<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: DECEMBER 31, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 333-85503
TELECOMUNICACIONES DE PUERTO RICO, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF PUERTO RICO 66-0566178
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1515 FD ROOSEVELT AVENUE
GUAYNABO, PUERTO RICO 00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 787-793-1818
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
None
--------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contain herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Telecomunicaciones de Puerto Rico, Inc. voting
stock held by non-affiliates at February 29, 2000 amounted to zero.
Telecomunicaciones de Puerto Rico, Inc. had 25,000,000 shares of no par common
stock outstanding at February 29, 2000.
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<PAGE> 2
INDEX
<TABLE>
PART I
<S> <C>
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
</TABLE>
<PAGE> 3
PART I
ITEM 1. 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,
Internet access, cellular telephony and paging services and telecommunications
equipment. We also provide network access and billing services to wireline and
wireless operators. We operate the island's largest network of public telephones
and market Puerto Rico's primary telephone directory.
We invested over $1.9 billion from 1994 through December 31, 1999 to
expand and enhance our wireline and wireless networks. Our switching network is
100% digital and encompasses over 73,000 fiber miles and currently uses SONET
technology in a fiber optic ring configuration with speeds up to OC-192. This
network provides the principal transmission medium for most public and special
facilities circuits and supplies direct fiber optic connections to more office
buildings than any other service provider on the island. Our cellular network
utilizes the IS-136 standard with time division multiple access (TDMA) digital
technology and provides island-wide coverage.
We have more than 1.2 million access lines in service, including
961,000 residential and 304,000 business lines. We held a 59% share of the
on-island long distance market and an approximate one-third share of the
cellular market at December 31, 1999.
THE ACQUISITION AND CORPORATE RESTRUCTURING
On April 7, 1997, the Government of the Commonwealth of Puerto Rico
(the "Government") announced a plan, which resulted 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, 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") pursuant to an acquisition agreement (the "Acquisition").
The Company was formed in anticipation of the privatization to hold the stock of
PRTC and CT from the Puerto Rico Telephone Authority ("PRTA"), a public
corporation and an instrumentality of the Government, in connection with the
privatization.
The closing of the Acquisition occurred on March 2, 1999, under the
following terms:
o A subsidiary of GTE Corporation (member of the GTE Group) acquired
40.01% plus one share of the Company stock, Popular Inc. (Popular)
acquired 9.99% and an Employee Stock Ownership Plan (ESOP) acquires 7%
as discussed below.
o The government received approximately $2.0 billion as part of the
Acquisition. A portion of this amount was paid as a special dividend
amounting to approximately $1.6 billion.
o In exchange for its forty-three percent (43%) interest less one share
the PRTA also agreed to contribute cash or stock worth a total of $200
million as a capital contribution in even installments over five years
beginning on March 2, 2000 to reduce the Company's unfunded pension and
other post-retirement benefit obligations.
In conjunction with the Acquisition, PRTA contributed 3% of the
Company's shares to a newly created ESOP valued at $26.1 million, and the GTE
Group purchased an additional 1% of the Company's shares from the PRTA for $8.7
million, which were contributed to the ESOP. The shares contributed by the PRTA
and the GTE Group vested to employees on March 2, 1999. The ESOP also acquired
an additional 3% of the Company's shares with the proceeds of a loan from the
Company. These shares were used to establish $26.1 million contributory
investment benefit plan for current and future employees.
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<PAGE> 4
PRTC and CT are referred to as the Predecessors.
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 the breakdown of residential and business access lines
in service, excluding public phones, direct inward dialing business lines, wide
area telecommunications services lines, private branch exchange trunks, and
cellular and paging customers:
ACCESS LINES IN SERVICE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
------ ------ ------
(In thousands except percentages)
<S> <C> <C> <C>
Residential 961 947 950
Business 304 284 271
------ ------ ------
Total Access Lines in Service 1,265 1,231 1,221
====== ====== ======
Growth 2.8% 0.8% 5.6%
</TABLE>
BASIC VOICE SERVICE
Basic voice service is the largest component of local service revenues,
with $367 million or 27% of total revenues in 1999. Revenues increased $15
million over the prior year as a result of access line growth as prices have not
changed. A strong local economy contributed in 1999 to strong business and
residential second line demand. We believe that access line growth in the 5%
range reflects an increase in current island demand. Access line growth in 1999
of 2.8% reflects facility-based local exchange competition, who entered the
market in 1997. Access line growth in 1998 of only .8% is attributable to a
41-day strike against the Company and the effects of Hurricane Georges, which
caused significant damage to Company facilities.
Communities are grouped into five categories for basic rate purposes.
The structure and rates for basic voice have not changed since 1982. Residential
customers in cities with 40,000 or more lines are charged $18.80 per month for
unlimited local calls, whereas customers in towns with 1,000 lines or less are
charged $7.60 per month for comparable service. Residential basic rates average
$13.60 per month. The rate range for business customers is much narrower, with
basic rates excluding local usage ranging from $34.60 to $36.65 per month.
Business rates, including local usage, average $46.00 per month. These rates
exclude an Federal Communications Commission (FCC) imposed subscriber line
charge of $3.50 per month to primary residential and single-line business
customers and $6.00 per month to multi-line residential and business customers
as these revenues are classified as access revenues. These rates also exclude
other miscellaneous fees for white-page directory listings and touch calling
which approximate an additional $1.50 per month.
TELEPHONE RENTAL
Approximately 80% of single-line businesses and 62% of residential
customers rent telephones, which generated approximately $29 million in revenues
in 1999. Rental levels are high compared to U.S. mainland operators as we own
the inside wire on a customers' premise and must maintain the inside wire and
the phone. The rental option, and therefore the associated instrument repair
responsibility, was eliminated for new service orders commencing in October 1999
as the telephone rental revenue stream was less than the cost of making customer
premise visits to repair telephone instruments.
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VALUE - ADDED SERVICES
Value-added services include over 15 voice features, such as caller ID,
call waiting and voice mail. Charges for these features range from $1.50 to
$7.50 per month and are also sold in discounted bundled packages. Residential
acceptance is widespread with approximately 36% and 47% subscribing to at least
one custom calling feature for class service or one class service feature,
respectively. Revenues of $37 million in 1999 increased $2 million over the
prior year, a 6% increase.
SPECIAL SERVICES
Special services include private high-speed dedicated lines marketed to
businesses for data transport. Revenues of $37 million in 1999 increased $7
million over the prior year, a 23% increase. The 1999 revenues are divided
between $16 million in local revenues and $21 million in long distance revenues.
The deployment of an Asynchromous Transfer Mode ATM network in late 1999 will
enable us to offer better tailored, cost effective high speed data services to
businesses such as frame relay.
INTERNET ACCESS
We market dial-up unlimited Internet access under the PRT.net brand for
$18 per month. We received $5 million of revenues in 1999 on 27,000 dial-up
Internet access customers at December 31, 1999, an increase of 4,000 in
customers over the prior year. Customer growth was inhibited by capacity
constraints, which was resolved in the fourth quarter of 1999.
We acquired 100% of Datacom Caribe, Inc. on December 22, 1999, the
largest Internet Service Provider (ISP) in Puerto Rico with approximately 38,000
dial-up customers at December 31, 1999. Datacom Caribe, Inc. markets its service
under the Coqui.net brand. The combination of these businesses makes us the most
significant dial-up ISP on the island with approximately 65,000 customers at
December 31, 1999.
PUBLIC PHONES
Revenues from public telephones in 1999 were $7 million, a decline of
$2 million from the prior year. We have experienced significant market share
erosion since the introduction of competition in 1997. We estimate that we held
approximately one-half of the market at December 31, 1999, as measured in fourth
quarter 1999 revenues.
The price of a public phone call was increased in July 1999 from 10
cents for a call of unlimited duration to 25 cents for each 3-minute segment. We
have not yet billed carriers of 800 cards for calls made from our phones. We are
currently in the process of negotiating a settlement for traffic dating from
September 1998. The expected settlement of $2 million, the prospective effect of
receiving dial-around compensation and the full year effect of the July 1999
price increase is expected to increase reported revenues in 2000.
NETWORK ACCESS
Network access services include services provided to long distance
carriers, other local exchange carriers, cellular and personal communications
service operators and paging companies for the origination and termination of
calls to and from local customers. These operators pay an access fee 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. Network access revenues totaled $348
million in 1999 and included the following amounts (in millions):
<TABLE>
<S> <C>
o Long term support subsidies $ 89
o Universal service fund subsidies 45
o Subscriber line charge 57
o Per minute access charges:
o Off-island switched & common
carrier line 100
o Off-island special 9
o On-island switched 39
o Wireless 9
</TABLE>
The long-term and universal support subsidies are received through
pooling arrangements administered by the National Exchange Carriers Association
(NECA). Please refer to the Regulatory and Competitive Trends section of
Management's Discussion and Analysis for a discussion of the factors affecting
future access revenues and the expected decline in long term support subsidies
in 2000 and beyond.
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LONG DISTANCE
The long distance market in Puerto Rico experienced profound change
during 1999. The market prior to February 1, 1999 was divided between off-island
and on-island. We could not sell off-island long distance because of a prior
non-compete agreement and our competitors could not sell on-island on an equal
access basis. AT&T, Telefonica Larga Distancia (TLD), and Sprint were the most
significant competitors in the off-island market.
The off-island and on-island distinction no longer exists with the
introduction of equal access on February 1st 1999. In 1999 we entered into the
off-island market. The price of a long distance call at December 31, 1999 was
the same anywhere in Puerto Rico and to the U.S. and ranged from 9 cents to 12
cents a minute for peak hours and 8 cents to 10 cents for off-peak hours. These
prices reflect a decrease of approximately 3 cents a minute since February 1,
1999 as a result of increased competition.
Total long distance revenues of $211 million in 1999 reflected a
decline of $41 million as compared with 1998, of which $54 million was primarily
applicable to erosion of the on-island market. We estimate that we held a 59%
market share of on-island long distance revenues at December 31, 1999 versus 98%
on December 31, 1998. Access revenues partially offset the loss in on-island
long distance revenues, as competitors must interconnect to our network to
complete a call. We realized $34 million in increase on-island access revenues
in 1999 primarily due to the loss of on-island long distance revenues.
CELLULAR SERVICE
Demand for cellular services has grown rapidly in recent years due to
increased competition, attractive price plans, prepaid calling cards, and wide
market acceptance. Total market penetration is estimated to approximate 24%. We
market analog and digital cellular service under the Celulares Telefonica brand
in the B block 800-megahertz frequency. There were five facility based cellular
operators providing service throughout the island with varying coverage at the
end of 1999. AT&T and TLD began marketing their service during 1999 under
the SunCom and Movistar brands, respectively. Several competitors' networks are
concentrated in the San Juan Metropolitan area, while we provide island-wide
coverage. We hold an approximate one-third market share which is the second
largest of any company.
Our customer growth has been driven by significant increases in regular
customers and customers who use our prepaid Activa cellular calling card. Total
customers grew from 204,000 at the end of 1998 to 285,000 at year-end 1999, a
40% growth rate. Prepaid customers grew from 48,000 at the end of 1998 to
101,000 at year-end 1999, a 110% growth rate. The growth in prepaid is driven by
budget conscious customers who have selected calling cards with low denominated
values. Average revenue per user (ARPU) for prepaid was $16 in 1999. We replaced
our lowest denominated card of $15 with a $20 card in the first quarter of 2000
to increase revenue potential. ARPU for regular customers was $53 in 1999, an
increase of $2 from the prior year, reflecting increased usage, due to lower
airtime price per minute than in the prior year. Total ARPU was $43 in 1999, a
decrease of $6 from the prior year.
Customer churn approximated 3% per month in 1999, a decrease of .8%
from the prior year. We believe churn is high compared to U.S. mainland
standards because of higher disconnections due to non-payment and the intensity
of competition. We signed a roaming agreement with AT&T to increase roaming
coverage for our customers in the U.S. mainland and we now offer roaming in the
Dominican Republic, through Codetel, a GTE affiliate.
We implemented a new on-line customer activation and billing system in
the fourth quarter of 1999. We believe that this system will improve our sales,
marketing, and customer retention capabilities.
PAGING
We market a facility-based paging service under the Celulares
Telefonica brand through our cellular distribution channels. Major competitors
include Celpage, CellularOne and Skytel. We have experienced a contraction in
customers since 1997. Our alphanumeric service averages $19 per month, with a
$60 instrument purchase which is close to a prepaid cellular calling card plan.
Consequently, we have experienced migration to cellular plans as well as high
disconnections related to non-payments.
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DIRECTORY SERVICES
We received $28 million in publishing revenue in 1999 under a revenue
sharing arrangement with VNU World Directories VNU. VNU is the publisher of the
white and yellow page directories distributed under the PRT brand and there is
no other significant competitor product. We entered into a new 95-year agreement
in 1999 with AXESA, a joint venture among VNU, GTE, and ourselves which provides
us a publishing right of 35% of yellow page advertising revenues, plus billing
and collection fees starting in June 2000. Revenues are estimated to remain
unchanged as this new arrangement is expected to generate higher revenues
despite a lower publishing right.
BILLING AND COLLECTION SERVICES
We generated $15 million in 1999 in revenues by billing and collecting
for most off-island long distance carriers, including AT&T, MCI Worldcom, Sprint
and TLD. The contract with AT&T, which represents half the revenue volume,
expires in 2001. The other arrangements are on a month to month basis and we
cannot predict if these carriers will continue to use our services.
NETWORK INFRASTRUCTURE
We invested approximately $1.9 billion from 1994 to 1999 and $273 million
in 1999 to expand and enhance our networks. We have publicly committed to spend
$1 billion over the 1999 through 2003 period through internally generated funds.
WIRELINE NETWORK
Our switching network is 100% digital, consisting of 29 local host
offices and two access tandems to ensure redundancy and network reliability. Our
network has the following characteristics:
o Approximately 80% of our transmission circuits use fiber optic systems;
consisting of 73,000 miles of fiber optic cable in fiber-ring and
point-to-point configurations.
o The entire transmission network for the San Juan Metropolitan Area uses
self-healing SONET rings operating at bandwidths up to OC-192 with fiber
cable connected to over 200 office buildings in this area.
o Approximately 39% of outside cable serving the local loop is underground.
o Our switching network and transmissions systems are monitored by a
Network Monitoring Center provided by Bellcore, which operates 24 hours
per day.
We have completed the installation of an ATM network, which provides
high-speed data transmission on a more efficient and reliable network. The ATM
network includes 15 nodes located throughout the island. We completed a project
for the Department of Education during the fourth quarter of 1999 to provide 750
schools with Internet access through the network.
WIRELESS NETWORK
We operate both an analog and a TDMA digital network using the IS-136
standard. We believe our island-wide coverage is superior to those of our
competitors in that we have 152 cells and 18 micro-cells which is more than our
competitors.
EMPLOYEES
Our workforce totaled 6,614 employees at December 31, 1999.
Approximately 74% of full-time employees are members 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. We are currently negotiating a new contract with each of these
unions as the past contracts expired in January 2000, and October 1999,
respectively. At this time, we cannot determine when and upon what terms the
negotiations will be completed.
Voluntary early retirement programs were offered during 1999. A total
of 1,342 employees chose to retire under these programs and $207 million of
non-cash charges were recorded.
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FRANCHISES AND LICENSES
Advances in technology, together with a number of regulatory,
legislative and judicial actions, continue to accelerate and increase the
competition affecting our operations and the opportunities available to us.
ENVIRONMENTAL REGULATIONS
Our operations are subject to federal, state and local laws and
regulations governing the use, storage, disposal of, and exposure to, hazardous
materials, the release of pollutants into the environment and the remediation of
contamination. As an owner or operator of facilities where hazardous materials
are used, we could be subject to environmental laws that impose liability for
the entire cost of cleanup at contaminated sites, regardless of fault or the
lawfulness of the activity that resulted in the contamination. We believe,
however, that our operations are in substantial compliance with applicable
environmental laws and regulations.
Many of our properties formerly and currently contain underground and
aboveground storage tanks used for the storage of fuel. Some of these tanks may
have leaked or otherwise caused contamination. We have investigated and
remediated, 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.
REGULATORY ENVIRONMENT IN PUERTO RICO
Introduction
We hold franchises, licenses and permits adequate for the conduct of
our business in the markets, which we serve. Advances in technology, together
with a number of regulatory, legislative and judicial actions, continue to
accelerate and increase the competition affecting our operations and the
opportunities available to us. The Federal Telecommunications Act of 1996 is
intended to promote competition in all sectors of the telecommunications
marketplace, while preserving and advancing universal telephone service.
The telecommunications regulatory environment in Puerto Rico is
undergoing change. With the passage of the Federal Telecommunications Act of
1996, which amended the 1934 Federal Act, our legal monopoly was eliminated. The
Puerto Rico Telecommunications Act provides for the creation of the
Telecommunications Regulatory Board (TRB), the main purpose of which is to
regulate telecommunications and cable television services on the island. The
Puerto Rico Telecommunications Act also incorporates the pro-competitive and
universal service features found in the Federal Telecommunications Act of 1996.
We are also subject to regulation by the Puerto Rico Planning Board, the
Administration of Regulations and Permits of Puerto Rico and the Environmental
Quality Board.
We are involved in proceedings arising under the Federal
Telecommunications Act of 1996, the FCC Rules and the Puerto Rico
Telecommunications Act, including disputes relating to access charges. The
unfavorable resolution of these matters may have an adverse effect on our
financial results. For more information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Regulatory and
Competitive Trends."
UNITED STATES TELECOMMUNICATIONS REGULATION
The regulation of telecommunications services is generally divided
between the inter-state and intra-state jurisdictions. 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. The Federal Telecommunications Act of
1996 amended the 1934 Federal Act to advance universal service and open the
telecommunications market to local competition by requiring the incumbent local
exchange carriers to enter into agreements permitting other telecommunications
carriers to access and utilize the incumbent local exchange carriers' network
for the provision of competitive local services. The Federal Telecommunications
Act of 1996 also provides for the resale of incumbent local exchange carrier
services by other telecommunications companies.
PUERTO RICO FEDERAL TELECOMMUNICATIONS ACT OF 1996
Provisions for Telecomunicaciones de Puerto Rico
The Puerto Rico Telecommunications Act directs the TRB to presume that we
control the local service, access service and on-island toll markets as of the
date of enactment of the Puerto Rico Telecommunications Act. The TRB is not to
presume that we possess control of the cellular or paging service markets. The
TRB may refrain from enforcing the provisions of the Puerto Rico
Telecommunications Act, with the exception of the universal service contribution
requirement, against carriers, which do not possess control of the market.
Within three years of the effective date of the Puerto Rico Telecommunications
Act, the TRB 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 TRB may refrain from
enforcing the provisions of the Puerto Rico Telecommunications Act against us to
that extent.
In February 2000, the TRB requested a response as to whether we
continue to control the local, access services and on-island markets. In March
2000, we responded that we continued to control the local and access service
markets and that we no longer control the on-island long distance markets.
Competitive Provisions
The Puerto Rico Telecommunications Act contains provisions that promote
competition and require, among other things, that telecommunications companies
provide interconnection to their facilities where technically feasible. Other
provisions also guarantee the competitive availability of certain services,
including access to directory assistance and repair service. In addition, all
interconnection agreements must be submitted to the TRB for approval.
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<PAGE> 9
ITEM 2. PROPERTIES
We have facilities in all the major population centers of San Juan,
Mayaguez, Ponce, Fajardo, Humacao, Arecibo, Aguadilla, and Guayama and in most
of the smaller towns. Facilities as of December 31, 1999 include:
<TABLE>
<CAPTION>
Owned Leased
----- ------
<S> <C> <C>
o Administrative Offices 13 14
o Commercial & Customer Service stores & offices 2 23
o Wireless kiosks -- 2
o Standalone Wireline Switching Center Buildings 82 --
o Inside & Outside Remote Switching Units 154 9
o Wireless Cell Sites 20 130
o Standalone Operational Centers (repair,
dispatch, assignment) 16 11
o Warehouses 2 --
</TABLE>
All of these properties are generally in good operating conditions and
adequate to satisfy the needs of the business.
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<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various legal and administrative proceeding
arising in the ordinary course of business. We believe the resolution of these
matters will not have a material adverse effect on our financial position and
results of operations. See the Regulatory and Competitive Trend section of
Managements Discussion and Analysis for more information regarding this matter.
In connection with the Acquisition, the PRTA agreed to indemnify, defend and
hold us harmless for specified significant litigation, including one
environmental matter.
The Federal Communications Commission (FCC) has recently issued an
order requiring to pass on $74 million to ratepayers in Puerto Rico through
reduced rates. We have filed a Petition for Reconsideration. For more
information about this order and petition, see "Rate Making Considerations
Related to the Creation of the Wireless Affiliates" and "Regulatory and
Competitive Trends of Management Discussion and Analysis."
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<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS
The shareholders approved a 25 to 1 stock split in order to decrease
the per share market price and increase the affordability of ESOP participants
at a December 1999 Shareholder's meeting.
The stock split was approved (a) unanimously by the Directors of the
Company and (b) by the shareholders of 93% of the Company's common stock. The
holder of the remaining 7% abstained from voting in this matter.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS
(A) MARKET FOR COMMON STOCK
There is no established trading market for the Company's common stock.
(B) HOLDERS
As of December 31, 1999, the number of common stock outstanding was 25
million shares. The number of holders of record at December 31, 1999
was four.
(C) DIVIDENDS
Our shareholders agreement states that dividends are equal to at least
50% of net income, payable quarterly to the extent funds are legally
available. A dividend is not expected for the near future since there
was a retained deficit of $133 million at December 31, 1999. The senior
note and credit facility indentures do not contain dividend
restrictions.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA
The following table was derived from our audited consolidated financial
statements and the audited combined financial statements of our Predecessors for
the designated periods. You should read the following data together with (a) our
Predecessor's historical combined financial statements and the notes thereto (i)
as of December 31, 1998 and 1997 and (ii) as of and for the period from January
1, 1999 to March 1, 1999; and (b) our historical consolidated financial
statements and the notes thereto as of and for the period from March 2, 1999 to
December 31, 1999, all of which have been audited by Deloitte & Touche LLP,
independent auditors, and appear elsewhere in this report. Our results of
operations and financial condition differ materially from those previously
reported due primarily to:
o The incurrence of $1.6 billion of debt and related interest expense in
connection with the acquisition;
o The change to a tax paying company;
o Voluntary early retirement programs introduced in 1999 resulting in
non-cash provisions of $207 million;
o The accrual of management fees owed to GTE;
o The introduction of dialing parity in the on-island long distance
market and our entrance into the off-island long distance market;
o Revaluation of assets and liabilities to reflect purchase accounting
relating to the acquisition; and
o The discontinuation of regulatory accounting principles
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
---------- -----------------------------------------------------------
MARCH 2 JANUARY 1
THROUGH THROUGH YEARS ENDED DECEMBER 31,
DECEMBER MARCH 1, ----------------------------------------------
31, 1999 1999 1998 1997 1996 1995
---------- ---------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues and Sales $ 1,126.3 $ 223.3 $1,270.7 $1,234.1 $1,201.4 $1,110.3
Operating Costs and Expenses 1,181.5 222.4 1,043.4 989.6 1,060.5 836.7
---------- ---------- -------- -------- -------- --------
Operating Income (loss) (55.2) .9 227.3 244.5 140.9 273.6
Interest Income (Expense),
Net (65.1) .4 2.5 3.0 1.6 2.2
Other Income (Expense) 1.2 .6 (5.4) (1.7) (0.8) .5
Income Tax Benefit 46.4 -- -- -- -- --
---------- ---------- -------- -------- -------- --------
Net Income (Loss), Before
Extraordinary Charge (72.7) 1.9 224.4 245.8 141.7 276.3
Extraordinary Charge (60.5) -- -- -- -- --
---------- ---------- -------- -------- -------- --------
Net Income (Loss) $ (133.2) $ 1.9 $ 224.4 $ 245.8 $ 141.7 $ 276.3
========== ========== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and Amortization $ 241.9 $ 50.4 $ 296.5 $ 279.2 $ 254.6 $ 213.4
Cash Flows from Operations 316.1 55.9 613.8 508.2 504.1 518.1
Capital Expenditures 240.1 33.2 288.0 362.2 391.4 383.9
Cash Flows used in Investing
Activities 246.4 33.1 279.6 351.3 380.7 373.4
Cash Flows from Financing
Activities (96.8) 14.2 (319.8) (178.7) (103.5) (134.6)
EBITDA(1) 186.7 51.3 523.8 523.7 395.5 487.0
EBITDA Margin(2) 17% 23% 41% 42% 33% 44%
Ratio of Earnings to Fixed
Charges(3) 1.4
</TABLE>
-12-
<PAGE> 14
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
--------- -------------------------------------------------
AS OF AS OF DECEMBER 31,
DEC 31, -------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLION)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets $ 440.2 $ 435.4 $ 379.7 $ 410.1 $ 370.4
Property, Plant and Equipment, Net 1,742.5 1,987.9 2,019.1 1,947.0 1,820.3
Total Assets 2,827.7 2,456.6 2,434.8 2,388.0 2,219.6
Current Liabilities 350.7 347.2 243.6 278.7 225.1
Total Debt 1,497.4 0.8 1.2 1.4 1.5
Shareholders' Equity 369.6 1,812.7 1,925.0 1,851.3 1,811.7
</TABLE>
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
----------- -------------------------------------------------
AS OF AS OF DECEMBER 31,
DECEMBER 31, -------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Access Lines in Service (000) 1,265 1,231 1,221 1,156 1,101
Wireless subscribers:
Cellular (000) 285 204 135 153 165
Paging (000) 183 219 235 200 135
Total Access Lines (per 100 households) 76 75 76 74 72
Number of full-time Employees 6,614 7,703 7,863 7,971 8,102
Access Lines/Wireline Employee 207 169 164 153 139
Cellular Average Monthly Service Revenue Per User $ 43 $ 49 $ 59 $ 71 $ 69
</TABLE>
- --------------------
(1) EBITDA represents operating income plus depreciation and amortization
expense. EBITDA is used by some investors and analysts to analyze and compare
companies on the basis of liquidity. EBITDA is not recognized under generally
accepted accounting principles and should therefore not be construed as an
alternative for net income, which is an indicator of a company's performance, or
cash flow from operations, which is a liquidity measure. It is included because
we believe it provides additional information with respect to our anticipated
ability to meet future debt service, capital expenditures, and working capital
requirements. Our calculation of EBITDA may be different from the calculation
used by other companies and therefore comparability may be affected.
(2) Determined by dividing EBITDA by revenues and sales.
(3) The ratio of earnings to fixed charges of the Predecessors has not been
presented, as the fixed charges were nominal prior to the Acquisition since
there was no significant indebtedness.
-13-
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company has made forward-looking statements. These
statements are based on the Company's estimates and assumptions and are subject
to certain risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company, as well as those statements preceded or followed by the words
"anticipates," "believes," "estimates," "expects," "hopes," "targets" or similar
expressions.
The future results of the Company could be affected by subsequent
events and could differ materially from those expressed in the forward-looking
statements. If future events and actual performance differ from the Company's
assumptions, the actual results could vary significantly from the performance
projected in the forward-looking statements.
The following important factors could affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements: (1) materially adverse changes in economic
conditions in Puerto Rico; (2) material changes in available technology; (3) the
final resolution of federal, state and local regulatory initiatives and
proceedings, including arbitration proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service,
unbundled network elements and resale rates; and (4) the extent, timing, success
and overall effects of competition from others in the Puerto Rico telephone
service market.
THE ACQUISITION AND CHANGE IN ACCOUNTING BASIS
Our results of operations and financial position as of December 31,
1999 reflect the adoption of a new accounting basis for our assets and
liabilities and the consequences of becoming a tax paying enterprise as a result
of the Acquisition. The revaluation of assets and liabilities reflects the value
paid by the GTE Group to acquire their 50% plus one share interest in the
Company in excess of the historical book value of the assets and liabilities
acquired. As a result of this Acquisition, our results of operations and
financial position for periods ending after March 2, 1999 differ materially from
those previously reported by our Predecessors primarily due to the items
discussed above and the following:
o The incurrence of $1.6 billion of debt and related interest expense in
connection with the Acquisition
o Voluntary early retirement programs introduced in 1999 resulting in
non-cash provisions of $207 million
o The accrual of management fees owed to GTE
o The introduction of dialing parity in the on-island long distance
market and our entrance into the off-island long distance market
o The discontinuation of regulatory accounting principles
RESULTS OF OPERATIONS
Our discussion of results for the year ended December 31, 1999 is based
upon results from March 2, 1999 to December 31, 1999, and the Predecessor
results from January 1, 1999 to March 2, 1999 and all of 1998. The comparison
for the years ended 1999 and 1998 is for the full twelve-month period and
combines the results of the Predecessors with the results for the Company in
1999. In the discussion below, references to the Company also include our
Predecessors. The comparability of revenues before and after the Acquisition was
not affected by a change in accounting basis. Accordingly, in the discussion of
revenue trends, we have not distinguished between the operations of the
Predecessors before March 2, 1999 and after this date.
We have two reportable segments, Wireline and Wireless. See Note 13 to
the consolidated financial statements for additional information on our
segments.
The Wireline segment provides:
o Local service including basic voice, telephone and telecommunications
equipment rental, value-added services, high speed private line
services, public phone services, internet access and installations;
o Long distance service consisting of on-island and off-island.
Off-island services began on February 1, 1999;
o Access service provided to long distance carriers, other local exchange
companies and cellular and paging operators to originate and terminate
calls on our network;
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<PAGE> 16
o Directory publishing right revenues and listing fees;
o Billing and collection services to competing long distance operators;
and
o Telecommunications equipment sales.
-15-
<PAGE> 17
The Wireless segment includes cellular and paging services.
REVENUES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLION)
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
WIRELINE:
Local $ 495 37% $ 468 37% $ 447 36%
Network Access 348 26 300 24 278 22
Long Distance 210 16 252 20 252 20
Directory and Other 101 7 80 6 90 8
-------- -------- -------- -------- -------- --------
Total Wireline 1,154 86% 1,100 87% 1,067 86%
-------- -------- -------- -------- -------- --------
WIRELESS:
Cellular 134 10 100 8% 102 8%
Paging 46 3 60 4 55 5
Wireless Equipment 15 1 11 1 10 1
-------- -------- -------- -------- -------- --------
Total Wireless 195 14% 171 13% 167 14%
-------- -------- -------- -------- -------- --------
Revenues and Sales $ 1,349 100% $ 1,271 100% $ 1,234 100%
======== ======== ======== ======== ======== ========
</TABLE>
EXPENSES AND CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLION)
-------------------------------
1999 1998 1997
-------- -------- --------
WIRELINE:
<S> <C> <C> <C>
Cost of services and sales $ 442 $ 415 $ 431
Selling, general and administrative 298 217 159
-------- -------- --------
Total Wireline 740 632 590
WIRELESS:
Cost of services and sales $ 46 $ 18 19
Selling, general and administrative 92 97 101
-------- -------- --------
Total Wireless 138 115 120
OTHER:
ESOP compensation expense 26 -- --
Early retirement provision 207 -- --
Depreciation and amortization 292 297 279
Interest and Others 62 3 (1)
Income Tax Benefit (46) -- --
Extraordinary Item (FAS #71) - net of tax 61 -- --
-------- -------- --------
Net Income (Loss) $ (131) $ 224 $ 246
======== ======== ========
</TABLE>
OPERATING DATA (1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Access Lines in Service (000's)(2) 1,265 1,231 1,221
On-island LD Minutes (million) 1,254 1,670 1,649
Off-island LD Minutes (million)(3) 62 -- --
Cellular Subscribers (000's) 285 204 135
Cellular ARPU $ 43 $ 49 $ 59
Paging Subscribers (000's) 184 219 235
</TABLE>
- ---------------
(1) December 31, 1999 assets included $2,591 million wireline assets, $297
million wireless assets and $60 million of intersegment asset
eliminations.
(2) Access lines excludes Wireless subscribers.
(3) Off-island long distance service commenced February 1, 1999.
-16-
<PAGE> 18
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES AND SALES. Revenues for the year ended 1999 increased $78
million, or 6%, to $1,349 million from the $1,271 million in the comparable
period in 1998.
WIRELINE:
Local service revenues include revenue generated from basic voice,
telephone rental, value-added services, special services, Internet access, and
installation services. Local service revenues for the year ended December 31,
1999 increased $27 million, or 6%, to $495 million from $468 million in 1998,
resulting primarily from increases in measured service, installation charges,
private lines and residential lines of $13 million, $6 million, $4 million and
$4 million, respectively.
Access line growth in the year ended December 31, 1999 was 2.8%,
compared to current Island demand of 5% due to local exchange competition from
Centennial who entered the market in 1997. The waiting list of orders for new
installations decreased to 22,200 at December 31, 1999 from 24,600 at June 30,
1999 and 36,600 at December 31, 1998.
Network access revenues for the year ended December 31, 1999 increased
$48 million, or 16%, to $348 million compared to $300 million for the year ended
December 31, 1998. We received $34 million of additional access revenues from
long distance carriers to originate on-island calls, which was the result of our
on-island long distance market share loss. An additional $20 million was
realized from higher switched access revenues due to higher competitor
off-island traffic. This increase was partially offset by a decrease of $7
million in carrier and universal service funds.
Long distance revenues include direct dialed on-island and off-island,
operator-assisted, calling card and on-island private line revenues. Long
distance revenues decreased $42 million, or 17%, to $210 million for the year
ended December 31, 1999 from $252 million in 1998. The decrease was attributed
to 21% lower on-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 on-island market accelerated in February 1999 with the
introduction of dialing parity. We have experienced erosion in market share from
98% in February 1999 to 59% in December 1999. The increase in off-island traffic
for the total market has mitigated some of our on-island share loss. We realized
$11 million in new revenues as a result of our entrance in the off-island long
distance market in February 1999.
Directory and other revenues for the year ended December 31, 1999
increased $21 million or 26%, to $101 million, from $80 million in 1998.
Directory revenues in 1999 increased $2 million over 1998. Billing and
collecting services and other services to carriers increased $6 million. In
addition, the sale of equipment increased $11 million mainly due to a new
contract with the Puerto Rico Department of Education.
WIRELESS:
Revenues from cellular and paging services increased $24 million, or
14%, to $195 million in the year ended December 31, 1999 compared to $171
million in 1998. Cellular service revenues increased $34 million or 34% as a
result of the net addition of approximately 81,000 subscribers in the year ended
December 31, 1999, which represents an increase in net subscribers of 40% from
December 31, 1998. Cellular average revenue per unit of $43 for the year ended
December 31, 1999 decreased by $6 from the similar period in 1998. The reduction
is the result of the offering of lower prices to maintain our competitiveness
and new entrants in 1999 and an increase in the number of prepaid plans, which
have lower average revenue per unit.
Paging revenues declined $14 million, or 23% to $46 million during the
year ended in December 31, 1999 from $60 million in the year ended December 31,
1998. The decrease was due to a reduction of 35,000 subscribers or 16% during
1999 because of the migration to cellular pre-paid plans as well as high
disconnections related to non-payments.
Other revenues include equipment sales, which increased $4 million or
36% to $15 million during the year ended December 31, 1999 from $11 million in
the year ended December 31, 1998. This was a result of higher gross additions.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the year
ended December 31, 1999 increased $131 million, or 18%, to $878 million from the
$747 million compared to December 31, 1998.
-17-
<PAGE> 19
WIRELINE:
Wireline expenses for the year ended December 31, 1999 increased $108
million, or 17% to $740 million from the $632 million incurred in 1998. Costs of
services and sales increased $27 million, or 7%, to $442 million mainly because
of the increase in property and municipal taxes of $46 million. Lower inventory
obsolescence provisions of $7 million, and lower facilities expenses of $8
million partially offset this amount. Selling, general and administrative
expenses of $298 million increased $81 million or 37% when compared to the year
ended December 31, 1998. The principal component of the increase related to
management and technology license fees of $33 million, higher bad debt
provisions of $28 million, GTE employee expenses of $7 million and telemarketing
and consulting expenses of $5 million.
WIRELESS:
Wireless expenses for the year ended December 31, 1999 increased $23
million or 20% to $138 million from the $115 million reported in 1998. Costs of
services and sales increased $28 million or 156% to $46 million from $18 million
in 1998 because of higher access charges of $10 million, higher inventory
obsolescence provisions of $4 million, higher property taxes of $3 million and
higher cost of equipment of $1 million. Selling, general and administrative
expenses decreased $5 million or 5% to $92 million from the $97 million reported
in 1998. The principal components of this decrease were lower operator service
expense of $3 million and lower temporary service expense of $2 million.
EARLY RETIREMENT PROGRAMS. Three voluntary early retirement programs
were offered during the year. The first relates to 131 of the Predecessors'
employees, who participated in a government sponsored pension plan and retired
on March 1, 1999. The Predecessors' results of operations for the period ended
March 1, 1999 include a $4 million payment to the government to compensate for a
portion of the expense.
A voluntary early retirement was offered during the third quarter to
qualified employees. Those choosing to retire received normal medical and life
insurance benefits, a credit for five additional years of service, and were not
penalized for early retirement in the calculation of their pension benefits. A
$165 million non-cash provision was recorded. There were 1,001 employees who
elected this program, an acceptance rate of 94%.
A third voluntary program was offered in the fourth quarter to union
employees, with 10 years of service, determined to be completely disabled by a
Company designated physician. A $38 million non-cash provision was recorded,
relating to 210 employees.
ESOP COMPENSATION EXPENSES. A $26 million non-cash expense was recorded
in 1999 representing the PRTA's grant. The grant was recorded as compensation
expense, with an offsetting credit to paid-in-capital.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
of $292 million for the year ended December 31, 1999 was $5 million lower than
the prior year primarily due to the discontinuation of regulatory accounting
principles.
INTEREST EXPENSE. Interest expense of $65 million for the year ended
December 31, 1999 results from the borrowing related to the special dividend.
Debt decreased from $1.6 billion on March 2, 1999 to $1.5 billion at December
31, 1999. There were no debt or interest expenses in 1998.
EXTRAORDINARY CHARGE. During 1996, the Government enacted the
Telecommunications Act of 1996, which began a process to open the local
telecommunications market to competition. This process resulted in the PRTA's
decision to privatize the local exchange telephone operations of the
Predecessors.
Prior to the Acquisition, our rates were regulated based upon rate of
return/cost of service regulation. The Predecessor entity was also entitled to
cost support from subsidy pools administered by NECA for operation in high cost
regions. As a rate of return carrier, we were permitted to charge prices
sufficient to cover our costs and which permitted an annual rate of return of up
to 11.5%. The high cost support subsidies provided us the funds, necessary to
achieve the rate of return. After the Acquisition, PRTC, as an indirect
subsidiary of GTE, is considered a price cap carrier. As such, our prices,
rather than our earnings, will be regulated. We must exit the long-term support
pool on July 1, 2000 and implement a price cap mechanism to recover common
carrier line costs. When we exit the long-term support pool, we can charge
inter-exchange carriers a pre-subscribed
-18-
<PAGE> 20
inter-exchange common carrier line charge ("PICC"), which is assessed on an
access line basis for interconnection to our local network. We estimate that the
annualized pretax loss in revenues is approximately $77 million.
We also terminated, in anticipation of the Acquisition, a mutual
non-compete agreement with Telefonica Larga Distancia (TLD), a long distance
service provider. The agreement prohibited us from providing off-island long
distance service and TLD from providing any telecommunication service in Puerto
Rico. In addition, on February 1, 1999, the requirement for competitor customers
to dial an access code was eliminated with the implementation of equal access
dialing as mandated by the Federal Communications Commission ("FCC"). These
actions significantly increased competition. We also agreed not to increase
prices for basic wireline services for three years in the Acquisition agreement.
As a result of changes in rate regulation, the competitive environment
and the terms of the Acquisition, we determined that regulatory accounting
principles set forth in SFAS No. 71 are no longer applicable to our operations
as prices will be based on market forces instead of cost. Accordingly, we
discontinued the application of SFAS No. 71 in conformance with SFAS No. 101
Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71. In general, SFAS No. 71 required us to depreciate plant
and equipment over lives approved by the regulator that, in many cases, extended
beyond an assets' economic lives. As a result of this requirement, the recorded
net book value of assets were in many cases higher than that which would
otherwise have been recorded had depreciation been based on the economic life.
As a result of the decision to discontinue SFAS No. 71, an assessment of the
cost of assets that will not be realized based on an analysis of the expected
cash flows from the plant and equipment over their remaining economic lives has
resulted in the write-down of plant and equipment of $198.5 million. A
proportionate amount of this adjustment (approximately $99 million) was
accounted for as a purchase price adjustment in accordance with the provisions
of partial step-up accounting to reflect the fair market values of the assets
acquired. The remaining $99 million was recorded as an extraordinary charge in
the accompanying consolidated statements of operations ($60.5 million after
tax).
INCOME TAXES. A tax credit of $46 million reflects deferred tax
benefits at a 39% statutory rate. We believe realization of the deferred tax
asset is more likely than not based on expectations of future taxable income. We
did not have income taxes in 1998, since we were not a taxable enterprise.
NET INCOME, LOSS. Principally because of severance provisions,
management and technology costs, taxes, and interest expense, there was a net
loss of $131 million for the year ended December 31, 1999.
-19-
<PAGE> 21
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES AND SALES. Revenues increased $37 million, or 3%, to $1,271
million for 1998 compared to $1,234 million for 1997. The increase resulted
primarily from growth in local and network access.
WIRELINE:
In 1998, local service revenues increased $21 million, or 5%, to $468
million for 1998 compared to $447 million for 1997. The increase was primarily
due to growth in value added services, such as caller I.D. and call waiting,
which produced $8 million of higher basic voice service revenue; growth in the
number of access lines, which produced a $10 million increase in rental revenues
from business and residential lines; additional usage revenues of $6 million and
an increase in Internet revenues of $3 million. Installation revenues declined
in 1998.
Access line growth in 1998 was only 0.8%, a substantial decrease when
compared to the growth rate for the preceding three years, which ranged from 4%
to 6%. Slower growth was primarily attributable to Hurricane Georges and a
41-day work stoppage organized to protest the privatization. The waiting list
for new installations increased to 36,600 orders at December 31, 1998 because we
were inhibited from deploying service after the summer work stoppage as our
efforts in the fourth quarter were primarily devoted to restoring service in
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 NECA..
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 access revenues of $4 million paid by
on-island long distance competitors contributed to the increase in access
revenues.
Long distance revenues remained constant at $252 million, with an
increase in on-island long distance revenues of $6 million over 1997 levels
offset by a reduction in toll private lines, toll-free services and wide area
telecommunications services revenues. On-island long distance minutes increased
by 1% in 1998, to 1,670 million minutes from 1,649 million minutes in 1997. This
increase was limited as a result of 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 and other revenues decreased by $9 million, or 9%, to $91
million for 1998 from $100 million for 1997. The decrease resulted from a
decline in directory revenues and equipment sales because of a larger than
normal equipment contract with the Puerto Rico Police Department in 1997.
WIRELESS:
Cellular revenues declined $2 million, or 2%, to $100 million for 1998
from $102 million for 1997, despite an increase of 69,000 customers to 204,000
at year-end 1998 from 135,000 at year-end 1997. Approximately 48,000 of the
69,000 new customers were prepaid customers who generate substantially lower
average revenue per unit than regular customers. Monthly average revenue per
unit averaged $49 in 1998, a decrease of $10 from 1997. The decline in average
revenues for regular accounts was caused by the addition of prepaid customers
and lower-end regular subscribers in a more competitive market.
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 stricter collection policies.
OPERATING COSTS AND EXPENSES. Wireline and Wireless costs and expenses
for 1998 increased by $37 million, or 5%, to $747 million from the $710 million
reported for 1997.
WIRELINE:
Wireline expenses for 1998 increased $42 million, or 7%, to $632
million from the $590 million reported for 1997. Cost of services and sales were
$415 million, or $16 million lower, than the $431 million reported in 1997,
primarily due to a reduction of $11 million in access charges and $2 million in
lower expending in facility expenses. Selling, general and
-20-
<PAGE> 22
administrative expenses were $217 million, or 36%, higher than the $159 million
reported for 1997. Consulting, commissions and operator services also
contributed to the increase.
WIRELESS:
Wireless expenses for 1998 of $115 million in 1998 reflected a slight
reduction of $5 million as compared to the $120 million in 1997. Cost of
services and sales decreased $1 million, or 5% to $18 million primarily due to a
reduction in access charges. Selling, general and administrative expenses
decreased $4 million, or 4% in 1998 to $97 million from the $101 million
reported in 1997, primarily due to a reduction in the bad debt provision.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased in $18 million, or 6%, to $297 million in 1998 from $279
million for 1997 due to higher levels of gross plant in service.
NET INCOME. For the reasons set forth above, net income decreased $22
million, or 9%, to $224 million in 1998 from $246 million in 1997. As previously
described, the 1998 period included $18 million of Hurricane Georges repair
costs and $5 million of incremental costs associated with the 41-day work
stoppage.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had working capital of $89 million compared
to $88 million at December 31, 1998. The Predecessors borrowed $1,591 million
under its credit facilities just prior to the closing of the Acquisition, of
which $1,565 million was used to pay the special dividend and $26 million was
used to make a loan to the ESOP.
Cash and cash equivalents were $45 million at December 31,1999,
compared to $36 million at December 31, 1998.
Cash flow from operations for the year ended December 31, 1999 was $372
million, compared to $614 million for the year ended December 31, 1998. The $242
million decrease is primarily attributable to a reduction of $88 million in
accounts payable, $67 million in cash interest expense, $46 million in cash
property and municipal taxes, $28 million in Hurricane Georges repair costs, and
$18 million in vacation and unused sick leave payments to early retirees.
Accounts payable was abnormally high in December 31, 1998 because Hurricane
Georges disrupted our normal disbursement process.
Cash expended for investing activities for the year ended December 31,
1999 was $279 million compared to $280 million for 1998. We have publicly
committed to spend $1.0 billion on capital expenditures from 1999 through 2003.
Our capital expenditure budget for 2000 is $228 million. We expect to fund our
capital expenditure plan with internally generated funds. We also invested $20.4
million in cash and issued a $2.0 million one-year note to acquire a 100%
interest in the stock of Datacom Caribe, Inc., the leading ISP on the island.
Our shareholders agreement states that dividends equal at least 50% of
net income, payable quarterly to the extent funds are legally available and
subject to any restrictions contained in any financing agreements. A dividend is
not expected for the near future since there was a retained deficit of $133
million at December 31, 1999. The senior note indentures and credit facility
indentures do not contain dividend restrictions.
REGULATORY AND COMPETITIVE TRENDS
Regulatory activity at the federal and local levels was primarily
directed at meeting challenges in maintaining existing access rates and long
term support and universal service subsidies. We are also addressing local
number portability requirements and compensation related to the payphone
business.
Our Predecessor continued to meet the wholesale requirements of new
competitors and have signed agreements with 15 wireless and wireline carriers.
These agreements permit them to purchase unbundled network elements, to resell
retail services, and to interconnect their networks.
-21-
<PAGE> 23
RATE MAKING CONSIDERATIONS RELATED TO THE CREATION OF WIRELESS AFFILIATE
Our Predecessors transferred it net wireless assets on September 1,
1998 to CT, a new subsidiary. Our Predecessors later filed a waiver request with
the FCC to record this transfer at book value instead of fair value. Our
Predecessors did not include the assets in the measurement of cost in the rate
setting process with the FCC. Accordingly, we believe that ratepayers did not
bear the cost of our Predecessors's wireless investment and the FCC should grant
the waiver.
The FCC denied our Predecessors' waiver request in a November 1999
order. The order concluded that the asset transfer resulted in a gain of $74
million. Of this amount approximately $18.5 million is manifested as interstate
access charges. Under FCC rules, we could required to pass on an equal amount to
carries through reduced rates beginning in 2000.
We filed a Petition for Reconsideration with the FCC in December 1999
stating that we believe that the FCC did not make the right conclusion based
upon the rate setting process. At a meeting with the FCC and interested parties
in January 2000, the FCC requested us to provide additional information to
demonstrate that our Predecessors excluded wireless costs from their rate base.
We are pursuing a favorable result with the FCC.
We cannot provide any assurance that the FCC will grant a favorable
ruling or that we will be able to recover any of our losses or damages resulting
from our Predecessor's actions or unfavorable rulings by the FCC or the Puerto
Rico Telecommunications Regulatory Board.
PRICE CAP REGULATION
The FCC requires that companies which set interstate access rates based
on a price cap formula must use this method for all of its affiliates and no
affiliate can remain a rate-of-return carrier. PRTC is a rate-of-return carrier
and under regulation it had until March 2, 2000 to adopt the formula as it had
became a GTE affiliate upon consummation of the Acquisition. The FCC granted our
extension request until July 1, 2000 for administrative ease and is evaluating
whether to allow us to remain a rate-of-return Company. The FCC will make a
final decision on our waiver extension request prior to July 1, 2000. NECA
supported our continued participation in the pools. The impact of adopting a
price cap formula is as follows:
o We must exit the NECA pool, resulting in an annual loss of $89 million in
long-term support.
o We may introduce a PICC to competing off-island long distance carriers on a
per line basis that is intended to recover the cost of the network for the
origination of off-island long distance calls. A July 1998 rate ruling set
the monthly PICC in year one at $0.53, $1.50, and $2.75, for primary
residential and business single lines, residential second lines, and
business multi-lines, respectively. Annual PICC revenue is projected at $12
million based on these rates and December 31, 1999 access lines in service.
o We may charge off-island carriers a usage sensitive access rate of 3.9
cents a minute to recover the cost of our switching network. This rate will
no longer be cost based, but will be increased by U.S. inflation and
decreased by current productivity factor of 6.5%.
o We can recover all of our interstate revenue requirements and therefore
maintain revenue neutrality by substantially increasing our common carrier
line ("CCC") access rates. However, our ability to raise these rates is
limited by competitive forces.
FCC UNIVERSAL SERVICE FUND ORDERS
The FCC has evaluated several cost models to replace universal service
support that non-rural carriers received from previous high-cost funds. We are
designated a non-rural carrier. A forward-looking cost per line model to
calculate support was established on January 1, 2000.
A transitional hold-harmless provision was also adopted on a
carrier-by-carrier basis to mitigate disruptions from this new mechanism. We
received this designation. We expect to receive the same $45 million of 1999
universal service support in year 2000. This provision lasts until 2003, when
the FCC will re-examine its need.
ON-ISLAND ACCESS RATE DISPUTE
The rate elements of our interstate access rates have been historically
based on cost studies in compliance with FCC rules and we used these same rates
for intrastate network elements. We changed to a cost-based intrastate access
rate in October 1998. Each network element reflects cost as a rate-of-return
carrier and to the extent the total rate does not recover revenue requirements
the CCL element is increased to recover our revenue requirements. The October
1998 rate change reflected a 2 cents per minute increase in the CCL element.
-22-
<PAGE> 24
In February 1999, the Telecommunications Regulatory Board (TRB) ordered
us to decrease the CCL element on the terminating side of the access rate. We
appealed the order, and continued billing the October 1998 rate through November
1999, at which time the increase was replaced with a monthly PICC of $2.75 per
line for residential and single-line business customers, and $6.00 per line for
multi-line business customers. In January 2000, the TRB instructed the Company
to show cause why it should not be required to refund the 2 cents increase since
February 1999 and accessed a $500,000 fine plus interest. We are in the process
of appealing this decision of the TRB.
INTERNET TRAFFIC
A competitive local exchange carrier (CLEC) brought an action before
the TRB complaining that we did not compensate them for local Internet traffic
originating from our customers and terminating on their network. The CLEC claims
that this traffic is subject to a reciprocal compensation agreement, providing
compensation at 1 cent per minute.
The TRB chose an arbitrator and ordered us to deposit the disputed
amount in escrow in a separate cash account pending resolution of the matter.
There was $6 million in the escrow account at December 31, 1999, representing
traffic from April through October 1999. The amount of $10 million for the
entire year of 1999 was deposited in escrow in January 2000.
We contend that the reciprocal compensation agreement is not applicable
to Internet traffic as the FCC ruled that Internet traffic is interstate in
nature. In an October 1999 ruling, the arbitrator accepted our position that
this agreement should not apply to interstate traffic, but determined that some
form of compensation is required. The CLEC filed a tariff with the FCC to
establish a per minute charge for Internet traffic. We filed a complaint with
the FCC challenging the legality of the tariff.
LONG DISTANCE CALLING PLANS
Telefonica Larga Distancia (TLD) filed complaints before the TRB in
November and December 1999 challenging three of our bundled long distance
calling plans on the basis that they are below our cost. The first complaint was
upheld and we subsequently withdrew the plan, which included competitive prices
for off-island and on-island long distance calls, free weekend on-island calls
and a minimum monthly billing of $15.
The second plan differed from the first by increasing the monthly
minimum to $18. The third plan was the same as the other two, except that
Internet access was added and the monthly minimum was replaced with a $15
monthly service charge. The TRB ordered that we retire these plans. A hearing is
scheduled for April 2000.
PAYPHONE SERVICE PROVIDER DIAL AROUND COMPENSATION
The FCC established that Payphone Services Providers (PSPs) be
compensated for "800" and "10XXX" calls at $.24 per call since October 1997. We
have neither received compensation as a PSP nor have we paid compensation to
other PSPs as a facility-based provider of an 800 on-island line.
While we have been sued by PSPs for non-payment, we do not expect
significant net exposure and could potentially realize additional income. We
currently hold roughly half the payphone market in terms of call volume.
However, in October 1997, the proportion was much higher. We are validating
traffic back to October 1997 with other long distance carriers to establish our
claim as a PSP.
LOCAL NUMBER PORTABILITY
Local Number Portability (LNP) is the ability of customers to retain
either existing telephone numbers after switching to another service provider,
without an impairment in quality, reliability or convenience. The FCC requires
that LNP be available six months after receiving a request from a CLEC. We
received such a request from Cellular One in June 1999, which would have
required a December 1999 implementation.
Because of year 2000 software modifications, we could not address this
request until December 1999 and we advised Cellular One that LNP would be
available in July 2000. Cellular One has accepted this schedule. Implementation
of LNP involves upgrading the software in all of our switches at an estimated
capital cost of $6 million in 2000 and $3 million in 2001. Operating expenses
are also estimated to be approximately $800,000 in 2000 and $500,000 in 2001.
-23-
<PAGE> 25
The FCC allows cost recovery for local exchange carriers through a
monthly end-user charge for a five-year period where available. We expect to
assess a monthly charge of $.30 per line to all customers as it becomes
available.
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.
We successfully completed our transition to the Year 2000. All of our
systems, network and equipment are currently operating normally. Service to our
customers was not affected by the Year 2000 transition.
COSTS TO ADDRESS YEAR 2000 ISSUES
The cost of the Year 2000 program was $21 million, which was expensed
as incurred.
THIRD PARTY RELATIONSHIPS
Our present assessment shows that no material impact is anticipated in
our business relationship with our major customers and suppliers. We will
continue to observe and evaluate the performance of our systems, networks and
equipment.
CONTINGENCY PLANS
Contingency plans are available for critical and non-critical systems
processes. We did not activate them during the Year 2000 transition. We will
continue to monitor our systems to ensure we can respond to an anticipated
disruption.
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<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The table below provides information about debt at December 31, 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 INITIAL
----------------------------------------------------------- PRINCIPAL MATURITY PRINCIPAL MATURITY
1999 2000 2001 2002 2003 2004 THEREAFTER TOTAL AMOUNT DATE
------- ------- ------- ------- ------- --------- ------------ ---------- --------- ---------
(IN THOUSANDS)
Long-term Debt
Fixed
Senior Notes
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2002(1)(2) $11,298 $18,450 $18,450 $20,200 $21,450 $ 21,450 $ 8,282 $ 119,580 $ 300,000 2002
Interest
Rate 6.15% 6.15% 6.15% 6.73% 7.15% 7.15% 7.15%
Senior Notes
2006(1) $16,279 $26,600 $26,600 $26,600 $26,600 $ 26,600 $ 36,575 $ 185,854 $ 400,000 2006
Interest
Rate 6.65% 6.65% 6.65% 6.65% 6.65% 6.65% 6.65%
Senior Notes
2009(1) $12,490 $20,400 $20,400 $20,400 $20,400 $ 20,400 $ 89,250 $ 203,740 $ 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)(7) $25,735 $39,825 $41,925 $43,625 $43,625 $ 43,625 $ 210,709 $ 449,069 $ 500,000 2004
Average interest
Rate(5)(6) 6.125% 7.965% 8.385% 8.725% 8.725% 8.725% 8.725%
364-day Revolving
Credit
Facility(4)(6) $ 1,817 $ -- $ -- $ -- $ -- $ -- $ -- $ 1,817 $ -- 2000
Average
interest
rate(5) 6.003% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%
</TABLE>
- ---------------
Assumptions:
(1) Results for 1999 reflect actual.
(2) Interest on the 2002 senior notes has been calculated at an average
rate of 6.15% up to May 2002, and 7.15% thereafter on the assumption
that the notes are refinanced for an additional three years.
(3) The outstanding balance of the five-year revolving credit facility as
of December 31, 1999 was $495 million and it was assumed that it would
be renewed for an additional five years.
(4) Interest for 1999 is based on the principal amount of $91.1M
outstanding from March 2, 1999 through June 2, 1999 and $26.1M
outstanding from June 2, 1999 through July 6, 1999.
(5) The interest rate for 1999 is a weighted average of the actual rates
for both lines.
(6) The interest rate projection for revolving credit facilities was
calculated using LIBOR projections plus 100 basis points plus
applicable margin.
(7) It was assumed that no principal payments were made throughout the
years.
-25-
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- See Index to Financial Statements on page F.
-26-
<PAGE> 28
ITEM 9. CHANGES & DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL
DISCLOSURES
Not applicable
-27-
<PAGE> 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
MANAGEMENT
BOARD OF DIRECTORS
The directors of the Company as of March 17, 2000 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)
International Operations of
GTE
Alfred Giammarino 43 Senior Vice President GTE Holdings (Puerto Rico)
International Finance,
Planning and Business
Development of GTE
Michael Masin 53 Vice Chairman of GTE GTE Holdings (Puerto Rico)
Jon Slater 53 President and Chief GTE Holdings (Puerto Rico)
Executive Officer,
Telecomunicaciones de PR
Howard Svigals 46 Vice-President-International GTE Holdings (Puerto Rico)
Finance and Planning of GTE
Richard Carrion 47 Chairman, President and Chief Popular, Inc.
Executive Officer, Popular, Inc.
Angel Morey 52 Secretary of State, PR Telephone Authority
Government of Puerto Rico
Lourdes Rovira 49 President, Government PR Telephone Authority
Development Bank
Vacant Puerto Rico Government Seat PR Telephone Authority
</TABLE>
Fares Salloum is Chairman of the Company. He was appointed Senior Vice
President of International Operations for GTE in June of 1997. He was also
recently appointed President International, The Americas, responsible for
wireless & wireline operations of the combined GTE/Bell Atlantic company. 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, VenWorld Telecom
C.A..(which holds a controlling interest in CANTV), CTI Holdings, S.A., and
Taiwan Cellular Corporation.
Alfred Giammarino was appointed Senior Vice President of International
Finance, Planning and Business Development for GTE in 1995. He was recently
appointed Senior Vice-President and Chief Financial Officer International,
responsible for finance, strategic planning and business development for the
international operations of the combined GTE/Bell Atlantic company. Mr.
Giammarino has held a wide range of senior management financial positions in his
15-year GTE career. He is a director of VenWorld Telecom C.A., CTI Holdings,
S.A., and The QuebecTel Group, Inc.
Michael Masin was appointed Vice Chairman of GTE in October 1993 and
President International in 1995. He was also recently appointed President and
Vice-Chairman of the combined GTE/Bell Atlantic company. Prior to joining GTE,
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
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<PAGE> 30
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.
Howard Svigals was appointed Vice President of International Finance
and Planning in 1998. Mr. Svigals has been the Vice President Planning and
Development for GTE Wireless since 1995. He has held several other management
positions during his 23 years at GTE including Vice-President and General
Manager of GTE Spacenet.
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.
Richard Carrion has been Chairman, President and Chief Executive
Officer of Popular, Inc., since 1990 and has been a director since 1982. Carrion
is a director of Bell Atlantic Corporation.
Angel Morey is the Secretary of State of the Government of Puerto Rico.
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 Rovira was appointed President of the Government Development
Bank (GDB) in August 1998 after serving as Executive Vice President since 1995.
Ms. Rovira is Chairman of the Economic Development Bank, the Governor's
Financial Board and is 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. 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.
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, and Howard Svigals. The Audit Committee oversees the financial reporting
process for which management is responsible, reviews the services provided by
our independent auditors, consults with the independent auditors in regard to
our audits and proposed audits, and reviews the need for internal auditing
procedures and the adequacy of our internal control systems.
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<PAGE> 31
EXECUTIVE OFFICERS
The executive officers of the Company as of March 30, 2000 are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Jon Slater 53 President and Chief Executive Officer
Frank Gatto 45 Vice President Finance and Chief Financial Officer
Jose Arroyo 35 Vice President Legal and Regulatory Affairs
Cristina Lambert 50 Vice President and General Manager of Wireline
Carla Ussery 36 Vice President and General Manager of Wireless
Elizabeth Lenz 52 Vice President Sales and Customer Contact
Georgia Scaife 49 Vice President Human Resources
Ileana Molina de Bachman 43 Vice President Corporate Communications
Roberto Correa 42 Vice President Network Services, Engineering and Technical Planning
Robert Huberty 47 Controller
Felipe Piazza 48 Treasurer
</TABLE>
Frank Gatto was appointed Vice President Finance and Chief Financial
Officer on August 27, 1999. He has over 21 years of experience with GTE. Prior
to joining the Company, Mr. Gatto was Vice President Finance and Planning at GTE
Airfone. From 1988 to 1995, Mr. Gatto served in various finance and planning
positions in GTE Wireless and GTE Corporate. Prior to 1988, Mr. Gatto held
numerous accounting positions within GTE Electrical Products Group, including
Division Controller. Mr. Gatto holds a bachelors degree in economics from
Villanova University and a masters degree in Finance from Boston College.
Jose Arroyo was appointed Vice President Legal and Regulatory Affairs
on March 17, 1999. He joined the Company in 1995 as Legal Counsel to the
President and was later appointed as Vice President Human Resources, Legal and
Regulatory Affairs. Prior to joining the Company, he was Associate Counsel for
two law firms in Puerto Rico and also served as Special Assistant to the
Attorney General of Puerto Rico. Mr. Arroyo holds a bachelors degree and a juris
doctorate from the University of Puerto Rico.
Cristina Lambert was appointed Vice President and General Manager of
Wireline on June 3, 1999. She has over 25 years of experience in the
telecommunications industry. After serving in various service management
positions in GTE, 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. The following year she assumed her most
recent responsibilities directing and implementing business strategies for GTE
national customer care organization. Ms. Lambert was born in the Republic of
Panama and holds a bachelors degree in Business Management from Indiana
University and a masters degree in Business Administration from Indiana Wesleyan
University.
Carla Ussery was appointed Vice President and General Manager of
Wireless on March 17, 1999. Prior to joining the Company, Ms. Ussery was General
Manager - Virginia Region, GTE Mobilnet. Ms. Ussery has been with GTE for eight
years and has held several financial management positions. Previously she worked
for Arthur Andersen. 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.
Elizabeth Lenz was appointed Vice President Sales and Customer Contact
on November 5, 1999. She is responsible for customer service, management of
PRTC's sales and services stores, billing and payment processing, centralized
traffic services, telephone directory business affairs and coordination of
repair and marketing centers. Ms. Lenz joined GTE in 1972 and served in several
operator services, customer services and operations assignments. In 1991, she
became Assistant Vice President Merger Integration for the GTE/Contel merger,
and two years later was named Assistant Vice President Reengineering
Implementation for Telops. Later, after serving in a national planning
assignment, Lenz joined GTE International as Assistant Vice President Products
and Services Integration, and in 1998 was named to a position in the GTE/Bell
Atlantic merger integration planning office. She holds a bachelors degree in
Business Management from the Eastern Illinois University.
-30-
<PAGE> 32
Georgia Scaife was appointed Vice President Human Resources on March
17, 1999. She has held numerous positions during her 17-year tenure with GTE,
including as a Director of Human Resources, Diversity and Compliance Programs,
Workforce Effectiveness, and Employee Relations. She holds a bachelors degree in
Sociology and has done post-graduate work in public and business administration.
Ileana Molina de Bachman was appointed Vice President Corporate
Communications on August 30, 1999. Ms. Bachman has over 22 years of experience
focusing on consumer markets in Puerto Rico, Mexico, the Dominican Republic and
the Hispanic market in the United States. Prior to joining the Company, Ms.
Bachman was the Director of Marketing and Strategic Planning of Suiza Fruit
Caribbean and from 1995 to 1998 with Frito Lay. She has also worked for Procter
& Gamble, Young and Rubicam and RJ Reynolds. She holds a bachelors degree from
the Boston College School of Management.
Roberto Correa was appointed Vice President Engineering and Technical
Planning on February 2, 2000. Mr. Correa was previously the Director of Network
Planning and Network Engineering and has held various management positions in
his 19 years including as a director of Mobile Services, Transmission
Engineering and Central Office Engineering. He represents the Company on various
technical committees before the United States Telecommunications Association. He
holds a bachelors degree in Electrical Engineering from the University of Puerto
Rico and a masters degree in Electrical Engineering from Georgia Tech.
Robert Huberty was appointed Controller on June 1, 1999. He has over 21
years of Finance, Marketing and Information Technology experience with GTE in
their corporate, international and former equipment manufacturing groups. Prior
to joining the Company, he was the Director of GTE International Mergers and
Acquisitions involved in the privatization of the Company. He holds a bachelors
degree in Accounting and a masters degree in Finance from Pace University and is
a Certified Public Accountant.
Felipe Piazza was appointed Treasurer of the Company in 1996 and has
held numerous management positions in his 27 year career at the Company,
including Vice President Finance, Controller, Director of Budgets, Assistant
Vice President Wireless, Assistant Vice President and Group Director Cost
Separations and Rates. He holds a bachelors degree in Business Administration
from the University of Puerto Rico.
-31-
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation of the five highest
compensated company executives.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- ---------------------------------------------------
AWARDS PAYOUTS
--------------------- ----------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS ($) SARS(#) PAYOUTS($)
---------- --------- --------- --------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Jon Slater
President & Chief Executive Officer 1999(1) 265,000 158,300 375,400
Frank Gatto
VP Finance & Chief Finance Officer 1999 185,000 75,700 69,500
Christina Lambert
VP & General Manager of Wireline 1999 160,000 91,700 52,900
Elizabeth Lenz
VP Customer Care & Sales 1999 188,700 82,000
Georgia Scaife
VP Human Resources 1999 154,000 70,500
</TABLE>
GTE RETIREMENT PROGRAMS
GTE PENSION PLANS
The following table illustrates the estimated annual benefits payable
under GTE's benefit pension plans. This information is included as the highest
compensated executives shown above who are GTE employees. GTE bills the Company
for the executives out-of-pocket benefit expenses. Consequently, these pension
expenses are not billed to the Company. The table assumes normal retirement at
age 65 and is calculated on a single life annuity basis:
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ---------------------------------------------------------------------------------
EARNINGS 15 20 25 30 35
- --------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 20,265 $ 27,020 $ 33,775 $ 40,530 $ 47,285
200,000 42,015 56,020 70,025 84,030 98,035
300,000 63,765 85,020 106,275 127,530 148,785
400,000 85,515 114,020 142,525 171,030 199,535
500,000 107,265 143,020 178,775 214,530 250,285
600,000 129,015 172,020 215,025 258,030 301,035
700,000 150,765 201,020 251,275 301,530 351,785
800,000 172,515 230,020 287,525 345,030 402,535
900,000 194,265 259,020 323,775 388,530 453,285
1,000,000 216,015 288,020 360,025 432,030 504,035
1,200,000 259,515 346,020 432,525 519,030 605,535
</TABLE>
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<PAGE> 34
The plan is noncontributory for all employees and participating
affiliates, not covered by collective bargaining agreements. Pension benefits
are related to basic salary incentive payments and certain other incentive
compensation. Pensions are computed on a two-rate basis of 1.15% and 1.45% for
each year of service, with the 1.15% being applied to that portion of the
average annual salary for the five highest consecutive years that does not
exceed $33,000, and the 1.45% being applied to that portion of the average
annual salary for the five highest consecutive years that exceeds this level up
to the statutory compensation limit.
Under U.S. federal law, an employee's benefits under a qualified
pension plan are limited to certain maximum amounts. GTE maintains the Excess
Pension Plan and the Supplement Executive Retirement Plan to compensate for
these limits.
EXECUTIVE RETIRED LIFE INSURANCE PLAN
GTE's Executive Retired Life Insurance Plan provides executives a
postretirement life insurance benefit up to three times final base salary.
Benefits may be paid as life insurance or, alternatively, an equivalent amount
equal to the present value of the life insurance amount as a lump sum payment,
as an annuity or in installment payments.
COMPANY'S PENSION PLAN
The following table illustrates the estimated annual benefits payable
under the Company's 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 20 25 30
------------- --------- --------- --------- ---------
<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>
The retirement plan for salaried employees is a noncontributory pension
plan for the benefit of all our employees who are not covered by the collective
bargaining agreements, unless the agreement provides for coverage under the
retirement plan for salaried employees. It provides a benefit based on a
participant's years of service and earnings. Our pension benefits and
contributions to the retirement plan for salaried employees are related to basic
salary differentials, exclusive of overtime differentials, incentive
compensation and other similar types of payments. Under the retirement plan for
salaried employees, pensions are computed on an offset formula basis of 2% of
average annual salary for the three highest consecutive years for each year of
service 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.
Under federal law, an employee's benefits under a qualified pension plan,
such as the retirement plan for salaried employees, are limited to certain
maximum amounts. We maintain a supplemental executive retirement plan, which
supplements the benefits of any participant in the retirement plan for salaried
employees in an amount by which any participant's benefits under the retirement
plan for salaried employees are limited by law.
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<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT
SHAREHOLDERS AND SHAREHOLDER RELATIONSHIPS
SHARE OWNERSHIP
There was 50 million authorized and 25 million outstanding shares of
common stock at December 31, 1999 of no par value. A 25 to 1 stock split was
approved and became effective on December 31, 1999 to decrease the per share
market price in order to increase their affordability for ESOP participants. The
owners of the common stock are as follows:
<TABLE>
<CAPTION>
SHARES
---------------------
NAME OF BENEFICIAL OWNER ADDRESS NUMBER PERCENTAGE
- -------------------------- ------- ------- ----------
<S> <C> <C> <C>
GTE Holdings (Puerto Rico) LLC GTE Holdings (Puerto Rico) LLC
5221 North O'Connor Boulevard
Irving, Texas 75039 10,002,525 40.01
Popular Inc. 209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918 2,497,500 9.99
Puerto Rico Telephone Authority c/o Government Development Bank
For Puerto Rico
Minillas Government Center
San Juan, PR 00940 10,749,975 43.00
Employee Stock Ownership Plan: c/o Dennis M. Kurisaki
U.S. Trust Company National Association
515 South Flower Street
Los Angeles, California 90171
Fully allocated and vested
to participant 1,000,000 4.00
Unallocated 750,000 3.00(1)
---------- -------
25,000,000 100.00
---------- -------
All Directors and Executive
Officers as a Group
(17 persons) 0 0
</TABLE>
- ---------------
(1) The unallocated shares were acquired through a loan from the Company.
SHAREHOLDER'S AGREEMENT
The board of directors includes 9 members composed of 5 GTE directors,
1 Popular Inc. director, and 3 Puerto Rico Government directors. The ESOP does
not hold a board seat. The number of government members is related to their
ownership. They are entitled to hold 3, 2, and 1 seat as long as they hold at
least a 25%, 15%, and 4% ownership interest, respectively. Unanimous approval is
required for the following actions:
o An acquisition, strategic alliance, or joint venture exceeding
15% of assets;
o Issuance of equities, convertible equity securities, or debt;
o Changes in dividend policy;
o Transactions with GTE exceeding $1 million, annually
-34-
<PAGE> 36
Unanimous approval is required for the additional following matters as
long as the Government holds at least a 10% ownership interest:
o Asset sales of 25% or more of assets;
o Amendments to the Certificate of Incorporation adversely
affecting the government;
o The liquidation, merger or consolidation of the Company
GTE must maintain it's current ownership interest until March 2, 2002,
at which time it can reduce it's interest to 35% and then reduce it's interest
altogether after March 2, 2004. 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.
GTE and Popular, Inc., holds an option through March 2, 2002 to
purchase up to an additional 15% interest held by the Government at $45.94 per
share. GTE also holds a right of first refusal should the Government sell their
interest other than in a public offering or a widely disseminated private
placement.
The Company has agreed to use all commercially reasonable efforts to
support the initial public offering (IPO) of the Government's interest after
August 2000. GTE and the Government agreed that either party couldn't compete in
the telecommunications business until the earlier of:
o The date when the Government ceases to own at least 5% of the
shares,
o The latter of 7 years or 1 year after the IPO.
-35-
<PAGE> 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH GTE
MANAGEMENT AND TECHNOLOGY LICENSE AGREEMENT
GTE is responsible for providing advice and direction regarding the
administration and operations of our business as well as providing it's existing
intellectual property and software that is not restricted by patent or
copyrights under a 5-year agreement expires on March 2, 2004. GTE is reimbursed
for transportation, lodging, and meals plus a fee based on the following
percentages of EBITDA, excluding provisions for voluntary severance programs:
o 8% for years 1 and 2 of the agreement;
o 7% for years 3 and 4 of the agreement;
o 6% for year 5 of the agreement.
Cash payments for services through the end of the second quarter of 2000
are deferred, with interest, until September 2, 2000. The total fee accrued in
1999 was $37 million.
OTHER AFFILIATED TRANSACTIONS
The Company also enters into transactions with second parties for the
purchase of materials and supplies and plant and equipment used in construction
and expansion of its telecommunications network. Such transactions are subject
to conditions similar to transactions with independent third parties. The
Company also participates with affiliates of shareholders in sharing the cost of
development of computer software programs by third party vendors. The
shareholders receive no compensation for arranging the development of such
systems. In addition, the Company reimburses shareholders and affiliates for the
direct cost of a limited number of employees that work at the Company in
management positions.
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.
TRANSACTIONS WITH POPULAR, INC.
Popular, Inc. provides general banking services including bill
collection, lock-box, and cash management services. These services, which are
evaluated on an arms-length basis cost approximately $5 million in 1999. A
unused $200 million working capital credit facility is also maintained with
Popular, Inc. which expired on February 29, 2000.
-36-
<PAGE> 38
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) List of Financial Statements and Financial Statements Schedules:
See Index to Financial Statements on page F.
(1) Valuation and Qualifying Accounts
(Schedules other than those listed are omitted for the reason that they are
not required or are not applicable or the required information is shown in
the financial statements or notes thereto.)
(2) Exhibits
(b) Reports on Form 8-K
None
-37-
<PAGE> 39
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997 F-6
Notes to Consolidated Financial Statements for the Years Ended December 31,
1999, 1998 and 1997 F-7
</TABLE>
F
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Telecomunicaciones de Puerto Rico, Inc.:
We have audited the accompanying consolidated balance sheet of
Telecomunicaciones de Puerto Rico, Inc. and subsidiaries (the "Company") as of
December 31, 1999, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity and cash flows for
the period from March 2, 1999 to December 31, 1999 and the combined balance
sheet of Puerto Rico Telephone Company, Inc. and Celulares Telefonica, Inc. (the
"Predecessors") as of December 31, 1998 and their combined statements of
operations, comprehensive income (loss), changes in shareholder's equity and
cash flows for the period from January 1, 1999 to March 1, 1999 and the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the management of the Company and the Predecessors. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Telecomunicaciones de Puerto
Rico, Inc. and subsidiaries as of December 31, 1999 and the consolidated results
of their operations and their cash flows for the period from March 2, 1999 to
December 31, 1999, and the combined financial position of Puerto Rico Telephone
Company, Inc. and Celulares Telefonica, Inc. as of December 31, 1998 and the
combined results of their operations and their cash flows for the period from
January 1, 1999 to March 1, 1999 and the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Juan, Puerto Rico
March 24, 2000
F-1
<PAGE> 41
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
--------------- ---------------
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,482 $ 35,611
Accounts receivable, net of allowance for doubtful accounts
of $66,994,000 and $56,003,000 in 1999 and 1998, respectively 357,895 365,137
Inventory and supplies, net 31,370 28,117
Prepaid expenses 5,407 6,491
--------------- ---------------
Total current assets 440,154 435,356
PROPERTY, PLANT AND EQUIPMENT, net 1,742,489 1,987,901
INTANGIBLES, net 371,378 21,664
DEFERRED INCOME TAX 256,559 --
OTHER ASSETS 17,167 11,683
--------------- ---------------
TOTAL ASSETS $ 2,827,747 $ 2,456,604
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 2,317 $ 235
Other current liabilities 348,368 346,993
--------------- ---------------
Total current liabilities 350,685 347,228
LONG-TERM DEBT, excluding current portion 1,495,109 515
OTHER NON-CURRENT LIABILITIES 612,325 296,177
--------------- ---------------
Total liabilities 2,458,119 643,920
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 699,284 6
Additional paid in capital -- 1,835,800
Deferred ESOP compensation (26,100) --
Subscription receivable (170,363) --
Retained deficit (133,193) --
Accumulated other comprehensive loss -- (23,122)
--------------- ---------------
Total shareholders' equity 369,628 1,812,684
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,827,747 $ 2,456,604
=============== ===============
</TABLE>
See notes to consolidated financial statements for the Company and its
Predecessors, respectively.
F-2
<PAGE> 42
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
------------ -------------------------------------------
FOR THE 1999 PERIOD FOR THE YEARS ENDED
---------------------------- ----------------------------
MARCH 2, JANUARY 1,
THROUGH THROUGH DECEMBER 31, DECEMBER 31,
DECEMBER 31, MARCH 1, 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Local services $ 414,881 $ 80,196 $ 467,819 $ 447,338
Long distance services 161,998 48,613 251,754 252,259
Access services 298,563 49,517 300,448 277,469
Cellular services 113,507 20,541 100,265 102,082
Paging services 37,542 8,202 59,728 55,212
Directory services 32,878 6,726 40,195 42,611
Other services and sales 66,897 9,505 50,475 57,150
------------ ------------ ------------ ------------
Total revenues and sales 1,126,266 223,300 1,270,684 1,234,121
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 394,696 91,723 432,792 450,288
Selling, general and administrative 341,654 49,983 314,098 260,084
ESOP government grant -- 26,100 -- --
Early retirement provision 203,187 4,226 -- --
Depreciation and amortization 241,974 50,393 296,493 279,198
------------ ------------ ------------ ------------
Total operating costs and expenses 1,181,511 222,425 1,043,383 989,570
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (55,245) 875 227,301 244,551
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net (65,127) 407 3,208 3,705
Other income (expense), net 1,226 569 (6,142) (2,452)
------------ ------------ ------------ ------------
Total other income (expense), net (63,901) 976 (2,934) 1,253
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX (119,146) 1,851 224,367 245,804
INCOME TAX BENEFIT (46,453) -- -- --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE (72,693) 1,851 224,367 245,804
EXTRAORDINARY CHARGE-
DISCONTINUANCE OF REGULATORY
ACCOUNTING, net of income tax benefit of $38,750,000 (60,500) -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (133,193) $ 1,851 $ 224,367 $ 245,804
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements for the Company and its
Predecessors, respectively.
F-3
<PAGE> 43
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
--------- -----------------------
FOR THE 1999 PERIOD FOR THE YEARS ENDED
------------------------- ---------------------------
MARCH 2, JANUARY 1,
THROUGH THROUGH DECEMBER 31, DECEMBER 31,
DECEMBER 31, MARCH 1, 1998 1997
------------ ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (133,193) $ 1,851 $ 224,367 $ 245,804
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustment 9,903 2,369 (17,362) 6,259
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ (123,290) $ 4,220 $ 207,005 $ 252,063
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements for the Company and its
Predecessors, respectively.
F-4
<PAGE> 44
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DEFERRED RETAINED OTHER
COMMON PAID-IN ESOP SUBSCRIPTION EARNINGS COMPREHENSIVE
STOCK CAPITAL COMPENSATION RECEIVABLE (DEFICIT) LOSS TOTAL
---------- ---------- ------------ ------------ ---------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSORS (COMBINED):
BALANCE DECEMBER 31, 1996 $ 6 $1,863,354 $ -- $ -- $ -- $ (12,019) $ 1,851,341
Net income 245,804 245,804
Dividends and return of capital (255,458) (245,804) (501,262)
Capital contributions 322,896 322,896
Minimum pension liability adjustment 6,259 6,259
---------- ---------- ------------ ------------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 6 1,930,792 -- -- -- (5,760) 1,925,038
Net income 224,367 224,367
Dividends and return of capital (305,468) (224,367) (529,835)
Capital contributions 210,476 210,476
Minimum pension liability adjustment (17,362) (17,362)
---------- ---------- ------------ ------------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 6 1,835,800 -- -- -- (23,122) 1,812,684
Net income, January 1, 1999 to
March 1, 1999 1,851 1,851
Dividends and return of capital (98,811) (1,851) (100,662)
Capital contributions 110,577 110,577
Special dividend (1,570,182) (1,570,182)
Shares of common stock
contributed to the ESOP 26,100 (26,100) --
Minimum pension liability
adjustment 2,369 2,369
---------- ---------- ------------ ------------ ---------- ----------- -----------
BALANCE, MARCH 1, 1999 $ 6 $ 303,484 $ (26,100) $ -- $ -- $ (20,753) $ 256,637
========== ========== ============ ============ ========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY:
BALANCE, MARCH 1, 1999 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Acquisition by GTE and Popular Inc.
and partial step-up accounting 530,876 (26,100) (9,903) 494,873
ESOP capital contribution 8,700 (8,700)
Contribution receivable from PRTA 159,708 (159,708)
Net loss, March 2, 1999 to December
31, 1999 (133,193) (133,193)
Accretion of discount on subscription
receivable (10,655) (10,655)
ESOP compensation expense 8,700 8,700
Minimum pension liability adjustment 9,903 9,903
---------- ---------- ------------ ------------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 699,284 $ -- $ (26,100) $ (170,363) $ (133,193) $ -- $ 369,628
========== ========== ============ ============ ========== =========== ===========
</TABLE>
See notes to consolidated financial statements for the Company and its
Predecessors, respectively.
F-5
<PAGE> 45
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDECESSORS (COMBINED)
-------------- -------------------------------------------------------
FOR THE 1999 PERIOD FOR THE YEARS ENDED
-------------------------------- --------------------------------------
MARCH 2, JANUARY 1
THROUGH THROUGH
DECEMBER 31, MARCH 1, DECEMBER 31, 1998 DECEMBER 31, 1997
-------------- -------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (133,193) $ 1,851 $ 224,367 $ 245,804
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary charge 60,500
Depreciation and amortization 241,974 50,393 296,493 279,198
Early retirement provision 203,187
Accretion of discount on subscription receivable (10,655)
Deferred income tax (46,453)
Compensation expense resulting from contribution
of shares to ESOP by PRTA 26,100
ESOP compensation expense 8,700
Loss on retirement of telephone plant 13,638
Changes in assets and liabilities:
Accounts receivable 12,442 (14,496) (45,670) (14,860)
Inventory and supplies 9,428 (1,306) 7,709 23,606
Prepaid expenses and other assets (7,018) 2,374 (3,653) 5,198
Other current and non-current liabilities (22,783) (9,059) 120,867 (30,706)
-------------- -------------- -------------- --------------
Net cash provided by operating activities 316,129 55,857 613,751 508,240
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of telephone plant,
including cost of removal (240,117) (33,237) (287,988) (362,247)
Net salvage on retirements 14,150 73 8,382 10,923
Acquisition of Internet Service Provider (20,440)
-------------- -------------- -------------- --------------
Net cash used in investing activities (246,407) (33,164) (279,606) (351,324)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 110,577 210,476 322,896
Dividends and return of capital (83,116) (529,835) (501,262)
Deferred ESOP contribution (26,100)
Net borrowings under line-of-credit agreement
and proceeds from issuance of long-term debt 1,074,594 1,583,044
Special dividend paid to PRTA (1,570,182)
Repayment of principal on debt and capital
lease obligations (1,171,361) (429) (325)
-------------- -------------- -------------- --------------
Net cash provided by (used in) financing
activities (96,767) 14,223 (319,788) (178,691)
-------------- -------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (27,045) 36,916 14,357 (21,775)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 72,527 35,611 21,254 43,029
-------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 45,482 $ 72,527 $ 35,611 $ 21,254
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements for the Company and its
Predecessors, respectively.
F-6
<PAGE> 46
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. THE ACQUISITION, RELATED CORPORATE RESTRUCTURING AND CHANGES IN ACCOUNTING
BASIS
THE ACQUISITION AND CORPORATE RESTRUCTURING
On April 7, 1997, the Government of the Commonwealth of Puerto Rico (the
"Government") announced a plan, which resulted 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")
and entered into the acquisition agreement (the "Acquisition"). 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"), a public
corporation and an instrumentality of the Government, 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, 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 a controlling interest in the Predecessors to
the GTE Group under the Acquisition agreement.
The PRTA received approximately $2.0 billion as part of the Acquisition. A
portion of this amount was paid as a special dividend amounting to
approximately $1.6 billion.
The closing of the sale occurred on March 2, 1999, under the following
terms:
o 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% of the Company stock.
o The PRTA obtained a forty-three percent (43%) interest less one
share of the stock of the Company in exchange for its remaining
interests in PRTC and CT. In the Acquisition agreement, the PRTA agreed
to contribute cash or stock worth a total of $200 million as a capital
contribution in even installments over five years beginning on March 2,
2000. The Company will use the $200 million to fund its unfunded
pension and other post-retirement 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. Future receipts have been
recorded at their discounted present value of $159.7 million (at a 8%
discount rate).
In conjunction with the Acquisition, PRTA contributed 3% of the Company's
shares to a newly created employee stock ownership plan (the "ESOP")
amounting to $26.1 million, and the GTE Group purchased an additional 1% of
the Company's shares from the PRTA amounting to $8.7 million, and
contributed them to the ESOP. The shares for the $26.1 million fully vested
to employees on March 2, 1999. The ESOP also acquired an additional 3% with
funds borrowed from the Company, amounting to $26.1 million, for the
purpose of establishing a newly created contributory investment benefit
plan for current and future employees.
PARTIAL STEP-UP IN ACCOUNTING BASIS
The Acquisition was accounted for following rules governing partial step-up
in accounting basis under the Accounting Principles Board Opinion (APB)
No.16, Business Combinations, and Emerging Issues Task Force Consensus
(EITF) 88-16, "Basis in Leveraged Buyout Transactions". The Acquisition
resulted in a purchase of 100% of the common stock of PRTC and CT by the
Company, a purchase of a controlling interest in the Company by a new group
of controlling investors with the shareholders of the Predecessors
maintaining a minority interest in the new company. Under EITF 88-16, a
partial step-up is required to reflect the difference between the book
value of the portion of the assets and liabilities purchased by the GTE
Group and the fair
F-7
<PAGE> 47
value on the Acquisition date. In accordance with EITF 88-16, no step-up is
recorded for the portion of the assets and liabilities owned by the PRTA.
The excess of the purchase price over the basis in the assets and
liabilities has been allocated to the net assets reflecting the 50%
interest acquired by the GTE Group and Popular as follows (amounts in
thousands):
<TABLE>
<S> <C>
Goodwill and other long-term intangibles $ 336,118
Deferred tax assets 171,356
Property, plant and equipment (99,250)
Employee benefit plan liabilities (180,740)
Other intangibles, net (98)
-----------
Total increase in paid-in capital $ 227,386
===========
</TABLE>
These adjustments consider the effect of a change in the status of the
Company to a tax paying enterprise after March 2, 1999, as required by the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". The Company has estimated the purchase price
allocation 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 within one year of the
Acquisition upon final determination of the tax bases of the assets and
liabilities for income tax purposes. The deferred tax asset will be reduced
in the future as the tax benefits associated with the increase in the tax
basis of the Company's assets are realized through its payment of reduced
income taxes.
DISCONTINUATION OF SFAS NO. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES
OF REGULATION
During 1996, the Government enacted the Telecommunications Act of 1996,
which began a process to open the local telecommunications market to
competition. This process resulted in the PRTA's decision to privatize the
local exchange telephone operations of the Predecessors.
Prior to the Acquisition, PRTC's rates were regulated based upon rate of
return/cost of service regulation. The Predecessor entity was also entitled
to cost support from subsidy pools administered by the 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 which permitted an annual
rate of return of up to 11.5%. The high cost support subsidies provided the
PRTC with the funds, necessary to achieve the rate of return. After the
Acquisition, PRTC, as an indirect subsidiary of GTE, is considered a price
cap carrier. As such, the PRTC's prices, rather than its costs and
earnings, will be regulated. The PRTC must exit the long-term support pool
on July 1, 2000 and implement a price cap mechanism to recover 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 Company
estimates that the annualized pretax loss in revenues is approximately $77
million.
PRTC also terminated, in anticipation of the Acquisition, a mutual
non-compete agreement with Telefonica Larga Distancia (TLD), a long
distance service provider. The agreement prohibited PRTC from providing
off-island long distance service and TLD from providing any
telecommunication service in Puerto Rico. In addition, on February 1, 1999,
the requirement for competitors customers to dial an access code was
eliminated with the implementation of equal access dialing as mandated by
the Federal Communications Commission ("FCC"). These actions significantly
increased competition. PRTC also agreed not to increase prices for basic
wireline services for three years in the Acquisition agreement.
As a result of changes in rate regulation, the competitive environment and
the terms of the Acquisition, PRTC determined that regulatory accounting
principles set forth in SFAS No. 71 are no longer applicable to its
operations as prices will be based on market forces instead of cost.
Accordingly, PRTC discontinued the application of SFAS No. 71 in
conformance with SFAS No. 101, Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71. In general, SFAS
No. 71 required the Company to depreciate plant and equipment over lives
approved by the regulator that, in many cases, extended beyond the assets'
economic lives. As a result of this requirement, the recorded net book
value of assets were in many cases higher than that which would otherwise
have been recorded had depreciation been based on the economic life.
F-8
<PAGE> 48
As a result of the decision to discontinue SFAS No. 71, an assessment of
the cost of assets that will not be realized based on an analysis of the
expected cash flows from the plant and equipment over their remaining
economic lives has resulted in the write-down of plant and equipment of
$198.5 million. A proportionate amount of this adjustment (approximately
$99 million) was accounted for as a purchase price adjustment in accordance
with the provisions of partial step-up accounting to reflect the fair
market values of the assets acquired. The remaining $99 million was
recorded as an extraordinary charge in the accompanying consolidated
statements of operations ($60.5 million after tax). The Company also
shortened the depreciable lives of its plant and equipment, as set forth
below:
<TABLE>
<CAPTION>
Depreciable Lives
Asset Category in Years
------------------------ -------------------
Before After
------ -----
<S> <C> <C>
Digital Switching Equipment 17.2 11.5
Digital Circuit Equipment 12.7 8.4
Underground Cable 25.9 15.2
Buried Cable 23.9 14.5
Other 6.3 3.8
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Predecessors for the two-month
period ended March 1, 1999, and the years ended December 31, 1998 and 1997,
reflect the historical cost of their assets and liabilities and results of
their operations prior to completion of the Acquisition and are referred to
as the Predecessors' combined financial statements. Accordingly, the
accompanying financial statements of the Predecessors and the Company are
not comparable in all material respects, because the Company's financial
condition, results of operations, and cash flows use a new accounting
basis. The Company is a holding company with no assets or operations other
than its investment in its subsidiaries. PRTC and CT are wholly owned
subsidiaries of the Company, and fully and unconditionally guarantee
payment of the senior notes, as set forth in the financing indentures
pursuant to which the senior notes were issued.
Separate financial statements for PRTC and CT are excluded because the
aggregate net assets, earnings and equity of PRTC and CT are substantially
equivalent to the aggregate net assets, earnings and equity of the Company
on a consolidated basis. Management believes that separate financial
statements and other disclosures concerning PRTC and CT are not material to
investors. In addition, the Company's other subsidiaries, Puerto Rico
Telephone Directories, Inc. and Datacom Caribe, Inc. (which are not
guarantors of the senior notes) are inconsequential to the consolidated
financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after the elimination of significant
intercompany transactions and balances. The financial statements of the
Predecessors include the combined accounts of PRTC and CT after the
elimination of all significant transactions between these two companies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-9
<PAGE> 49
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.
REVENUE RECOGNITION
Revenues are recognized when services are rendered or products are
delivered to customers.
Common carrier line access revenues are generated based on the
participation by the PRTC in revenue pools with other telephone companies
managed by the NECA, which are funded by access charges authorized by the
FCC and long-term support amounts received from the Universal Service Fund.
Pooled amounts are divided among telephone companies based on allocations
of costs and investments in providing interstate services. Revenues are
based on preliminary allocations and cost studies and are subject to final
settlement in subsequent periods.
Revenues from prepaid cellular cards are recognized based upon usage with
any residual balances recognized at the expiration date.
Installation fees, which are set at amounts intended to recover
installation costs, are recognized as revenue at the time of installation.
Installation revenues in excess of installation costs, if any, are deferred
and amortized over the estimated life of the customer.
CASH AND CASH EQUIVALENTS
Short-term investments with maturities of three months or less are
classified as 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 and the related
allowance may change in the near term. The Company is not dependent on any
single customer.
INVENTORY AND SUPPLIES
Inventory and supplies are stated at average cost, net of obsolescence
reserves.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the original cost of acquisition
or construction, including interest on funds borrowed to finance the
acquisition or construction of major capital additions. No interest was
capitalized for the year ended December 31, 1998. Property 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 is computed on the straight-line method at rates
considered adequate to allocate the cost of property over their estimated
lives.
INTANGIBLE ASSETS
As a result of the Acquisition, the Company recorded goodwill and other
long-term intangible assets of $336 million, which are amortized on a
straight-line basis over 25 years. A Wireless customer base intangible of
$17.5 million was also created with the Acquisition. The customer base is
being amortized on a straight-line basis over 3 years to reflect the period
over which revenues are expected to be generated by customers.
F-10
<PAGE> 50
The Company recorded goodwill of $21 million and a customer base intangible
of $3 million relating to the acquisition of Datacom Caribe, Inc., an
Internet Service Provider. These intangible assets are being amortized on a
straight-line basis over 10 and 4 years, respectively.
EMPLOYEE BENEFIT PLANS
Pension and post-retirement health care and life insurance benefits earned
as well as interest on projected benefit obligations are accrued currently.
Prior service costs and credits resulting from changes in plan benefits are
amortized over the average remaining service period of the employees
expected to receive the benefits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts for cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to their short-term duration.
The carrying value of short and long-term debt approximates fair value.
VALUATION OF ASSETS
Assets are assessed for impairment when changes in circumstances indicate
that their carrying value are not 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 cash flows, salvage value or expected net sales
proceeds. Losses are recognized in circumstances where an impairment
exists, at the amount by which the carrying value of assets exceeds fair
value. Fair value is determined based on quoted market prices or other
information when quoted market prices are not available.
In instances where goodwill has been recorded in connection with an
impairment, 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 impairment
losses, as well as gains or losses on asset sales as a component of
operating income. Under APB No. 17, "Intangible Assets," the Company also
annually evaluates the future period over which the benefit of goodwill or
other intangibles will be recovered, based on cash flows, and changes the
amortization life accordingly.
INCOME TAXES
The Company uses an asset and liability approach in accounting for income
taxes following the provisions of SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are established for temporary
differences between the way certain income and expense items are reported
for financial reporting and tax purposes. Deferred tax assets and
liabilities are adjusted, to the extent necessary, to reflect tax rates
expected to be in effect when the temporary differences reverse. A
valuation allowance is established for deferred tax assets for which
realization is not likely.
RECLASSIFICATIONS
Reclassifications of prior years' data have been made, where appropriate,
to conform to the current presentation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Under the
provisions of this SOP, effective January 1, 1999, the Company was required
to capitalize and amortize the cost of all internal-use software
expenditures. Implementation of this statement did 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 and hedging activities. The statement requires entities that
use derivatives to measure
F-11
<PAGE> 51
these instruments at fair value and record them as assets or liabilities on
the balance sheet. It also requires entities to reflect gains or losses
associated with changes in the fair value of these derivatives, either in
earnings or as a separate component of comprehensive income, depending on
the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, as amended by SFAS
No. 137, which is now effective January 1, 2001. The Company does not
currently use derivatives. Therefore, the adoption of SFAS No. 133 is not
expected to have a significant effect on the results of operations or
financial condition.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition as well as criteria
for when revenue is generally realized and earned and also requires the
deferral of incremental direct selling costs. The Company is currently
assessing the impact of SAB No. 101.
3. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma summary represents the consolidated
results of operations of the Company as if the Acquisition had occurred at
the beginning of 1998, after giving effect to certain adjustments. This pro
forma information is presented for informational purposes only and may not
be indicative of the results of operations as they would have been if the
Company had been a single entity during 1999 and 1998, nor is it indicative
of the results of operations which may occur in the future.
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Revenues and sales $ 1,279,566 $ 1,200,684
--------------- ---------------
Loss before income tax $ (221,537) $ (51,515)
--------------- ---------------
Loss before extraordinary charge $ (135,138) $ (31,424)
=============== ===============
</TABLE>
The pro forma amounts reflect adjustments for interest expense, property,
municipal and unemployment taxes, management and technology fees,
amortization expense, and an anticipated loss in long term support from
NECA.
F-12
<PAGE> 52
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 23,441 $ 26,871
Buildings 322,431 315,867
Central office and transmission equipment 1,125,272 1,004,347
Outside plant 1,836,360 1,733,846
Other equipment 365,254 359,282
------------ ------------
Total plant in service 3,672,758 3,440,213
Less accumulated depreciation and amortization 2,056,432 1,701,288
------------ ------------
Net plant in service 1,616,326 1,738,925
Construction in progress 126,163 248,976
------------ ------------
Total $ 1,742,489 $ 1,987,901
============ ============
</TABLE>
Fifty percent of the accumulated depreciation balance was adjusted based on
the revaluation of property, plant and equipment, as a partial step-up in
basis is 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>
COMPANY PREDECESSORS
(COMBINED)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill $ 150,236 $ --
Franchise-Wireline 96,000 --
Franchise -Wireless 60,000 --
Brand 50,900 --
Customer base-Wireless 17,500 --
Deferred pension asset 6,290 21,664
Other 5,479 --
------------ ------------
Total cost 386,405 21,664
Less accumulated amortization 15,027 --
------------ ------------
Total $ 371,378 $ 21,664
============ ============
</TABLE>
F-13
<PAGE> 53
6. PENSION PLAN
The Company has two noncontributory pension plans covering all full-time
employees. The Company makes contributions, which meet minimum Employee
Retirement Income Security Act of 1974 (the "ERISA") requirements, as these
contributions are tax deductible. Plan assets are invested in equity and
fixed income securities.
All full-time employees also participate in a Lump Sum Retirement Plan (the
"Lump Sum Plan"). Participants are entitled to a lump sum amount equal to a
number of months based on years of service. This Plan is subject to ERISA
provisions, and is exempt from income tax.
Health care and life insurance benefits are provided to former employees who
reach normal retirement age or receive this benefit under an early
retirement program. The following table sets forth the status of the plans,
the actuarial assumptions and the amounts in the financial statements as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION AND LUMP
SUM BENEFITS OTHER POSTRETIREMENT BENEFITS
-------------------------------------- ----------------------------------------
FOR THE 1999 PERIOD FOR THE 1999 PERIOD
-------------------------------------- ----------------------------------------
PREDECESSORS PREDECESSORS
COMPANY (COMBINED) COMPANY (COMBINED)
----------- ---------- FOR THE YEAR ----------- ---------- FOR THE YEAR
MARCH 2, JANUARY 1, ENDED MARCH 2, JANUARY 1, ENDED
THROUGH THROUGH DECEMBER 31, THROUGH THROUGH DECEMBER 31,
DECEMBER 31, MARCH 1, 1998 DECEMBER 31, MARCH 1, 1998
----------- ---------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning
of period $ 767,862 $ 761,186 $ 617,694 $ 179,041 $ 177,446 $ 132,340
Service cost 18,968 3,663 17,795 4,793 849 3,981
Interest cost 51,694 8,830 48,640 13,705 2,059 11,404
Amendments (114,313) -- -- 50,684 -- --
Actuarial loss 200,995 258 114,131 11,289 -- 37,276
Benefits paid (69,159) (6,075) (37,074) (9,286) (1,313) (7,555)
---------- ---------- ---------- ---------- ---------- ----------
Benefit obligation at end of
period $ 856,047 $ 767,862 $ 761,186 $ 250,226 $ 179,041 $ 177,446
---------- ---------- ---------- ---------- ---------- ----------
Change in plan assets:
Fair value of plan assets at
beginning of period 513,456 505,681 426,528 -- -- --
Actual return on plan assets 67,028 7,846 74,559 -- -- --
Employer contributions 62,395 6,004 41,668 -- -- --
Benefits paid (69,159) (6,075) (37,074) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Fair value of plan assets at end
of period $ 573,720 $ 513,456 $ 505,681 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Funded status (282,327) (254,406) (255,505) (250,226) (179,041) (177,446)
Unrecognized (gain) loss (121,789) 107,362 107,742 47,590 26,512 26,657
Unrecognized prior service cost 25,376 32,667 33,519 7,428 16,350 16,649
Unrecognized net transition
obligation 4,061 9,193 9,407 29,137 61,944 62,678
---------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ (374,679) $ (105,184) $ (104,837) $ (166,071) $ (74,235) $ (71,462)
========== ========== ========== ========== ========== ==========
Balance sheet amounts consist of:
Accrued benefit liability $ (380,969) $ (140,317) $ (149,623) $ (166,071) $ (74,235) $ (71,462)
Intangible asset (Note 5) 6,290 22,965 21,664 -- -- --
Accumulated other comprehensive
loss -- 12,168 23,122 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ (374,679) $ (105,184) $ (104,837) $ (166,071) $ (74,235) $ (71,462)
========== ========== ========== ========== ========== ==========
</TABLE>
F-14
<PAGE> 54
<TABLE>
<CAPTION>
PENSION AND OTHER
LUMP POSTRETIREMENT
SUM BENEFITS BENEFITS
------------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of December 31 of each
year:
Discount rate 8% 7% 8% 8% 7% 8%
Rate of compensation increase 6% 6% 6% 6% 6% 6%
Expected return on plan assets 9% 9% 8% n/a n/a n/a
</TABLE>
The health-care cost trend rate used for 1999 and 1998 was 7%.
An additional minimum pension liability related to the hourly plan was recorded
at December 31, 1999 and 1998. This amount represents the excess of accumulated
benefit obligations over the fair value of plan assets and accrued liabilities.
A deferred pension asset was recorded for unrecognized prior service costs. At
December 31, 1998, since the deferred pension asset recognized did not exceed
the unrecognized prior service cost, the excess liability was recorded as a
separate reduction to shareholders' equity and was classified as "Accumulated
Other Comprehensive Loss."
In the Acquisition agreement, the PRTA agreed to contribute cash or stock worth
a total of $200 million as a capital contribution in even installments over five
years beginning on March 2, 2000. The Company will use the $200 million to fund
its unfunded pension and other post-retirement 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. Future receipts have been recorded
at their discounted present value of $159.7 million (at a 8% discount rate) as a
specific component of stockholder's equity.
Net pension and other post-retirement benefit expenses for the years 1999, 1998
and 1997 (in thousands) includes the following components:
<TABLE>
<CAPTION>
FOR THE 1999 PERIOD
----------------------------
PREDECESSORS (Combined)
--------------------------------------------
COMPANY
------------ FOR THE YEAR FOR THE YEAR
MARCH 2, JANUARY 1, ENDED ENDED
THROUGH THROUGH DECEMBER 31, DECEMBER 31,
DECEMBER 31, MARCH 1, 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PENSION BENEFIT EXPENSES:
Service cost $ 18,968 $ 3,663 $ 17,795 $ 16,517
Interest cost 51,694 8,830 48,640 45,677
Expected return on plan assets (38,645) (7,588) (34,280) (58,138)
Net amortization and deferral 4,262 1,446 6,539 36,187
Effect of early retirement program 182,591 -- -- --
------------ ------------ ------------ ------------
Total $ 218,870 $ 6,351 $ 38,694 $ 40,243
============ ============ ============ ============
OTHER POSTRETIREMENT BENEFIT EXPENSES:
Service cost $ 4,793 $ 849 $ 3,981 $ 3,510
Interest cost 13,706 2,059 11,404 9,748
Net amortization and deferral 4,162 1,176 6,655 5,906
Effect of early retirement program 11,289 -- -- --
------------ ------------ ------------ ------------
Total $ 33,950 $ 4,084 $ 22,040 $ 19,164
============ ============ ============ ============
</TABLE>
Three voluntary early retirement programs were offered during 1999. The
first relates to 131 of the Predecessors' employees, who participated in the
Government's Employees' Retirement System and retired on March 1, 1999. The
Predecessors' results of operations for the period ended March 1, 1999
include a $4 million payment to the Government to compensate for a portion
of the benefit.
A voluntary early retirement was offered during the third quarter of 1999 to
qualified employees. Those choosing to retire received normal medical and
life insurance benefits, a credit for five additional years of service, and
were
F-15
<PAGE> 55
not penalized for early retirement in the calculation of their pension
benefits. A $165 million non-cash provision was recorded. There were 1,001
employees who elected this program, an acceptance rate of 94%.
A third voluntary retirement program was offered in the fourth quarter of
1999 to union employees, with 10 years of service, determined to be
completely disabled by a Company designated physician. A $38 million
non-cash provision was recorded relating to 210 employees.
DEFERRED ESOP COMPENSATION
Initial funding for the ESOP with the Acquisition included contributions
from the PRTA and the GTE Group for 4% of the Company's common shares.
These shares were allocated and released to full-time employees on March 2,
1999 based on 1999 wages.
The ESOP also acquired an additional 3% interest amounting to $26.1 million
with funds borrowed from the Company in order to establish a contributory
investment fund plan for current and future employees. Shares are
maintained in a suspense account until released to a participant. The
release of shares is determined by multiplying the number of shares in the
suspense account by the ratio of annual debt service to total debt service
for the 20-year note. Compensation expense is recorded based on the release
of shares at market value, based on an annual appraisal, with an offsetting
reduction to deferred compensation and paid-in-capital.
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
(COMBINED)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior notes
Due May 20, 2002 at 6.15% $ 299,944 $ --
Due May 20, 2006 at 6.65% 399,863
Due May 20, 2009 at 6.80% 299,839
Bank note facility due March 2, 2004 495,000
Other debt, including obligations under capital leases 2,780 750
------------ ------------
Total 1,497,426 750
Less short-term debt 2,317 235
------------ ------------
Long-term debt $ 1,495,109 $ 515
============ ============
</TABLE>
The Company issued senior notes dated March 20, 1999, which are
unconditionally guaranteed by PRTC and CT and for which there are no
financial covenants. The 2006 and 2009 notes can be prepaid at a 15 basis
point penalty. Bank note consists of a $500 million syndicated five year
revolving credit facility with prepayment at the option of the Company and
bears interest at LIBOR plus .725%, approximating a 7% interest rate at
December 31, 1999. This bank debt is subject to financial covenants, with
the most significant being where the debt must be less than 4 times
adjusted EBITDA, as defined in the bank facility agreement.
All of the debt is unsecured and non-amortizing. A unused working capital
facility, totaling $200 million, was also maintained which expired on
December 31, 1999. The working capital facility bears interest at LIBOR
plus .925%.
F-16
<PAGE> 56
8. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable $ 111,582 $ 181,004
Accrued expenses 131,843 85,483
Employee accruals 40,564 63,065
Carrier payables 32,102 16,776
Taxes 20,684 --
Interest 11,593 665
-------------- --------------
Other current liabilities $ 348,368 $ 346,993
============== ==============
</TABLE>
9. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Customer deposits $ 28,990 $ 41,437
Employee benefit plans liability 547,040 221,085
Other liabilities 36,295 33,655
-------------- --------------
Other non-current liabilities $ 612,325 $ 296,177
============== ==============
</TABLE>
10. SHAREHOLDERS' EQUITY
COMMON STOCK
There was 50 million authorized and 25 million shares outstanding of common
stock at December 31, 1999 of no par value. A 25 to 1 stock split was
approved and became effective on December 31, 1999, to decrease the per
share market price in order to increase their affordability to ESOP
participants.
The authorized common stock of PRTC at December 31, 1998 consisted of 1,000
shares with par value of $10 per share, of which 589 shares were issued and
outstanding. The authorized common stock of CT consisted of 10,000 no par
value shares, unissued at December 31, 1998.
SUBSCRIPTION RECEIVABLE
The subscription receivable reflects future receipts at their discounted
present value (at a 8% discount rate) to be contributed by PRTA in even
installments over five years to the unfunded pension and other
post-retirement benefit obligations.
F-17
<PAGE> 57
ACCUMULATED OTHER COMPREHENSIVE LOSS
The accumulated other comprehensive loss represents unrecognized losses and
transition obligations associated with the hourly pension plan because the
accumulated benefit obligation exceeds the fair value of plan assets.
11. INCOME TAXES
The Predecessors were exempt from income, property, municipal gross
receipts, and other taxes until March 2, 1999, as all taxes and payments in
lieu of taxes were the responsibility of the PRTA. Effective March 2, 1999,
because of 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
income tax ("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 by applying the maximum
statutory tax rate of 39% to pretax income. During the period from March 2,
1999 through December 31, 1999, the Company recorded an income tax benefit
of $46.4 million as set forth below: (in thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
---------------------------------
MARCH 2, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ------------
<S> <C> <C>
Current $ (27,920) $ --
Deferred (18,533) --
------------ ------------
Total $ (46,453) $ --
============ ============
</TABLE>
A reconciliation of the current benefit to the amount computed by applying
the statutory rate to the taxable loss for the period from March 2, 1999 to
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
1999
--------------
(IN THOUSANDS)
<S> <C>
Benefit computed at statutory rate $ (27,920)
Effect of income tax benefit as a result of:
Nondeductible expenses 10,096
Temporary differences:
Excess of accounts receivables write-off over provision (5,866)
Other post-retirement expense (43,604)
Excess of tax versus book goodwill amortization 8,573
Loss on asset disposition for tax purposes 10,870
Other temporary differences 1,398
--------------
Deferred income tax benefit $ (46,453)
==============
</TABLE>
F-18
<PAGE> 58
The amount of deferred income tax asset as of December 31, 1999, which is
all non-current in nature, is as follows (amounts in thousands):
<TABLE>
<S> <C>
Goodwill and other long-term intangibles $ 110,919
Customer base intangible 6,257
Employee benefit liabilities 111,463
Net loss carryforward 27,920
------------
Total $ 256,559
============
</TABLE>
Management believes that realization of the deferred income tax asset is
more likely than not, based on expectations of future taxable income.
Consequently, no valuation allowance against the deferred income tax asset
was recorded as of December 31, 1999.
12. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999, the Company had the following
significant transactions with affiliated companies:
o The Company at December 31, 1999 maintains an unused $200 million
working capital credit facility with an affiliate. This affiliate also
provides the Company general banking services, such as lock-box and
payroll. The charges for these services amounted to $5 million for
1999.
o As a result of the Acquisition, the Company entered into a five-year
Management and Technology License Agreement with GTE. Under this
agreement GTE will provide advice and direction related to the
administration and operations of the Company, as well as for
intellectual property or software. Fees for these services are based on
the following percentages of EBITDA, as defined, excluding provisions
for voluntary severance programs, as follows: 8% for years 1 and 2; 7%
for years 3 and 4; and 6% for the last year of the agreement. The
charge related to this agreement in 1999 was $37 million.
o The Company also enters into transactions with second parties for the
purchase of materials and supplies and plant and equipment used in the
construction and expansion of its telecommunications network. Such
transactions are subject to conditions similar to transactions with
independent third parties. The Company also participates with
affiliates of shareholders in sharing the cost of development of
computer software programs by third party vendors. The shareholders
receive no compensation for arranging the development of such systems.
In addition, the Company reimburses shareholders and affiliates for the
direct cost of a limited number of employees that work at the Company
in management positions.
13. 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; Wireline and Wireless. The
Wireline segment provides:
o Local service including basic voice, telephone and telecommunications
equipment rentals, public phone services, value-added services, high
speed private line services, Internet access and installations.
o Long distance service both on-island and off-island. Off-island
services began on February 1, 1999.
F-19
<PAGE> 59
o Access service provided to long distance, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on its network.
o Directory publishing right revenues and listing fees.
o Telecommunications equipment sales and billing and collection services
to competitor long distance operators in Puerto Rico.
The Wireless segment includes cellular and paging services.
The Company measures and evaluates the performance of its segments based on
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA),
which is a common industry profitability and liquidity measure. 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 for the
Company or its Predecessors.
F-20
<PAGE> 60
Segment results for the Company and its Predecessors were as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (COMBINED)
------------- --------------
FOR THE PERIOD FOR THE PERIOD
FROM MARCH 2, FROM JANUARY FOR THE YEARS ENDED
THROUGH 1, THROUGH -----------------------------
DECEMBER 31, MARCH 1, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Wireline:
Revenues and sales
Local services $ 420,157 $ 80,196 $ 467,819 $ 447,338
Long distance services 162,608 48,613 251,754 252,259
Access services 307,410 49,517 300,448 277,469
Directory services and 135,806 16,231 90,670 99,761
other ------------- ------------- ------------- -------------
Total revenues and sales $ 1,025,981 $ 194,557 $ 1,110,691 $ 1,076,827
============= ============= ============= =============
EBITDA $ 147,064
=============
Operating income $ 888 $ 203,137 $ 224,896
============= ============= =============
Capital Expenditures $ 172,599 $ 31,427 $ 250,986 $ 324,231
============= ============= ============= =============
Wireless:
Revenue and sales
Cellular services $ 114,231 $ 20,541 $ 100,265 $ 102,082
Paging services 39,717 8,202 59,728 55,212
------------- ------------- ------------- -------------
Total revenues and sales $ 153,948 $ 28,743 $ 159,993 $ 157,294
============= ============= ============= =============
EBITDA $ 39,665
=============
Operating income $ (13) $ 24,164 $ 19,655
============= ============= =============
Capital Expenditures $ 40,192 $ 5,388 $ 31,675 $ 30,471
============= ============= ============= =============
Consolidated revenues & sales $ 1,179,929 $ 223,300 $ 1,270,684 $ 1,234,121
============= ============= ============= =============
Consolidated EBITDA $ 186,729
=============
Consolidated operating income $ 875 $ 227,301 $ 244,551
============= ============= =============
Consolidated depreciation and
amortization $ 241,974 $ 50,393 $ 296,493 $ 279,198
============= ============= ============= =============
Revenues
Total revenues for reportable
segments $ 1,179,929
Elimination of intersegment
revenues (53,663)
-------------
Consolidated revenues $ 1,126,266
=============
</TABLE>
<TABLE>
<CAPTION>
Assets AS OF AS OF AS OF
- ------ DECEMBER 31, MARCH 1, DECEMBER 31,
1999 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Wireline assets $ 2,591,170 $ 2,234,243 $ 2,231,822
Wireless assets 296,550 216,178 224,782
------------- ------------- -------------
Segment assets $ 2,887,720 $ 2,450,421 $ 2,456,604
============= =============
Elimination of intersegment
assets (59,973)
-------------
Consolidated Assets $ 2,827,747
=============
</TABLE>
F-21
<PAGE> 61
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest from March 2, 1999 through December 31, 1999
amounted to approximately $67 million. The Predecessors did not pay any
material interest expense during the period from January 1, 1999 to March
1, 1999 and for the fiscal years 1998 and 1997. There was no cash paid for
income taxes by the Company or its Predecessors.
15. LEASES
The Company has capital and operating leases for certain facilities and
equipment. Future minimum lease payments under non-cancelable capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
<S> <C> <C>
2000 $ 332 $ 5,941
2001 163 3,642
2002 136 2,182
2003 117 1,629
2004 106 1,181
Thereafter 101 8,287
------- -------
Total minimum lease payments 955 22,862
Less amount representing interest 187 --
------- -------
Present value of minimum lease payments $ 768 $22,862
======= =======
</TABLE>
Lease costs from January 1, 1999 to March 1, 1999, and March 2, 1999
through December 31, 1999, amounted to approximately $4 million and
$5 million, respectively.
16. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
The Company is a defendant in various legal matters arising in the
ordinary course of business. The Company's management, after consultation with
legal counsel, believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position and results of
operations. In connection with the Acquisition, the PRTA agreed to indemnify,
defend and hold us harmless for specified significant litigation, including one
environmental matter.
F-22
<PAGE> 62
TELECOMUNICACIONES DE PUERTO RICO, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
Balance at Charged Deductions
Beginning Charged to (Credited) to From Balance at
Description of Year Income Other Accounts Reserves(1) Close of Year
----------- --------------- --------------- --------------- --------------- ---------------
(Dollars in Million)
December 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible
Accounts $ 56 $ 80 $ (5)(2) $ (66) $ 65
=============== =============== =============== =============== ===============
December 31, 1998
Allowance for uncollectible
Accounts $ 64 $ 50 $ (5)(2) $ (53) $ 56
=============== =============== =============== =============== ===============
December 31, 1997
Allowance for uncollectible
Accounts $ 58 $ 51 $ 8 $ (53) $ 64
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at Charged Deductions
Beginning Charged to (Credited) to From Balance at
Description of Year Income Other Accounts Reserves(1) Close of Year
----------- --------------- --------------- --------------- ------------- ---------------
(Dollars in Million)
December 31, 1999
<S> <C> <C> <C> <C> <C>
Allowance for Inventory
Obsolescence $ 16 $ 1 $ 0 $ (4) $ 13
============== ============== ============== ============== ==============
December 31, 1998
Allowance for Inventory
Obsolescence $ 14 $ 8 $ 0 $ (6) $ 16
============== ============== ============== ============== ==============
December 31, 1997
Allowance for Inventory
Obsolescence $ 8 $ 13 $ 0 $ (7) $ (14)
============== ============== ============== ============== ==============
</TABLE>
NOTES:
(1) Charges for which reserve was created.
(2) Recoveries of amounts written off in prior years.
<PAGE> 63
SIGNATURE
Pursuant to the requirements of the Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By: /s/ Jon Slater
-----------------------------------------------
Name: Jon Slater
Title: Chief Executive Officer
Date: March 30, 2000
<PAGE> 64
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date Signature Capacity
---- --------- --------
<S> <C> <C>
March 30, 2000 /s/ Jon Slater Chief Executive Officer
----------------------------
Jon Slater
March 30, 2000 /s/ Frank Gatto V-President Finance and
----------------------------- Chief Financial Officer
Frank Gatto
March 30, 2000 /s/ Robert Huberty Controller
----------------------------
Robert Huberty
March 30, 2000 /s/ Fares Salloum Director
----------------------------
Fares Salloum
March 30, 2000 /s/ Alfred Gianmarino Director
----------------------------
Alfred Gianmarino
March ___, 2000 Director
----------------------------
Michael Masin
March 30, 2000 /s/ Jon Slater Director
----------------------------
Jon Slater
March 30, 2000 /s/ Howard Svigals Director
----------------------------
Howard Svigals
March 30, 2000 /s/ Richard Carrion Director
----------------------------
Richard Carrion
March 30, 2000 /s/ Angel Morey Director
----------------------------
Angel Morey
March ___, 2000 Director
----------------------------
Lourdes Rovira
</TABLE>
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc (Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503).
3.2 Certificate of Amendment to the Certificate of Incorporation of
Telecomunicaciones de Puerto Rico, Inc.
3.3 By-Laws of Telecomunicaciones de Puerto Rico, Inc. (Incorporated
by reference to Exhibit 3.4 of the Company's Registration
Statement filed on Form S-4 (File 333-85503).
4.1 Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
10.1 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. (Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement filed on
Form S-4 (File 333-85503).
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.
(Incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
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.
(Incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
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. (Incorporated by reference to Exhibit 10.4 of
the Company's Registration Statement filed on Form S-4 (File
333-85503).
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.
(Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
10.6 Amended and Restated Puerto Rico Management Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement filed on
Form S-4 (File 333-85503).
10.7 Amended and Restated U.S. Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement filed on
Form S-4 (File 333-85503).
10.8 Amended and Restated Technology Transfer Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement filed on
Form S-4 (File 333-85503).
10.9 Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
10.10 Share Option Agreement, dated as of March 2, 1999, by and among
Puerto Rico Telephone Authority, Telecomunicaciones de Puerto
Rico, Inc, GTE Holdings (Puerto Rico) LLC, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.10 of the Company's Registration Statement filed on
Form S-4 (File 333-85503).
10.11 Stock Purchase Agreement, dated as of March 1, 1999, by and
between Telecomunicaciones de Puerto Rico, Inc and Puerto Rico
Telephone Authority. (Incorporated by reference to Exhibit 10.11
of the Company's Registration Statement filed on Form S-4 (File
333-85503).
10.12 Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement filed on Form S-4 (File 333-85503).
10.13 ESOP Loan Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and Telecomunicaciones
de Puerto Rico, Inc. (Incorporated by reference to Exhibit 10.13
of the Company's Registration Statement filed on Form S-4 (File
333-85503).
10.14 Stock Purchase Agreement, dated as of March 2, 1999, by and
between Puerto Rico Telephone Authority and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.14 of the
Company's Registration Statement filed on Form S-4 (File
333-85503).
10.15 Pledge Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.15 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
10.16 Tag Along Agreement, dated as of March 2, 1999, by and among GTE
Holdings (Puerto Rico) LLC, GTE International Telecommunications
Incorporated, and the Trust of the Employee Stock Ownership Plan
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.16 of the Company's Registration
Statement filed on Form S-4 (File 333-85503).
10.17 $500,000,000 Five-Year Credit Agreement, dated as of March 2,
1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, the Initial Lenders named therein,
Citibank, N.A., as Administrative Agent, Bank of America
National Trust and Savings Association, as Syndication Agent,
and The Chase Manhattan Bank and Morgan Guaranty Trust Company
of New York, as Documentation Agents. (Incorporated by reference
to Exhibit 10.17 of the Company's Registration Statement filed
on Form S-4 (File 333-85503).
10.18 Letter Amendment to the Five-Year Credit Agreement, dated May 7,
1999. (Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement filed on Form S-4 (File
333-85503).
10.19 $200,000,000 Revolving Credit Agreement, dated as of March 2,
1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, Banco Popular de Puerto Rico, as
Managing Agent and Administrative Agent, Scotiabank de Puerto
Rico, as Co-Agent, and Banco Popular de Puerto Rico, Scotiabank
de Puerto Rico, Banco Bilbao Vizcaya Puerto Rico and Banco
Popular North America, as Initial Lenders. (Incorporated by
reference to Exhibit 10.19 of the Company's Registration
Statement filed on Form S-4 (File 333-85503).
10.20 First Amendment to $200,000,000 Revolving Credit Agreement.
(Incorporated by reference to Exhibit 10.20 of the Company's
Registration Statement filed on Form S-4 (File 333-85503).
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule as of December 31, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 3.2 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF
TELECOMUNICACIONES DE PUERTO RICO, INC.
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
AFTER THE RECEIPT OF PAYMENT OF CAPITAL
FIRST: That at a meeting of the Board of Directors of TELECOMUNICACIONES DE
PUERTO RICO, INC., a resolution was adopted setting forth a proposed amendment
to the Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and calling for the stockholders of said corporation
to consider the same. The resolution setting forth the proposed amendment reads
as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be amended
by changing Article FOURTH so that it reads as follows:
FOURTH: The total number of shares of Common Stock which the
Corporation shall have authority to issue is FIFTY MILLION
(50,000,000) without par value per share and all of the same
class.
SECOND: That thereafter, pursuant to the resolution of its Board of Directors,
the stockholders having the minimum numbers of votes necessary to authorize this
Amendment gave their consent in writing pursuant to Section 7.17 of the General
Corporation Law of 1995 and written notification has been given to the
stockholders who did not give their consent also pursuant to Section 7.17 of the
General Corporation Law of 1995.
IN WITNESS WHEREOF, I, Jon E. Slater, Authorized Officer who signs this
certificate, hereby swear that the facts herein stated are true, this 29 of
December, 1999.
/s/ JON E. SLATER
--------------------------------
Jon E. Slater
Authorized Officer
<PAGE> 1
EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS (DEFICIENCY) TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, 1999 MARCH 2 THROUGH
PRO FORMA DECEMBER 31, 1999
REPORTED ADJUSTED REPORTED ADJUSTED
------------ ------------ ------------ ------------
(Dollars in million)
<S> <C> <C> <C> <C>
Net earnings available for fixed charges:
Net income (loss) before extraordinary
charge $ (70.8) $ 28.5 $ (72.7) $ .6
Add: Income taxes (benefit) (46.5) .3 (46.5) .3
Fixed charges 65.1 65.1 65.1 65.1
------------ ------------ ------------ ------------
Adjusted earnings (loss) $ (52.2) $ 93.9 $ (54.1) $ 66.0
============ ============ ============ ============
Fixed charges $ 65.1 $ 65.1 $ 65.1 $ 65.1
============ ============ ============ ============
RATIO OF EARNINGS (DEFICIENCY) TO FIXED CHARGES
a) 1.4 b) 1.0
</TABLE>
a) Results for the year ended December 31, 1999 include after-tax
non-recurring provisions for early retirement of $73.2 million and the
ESOP grant of $26.1 million. As a result, earnings were not adequate to
cover fixed charges in the period. The amount of such deficiency was
$52.2 million for the year ended December 31, 1999. The adjusted column
represents the ratio of earnings to fixed charges calculated to adjust
for the $99.3 million portion of these after-tax, non-recurring costs
as permitted under the provisions of the Company's debt covenants.
b) Results for the period from March 2 through December 31, 1999 include
an after-tax non-recurring provision for early retirement of $73.2
million. As a result, earnings were not adequate to cover fixed charges
in the period. The amount of such deficiency was $54.1 million for the
March 2, through December 31, 1999 period. The adjusted column
represents the ratio of earnings to fixed charges to adjust for the
$73.2 million portion of these after-tax, non-recurring expenses as
permitted under the provisions of the Company's debt covenants.
<PAGE> 1
EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C> <C>
1. Puerto Rico Telephone Company, Inc.
Physical address: 1515 F.D. Roosevelt Avenue, Guaynabo, Puerto Rico 00968
Mailing address: P.O. Box 360998, San Juan, P.R. 00936-0998
State/jurisdiction
of Incorporation: Puerto Rico
2. Celulares Telefonica, Inc.
Physical address: 1515 F.D. Roosevelt Avenue, Guaynabo, Puerto Rico 00968
Mailing address: P.O. Box 360998, San Juan, P.R. 00936-0998
State/jurisdiction
of Incorporation: Puerto Rico
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We agree to the inclusion in the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 of Telecomunicaciones de Puerto Rico, Inc., of our
report, dated March 24, 2000, on our audits of the consolidated financial
statements of Telecomunicaciones de Puerto Rico, Inc. and subsidiaries as of
December 31, 1999, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity and cash flows for
the period from March 2, 1999 to December 31, 1999 and the combined balance
sheet of Puerto Rico Telephone Company, Inc. and Celulares Telefonica, Inc. (the
"Predecessors") as of December 31, 1998 and their combined statements of
operations, comprehensive income (loss), changes in shareholder's equity and
cash flows for the period from January 1, 1999 to March 1, 1999 and the years
ended December 31, 1998 and 1997.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 45,482
<SECURITIES> 0
<RECEIVABLES> 424,889
<ALLOWANCES> 66,994
<INVENTORY> 31,370
<CURRENT-ASSETS> 440,154
<PP&E> 3,798,921
<DEPRECIATION> 2,056,432
<TOTAL-ASSETS> 2,827,747
<CURRENT-LIABILITIES> 350,685
<BONDS> 1,495,109
0
0
<COMMON> 699,284
<OTHER-SE> (329,656)
<TOTAL-LIABILITY-AND-EQUITY> 2,827,747
<SALES> 1,349,566
<TOTAL-REVENUES> 1,349,566
<CGS> 486,419
<TOTAL-COSTS> 1,403,936
<OTHER-EXPENSES> (1,795)
<LOSS-PROVISION> 70,061
<INTEREST-EXPENSE> 64,720
<INCOME-PRETAX> (117,295)
<INCOME-TAX> (46,453)
<INCOME-CONTINUING> (70,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 60,500
<CHANGES> 0
<NET-INCOME> (131,342)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
