On December 31, 1999, the Borrower
shall pay to Lender the interest accrued on the Loan for the period ending
December 31, 1999. The Loan shall amortize over a period of twenty (20) years,
and the principal thereof together with interest thereon shall be payable in
accordance with the amortization schedule set forth in Exhibit B hereto. On any
payment date in any given year pursuant to this Section 1.03, the accrued
interest being paid shall be the interest that would have accrued if such
payment date were December 31st of such year. The unpaid principal balance, and
accrued and unpaid interest, together with other charges and fees, if any, shall
be due and payable on the last Business Day of December, 2019.
Section 1.04. Prepayment. (a) Optional Prepayment. The Borrower may prepay
the Loan, in whole, without payment of any penalty or premium, at any time or
times upon five Business Days written notice to the Company.
(b) Mandatory Prepayment. The Borrower shall prepay the Loan, on an annual
basis, out of any excess cash available on the first Business Day following the
first day on which distributions to participants are made under the ESOP during
a year. "Excess cash" shall mean any cash comprising assets of the Borrower
after payment by the Borrower of the expenses and liabilities thereof for the
prior year, including interest and regularly scheduled principal on the Loan,
and all amounts payable as distributions to participants for the prior year out
of the assets of the Borrower, but only to the extent the cash represents
amounts described in Section 1.06 (b) or (c), below, or dividends on shares
purchased with the Loan that have been allocated to the accounts of participants
under the ESOP.
Section 1.05. Security. The Note shall be secured pursuant to the terms of
a pledge agreement, substantially in the form of Exhibit C hereto, with the
blanks appropriately filled in (the "Pledge Agreement"). As used herein, the
term "Collateral" shall have the meaning ascribed to such term in the Pledge
Agreement.
Section 1.06. Non-Recourse Nature of Loans. No Person (as defined below,
including, but not limited to, the Company and any subsequent holder of the
Note) entitled to payment with respect to the Loan (whether under this
Agreement, the Pledge Agreement, the Note or otherwise) shall have any right of
recourse against the Borrower (or UST in its individual capacity) with respect
to the Loan or shall have any right to assets of the Borrower with respect to
the Loan other than:
(a) the Collateral;
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<PAGE> 3
(b) participant contributions, if any, and Company contributions,
other than contributions of employer securities, to the Borrower under the
ESOP to meet the Borrower's obligations hereunder or under the Note; and
(c) earnings attributable to the Collateral and the investment of
non-excluded contributions referred to in Section 1.06(b) above.
The Borrower shall account for such earnings and nonexcluded contributions
separately on its books of account until the Loan is repaid. Notwithstanding the
foregoing, in the event of any default with respect to the Loan, the value of
any assets of the Borrower applied in satisfaction of the Loan shall not exceed
the amount of the default, and if the Person (including, but not limited to, the
Company and any subsequent holder of the Note) for whose benefit such assets are
or would be applied is a disqualified person within the meaning of Section
4975(e)(2) of the Internal Revenue Code of 1986, as amended (the "Code") with
respect to the Borrower, such application of assets of the Borrower upon a
default with respect to the Loan shall be made only upon and to the extent of
the failure of the Borrower to meet the payment schedule of the Loan. The
provisions of this Section 1.06 shall apply notwithstanding any other provision
to the contrary contained in this Agreement, the Pledge Agreement or the Note.
Section 1.07. Application of Payments. All payments made in connection
with this Agreement or under the Note shall be applied in the following order
with no portion of such payment applied to a subsequently listed item until all
previous items have been paid in full:
(a) to interest on the Note then due and payable; and
(b) to the unpaid principal balance of the Note in the order of the
next succeeding annual installments.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.01. Representations and Warranties of the Borrower. The
Borrower represents and warrants that the following are true and correct as of
the date of this Agreement:
(a) Authority. The Borrower, acting by and through the Trustee, has
all requisite power, authority and legal right to execute and deliver this
Agreement, the Pledge Agreement and the Note and to perform its obligations
hereunder and thereunder.
(b) Enforceability. This Agreement, the Pledge Agreement and the Note
will constitute valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms, except as
the enforceability hereof and thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
or other laws affecting the enforcement of creditors' rights generally and
by general principles of equity.
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<PAGE> 4
Section 2.02. Representations and Warranties of the Company. The
Company represents and warrants that the following are true and correct as of
the date of this Agreement:
(a) Authority. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action. This Agreement has been duly executed and
delivered by the Company and, assuming due execution and delivery by
the Borrower, constitutes a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms,
except as the enforceability hereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
(b) No Violations. The execution, delivery, performance and
compliance with the terms, of this Agreement by the Company does not
and will not, and consummation by the Company of the transactions
contemplated by this Agreement will not, (i) result in a violation of
any laws applicable to the Company or any of its subsidiaries; (ii)
result in the violation of the constituent documents of the Company or
any of its subsidiaries; (iii) result in the breach of, or constitute
a default under, or permit the acceleration of any obligation under,
any agreement or instrument to which the Company or any of its
subsidiaries is a party or by which any of them or any of the
respective assets of the Company and its subsidiaries is bound; (iv)
result in the mandatory acceleration, redemption, payment or
prepayment of any obligation of the Company or any of its subsidiaries
under any such agreement or instrument or afford the holder of any
such obligation the right to require the Company or any of its
subsidiaries to purchase, redeem or otherwise acquire, reacquire or
repay any such obligation; (v) result in the creation or imposition in
favor of any person of any lien upon any of the assets of the Company
or any of its subsidiaries; or (vi) constitute an event which, after
notice or lapse of time or both, would result in any of the foregoing.
(c) Prohibited Transactions. Assuming the Borrower has properly
discharged its fiduciary duties pursuant to ERISA and complied with
the applicable provisions of the Code, the execution, delivery and
performance by the Company of this Agreement and the Pledge Agreement
do not involve or constitute: (i) a non-exempt "prohibited
transaction" within the meaning of Section 406 of ERISA or (ii) a
non-exempt "prohibited transaction" within the meaning of Section
4975(c) of the Code.
ARTICLE III
CONDITIONS TO LOAN
Section 3.01. Conditions Precedent to Loan. The obligation of the
Company to make the Loan shall be subject to the prior or concurrent
satisfaction of the following conditions:
(a) Note. The Borrower having executed and delivered the Note;
and
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<PAGE> 5
(b) Pledge Agreement. The Borrower having executed and delivered
the Pledge Agreement, together with all documents referred to therein.
ARTICLE IV
EVENTS OF DEFAULT
Section 4.01. Events of Default. If any one or more of the
following events (each, an "Event of Default") shall occur and be continuing:
(a) Payment Default Under Note. Default shall be made in the
payment of any principal of or interest on the Note for more than five
(5) Business Days after the same shall become due and payable, whether
at a date fixed for the payment of an installment or at final
maturity, if the Borrower has sufficient available funds under the
ESOP for the payment on the Note and if not, after the Company has
contributed sufficient funds to the Borrower to pay such amount; or
(b) Representations and Warranties. If any representation or
warranty made by the Borrower in this Agreement shall cease to be true
or shall prove to have been false in any material respect on the date
as of which made, and such representation or warranty is not corrected
or made good within thirty (30) days after written notice thereof
shall have been given to the Borrower by the Company; or
(c) Other Covenants. Default shall be made in the due observance
or performance of any other material covenant or agreement contained
in this Agreement or the Note to be observed or performed by the
Borrower and such default shall remain unremedied for thirty (30) days
after written notice thereof shall have been given to the Borrower by
the Company; or
(d) Pledge Agreement. Default shall be made in the due observance
or performance of any covenant or agreement or obligation of the
Borrower under the Pledge Agreement or any event of default shall
occur and continue under the Pledge Agreement and, in each case, shall
remain unremedied for thirty (30) days after written notice thereof
shall have been given to the Borrower by the Company;
then, and in every such event, the Company may, at its option, exercise its
rights with respect to the Collateral. Subject to Section 1.06 hereof, if any
Event of Default shall occur and be continuing, the Company or any subsequent
holder of the Note may declare any outstanding principal and accrued interest on
the Note to be immediately due and payable.
Section 4.02. Remedies. Each of the rights, powers and remedies
of the Company set forth in this Agreement and the Pledge Agreement may be
exercised alternatively or conjunctively and at such times, in such order and
from time to time, all as determined by the Company. No partial exercise of any
right, remedy or power by the Company shall preclude any further exercise of
such right, power or remedy or the exercise of any other right, power or remedy
consistent with the terms hereof. The rights, remedies and powers of the Company
set
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<PAGE> 6
forth herein or in the Pledge Agreement are cumulative and are in addition
to any provided by law or in equity. No delay or omission on the part of the
Company in exercising any right, power or remedy shall impair such right, power
or remedy or be construed as a waiver of any Event of Default or acquiescence
therein. No waiver of any Event of Default shall extend to any subsequent Event
of Default of the same or a dissimilar nature. The Company, in its discretion,
may proceed against the Collateral without first proceeding against the
Borrower.
ARTICLE V
DEFINITIONS
Section 5.01. Additional Definitions. The terms defined in this
Section 5.01, which are in addition to terms defined elsewhere in this
Agreement, shall have the meanings indicated below.
"Business Day" - means any Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York are
authorized or obligated to close by law or executive order, and for purposes of
the definition of LIBOR in Section 1.02 hereof, a day on which transactions are
effected in the London interbank market.
"ERISA" - means the Employee Retirement Income Security Act of
1974, as from time to time in effect or as otherwise expressly specified herein,
and references to particular sections or provisions of ERISA (or the Code)
include any successor section covering substantially the same subject matter or
area covered by the specified section on the date hereof as well as all rules,
regulations and orders issued pursuant thereto.
"Person" - includes an individual, a corporation, a partnership,
a limited liability company, a government or agency or political subdivision
thereof, a trust, joint venture, employee organization and an "employee benefit
plan," as defined in Section 3 of ERISA.
Section 5.02. Time. As used in this Agreement, a "day" is a
calendar day except in those instances where reference is expressly made to
Business Days.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Notices. All notices, consents and demands
hereunder shall be in writing and mailed by first class mail, postage prepaid,
to the Borrower to:
-6-
<PAGE> 7
Dennis M. Kunisaki
U.S. Trust Company, National Association
515 South Flower Street
Los Angeles, California 90171
Telephone: (213) 861-5073
Fax: (213) 488-1366
With a copy to:
Ronald S. Rizzo
Jones, Day, Reavis & Pogue
77 West Wacker, Suite 3500
Chicago, Illinois 60601-1692
Telephone: (312) 782-3939
Fax: (312) 782-8585
To the Company:
Vice President of Human Resources
Telecomunicaciones de Puerto Rico, Inc.
1515 Franklin D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
Telephone: (787) 793-1818
Fax: (787) 792-9830
With a copy to:
GTE International Telecommunications Incorporated
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
Section 6.02. Survival of Representations and Warranties. All
representations and warranties made in this Agreement or otherwise in writing in
connection herewith shall survive the execution and delivery of this Agreement,
any investigation at any time made by any Person, the execution and delivery of
the Note and the making of the Loan provided for in this Agreement.
Section 6.03. Entire Agreement. This Agreement, together with the
Stock Purchase Agreement, the Pledge Agreement and the Note, embodies the entire
agreement and understanding between the Borrower and the Company with respect to
the subject matter hereof and supersedes all prior agreements and understandings
relating to the subject matter hereof. The Company and the Borrower may enter
into further and additional written agreements to amend or supplement this
Agreement, and the terms and provisions of such further or additional written
-7-
<PAGE> 8
agreements shall be deemed a part of this Agreement as though incorporated
herein. No amendment of, modification or supplement to, or waiver of any
provision of, this Agreement shall in any event be effective unless in writing
and signed by the parties hereto.
Section 6.04. Parties in Interest. All the terms and provisions
of this Agreement shall inure to the benefit of and be binding upon and
enforceable by the parties hereto and their respective successors and assigns,
except that neither the Borrower nor the Company shall assign its respective
rights hereunder without the prior written consent of the other party; provided,
however, that the Company may at any time and without the prior consent of the
Borrower grant a security interest in any or all of its rights under this
Agreement, the Pledge Agreement and the Note.
Section 6.05. Construction; Governing Law. This Agreement and the
Note shall be governed by, and construed and enforced in accordance with, the
laws of the State of New York without reference to the State of New York's
conflict of laws provisions. The parties hereto intend that the Loan provided
for herein shall be an "exempt loan" within the meanings of Section 408(b)(3) of
ERISA and Section 4975(d)(3) of the Code, and that the terms of this Agreement
shall be construed in a manner consistent with that intention.
Section 6.06. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original, but both of which
taken together shall constitute one agreement.
IN WITNESS WHEREOF, the parties have caused this Loan Agreement
to be executed on the date first above written by their respective officers
thereunto duly authorized.
-8-
<PAGE> 9
TRUST OF THE EMPLOYEE STOCK
OWNERSHIP PLAN OF
TELECOMUNICACIONES DE PUERTO RICO,
INC.
By: U.S. TRUST COMPANY, NATIONAL
ASSOCIATION, solely in its capacity as
trustee and not in its individual capacity
By:
---------------------------------------
Name: Norman P. Goldberg
Title: Managing Director
TELECOMUNICACIONES DE PUERTO RICO,
INC.
By:
---------------------------------------
Name:
Title:
-9-
<PAGE> 1
EXHIBIT 10.17
TAG-ALONG AGREEMENT
This Tag-Along Agreement is made as of March 2, 1999, by and among GTE
Holdings (Puerto Rico) LLC, a Delaware limited liability company ("Purchaser"),
GTE International Telecommunications Incorporated, a Delaware corporation and
the sole holder of equity interests of Purchaser ("Strategic Purchaser"), and
the Trust of the Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (the "Trust"), with reference to the following facts:
A. Purchaser is the registered and beneficial owner of 40.01% plus one
share of the total issued and outstanding shares, par value $0.01 per share (the
"Shares"), of Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation
(the "Company"), and has an option to acquire an additional 15% of the Shares of
the Company.
B. The Trust was established to fund benefits under the Employee Stock
Ownership Plan of Telecomunicaciones de Puerto Rico, Inc. and has agreed to
purchase 30,000 Shares from the Puerto Rico Telephone Authority, subject to
Purchaser's and Strategic Purchaser's entering into this Agreement.
C. As used in this Agreement, the term "Seller" means Purchaser, Strategic
Purchaser, and the GTE Permitted Transferees (as defined in Section 1, below).
NOW, THEREFORE, it is agreed by and among the parties as follows:
1. In the event that Purchaser, Strategic Purchaser and/or their GTE
Permitted Transferees (as such term is defined in that
-10-
<PAGE> 2
certain Shareholders Agreement (the "Shareholders Agreement") dated as of March
2, 1999, by and among Purchaser, Strategic Purchaser, the Company, Popular Inc.,
a Puerto Rico corporation, and Puerto Rico Telephone Authority), as applicable,
proposes to, directly or indirectly, sell or otherwise dispose of (any such
event, a "Transfer") any Shares or Purchaser Interests (as such term is defined
in the Shareholders Agreement), as applicable, other than to GTE Permitted
Transferees (the "Offered Shares") in one or a series of related transactions,
which (i) in the aggregate comprise (directly or indirectly) over 7.5% of the
total number of outstanding Shares of the Company or (ii) would result in the
transferee and its affiliates owning, directly or indirectly, over 20% of the
Shares, such Sellers shall promptly give written notice to the Trust at least 20
days prior to the closing of such proposed sale. The notice (the "Tag-Along
Notice") shall describe in reasonable detail the proposed Transfer, including,
without limitation, the name of the buyer, the number of Shares to be directly
or indirectly Transferred by the Seller, the per Share sale price, any other
significant terms of such sale and the date such proposed sale will be
consummated.
2. The Trust shall have the right, exercisable upon written notice to the
Sellers, within 15 days after receipt of the Tag-Along Notice, to participate in
such sale, by selling a pro rata portion of the lesser of (i) 30,000 Shares or
(ii) the aggregate number of Shares then owned by it (the "Trust Shares") to the
buyer on the same terms and conditions as set forth in the Tag-Along Notice, as
determined in accordance with the calculation set forth below (a "Tag-Along
Transaction"). If the Trust elects to participate in the sale described in the
Tag-Along Notice, the Trust shall indicate in its notice of election
-2-
<PAGE> 3
to the Sellers the maximum number of Trust Shares it desires to sell in
connection with such sale. To the extent the Trust exercises such right of
participation in accordance with the terms and conditions set forth in this
Agreement, and the buyer agrees to purchase the Trust Shares indicated by the
Trust in its notice of election, the Trust may sell the same percentage of its
Trust Shares as the Sellers are selling (the "pro rata portion"). In the event
the buyer does not agree to purchase the Trust's Shares in addition to the
Sellers' Shares, the number of Shares or Purchaser Interests, as applicable,
that the Sellers may sell in the transaction shall be correspondingly reduced by
the number of Trust Shares entitled to be sold by the Trust. In this event, the
"pro rata portion" of the Trust shall be the Trust Shares multiplied by a
fraction, (i) the numerator of which is the number of Shares proposed to be,
directly or indirectly, sold by Sellers in the Tag-Along Notice and (ii) the
denominator of which is the sum of (A) the total number of Shares, directly or
indirectly, owned by the Sellers immediately prior to the sale proposed in the
Tag-Along Notice and (B) the Trust Shares owned by the Trust immediately prior
to the sale proposed in the Tag-Along Notice. In the event that the Tag-Along
Transaction involves the sale of Purchaser Interests, the Trust shall be
entitled to sell to the buyer that number of Trust Shares constituting its pro
rata share calculated in accordance with the preceding sentence as if
immediately prior thereto Purchaser was liquidated, each equity holder thereof
received a total distribution of Shares and each such equity holder was the
Seller for purposes of this Section. Not later than five days prior to the date
scheduled for such sale, Sellers shall provide notice to
-3-
<PAGE> 4
the Trust of the "pro rata portion" of Trust Shares to be sold by the Trust in
such sale.
3. The Trust shall effect its participation in the sale by delivering, on
the date scheduled for such sale, to Sellers, for their own accounts or for
delivery to the prospective transferee, as applicable, one or more certificates,
in proper form for transfer, which represent the number of Trust Shares which
the Trust is entitled to sell in accordance with this Agreement. Such stock
certificate or certificates shall be delivered on such date to such transferee
in consummation of the sale of the Offered Shares pursuant to the terms and
conditions specified in the Tag-Along Notice and the Sellers shall concurrently
therewith remit to the Trust that portion of the sale proceeds to which the
Trust is entitled by reason of its participation in such sale. Sellers' sale of
Shares or Purchaser Interests, as applicable, in any sale proposed in a
Tag-Along Notice shall be effected on the terms and conditions set forth in such
Tag-Along Notice. In no event shall any Seller receive special consideration or
a control premium in such sale that is not received by all Sellers, including
the Trust.
4. The exercise or non-exercise of the right of the Trust to participate in
one or more sales subject to this Agreement shall not adversely affect the
Trust's right to participate in subsequent sales of Shares or Purchaser
Interests subject to this Agreement.
5. In the event that the buyer of Offered Shares fails or refuses to
purchase the Trust Shares which the Trust is entitled to sell pursuant to this
Agreement, and if the transaction giving rise to such right closes, then the
Sellers shall be obligated to purchase the same, simultaneously with the closing
of the Tag-
-4-
<PAGE> 5
Along Transaction, for the same per Share price as that received by
the Sellers in the Tag-Along Transaction.
6. Notwithstanding any provision in this Agreement to the contrary:
(a) The Trust shall not be required to make any representation, covenant
or warranty in connection with the Tag-Along Transaction, other than as to the
Trust's ownership and the trustee's authority, on behalf of the Trust, to sell,
free of liens, claims and encumbrances, the Shares proposed to be sold by the
Trust. Sellers shall, without limitation as to time, indemnify and hold
harmless, to the full extent permitted by law, the Trust and the trustee of the
Trust against all losses, claims, damages, liabilities, costs (including costs
of preparation) and expenses (including reasonable attorney's fees) arising out
of or relating to any representation or warranty made by, or covenant of,
Sellers or the Company or any agent, employee, officer or director of any of
them in connection with or relating to, or under the terms of each agreement
entered into in connection with, such Tag-Along Transaction, except insofar as
the same are based solely upon written information furnished in writing to
Sellers or the Company by the Trust expressly for use therein.
(b) If Sellers have agreed to sell any Shares for non-cash
consideration, the buyer's offer shall include (or, at the option of Sellers,
Sellers may otherwise provide) an option for the Trust to participate in such
Tag-Along Transaction and to select as consideration for its sale either its pro
rata share of such non-cash consideration or cash in the amount of the fair
market value of such non-cash consideration.
-5-
<PAGE> 6
(c) The Trust's right to effect a sale of Trust Shares hereunder shall
terminate on March 1, 2009.
7. Any notice or other communication under this Agreement shall be in
writing and shall be considered given when delivered in person, sent by telefax
transmission or mailed by certified mail, return receipt requested, to the
parties at the following addresses or telefax numbers (or at such other address
or telefax number as a party may specify by notice to the others):
If to Purchaser or Strategic Purchaser, at:
GTE Holdings (Puerto Rico) LLC
5221 North O'Connor Boulevard
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
with a copy to:
GTE International Telecommunications Incorporated
Irving, Texas 75039
Telephone: (972) 718-5000
Telecopy: (972) 718-2916
Attention: Fares Salloum
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
Telephone: (212) 696-6000
Telecopy: (212) 697-1559
Attention: Matias A. Vega
If to the Trust, at:
U.S. Trust Company, National Association
515 South Flower Street
Los Angeles, California 90071
Telephone: (213)861-5073
Telecopy: (213)488-1366
Attention: Dennis M. Kunisaki
-6-
<PAGE> 7
with a copy to:
Jones, Day, Reavis & Pogue
77 West Wacker Drive, Suite 3500
Chicago, Illinois 60601
Telephone: (312)782-3939
Telecopy: (312)782-8585
Attention: Ronald S. Rizzo
8. No waiver of any provision of this Agreement in any instance shall be,
or for any purpose be deemed to be, a waiver of the right of any party hereto to
enforce strict compliance with the provisions hereof in any subsequent instance.
9. Each party hereto and its successors and assigns shall perform any
further acts and execute and deliver any documents which may reasonably be
necessary to carry out the provisions of this Agreement.
10. No provision of this Agreement may be amended, modified or waived
without the written approval of each of the parties hereto.
11. This Agreement may be executed in multiple counterparts, subject to the
execution of at least one of such counterparts by each of the parties hereto.
12. Every provision of this Agreement is intended to be severable and if
any term or all or part of any provision hereof is held by judicial decision to
be invalid, such invalidity shall not affect the validity of the remainder of
this Agreement.
13. This Agreement is intended by the parties hereto as a final expression
of their agreement and understanding with respect to the subject matter hereof
and supersedes any and all prior and contemporary agreements and understandings.
-7-
<PAGE> 8
14. This Agreement shall be construed and interpreted in accordance with
the laws of the State of California, without giving effect to its principles of
conflicts of laws.
15. When necessary, the singular shall include the plural and vice versa.
16. This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto. None of the rights or obligations of the parties
hereunder may be assigned (other than to a GTE Permitted Transferee), and no
other person or party shall be a third party beneficiary of this Agreement.
17. Each of the parties hereto acknowledges that the other parties will be
irreparably damaged and will have no adequate remedy at law in the event of a
breach or threatened breach of obligations hereunder and shall be entitled to
such equitable and injunctive relief as may be available to restrain a violation
of, or threatened violation of, or to specifically enforce, this Agreement.
Nothing herein shall be deemed to preclude any party from pursuing any other
remedies available under this Agreement or otherwise to such party for such
breach or threatened breach, including the recovery of damages.
18. Any legal action or proceeding with respect to this Agreement shall be
brought in the United States District Court for the Southern District of
California (by way of summary judgment in lieu of complaint if procedure so
permits) or, if such court lacks subject matter jurisdiction, in the courts of
California situated in Los Angeles County. By execution and delivery of this
Agreement, each of the parties hereby irrevocably accepts for itself and in
respect of its property, generally and unconditionally, the jurisdiction of the
aforesaid courts and irrevocably consents to the service of process out of
-8-
<PAGE> 9
any of the aforementioned courts in any such action or proceeding by the mailing
of copies thereof by registered or certified mail, postage prepaid, to such
party at its address set forth in Section 7, such service to become effective 30
days after such mailing. Nothing herein shall affect the right of any party
hereto to serve process in any other manner permitted by law. Each of the
parties hereto hereby irrevocably waives any objection which it may now or
hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement brought in the
courts referred to in this Section and hereby further irrevocably waives and
agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
GTE HOLDINGS (PUERTO RICO) LLC
By:
-----------------------------------
Name:
Title:
GTE INTERNATIONAL
TELECOMMUNICATIONS INCORPORATED
By:
-----------------------------------
Name:
Title:
TRUST OF THE EMPLOYEE
STOCK OWNERSHIP PLAN OF
TELECOMUNICACIONES DE PUERTO
RICO, INC.
By: U.S. TRUST COMPANY, NATIONAL
ASSOCIATION, SOLELY IN ITS
CAPACITY AS TRUSTEE AND NOT IN
ITS INDIVIDUAL CAPACITY
By:
-----------------------------------
Name: Norman P. Goldberg
Title: Managing Director
-10-
<PAGE> 1
Exhibit 12.1
Telecomunicaciones de Puerto Rico, Inc.
Statement Regarding Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
Pro Forma (1) Pro Forma (1)
---------------- -----------------
(Dollars in millions)
<S> <C> <C>
Net earnings available for fixed charges:
Net income $ 1.7 $ 15.8
Add: Income taxes 1.1 10.1
Fixed charges 46.7 100.4
---------------- -----------------
Adjusted earnings $ 49.5 $ 126.3
---------------- -----------------
Fixed charges $ 46.7 $ 100.4
---------------- -----------------
RATIO OF EARNINGS TO FIXED CHARGES 1.1 1.3
</TABLE>
Note: The Company's fixed charges were nominal prior to the acquisition since
there was no significant indebtedness.
(1) Refer to "Unaudited Pro Forma Condensed Consolidated Financial
Statements" for a description of the pro forma adjustments.
<PAGE> 1
EXHIBIT 15.1
[LETTERHEAD OF DELOITTE & TOUCHE]
August 13, 1999
Telecomunicaciones de Puerto Rico, Inc.
1515 F.D. Roosevelt Avenue
Guaynabo, PR 00968
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Telecomunicaciones de Puerto Rico, Inc. and subsidiaries as of
June 30, 1999 and for the six months periods ended June 30, 1999 and 1998, as
indicated in our report dated August 13, 1999; because we did not perform an
audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in the
Prospectus, is being used in this Registration Statement.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANTS
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION NAME UNDER WHICH IT DOES BUSINESS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Puerto Rico Telephone Company, Inc. Commonwealth of Puerto Rico Puerto Rico Telephone Company, Inc.
- ---------------------------------------------------------------------------------------------------------------------
Celulares Telefonica, Inc. Commonwealth of Puerto Rico Celulares Telefonica, Inc.
- ---------------------------------------------------------------------------------------------------------------------
PRTC Directories, Inc. Commonwealth of Puerto Rico PRTC Directories, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 23.1
[LETTERHEAD OF DELOITTE & TOUCHE]
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this 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 consolidated financial statements of
Telecomunicaciones de Puerto Rico, Inc. and subsidiaries (the "Predecessors") as
of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998, 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 Summary Historical and Pro
Forma Financial and Operating Data and the Selected Historical Financial and
Operational Data.
Deloitte & Touche LLP
San Juan, Puerto Rico
August 13, 1999
<PAGE> 1
Exhibit 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |_|
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S.employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
Telecomunicaciones de Puerto Rico, Inc.
(Exact name of obligor as specified in its charter)
Commonwealth of Puerto Rico 66-0566178
(State or other jurisdiction of (I.R.S.employer
incorporation or organization) identification no.)
Puerto Rico Telephone Company, Inc., as Guarantor
(Exact name of obligor as specified in its charter)
Commonwealth of Puerto Rico 66-0564397
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Celulares Telefonica, Inc., as Guarantor
(Exact name of obligor as specified in its charter)
Commonwealth of Puerto Rico 66-0551848
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1515 F. D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
<PAGE> 2
(Address of principal executive offices) (Zip code)
----------------------
6.15% Senior Notes due 2002
6.65% Senior Notes due 2006
6.80% Senior Notes due 2009
(Title of the indenture securities)
================================================================================
- 2 -
<PAGE> 3
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to Rule
7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit
1 to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 11th day of August, 1999.
THE BANK OF NEW YORK
By: /s/ REMO J. REALE
-------------------------------------
Name: REMO J. REALE
Title: VICE PRESIDENT
- 4 -
<PAGE> 5
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1999,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS In Thousands
<S> <C>
Cash and balances due from
depository institutions:
Noninterest-bearing balances and
currency and coin ....................................... $ 4,508,742
Interest-bearing balances ................................ 4,425,071
Securities:
Held-to-maturity securities .............................. 836,304
Available-for-sale securities ............................ 4,047,851
Federal funds sold and Securities
purchased under agreements to resell ..................... 1,743,269
Loans and lease financing receivables:
Loans and leases, net of unearned
income .................................................. 39,349,679
LESS: Allowance for loan and
lease losses ............................................ 603,025
LESS: Allocated transfer risk
reserve ................................................. 15,906
Loans and leases, net of unearned
income, allowance, and reserve .......................... 38,730,748
Trading Assets ............................................. 1,571,372
Premises and fixed assets (including
capitalized leases) ...................................... 685,674
Other real estate owned .................................... 10,331
Investments in unconsolidated subsidiaries
and associated companies ................................. 182,449
Customers' liability to this bank on
acceptances outstanding .................................. 1,184,822
Intangible assets .......................................... 1,129,636
Other assets ............................................... 2,632,309
-----------
Total assets ............................................... $61,688,578
===========
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES
Deposits:
In domestic offices ...................................... $25,731,036
Noninterest-bearing ...................................... 10,252,589
Interest-bearing ......................................... 15,478,447
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ........................ 18,756,302
Noninterest-bearing ...................................... 111,386
Interest-bearing ......................................... 18,644,916
Federal funds purchased and Securities
sold under agreements to repurchase ...................... 3,276,362
Demand notes issued to the
U.S.Treasury ............................................. 230,671
Trading liabilities ........................................ 1,554,493
Other borrowed money:
With remaining maturity of one year
or less ................................................. 1,154,502
With remaining maturity of more than one
year through three years ................................ 465
With remaining maturity of more than
three years ............................................. 31,080
Bank's liability on acceptances executed
and outstanding ......................................... 1,185,364
Subordinated notes and debentures .......................... 1,308,000
Other liabilities .......................................... 2,743,590
-----------
Total liabilities .......................................... 55,971,865
===========
EQUITY CAPITAL
Common stock ............................................... 1,135,284
Surplus .................................................... 764,443
Undivided profits and capital reserves ..................... 3,807,697
Net unrealized holding gains (losses) on
available-for-sale securities ............................ 44,106
Cumulative foreign currency translation
adjustments .............................................. (34,817)
Total equity capital ....................................... 5,716,713
-----------
Total liabilities and equity capital ....................... $61,688,578
===========
</TABLE>
<PAGE> 7
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni --
Alan R. Griffith | Directors
Gerald L. Hassell --
- --------------------------------------------------------------------------------
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
<ARTICLE> 5
<CIK> 0001089357
<NAME> TELECOMUNICACIONES DE PUERTO RICO INC
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELECOMUNICACIONES DE PUERTO RICO,INC.
AND ITS SUBSIDIARIES AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 35,611
<SECURITIES> 0
<RECEIVABLES> 421,140
<ALLOWANCES> 56,003
<INVENTORY> 28,117
<CURRENT-ASSETS> 435,356
<PP&E> 3,689,995
<DEPRECIATION> 1,701,288
<TOTAL-ASSETS> 2,456,604
<CURRENT-LIABILITIES> 347,228
<BONDS> 515
0
0
<COMMON> 10
<OTHER-SE> 1,812,674
<TOTAL-LIABILITY-AND-EQUITY> 2,456,604
<SALES> 1,270,684
<TOTAL-REVENUES> 1,270,684
<CGS> 482,877
<TOTAL-COSTS> 1,043,383
<OTHER-EXPENSES> 6,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 224,367
<INCOME-TAX> 0
<INCOME-CONTINUING> 224,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224,367
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.2
<ARTICLE> 5
<CIK> 0001089357
<NAME> TELECOMUNICACIONES DE PUERTO RICO INC
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELECOMUNICACIONES DE PUERTO RICO,INC.
AND ITS CONSOLIDATED SUBSIDIARIES AS OF JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 63,711
<SECURITIES> 0
<RECEIVABLES> 418,008
<ALLOWANCES> 60,227
<INVENTORY> 33,450
<CURRENT-ASSETS> 468,957
<PP&E> 2,731,093
<DEPRECIATION> 1,000,385
<TOTAL-ASSETS> 2,713,740
<CURRENT-LIABILITIES> 370,581
<BONDS> 1,500,226
0
0
<COMMON> 10
<OTHER-SE> 452,708
<TOTAL-LIABILITY-AND-EQUITY> 2,713,740
<SALES> 670,283
<TOTAL-REVENUES> 670,283
<CGS> 271,241
<TOTAL-COSTS> 609,183
<OTHER-EXPENSES> 1,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,929
<INCOME-PRETAX> 34,025
<INCOME-TAX> 11,729
<INCOME-CONTINUING> 22,296
<DISCONTINUED> 0
<EXTRAORDINARY> (60,500)
<CHANGES> 0
<NET-INCOME> (38,204)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
