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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended:September 30, 2006
Or
o | 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:787-792-6052
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.
YESþ NOo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YESo NOþ
At November 14, 2006, 25 million shares of no par common stock of the registrant were outstanding.
INDEX
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(In thousands)
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 106,276 | $ | 55,086 | ||||
Accounts receivable, net of allowance for doubtful accounts of $85,169 and $76,815, in 2006 and 2005, respectively | 193,194 | 227,629 | ||||||
Deferred income tax | 32,431 | 18,324 | ||||||
Inventory and supplies, net | 23,806 | 47,431 | ||||||
Prepaid expenses | 28,365 | 20,571 | ||||||
Total current assets | 384,072 | 369,041 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net | 1,275,253 | 1,351,510 | ||||||
GOODWILL | 126,927 | 126,927 | ||||||
INTANGIBLES, net | 198,541 | 209,357 | ||||||
DEFERRED INCOME TAX | 164,702 | 205,853 | ||||||
OTHER ASSETS | 93,328 | 115,271 | ||||||
TOTAL ASSETS | $ | 2,242,823 | $ | 2,377,959 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Short-term debt | $ | — | $ | 452,042 | ||||
Other current liabilities | 166,765 | 172,961 | ||||||
Total current liabilities | 166,765 | 625,003 | ||||||
LONG-TERM DEBT, excluding current portion | 574,942 | 299,812 | ||||||
PENSION AND OTHER POST-EMPLOYMENT BENEFITS | 523,099 | 563,395 | ||||||
OTHER NON-CURRENT LIABILITIES | 115,671 | 136,345 | ||||||
Total liabilities | 1,380,477 | 1,624,555 | ||||||
MINORITY INTEREST | 18,373 | 16,555 | ||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Common stock | 705,516 | 705,516 | ||||||
Deferred ESOP compensation | (26,042 | ) | (26,042 | ) | ||||
Retained earnings | 335,810 | 228,877 | ||||||
Accumulated other comprehensive loss, net of taxes | (171,311 | ) | (171,502 | ) | ||||
Total shareholders’ equity | 843,973 | 736,849 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 2,242,823 | $ | 2,377,959 | ||||
The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Operations (In thousands)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
REVENUES: | ||||||||||||||||
Local services | $ | 142,260 | $ | 154,137 | $ | 446,100 | $ | 452,981 | ||||||||
Access services | 50,848 | 61,845 | 158,994 | 179,834 | ||||||||||||
Long distance services | 14,654 | 16,810 | 47,622 | 46,852 | ||||||||||||
Cellular services | 95,096 | 70,917 | 271,412 | 202,224 | ||||||||||||
Directory services and other sales | 14,345 | 18,682 | 208,405 | 48,479 | ||||||||||||
Total revenues | 317,203 | 322,391 | 1,132,533 | 930,370 | ||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||||||
Cost of services and sales | 80,147 | 80,261 | 253,069 | 235,804 | ||||||||||||
Selling, general and administrative | 121,148 | 133,729 | 392,980 | 385,997 | ||||||||||||
Early retirement and voluntary separation provision | — | — | — | 1,687 | ||||||||||||
Depreciation and amortization | 61,591 | 59,521 | 185,247 | 181,430 | ||||||||||||
Total operating costs and expenses | 262,886 | 273,511 | 831,296 | 804,918 | ||||||||||||
OPERATING INCOME | 54,317 | 48,880 | 301,237 | 125,452 | ||||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||
Interest expense, net | (9,545 | ) | (11,668 | ) | (31,060 | ) | (34,136 | ) | ||||||||
Equity income from joint venture | — | 583 | 28,198 | 1,695 | ||||||||||||
Minority interest in consolidated subsidiary | (731 | ) | (722 | ) | (1,818 | ) | (2,129 | ) | ||||||||
Total other income (expense), net | (10,276 | ) | (11,807 | ) | (4,680 | ) | (34,570 | ) | ||||||||
INCOME BEFORE INCOME TAX EXPENSE | 44,041 | 37,073 | 296,557 | 90,882 | ||||||||||||
INCOME TAX EXPENSE | 17,077 | 14,857 | 78,536 | 35,711 | ||||||||||||
NET INCOME | $ | 26,964 | $ | 22,216 | $ | 218,021 | $ | 55,171 | ||||||||
The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
(In thousands)
Accumulated | ||||||||||||||||||||
Deferred | Other | |||||||||||||||||||
Common | ESOP | Retained | Comprehensive | |||||||||||||||||
Stock | Compensation | Earnings | Loss | Total | ||||||||||||||||
BALANCE DECEMBER 31, 2005 | $ | 705,516 | $ | (26,042 | ) | $ | 228,877 | $ | (171,502 | ) | $ | 736,849 | ||||||||
Dividends paid | — | — | (111,088 | ) | — | (111,088 | ) | |||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | — | — | 218,021 | — | 218,021 | |||||||||||||||
Other comprehensive loss, net of taxes: | ||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | 191 | 191 | |||||||||||||||
Comprehensive income | — | — | — | — | 218,212 | |||||||||||||||
BALANCE SEPTEMBER 30, 2006 (Unaudited) | $ | 705,516 | $ | (26,042 | ) | $ | 335,810 | $ | (171,311 | ) | $ | 843,973 | ||||||||
The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(In thousands)
For the Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 218,021 | $ | 55,171 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 185,247 | 181,430 | ||||||
Provision for uncollectible accounts | 38,037 | 34,898 | ||||||
Deferred income tax expense | 27,044 | 29,460 | ||||||
Employee retirement benefits expense | 82,285 | 74,101 | ||||||
Equity income from joint venture | (665 | ) | (1,695 | ) | ||||
Early retirement and voluntary separation provision | — | 1,687 | ||||||
Gain on sale of building | — | (207 | ) | |||||
Gain on sale of interest in joint venture | (27,533 | ) | — | |||||
Minority interest in consolidated subsidiary | 1,818 | 2,129 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (3,602 | ) | (1,836 | ) | ||||
Inventory and supplies | 23,625 | (7,647 | ) | |||||
Prepaid expenses and other assets | 15,892 | (499 | ) | |||||
Other current and non-current liabilities | (26,789 | ) | (68,537 | ) | ||||
Pension and other post-employment benefits | (122,581 | ) | (118,709 | ) | ||||
Net cash provided by operating activities | 410,799 | 179,746 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures, including removal costs | (98,172 | ) | (115,192 | ) | ||||
Proceeds from sale of investment | 26,651 | 1,136 | ||||||
Net cash used in investing activities | (71,521 | ) | (114,056 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net repayments of short-term debt, including capital leases | (452,000 | ) | (73,129 | ) | ||||
Borrowings of long-term debt | 275,000 | — | ||||||
Dividends paid | (111,088 | ) | (18,123 | ) | ||||
Net cash used in financing activities | (288,088 | ) | (91,252 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 51,190 | (25,562 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 55,086 | 63,346 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 106,276 | $ | 37,784 | ||||
The accompanying notes are an integral part of these financial statements.
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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
1. | Business / Corporate Structure | |
Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (The “Company”), holds 100% of the common stock of Puerto Rico Telephone Company, Inc. (“PRTC”), PRT Larga Distancia, Inc. (“PRTLD”) and Datacom Caribe, Inc. (“Datacom”). The Company holds a 67% interest in Coqui.net Corporation (“Coqui.net”), in which Popular, Inc., (Popular) one of our shareholders, holds the remaining 33% interest. The Company also held a 24% interest in Verizon Information Services Puerto Rico, Inc. S en C. (“VISI”), in which GTE Holdings (Puerto Rico) LLC, our majority shareholder, held a 36% interest. On March 31, 2006, the Company sold its equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. Directory publishing revenues were generated through VISI until March 31, 2006. As incumbent local exchange carrier for the island of Puerto Rico, we provide both wireline and wireless services (the latter using the Verizon Wireless brand name). The Company’s off-island long distance service is provided by PRTLD and its Internet access service is provided by Coqui.net. | ||
GTE Corporation (“GTE”), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40% interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone Authority (“PRTA”), an entity of the Commonwealth of Puerto Rico (the “Acquisition”). In connection with the Acquisition, Popular acquired a 10% interest in the Company. GTE and Bell Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc. (“Verizon”). On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular acquired an additional 12% and 3% interest in the Company, respectively, by exercising an option each had held since the Acquisition. Verizon and Popular acquired the additional ownership interest from PRTA Holdings Corp., a subsidiary of the PRTA (“PRTA Holdings”). Verizon and Popular paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172 million in cash for the additional 3,750,000 shares at a $45.9364 per share price established in a share option agreement entered into at the time of the Acquisition. As a result, Verizon owns 52%, Popular owns 13%, PRTA owns 28% and the Employee Stock Ownership Plan (“ESOP”) owns 7% of the outstanding capital stock of the Company. | ||
2. | Summary of Significant Accounting Policies | |
Basis of Presentation | ||
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles for annual financial statements have been condensed or omitted pursuant to such rules and regulations. These financial statements include all adjustments and recurring accruals necessary to present fairly the results of its operations and financial condition for the interim periods shown. The results for the interim periods are not necessarily indicative of results for the full year. The Consolidated Balance Sheet at December 31, 2005 was derived from audited financial statements and should be read in conjunction with the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. | ||
Recent Accounting Pronouncements | ||
Uncertainty in Income Taxes | ||
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company is required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. |
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Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We are currently evaluating the impact that FIN 48 will have on our future results of operations and financial position.
Leveraged Leases
In July 2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2). FSP 13-2 requires that changes in the projected timing of income tax cash flows generated by a leveraged lease transaction be recognized as a gain or loss in the year in which change occurs. The pretax gain or loss is required to be included in the same line item in which the leveraged lease income is recognized, with the tax effect being included in the provision for income taxes. We are required to adopt FSP 13-2 effective January 1, 2007. The cumulative effect of initially adopting this FSP will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. We are currently evaluating the impact this new standard will have on our future results of operations and financial position.
Effects of Prior Year Misstatements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 requires the quantification of financial statement errors based on the effects on the current year income statement and the cumulative effects on the balance sheet. SAB 108 is effective December 31, 2006 and we expect that the adoption of SAB 108 will not affect our results of operations or financial position.
Fair Value Measurements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurement(SFAS No. 157). SFAS No. 157 expands disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. We are required to adopt SFAS No. 157 effective January 1, 2008 on a prospective basis. We are currently evaluating the impact this new standard will have on our future results of operations and financial position.
Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans –an amendment of FASB Statements No. 87, 88, 106, and 132 (R) (FAS 158). FAS 158 requires the recognition of a defined benefits plan’s funded status as either an asset or liability on the balance sheet. FAS 158 also requires the immediate recognition of the unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of other accumulated comprehensive income, net of applicable income taxes. Additionally, the fair value of plan assets must be determined as of the Company’s year-end. TELPRI is required to adopt FAS 158 effective December 31, 2006. The Company currently expects that the impact of adopting FAS 158 will result in an increase to liabilities and decrease to shareowners’ investment of approximately $450 millions, however the final amount will be dependent on plan asset performance through the end of 2006 as well as interest rates and other factors that will be applicable as of December 31, 2006.
Impairment or Disposal of Long-lived Assets
Assets are assessed for impairment when changes in circumstances indicate that their carrying values are not recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Losses are recognized in circumstances where impairment exists, at the amount by which the carrying value of assets exceeds fair value. Fair value is determined based on quoted market prices, if not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows and fundamental analysis.
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Goodwill and Other Intangibles
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. SFAS No. 142 “Goodwill and Other Intangible Assets” no longer permits the amortization of goodwill and other indefinite-lived intangible assets acquired in a business combination. Impairment testing for goodwill is performed at least annually unless indicators of impairment exist according to SFAS No. 142. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment. The Company is currently undergoing its annual evaluation of goodwill using the fair value approach for each reporting unit to determine if there is an impairment exposure and the impact it would have on the Company’s results of operations for 2006.
Indefinite Life Intangible Assets
The indefinite life intangible assets are those intangibles not subject to amortization and consist principally of wireline concessions and FCC cellular licenses.
A significant portion of the intangible assets are cellular licenses that provide wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142.
We have tested the indefinite life intangible assets for impairment at least annually unless indicators of impairment exist. We began using the direct value approach in 2005 to perform the annual impairment test on the indefinite life intangible assets in accordance with a September 29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” The direct value approach determines fair value using estimates of future cash flows associated specifically with the licenses. Previously, we used a residual method, which determined the fair value of the business by estimating future cash flows of the operations. The fair value of aggregate licenses was determined by subtracting from the fair value of the business the fair value of all of the other net tangible and intangible (primarily recognized and unrecognized customer relationship intangible assets) assets of our operations. We determined the fair value of the customer relationship intangible assets based on the average customer acquisition costs. Under either the direct method or the residual method, if the fair value of the aggregated licenses was less than the aggregated carrying amount of the licenses, an impairment would have been recognized. The Company is currently undergoing its annual evaluation of the indefinite life intangible assets using the direct value approach for each reporting unit to determine if there is an impairment exposure and the impact it would have on the Company’s results of operations for 2006.
Definite Life Intangible Assets
The definite life intangible assets are those intangibles assets subject to amortization and consist principally of trade names and software licenses. The Company amortizes trade names and software licenses on a straight-line basis over 25 and 5 years, respectively.
For information related to the breakdown of the carrying amount of goodwill as well as the major components of the other intangible assets, see Notes 5 and 6.
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Reclassifications | ||
Reclassifications of prior periods’ amounts have been made to conform to the current period’s presentation. | ||
3. | Gain on Sale of Interest in Joint Venture | |
In February 2006, the Company signed an agreement to sell its participation in the Company’s equity interest in the Puerto Rico directory operation for $23 million and the Company’s right to receive 35% of the revenues from the publication of directory advertising for $167 million. The transaction closed on March 31, 2006. The net pretax gain from the sale of the Company’s equity interest was $28 million, which is included in “Equity (loss) income from joint venture”, and the net pretax gain from the sale of the Company’s right was $158 million, which is included in “Directory services and other”. Both transactions are included in the nine months ended September 30, 2006 consolidated statement of operations. The proceeds were used to pay dividends and long-term debt. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. | ||
4. | Property, Plant and Equipment | |
Following is a breakdown of Property Plant and Equipment: |
Remaining Useful | September 30, | December 31, | ||||||||||
Lives (Yrs) | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Outside plant | 9.0 | $ | 2,225,690 | $ | 2,198,892 | |||||||
Central office and transmission equipment | 3.8 | 1,295,392 | 1,282,713 | |||||||||
Equipment and other | 2.7 | 269,711 | 273,245 | |||||||||
Buildings | 14.6 | 329,072 | 324,988 | |||||||||
Land | N/A | 25,547 | 25,500 | |||||||||
Gross plant in service | 4,145,412 | 4,105,338 | ||||||||||
Less: accumulated depreciation | 2,905,610 | 2,772,489 | ||||||||||
Net plant in service | 1,239,802 | 1,332,849 | ||||||||||
Construction in progress | 35,451 | 18,661 | ||||||||||
Total | $ | 1,275,253 | $ | 1,351,510 | ||||||||
5. | Goodwill | |
Following is a breakdown of goodwill: |
CarryingValue | ||||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Wireline (PRTC) | $ | 102,731 | $ | 102,731 | ||||
Dial-up Internet (Coqui.net) | 24,196 | 24,196 | ||||||
Total | $ | 126,927 | $ | 126,927 | ||||
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6. | Intangibles |
Following is a breakdown of intangibles:
Carrying Value | ||||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Indefinite Life: | ||||||||
Wireline concession | $ | 85,120 | $ | 85,120 | ||||
FCC Cellular licenses | 23,855 | 23,855 | ||||||
Total Indefinite Life | $ | 108,975 | $ | 108,975 | ||||
September 30, 2006 | December 31, 2005 | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Cost | Acc. Amort | Book Value | Cost | Acc. Amort | Book Value | |||||||||||||||||||
Definite Life: | ||||||||||||||||||||||||
Wireline trade name | $ | 48,400 | $ | 14,670 | $ | 33,730 | $ | 48,400 | $ | 13,218 | $ | 35,182 | ||||||||||||
Software licenses | 134,575 | 78,739 | 55,836 | 126,720 | 61,520 | 65,200 | ||||||||||||||||||
Total Definite Life | $ | 182,975 | $ | 93,409 | $ | 89,566 | $ | 175,120 | $ | 74,738 | $ | 100,382 | ||||||||||||
Plus: Total Indefinite Life | 108,975 | 108,975 | ||||||||||||||||||||||
Total | $ | 182,975 | $ | 93,409 | $ | 198,541 | $ | 175,120 | $ | 74,738 | $ | 209,357 | ||||||||||||
The following table presents expected amortization expense of existing intangible assets as of September 30, 2006 and for each of the following years (in thousands):
Aggregate Amortization expense: | ||||||||
For the nine months ended September 30, 2006 | $ | 18,662 | ||||||
Expected amortization expense: | ||||||||
For the remainder of 2006 | $ | 2,627 | ||||||
For the years ending December 31, | ||||||||
2007 | 19,246 | |||||||
2008 | 14,832 | |||||||
2009 | 9,881 | |||||||
2010 and thereafter | 42,980 |
Intangible asset amortization expense was $6 million for both quarters ended September 30, 2006 and 2005, and $19 million and $16 million for the nine months ended September 30, 2006 and 2005, respectively.
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7. | Other assets | |
Following is a breakdown of other assets: |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Deferred activation and installation costs | $ | 47,740 | $ | 68,422 | ||||
Notes receivable-equipment sales | 141 | 1,995 | ||||||
Deferred pension asset | 41,729 | 41,729 | ||||||
Deferred financing costs, net | 895 | 1,359 | ||||||
Other assets | 2,823 | 1,766 | ||||||
Total | $ | 93,328 | $ | 115,271 | ||||
Customer activation fees, along with the related costs up to but not exceeding the activation fees, are deferred and amortized over the customer relationship period, as required by Staff Accounting Bulletin “SAB” 104. However, customer activation fees are subject to additional consideration when wireless handsets are sold to the customers at a discount and recorded as equipment sales revenue. During the nine months ended September 30, 2006, the customer relationship period was reviewed and changed to 4 years from 5 years for wireline customers and to 2 years from 3 years for wireless customers. This change in estimate resulted in an increase of $15 million in activation and installation revenues and a corresponding in activation and installation expenses for the same amount. This change in estimate did not impact operating income nor net income.
8. | Pension Plan | |
The Company has noncontributory pension plans for full-time employees, which are tax qualified as they meet Employee Retirement Income Security Act of 1974 (the “ERISA”) requirements. The Company realizes tax deductions when contributions are made to the trusts. The trusts invest in equity and fixed income securities to meet benefit obligations. | ||
The pension benefit is composed of two elements. First, an employee receives an annuity at retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated by applying a percentage times years of service to the last three years of salary. The second element is a lump sum based on years of service, up to a maximum of nine months of salary for hourly employees and twelve months of salary for salaried employees. | ||
There are separate trusts for the annuity and the lump sum benefits. Furthermore, annuity benefit plans are segregated by two employee groups: Salaried and Hourly employees. Salaried group includes HIETEL and management employees. Hourly employees group includes UIET union employees. The Company also provides health care and life insurance benefits to retirees. | ||
The estimated components of the net pension and other post-employment benefit expenses for the three months and nine months ended September 30, 2006 and 2005 are presented below. |
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Pension and Lump Sum Benefits | Post- Retirement Benefits | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||||||
Service cost | 6,560 | $ | 5,714 | 19,680 | 17,142 | $ | 648 | $ | 1,556 | $ | 4,618 | $ | 4,668 | |||||||||||||||||||
Interest cost | 19,300 | 18,259 | 57,900 | 54,777 | 9,214 | 8,218 | 27,642 | 24,654 | ||||||||||||||||||||||||
Expected return on plan assets | (19,474 | ) | (18,135 | ) | (58,422 | ) | (54,405 | ) | — | — | — | — | ||||||||||||||||||||
Amortization of unrecognized: | — | — | — | — | ||||||||||||||||||||||||||||
Transition obligation | 90 | 90 | 270 | 270 | 551 | 551 | 1,653 | 1,653 | ||||||||||||||||||||||||
Prior service cost (benefit) | 912 | 783 | 2,736 | 2,349 | (2,306 | ) | (2,463 | ) | (6,918 | ) | (7,389 | ) | ||||||||||||||||||||
Actuarial loss, net | 5,922 | 5,549 | 17,766 | 16,647 | 5,120 | 4,579 | 15,360 | 13,737 | ||||||||||||||||||||||||
Total | $ | 13,310 | $ | 12,260 | $ | 39,930 | $ | 36,780 | $ | 13,227 | $ | 12,441 | $ | 42,355 | $ | 37,323 | ||||||||||||||||
Cash Flows | ||
Our estimate of the amount required for qualified pension trust contributions for 2006 is approximately $102 million. We anticipate approximately $1 million in contributions to the non-qualified pension plans and approximately $24 million for the other post-retirement benefits in 2006. As of September 30, 2006, we have contributed approximately $102 million to the qualified pension trust and approximately $21 million to the other post-retirement benefits. We have sufficient liquid resources to fund the remainder of the contribution. | ||
9. | Deferred ESOP Compensation | |
The Employee Stock Ownership Plan (“ESOP”) acquired a 3% interest in the Company in 1999, which was financed by a $26 million, twenty-year note borrowed from the Company to establish a contributory investment fund for employees. The ESOP only invests in shares of the Company’s common stock. Shares are held by the ESOP’s trustee and maintained in a suspense account until they are released to employee participants. The yearly release of shares to participants is based on the greater of participant contributions plus a Company match of 30% up to 5% of wages or a minimum based on an amortization schedule. The minimum is based on the ratio of annual debt service to total debt service multiplied by the initial 750,000 shares. | ||
During 2005, the ESOP entered into a new loan agreement amounting $2.0 million with the Company to finance the ESOP’s acquisition of the Company’s stock. Also, during 2000 and 2001, subsequent to ESOP’s commencement, the ESOP entered into various loan agreements amounting to $4.9 million with the Company to finance the ESOP’s acquisition of the Company’s stock from former employees. | ||
Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999 were eligible to receive a portion of the Initial Grant of the Company’s stock. Employees that were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant provided that they met the following condition: | ||
Employees who were on short-term disability, workers’ compensation, Family and Medical Care Leave Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence; and the employees returned to active employment with the Company as soon as they were eligible to do so and within 180 days after March 2, 1999. | ||
Compensation expense is recorded based on the release of shares at market value, which is based on an independent appraisal performed annually. The release of shares, based upon the per share price established at the Acquisition, amounted to $1 million for December 31, 2005, which was reflected as a reduction of deferred ESOP compensation in equity. | ||
As of September 30, 2006 and 2005, the Employee Stock Ownership Plan (“ESOP”) owns 7% of the outstanding capital stock of the Company. | ||
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On November 1, 2006 Sercotel S.A. de C.V. offered to purchase the Company’s stock held by the plan. Pursuant to section 14.03 of the plan document each participant or beneficiary may direct the Trustee either, to sell or not to sell the Company’s stock allocated to the participant’s or beneficiary’s account. The Trustee on behalf of Sercotel S.A. de C.V. sent all ESOP participants and beneficiaries an information statement package disclosing the terms of the offer and voting card. These documents should be reviewed, completed and returned to the Trustee on or before November 29, 2006. | ||
10. | Other Current Liabilities | |
Following is a breakdown of current liabilities: |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Accounts payable | $ | 20,188 | $ | 43,719 | ||||
Accrued expenses | 66,563 | 74,805 | ||||||
Employee benefit accruals | 49,323 | 39,991 | ||||||
Carrier payables | 10,828 | 7,812 | ||||||
Taxes | 9,466 | 730 | ||||||
Interest | 10,397 | 5,904 | ||||||
Total | $ | 166,765 | $ | 172,961 | ||||
11. | Debt | |
Following is a breakdown of debt: |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Senior notes | ||||||||
Due May 15, 2006 at 6.65% | $ | — | $ | 399,990 | ||||
Due May 15, 2009 at 6.80% | 299,942 | 299,929 | ||||||
Term credit facilities: | ||||||||
Due February 28, 2011 at 55 basis points over LIBOR at September 30, 2006 | 275,000 | — | ||||||
Commercial paper | — | 52,000 | ||||||
Deferred derivative and interest rate swap | — | (107 | ) | |||||
Capital leases | — | 42 | ||||||
Total | 574,942 | 751,854 | ||||||
Less short-term debt | — | 452,042 | ||||||
Long-term debt | $ | 574,942 | $ | 299,812 | ||||
The senior notes and term credit facilities are unsecured and non-amortizing. PRTC is the guarantor of these debt instruments. The senior notes indentures and term credit facility agreements do not contain dividend restrictions.
The Company had a $400 million commercial paper program with maturities not to exceed 364 days, backed by a working capital facility. As of February 28, 2006, the Company decreased the commercial paper program to $275 million.
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On March 1, 2005, the Company entered into an unsecured, $400 million 364-day revolving credit facility. The intended purpose of this facility was for working capital purposes and served as backstop facility for the commercial paper program. This facility matured on February 28, 2006, on which date the Company entered into a replacement facility.
The replacement facility consists of two related, unsecured credit facilities, a $275 million revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility maturing on February 28, 2011 that was drawn on May 1, 2006, for the repayment of the $400 million 6.65% Senior Notes due on May 15, 2006. At the option of the Company, the maximum amount which may be borrowed under the revolving credit facility may be increased at any time prior to maturity to $300 million. Amounts borrowed under these facilities are guaranteed by PRTC, and bear interest at the applicable LIBOR rate plus margins applicable to each facility or at the base rate; which is the higher of the base rate publicly announced by the administrative agent from time to time or the Federal Funds rate plus 0.5%, plus margins applicable to each facility. Accrued interest on Eurodollar rate borrowings is payable based on elected intervals of one, two, three or six months or other interest period as the Company may select, subject to certain conditions. Accrued interest on base rate borrowings is payable quarterly. The Company is also required to pay a quarterly facility fee on commitments under the revolving credit facility, irrespective of usage, and a commitment fee on commitments under the term credit facility until utilized. The revolving credit facility and the term credit facility contain covenants, including negative covenants and financial ratios, and events of default which are substantially the same as those which existed under the 364-day facility that was replaced. The revolving credit facility is for working capital purposes and serves as backstop facility for the commercial paper program.
On August 31, 2001, the Company entered into an interest rate swap contract with a notional amount of $150 million. In September 2002, the Company drew the value out of the hedge position without changing the fixed/floating funding mix of the original swap transaction. This transaction resulted in cash proceeds of $11 million, reflected in cash from operations as required by SFAS No. 104, and created a deferred derivative, which was fully amortized by April 2006. The purpose of the swap was to hedge against changes in the fair market value of the Company’s senior notes to achieve a targeted mix of fixed and variable rate debt. The swap received interest at a fixed rate of 6.65% and paid interest at a net variable rate equal to six month LIBOR plus 170 basis points, with semiannual settlements and reset dates every May 15 and November 15 until maturity of the May 15, 2006 senior notes. The swap was entered into “at market” and as a result, there was no exchange of premium at the initial date of the swap. PRTC was guarantor of the interest rate swap. The interest rate swap matured on May 15, 2006, and all interest payable due regarding the transaction was paid in full at maturity. On May 15, 2006, the Company paid a total of $424 million, of principal and interest of the $400 million senior notes due on that date, of which $275 million was refinanced with the Term Credit Facility that is due on February 28, 2011 and $149 million was paid with cash from operations.
Aggregate maturities of the senior notes and term credit facilities are as follow:
Year | Amount | |||
(In thousands) | ||||
2009 | Senor Note | $ | 300,000 | |
2011 | Term loan | 275,000 | ||
Total | $ | 575,000 | ||
Currently, the Company is in compliance with all debt covenant agreements and with the financial ratios as specified in term facilities.
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12. | Other Non-Current Liabilities | |
Following is a breakdown of other non-current liabilities: |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Deferred activation and installation revenues | $ | 47,740 | $ | 68,422 | ||||
Customer deposits | 25,962 | 26,297 | ||||||
Other liabilities | 41,969 | 41,626 | ||||||
Total | $ | 115,671 | $ | 136,345 | ||||
13. | Shareholders’ Equity | |
Common Stock | ||
Common stock consists of fifty million authorized shares, no par value, of which twenty five million shares were outstanding at September 30, 2006 and December 31, 2005. | ||
Accumulated Other Comprehensive Loss | ||
The accumulated other comprehensive loss represents unrecognized losses, other than unrecognized prior service costs which are reflected as an other asset, associated with the hourly employee pension fund, since the accumulated benefit obligation exceeds the fair value of plan assets. | ||
Dividends | ||
To the extent funds are legally available, the Company’s shareholders’ agreement requires the payment of dividends equal to at least 50% of consolidated net income to be paid in the following quarter. | ||
Declared dividends for financial reporting purposes were the following: |
2006 | 2005 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||
(Unaudited) | ||||||||||||||
4thQuarter | $ | — | 4th Quarter | $ | 27,144 | |||||||||
3rdQuarter | 10,812 | 3rd Quarter | 16,200 | |||||||||||
2ndQuarter | 84,717 | 2nd Quarter | 14,875 | |||||||||||
1stQuarter | 15,559 | 1st Quarter | 3,248 | |||||||||||
Total | $ | 111,088 | Total | $ | 61,467 | |||||||||
The senior notes indentures and credit facility agreements do not contain dividend restrictions. The Company declared legal dividends of approximately $111 million during 2006 and paid and declared legal dividends of $63 million during 2005. However, the legal dividends were adjusted for the dividends of the ESOP unallocated shares by $2 million during 2005, only for financial reporting purposes. Dividend corresponding to the consolidated net income for the third quarter ended September 30, 2006 is expected to be declared in the fourth quarter 2006.
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14. | Fair Value of Financial Instruments | |
The carrying amounts and fair values of the Company’s financial instruments at September 30, 2006 and December 31, 2005 are as follows: |
September 30, | December 31, | |||||||||||||||
2006 | 2005 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 106,276 | $ | 106,276 | $ | 55,086 | $ | 55,086 | ||||||||
Accounts receivable, net | 193,194 | 193,194 | 227,629 | 227,629 | ||||||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | 166,765 | 166,765 | 172,961 | 172,961 | ||||||||||||
Short-term debt | — | — | 452,042 | 454,172 | ||||||||||||
Long-term debt, including interest rate swap | 574,942 | 582,782 | 299,812 | 308,883 |
15. Segment Reporting
The Company has two reportable segments: Wireline and Wireless.
The Wireline segment consists of:
• | Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed private line services, and Internet access; | ||
• | Access services to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on the Company’s network; | ||
• | Long distance services including direct dial on-island and off-island, operator assisted calls, and prepaid calling card; | ||
• | Directory publishing rights services; and | ||
• | Telecommunication equipment sales and billing and collection services to competing long distance operators in Puerto Rico. |
The Wireless segment consists of:
• | Postpaid and Prepaid services; and | ||
• | Wireless equipment sales. |
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Segment results for the Company are as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(In thousands) | ||||||||||||||||
Wireline: | ||||||||||||||||
Revenues- | ||||||||||||||||
Local services | $ | 147,709 | $ | 158,858 | $ | 461,316 | $ | 465,092 | ||||||||
Access services | 52,023 | 62,739 | 162,349 | 183,376 | ||||||||||||
Long distance services | 15,138 | 17,817 | 49,015 | 48,474 | ||||||||||||
Directory services and other | 14,432 | 18,689 | 208,808 | 48,589 | ||||||||||||
Total revenues | $ | 229,302 | $ | 258,103 | $ | 881,488 | $ | 745,531 | ||||||||
Operating income | $ | 33,220 | $ | 46,045 | $ | 244,815 | $ | 121,145 | ||||||||
Wireless: | ||||||||||||||||
Revenues- | ||||||||||||||||
Cellular services | $ | 96,059 | $ | 72,689 | $ | 273,997 | $ | 204,766 | ||||||||
Operating income | $ | 21,097 | $ | 2,835 | $ | 56,422 | $ | 4,307 | ||||||||
Consolidated: | ||||||||||||||||
Revenues for reportable segments | $ | 325,361 | $ | 330,792 | $ | 1,155,485 | $ | 950,297 | ||||||||
Elimination of intersegment revenues | (8,158 | ) | (8,401 | ) | (22,952 | ) | (19,927 | ) | ||||||||
Consolidated revenues | $ | 317,203 | $ | 322,391 | $ | 1,132,533 | $ | 930,370 | ||||||||
Operating income | $ | 54,317 | $ | 48,880 | $ | 301,237 | $ | 125,452 | ||||||||
As of | As of | |||||||
September 30, | December 31, | |||||||
Assets | 2006 | 2005 | ||||||
(Unaudited) | ||||||||
Wireline assets | $ | 2,237,284 | $ | 2,331,252 | ||||
Wireless assets | 414,177 | 422,557 | ||||||
Segment assets | $ | 2,651,461 | $ | 2,753,809 | ||||
Elimination of intersegment assets | (408,638 | ) | (375,850 | ) | ||||
Consolidated assets | $ | 2,242,823 | $ | 2,377,959 | ||||
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16. | Condensed Consolidating Information | |
The following summarizes the condensed consolidating financial information as of September 30, 2006, unaudited and December 31, 2005 and for the quarters then ended presents the financial position, results of operations and cash flows of (i) the Company as if it had accounted for its subsidiaries using the equity method, (ii) the Guarantor Subsidiary (as defined below); and (iii) the Non-Guarantor Subsidiaries (as defined below) on a combined basis. The consolidation entries eliminate investments in subsidiaries and intercompany balances and transactions. | ||
The Notes are guaranteed by PRTC (the “Guarantor Subsidiary”), a wholly-owned subsidiary of the Company, but not guaranteed by the Company’s other subsidiaries, Coqui.net, PRTLD and Datacom (the “Non-Guarantor Subsidiaries”). The guarantee by the Guarantor Subsidiary is full and unconditional. |
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Condensed Consolidating Balance Sheet
September 30, 2006
(In thousands)
(Unaudited)
September 30, 2006
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 77,503 | $ | 28,773 | $ | — | $ | 106,276 | ||||||||||
Intercompany accounts receivable | 57,115 | 47,413 | 65,403 | (169,931 | ) | — | ||||||||||||||
Accounts receivable, net | — | 193,382 | (188 | ) | — | 193,194 | ||||||||||||||
Deferred income tax | — | 32,398 | 33 | — | 32,431 | |||||||||||||||
Inventory and supplies, net | — | 23,805 | 1 | — | 23,806 | |||||||||||||||
Prepaid expenses | — | 26,915 | 1,450 | — | 28,365 | |||||||||||||||
Total current assets | 57,115 | 401,416 | 95,472 | (169,931 | ) | 384,072 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | — | 1,267,833 | 7,420 | — | 1,275,253 | |||||||||||||||
GOODWILL AND OTHER INTANGIBLES, net | — | 301,091 | 24,377 | — | 325,468 | |||||||||||||||
DEFERRED INCOME TAX | — | 164,168 | 942 | (408 | ) | 164,702 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES | 828,066 | — | — | (828,066 | ) | — | ||||||||||||||
OTHER ASSETS | 575,895 | 93,325 | — | (575,892 | ) | 93,328 | ||||||||||||||
TOTAL ASSETS | $ | 1,461,076 | $ | 2,227,833 | $ | 128,211 | $ | (1,574,297 | ) | $ | 2,242,823 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Intercompany accounts payable | $ | 31,646 | $ | 89,618 | $ | 53,748 | $ | (175,012 | ) | $ | — | |||||||||
Other current liabilities | 10,513 | 149,855 | 6,392 | 5 | 166,765 | |||||||||||||||
Total current liabilities | 42,159 | 239,473 | 60,140 | (175,007 | ) | 166,765 | ||||||||||||||
LONG-TERM DEBT, excluding current portion | 574,942 | 574,940 | — | (574,940 | ) | 574,942 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 634,488 | 561 | 3,721 | 638,770 | |||||||||||||||
Total liabilities | 617,101 | 1,448,901 | 60,701 | (746,226 | ) | 1,380,477 | ||||||||||||||
MINORITY INTEREST | — | — | — | 18,373 | 18,373 | |||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||||||
Common stock, additional paid in capital and treasury stock | 705,516 | 646,783 | 41,143 | (687,926 | ) | 705,516 | ||||||||||||||
Deferred ESOP compensation | (26,042 | ) | — | — | — | (26,042 | ) | |||||||||||||
Retained earnings | 335,810 | 303,458 | 26,367 | (329,825 | ) | 335,810 | ||||||||||||||
Accumulated other comprehensive loss | (171,309 | ) | (171,309 | ) | — | 171,307 | (171,311 | ) | ||||||||||||
Total shareholders’ equity | 843,975 | 778,932 | 67,510 | (846,444 | ) | 843,973 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,461,076 | $ | 2,227,833 | $ | 128,211 | $ | (1,574,297 | ) | $ | 2,242,823 | |||||||||
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Condensed Consolidating Balance Sheet
December 31, 2005
(In thousands)
(Unaudited)
December 31, 2005
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | 135 | $ | 31,130 | $ | 23,821 | $ | — | $ | 55,086 | ||||||||||
Intercompany accounts receivable | 504,484 | 46,610 | 54,995 | (606,089 | ) | — | ||||||||||||||
Accounts receivable, net | — | 227,804 | (175 | ) | — | 227,629 | ||||||||||||||
Deferred income tax | 718 | 17,573 | 33 | — | 18,324 | |||||||||||||||
Inventory and supplies, net | — | 47,430 | 1 | — | 47,431 | |||||||||||||||
Prepaid expenses | — | 19,814 | 757 | — | 20,571 | |||||||||||||||
Total current assets | 505,337 | 390,361 | 79,432 | (606,089 | ) | 369,041 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | — | 1,342,915 | 8,595 | — | 1,351,510 | |||||||||||||||
GOODWILL AND OTHER INTANGIBLES, net | — | 311,819 | 24,465 | — | 336,284 | |||||||||||||||
DEFERRED INCOME TAX | — | 207,038 | (33 | ) | (1,152 | ) | 205,853 | |||||||||||||
INVESTMENT IN SUBSIDIARIES | 720,228 | — | — | (720,228 | ) | — | ||||||||||||||
OTHER ASSETS | 300,977 | 115,542 | — | (301,248 | ) | 115,271 | ||||||||||||||
TOTAL ASSETS | $ | 1,526,542 | $ | 2,367,675 | $ | 112,459 | $ | (1,628,717 | ) | $ | 2,377,959 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Short-term debt | $ | 452,000 | $ | 452,042 | $ | — | $ | (452,000 | ) | $ | 452,042 | |||||||||
Intercompany accounts payable | 32,136 | 86,430 | 41,370 | (159,936 | ) | — | ||||||||||||||
Other current liabilities | 5,745 | 161,143 | 5,793 | 280 | 172,961 | |||||||||||||||
Total current liabilities | 489,881 | 699,615 | 47,163 | (611,656 | ) | 625,003 | ||||||||||||||
LONG-TERM DEBT, excluding current portion | 299,812 | 299,917 | — | (299,917 | ) | 299,812 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 695,273 | 1,383 | 3,084 | 699,740 | |||||||||||||||
Total liabilities | 789,693 | 1,694,805 | 48,546 | (908,489 | ) | 1,624,555 | ||||||||||||||
MINORITY INTEREST | — | — | — | 16,555 | 16,555 | |||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||||||
Common stock, Additional paid in capital and Treasury stock | 705,516 | 645,298 | 41,143 | (686,441 | ) | 705,516 | ||||||||||||||
Deferred ESOP compensation | (26,042 | ) | — | — | — | (26,042 | ) | |||||||||||||
Retained earnings | 228,877 | 199,074 | 22,770 | (221,844 | ) | 228,877 | ||||||||||||||
Accumulated other comprehensive loss | (171,502 | ) | (171,502 | ) | — | 171,502 | (171,502 | ) | ||||||||||||
Total shareholders’ equity | 736,849 | 672,870 | 63,913 | (736,783 | ) | 736,849 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,526,542 | $ | 2,367,675 | $ | 112,459 | $ | (1,628,717 | ) | $ | 2,377,959 | |||||||||
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Condensed Consolidating Statements of Operations
For the three months ended September 30, 2006
(In thousands)
(Unaudited)
For the three months ended September 30, 2006
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Local services | $ | — | $ | 136,661 | $ | 7,962 | $ | (2,363 | ) | $ | 142,260 | |||||||||
Access services | — | 51,814 | — | (966 | ) | 50,848 | ||||||||||||||
Long distance services | — | 6,345 | 8,821 | (512 | ) | 14,654 | ||||||||||||||
Cellular services | — | 95,214 | — | (118 | ) | 95,096 | ||||||||||||||
Directory and other services and sales | — | 17,149 | 628 | (3,432 | ) | 14,345 | ||||||||||||||
Total revenues | — | 307,183 | 17,411 | (7,391 | ) | 317,203 | ||||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||||||||||
Total operating costs and expenses | 46 | 254,516 | 15,444 | (7,120 | ) | 262,886 | ||||||||||||||
OPERATING (LOSS) INCOME | (46 | ) | 52,667 | 1,967 | (271 | ) | 54,317 | |||||||||||||
OTHER INCOME (EXPENSE), NET | 27,010 | (10,376 | ) | 561 | (27,471 | ) | (10,276 | ) | ||||||||||||
INCOME TAX EXPENSE | — | 16,933 | 144 | — | 17,077 | |||||||||||||||
NET INCOME | $ | 26,964 | $ | 25,358 | $ | 2,384 | $ | (27,742 | ) | $ | 26,964 | |||||||||
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Condensed Consolidating Statements of Operations
For the three months ended September 30, 2005
(In thousands)
For the three months ended September 30, 2005
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Local services | $ | — | $ | 148,589 | $ | 8,210 | $ | (2,662 | ) | $ | 154,137 | |||||||||
Access services | — | 63,513 | — | (1,668 | ) | 61,845 | ||||||||||||||
Long distance services | — | 6,864 | 10,973 | (1,027 | ) | 16,810 | ||||||||||||||
Cellular services | — | 72,109 | — | (1,192 | ) | 70,917 | ||||||||||||||
Directory and other services and sales | — | 20,947 | 332 | (2,597 | ) | 18,682 | ||||||||||||||
Total revenues | — | 312,022 | 19,515 | (9,146 | ) | 322,391 | ||||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||||||||||
Total operating costs and expenses | 3 | 267,008 | 15,646 | (9,146 | ) | 273,511 | ||||||||||||||
OPERATING (LOSS) INCOME | (3 | ) | 45,014 | 3,869 | — | 48,880 | ||||||||||||||
OTHER INCOME (EXPENSE), NET | 22,219 | (11,427 | ) | 345 | (22,944 | ) | (11,807 | ) | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 22,216 | 33,587 | 4,214 | (22,944 | ) | 37,073 | ||||||||||||||
INCOME TAX EXPENSE | — | 13,288 | 1,569 | — | 14,857 | |||||||||||||||
NET INCOME | $ | 22,216 | $ | 20,299 | $ | 2,645 | $ | (22,944 | ) | $ | 22,216 | |||||||||
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Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2006
(In thousands)
(Unaudited)
For the nine months ended September 30, 2006
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Local services | $ | — | $ | 429,407 | $ | 23,864 | $ | (7,171 | ) | $ | 446,100 | |||||||||
Access services | — | 161,885 | — | (2,891 | ) | 158,994 | ||||||||||||||
Long distance services | — | 21,370 | 27,736 | (1,484 | ) | 47,622 | ||||||||||||||
Cellular services | — | 271,970 | — | (558 | ) | 271,412 | ||||||||||||||
Directory and other services and sales | — | 222,676 | 1,414 | (15,685 | ) | 208,405 | ||||||||||||||
Total revenues | — | 1,107,308 | 53,014 | (27,789 | ) | 1,132,533 | ||||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||||||||||
Total operating costs and expenses | (15 | ) | 811,039 | 47,791 | (27,519 | ) | 831,296 | |||||||||||||
OPERATING INCOME | 15 | 296,269 | 5,223 | (270 | ) | 301,237 | ||||||||||||||
OTHER INCOME (EXPENSE), NET | 217,240 | (4,342 | ) | 1,222 | (218,800 | ) | (4,680 | ) | ||||||||||||
INCOME TAX (BENEFIT) EXPENSE | (766 | ) | 76,454 | 2,848 | — | 78,536 | ||||||||||||||
NET INCOME | $ | 218,021 | $ | 215,473 | $ | 3,597 | $ | (219,070 | ) | $ | 218,021 | |||||||||
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Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2005
(In thousands)
For the nine months ended September 30, 2005
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Local services | $ | — | $ | 436,314 | $ | 24,291 | $ | (7,624 | ) | $ | 452,981 | |||||||||
Access services | — | 184,344 | — | (4,510 | ) | 179,834 | ||||||||||||||
Long distance services | — | 20,504 | 28,172 | (1,824 | ) | 46,852 | ||||||||||||||
Cellular services | — | 203,416 | — | (1,192 | ) | 202,224 | ||||||||||||||
Directory and other services and sales | — | 55,443 | 1,116 | (8,080 | ) | 48,479 | ||||||||||||||
Total revenues | — | 900,021 | 53,579 | (23,230 | ) | 930,370 | ||||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||||||||||
Total operating costs and expenses | (4 | ) | 787,303 | 40,849 | (23,230 | ) | 804,918 | |||||||||||||
OPERATING INCOME | 4 | 112,718 | 12,730 | — | 125,452 | |||||||||||||||
OTHER INCOME (EXPENSE), NET | 55,167 | (33,289 | ) | 856 | (57,304 | ) | (34,570 | ) | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 55,171 | 79,429 | 13,586 | (57,304 | ) | 90,882 | ||||||||||||||
INCOME TAX EXPENSE | — | 30,633 | 5,078 | — | 35,711 | |||||||||||||||
NET INCOME | $ | 55,171 | $ | 48,796 | $ | 8,508 | $ | (57,304 | ) | $ | 55,171 | |||||||||
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Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2006
(In thousands)
(Unaudited)
For the nine months ended September 30, 2006
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Total | ||||||||||||||
Parent | Subsidiary | Subsidiaries | Consolidated | |||||||||||||
CASH PROVIDED BY OPERATING ACTIVITIES | $ | — | $ | 432,441 | $ | (21,642 | ) | $ | 410,799 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures, including removal costs | — | (98,115 | ) | (57 | ) | (98,172 | ) | |||||||||
Proceeds from sale of investment | — | — | 26,651 | 26,651 | ||||||||||||
Net cash (used in) provided by investing activities | — | (98,115 | ) | 26,594 | (71,521 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net repayments of short-term debt, including capital leases | (177,000 | ) | — | (177,000 | ) | |||||||||||
Dividends paid | (111,088 | ) | — | — | (111,088 | ) | ||||||||||
Borrowings/(repayment) intercompany loans | 287,953 | (287,953 | ) | — | — | |||||||||||
Net cash used in financing activities | (135 | ) | (287,953 | ) | — | (288,088 | ) | |||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (135 | ) | 46,373 | 4,952 | 51,190 | |||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 135 | 31,130 | 23,821 | 55,086 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | — | $ | 77,503 | $ | 28,773 | $ | 106,276 | ||||||||
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Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2005
(In thousands)
For the nine months ended September 30, 2005
(In thousands)
Guarantor | Non-Guarantor | Total | ||||||||||||||
Parent | Subsidiary | Subsidiaries | Consolidated | |||||||||||||
CASH PROVIDED BY OPERATING ACTIVITIES: | $ | — | $ | 176,832 | $ | 2,914 | $ | 179,746 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures, including removal costs | — | (114,450 | ) | (742 | ) | (115,192 | ) | |||||||||
Proceeds from sale of fixed assets | — | 1,136 | — | 1,136 | ||||||||||||
Net cash used in investment investing activities | — | (113,314 | ) | (742 | ) | (114,056 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net repayments of short-term debt, including capital leases | (73,000 | ) | (129 | ) | — | (73,129 | ) | |||||||||
Dividends paid | (18,123 | ) | — | — | (18,123 | ) | ||||||||||
Borrowings/(repayment) intercompany loans | 91,036 | (91,036 | ) | — | — | |||||||||||
Net cash used in financing activities | (87 | ) | (91,165 | ) | — | (91,252 | ) | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (87 | ) | (27,647 | ) | 2,172 | (25,562 | ) | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | (149 | ) | 44,658 | 18,837 | 63,346 | |||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | (236 | ) | $ | 17,011 | $ | 21,009 | $ | 37,784 | |||||||
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17. | Contingencies and Regulatory and Other Matters | |
The Company is a defendant in various legal matters arising in the ordinary course of business. Management, after consultation with legal counsel, believes at this time that the resolution of these matters will not have a material adverse effect on the Company’s financial position and results of operations. See Part I Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters” for more information regarding legal and regulatory matters. | ||
Regulatory activity at the federal and local levels has been primarily directed at meeting challenges in maintaining support for local exchange rates and Universal Service while affecting the rate rebalancing and regulatory restructuring required by an increasingly competitive environment. Among the regulatory issues are: rate rebalancing, network interconnection, inter-carrier compensation and insular relief. | ||
We continue to meet the wholesale requirements of new competitors and have signed agreements with various wireless and wireline carriers. These agreements permit them to purchase unbundled network elements, to resell retail services, and to interconnect their networks with ours. |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the largest telecommunications service provider in Puerto Rico and the seventh largest local exchange carrier in the United States as measured by access lines in service. We have two reportable segments: Wireline and Wireless. Wireline service, which has been provided since 1914, is marketed under the PRT brand. At September 30, 2006, we had approximately 1 million access lines in service, including 789,000 residential and 256,000 business lines. We market our cellular service under the Verizon Wireless brand. The Company’s off-island long distance service is provided by PRTLD and its dial-up Internet access service is provided by Coqui.net. On March 31, 2006, the Company sold its equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. Directory publishing revenues were generated through VISI until March 31, 2006.
The sections that follow provide information concerning our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, financial position and sources and uses of cash, as well as significant future commitments. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources.
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect management’s focus on the following four key areas:
• | Revenue Growth — Our emphasis is on revenue transformation, devoting more resources from traditional markets, where we have been experiencing access line erosion, to higher growth markets such as wireless and broadband, including digital subscriber lines (DSL), as well as expanded data services to enterprise markets. For the quarter ended September 30, 2006, our wireless and broadband services increased by 24% compared to the same period in 2005. | ||
For the quarter ended September 30, 2006, the growth of wireless areas, in particular post-paid cellular services increased revenues by 35% compared to the same period in 2005. This increase was driven by the net increase of approximately 62,000 post-paid wireless customers as of September 30, 2006 compared to the number of customers as of September 30, 2005. The data and broadband services revenues for the quarter ended September 30, 2006 increased by 3% compared to the same period in 2005. This increase was driven by DSL revenue growth. The number of the DSL customers as of September 30, 2006 increased by approximately 40,000 compared to the number of customers as of September 30, 2005. | |||
• | Operational Efficiency — While focusing resources on growth markets, we are continually challenging our management team to reduce expenses, particularly through technology-assisted productivity improvements. As of September 30, 2006, the Company had reduced workforce levels compared to the same period in 2005, which we expect will provide future benefits. At September 30, 2006, the Company had approximately 4,712 full-time employees compared to 4,874 at September 30, 2005. | ||
• | Capital Allocation — Capital spending has been, and will continue to be, directed toward growth markets, such as high-speed wireless data or Evolution Data Optimized (EV-DO) technologies. Replacement of the TDMA network and expanded services offered to enterprise markets are some examples of areas of capital spending which support these growth markets. | ||
• | Cash Flow Generation — The financial statements reflect the emphasis of management on using cash provided by our operating and investing activities to significantly reduce debt and to fund our pension plans. |
Supporting these key focus areas are continuing initiatives to more effectively package and add value to our products and services. Innovative product bundles include local wireline services, long distance, wireless and DSL for
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consumer and general business retail customers. We believe that the Company’s marketing and operational efficiency efforts will enable management to counter the effects of competition and technology migration to alternative network platforms, such as wireless and VoIP.
The Company entered into an agreement to sell its public telephone assets, subject to certain terms and conditions, to a local public telephone service provider. The transaction received regulatory approval and the transfer of assets was completed in May 2005. The disposition of the public telephone assets has enabled management to focus on higher growth areas, such as wireless and broadband.
In February 2006, the Company entered into an agreement to sell its equity interest in the Puerto Rico directory operation and the right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. This transaction closed on March 31, 2006. In connection with this sale, the Company received net proceeds of $190 million and recorded a net pretax gain of $185 million with an after-tax gain of $149 million.
On April 3, 2006, Verizon reached agreements to sell its interests in its Caribbean and Latin American telecommunications operations in three separate transactions to América Móvil, S.A. de C.V. (“América Móvil”), a wireless service provider throughout Latin America, and a company owned jointly by Teléfonos de México, S.A. de C.V. (“Telmex”) and América Móvil. The agreements contemplate the sale by Verizon of its 52% interest in the Company to América Móvil. Each transaction is subject to separate approvals by the various national regulatory agencies. Verizon expects to close the sale of its interest in the Company in 2006 or 2007. Popular Inc. and PRTA announced their intention to sell their participation in the Company to América Móvil on similar terms agreed to with Verizon. On November 1, 2006 Sercotel S.A. de C.V. offered to purchase the Company’s stock held by the Company’s Employee Stock Ownership Plan as disclosed in Note 9 to the Company’s unaudited condensed consolidated financial statements.
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CONSOLIDATED RESULTS OF OPERATIONS
In this section, we discuss our overall results of operations and highlight special and non-recurring items. In the following section we review our consolidated results and the performance of our two segments.
CONSOLIDATED REVENUES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Local | $ | 142 | $ | 154 | (8 | )% | $ | 446 | $ | 453 | (2 | )% | ||||||||||||
Network Access | 51 | 62 | (18 | ) | 159 | 180 | (12 | ) | ||||||||||||||||
Long Distance | 15 | 17 | (12 | ) | 48 | 47 | 2 | |||||||||||||||||
Cellular | 95 | 71 | 34 | 272 | 202 | 35 | ||||||||||||||||||
Directory and Other | 14 | 18 | (22 | ) | 208 | 48 | 333 | |||||||||||||||||
Consolidated revenues | $ | 317 | $ | 322 | (2 | ) | $ | 1,133 | $ | 930 | 22 | |||||||||||||
Consolidated revenues for the quarter ended September 30, 2006 decreased $5 million, or 2%, to $317 million when compared to the same period in 2005. The decrease was primarily the result of a decrease in network access and local voice. The decrease was partially offset by an increase in the cellular revenue. Consolidated revenues for the nine months ended September 30, 2006 increased $203 million, or 22%, to $1,133 million when compared to the same period in 2005. The increase was primarily the result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising which generated proceeds of $167 million and the result of an increase in cellular revenues.
Cellular revenues for the quarter ended September 30, 2006 increased $24 million, or 34%, to $95 million when compared to the same period in 2005. This increase was mainly the result of an increase in the number of cellular customers due to attractive price plans, the strength of the network coverage and capacity and the impact of Universal Service Administration Company (“USAC”) certification of our wireless operation to receive Interstate Common Line Support (“ICLS”) payments effective October 2005. As a result, the Company expects to receive approximately $23 million in ICLS payments on a yearly basis.
Cellular revenues for the nine months ended September 30, 2006 increased by $70 million, or 35%, to $272 million when compared to the same period in 2005. The increase was primarily the result of an increase of approximately 62,000 postpaid wireless customers due to attractive price plans, the strength of the network coverage and capacity, the impact of “USAC” certification of our wireless operation to receive “ICLS” payments effective October 2005 and an increase in cellular roaming revenues.
Directory and other revenues for the quarter ended September 30, 2006 decreased $4 million, or 22%, to $14 million when compared to the same period in 2005. This decrease was the result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The Company received proceeds of $167 million for the publication right, which were recognized as directory revenues in the quarter ended March 31, 2006.
Directory and other revenues for the nine months ended September 30, 2006 increased $160 million or 333% to $208 million when compared to the same period in 2005. The increase was the result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising which resulted in proceeds of $167 million, and were recognized as directory revenues March 31, 2006.
CONSOLIDATED OPERATING EXPENSES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | %Change | 2006 | 2005 | %Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Cost of services and sales | $ | 80 | $ | 80 | (0 | )% | $ | 253 | $ | 236 | 7 | % | ||||||||||||
Selling, general and administrative expenses | 121 | 134 | (10 | ) | 393 | 388 | 1 | |||||||||||||||||
Total consolidated operating expenses | $ | 201 | $ | 214 | (6 | ) | $ | 646 | $ | 624 | 3 | |||||||||||||
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Consolidated operating expenses for the quarter ended September 30, 2006 decreased $13 million, or 6%, to $201 million when compared to the same period in 2005. Consolidated operating expenses for the nine months ended September 30, 2006 increased $22 million, or 3%, to $646 million when compared to the same period in 2005.
Cost of services and sales for the quarter ended September 30, 2006 remained constant when compared to the same period in 2005. Cost of services and sales for the nine months ended September 30, 2006 increased $17 million, or 7%, to $253 million when compared to the same period in 2005. This increase was mainly due to an increase in activation charges of $16 million resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation revenues.
Selling, general and administrative expenses for the quarter ended September 30, 2006 decreased $13 million, or 10%, to $121 million when compared to the same period in 2005. The decrease was due to a $4 million decrease in regulatory fees, $3 million decrease in consulting fees, of $2 million decrease in legal expenses , a $1 million decrease in collection agent commission expenses and a $3 million decrease in other expenses.
Selling, general and administrative expenses for the nine months ended September 30, 2006 increased $5 million, or 1%, to $393 million when compared to the same period in 2005. This increase was mainly due to transaction and indemnity expenses of $9 million incurred in connection with the sale of the Company’s equity interest in the Puerto Rico directory operation and the publication rights of directory advertising and a $4 million decrease in advertising expenses.
OTHER CONSOLIDATED RESULTS
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | %Change | 2006 | 2005 | %Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Retirement and voluntary separation provision | $ | — | $ | — | — | % | $ | — | $ | 2 | (100 | )% | ||||||||||||
Depreciation and amortization | 62 | 60 | 3 | 185 | 181 | 2 | ||||||||||||||||||
Interest expense and others | 10 | 12 | (17 | ) | 31 | 34 | (9 | ) | ||||||||||||||||
Equity income in joint venture | — | (1 | ) | (100 | ) | (28 | ) | (2 | ) | 13 | ||||||||||||||
Minority interest in consolidated subsidiary | 1 | 1 | 0 | 2 | 2 | 0 | ||||||||||||||||||
Income tax (benefit) expense | 17 | 15 | 13 | 79 | 36 | 120 | ||||||||||||||||||
Total Other Consolidated Results | $ | 90 | $ | 87 | 3 | $ | 269 | $ | 253 | 6 | ||||||||||||||
Retirement and Voluntary Separation Provisions
In May 2005, 33 eligible HIETEL employees accepted the voluntary separation program offered by the Company in March 2005. In March 2005, 46 eligible management employees accepted the voluntary separation program offered by the Company in December 2004. These programs resulted in a provision of $1.7 million during the nine months ended September 30, 2005.
Depreciation and Amortization Expense
Depreciation and amortization expense for the quarter ended September 30, 2006 increased $2 million, or 3% to $62 million when compared to the same period in 2005 due to higher amortization of software implementations. Depreciation and amortization expense for the nine months ended September 30, 2006 increased $4 million, or 2% to $185 million when compared to the same period in 2005 due to higher amortization of software implementations.
Interest Expense, net
Interest expense for the quarter ended September 30, 2006 decreased $2 million, or 17%, to $10 million when compared to the same period in 2005. The decrease was primarily due to a lower outstanding debt balance. Interest expense for the nine months ended September 30, 2006 decreased $3 million, or 9% to $31 million when compared to the same period in 2005 due to lower outstanding debt.
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Equity Income From Joint Venture
The equity income from joint venture for the nine months ended September 30, 2006, excluding the net pre-tax gain from the sale of the Company’s equity interest, decreased $2 million, to $0, when compared to the same period in 2005. The Company generated equity income from the joint venture until March 31, 2006, when the Company consummated the sale of its equity interest in the Puerto Rico directory operation.
Gain On Sale Of Interest In Joint Venture
On March 31, 2006, the Company consummated the sale of its participation in the equity interest in the Puerto Rico directory operation. The net pre-tax gain from the sale of the Company’s equity interest was $28 million.
Minority Interest In Consolidated Subsidiary
The minority interest included in the Company’s results of operations reflects the 33% interest in Coqui.net that is not held by the Company but held by Popular, Inc., one of our current shareholders. The minority interest for the quarter ended September 30, 2006 and for the nine months ended September 30, 2006 remained constant at $1 million and $2 million, respectively, when compared to the same periods in 2005.
Income Taxes
The effective income tax rate is the provision for income taxes as a percentage of income before tax from continuing operations. A $79 million tax provision for the nine months ended September 30, 2006 reflects a 26.3% effective tax rate. The difference in the tax provision of $45 million between the effective and the statutory tax rate of 41.5%, primarily represents permanent differences mainly due to the sale of the Company’s participation in the equity interest in the Puerto Rico directory operation and the right to the revenues from the directory advertising, which was treated as capital gains taxed at a reduced tax rate of 20% and due to the application of a reduced corporate tax rate of 29% to certain operations due to net operating loss carry forward.
SEGMENT RESULTS OF OPERATIONS
The Company has two reportable segments, Wireline and Wireless. See Note 16 to the unaudited condensed consolidated financial statements for additional information on the Company’s segments. Reclassifications of prior period’s data have been made to conform to the current period’s presentation.
Wireline segment consists of:
• | Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed data services, and Internet access; | ||
• | Long distance services including direct dial on-island and off-island, operator assisted calls, and prepaid calling card; | ||
• | Access services to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on the Company’s network; | ||
• | Directory publishing rights services; and | ||
• | Telecommunication equipment sales and billing and collection services to competing long distance operators in Puerto Rico. |
Wireless segment consists of:
• | Postpaid and prepaid services; and | ||
• | Wireless equipment sales. |
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WIRELINE REVENUES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Local | $ | 148 | $ | 159 | (7 | )% | $ | 461 | $ | 465 | (1 | )% | ||||||||||||
Network Access | 52 | 63 | (17 | ) | 162 | 183 | (11 | ) | ||||||||||||||||
Long Distance | 15 | 18 | (17 | ) | 49 | 49 | — | |||||||||||||||||
Directory and Other | 14 | 18 | (22 | ) | 209 | 49 | 327 | |||||||||||||||||
Total Wireline | $ | 229 | $ | 258 | (11 | ) | $ | 881 | $ | 746 | 18 | |||||||||||||
OPERATING DATA
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | |||||||||||||||||||
Access Lines in Service (000’s): | ||||||||||||||||||||||||
Residential | 789 | 863 | -9 | % | 789 | 863 | -9 | % | ||||||||||||||||
Business | 256 | 273 | -6 | % | 256 | 273 | -6 | % | ||||||||||||||||
Total | 1,045 | 1,136 | -8 | % | 1,045 | 1,136 | -8 | % | ||||||||||||||||
Wireline revenues include local service, network access, long distance, directory and other revenues. For the quarter ended September 30, 2006, wireline revenues decreased $29 million, or 11%, to $229 million when compared to the same period in 2005. The revenue decrease is primarily attributable to a reduction in local voice and network access revenues due to a decrease of approximately 91,000 customers as of September 30, 2006 when compared to the number of customers as of September 30, 2005.
Wireline revenues for the nine months ended September 30, 2006 increased $135 million, or 18%, to $881 million when compared to the same period in 2005. The revenue increase is primarily attributable to the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The Company received proceeds of $167 million from the sale of the directory publication rights, which were recognized as directory revenues.
Local Services
Local service revenues include revenues from basic voice, telephone and telecommunications equipment rental, value-added services, high-speed data services, and Internet access. Local service revenues for the quarter ended September 30, 2006 decreased $11 million, or 7%, to $148 million when compared to the same period in 2005. This decrease was mainly due to a reduction of $13 million decrease in basic voice service revenues directly as a result of a decrease in access lines. This decrease was offset by a $2 million increase in data service revenues as a result of an increase in the number of customers requesting special services, such as DSL.
Local service revenues for the nine months ended September 30, 2006 decreased $4 million, or 1%, to $461 million when compared to the same period in 2005. The decrease was mainly due to lower basic voice service revenues directly as a result of a decrease in access lines. This decrease was also driven by a decrease in public phone revenues as a result of the Company’s sale of public phone assets in May, 2005. This decrease was offset by a $7 million increase in activation revenues resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation revenues. This decrease was also offset by an $11 million increase in data service revenues as a result of an increase in the number of customers requesting special services, such as DSL.
Network Access
Network access revenues include revenues from services provided to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on our network. Network access revenues for the quarter ended September 30, 2006 decreased $11 million, or 17%, to $52 million when compared to the same period in 2005. The decrease was mainly due to a $7 million decrease in interstate regulated access revenues driven by the interstate common line adjusted estimates as a result of the NECA settlement process and a $4 million decrease in intra-island and interstate access revenues of $4 million due to lower access traffic.
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Network access revenues for the nine months ended September 30, 2006 decreased $21 million, or 11%, to $162 million when compared to the same period in 2005. The decrease was mainly due to a $11 million decrease in regulated access revenues driven by the interstate common line adjusted estimates as a result of the NECA settlement process. The decrease in network access was also driven by a $10 million decrease in intra-island and interstate access revenues due to lower access traffic.
Long Distance
Long distance revenues include direct dial on-island and off-island, operator-assisted calls and prepaid calling cards revenues. Long distance revenues for the quarter ended September 30, 2006 decreased $3 million or 17%, to $15 million when compared to the same period in 2005, mainly due to lower interstate toll traffic.
Long distance revenues for the nine months ended September 30, 2006, remained constant at $49 million, mainly due to an increase in the monthly minimum usage charge implemented in August 2005 offset by decrease in interstate toll traffic.
Directory and Other
Directory and other revenues include revenues from directory publishing rights, telecommunication equipment sales and billing and collection services provided to competing long distance operators in Puerto Rico. Directory and other revenues for the quarter ended September 30, 2006 decreased $4 million or 22 %, to $14 million when compared to the same period in 2005, due to a $3 million decrease in directory revenue mainly as a result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The Company received proceeds of $167 million for the publication right, which were recognized under directory revenue. The decrease was also driven by lower wireline equipment sales when compared to same period in 2005.
Directory and other revenues for the nine months ended September 30, 2006 increased $160 million, or 327%, to $209 million when compared to the same period in 2005, mainly as a result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The increase in directory and other revenues was also due to a $3 million increase in other services of as a result of the recognition of late payment fees.
WIRELINE EXPENSES AND CHARGES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | %Change | 2006 | 2005 | %Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Cost of services and sales | $ | 49 | $ | 55 | (11 | )% | $ | 166 | $ | 162 | 3 | % | ||||||||||||
Selling, general and administrative expenses | 95 | 106 | (11 | ) | 315 | 306 | 3 | |||||||||||||||||
Total Wireline | $ | 144 | $ | 161 | (11 | ) | $ | 481 | $ | 468 | 3 | |||||||||||||
Wireline expenses for the quarter ended September 30, 2006 decreased $17 million, or 11%, to $144 million when compared to the same period in 2005. Wireline expenses for the nine months ended in September 30, 2006 increased $13 million, or 3%, to $481 million when compared to the same period in 2005.
Cost of Services and Sales
Cost of services and sales for the quarter ended September 30, 2006 decreased $6 million, or 11%, to $49 million when compared to the same period in 2005. The decrease was due to a $3 million decrease in the cost of equipment sold and $3 million decrease in activation charges.
Cost of service and sales for the nine months ended September 30, 2006 increased $4 million, or 3%, to $166 million when compared to the same period in 2005. The increase is mainly driven by higher activation charges of $8 million, resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation charges. The increase was partially offset by a $2 million decrease in material usage and a $1 million decrease in tools expense.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 30, 2006 decreased $11 million, or 11%, to $95 million when compared to the same period in 2005. The decrease was driven by a $3 million decrease in labor and benefits, a $1 million decrease in consulting expense, a $2 million decrease in legal expenses, a $1 million decrease in collection agent commissions, a $1 million decrease in regulatory fees, and a $3 million decrease in other expenses.
Selling, general and administrative expenses for the nine months ended September 30, 2006 increased $9 million, or 3%, to $315 million when compared to the same period in 2005. The increase was due to the transaction and indemnity expenses of $9 million incurred in connection with the sale of the participation in the equity interest in the Puerto Rico directory operation and the publication right of directory advertising.
WIRELESS REVENUES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Postpaid Cellular | $ | 67 | $ | 56 | 20 | % | $ | 192 | $ | 154 | 25 | % | ||||||||||||
Prepaid Cellular | 6 | 4 | 1 | 15 | 12 | 25 | ||||||||||||||||||
Total Cellular | 73 | 60 | 22 | 207 | 166 | 25 | ||||||||||||||||||
Wireless Equipment and Other | 23 | 13 | 77 | 67 | 39 | 72 | ||||||||||||||||||
Total Wireless | $ | 96 | $ | 73 | 32 | $ | 274 | $ | 205 | 34 | ||||||||||||||
OPERATING DATA
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | |||||||||||||||||||
Cellular Customers (000’s): | ||||||||||||||||||||||||
Postpaid | 425 | 362 | 17 | % | 425 | 362 | 17 | % | ||||||||||||||||
Prepaid | 103 | 96 | 7 | 103 | 96 | 7 | ||||||||||||||||||
Total | 528 | 458 | 15 | 528 | 458 | 15 | ||||||||||||||||||
Postpaid Cellular Average Revenue Per Unit (ARPU) | $ | 53 | $ | 53 | — | % | $ | 53 | $ | 53 | — | % | ||||||||||||
Prepaid Cellular ARPU | 20 | 13 | 54 | 16 | 14 | 14 | ||||||||||||||||||
Combined Cellular ARPU | 47 | 43 | 9 | 46 | 44 | 5 |
Total revenues from wireless services and related equipment sales and other services for the quarter ended September 30, 2006 increased $23 million, or 32%, to $96 million when compared to the same period in 2005, driven by strong growth in the number of cellular subscribers.
Total Cellular Revenues
Total Cellular revenues for the quarter ended September��30, 2006 increased $13 million, or 22%, to $73 million when compared to the same period in 2005. This increase was mainly due to a $7 million increase in access rent revenues resulting from an increase of approximately 62,000 postpaid cellular customers as of September 30, 2006 when compared to the number of customers as of September 30, 2005, attractive price plans and the strength of the network coverage and capacity. Cellular service revenues for the quarter ended September 30, 2006 also reflect a $2 million increase in activation charges resulting from a change in estimate of the average customer life used for amortizing previously deferred activation charges.
Total Cellular revenues for the nine months ended September 30, 2006 increased $41 million, or 25%, to $207 million when compared to the same period in 2005. This increase was mainly due to an increase in access rent revenue of $23 million as a result of an increase of approximately 62,000 postpaid cellular customers as of September 30, 2006 compared to the number of customers as of September 30, 2005, attractive price plans and the strength of the network coverage and capacity. Cellular service revenues for the nine months ended September 30, 2006 also reflect an increase in activation charges of $8 million resulting from a change in estimate of the average customer life used for amortizing previously deferred activation charges.
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Wireless Equipment and Other
Revenues from wireless equipment sales and other services for the quarter ended September 30, 2006 increased $10 million, or 77%, to $23 million when compared to the same period in 2005. This increase is mainly due to higher access revenues of $6 million due to the impact of the USAC certification of our wireless operation to receive Interstate Common Line Support (“ICLS”) payments effective October 2005, as a result of which the Company expects to receive approximately $23 million in ICLS payments on a yearly basis.
Revenues from wireless equipment sales and other services for the nine months ended September 30, 2006 increased $28 million, or 72%, to $67 million when compared to the same period in 2005. This increase is mainly due to higher access revenues of $18 million due to the impact of the USAC certification of our wireless operation.
WIRELESS EXPENSES AND CHARGES
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | %Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Cost of services and sales | $ | 33 | $ | 28 | 18 | % | $ | 93 | $ | 80 | 16 | % | ||||||||||||
Selling, general and administrative expenses | 33 | 33 | 0 | 95 | 93 | 2 | ||||||||||||||||||
Total Wireless | $ | 66 | $ | 61 | 8 | $ | 188 | $ | 173 | 9 | % | |||||||||||||
Wireless expenses for the quarter ended September 30, 2006 increased $5 million, or 8%, to $66 million when compared to the same period in 2005. Wireless expenses for the nine months ended September 30, 2006 increased $15 million, or 9%, to $188 million when compared to the same period in 2005.
Cost of Services and Sales
Cost of service and sales for the quarter ended September 30, 2006 increased $5 million, or 18%, to $33 million when compared to the same period in 2005. The increase was due to a $3 million increase in equipment cost of sales, and a $2 million increase in activation charges.
Cost of services and sales for the nine months ended September 30, 2006 increased $13 million, or 16%, to $93 million when compared to the same period in 2005. The increase was due to a $6 million increase in activation charges resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation charges, a $3 million increase in cellular roaming expenses and an $4 million increase in equipment cost of sales as a result of the significant increase in the wireless subscriber base.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 30, 2006 remained constant at $33 million when compared with the same period in 2005.
Selling, general and administrative expenses for the nine months ended September 30, 2006 increased $2 million, or 2%, to $95 million when compared to the same period in 2005. The increase was mainly driven by higher facilities T1 expense of $4 million offset by a $2 million decrease in wireless commissions expense.
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LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED FINANCIAL CONDITION
For the Nine Months Ended September 30, | ||||||||||||
2006 | 2005 | Change | ||||||||||
(in millions) | ||||||||||||
Cash flows from (used in): | ||||||||||||
Operations | $ | 411 | $ | 180 | $ | 231 | ||||||
Investing | (72 | ) | (114 | ) | 42 | |||||||
Financing | (288 | ) | (91 | ) | (197 | ) |
OVERALL LIQUIDITY ASSESSMENT
As of September 30, 2006, current assets exceeded current liabilities by $217 million. We believe our sources of funds including operations, sales of non-strategic assets and readily available external financing arrangements will be sufficient to meet our ongoing requirements.
On March 31, 2006, the Company completed the sale of its participation in the equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company received net proceeds from the sale of $190 million, with an after tax gain of $149 million. The Company used the proceeds from this sale to pay dividends and reduce long-term debt.
OPERATIONS
Cash from operations continued to be our primary source of funds. Cash from operations for the nine months ended September 30, 2006 increased $231 million compared to same period in 2005. This increase was primarily due to the Company’s receipt of $167 million from the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, reduced pension contributions of $33 million and the Company’s collection of $27 million from the Schools and Libraries Program of the Federal Universal Service Fund.
INVESTING
Net cash used in investing activities for the nine months ended September 30, 2006 was $72 million compared to $114 million for the same period in 2005. The $42 million decrease in net cash used in investing activities was primarily due to the Company’s receipts of $23 million in proceeds from the sale of the Company’s participation in the equity interest in the Puerto Rico directory operation, the proceeds of $4 million from a cash sweep related to the sale mentioned above and a decrease of $17 million in capital expenditures and costs of removal as a result of decreased spending on outside plant, mainly in urban projects.
We have invested approximately $1.4 billion from the date of the Acquisition through September 30, 2006 to expand and enhance our networks. Our planned capital expenditures for 2006 are approximately $154 million, which we expect to finance with internally generated funds.
FINANCING
Net cash used in financing activities for the nine months ended September 30, 2006 was $288 million compared to $91 million for the same period of 2005. The Company reduced outstanding debt, including capital leases and commercial paper, by $177 million for the nine months ended September 30, 2006.
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On March 1, 2006, the Company entered into two related, unsecured credit facilities, a $275 million revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility, which is available to be drawn in one borrowing at any time until May 1, 2006 and will mature on February 28, 2011. The Company also had an undrawn $40 million working capital credit facility, which was cancelled on February 28, 2006. On May 1, 2006, the term credit facility was drawn in full and proceeds were used for repayment of the senior notes maturing on May 15, 2006. See Note 11 to the consolidated financial statements for more information.
The shareholders’ agreement requires the payment of dividends equal to at least 50% of consolidated net income, payable quarterly to the extent funds are legally available. For the nine months ended September 30, 2006 and September 30, 2005, the Company paid dividends of $111 million and $18 million, respectively, which were declared in the quarters ended in September 30, 2006 and September 30, 2005, respectively. The senior note indentures and credit facility agreements do not contain restrictions on the payment of dividends.
OFF-BALANCE SHEET ARRANGEMENTS
The Company currently does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
REGULATORY AND OTHER MATTERS
REGULATORY AND COMPETITIVE TRENDS
Regulatory activity at the federal and local levels has been primarily directed at meeting challenges in maintaining support for local exchange rates and Universal Service while putting into effect the rate rebalancing and regulatory restructuring required by an increasingly competitive environment. Some of the regulatory issues are: rate rebalancing, network interconnection, inter-carrier compensation and high cost support for insular relief.
We continue to meet the wholesale requirements of new competitors and have signed agreements with various wireless and wireline carriers. These agreements permit these carriers to purchase unbundled network elements, to resell retail services, and to interconnect their networks with ours.
RATE REBALANCING
On April 6, 2005, PRTC filed with the TRB a new tariff structure for basic telephone service which would have eliminated all intra-LATA long distance charges by reducing its existing local calling areas from 10 to 1 (the “Single Zone Plan”).
On May 17, 2005 and May 20, 2005, TLD and WorldNet, respectively, filed separate complaints challenging the legality of the Single Zone Plan, alleging in their complaint that PRTC’s new tariff structure under the Single Zone Plan is not based on cost and that the tariff would eliminate the intra-island long distance market.
As a result of repeated delays in the administrative proceeding, on February 3, 2006, the Company withdrew the tariff structure proposed under the Single Zone Plan and filed a motion to dismiss the related complaint. The TRB granted the company’s motion to dismiss the related complaint. PRTC had planned to file a new tariff structure in the second quarter of 2006 that would rebalance residential and business service within the context of the current 10 local calling areas. However, PRTC has decided to postpone the rebalancing effort until management believes the timing is appropriate.
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TOUCHTONE CHARGES
On November 17, 2003, six residential subscribers and eight business service subscribers filed a class action suit with the Court of First Instance of Puerto Rico (the “Court”) under the Puerto Rico Telecommunications Act of 1996 (the “Act”) and the Puerto Rico Class Action Act of 1971. The plaintiffs have claimed that the Company’s charges for touchtone service are not based on cost, and therefore violate the Act. The plaintiffs have requested that the Court (i) issue an order certifying the case as a class action, (ii) designate the plaintiffs as representative of the class, (iii) find that the charges are illegal, and (iv) order the Company to reimburse every subscriber for excess payments made since September 1996.
On November 1, 2004 PRTC filed a Motion for Summary Judgment requesting the dismissal of plaintiffs’ claim due to plaintiffs’ failure to follow the procedure to object to charges established by Law 33. Law 33 establishes that a telecommunication services user has twenty days from the receipt of the telecommunications service company invoice to object to charges in the invoice. In the motion, PRTC has argued that since plaintiffs admittedly failed to comply with said procedure their claims are time-barred. The motion is still under consideration by the Court.
On May 10, 2005 the Court issued an Order certifying the case as a class action. PRTC sought reconsideration of that decision and a hearing was held on June 20, 2005 to discuss the merits of PRTC’s position. On June 22, 2005 the Court issued an Order confirming the class as a certified class action suit. As a consequence, a writ of certiorari was filed on June 22, 2005. On September 19, 2005 the Puerto Rico Court of Appeals denied the same. PRTC sought reconsideration of that decision on October 4, 2005. The reconsideration request was denied on October 11, 2005. Therefore PRTC filed a writ of certiorari with the Puerto Rico Supreme Court on November 10, 2005. The writ of certiorari was denied on January 18, 2006.
On January 11, 2006, the PRTC filed a motion to dismiss alleging lack of subject matter jurisdiction based on the enactment of Law No. 138 of November 4, 2005. This new law grants the TRB exclusive primary jurisdiction to entertain class actions related to telecommunication services. The hearing scheduled for January 24, 2006 was rescheduled for May 16, 2006 in response to plaintiffs’ request for time to oppose PRTC’s motion to dismiss. The court granted the plaintiffs an extension of the deadline until March 24, 2006 to submit their motions opposing PRTC’s motion to dismiss. In addition the Court granted PRTC until April 24, 2006 to submit its reply. On March 24, 2006 plaintiffs filed a request for sixty additional days to submit their opposing motion. On March 29, 2006 PRTC opposed this request and asked the Court to rule on the jurisdictional matter brought by PRTC. On April 3, 2006, the Court denied plaintiffs’ request for extension of time, but did not rule on PRTC’s motion to dismiss. On April 12, 2006, plaintiffs’ filed for reconsideration, which was not considered by the Court. Consequently, on April 28, 2006, plaintiffs’ filed an opposition to PRTC’s motion to dismiss arguing that Law 138 is unconstitutional. PRTC filed an urgent motion, arguing that the opposition was untimely filed, and as a result the Court has lost jurisdiction of said motion under the Rules of Civil Procedure. In the alternative, and due to the fact that this is an interlocutory proceeding, PRTC requested additional time to file a reply and a new date for the argumentative hearing. On May 9, 2006, plaintiffs filed opposition to PRTC’s request.
On May 9, 2006, the Judge issued a final judgment dismissing the proceeding. The Judge acknowledged that with the enactment of Law 138, the TRB has primary jurisdiction to hear the case. On June 8, 2006 the plaintiffs filed an appeal before the Puerto Rico Court of Appeals.
On July 10, 2006, PRTC filed its corresponding opposition to the appeal. The Plaintiffs filed a request for oral hearing. On October 12, 2006, the Court of Appeals denied the plaintiffs’ request for oral hearing and acknowledged the brief filed by PRTC. The case has been submitted and pending for a final determination.
CTI ASSET TRANSFER
Prior to the Acquisition, PRTC transferred its net wireless assets on September 1, 1998 to CTI (which subsequently became Verizon Wireless, a division of PRTC, on May 1, 2002). Our predecessors later filed a waiver request in 1998 with the FCC to record this transfer at book value instead of fair value. Since our predecessors had not included the costs of wireless operations in the regulated rate setting process, we argued that ratepayers did not bear the cost of our predecessors’ wireless investment. The FCC denied the Company’s waiver petition in April 2001, but recognized that the cellular and paging assets had been removed from the interstate rate base even though it had questions concerning certain costs and expenses.
Separately, the TRB initiated an agreed upon procedures audit of the Company, which included an audit of its compliance with the FCC’s affiliate transactions rules and the CTI asset transfer. On May 5, 2005, the Audit Report was delivered to PRTC. The audit report confirmed that PRTC complied with the affiliate transaction rules. With respect to the CTI asset transfer, the audit report essentially repeated the FCC’s conclusions. The agreed-upon procedures audit is pending final approval by the TRB.
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PRICE CAP REGULATION
Under the FCC’s “all or nothing” rule, telecommunications carriers that set interstate access rates based on a price cap formula are required to use the price cap formula for all of their affiliates. The price cap formula is based on a plan adopted by the FCC called the Coalition of Affordable Local and Long Distance Service (“CALLS”), which uses rate-of-return as a basis for setting rates. The Company would have been required to implement price caps by March 2, 2000 under the FCC’s rules. Prior to March 2, 2000, the Company had set its interstate access rates based on rate-of-return principles.
The FCC delayed conversion to price cap regulation until June 30, 2002, and the Company requested an extension until June 30, 2003. Under an FCC order issued on April 18, 2002, the Company was no longer required to file a waiver request until the FCC had completed its review of the “all-or-nothing” rule. In addition, upon the FCC’s issuance of an Order and Second Further Notice of Proposed Rulemaking (the “Order”) by the FCC on February 28, 2004, the FCC deferred further action on the “all-or-nothing” rule until it had reviewed the record compiled in response to the notice included in the Order. Furthermore, the FCC declared that all outstanding interim waivers of the “all-or-nothing” rule that depended on the FCC’s pending decision shall continue to be effective until the FCC issues a final order on this matter. As a result, the Company currently continues to set its interstate access rates based on rate-of-return principles.
On May 10, 2004, PRTC filed comments in response to the Order, requesting that the FCC eliminate the “all or nothing rule” or, in the alternative, if the rule is not eliminated, that the FCC grant PRTC’s 1999 waiver request to permit PRTC to remain a carrier that sets its interstate access rates based on rate-of-return principles. The basis of PRTC’s request is that if PRTC were no longer eligible to receive Interstate Common Line Support (“ICLS”), PRTC would require $139 million in additional universal service support to offset lost ICLS revenues and that the CALLS plan cannot accommodate PRTC since there is a $650 million cap on the equivalent support in the CALLS plan, which was based on the anticipated universal service needs of price cap carriers that were participating in the plan at the time of its adoption. There has been no announcement regarding the expected timing for the completion of this proceeding.
HIGH COST SUPPORT FOR INSULAR RELIEF
On December 9, 2005, the FCC issued a Notice of Proposed Rulemaking in which it tentatively concluded thatit would establish a non-rural insular universal service mechanism. The FCC’s proposed mechanism is based on a proposal made by the Company on May 6, 2005. Initially, comments were due on February 10, 2006 and reply comments on March 13, 2006. After a request for extension filed by US Telecom, the FCC extended the deadline for filing comments and reply comments to March 27, 2006 and May 26, 2006 respectively. PRTC filed comments in support of the Commission’s tentative conclusion on March 27, 2006, and reply comments on May 26, 2006. If the FCC’s tentative conclusion were adopted, the Company would be eligible to receive approximately $33 million in annual support based on current investment levels. The Company would be eligible for additional support for its wireless service based on the same per-line support received by the Company. FCC has not provided a timetable for action on its tentative conclusion, nor any assurances that it will adopt the mechanism as proposed. While the Company does not currently receive high-cost support from the FCC, PRTC does receive significant universal service money under other FCC universal service programs.
MUNICIPAL RIGHT OF WAY FEES
Under Puerto Rico law, municipalities are authorized to impose fees for the use of their rights of way and the TRB has an obligation to adopt regulations governing fees for use of municipal rights of way, consistent with local and federal law. The TRB has not yet adopted a regulation, but a number of municipalities in Puerto Rico have sought to impose fees upon the Company for using their rights of way. The exact manner in which these fees are calculated varies, but they generally seek to collect five percent of the Company’s gross revenue generated in the municipality.
The Company has challenged each of these fees in federal court and in the Puerto Rico courts. In the leading case,PRTC v. Guayanilla, the federal district court granted the Company’s motion for summary judgment on January 28, 2005, holding that the fee proposed by the municipality violated federal law because the municipality could not show that the fee was related to rights of way use. The municipality appealed the district court’s ruling. All local court cases were stayed pending the outcome of the Guayanilla appeal. On June 7, 2006, the First Circuit issued an order affirming the District Court’s grant of summary judgment in the Guayanilla case. The opinion contains an endorsement of the principle that any rights-of-way fees imposed by a municipality must bear a direct relationship to a telecommunications carrier’s use of those rights-of-way and that a municipality’s costs of maintaining the rights-of-way are “an essential part of the equation.”
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It adopts the principle that once a municipal fee is shown to be a potential barrier to providing service under Section 253(a), the burden of proof shifts to the municipality to show that the fee meets the definition of “fair and reasonable compensation” as specified in Section 253(c) of the federal law. PRTC has filed or is in the process of filing a corresponding motion to dismiss in all pending cases based on this Opinion. So far, for the following pending cases at the federal court, to wit,PRT v.Municipality of Caguas,PRTC v. Municipality of PonceandPRTC v. Municipality of Utuado. In all cases, the Court has declared the municipality ordinance null and void based on the Guayanilla Opinion.PRT v. Municipality of Cidra,PRT v. Municipality of Vega BajaandPRT v. Municipality of Catañoare still pending.
Despite the favorable outcome in the Guayanilla case and its potential impact on the remaining right of way cases, Puerto Rico municipalities may continue to adopt ordinances intended to charge for the use of their rights of way. To the extent such fees are upheld under the newly adopted standard, PRTC will either pass the costs along to its customers, which will negatively impact its ability to compete, or absorb them, which will negatively impact its profitability.
INTERCONNECTION DISPUTE
In October 2004, the TRB arbitrated an interconnection contract between WorldNet Telecommunications Inc. (“WorldNet”) and the Company. Among its conclusions, the TRB adopted the arbitrator’s decision to approve a provision that established performance parameters under the contract but rejected the imposition of liquidated damages for failure to meet the performance parameters. Both WorldNet and the Company cross-appealed certain aspects of the TRB’s rulings in the U.S. District Court for the District Court of Puerto Rico pursuant to the Federal Communications Act and moved for summary judgment. In early February 2006, the District Court affirmed in part and reversed in part the disputed TRB rulings. Both the Company and the TRB filed notices of appeal in the U.S. Court of Appeals for the First Circuit, which remain pending and their timing and outcome are unknown. PRT filed its brief on Appeal on September 15, 2006. The TRB and WorldNet also filed their corresponding briefs. Reply briefs for WorldNet were due on October 20, 2006 and for PRTC and the TRB on November 20, 2006. In addition, WorldNet has also requested immediate further proceedings before the TRB with respect to the ruling of the District’s Court. PRTC opposed on the grounds that said petition is premature, improper and unnecessary. That request is pending.
SUBSCRIBER LINE CHARGE (SLC)
On December 14, 2005, the FCC sent PRTC a letter questioning PRTC’s relative percentages of single line and multiline business access lines in the Company’s annual reports submitted to the FCC for the years 2000-2004. As result of this inquiry, PRTC discovered that the Company had been under billing some customers for the multiline subscriber line charge (SLC). Effective June 1, 2006, PRTC implemented a prospective correction for the single/multiline customers to amend the error.
Since PRTC is a member of the NECA Common Line Pool, any SLC under billing has been recovered from the NECA pool. As a result, PRTC, in conjunction with NECA, have been discussing the back-billing issue taking into consideration the NECA Administration Procedures and FCC orders and opinions issued in connection with back-billing controversies. On June 1, 2006 PRT started billing the SLC correctly to all its customers. On July 28, 2006 members of NECA and PRTC agreed to jointly approach the FCC during the month of August 2006 to seek a determination of the proper back-billing period and to inform USAC of the situation, as deemed necessary. On September 15, 2006 PRTC representatives met with FCC and USAC to discuss PRTC’s petition regarding a six (6) month term for back billing and for the devolution of funds to USAC. On September 27, 2006 PRTC submitted a letter expressing the reasoning behind the petition that the FCC should determine that the six (6) month period is reasonable under the specific circumstances. On October 1, 2006, PRTC started back billing customers a six (6) month period from December 2005 until May 2006, inclusive.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q, 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 such words as “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.
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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 and industry conditions in Puerto Rico and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact in the markets served by us; (2) material changes in available technology; (3) the final resolution of regulatory initiatives and proceedings, including arbitration proceedings pertaining to, among other matters, the terms of interconnection, access charges, universal service, unbundled network elements and resale rates; (4) changes in our accounting policies that may be required by regulatory agencies, including the SEC or that result from changes in the accounting policies or their application, which could result in an impact on earnings; and (5) the extent, timing, success and overall effects of competition from others in the Puerto Rico telecommunications service industry.
Although the Company believes the expectations reflected in its forward-looking statements are reasonable, the Company cannot guarantee its future performance or results of operations. All forward-looking statements in this report are based on information available to the Company on the date of this report; however, the Company is not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The risks described above and elsewhere in this report, including in Part II, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be considered when reading any forward-looking statements in this report. Given these uncertainties and risks, the reader should not place undue reliance on these forward-looking statements.
CRITICAL ACCOUNTING POLICIES
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles for annual financial statements have been condensed or omitted pursuant to such rules and regulations.
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported interim amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, intangible assets, income taxes, financing operations, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Because of uncertainties inherent in the estimation process, the Company’s estimate of losses and the related allowance may change. The Company does not depend on any single customer for its business.
Deferred 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.
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The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Similarly, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income during the period in which such determination was made.
The Puerto Rico Treasury Department concluded the ordinary audit of the 2001 corporate income tax return of one of our subsidiaries resulting in an additional tax liability of $0.5 million.
A Puerto Rico law was passed in August 2005, providing for an additional 2.5% tax on corporate taxpayers with taxable income of $20,000 or more for tax years 2005 and 2006. The effectiveness of the law was contingent upon the approval of Joint Resolution 445 which related to the 2005-2006 Governmental Budget. The Governor of Puerto Rico vetoed Joint Resolution 445; therefore, the deferred taxes as of December 31, 2005 do not reflect the additional tax of 2.5%.
On May 16, 2006, the Governor signed into law a clarification that the maximum corporate tax rate is 41.5%. Therefore, income taxes reflected as of September 30, 2006 for current and deferred tax purposes reflect such effect.
The estimated impact was an increase in the deferred tax asset of $0.8 million, and a decrease in the income tax provision of $0.8 million, which were recorded in the quarter ended September 30, 2006.
Property, Plant and Equipment and Depreciation
Property, plant and equipment is stated at original cost, including interest on funds borrowed to finance the acquisition of capital additions. Repairs and maintenance are expensed as incurred. Depreciable property disposed of in the ordinary course of business, less salvage value, is charged to accumulated depreciation with no gain or loss recognized. Gains or losses from the sale of land are recorded in results of operations.
The Company’s depreciation expense is based on the composite group remaining life method using straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant over the remaining asset lives. This method also requires a periodic evaluation of the average remaining useful lives related to the expected recoverability of the carrying value of assets based on changes in technology, environmental factors, the federal and local regulatory environment, industry and other competitive forces. Effective July 2005, the Company revised its plant useful lives estimates based on a detailed review of the lives underlying the depreciation rates. The depreciation rate revision reflects expected useful lives resulting from the impact of technology and future competition and more closely approximate the assumptions used by other telephone companies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We are exposed to market risk in the normal course of business, resulting primarily from interest rate changes on our senior notes and interest rate swap agreements.
The following table summarizes the fair value of our senior notes at September 30, 2006 and the fair value of our senior notes and interest rate swap at December 31, 2005 and provides a sensitivity analysis of the fair values of these instruments assuming a 100 basis point increase or decrease in the yield curve. The sensitivity analysis does not include the fair values of our floating-rate debt since it is not significantly affected by changes in market interest rates.
Fair Value | ||||||||||||||||
Assuming 100 Basis Point | ||||||||||||||||
Carrying Amount | Fair Value | Increase | Decrease | |||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2006: | ||||||||||||||||
Senior notes | $ | 299,942 | $ | 307,782 | $ | 300,544 | $ | 315,238 | ||||||||
December 31, 2005: | ||||||||||||||||
Senior notes | $ | 699,919 | $ | 711,120 | $ | 700,558 | $ | 722,038 | ||||||||
Interest rate swap | (1,080 | ) | (1,080 | ) | (1,446 | ) | (713 | ) | ||||||||
Total | $ | 698,839 | $ | 710,040 | $ | 699,112 | $ | 721,325 | ||||||||
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ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the Company’s reports that are filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. In designing and evaluating the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer recognized that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report (the “Evaluation Date”). They have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various legal matters arising in the ordinary course of business. Management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position and results of operations. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters”, which is incorporated herein by reference, for more information regarding legal and regulatory matters, including a regulatory dispute regarding intra-island access fees charged to long distance carriers.
Item 1A. Risk Factors
There have been no material changes from our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
a) See Exhibit Index on page following signatures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TELECOMUNICACIONES DE PUERTO RICO, INC.
By: Name: | /s/ Cristina M, Lambert | |||||
Title: | President and Chief Executive Officer | |||||
Date: | November 14, 2006 | |||||
By: Name: | /s/ Héctor Houssay | |||||
Title: | Vice President Finance and Chief Financial Officer | |||||
Date: | November 14, 2006 |
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EXHIBIT INDEX
EXHIBIT | ||||
NUMBER | DESCRIPTION | |||
3.1 | Certificate of Incorporation of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement filed on Form S-4, as amended (File 333-85503)). | |||
3.2 | Certificate of Amendment to the Certificate of Incorporation of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999(File 333-85503)). | |||
3.3 | By-Laws of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement filed on Form S-4, as amended (File 333-85503)). | |||
4.1 | Trust Indenture dated as of May 20, 1999 between Telecomunicaciones de Puerto Rico, Inc. and The Bank of New York. (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement filed on Form S-4, as amended(File 333-85503)). | |||
10.1 | Shareholders Agreement, dated as of March 2, 1999, by and among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto Rico) LLC, GTE International Telecommunications Incorporated, Popular, Inc., Puerto Rico Telephone Authority and the shareholders of Telecomunicaciones de Puerto Rico, Inc., who shall from time to time be parties thereto as provided therein. (Incorporated by reference to Exhibit 10.5 of the Company’s Registration Statement filed on Form S-4, as amended(File 333-85503)). | |||
10.2 | 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, as amended (File 333-85503)). | |||
10.3 | 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, as amended (File 333-85503)). | |||
10.4 | 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, as amended (File 333-85503)). | |||
10.5 | 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, as amended (File 333-85503)). | |||
10.6 | 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, as amended(File 333-85503)). | |||
10.7 | Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, Inc., as Guarantors; and Merrill Lynch Money Markets Inc., as Dealer for notes with maturities up to 240 days; Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for notes with maturities over 270 days up to 365 days. Concerning notes to be issued pursuant to an Issuing and Paying Agency Agreement dated as of November 9, 2000 between the Issuer and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |||
10.8 | Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, Inc., as Guarantors; and Salomon Smith Barney Inc., as Dealer. Concerning notes to be issued pursuant to an Issuing and Paying Agency Agreement dated as of November 9, 2000 between the Issuer and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). |
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EXHIBIT | ||||
NUMBER | DESCRIPTION | |||
10.9 | Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, Inc., as Guarantors; and Banc of America Securities LLC. Concerning notes to be issued pursuant to an Issuing and Paying Agency Agreement dated as of November 9, 2000 between the Issuer and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |||
10.10 | Commercial Paper Dealer Agreement 4(2) Program among Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico Telephone Company, Inc. and Celulares Telefónica, Inc., as Guarantors; and Popular Securities, Inc., as Dealer for notes with maturities up to 365 days. Concerning notes to be issued pursuant to an Issuing and Paying Agency Agreement dated as of November 9, 2000 between the Issuer and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |||
10.11 | Issuing and Paying Agency Agreement dated as of November 9, 2000, by and among Telecomunicaciones de Puerto Rico, Inc., as Issuer, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and The Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File 333-85503)). | |||
10.12 | Letter Amendment, to the March 2, 1999 Shareholders Agreement, dated as of May 25, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto Rico) LLC, GTE International Telecommunications Incorporated, Popular, Inc., and the Puerto Rico Telephone Authority. (Incorporated by reference to Exhibit 10.25 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001 (File 333-85503)). | |||
10.13 | ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Bank of America, N.A., as the Bank. (Incorporated by reference to Exhibit 10.27 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (File 333-85503)). | |||
10.14 | ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Citibank, N.A., as the Bank. (Incorporated by reference to Exhibit 10.28 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001(File 333-85503)). | |||
10.15 | Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. (Incorporated by reference to Exhibit 10.29 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (File 333-85503)). | |||
10.16 | Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Union of Telephone Employees of Puerto Rico effective from January 18, 2003 until January 17, 2006. Approved on February 13, 2003. English Version. (Incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)). | |||
10.17 | Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. English Version. (Incorporated by reference to Exhibit 10.32 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)). | |||
10.18 | Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Union of Telephone Employees of Puerto Rico effective from January 18, 2006 until January 17, 2011. Approved on October 20, 2005. (Incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File 333-85503)). |
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EXHIBIT | ||||
NUMBER | DESCRIPTION | |||
10.19 | $600,000,000 Credit Agreement dated as of February 28, 2006, among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Scotiabank of Puerto Rico, as Co-Syndication Agents, and Banco Popular de Puerto Rico and The Bank of Tokyo-Mitsubishi UFG, LTD., New York Branch, as Co-documentation Agents. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005(File 333-85503)). | |||
10.20 | ESOP Loan Agreement dated as of November 4, 2005, 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 10.24 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File 333-85503)). | |||
10.21 | Share and publication rights purchase agreement dated as of February 28, 2006 by an d between PRTC Directories, Inc., Puerto Rico Telephone Company, Inc. and CII Acquisition Corp (Incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File 333-85503)). | |||
31.1 | Certification of Principal Executive Officer (Filed herewith). | |||
31.2 | Certification of Principal Financial Officer (Filed herewith). | |||
32.1 | Certification Required by 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
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