<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 2000
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1515 F.D. Roosevelt Avenue
Guaynabo, Puerto Rico 00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 787-792-6052
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,891 $ 45,482
Accounts receivable, net of allowance for doubtful accounts
of $69,406 and $66,994 in 2000 and 1999, respectively 348,353 329,320
Inventory and supplies, net 27,387 31,370
Prepaid expenses 6,861 5,407
----------- -----------
Total current assets 451,492 411,579
PROPERTY, PLANT AND EQUIPMENT, net 1,660,645 1,742,489
INTANGIBLES, net 354,542 371,378
DEFERRED INCOME TAX 199,941 256,559
OTHER ASSETS 48,042 45,742
----------- -----------
TOTAL ASSETS $ 2,714,662 $ 2,827,747
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 102,128 $ 2,317
Other current liabilities 384,055 348,368
----------- -----------
Total current liabilities 486,183 350,685
LONG-TERM DEBT, excluding current portion 1,169,393 1,495,109
OTHER NON-CURRENT LIABILITIES 569,464 612,325
----------- -----------
Total liabilities 2,225,040 2,458,119
----------- -----------
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 699,284 699,284
Deferred ESOP compensation (26,100) (26,100)
Subscription receivable (138,674) (170,363)
Accumulated deficit (44,888) (133,193)
----------- -----------
Total shareholders' equity 489,622 369,628
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,714,662 $ 2,827,747
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-----------------------------------------------------------------------
FOR THE 1999 PERIOD
------------------------
FOR THE THREE FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 2 JANUARY 1
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, THROUGH THROUGH
2000 1999 2000 SEPTEMBER 30 MARCH 1
------------- ------------- ------------- ------------ ---------
(UNAUDITED)
--------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND SALES:
Local services $ 140,281 $ 128,827 $ 426,177 $ 293,056 $ 82,012
Long distance services 43,796 46,850 129,916 120,821 48,613
Access services 104,916 82,014 291,549 201,161 49,517
Cellular services 35,711 36,005 108,081 80,231 20,541
Paging services 8,347 12,170 27,825 28,829 8,202
Directory services 5,079 7,032 18,875 16,546 4,910
Other services and sales 17,545 21,963 54,814 41,200 9,505
--------- --------- ----------- --------- --------
Total revenues and sales 355,675 334,861 1,057,237 781,844 223,300
--------- --------- ----------- --------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits 103,490 100,497 294,932 251,315 82,723
Other operating expenses 116,008 117,440 336,506 252,611 58,414
ESOP compensation grant -- -- -- -- 26,100
Early retirement provision -- 126,843 -- 126,843 4,226
Depreciation and amortization 73,548 73,429 222,381 172,913 50,393
--------- --------- ----------- --------- --------
Total operating costs and expenses 293,046 418,209 853,819 803,682 221,856
--------- --------- ----------- --------- --------
OPERATING INCOME (LOSS) 62,629 (83,348) 203,418 (21,838) 1,444
OTHER INCOME (EXPENSE):
Interest income (expense), net (18,609) (19,592) (59,644) (48,928) 407
Equity income from joint venture 500 -- 1,500 -- --
--------- --------- ----------- --------- --------
Total other income (expense), net (18,109) (19,592) (58,144) (48,928) 407
--------- --------- ----------- --------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 44,520 (102,940) 145,274 (70,766) 1,851
INCOME TAX EXPENSE (BENEFIT) 17,127 (39,327) 56,969 (27,598) --
--------- --------- ----------- --------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE 27,393 (63,613) 88,305 (43,168) 1,851
EXTRAORDINARY CHARGE-
DISCONTINUANCE OF REGULATORY
ACCOUNTING, net of income tax benefit of $38,750 -- -- -- (60,500) --
--------- --------- ----------- --------- --------
NET INCOME (LOSS) $ 27,393 $ (63,613) $ 88,305 $(103,668) $ 1,851
========= ========= =========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-----------------------------------------------------------------------
FOR THE 1999 PERIOD
------------------------
FOR THE THREE FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 2 JANUARY 1
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, THROUGH THROUGH
2000 1999 2000 SEPTEMBER 30 MARCH 1
------------- ------------- ------------- ------------ ---------
(UNAUDITED)
--------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $27,393 $(63,613) $88,305 $(103,668) $ 1,851
Minimum pension liability adjustment -- -- -- -- 2,369
------- -------- ------- --------- -------
COMPREHENSIVE INCOME (LOSS) $27,393 $(63,613) $88,305 $(103,668) $ 4,220
======= ======== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED
DEFERRED OTHER
COMMON ESOP SUBSCRIPTION ACCUMULATED COMPREHENSIVE
STOCK COMPENSATION RECEIVABLE DEFICIT LOSS TOTAL
-------- ------------ ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
(Unaudited)
Net income, for the nine months ended
September 30, 2000 ................... 88,305 88,305
Accretion of discount on subscription
receivable ........................... (8,311) (8,311)
PRTA capital contribution .............. 40,000 40,000
-------- -------- --------- --------- ------- ---------
BALANCE, SEPTEMBER 30, 2000 ............... $699,284 $(26,100) $(138,674) $ (44,888) $ -- $ 489,622
======== ======== ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
-----------------------------------------------
FOR THE 1999 PERIOD
-----------------------------
FOR THE NINE
MONTHS ENDED MARCH 2 JANUARY 1
SEPTEMBER 30, THROUGH THROUGH
2000 SEPTEMBER 30 MARCH 1
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 88,305 $ (103,668) $ 1,851
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 222,381 172,913 50,393
Deferred income tax 56,618 (27,598)
Extraordinary charge 60,500
Accretion of discount on subscription receivable (8,311) (6,378)
Equity income from joint venture (1,500)
Early retirement provision 126,843
ESOP compensation grant 26,100
Changes in assets and liabilities:
Accounts receivable (19,033) 2,298 (14,496)
Inventory and supplies 3,983 3,489 (1,306)
Prepaid expenses and other assets (3,560) (16,388) 2,374
Other current and non-current liabilities 42,952 (88,406) (10,960)
Pension and other post-employment benefit liability (50,126) 95,241 1,901
--------- ----------- -----------
Net cash provided by operating activities 331,709 218,846 55,857
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs (127,640) (134,013) (33,237)
Net salvage on retirements 5,245 3,995 73
--------- ----------- -----------
Net cash used in investing activities (122,395) (130,018) (33,164)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 40,000 110,577
Dividends (83,116)
ESOP contribution (26,100)
Net issuance of short-term debt 99,811 1,039,838 1,583,044
Debt repayments (325,716) (1,166,361)
Special PRTA dividend (1,570,182)
--------- ----------- -----------
Net cash provided by (used in) financing activities (185,905) (126,523) 14,223
--------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,409 (37,695) 36,916
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 45,482 72,527 35,611
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,891 $ 34,832 $ 72,527
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
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 Puerto Rico Telephone Authority ("PRTA"), a public corporation and an
instrumentality of the Government. 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, assets or 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-employment benefit obligations. The contribution must be in cash for
the first two installments and cash or stock of the Company for the last
three installments. Future receipts have been recorded at their discounted
present value of $159.7 million (at an 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") 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, and contributed them to the
ESOP. These shares 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.
On June 30, 2000, the Company's managing shareholder, GTE Corporation,
completed a merger with Bell Atlantic Corporation. The new merged Company is
doing business as Verizon Communications ("Verizon"). The Company is now an
indirect affiliate of Verizon.
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
7
<PAGE> 8
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 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".
DISCONTINUATION OF SFAS NO. 71, "ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES
OF REGULATION"
PRTC discontinued the application of SFAS No. 71 with the consummation of the
Acquisition on March 2, 1999, due to changes in regulation, the competitive
environment and the terms of the Acquisition. A write-down of plant and
equipment of $199 million was recorded of which $99.5 million was accounted
for as a purchase price adjustment consistent with partial step-up accounting
to reflect the fair value of the acquired assets. The remaining $99.5 million
was recorded as an extraordinary charge (approximately $60.5 million
after-tax).
2. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been prepared
pursuant to rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. Management believes the financial
statements include all adjustments and recurring accruals necessary to
present fairly the results of operations and financial condition for the
interim periods shown as well as the financial information and changes in the
basis of accounting to properly account for the acquisition as explained in
Note 1. The December 31, 1999 condensed consolidated balance sheet was
derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the
United States of America. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's 1999 Annual Report on Form 10-K.
The condensed consolidated financial statements of the Predecessors for the
two-month period ended March 1, 1999, reflect the historical cost of its
assets and liabilities and results of its operations prior to completion of
the Acquisition and are referred to as the Predecessors' condensed
consolidated financial statements. Accordingly, the accompanying financial
statements of the Predecessors and the Company are not comparable in all
material respects, since the Company's financial condition, results of
operations, and cash flows use a new accounting basis. PRTC and CT are wholly
owned subsidiaries, and fully and unconditionally guarantee payment of the
senior notes, as set forth in the Indenture.
Separate financial statements for PRTC and CT have not been included because
the aggregate net assets, earnings and equity of PRTC and CT are
substantially equivalent to the aggregate net assets, earnings and equity of
the Company on a consolidated basis. Management believes that separate
financial statements and other disclosures concerning PRTC and CT are not
material to investors. In addition, the Company's other subsidiaries namely
Puerto Rico Telephone Directories, Inc. and Datacom Caribe, Inc. (which are
not guarantors of the senior notes), are inconsequential to the condensed
consolidated financial statements but are consolidated subsidiaries.
8
<PAGE> 9
3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
all derivatives be measured at fair value and recognized as either assets or
liabilities on the Company's balance sheet. Changes in the fair values of
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date
of SFAS No. 133 for one year. We must adopt SFAS No. 133 no later than
January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS
No. 133. The amendments in SFAS No. 138 address certain implementation issues
and related such matters as the normal purchases and normal sales exception,
the definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives. SFAS No. 138 also amends SFAS No. 133 for decisions made by the
FASB related to the Derivatives Implementation Group process.
The Company has assessed the impact of adopting SFAS No. 133 and SFAS No. 138
and it is expected that the adoption will not have an effect on the Company's
results of operations or financial condition.
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 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 finalizing its assessment of the impact of SAB No. 101 on its
results of operations and financial position. It is not expected to have a
material effect on the results of operations.
Financial Assets and Extinguishments of Liabilities
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishing of Liabilities", which
supersedes SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishing of Liabilities." This Statement provides accounting
and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. Under this Statement, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
This Statement is effective for transfers occurring after March 31, 2001, but
the disclosure requirements relating to securitization transactions and
collateral are effective for fiscal years ending after December 15, 2000.
This Statement will not have an effect on the Company's financial position or
results of operations.
9
<PAGE> 10
4. PRO FORMA INFORMATION
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 1999, after giving effect to certain adjustments. This pro forma
information is presented for information 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 the entire 1999, nor is it indicative
of the results of operations which may occur in the future.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1999
--------------
(In thousands)
<S> <C>
Revenues and sales $ 1,005,144
============
Loss before income tax $ (100,917)
============
Loss before extraordinary charge $ (61,559)
============
</TABLE>
The pro forma amounts reflect adjustments for interest expense, property,
municipal and unemployment taxes, management and technology fees, and
amortization expense. The Company has received an extension through July 1,
2001 in the support from the National Exchange Carriers Association ("NECA")
which the Company anticipated losing. As a result, the adjustments for this
matter reflected in previously reported pro forma information are not
reflected in the figures above.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Outside plant $1,871,403 $1,836,360
Central office and transmission equipment 1,198,615 1,125,272
Other equipment 361,011 365,254
Buildings 324,244 322,431
Land 22,911 23,441
---------- ----------
Gross plant in service 3,778,184 3,672,758
Less accumulated depreciation 2,228,003 2,056,432
---------- ----------
Net plant in service 1,550,181 1,616,326
Construction in progress 110,464 126,163
---------- ----------
Total $1,660,645 $1,742,489
========== ==========
</TABLE>
10
<PAGE> 11
6. INTANGIBLES
Intangibles consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Goodwill $150,236 $150,236
Franchise-wireline 96,000 96,000
Franchise-wireless 60,000 60,000
Brand 50,900 50,900
Customer base 21,100 21,100
Deferred pension asset 6,290 6,290
Other 2,221 1,879
-------- --------
Total cost 386,747 386,405
Less accumulated amortization 32,205 15,027
-------- --------
Total $354,542 $371,378
======== ========
</TABLE>
7. DEFERRED ESOP COMPENSATION
The ESOP acquired a 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 participants. The release of shares to
participants in a given year is based on the greater of participant
contributions plus a Company match of 30% up to 5% of wages or a minimum
based on an amortization schedule. The minimum amount is based on the ratio
of annual debt service to total debt service multiplied by the initial
750,000 shares. Compensation expense is recorded based on the release of
shares at market value, based on an independent appraisal performed
periodically.
8. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Accrued expenses $142,432 $131,843
Accounts payable 128,639 111,582
Employee benefit accruals 49,972 40,564
Carrier payables 36,183 32,102
Taxes 963 20,684
Interest 25,866 11,593
-------- --------
Total $384,055 $348,368
======== ========
</TABLE>
11
<PAGE> 12
9. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Senior notes
Due May 20, 2002 at 6.15% $ 299,961 $ 299,944
Due May 20, 2006 at 6.65% 399,876 399,863
Due May 20, 2009 at 6.80% 299,849 299,839
Bank note facility due March 2, 2004 169,000 495,000
Working capital facility 100,000 --
Other debt, including obligations under
capital leases 2,835 2,780
---------- ----------
Total 1,271,521 1,497,426
Less short-term debt 102,128 2,317
---------- ----------
Long-term debt $1,169,393 $1,495,109
========== ==========
</TABLE>
The senior notes are unconditionally guaranteed by PRTC and CT with no
financial covenants. The 2006 and 2009 notes can be prepaid at a 15 basis
point penalty. The 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 57.5 basis points, approximating a
7.20% interest rate at September 30, 2000. The bank debt is subject to
financial covenants, with the most significant being that the outstanding
principal balance must be less than 4 times adjusted Earnings Before
Interest, Taxes, Depreciation, and Amortization ("EBITDA"), as defined in
the facility agreement. All of the debt is unsecured and non-amortizing.
10. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Pension and other post-employment
benefits liability $496,914 $547,040
Customer deposits 29,986 28,990
Other liabilities 42,564 36,295
-------- --------
Total $569,464 $612,325
======== ========
</TABLE>
11. SHAREHOLDERS' EQUITY
COMMON STOCK
Common stock consisted of fifty million authorized and twenty five million
shares outstanding of no par value at September 30, 2000 and December 31,
1999. 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.
SUBSCRIPTION RECEIVABLE
The subscription receivable reflects future receipts (see Note 1) at their
discounted present value (at an 8% discount rate) to be contributed by PRTA
in even $50 million annual installments over five years commencing March 2,
2000 to fund a portion of the unfunded pension and other post-employment
benefit obligations. During the nine month period ended September 30, 2000,
the Company received $40 million under this agreement.
12
<PAGE> 13
12. SEGMENT REPORTING
The Company has two reportable segments: Wireline and Wireless. The Wireline
segment provides:
o Local services including basic voice, telephone and telecommunications
equipment rentals, value-added services, high speed private line services,
Internet access, public phone service and line installations;
o Access services provided to long distance carriers, competitive local
exchange carriers, and cellular and paging operators to originate and
terminate calls on our network;
o Long distance services including direct dial on-island and off-island,
operator assisted, calling card and high-speed private line revenues;
o Directory publishing rights revenues; and
o Telecommunication equipment sales and billing and collection services to
competing long distance operators in Puerto Rico.
The Wireless segment provides cellular and paging services, and wireless
equipment sales.
The Company measures and evaluates the performance of its segments based on
EBITDA, which is a common industry profitability and liquidity measure. The
accounting policies of the segments are the same as those followed by the
Company. The Company accounts for intersegment revenues at market prices.
13
<PAGE> 14
Segment results were as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSORS
------------------------------- ------------
FOR THE NINE MARCH 2, JANUARY 1,
MONTHS ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, MARCH 1,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
WIRELINE:
--------
Revenues and sales:
Local services $ 428,814 $ 293,056 $ 82,012
Long distance services 130,250 120,821 48,613
Access services 295,840 201,161 49,517
Directory services and other 63,466 47,173 11,135
----------- ----------- -----------
Total revenues and sales $ 918,370 $ 662,211 $ 191,277
=========== =========== ===========
EBITDA $ 399,992 $ 109,910 $ 43,723
=========== =========== ===========
WIRELESS:
--------
Revenue and sales:
Cellular services $ 108,081 $ 80,231 $ 20,541
Paging services 27,825 28,829 8,202
Equipment sales 10,223 10,573 3,280
----------- ----------- -----------
Total revenues and sales $ 146,129 $ 119,633 $ 32,023
=========== =========== ===========
EBITDA $ 25,807 $ 41,165 $ 8,114
=========== =========== ===========
CONSOLIDATED:
------------
Revenues for reportable segments $ 1,064,499
Elimination of intersegment revenues (7,262)
-----------
Consolidated revenues $ 1,057,237 $ 781,844 $ 223,300
=========== =========== ===========
EBITDA:
------
Operating Income $ 203,418 $ (21,838) $ 1,444
Depreciation and Amortization 222,381 172,913 50,393
----------- ----------- -----------
EBITDA $ 425,799 $ 151,075 $ 51,837
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------------------------- ------------ -----------
<S> <C> <C>
Wireline $ 2,534,004 $ 2,591,170
Wireless 264,970 296,550
----------- -----------
Subtotal $ 2,798,974 $ 2,887,720
Elimination of intersegment assets (84,312) (59,973)
----------- -----------
Consolidated assets $ 2,714,662 $ 2,827,747
=========== ===========
</TABLE>
14
<PAGE> 15
13. CONTINGENCIES
The Company is a defendant in various legal matters arising in the ordinary
course of business including a regulatory issue relating to the creation of
the Company's wireless affiliate. 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. For more information regarding the
creation of the wireless affiliate, please refer to the "Regulatory Matters"
section of the Management's Discussion and Analysis. In connection with the
Acquisition, the PRTA agreed to indemnify, defend and hold the Company
harmless for specified litigation in excess of $50 million in the aggregate,
including one environmental matter.
14. SUBSEQUENT EVENT
In October 2000, the Company agreed to new labor contracts with its craft and
office workers unions. Renegotiated contracts involving the 3,200 craft
workers will now expire in January 2002 and with the 1,750 office workers in
October 2003. An aggregate of $10 million reflecting wage increases
retroactive to the date of the last contract, will be paid in two $5 million
installments in December 2000 and January 2001. The full amount was accrued
in the third quarter.
The weighted average wage increases contained in the contracts is 6.7% in
2000, 6% in 2001, 4.8% in 2002, and 4.7% in 2003. If the workforce remains
unchanged, these increases together with other benefit increases and payroll
taxes in higher labor costs over 2000 levels of $16 million and $28 million
in 2001 and 2002, respectively.
15. RECLASSIFICATIONS
Reclassifications of prior periods' data have been made to conform to the
current presentation.
15
<PAGE> 16
ITEM 2.
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
information concerning possible or assumed future results of operations, as well
as those statements preceded or followed by the words "anticipates," "believes,"
"estimates," "expects," "hopes," "targets" or similar expressions.
Future results could be affected by subsequent events and could differ
materially from those expressed in the forward-looking statements. If future
events and actual performance differ from the Company's assumptions, the actual
results could vary significantly from the performance projected in the
forward-looking statements.
The following important factors could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in Puerto Rico; (2) material changes in available technology; (3) the
final resolution of regulatory initiatives and proceedings, including
arbitration proceedings, pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; and (4) the extent, timing, success and overall effects of
competition from others in the Puerto Rico telecommunications service industry.
THE ACQUISITION AND CHANGE IN ACCOUNTING BASIS
Our results of operations and financial position as of September 30,
2000 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 aggregate 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 the Acquisition, our results of operations and
financial position for periods ending after March 2, 1999 differ materially from
those previously reported by the 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 The accrual of management fees owed to Verizon (as GTE's successor);
o The introduction of dialing parity in the on-island long distance market and
our entrance into the off-island long distance market; and
o The discontinuation of regulatory accounting principles.
RESULTS OF OPERATIONS
Our discussion of results for the quarter and the nine months ended
September 30, 2000 and 1999 is based upon the Company's results from March 2,
1999 to September 30, 1999, and the Predecessors' results from January 1, 1999
to March 1, 1999. In the discussion, 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 1, 1999 and of the Company after this date.
We have two reportable segments, Wireline and Wireless. See Note 12 to
the condensed consolidated financial statements for additional information on
our segments. Reclassifications of prior years' data have been made to conform
to the 2000 presentation.
16
<PAGE> 17
The Wireline segment provides:
o Local services including basic voice, telephone and telecommunications
equipment rentals, value-added services, high speed private line services,
Internet access, public phone service and line installations;
o Access services provided to long distance carriers, competitive local
exchange carriers, and cellular and paging operators to originate and
terminate calls on our network;
o Long distance services including direct dial on-island and off-island
operator assisted, calling card and high-speed private line revenues;
o Directory publishing rights revenues; and
o Telecommunication equipment sales and billing and collection services to
competing long distance operators in Puerto Rico.
The Wireless segment includes cellular and paging services and wireless
equipment sales.
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------ ----------------------------------------
2000 1999 2000 1999
-------------- -------------- ---------------- ----------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WIRELINE:
Local $ 140 39% $ 129 39% $ 426 40% $ 375 37%
Network Access 105 30 82 24 292 28 251 25
Long Distance 44 12 47 14 130 12 169 17
Directory and Other 19 6 22 7 63 6 62 6
----- --- ----- --- ------ --- ------ ---
Total Wireline 308 87% 280 84% 911 86% 857 85%
----- --- ----- --- ------ --- ------ ---
WIRELESS:
Cellular 36 10% 36 11% 108 10% 101 10%
Paging 8 2 12 3 28 3 37 4
Wireless Equipment 4 1 7 2 10 1 10 1
----- --- ----- --- ------ --- ------ ---
Total Wireless 48 13% 55 16% 146 14% 148 15%
----- --- ----- --- ------ --- ------ ---
Revenues and Sales $ 356 100% $ 335 100% $1,057 100% $1,005 100%
===== === ===== === ====== === ====== ===
</TABLE>
17
<PAGE> 18
EXPENSES AND CHARGES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ----- ---- -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
WIRELINE:
Labor and Benefits $ 94 $ 96 $271 $ 316
Other operating expenses 85 84 247 234
---- ----- ---- -----
Total Wireline 179 180 518 550
WIRELESS:
Labor and benefits $ 9 $ 5 $ 24 $ 18
Other operating expenses 31 33 90 77
---- ----- ---- -----
Total Wireless 40 38 114 95
OTHER:
ESOP compensation expense $ -- $ -- $ -- $ 26
Early retirement provision -- 127 -- 131
Depreciation and amortization 74 73 222 223
Interest and others 19 20 58 49
Income tax expense (benefit) 17 (39) 57 (28)
Extraordinary item (FAS #71) - net of tax -- -- -- 61
---- ----- ---- -----
Net income (loss) $ 27 $ (64) $ 88 $(102)
==== ===== ==== =====
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Access Lines in Service (000's):
Residential 968 957 968 957
Business 309 302 309 302
------ ------ ------ ------
Total 1,277 1,259 1,277 1,259
On-island LD Minutes (millions) 240 268 739 992
Off-island LD Minutes (millions) (1) 43 21 110 33
Cellular Customers (000's):
Postpaid 202 180 202 180
Prepaid 121 90 121 90
------ ------ ------ ------
Total 323 270 323 270
Cellular ARPU $ 36 $ 44 $ 38 $ 46
Paging Customers (000's) 150 193 150 193
</TABLE>
----------
(1) Off-island long distance service commenced February 1, 1999.
18
<PAGE> 19
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1999
REVENUES AND SALES. Revenues for the quarter ended September 30, 2000
increased $21 million, or 6%, to $356 million from $335 million in the
comparable 1999 period.
WIRELINE:
Local service revenues include revenue generated from basic voice,
telephone and telecommunication equipment rental, value-added services,
high-speed private line services, Internet access, public phone service, and
line installation services. Local service revenues for the quarter ended
September 30, 2000 increased $11 million, or 9%, to $140 million from $129
million in the same 1999 period, resulting primarily from increases in basic
rent, Internet access and ATM private lines revenue of $4 million, $4 million,
and $3 million, respectively.
The increase in basic rent of $4 million is primarily due to a shift in
access lines toward higher priced flat rated service caused by Internet usage.
Access line growth for the quarter ended September 30, 2000 was 1%, when
compared to the 1999 quarter. The waiting list of regular orders for new
installations decreased to 20,900 at September 30, 2000 in comparison with
35,400 at June 30, 2000 and 22,800 at September 30, 1999. The decrease in the
waiting list was due to our effort to reduce provisioning time. The increase in
local measured service is primarily due to higher business usage.
Network access revenues include service provided to long distance,
competitive local exchange carriers, and cellular and paging operators to
originate and terminate calls on our network. Network access revenues for the
quarter ended September 30, 2000 increased $23 million, or 28%, to $105 million
compared to $82 million for the quarter ended September 30, 1999. We received $9
million of additional access revenues from long distance carriers to originate
on-island calls, due to on-island long distance market share loss. In addition,
our off-island access revenues increased $14 million as compared to the same
1999 period. This increase is related to higher common carrier line and switched
access revenues of $13 million and $1 million, respectively, as a result of
higher competitor off-island traffic.
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 $3 million, or 6%, to $44 million for the quarter
ended September 30, 2000 from $47 million in the same quarter in 1999. The
decrease was attributable to 10% 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. Our on-island long distance market share decreased to 60%
as of September 30, 2000 due to competition in the on-island market as a result
of introducing dialing parity in February 1999. The increase in off-island
traffic for the total market has mitigated some of this decrease. For the
quarter ended September 30, 2000, new revenues as a result of our entrance in
the off-island long distance market were $4 million higher than for the same
period in 1999. Our off-island market share at September 30, 2000 is 12%.
Directory and other revenues include directory publishing rights, sales
of telecommunication equipment and billing and collection services to competitor
long distance operators. Directory and other revenues for the quarter ended
September 30, 2000 decreased $3 million, or 14%, to $19 million, from $22
million in the quarter ended September 30, 1999 mainly due to lower billing,
collection and miscellaneous services to carriers.
WIRELESS:
Revenues from cellular and paging services and related equipment sales
for the quarter ended September 30, 2000 decreased $7 million, or 13%, to $48
million from $55 million in the same quarter in 1999. Cellular service remained
constant at $36 million for the quarter as compared to the same 1999 period.
Cellular average revenue per customer per month of $36 for the quarter ended
September 30, 2000 decreased by $8 from the same period in 1999. The reduction
is the result of competitive pricing actions and a larger portion of prepaid
customers, which have lower average revenue per customer. Prepaid customers
increased 34% at September 30, 2000 as compared to September 30, 1999.
19
<PAGE> 20
Paging revenues declined $4 million, or 33%, to $8 million during the
quarter ended September 30, 2000 from $12 million in the same 1999 period. The
decrease was due to a reduction in the number of paging customers related to
disconnections for non-payment and migration to cellular prepaid plans. Paging
customers decreased 43,000 or 22%, for the quarter ended September 30, 2000, as
compared to the same 1999 period.
Other revenues include equipment sales, which decreased $3 million, or
43%, to $4 million during the quarter ended September 30, 2000 from $7 million
in the same 1999 period. This was a result of lower gross additions.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the quarter
ended September 30, 2000 increased $1 million, to $219 million from the $218
million incurred in the same 1999 period.
WIRELINE:
Wireline expenses for the quarter ended September 30, 2000 decreased $1
million, to $179 million from the $180 million incurred in the same 1999
quarter. Labor and benefits decreased $2 million, or 2%, to $94 million from $96
million, mainly due to decreases in labor and employee benefits of $3 million,
which includes a $9 million retroactive wage increase, and contractor expenses
of $1 million. This decrease was partially offset by an increase in retirees and
pension plan expenses of $2 million. Labor savings resulted from a workforce
reduction of 1,342 employees related to the 1999 early retirement program.
Other operating expenses of $85 million for the quarter ended September
30, 2000, increased $1 million, or 1%, compared to the same 1999 period. The
principal component of the increase relates to access charges of $9 million and
higher management fees of $3 million, offset in part by decreases in bad debt
provisions of $5 million, property and municipal taxes of $4 million,
advertising of $1 million, and consulting expenses of $1 million.
WIRELESS:
Wireless expenses for the quarter ended September 30, 2000, increased
$2 million, or 5%, to $40 million from the $38 million reported in the same
period of 1999. Labor and benefits increased $4 million, or 80%, to $9 million
from $5 million in the same quarter of 1999. The increase was mainly due to
higher salaries and labor costs of $4 million, this includes a $1 million
retroactive wage increase.
Other operating expenses decreased $2 million, or 6%, to $31 million
from the $33 million reported in the same 1999 period. The principal components
of this decrease were lower cost of equipment sold of $1 million, and management
fees of $1 million.
EARLY RETIREMENT PROVISION. The Company offered a voluntary early retirement
incentive in stages during the third quarter of 1999 to selected employees.
Those choosing to retire early received normal medical and life insurance
benefits, credit for five additional years of services, and were not penalized
for early retirement in the pension benefit calculation. Last year's third
quarter results of operations include a $127 million non-cash provision for 816
salaried and union employees who chose to retire.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization of $74
million for the quarter ended September 30, 2000 was $1 million higher than the
prior year's quarter.
INTEREST EXPENSE. Interest expense of $19 million for the quarter ended
September 30, 2000 primarily resulted from privatization related borrowings.
Debt decreased from $1.5 billion on December 31, 1999 to $1.3 billion at
September 30, 2000.
EQUITY INCOME FROM JOINT VENTURE. Earnings of $0.5 million were generated from
the Company's approximate 25% share in AXESA, the largest yellow page publishing
company in Puerto Rico. The Company's share of the earnings commenced in January
2000.
INCOME TAXES. A $17 million tax provision for the second quarter of 2000
reflects a 39% statutory rate. Non-tax deductible goodwill amortization has been
added back to arrive at net taxable income.
20
<PAGE> 21
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES AND SALES. Revenues for the nine months ended September 30, 2000
increased $52 million, or 5%, to $1,057 million from $1,005 million in the
comparable 1999 period.
WIRELINE:
Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, public phone service, and installation services.
Local service revenues for the nine months ended September 30, 2000 increased
$51 million, or 14%, to $426 million from $375 million in the same 1999 period,
resulting primarily from increases in revenues from basic rent, private lines,
Internet access, public phones, measured services, high speed local private
lines, and value-added services of $15 million, $13 million, $11 million, $5
million, $4 million, $2 million, and $1 million, respectively.
The increase in basic rent of $15 million is primarily due to a shift
in access lines toward higher priced flat rated service caused by Internet
usage. Access line growth in the nine months ended September 30, 2000 was 1%;
compared to 2% for the comparable 1999 period due to facilities based local
exchange competition. The waiting list of regular orders for new installations
decreased to 20,900 at September 30, 2000 in comparison to 22,200 at December
31, 1999, and 22,800 at September 30, 1999. The decrease in the waiting list,
when compared to December 31, 1999, was due to the effort in reducing
provisioning time. The increase in local measured service is primarily due to
higher business usage.
Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on our network. Network access revenues for the
nine months ended September 30, 2000 increased $41 million, or 16%, to $292
million compared to $251 million for the comparable 1999 period. We received $30
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 $11 million was realized from higher off-island access
revenues due to higher competitor off-island traffic.
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 $39 million, or 23%, to $130 million for the nine
months ended September 30, 2000 from $169 million in the same 1999 period. The
decrease was attributable to 26% 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. Our on-island long distance market share decreased to 60%
as of September 30, 2000 due to competition in the on-island market as a result
of introducing dialing parity in February 1999. The increase in off-island
traffic for the total market has mitigated some of this decrease. For the nine
months ended September 30, 2000, new revenues as a result of our entrance in the
off-island long distance market were $14 million higher than for the same 1999
period. We commenced off-island long distance service in February 1999.
Directory and other revenues include directory publishing rights,
telecommunication equipment and billing and collecting services to competitor
long distance operators. Directory and other revenues for the nine months ended
September 30, 2000 increased $1 million, or 2%, to $63 million, from $62 million
in the comparable 1999 period mainly due to higher billing, collection and
miscellaneous services to carriers.
WIRELESS:
Revenues from cellular and paging services and related equipment sales
for the nine month period ended September 30, 2000 decreased $2 million to $146
million from $148 million for the comparable 1999 period. Cellular service
revenues increased $7 million, or 7%, as a result of the net addition of
approximately 53,000 customers versus the same period last year, representing a
20% increase in net customers. Cellular average revenue per customer per month
of $38 decreased by $8 as a result of competitive pricing actions and a larger
portion of prepaid customers, which have lower average revenue per customer.
Prepaid customers increased 34% at September 30, 2000, as compared to the same
1999 period.
21
<PAGE> 22
Paging revenues declined $9 million, or 24%, to $28 million during the
nine months period ended September 30, 2000 from $37 million for the comparable
1999 period. The decrease was due to a reduction of 43,000 customers versus the
same 1999 period because of disconnections related to non-payment and the
migration to cellular prepaid plans.
Other revenues consist of equipment sales, which remained constant at
$10 million for the nine months period ended September 30, 2000 as compared to
the same 1999 period.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine
months period ended September 30, 2000 decreased $13 million, or 2%, to $632
million from the $645 million for in the same 1999 period.
WIRELINE:
Wireline expenses for the nine months period ended September 30, 2000
decreased $32 million, or 6%, to $518 million from the $550 million incurred in
the comparable 1999 period. Labor and benefits decreased $45 million, or 14%, to
$271 million from $316 million in the same period of 1999, mainly due to
decreases in labor of $29 million, and the absence of Hurricane Georges repair
and contractor expenses of $28 million, offset by increases in pension, OPEB and
ESOP expenses of $4 million, $4 million, and $2 million, respectively. Labor
savings resulted from a workforce reduction of 1,342 employees related to the
1999 early retirement program.
Other operating expenses of $247 million for the nine months period
ended September 30, 2000, increased $13 million, or 6%, compared to the same
1999 period. The increase is due to higher accrued management fees of $15
million, and access charges of $16 million, offset by a decrease in cost of
equipment sold of $5 million, bad debt provisions of $4 million, property and
municipal taxes of $3 million, materials of $2 million, consulting expenses of
$2 million and vehicle expenses of $1 million.
WIRELESS:
Wireless expenses for the nine months period ended September 30, 2000,
increased $19 million, or 20%, to $114 million from the $95 million reported in
the same 1999 period. Labor and benefits increased $6 million to $24 million
from $18 million in the comparable 1999 period. The principal components of this
increase are higher salary and labor costs of $6 million.
Other operating expenses increased $13 million, or 17%, to $90 million
from the $77 million reported in the same 1999 period. The principal components
of this increase were higher bad debt provisions of $9 million, commissions of
$4 million, and advertising expense of $3 million. These increases reflect an
intense competitive market. This increase was offset in part by a decrease in
management fees of $2 million and inventory obsolescence reserve of $1 million.
ESOP COMPENSATION EXPENSES. A $26 million non-cash expense was recorded in the
first quarter of 1999 representing the PRTA's grant, with an offsetting credit
to paid-in-capital.
EARLY RETIREMENT PROVISION. Voluntary early retirement programs were initiated
by us in 1999. The first program 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 settle the obligation.
We offered a voluntary early retirement incentive in stages during the
1999 third quarter to selected employees. Those choosing to retire early
received normal medical and life insurance benefits, five additional years of
service, and were not penalized for early retirement in the pension benefit
calculation. Third quarter results of operations of 1999 include a $127 million
non-cash provision for 816 salaried and union employees who chose to retire.
22
<PAGE> 23
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization of $222
million for the nine months ended September 30, 2000 was $1 million lower than
the prior year period.
INTEREST EXPENSE. Interest expense of $60 million for the nine months ended
September 30, 2000 primarily resulted from privatization related borrowings.
Debt decreased from $1.5 billion on December 31, 1999 to $1.3 billion at
September 30, 2000.
EQUITY INCOME FROM JOINT VENTURE. Earnings of $1.5 million were generated from
our approximate 25% share in AXESA, the largest yellow page publishing company
in Puerto Rico. Our share of the earnings commenced in January 2000.
INCOME TAXES. A $57 million tax provision for the nine months period ended
September 30, 2000 reflects a 39% statutory rate. Non-tax deductible goodwill
amortization has been added back to arrive at net taxable income.
EXTRAORDINARY CHARGE. PRTC discontinued the application of SFAS No. 71 with the
consummation of the Acquisition on March 2, 1999, due to changes in regulation,
the competitive environment and the terms of the Acquisition. A write-down of
plant and equipment of $199 million was recorded of which $99.5 million was
accounted for as a purchase price adjustment consistent with partial step-up
accounting to reflect the fair value of the acquired assets. The remaining $99.5
million was recorded as an extraordinary charge (approximately $60.5 million
after-tax).
23
<PAGE> 24
CONSOLIDATED FINANCIAL CONDITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999 CHANGE
----- ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash flows from (used in):
Operations $ 332 $ 275 $ 57
Investing (122) (163) 41
Financing (186) (112) (74)
</TABLE>
INCREASE IN CASH AND CASH EQUIVALENTS
Cash from operations is sufficient to meet working capital needs and a
capital expenditures budget for 2000 of $228 million. While current liabilities
exceeded current assets at September 30, 2000, our sources of funds, primarily
from operations and to the extent necessary, from readily available external
financing arrangements, are sufficient to meet ongoing operating and investing
requirements. We expect that presently foreseeable capital requirements will
continue to be financed primarily through internally generated funds. Current
liabilities exceeded current assets at September 30, 2000 by $35 million due to
borrowings of $100 million under a short-term working capital facility, the
proceeds of which were used for the prepayment of $100 million of bank debt.
OPERATIONS
Our primary source of funds continued to be cash generated from
operations. The increase in cash from operations primarily reflects improved
operating income. Cash from operations increased $57 million for the nine months
ended September 30, 2000, as compared to the same 1999 period.
The increase in cash from operations is directly related to earnings
before taxes and other non-cash charges recorded in 1999. Earnings before taxes
for the nine months ended September 30, 2000 was $145 million. This compares to
earnings before taxes of $85 million for the same period in 1999 after excluding
early retirement provision and non-cash ESOP expenses.
INVESTING
Capital expenditures continued to be our primary use of capital
resources. Capital spending for the nine months ended September 30, 2000 was
$122 million compared to $163 million for the comparable 1999 period. The $41
million decrease was due to the timing of equipment deliveries from suppliers
and contractor work actions. Our capital expenditure program will range from
$200 million to $225 million for 2000, financed from internally generated funds.
FINANCING
Debt reduction for 2000 was $226 million. Outstanding borrowings under
bank loans and working capital facilities decreased from $495 million at
December 31, 1999 to $269 million at September 30, 2000. The Company executed
two new working capital line of credit facilities with Banco Bilbao Vizcaya
("BBV") and Popular, Inc. ("Popular") for $50 million during the second quarter.
These facilities replaced a $200 million facility with Popular, which was
initiated on March 2, 1999 and expired on March 2, 2000. The interest rate on
the credit facilities is LIBOR plus 57.5 basis points, approximating a 7.2%
interest rate at September 30, 2000. This is 35 basis points lower than the bank
notes.
24
<PAGE> 25
REGULATORY MATTERS
LONG DISTANCE CALLING PLANS
Telefonica Larga Distancia ("TLD") has asserted to the
Telecommunications Regulatory Board ("TRB") that several of our bundled long
distance calling plans are below cost. One of these plans includes competitive
prices for off-island and on-island long distance and free weekend on-island
calls with a minimum monthly fee. The TRB found the plan was based on cost in a
March 2000 ruling, but required us to submit a new cost study by October 2000 to
reflect weekend traffic. The cost study has been submitted to the TRB and we
await a decision.
ON-ISLAND ACCESS RATE DISPUTE
We changed our intrastate rate elements in October 1998 based on a
cost study. The change involved increasing the common carrier line ("CCL") rate
element by 2 cents per minute and decreasing other elements with no change in
total revenue requirements. In May 2000, the TRB ordered a 2 cents per minute
refund for a portion of the 1999 period and imposed a fine of $250,000, which
has been accrued at September 30, 2000. The Appellate Court of Puerto Rico
upheld the TRB order in an August 2000 ruling.
PUBLIC TELEPHONE ACCESS RATES
In June 2000, the Puerto Rico Supreme Court upheld a TRB order of May
1998 to reduce access rates to payphone service providers ("PSP's"). Settlements
were reached with the PSP's in the third quarter and a $5 million revenue
adjustment was recorded.
PAYPHONE SERVICE PROVIDER DIAL-AROUND COMPENSATION
The Federal Communication Commission ("FCC") established that PSP's be
compensated for "800" or "10XXX" calls at $.24 per call. We had previously
neither received compensation as a PSP nor paid compensation to competitor PSP's
as a facility-based provider of an 800 on-island line. We reached a settlement
in September 2000 with all associated parties for both the revenues owed to us
and amounts due to competitor PSP's. Third quarter results include revenues and
expenses of $2 million and $1 million respectively, as a settlement of past
claims.
RATE MAKING CONSIDERATIONS RELATED TO THE CREATION OF WIRELESS AFFILIATE
Our Predecessors transferred their 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. Since our
Predecessors had not included the costs of wireless operations in the regulated
rate setting process, we believe ratepayers did not bear the cost of our
Predecessor's wireless investment 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 could be attributable to
interstate access charges. Under the initial FCC ruling, we could be required to
pass on an equal amount to carriers 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 reach the right conclusion based
upon the rate setting process. The FCC requested, and received from one carrier,
public comments regarding this issue in June 2000.
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 TRB.
25
<PAGE> 26
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 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 has
became a Verizon affiliate upon consummation of the Acquisition. The FCC granted
our extension request until July 1, 2001 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, 2001.
NECA supported our continued participation in the pools.
26
<PAGE> 27
RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on the Company's balance sheet. Changes in the fair values of
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No.133 for one year. We must adopt SFAS No. 133 no later than January 1,
2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
related to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives. SFAS No. 138 also amends SFAS No. 133 for decisions made by the
FASB related to the Derivatives Implementation Group process.
We have assessed the impact of adopting SFAS No. 133 and SFAS No. 138
and it is expected that the adoption will not have an effect on the Company's
results of operations or financial condition.
REVENUE RECOGNITION
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 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.
We are finalizing the assessment of the impact of SAB No. 101 on our
results of operations and financial position. It is not expected to have a
material effect on the results of operations.
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishing of Liabilities",
which supersedes SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishing of Liabilities." This Statement provides
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. Under this Statement, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
This Statement is effective for transfers occurring after March 31,
2001, but the disclosure requirements relating to securitization transactions
and collateral are effective for fiscal years ending after December 15, 2000.
This Statement will not have an effect on the Company's financial position or
results of operations.
27
<PAGE> 28
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We are exposed to market risk in the normal course of our business,
primarily resulting from the impact of interest rate changes on our cost of
borrowings.
The table that follows summarizes the fair values of our long-term debt
as of September 30, 2000 and December 31, 1999. The table also provides a
sensitivity analysis of the estimated fair values of such debt assuming
100-basis-point upward and downward parallel shifts in the yield curve. Our
sensitivity analysis did not include the fair values of our floating-rate debt
because they are not significantly affected by changes in market interest rates.
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE
ASSUMING ASSUMING
+100 BASIS -100 BASIS
FAIR VALUE POINT SHIFT POINT SHIFT
---------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
September 30, 2000 $ 955,142 $ 916,707 $ 996,071
============ ============ ============
December 31, 1999 $ 948,052 $ 905,320 $ 993,743
============ ============ ============
</TABLE>
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are a defendant in various legal matters arising in the ordinary
course of business including a regulatory issue relating to the creation of the
Company's wireless affiliate. After consultation with legal counsel, we believe
that the resolution of these matters will not have a material adverse effect on
the Company's financial position and results of operation. For more information
regarding the creation of the wireless affiliate, please refer to the
"Regulatory Matters" section of the Management's Discussion and Analysis. In
connection with the Acquisition, the PRTA agreed to indemnify, defend and hold
us harmless for specified litigation in excess of $50 million, including one
environmental matter.
ITEM 5. Other Information
New Union Contract
In October 2000, we agreed to new labor contracts with our craft and
office workers unions. Renegotiated contracts involving the 3,200 craft workers
will now expire in January 2002 and with the 1,750 office workers in October
2003. An aggregate of $10 million reflecting wage increases retroactive to the
date of the last contract, will be paid in two $5 million installments in
December 2000 and January 2001. The full amount was accrued in the third
quarter.
The weighted average wage increases contained in the contracts is 6.7%
in 2000, 6% in 2001, 4.8% in 2002, and 4.7% in 2003. If the workforce remains
unchanged, these increases together with other benefit increases and payroll
taxes result in higher labor costs over 2000 levels of $16 million and $28
million in 2001 and 2002, respectively.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K
12) Statement re: Calculation of the Consolidated Ratio of Earnings to
Fixed Charges
27) Financial Data Schedule
b) No reports on Form 8-K were filed during the third quarter of 2000.
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By: /s/ Jon E. Slater
------------------------------------
Name: Jon E. Slater
Title: Chief Executive Officer
Date: November 13, 2000
By: /s/ Frank P. Gatto
------------------------------------
Name: Frank P. Gatto
Title: Chief Financial Officer
Date: November 13, 2000
By: /s/ Robert P. Huberty
------------------------------------
Name: Robert P. Huberty
Title: Chief Accounting Officer
Date: November 13, 2000
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.21 $50,000,000 working capital revolving credit agreement dated
as of May 4, 2000, among Telecomunicaciones de Puerto Rico,
Inc., as borrower, and Banco Bilbao Vizcaya Argentaria S.A.
and Banco Bilbao Vizcaya Puerto Rico, as lenders.
Incorporated by reference to Exhibit 10.21 filed on the
Company's Form 10-Q for the period ended June 30, 2000
(Files 333-85503).
10.22 $50,000,000 working capital revolving credit agreement dated
as of June 2, 2000, among Telecomunicaciones de Puerto Rico,
Inc., as borrower, and Banco Popular de Puerto Rico, as
lender. Incorporated by reference to Exhibit 10.22 filed on
the Company's Form 10-Q for the period ended June 30, 2000
(File 333-85503).
12 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
27 Financial Data Schedule as of September 30, 2000.
</TABLE>
