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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended: December 31, 2005
 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.
  Commonwealth of Puerto Rico
    
    66-0566178(STATE OR OTHER JURISDICTION OF
    
    (IRS EMPLOYER IDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)1515 FD Roosevelt Ave.Guaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
  o þ
 þ o
 þ o
 þ
  Large accelerated filer o
    Accelerated filer o
    Non-accelerated filer þ
 o þ




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##### 



INDEX
 PART IItem 1.
    
    Business
    3Item 1A.
    
    Risk Factors
    12Item 1B.
    
    Unresolved Staff Comments
    13Item 2.
    
    Properties
    14Item 3.
    
    Legal Proceedings
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    16PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    17Item 6.
    
    Selected Financial Data
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    39Item 8.
    
    Financial Statements and Supplementary Data
    40Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    80Item 9A.
    
    Controls and Procedures
    80Item 9B.
    
    Other Information
    80PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    81Item 11.
    
    Executive Compensation
    86Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and related
Stockholder Matters
    90Item 13.
    
    Certain Relationships and Related Transactions
    92Item 14.
    
    Principal Accounting Fees and Services
    93PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    94SIGNATURES
    
    
    95EXHIBIT INDEX
    97$600,000,000 Credit AgreementESOP Loan AgreementSubsidiaries of the RegistrantIndependent Auditors' ConsentCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
  2




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##### Table of Contents



ITEM 1. BUSINESS
 GENERAL
   BUSINESS OVERVIEW AND CORPORATE RESTRUCTURING
   PRTC/VERIZON WIRELESS MERGER
   3




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STRATEGY
   COMPETITION
    
    
    Pricing: The wireless service and equipment pricing is mainly determined by
competition. As a result, wireless market prices have declined over the last several
years and may continue to decline in the future due to increased competition.
    
    Customer Service: The quality customer service is essential to ensure the retention of
our customers and to attract new customers.
    
    Product Development: We are committed to continue pursuing the development of our
services, products and devices maximizing the use of new technologies.
    
    Distribution: The key to achieve sales success in the wireless business is the reach
and quality of sales channels and distribution points, which is considered an important
ingredient in achieving-leading profitability.
    
    Capital Resources: In order to expand the capacity and coverage of their networks and
introduce new products and services, wireless providers require significant capital
resources. As of the result of the competitive environment, the Company has been forced
to introduce new service offerings at lower prices, to increase advertising spending, to
offer equipment discounts expenses, and to increase the capital investment to ensure we
maintain or enhance the service quality.
 4




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BUSINESS SEGMENTS
   
    
    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 cards;
 
    
    Access services, to long distance carriers, competitive local exchange carriers, and wireless operators for originating
and terminating calls on our network;
 
    
    Directory publishing rights revenues; 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 cellular service; and
 
    
    Wireless equipment sales.
 WIRELINE
   ACCESS LINES IN SERVICE
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands except percentages)Residential
    
    
    841
    
    
    
    887
    
    
    
    940Business/Government
    
    
    269
    
    
    
    281
    
    
    
    290Total Access Lines in Service
    
    
    1,110
    
    
    
    1,168
    
    
    
    1,230Growth
    
    
    (5.0
    %)
    
    
    (5.0
    %)
    
    
    (2.4
    %)
   5




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6




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Year Ended December 31,2005
    
    
    2004
    
    
    2003(In millions)O Federal long-term support subsidies
    
    $
    74
    
    
    $
    82
    
    
    $
    81O Subscriber line charge
    
    
    95
    
    
    
    95
    
    
    
    97O Federal High Cost subsidies & Local
Universal Service Fund Charge
    
    
    1
    
    
    
    2
    
    
    
    5O Per minute wireline access charges:o On-island switched
    
    
    7
    
    
    
    24
    
    
    
    49o Off-island switched & common carrier line
    
    
    22
    
    
    
    30
    
    
    
    20o Off-island special
    
    
    19
    
    
    
    21
    
    
    
    24o Wireless interconnection
    
    
    17
    
    
    
    15
    
    
    
    19$
    235
    
    
    $
    269
    
    
    $
    295
     Year Ended December 31,2005
    
    
    2004
    
    
    2003(In millions)Long distance MOU:On-island Long Distance minutes
    
    
    206
    
    
    
    549
    
    
    
    757Off-island Long Distance minutes
    
    
    149
    
    
    
    178
    
    
    
    170
  7




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WIRELESS
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands except percentages)Cellular Customers:Postpaid
    
    
    382
    
    
    
    290
    
    
    
    240Prepaid
    
    
    103
    
    
    
    97
    
    
    
    113Total Cellular Customers
    
    
    485
    
    
    
    387
    
    
    
    353Growth
    
    
    25.3
    %
    
    
    9.6
    %
    
    
    0.6
    %
      8




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NETWORK INFRASTRUCTURE
  WIRELINE NETWORK
  o
    
    Our 100% digital switching network includes 29 local host central offices and two access
tandems to ensure redundancy and network reliability. Also, we have a long distance switch
to provide access to national and international long distance calls.o
    
    Approximately 90% of our transmission circuits use fiber optic systems consisting of
approximately 90,200 miles of fiber optic cable in fiber-ring and point-to-point
configurations.o
    
    The entire fiber optic backbone transport network consists of self-healing SONET rings
operating at bandwidths up to OC-192, with new equipment installed capable of evolving to
DWDM. Fiber optic cable facilities have been provided to over 270 office buildings for
business and residential customers. Also, a MAN (Metro Area Network) installed in the
Metropolitan Area to provide Ethernet services.o
    
    Approximately 39% of the outside cable serving the local loop is underground and buried.o
    
    Our network is monitored by a network monitoring center, which operates 24 hours per day,
with the capabilities to monitor customers IP based networks.o
    
    Our Remote Access Server (RAS) network includes 28 nodes located throughout the island
connecting Internet customers of various ISP providers through more than 40,000 modems.o
    
    DSL service has been extended to 229 sites equipped with an aggregate of 104,000 ports.
As of December 31, 2005, we had approximately 77,000 DSL customers, representing an increase
of 37,000 customers as compared to last year.o
    
    Our ATM network provides ATM and Frame Relay services and also serves as the transport
medium for DSL and RAS networks. This network also provides PRTC with IP capability.
 WIRELESS NETWORK
   9




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EMPLOYEES
   CONCESSION AND LICENSES
  ENVIRONMENTAL REGULATIONS
    REGULATORY ENVIRONMENT IN PUERTO RICO
   10




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INFORMATION ON OUR INTERNET WEBSITE
 www.telefonicapr.com
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     11




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ITEM 1A. RISK FACTORS
  We face significant competition that may reduce our market share and adversely affect our profit
margins.
  If we are unable to meet future advances in competing technologies in the telecommunications
industry on a timely basis or at an acceptable cost, we may experience a decline in demand for our
services.
  The final resolution of existing regulatory initiatives and proceedings or the adoption of new laws
or regulations could adversely affect our business plans or results of operations.
   12




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Changes in the labor negotiations and the effect of our labor strikes could affect the results of
operations.
   Changes in economic and industry condition in Puerto Rico could adversely affect the results of
operations
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  13




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ITEM 2. PROPERTIES
   2005
    
    2004Wireline
    
    Wireless
    
    Total
    
    Wireline
    
    Wireless
    
    TotalOutside Plant
    
    
    53.3
    %
    
    
    0.0
    %
    
    
    53.3
    %
    
    
    52.4
    %
    
    
    0.0
    %
    
    
    52.4
    %Central office and transmission equipment
    
    
    27.6
    %
    
    
    3.5
    %
    
    
    31.1
    %
    
    
    27.2
    %
    
    
    2.8
    %
    
    
    30.0
    %Other equipment
    
    
    5.8
    %
    
    
    0.9
    %
    
    
    6.7
    %
    
    
    6.6
    %
    
    
    0.8
    %
    
    
    7.4
    %Land and Buildings
    
    
    7.6
    %
    
    
    0.9
    %
    
    
    8.5
    %
    
    
    7.8
    %
    
    
    0.7
    %
    
    
    8.5
    %Plant under Construction
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.4
    %
    
    
    0.9
    %
    
    
    0.8
    %
    
    
    1.7
    %Total
    
    
    94.5
    %
    
    
    5.5
    %
    
    
    100.0
    %
    
    
    94.9
    %
    
    
    5.1
    %
    
    
    100.0
    %
    Owned
    
    Leasedo Administrative Offices
    
    
    9
    
    
    
    12o Commercial & Customer Service stores & offices
    
    
    
    
    
    
    5o Standalone Wireline Switching Center Buildings
    
    
    81
    
    
    
    1o Inside & Outside Remote Switching Units
    
    
    157
    
    
    
    240o Standalone Operational Centers (repair, dispatch, assignment)
    
    
    13
    
    
    
    9o Warehouses
    
    
    2
    
    
    
    2o Wireless Stores and Kiosks
    
    
    
    
    
    
    32o Wireless Cell Sites
    
    
    21
    
    
    
    259
  14




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ITEM 3. LEGAL PROCEEDINGS
  15




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  16




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
       17




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  YEARS ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(IN MILLIONS)INCOME STATEMENT DATA (1):Revenues
    
    $
    1,253
    
    
    $
    1,214
    
    
    $
    1,281
    
    
    $
    1,301
    
    
    $
    1,397Operating Costs and Expenses
    
    
    1,076
    
    
    
    994
    
    
    
    1,191
    
    
    
    1,054
    
    
    
    1,150Operating Income
    
    
    177
    
    
    
    220
    
    
    
    90
    
    
    
    247
    
    
    
    247Other Expense, Net
    
    
    47
    
    
    
    44
    
    
    
    64
    
    
    
    47
    
    
    
    59Income Tax Expense
    
    
    51
    
    
    
    68
    
    
    
    8
    
    
    
    29
    
    
    
    70Income Before Extraordinary
Charge and Cumulative Effect of Accounting Change
    
    
    79
    
    
    
    108
    
    
    
    18
    
    
    
    171
    
    
    
    118Cumulative Effect of Accounting Change, net of tax
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    Net Income
    
    $
    79
    
    
    $
    108
    
    
    $
    77
    
    
    $
    171
    
    
    $
    118OTHER FINANCIAL DATA:Depreciation and Amortization
    
    $
    242
    
    
    $
    261
    
    
    $
    252
    
    
    $
    262
    
    
    $
    271Cash Flows from Operations
    
    
    239
    
    
    
    289
    
    
    
    357
    
    
    
    405
    
    
    
    216Capital Expenditures, including removal costs
    
    
    146
    
    
    
    172
    
    
    
    176
    
    
    
    209
    
    
    
    246Cash Flows used in Investing
    
    
    (143
    )
    
    
    (166
    )
    
    
    (170
    )
    
    
    (206
    )
    
    
    (220
    )Cash Flows (used in) from Financing
    
    
    (105
    )
    
    
    (81
    )
    
    
    (198
    )
    
    
    (200
    )
    
    
    8Cash dividends declared per common share (2)
    
    
    2.53
    
    
    
    2.63
    
    
    
    2.73
    
    
    
    2.75
    
    
    
    2.32
 AS OF DECEMBER 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(IN MILLIONS)BALANCE SHEET DATA:Current Assets
    
    $
    369
    
    
    $
    417
    
    
    $
    392
    
    
    $
    430
    
    
    $
    431Property, Plant and Equipment, Net
    
    
    1,352
    
    
    
    1,459
    
    
    
    1,558
    
    
    
    1,575
    
    
    
    1,632Total Assets
    
    
    2,378
    
    
    
    2,545
    
    
    
    2,621
    
    
    
    2,717
    
    
    
    2,748Current Liabilities
    
    
    625
    
    
    
    309
    
    
    
    273
    
    
    
    366
    
    
    
    841Total Debt
    
    
    752
    
    
    
    797
    
    
    
    862
    
    
    
    1,035
    
    
    
    1,196Shareholders Equity
    
    
    737
    
    
    
    723
    
    
    
    701
    
    
    
    665
    
    
    
    538
 AS OF DECEMBER 31,2005
    
    2004
    
    2003
    
    2002
    
    2001OPERATING DATA:Access Lines in Service (000)
    
    
    1,110
    
    
    
    1,168
    
    
    
    1,230
    
    
    
    1,260
    
    
    
    1,273Wireless subscribers:Cellular (000)
    
    
    485
    
    
    
    387
    
    
    
    353
    
    
    
    351
    
    
    
    302Total Access Lines (per 100 households)
    
    
    62
    
    
    
    65
    
    
    
    69
    
    
    
    71
    
    
    
    73Number of full-time Employees
    
    
    4,953
    
    
    
    5,250
    
    
    
    5,548
    
    
    
    5,881
    
    
    
    6,383Access Lines/Wireline Employee
    
    
    261
    
    
    
    262
    
    
    
    260
    
    
    
    250
    
    
    
    232Cellular Average Monthly Service Revenue Per User
    
    $
    44
    
    
    $
    43
    
    
    $
    43
    
    
    $
    43
    
    
    $
    44
 
 (1)
    
    Certain reclassifications of prior years data have been made to conform to the current year
presentation.(2)
    
    The Company declared legal dividends of $63 million, $66 million, $68 million, $69 million and
$58 million during 2005, 2004, 2003, 2002 and 2001, or $2.528, $2.631, $2.725, $2.753 and $2.315
per share, respectively. Dividends were paid for the first time during 2001. Since 2001, there
have been 25 million outstanding shares of common stock and four shareholders of record. 18




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 OVERVIEW
     
    
    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 year 2005, our wireless and broadband
services represented 33% of the total revenues, up from 28% for year 2004 and from 24% for
year 2003.For the year ended December 31, 2005, revenues from the growth of
wireless areas, in particular post-paid cellular services and sale
of wireless equipment increased by 27% and 45%, respectively,
compared to the same period in 2004. These increases were driven by
the net addition of approximately 92,000 post-paid wireless
customers during the year ended December 31, 2005. The broadband
services revenues for the year ended December 31, 2005 increased by
7% compared to the same period in 2004. This increase was driven by
strong DSL revenue growth. For the year ended December 31, 2005,
the net addition of DSL customers was approximately 34,000.For the year ended December 31, 2004, revenues from the growth of
wireless areas, in particular post-paid cellular services and sale
of wireless equipment increased by 10% and 69%, respectively,
compared to the year ended December 31, 2003. The Company added
approximately 50,000 post-paid wireless customers during the year
ended December 31, 2004. The broadband services revenues for the
year ended December 31, 2004 increased by 14% compared to the same
period in 2003, which was driven by strong DSL revenue growth. For
the year ended December 31, 2004, the net addition of DSL customers
was approximately 19,000.
    
    Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to reduce expenses, particularly through
technology-assisted productivity improvements. The Company has significantly reduced
workforce levels compared to the same period in 2004, which we expect will provide future
benefits. At December 31, 2005, the Company had approximately 4,785 employees compared to
5,410 at December 31, 2004. Labor and benefits expenses declined by approximately $13
million, or 3%, for the year ended December 31, 2005 compared to the same period in 2004,
largely as a result of the early retirement program offered during 2004 and the voluntary
separation program offered during 2005.
 19




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
    
    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.
     20




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CONSOLIDATED RESULTS OF OPERATIONS
  CONSOLIDATED REVENUES
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    596
    
    
    $
    587
    
    
    
    2
    %
    
    $
    587
    
    
    $
    605
    
    
    
    (3
    )%Network Access
    
    
    235
    
    
    
    269
    
    
    
    (13
    )
    
    
    269
    
    
    
    295
    
    
    
    (9
    )Long Distance
    
    
    69
    
    
    
    69
    
    
    
    0
    
    
    
    69
    
    
    
    112
    
    
    
    (38
    )Cellular
    
    
    241
    
    
    
    196
    
    
    
    23
    
    
    
    196
    
    
    
    187
    
    
    
    5Directory and Other
    
    
    112
    
    
    
    93
    
    
    
    20
    
    
    
    93
    
    
    
    82
    
    
    
    13Consolidated revenues
    
    $
    1,253
    
    
    $
    1,214
    
    
    
    3
    
    
    $
    1,214
    
    
    $
    1,281
    
    
    
    (5
    )
      21




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CONSOLIDATED OPERATING EXPENSES
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    344
    
    
    $
    312
    
    
    
    10
    %
    
    $
    312
    
    
    $
    314
    
    
    
    (1
    )%Selling, general and administrative expenses
    
    
    488
    
    
    
    418
    
    
    
    17
    
    
    
    418
    
    
    
    607
    
    
    
    (31
    )Total consolidated operating expenses
    
    $
    832
    
    
    $
    730
    
    
    
    14
    
    
    $
    730
    
    
    $
    921
    
    
    
    (21
    )
      22




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OTHER CONSOLIDATED RESULTS
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Retirement and voluntary separation provision
    
    $
    2
    
    
    $
    3
    
    
    
    (33
    )%
    
    $
    3
    
    
    $
    17
    
    
    
    (82
    )%Depreciation and amortization
    
    
    242
    
    
    
    261
    
    
    
    (7
    )
    
    
    261
    
    
    
    252
    
    
    
    4Interest expense and others
    
    
    46
    
    
    
    43
    
    
    
    7
    
    
    
    43
    
    
    
    53
    
    
    
    (19
    )Equity income in joint venture
    
    
    (3
    )
    
    
    (2
    )
    
    
    50
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    50Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (100
    )Income tax expense
    
    
    51
    
    
    
    68
    
    
    
    (25
    )
    
    
    68
    
    
    
    8
    
    
    
    750Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (100
    )Total Other Consolidated Results
    
    $
    341
    
    
    $
    376
    
    
    
    (9
    )
    
    $
    376
    
    
    $
    283
    
    
    
    33
 Retirement and voluntary separation provisions
    Depreciation and amortization expense
    Interest expense, net
   23




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Equity income from joint venture
  Minority interest in consolidated subsidiary
  Asset Impairment Charge
  Income taxes
   Cumulative effect of accounting change
   24




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SEGMENT RESULTS OF OPERATIONS
   
    
    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.
  
    
    Postpaid and Prepaid services; and
    
    Wireless equipment sales.
 25




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##### Table of Contents



RESULTS OF OPERATIONS REVENUE WIRELINE
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    615
    
    
    $
    596
    
    
    
    3
    %
    
    $
    596
    
    
    $
    614
    
    
    
    (3
    )%Network Access
    
    
    234
    
    
    
    271
    
    
    
    (14
    )
    
    
    271
    
    
    
    296
    
    
    
    (8
    )Long Distance
    
    
    65
    
    
    
    66
    
    
    
    (2
    )
    
    
    66
    
    
    
    112
    
    
    
    (41
    )Directory and Other
    
    
    80
    
    
    
    71
    
    
    
    13
    
    
    
    71
    
    
    
    67
    
    
    
    6Total Wireline
    
    $
    994
    
    
    $
    1,004
    
    
    
    (1
    )
    
    $
    1,004
    
    
    $
    1,089
    
    
    
    (8
    )
  Local Services
   Network Access
   26




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##### Table of Contents



Long Distance
   Directory and Other
   RESULTS OF OPERATIONS EXPENSE WIRELINE
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    242
    
    
    $
    237
    
    
    
    2
    %
    
    $
    237
    
    
    $
    253
    
    
    
    (6
    )%Selling, general and administrative expenses
    
    
    379
    
    
    
    327
    
    
    
    16
    
    
    
    327
    
    
    
    514
    
    
    
    (36
    )Total Wireline
    
    $
    621
    
    
    $
    564
    
    
    
    10
    
    
    $
    564
    
    
    $
    767
    
    
    
    (26
    )
      27




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##### Table of Contents



RESULTS OF OPERATIONS REVENUE WIRELESS
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Postpaid Cellular
    
    $
    228
    
    
    $
    180
    
    
    
    27
    %
    
    $
    180
    
    
    $
    162
    
    
    
    11
    %Prepaid Cellular
    
    
    17
    
    
    
    19
    
    
    
    (11
    )
    
    
    19
    
    
    
    26
    
    
    
    (27
    )Total Cellular
    
    
    245
    
    
    
    199
    
    
    
    23
    
    
    
    199
    
    
    
    188
    
    
    
    6Wireless Equipment and Other
    
    
    44
    
    
    
    27
    
    
    
    63
    
    
    
    27
    
    
    
    14
    
    
    
    93Total Wireless
    
    $
    289
    
    
    $
    226
    
    
    
    28
    
    
    $
    226
    
    
    $
    202
    
    
    
    12
 OPERATING DATA
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cellular Customers (000s):Postpaid
    
    
    382
    
    
    
    290
    
    
    
    32
    %
    
    
    290
    
    
    
    240
    
    
    
    21
    %Prepaid
    
    
    103
    
    
    
    97
    
    
    
    6
    
    
    
    97
    
    
    
    113
    
    
    
    (14
    )Total
    
    
    485
    
    
    
    387
    
    
    
    25
    
    
    
    387
    
    
    
    353
    
    
    
    10Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    53
    
    
    $
    54
    
    
    
    (2
    )%
    
    $
    54
    
    
    $
    55
    
    
    
    (2
    )%Prepaid Cellular ARPU
    
    
    14
    
    
    
    15
    
    
    
    (7
    )
    
    
    15
    
    
    
    19
    
    
    
    (21
    )Combined Cellular ARPU
    
    
    44
    
    
    
    43
    
    
    
    2
    
    
    
    43
    
    
    
    43
    
    
    
    
  Cellular Services
   Wireless Equipment and other
  28




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RESULTS OF OPERATIONS EXPENSE WIRELESS
 For the Year Ended December 31,2005
    
    
    2004
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    110
    
    
    $
    80
    
    
    
    38
    %
    
    $
    80
    
    
    $
    62
    
    
    
    29
    %Selling, general and administrative expenses
    
    
    131
    
    
    
    102
    
    
    
    28
    
    
    
    102
    
    
    
    102
    
    
    
    Total Wireless
    
    $
    241
    
    
    $
    182
    
    
    
    32
    
    
    $
    182
    
    
    $
    164
    
    
    
    11
      29




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 For the Years Ended December 31,2005
    
    
    2004
    
    
    2003(in millions)Cash flows from (used in):Operations
    
    $
    239
    
    
    $
    289
    
    
    $
    357Investing
    
    
    (143
    )
    
    
    (166
    )
    
    
    (170
    )Financing
    
    
    (105
    )
    
    
    (81
    )
    
    
    (198
    )
           30




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##### Table of Contents



Contractual Obligations & Other Commercial Commitments:
    
    Payments Due In Period(in millions)Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong-term
debt, including interest rate swap (See Note 10)
    
    $
    300
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    300
    
    
    $
    
    
    
    $
    Interest on long-term debt (See Note 10)
    
    
    85
    
    
    
    35
    
    
    
    20
    
    
    
    20
    
    
    
    10
    
    
    
    
    
    
    
    Pension benefit obligations (See Note 8)
    
    
    537
    
    
    
    102
    
    
    
    243
    
    
    
    143
    
    
    
    42
    
    
    
    7
    
    
    
    Operating leases (See Note 19)
    
    
    88
    
    
    
    16
    
    
    
    15
    
    
    
    15
    
    
    
    16
    
    
    
    15
    
    
    
    11Total
    
    $
    1,010
    
    
    $
    153
    
    
    $
    278
    
    
    $
    178
    
    
    $
    368
    
    
    $
    22
    
    
    $
    11
 31




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##### Table of Contents



REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE (K-2)
  SINGLE ZONE
    PUBLIC
TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS
 .
 TOUCHTONE CHARGES
     32




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CTI ASSET TRANSFER
   PRICE CAP REGULATION
    33




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##### Table of Contents



INSULAR RELIEF
  MUNICIPAL RIGHT OF WAY FEES
  Right of Way Litigations
    
    StatusUS District Court:1. PRTC v. Municipality of Caguas
    
    PRTCs challenge of Caguas ordinance is stayed pending resolution of the Guayanilla
case.2. PRTC v. Municipality of Guayanilla
    
    Federal District Court found the ordinance violative of Section 253. Guayanillas
appeal is pending before the First Circuit Court of Appeals.3. PRTC v. Municipality of Ponce
    
    Declaratory judgment action filed in federal and local court on November 22 and
November 28, 2005, respectively. Ponce was served with summons.4. PRTC v. Municipality San Juan
    
    The case was dismissed when San Juan withdrew its ordinance.5. PRTC v. Municipality of Vega Baja
    
    Declaratory judgment action filed in federal and local court on February 22, 2006.
Vega Baja was served with summons.6. PRTC v. Municipality of Cataño
    
    Declaratory judgment action filed in federal and local court on February 28, 2006.
Cataño served with summons.7. PRTC v. Municipality of Utuado
    
    Declaratory judgment action filed in federal and local court on March 24, 2006.
Pending summons.Local Courts:1. PRTC v. Municipality of Caguas
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.2. PRTC v. Municipality of Ponce
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.3. PRTC v. Municipality San Juan
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.4. PRTC v. Municipality of Vega Baja
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.5. PRTC v. Municipality of Cataño
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.6. PRTC v. Municipality of Utuado
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.
 34




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##### Table of Contents



INTERCONNECTION DISPUTE
  35




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     CRITICAL ACCOUNTING POLICIES
 General
    Allowance for Doubtful Accounts
  36




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##### Table of Contents



Deferred Taxes
     Property, Plant and Equipment and Depreciation
   Pensions
   37




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##### Table of Contents



Other Post Employment Benefits
  38




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointCarrying Amount
    
    Fair Value
    
    Increase
    
    Decrease(in thousands)December 31,2005:Senior notes
    
    $
    699,919
    
    
    $
    711,120
    
    
    $
    700,558
    
    
    $
    722,038Interest rate swap
    
    
    (1,080
    )
    
    
    (1,080
    )
    
    
    (1,446
    )
    
    
    (713
    )Total
    
    $
    698,839
    
    
    $
    710,040
    
    
    $
    699,112
    
    
    $
    721,325Decenber 31, 2004:Senior notes
    
    $
    699,876
    
    
    $
    735,790
    
    
    $
    718,569
    
    
    $
    753,663Interest rate swap
    
    
    3
    
    
    
    3
    
    
    
    (1,813
    )
    
    
    1,834Total
    
    $
    699,879
    
    
    $
    735,793
    
    
    $
    716,756
    
    
    $
    755,497
 39




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2005 and 2004Consolidated Statements of Operations for the Years Ended December 31,
2005, 2004 and 2003Consolidated Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2005, 2004 and 2003Consolidated Statements of Cash Flows for the Years Ended December 31, 2005,
2004 and 2003Notes to Consolidated Financial Statements for the Years Ended December 31,
2005, 2004 and 2003Schedule I  Condensed Consolidating Information for the Years Ended December 31,
2005 and 2004Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31,
2005, 2004 and 2003
 40




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41




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
  December 31,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    55,086
    
    
    $
    63,346Accounts receivable, net of allowance for doubtful accounts
of $76,815 and $106,090 in 2005 and 2004, respectively
    
    
    227,629
    
    
    
    270,914Deferred income tax
    
    
    18,324
    
    
    
    28,054Inventory and supplies, net
    
    
    47,431
    
    
    
    28,158Prepaid expenses
    
    
    20,571
    
    
    
    26,616Total current assets
    
    
    369,041
    
    
    
    417,088PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,351,510
    
    
    
    1,459,459GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    209,357
    
    
    
    196,820DEFERRED INCOME TAX
    
    
    205,853
    
    
    
    235,886OTHER ASSETS
    
    
    115,271
    
    
    
    109,102TOTAL ASSETS
    
    $
    2,377,959
    
    
    $
    2,545,282LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    452,042
    
    
    $
    93,168Other current liabilities
    
    
    172,961
    
    
    
    216,187Total current liabilities
    
    
    625,003
    
    
    
    309,355LONG-TERM DEBT, excluding current portion
    
    
    299,812
    
    
    
    703,556PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    563,395
    
    
    
    607,115OTHER NON-CURRENT LIABILITIES
    
    
    136,345
    
    
    
    186,781Total liabilities
    
    
    1,624,555
    
    
    
    1,806,807MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    16,555
    
    
    
    15,010SHAREHOLDERS EQUITY:Common stock
    
    
    705,516
    
    
    
    704,386Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    (25,172
    )Retained earnings
    
    
    228,877
    
    
    
    210,956Accumulated other comprehensive loss, net of taxes
    
    
    (171,502
    )
    
    
    (166,705
    )Total shareholders equity
    
    
    736,849
    
    
    
    723,465TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,377,959
    
    
    $
    2,545,282
 The accompanying notes are an integral part of these financial statements.
 42




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003REVENUES:Local services
    
    $
    595,823
    
    
    $
    586,598
    
    
    $
    605,259Access services
    
    
    235,083
    
    
    
    268,974
    
    
    
    295,801Long distance services
    
    
    69,176
    
    
    
    68,890
    
    
    
    111,416Cellular services
    
    
    241,248
    
    
    
    196,426
    
    
    
    187,084Directory services and other
    
    
    111,194
    
    
    
    93,036
    
    
    
    81,859Total revenues
    
    
    1,252,524
    
    
    
    1,213,924
    
    
    
    1,281,419OPERATING COSTS AND EXPENSES:Cost of
services and sales
    
    
    344,418
    
    
    
    312,588
    
    
    
    313,575Selling,
general and administrative expenses
    
    
    487,393
    
    
    
    417,784
    
    
    
    607,899Early retirement and voluntary separation provision
    
    
    1,687
    
    
    
    2,786
    
    
    
    17,347Depreciation and amortization
    
    
    242,229
    
    
    
    261,036
    
    
    
    251,735Total operating costs and expenses
    
    
    1,075,727
    
    
    
    994,194
    
    
    
    1,190,556OPERATING INCOME
    
    
    176,797
    
    
    
    219,730
    
    
    
    90,863OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (46,362
    )
    
    
    (43,284
    )
    
    
    (53,175
    )Equity income from joint venture
    
    
    2,660
    
    
    
    2,454
    
    
    
    2,151Minority interest in consolidated subsidiary
    
    
    (2,919
    )
    
    
    (2,749
    )
    
    
    (1,529
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    (11,800
    )Total other income (expense), net
    
    
    (46,621
    )
    
    
    (43,579
    )
    
    
    (64,353
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    130,176
    
    
    
    176,151
    
    
    
    26,510INCOME TAX EXPENSE
    
    
    50,788
    
    
    
    67,762
    
    
    
    8,183INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    79,388
    
    
    
    108,389
    
    
    
    18,327CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of
income tax provision of $40,672
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    79,388
    
    
    $
    108,389
    
    
    $
    76,856
 The accompanying notes are an integral part of these financial statements.
 43




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
  AccumulatedCommon
    
    
    Deferred ESOP
    
    
    Subscription
    
    
    Retained
    
    
    Other ComprehensiveStock
    
    
    Compensation
    
    
    Receivable
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE, DECEMBER 31, 2002
    
    $
    703,270
    
    
    $
    (27,408
    )
    
    $
    (76,093
    )
    
    $
    155,789
    
    
    $
    (90,182
    )
    
    $
    665,376Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,125
    )
    
    
    
    
    
    
    (68,125
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (3,422
    )
    
    
    
    
    
    
    
    
    
    
    (3,422
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    614
    
    
    
    1,255
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,869Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,856
    
    
    
    
    
    
    
    76,856Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,203
    )
    
    
    (11,203
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,653BALANCE DECEMBER 31, 2003
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    (39,515
    )
    
    $
    164,520
    
    
    $
    (101,385
    )
    
    $
    701,351Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,953
    )
    
    
    
    
    
    
    (61,953
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    502
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,389
    
    
    
    
    
    
    
    108,389Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,320
    )
    
    
    (65,320
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,069BALANCE DECEMBER 31, 2004
    
    $
    704,386
    
    
    $
    (25,172
    )
    
    $
    
    
    
    $
    210,956
    
    
    $
    (166,705
    )
    
    $
    723,465Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,467
    )
    
    
    
    
    
    
    (61,467
    )Release of ESOP shares
    
    
    1,130
    
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,260Loan to ESOP
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,388
    
    
    
    
    
    
    
    79,388Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,797
    )
    
    
    (4,797
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,591BALANCE DECEMBER 31, 2005
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    
    
    
    $
    228,877
    
    
    $
    (171,502
    )
    
    $
    736,849
 The accompanying notes are an integral part of these financial statements.
 44




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    79,388
    
    
    $
    108,389
    
    
    $
    76,856Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    242,229
    
    
    
    261,036
    
    
    
    251,735Provision for uncollectible accounts
    
    
    47,273
    
    
    
    29,746
    
    
    
    64,515Abandoned software project
    
    
    
    
    
    
    
    
    
    
    32,262Wireless asset impairment charge
    
    
    
    
    
    
    
    
    
    
    11,800Deferred income tax expense
    
    
    42,828
    
    
    
    50,495
    
    
    
    2,371Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (58,529
    )Employee retirement benefits expense
    
    
    102,119
    
    
    
    106,018
    
    
    
    116,982Accretion of discount on subscription receivable
    
    
    
    
    
    
    (485
    )
    
    
    (3,422
    )Equity income from joint venture
    
    
    (2,660
    )
    
    
    (2,454
    )
    
    
    (2,151
    )Early retirement and voluntary separation provision
    
    
    1,687
    
    
    
    2,786
    
    
    
    17,347Release of ESOP shares
    
    
    2,260
    
    
    
    1,483
    
    
    
    1,869Gain on sale of building
    
    
    (1,096
    )
    
    
    (3,349
    )
    
    
    (824
    )Minority interest in consolidated subsidiary
    
    
    2,919
    
    
    
    2,749
    
    
    
    1,529Changes in assets and liabilities:Accounts receivable
    
    
    (3,989
    )
    
    
    (13,413
    )
    
    
    (8,264
    )Inventory and supplies
    
    
    (19,273
    )
    
    
    (6,956
    )
    
    
    (3,163
    )Prepaid expenses and other assets
    
    
    17,854
    
    
    
    10,888
    
    
    
    (14,347
    )Other current and non-current liabilities
    
    
    (100,481
    )
    
    
    (52,283
    )
    
    
    15,723Pension and other post-employment benefits
    
    
    (171,680
    )
    
    
    (205,381
    )
    
    
    (145,472
    )Net cash provided by operating activities
    
    
    239,378
    
    
    
    289,269
    
    
    
    356,817CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (145,800
    )
    
    
    (171,638
    )
    
    
    (176,278
    )Proceeds from sale of building
    
    
    2,778
    
    
    
    5,436
    
    
    
    6,000Net cash used in investing activities
    
    
    (143,022
    )
    
    
    (166,202
    )
    
    
    (170,278
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    
    
    
    
    40,000
    
    
    
    40,000Loan to ESOP
    
    
    (2,000
    )
    
    
    
    
    
    
    Net repayments of short-term debt, including
capital leases
    
    
    (41,149
    )
    
    
    (59,500
    )
    
    
    (170,349
    )Dividends Paid
    
    
    (61,467
    )
    
    
    (61,953
    )
    
    
    (68,125
    )Net cash used in financing activities
    
    
    (104,616
    )
    
    
    (81,453
    )
    
    
    (198,474
    )NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    (8,260
    )
    
    
    41,614
    
    
    
    (11,935
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
    
    
    63,346
    
    
    
    21,732
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    55,086
    
    
    $
    63,346
    
    
    $
    21,732
 The accompanying notes are an integral part of these financial statements.
 45




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##### Table of Contents



TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 1.
    
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the Company or we),
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 also holds a 67%
interest in Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of the Companys
shareholders, holds the remaining 33% interest. The Company also holds a 24% interest in
Verizon Information Services Puerto Rico, Inc. S. en C. (VISI), in which GTE Holdings (Puerto
Rico) LLC, the Companys majority shareholder also holds a 36% interest. The Company is the
largest telecommunications service provider in Puerto Rico. PRTC is the incumbent local
exchange carrier for the island of Puerto Rico. Wireline service is provided by PRTC and
cellular service is provided by the wireless division of PRTC, under the brand of Verizon
Wireless Puerto Rico (Verizon Wireless). The Companys off-island long distance service is
provided by PRTLD. The Companys dial-up Internet access service is provided by Coqui.net and
the directory publishing revenues are generated by VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest and management control over the Company on March 2, 1999 from the Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In the
Acquisition, Popular, Inc. 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, Inc. acquired an additional 12% and 3%
interest in the Company, respectively, by exercising an option each held since the Acquisition
(the Option Exercise). Verizon and Popular, Inc. obtained the additional ownership interest
from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and Popular, Inc.
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 the Share
Option Agreement, an agreement entered into at the time of the Acquisition. As a result,
Verizon now owns 52%, PRTA owns 28%, Popular Inc. owns 13% and the Employee Stock Ownership Plan
owns 7% of the outstanding capital stock of the Company. The Company is an affiliate of
Verizon, which consolidates the Companys financial results with its own financial results.2.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying audited consolidated financial statements have been prepared in accordance with
 U.S. generally accepted accounting principles and with the rules and regulations
of the Securities and Exchange Commission (SEC). The Company is a holding company with
no significant assets or operations other than its investment in its subsidiaries. PRTC is a
wholly owned subsidiary of the Company, and fully and unconditionally guarantee payment of the
senior notes and the commercial paper.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its controlled
subsidiary companies, which are wholly owned or majority owned. All significant intercompany
accounts and transactions have been eliminated.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 46




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##### Table of Contents



Revenue Recognition
        Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  47




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##### Table of Contents



Inventory and Supplies
  Property, Plant and Equipment and Depreciation
   Goodwill and Other Intangible Assets
 Goodwill
  Indefinite Life Intangible Assets
    48




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##### Table of Contents



Definite Life Intangible Assets
   Software Costs
  Advertising Costs
  Repairs and maintenance
  Employee Benefit Plans
  Impairment or Disposal of Long-lived Assets
    49




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##### Table of Contents



Income Taxes
  Interest Rate Risk
  Minority Interest in Consolidated Subsidiary
  Reclassifications
  3.
    
    Accounting ChangeDirectory Revenue RecognitionEffective January 1, 2003, the Company changed its method of accounting for directory-publishing
revenues and related expenses from the point-of-publication method to the amortization method.
The cumulative effect of applying this accounting change to prior years was recognized as of
January 1, 2003 as a one-time, non-cash loss of $17 million ($13 million, after tax).Asset Retirement ObligationsOn January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations. This
statement provides the accounting for the cost of legal obligations associated with the
retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value
of a liability for asset retirement obligations in the period in which the obligations are
incurred and capitalize that amount as part of the book value of the long-lived asset. We have
determined that the Company does not have a material legal obligation to remove long-lived assets
as described by this statement. However, we have included estimated removal costs in our group
depreciation models. These costs have increased depreciation expense and accumulated
depreciation for future removal costs for existing assets. These removal costs are recorded as a
reduction to accumulated depreciation when the assets are retired and removal costs are incurred.For some assets, such as telephone poles, the removal costs exceed salvage value. Under the
provisions of SFAS No. 143, we are required to exclude costs of removal from our depreciation
rates for assets for which the removal costs exceed salvage. Accordingly, in connection with the
initial adoption of this standard on January 1, 2003, we have reversed accrued costs of removal
in excess of salvage from our accumulated depreciation accounts for these assets. The adjustment
was recorded as a cumulative effect of an accounting change, resulting in the recognition of an
estimated gain of $117 million ($71 million after-tax). Effective January 1, 2003, we began
expensing costs of removal in excess of salvage for these assets as incurred. The impact of this
change in accounting resulted in a decrease in depreciation expense and an increase in
operational and support expenses. The net increase to operating income in 2003, excluding the
cumulative effect adjustment, was approximately $12 million ($7 million after-tax).Additionally, no later than December 31, 2005, FASB Interpretation (FIN) No. 47, Accounting for
Conditional Asset retirement Obligations  an interpretation of FASB Statement No. 143 became
effective. There was no impact of the adoption of FIN No. 47 on the Companys results of
operations or financial position.
 50




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##### Table of Contents



4.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of:
 Remaining Useful
    
    
    December 31,
    
    
    December 31,Lives (Yrs)
    
    
    2005
    
    
    2004(In thousands)Current
    
    
    PreviousOutside plant
    
    
    9.0
    
    
    
    9.2
    
    
    $
    2,198,892
    
    
    $
    2,148,244Central office and transmission equipment
    
    
    3.8
    
    
    
    4.4
    
    
    
    1,282,713
    
    
    
    1,228,001Equipment and other
    
    
    2.7
    
    
    
    2.7
    
    
    
    273,245
    
    
    
    304,716Buildings
    
    
    14.6
    
    
    
    15.0
    
    
    
    324,988
    
    
    
    321,928Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    25,500
    
    
    
    26,003Gross plant in service
    
    
    
    
    
    
    
    
    
    
    4,105,338
    
    
    
    4,028,892Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,772,489
    
    
    
    2,637,434Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,332,849
    
    
    
    1,391,458Construction in progress
    
    
    
    
    
    
    
    
    
    
    18,661
    
    
    
    68,001Total
    
    
    
    
    
    
    
    
    
    $
    1,351,510
    
    
    $
    1,459,459
  5.
    
    Goodwill
  CarryingValueDecember 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
 6.
    
    Intangibles
 CarryingValueDecember 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 51




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##### Table of Contents



December 31, 2005
    
    
    December 30, 2004(In thousands)Definite Life:
    
    Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    Book ValueWireline trade name
    
    $
    48,400
    
    
    $
    13,218
    
    
    $
    35,182
    
    
    $
    48,400
    
    
    $
    11,282
    
    
    $
    37,118Software licenses
    
    
    126,720
    
    
    
    61,520
    
    
    
    65,200
    
    
    
    91,759
    
    
    
    41,032
    
    
    
    50,727Total Definite Life
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    100,382
    
    
    $
    140,159
    
    
    $
    52,314
    
    
    $
    87,845Plus: Total Indefinite
Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    209,357
    
    
    $
    140,159
    
    
    $
    52,314
    
    
    $
    196,820
  Expected amortization expense for the years ending December 31,:2006
    
    $
    19,3352007
    
    
    17,2932008
    
    
    12,8782009
    
    
    7,9282010
    
    
    1,936
 7.
    
    Other assets
 December 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Deferred activation and installation costs
    
    $
    68,422
    
    
    $
    72,775Notes receivable-equipment sales
    
    
    1,995
    
    
    
    5,675Deferred pension asset
    
    
    41,729
    
    
    
    23,747Deferred financing costs, net
    
    
    1,359
    
    
    
    2,307Other assets
    
    
    1,766
    
    
    
    4,598Total
    
    $
    115,271
    
    
    $
    109,102
 8.
    
    Pension PlanThe 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 obligation.The pension benefit is composed of two elements. 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, approximating nine to twelve months of salary.There are separate trusts for the annuity and the lump sum benefit with a further separation
of the annuity benefit into a plan for the UIET union, for the HIETEL union and management
employees. Health care and life insurance benefits are provided to retirees.The following table sets forth the status of the plans and the amounts in the financial
statements as of December 31, 2005 and 2004:
 52




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##### Table of Contents



Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Change in benefit obligation:Benefit obligation at beginning
of period
    
    $
    1,286,932
    
    
    $
    1,142,433
    
    
    $
    543,390
    
    
    $
    622,770Service cost
    
    
    23,825
    
    
    
    20,551
    
    
    
    7,061
    
    
    
    6,321Interest cost
    
    
    73,694
    
    
    
    72,600
    
    
    
    32,258
    
    
    
    32,226Actuarial loss
    
    
    33,311
    
    
    
    139,900
    
    
    
    72,445
    
    
    
    (24,110
    )Plan amendments-ERW
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    696Plan amendments-Other
    
    
    21,990
    
    
    
    6,239
    
    
    
    
    
    
    
    (66,605
    )Expected expenses
    
    
    
    
    
    
    (4,809
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (85,677
    )
    
    
    (90,921
    )
    
    
    (27,353
    )
    
    
    (27,908
    )Benefit obligation at end of
period
    
    $
    1,354,075
    
    
    $
    1,286,932
    
    
    $
    627,801
    
    
    $
    543,390Change in plan assets:Fair value of plan assets at
beginning of period
    
    
    870,110
    
    
    
    718,192
    
    
    
    
    
    
    
    Actual return (loss) on plan assets
    
    
    60,732
    
    
    
    65,366
    
    
    
    
    
    
    
    Employer contributions
    
    
    144,327
    
    
    
    177,473
    
    
    
    27,353
    
    
    
    27,908Benefits paid
    
    
    (85,677
    )
    
    
    (90,921
    )
    
    
    (27,353
    )
    
    
    (27,908
    )Fair value of plan assets at end
of period
    
    $
    989,492
    
    
    $
    870,110
    
    
    $
    
    
    
    $
    Funded status:Funded status at end of year
    
    
    (364,583
    )
    
    
    (416,822
    )
    
    
    (627,801
    )
    
    
    (543,390
    )Unrecognized actuarial loss, net
    
    
    395,179
    
    
    
    372,442
    
    
    
    369,317
    
    
    
    315,323Unrecognized prior service cost (benefit)
    
    
    40,608
    
    
    
    22,267
    
    
    
    (70,596
    )
    
    
    (79,822
    )Unrecognized net transition
obligation
    
    
    1,121
    
    
    
    1,480
    
    
    
    15,925
    
    
    
    18,127Net amount recognized
    
    $
    72,325
    
    
    $
    (20,633
    )
    
    $
    (313,155
    )
    
    $
    (289,762
    )Balance sheet amounts consist of:Accrued benefit liability
    
    $
    (250,240
    )
    
    $
    (317,353
    )
    
    $
    (313,155
    )
    
    $
    (289,762
    )Other asset (Note 7)
    
    
    41,729
    
    
    
    23,747
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    280,836
    
    
    
    272,973
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    72,325
    
    
    $
    (20,633
    )
    
    $
    (313,155
    )
    
    $
    (289,762
    )
     At December 31,
    
    2005
    
    2004Projected benefit obligation
    
    $
    1,354,075
    
    
    $
    1,286,932Accumulated benefit obligation
    
    
    1,239,733
    
    
    
    1,187,463Fair value of plan assets
    
    
    989,492
    
    
    
    870,110
 53




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##### Table of Contents



Net Periodic Cost
   Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Service cost
    
    $
    23,825
    
    
    $
    20,551
    
    
    $
    18,092
    
    
    $
    7,061
    
    
    $
    6,321
    
    
    $
    8,701Interest cost
    
    
    73,694
    
    
    
    72,600
    
    
    
    67,299
    
    
    
    32,258
    
    
    
    32,226
    
    
    
    35,511Expected return on plan assets
    
    
    (72,875
    )
    
    
    (59,384
    )
    
    
    (46,311
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    359
    
    
    
    359
    
    
    
    430
    
    
    
    2,202
    
    
    
    2,202
    
    
    
    2,202Prior service cost (benefit)
    
    
    3,650
    
    
    
    5,257
    
    
    
    4,743
    
    
    
    (9,225
    )
    
    
    (5,373
    )
    
    
    (2,513
    )Actuarial loss, net
    
    
    22,719
    
    
    
    17,008
    
    
    
    13,124
    
    
    
    18,451
    
    
    
    14,251
    
    
    
    15,704Net amortization and deferral
    
    
    51,372
    
    
    
    56,391
    
    
    
    57,377
    
    
    
    50,747
    
    
    
    49,627
    
    
    
    59,605Effect of early retirement program
    
    
    
    
    
    
    939
    
    
    
    8,714
    
    
    
    
    
    
    
    696
    
    
    
    6,222Total
    
    $
    51,372
    
    
    $
    57,330
    
    
    $
    66,091
    
    
    $
    50,747
    
    
    $
    50,323
    
    
    $
    65,827
 Additional Information
  Pension and Lump Sum Benefits(In thousands)
    
    2005
    
    2004Increase in minimum liability included in other
comprehensive income, before tax
    
    
    7,863
    
    
    
    106,767
 Assumptions
  Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2005
    
    2004
    
    2005
    
    2004Discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.85
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
 54




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##### Table of Contents



Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2005
    
    2004
    
    2003
    
    2005
    
    2004
    
    2003Discount rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    6.25
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
   Post-Retirement Benefits2005
    
    2004
    
    2003Health care cost trend rate assumed for next year
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %Rate to which cost trend rate gradually declines
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    4.75
    %Year the rate reaches level it is assumed to remain thereafter
    
    
    2010
    
    
    
    2008
    
    
    
    2007
  One-percentage-point
 Post-Retirement Benefits(In thousands)
    
    Increase
    
    DecreaseEffect on 2005 total service and interest cost
    
    $
    5,972
    
    
    $
    (5,135
    )Effect on post-retirement benefit obligation as of December 31, 2005
    
    
    75,512
    
    
    
    (66,550
    )
 Plan Assets
  2005
    
    2004Equity securities
    
    
    61
    %
    
    
    60
    %Debt securities
    
    
    36
    %
    
    
    37
    %Other
    
    
    3
    %
    
    
    3
    %100
    %
    
    
    100
    %
  55




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##### Table of Contents



Cash Flows
  Estimated Future Benefit Payments
  Pension and Lump
    
    Post-Retirement(In thousands)
    
    Sum Benefits
    
    Benefits2006
    
    $
    78,754
    
    
    $
    28,7172007
    
    
    80,752
    
    
    
    30,1702008
    
    
    80,151
    
    
    
    31,3182009
    
    
    80,200
    
    
    
    32,1212010
    
    
    79,817
    
    
    
    32,9342011-2015
    
    
    394,861
    
    
    
    175,945
  Post-Retirement(In thousands)
    
    Benefits2006
    
    $
    4,3762007
    
    
    4,6032008
    
    
    4,7832009
    
    
    4,9092010
    
    
    5,0352011-2015
    
    
    26,958
 Early Retirement and Voluntary Separation Provision
    56




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##### Table of Contents



9. Other Current Liabilities
 December 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Accounts payable
    
    $
    43,719
    
    
    $
    33,379Accrued expenses
    
    
    74,805
    
    
    
    105,129Employee benefit accruals
    
    
    39,991
    
    
    
    52,630Carrier payables
    
    
    7,812
    
    
    
    16,812Taxes
    
    
    730
    
    
    
    1,868Interest
    
    
    5,904
    
    
    
    6,369Total
    
    $
    172,961
    
    
    $
    216,187
 10. Debt
 December 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    399,990
    
    
    $
    399,966Due May 15, 2009 at 6.80%
    
    
    299,929
    
    
    
    299,910Term credit facilities:Due May 16, 2005 at 57 basis points over LIBOR
    
    
    
    
    
    
    30,000Due August 19, 2005 at 70 basis points over LIBOR
    
    
    
    
    
    
    63,000Commercial paper
    
    
    52,000
    
    
    
    Deferred derivative and Interest rate swap
    
    
    (107
    )
    
    
    3,657Capital leases
    
    
    42
    
    
    
    191Total
    
    
    751,854
    
    
    
    796,724Less short-term debt
    
    
    452,042
    
    
    
    93,168Long-term debt
    
    $
    299,812
    
    
    $
    703,556
    57




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##### Table of Contents



Year
    
    
    
    
    
    Amount(In thousands)2006
    
    Senior note
    
    $
    400,0002009
    
    Senior note
    
    
    300,000Total
    
    
    
    
    
    $
    700,000
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##### Table of Contents



11. Other Non-Current Liabilities
  December 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Deferred activation and installation revenues
    
    $
    68,422
    
    
    $
    72,775Deferred directory-publishing revenues
    
    
    
    
    
    
    14,065Customer deposits
    
    
    26,297
    
    
    
    26,520Other liabilities
    
    
    41,626
    
    
    
    73,421Total
    
    $
    136,345
    
    
    $
    186,781
 12.
    
    Deferred ESOP CompensationThe 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 year 2005, the ESOP entered into a new loan agreement amounting $2.0 million with the
Company to finance the ESOPs acquisition of Company stocks. Also, during year 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 Company stocks 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 ESOP released approximately 33,000 and 32,000
shares in 2005 and 2004, respectively. This release resulted in compensation expense of $2
million for the years ended December 31, 2005, 2004 and 2003, respectively, reflecting the market
value of the shares. The release of shares, based upon the per share price established at the
Acquisition, amounted to $1 million for December 31, 2005 and 2004, respectively, which is
reflected as a reduction of deferred ESOP compensation in equity.
 13.
    
    Shareholders EquityCommon StockCommon stock consisted of fifty million authorized no par value shares, of which twenty five
million shares were outstanding at December 31, 2005 and 2004.Subscription ReceivableThe subscription receivable reflects receipts from the PRTA originally recorded at its present
value (at an 8% discount rate). As part of the Acquisition agreement, the PRTA agreed to
contribute a total of $200 million in cash or stock as a capital
 59




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##### Table of Contents



contribution in equal
installments of $40 million over five years beginning on March 2, 2000. The Company employed the
$200 million capital contribution to partially fund it under funded pension and other
post-employment benefit obligations, as agreed. The stock purchase agreement required the
Company to contribute $66 million, which included the $40 million received from PRTA, to the
pension plan immediately upon receipt of the proceeds each year. The Company received the final
$40 million installment in March 2004 and made the required pension payment of $66 million. All
installments were made in cash.Accumulated Other Comprehensive LossThe 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.The accumulated other comprehensive loss amount as of December 31, 2005 and 2004 has been
adjusted in the amount of $5 million and $65 million, respectively, in order to reflect the
after-tax amount in accordance with the provisions of SFAS No.130, Reporting Comprehensive
Income.DividendsTo the extent funds are legally, 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:
 2005
    
    
    2004
    
    
    2003(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)4th Quarter
    
    $
    27,144
    
    

4th Quarter
    
    $
    22,990
    
    

4th Quarter
    
    $
    3rd Quarter
    
    
    16,200
    
    

3rd Quarter
    
    
    26,577
    
    

3rd Quarter
    
    
    2nd Quarter
    
    
    14,875
    
    

2nd Quarter
    
    
    12,386
    
    

2nd Quarter
    
    
    68,1251st Quarter
    
    
    3,248
    
    

1st Quarter
    
    
    
    
    

1st Quarter
    
    
    Total
    
    $
    61,467
    
    
    Total
    
    $
    61,953
    
    
    Total
    
    $
    68,125
 The senior notes indentures and credit facility agreements do not contain dividend
restrictions. The Company declared and paid legal dividends of $63 million, $66 million and $68
million during 2005, 2004 and 2003, respectively. However, these the legal dividends were
adjusted for the dividends of the ESOP unallocated shares by $2 million and $4 million during
2005 and 2004, respectively, only for financial reporting purposes.14.
    
    Income TaxesThe Company and its subsidiaries file separate income tax returns, as consolidated returns are
not allowed under the provisions of the 1994 Puerto Rico Internal Revenue Code, as amended (the
Code).Provision for income tax is determined by applying the maximum statutory tax rate of 39% to
pretax income. During the year 2005, 2004 and 2003, the Company recorded an income tax provision
of $51 million, $68 million and $8 million, respectively, as
set forth below:
 2005
    
    
    2004
    
    
    2003(In thousands)Current
    
    $
    7,960
    
    
    $
    17,267
    
    
    $
    5,812Deferred
    
    
    42,828
    
    
    
    50,495
    
    
    
    2,371Total
    
    $
    50,788
    
    
    $
    67,762
    
    
    $
    8,183
 60




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##### Table of Contents



A reconciliation of the provision to the amount computed by applying the statutory rate for
the year ended December 31, 2005, 2004 and 2003 is as follows:
 Year ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)Provision computed at statutory rate
    
    
    39.0
    %
    
    
    39.0
    %
    
    
    39.0
    %Effect of income tax provision (benefit) as a result of:Book income not subject to tax
    
    
    (0.7
    )
    
    
    (0.7
    )
    
    
    (9.5
    )Additional deduction for tax purposes
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (1.5
    )Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.638.2
    %
    
    
    37.9
    %
    
    
    28.6
    %
 The amount of deferred income tax asset as of December 31, 2005 and 2004 is as follows:
 2005
    
    
    2004(In thousands)Goodwill and intangibles
    
    $
    47,657
    
    
    $
    62,250Employee benefit liabilities
    
    
    227,712
    
    
    
    251,357Net loss carry-forward and other
    
    
    (51,192
    )
    
    
    (49,667
    )Total
    
    $
    224,177
    
    
    $
    263,940
 Management believes that realization of the deferred income tax asset is more likely than
not, based on its evaluation of the Companys anticipated taxable income over the period of years
that the temporary differences are expected to become tax deductions.A new Puerto Rico law was passed in August 2005, providing for an additional 2.5% tax to 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%. Should this
law take effect, its estimated impact would be to increase the deferred tax asset by $3.2 million
and to decrease the income tax provision by $2.8 million as of December 31, 2005.15.
    
    Related Party TransactionsDuring the years ended December 31, 2005, 2004 and 2003, the Company had the following
significant transactions with affiliated companies:
 
    
    At December 31, 2005, the Company maintained an outstanding $40 million working capital
credit facility with Popular, Inc. No balance was outstanding under this facility as of
December 31, 2005. This affiliate provides the Company with general banking services, such
as lock-box and payroll. In addition, the Company has a contract with this affiliate by
which they print and send the monthly billings to the Companys wireless customers. The
charges for all of these services amounted to approximately $9 million for year 2005 and
$10 million for each of the years 2004 and 2003.
    
    As a result of the Acquisition, the Company entered into a five-year Management and
Technology License Agreement with Verizon which expired on March 1, 2004. Under this
agreement, affiliates of Verizon provided advice and direction related to the
administration and operations of the Company, as well as intellectual property or software.
Since April 2004, Verizon provides management advice and services, general legal and
regulatory advice, as well as a license to use certain technology, under an annual
agreement with automatic renewal periods. Fees for these services amounted to $7 million,
$10 million and $24 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
    
    In January 2000, the Company entered into a joint venture agreement with VISI the
largest yellow page publishing company in Puerto Rico. The Company generated earnings of
$3 million during year ended December 31, 2005 and $2 million during years ended 2004 and
2003, respectively, for its approximate 24% share in VISI.
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##### Table of Contents




    
    The Company also enters into transactions with affiliates for the purchase of materials
and supplies used in the construction and expansion of its telecommunications network. Such
transactions are subject to conditions similar to transactions with independent third
parties. The Company also participates with affiliates of shareholders in sharing the cost
of development of computer software programs by third party vendors. The shareholders
receive no compensation for arranging the development of such systems. In addition, the
Company reimburses shareholders and affiliates for the direct cost of a limited number of
employees that work at the Company in management positions.
 16.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial instruments at December 31 are as follows:
 December 31,
    
    December 31,2005
    
    2004Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    55,086
    
    
    $
    55,086
    
    
    $
    63,346
    
    
    $
    63,346Accounts receivable
    
    
    227,629
    
    
    
    227,629
    
    
    
    270,914
    
    
    
    270,914Liabilities:Other current liabilities
    
    $
    172,961
    
    
    $
    172,961
    
    
    $
    216,187
    
    
    $
    216,187Short-term debt
    
    
    452,042
    
    
    
    454,172
    
    
    
    93,168
    
    
    
    93,168Long-term debt, including interest rate swap
    
    
    299,812
    
    
    
    308,883
    
    
    
    703,556
    
    
    
    739,470
 17.
    
    Segment ReportingThe 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, Internet access and public
phone service;
    
    Access services to long distance carriers, competitive local exchange carriers, and
cellular and paging operators to originate and terminate calls on our 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:
 
    
    Cellular service; and
    
    Wireless equipment sales.
 The accounting policies of the segments are the same as those followed by the Company (see Note 2). The Company accounts for intersegment revenues at market prices.
 62




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##### Table of Contents



For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)Wireline:Revenues-Local services
    
    $
    615,240
    
    
    $
    596,214
    
    
    $
    612,114Access services
    
    
    233,896
    
    
    
    271,127
    
    
    
    296,506Long distance services
    
    
    65,175
    
    
    
    65,704
    
    
    
    113,761Directory services and other
    
    
    79,789
    
    
    
    71,059
    
    
    
    66,820Total revenues
    
    $
    994,100
    
    
    $
    1,004,104
    
    
    $
    1,089,201Operating income
    
    $
    164,843
    
    
    $
    232,703
    
    
    $
    102,984Wireless:Revenues-Cellular services
    
    $
    244,500
    
    
    $
    199,074
    
    
    $
    187,676Equipment sales and other
    
    
    44,392
    
    
    
    26,658
    
    
    
    14,415Total revenues
    
    $
    288,892
    
    
    $
    225,732
    
    
    $
    202,091Operating income (loss)
    
    $
    11,954
    
    
    $
    (12,973
    )
    
    $
    (12,121
    )Consolidated:Revenues for reportable segments
    
    $
    1,282,992
    
    
    $
    1,229,836
    
    
    $
    1,291,292Elimination of intersegment revenues
    
    
    (30,468
    )
    
    
    (15,912
    )
    
    
    (9,873
    )Consolidated revenues
    
    $
    1,252,524
    
    
    $
    1,213,924
    
    
    $
    1,281,419Operating income
    
    $
    176,797
    
    
    $
    219,730
    
    
    $
    90,863
 As ofDecember 31,2005
    
    
    2004AssetsWireline assets
    
    $
    2,331,252
    
    
    $
    2,474,295Wireless assets
    
    
    422,557
    
    
    
    357,291Segment assets
    
    $
    2,753,809
    
    
    $
    2,831,586Elimination of intersegment assets
    
    
    (375,850
    )
    
    
    (286,304
    )Consolidated assets
    
    $
    2,377,959
    
    
    $
    2,545,282
 63




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##### Table of Contents



18.
    
    Supplemental Cash Flow InformationCash paid for interest for the year ended December 31, 2005, 2004 and 2003 amounted to
approximately $50 million, $47 million, and $49 million, respectively. During the years ended
December 31, 2005 and 2004, the Company paid income taxes amounting to $6 million each. During
the year ended December 31, 2003, the Company paid income taxes amounting to $33 million.19.
    
    LeasesThe Company has capital and operating leases for certain facilities and equipment. Future minimum
lease payments under non-cancelable capital and operating leases are as follows:
 Capital
    
    
    Operating(In thousands)Year ending December 31,2006
    
    $
    49
    
    
    $
    15,8972007
    
    
    
    
    
    
    15,5102008
    
    
    
    
    
    
    14,9062009
    
    
    
    
    
    
    15,6312010
    
    
    
    
    
    
    15,555Thereafter
    
    
    
    
    
    
    10,899Total minimum lease payments
    
    
    49
    
    
    
    88,398Less amount representing interest
    
    
    7
    
    
    
    Present value of minimum lease payments
    
    $
    42
    
    
    $
    88,398
 Lease costs for the year ended December 31, 2005 amounted to approximately $15 million. For
the years ended December 31, 2004 and 2003 lease costs were $14 million each.20.
    
    Subsequent Event
  21.
    
    Contingencies and Regulatory Matters
 REGULATORY AND COMPETITIVE TRENDS
   64




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INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE (K-2)
  SINGLE ZONE
    PUBLIC
TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS
 .
 TOUCHTONE CHARGES
     65




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CTI ASSET TRANSFER
   PRICE CAP REGULATION
    66




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INSULAR RELIEF
  MUNICIPAL RIGHT OF WAY FEES
  Right of Way Litigations
    
    StatusUS District Court:1. PRTC v. Municipality of Caguas
    
    PRTCs challenge of Caguas ordinance is stayed pending resolution of the Guayanilla
case.2. PRTC v. Municipality of Guayanilla
    
    Federal District Court found the ordinance violative of Section 253. Guayanillas
appeal is pending before the First Circuit Court of Appeals.3. PRTC v. Municipality of Ponce
    
    Declaratory judgment action filed in federal and local court on November 22 and
November 28, 2005, respectively. Ponce was served with summons.4. PRTC v. Municipality San Juan
    
    The case was dismissed when San Juan withdrew its ordinance.5. PRTC v. Municipality of Vega Baja
    
    Declaratory judgment action filed in federal and local court on February 22, 2006.
Vega Baja was served with summons.6. PRTC v. Municipality of Cataño
    
    Declaratory judgment action filed in federal and local court on February 28, 2006.
Cataño served with summons.7. PRTC v. Municipality of Utuado
    
    Declaratory judgment action filed in federal and local court on March 24, 2006.
Pending summons.Local Courts:1. PRTC v. Municipality of Caguas
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.2. PRTC v. Municipality of Ponce
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.3. PRTC v. Municipality San Juan
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.4. PRTC v. Municipality of Vega Baja
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.5. PRTC v. Municipality of Cataño
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.6. PRTC v. Municipality of Utuado
    
    Filed a motion to stay. Waiting for First Circuit Court decision on Guayanillas case.
 67




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INTERCONNECTION DISPUTE
  68




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##### Table of Contents



22. Quarterly Financial Data
  (In thousands)First Quarter
    
    
    
    
    
    Second Quarter
    
    
    
    
    
    Third Quarter
    
    
    
    
    
    Fourth Quarter2005Revenues
    
    $
    312,343
    
    
    
    
    
    
    $
    295,637
    
    
    
    
    
    
    $
    322,391
    
    
    
    
    
    
    $
    322,153Operating costs and expenses
    
    
    265,720
    
    
    
    
    
    
    
    265,688
    
    
    
    
    
    
    
    273,511
    
    
    
    
    
    
    
    270,808Operating income
    
    $
    46,623
    
    
    
    
    
    
    $
    29,949
    
    
    
    
    
    
    $
    48,880
    
    
    
    
    
    
    $
    51,345Net income
    
    $
    21,988
    
    
    
    
    
    
    $
    10,967
    
    
    
    
    
    
    $
    22,216
    
    
    
    
    
    
    $
    24,2172004Revenues
    
    $
    316,824
    
    
    
    
    
    
    $
    311,738
    
    
    
    
    
    
    $
    300,941
    
    
    
    
    
    
    $
    284,421Operating costs and expenses
    
    
    266,466
    
    
    
    
    
    
    
    213,400
    
    
    
    
    
    
    
    251,479
    
    
    
    
    
    
    
    262,849Operating income
    
    $
    50,358
    
    
    
    
    
    
    $
    98,338
    
    
    
    
    
    
    $
    49,462
    
    
    
    
    
    
    $
    21,572Net income
    
    $
    24,772
    
    
    
    
    
    
    $
    53,155
    
    
    
    
    
    
    $
    23,960
    
    
    
    
    
    
    $
    6,5022003Revenues (1)
    
    $
    325,442
    
    
    
    
    
    
    $
    326,667
    
    
    
    
    
    
    $
    308,836
    
    
    
    
    
    
    $
    320,474Operating costs and expenses (1)
    
    
    263,257
    
    
    
    
    
    
    
    300,479
    
    
    
    
    
    
    
    339,456
    
    
    
    
    
    
    
    287,364Operating income (1)
    
    $
    62,185
    
    
    
    
    
    
    $
    26,188
    
    
    
    
    
    
    $
    (30,620
    )
    
    
    
    
    
    $
    33,110Income before cumulative effect of
accounting change (1)
    
    $
    32,410
    
    
    
    
    
    
    $
    8,268
    
    
    
    
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    7,356Cumulative effect of accounting
change, net of tax (1)
    
    $
    58,529
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income (1)
    
    $
    90,939
    
    
    
    
    
    
    $
    8,268
    
    
    
    
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    7,356
 
 (1)
    
    During the second quarter of 2003, the Company changed its method of accounting for
directory-publishing revenues and related expenses from the point of publication method to the
amortization method, effective January 1, 2003 (see Note 3). The quarterly information for the
first quarter of 2003, which had been previously reported, has been restated. 69




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##### Table of Contents



Telecomunicaciones
de Puerto Rico, Inc.
 
 Schedule I
   70




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##### Table of Contents



Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    
    
    
    $
    55,086Intercompany accounts receivable
    
    
    504,484
    
    
    
    46,610
    
    
    
    54,995
    
    
    
    (606,089
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    227,804
    
    
    
    (175
    )
    
    
    
    
    
    
    227,629Deferred income tax
    
    
    718
    
    
    
    17,573
    
    
    
    33
    
    
    
    
    
    
    
    18,324Inventory and supplies, net
    
    
    
    
    
    
    47,430
    
    
    
    1
    
    
    
    
    
    
    
    47,431Prepaid expenses
    
    
    
    
    
    
    19,814
    
    
    
    757
    
    
    
    
    
    
    
    20,571Total current assets
    
    
    505,337
    
    
    
    390,361
    
    
    
    79,432
    
    
    
    (606,089
    )
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,342,915
    
    
    
    8,595
    
    
    
    
    
    
    
    1,351,510GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    311,819
    
    
    
    24,465
    
    
    
    
    
    
    
    336,284DEFERRED INCOME TAX
    
    
    
    
    
    
    207,038
    
    
    
    (33
    )
    
    
    (1,152
    )
    
    
    205,853INVESTMENT IN SUBSIDIARIES
    
    
    720,227
    
    
    
    
    
    
    
    
    
    
    
    (720,227
    )
    
    
    OTHER ASSETS
    
    
    300,978
    
    
    
    115,542
    
    
    
    
    
    
    
    (301,249
    )
    
    
    115,271TOTAL ASSETS
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    452,000
    
    
    $
    452,042
    
    
    $
    
    
    
    $
    (452,000
    )
    
    $
    452,042Intercompany accounts payable
    
    
    32,136
    
    
    
    86,430
    
    
    
    41,370
    
    
    
    (159,936
    )
    
    
    Other current liabilities
    
    
    5,745
    
    
    
    161,143
    
    
    
    5,793
    
    
    
    280
    
    
    
    172,961Total current liabilities
    
    
    489,881
    
    
    
    699,615
    
    
    
    47,163
    
    
    
    (611,656
    )
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    299,812
    
    
    
    299,917
    
    
    
    
    
    
    
    (299,917
    )
    
    
    299,812OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    695,273
    
    
    
    1,383
    
    
    
    3,084
    
    
    
    699,740Total liabilities
    
    
    789,693
    
    
    
    1,694,805
    
    
    
    48,546
    
    
    
    (908,489
    )
    
    
    1,624,555MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,555
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    705,516
    
    
    
    645,298
    
    
    
    41,143
    
    
    
    (686,441
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    228,877
    
    
    
    199,074
    
    
    
    22,770
    
    
    
    (221,844
    )
    
    
    228,877Accumulated other comprehensive loss
    
    
    (171,502
    )
    
    
    (171,502
    )
    
    
    
    
    
    
    171,502
    
    
    
    (171,502
    )Total shareholders equity
    
    
    736,849
    
    
    
    672,870
    
    
    
    63,913
    
    
    
    (736,783
    )
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959
 71




---



##### Table of Contents



Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    (149
    )
    
    $
    44,658
    
    
    $
    18,837
    
    
    $
    
    
    
    $
    63,346Intercompany accounts receivable
    
    
    342,749
    
    
    
    86,340
    
    
    
    47,423
    
    
    
    (476,512
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    270,807
    
    
    
    107
    
    
    
    
    
    
    
    270,914Deferred income tax
    
    
    718
    
    
    
    27,303
    
    
    
    33
    
    
    
    
    
    
    
    28,054Inventory and supplies, net
    
    
    
    
    
    
    28,157
    
    
    
    1
    
    
    
    
    
    
    
    28,158Prepaid expenses
    
    
    
    
    
    
    25,228
    
    
    
    1,388
    
    
    
    
    
    
    
    26,616Total current assets
    
    
    343,318
    
    
    
    482,493
    
    
    
    67,789
    
    
    
    (476,512
    )
    
    
    417,088PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,449,809
    
    
    
    9,650
    
    
    
    
    
    
    
    1,459,459GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    299,164
    
    
    
    24,583
    
    
    
    
    
    
    
    323,747DEFERRED INCOME TAX
    
    
    
    
    
    
    236,755
    
    
    
    
    
    
    
    (869
    )
    
    
    235,886INVESTMENT IN SUBSIDIARIES
    
    
    550,178
    
    
    
    
    
    
    
    
    
    
    
    (550,178
    )
    
    
    OTHER ASSETS
    
    
    706,035
    
    
    
    108,986
    
    
    
    
    
    
    
    (705,919
    )
    
    
    109,102TOTAL ASSETS
    
    $
    1,599,531
    
    
    $
    2,577,207
    
    
    $
    102,022
    
    
    $
    (1,733,478
    )
    
    $
    2,545,282LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    93,000
    
    
    $
    93,168
    
    
    $
    
    
    
    $
    (93,000
    )
    
    $
    93,168Intercompany accounts payable
    
    
    73,335
    
    
    
    280,296
    
    
    
    36,298
    
    
    
    (389,929
    )
    
    
    Other current liabilities
    
    
    6,195
    
    
    
    202,879
    
    
    
    7,218
    
    
    
    (105
    )
    
    
    216,187Total current liabilities
    
    
    172,530
    
    
    
    576,343
    
    
    
    43,516
    
    
    
    (483,034
    )
    
    
    309,355LONG-TERM DEBT, excluding current portion
    
    
    703,536
    
    
    
    699,895
    
    
    
    
    
    
    
    (699,875
    )
    
    
    703,556OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    793,177
    
    
    
    1,103
    
    
    
    (384
    )
    
    
    793,896Total liabilities
    
    
    876,066
    
    
    
    2,069,415
    
    
    
    44,619
    
    
    
    (1,183,293
    )
    
    
    1,806,807MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,010
    
    
    
    15,010SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    704,386
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    704,386Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,172
    )Retained earnings
    
    
    210,956
    
    
    
    188,905
    
    
    
    16,260
    
    
    
    (205,165
    )
    
    
    210,956Accumulated other comprehensive loss, net of taxes
    
    
    (166,705
    )
    
    
    (166,703
    )
    
    
    
    
    
    
    166,703
    
    
    
    (166,705
    )Total shareholders equity
    
    
    723,465
    
    
    
    507,792
    
    
    
    57,403
    
    
    
    (565,195
    )
    
    
    723,465TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,599,531
    
    
    $
    2,577,207
    
    
    $
    102,022
    
    
    $
    (1,733,478
    )
    
    $
    2,545,282
 72




---



##### Table of Contents



Condensed Consolidating Statements of Income
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    573,214
    
    
    $
    32,599
    
    
    $
    (9,990
    )
    
    $
    595,823Access services
    
    
    
    
    
    
    240,581
    
    
    
    
    
    
    
    (5,498
    )
    
    
    235,083Long distance services
    
    
    
    
    
    
    34,301
    
    
    
    37,187
    
    
    
    (2,312
    )
    
    
    69,176Cellular services
    
    
    
    
    
    
    242,675
    
    
    
    
    
    
    
    (1,427
    )
    
    
    241,248Directory and other services and sales
    
    
    
    
    
    
    120,589
    
    
    
    1,603
    
    
    
    (10,998
    )
    
    
    111,194Total revenues
    
    
    
    
    
    
    1,211,360
    
    
    
    71,389
    
    
    
    (30,225
    )
    
    
    1,252,524OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    
    
    
    
    1,050,204
    
    
    
    55,748
    
    
    
    (30,225
    )
    
    
    1,075,727OPERATING INCOME (LOSS)
    
    
    
    
    
    
    161,156
    
    
    
    15,641
    
    
    
    
    
    
    
    176,797OTHER INCOME (EXPENSE), NET
    
    
    79,388
    
    
    
    (45,066
    )
    
    
    1,377
    
    
    
    (82,320
    )
    
    
    (46,621
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    79,388
    
    
    
    116,090
    
    
    
    17,018
    
    
    
    (82,320
    )
    
    
    130,176INCOME TAX EXPENSE (BENEFIT)
    
    
    
    
    
    
    44,445
    
    
    
    6,343
    
    
    
    
    
    
    
    50,788NET INCOME
    
    $
    79,388
    
    
    $
    71,645
    
    
    $
    10,675
    
    
    $
    (82,320
    )
    
    $
    79,388
 73




---



##### Table of Contents



Condensed Consolidating Statements of Income
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    564,480
    
    
    $
    33,143
    
    
    $
    (11,025
    )
    
    $
    586,598Access services
    
    
    
    
    
    
    275,753
    
    
    
    
    
    
    
    (6,779
    )
    
    
    268,974Long distance services
    
    
    
    
    
    
    31,976
    
    
    
    37,246
    
    
    
    (332
    )
    
    
    68,890Cellular services
    
    
    
    
    
    
    196,426
    
    
    
    
    
    
    
    
    
    
    
    196,426Directory and other services and sales
    
    
    
    
    
    
    108,175
    
    
    
    1,125
    
    
    
    (16,264
    )
    
    
    93,036Total revenues
    
    
    
    
    
    
    1,176,810
    
    
    
    71,514
    
    
    
    (34,400
    )
    
    
    1,213,924OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (57
    )
    
    
    970,746
    
    
    
    57,905
    
    
    
    (34,400
    )
    
    
    994,194OPERATING INCOME
    
    
    57
    
    
    
    206,064
    
    
    
    13,609
    
    
    
    
    
    
    
    219,730OTHER INCOME (EXPENSE), NET
    
    
    108,043
    
    
    
    (41,197
    )
    
    
    437
    
    
    
    (110,862
    )
    
    
    (43,579
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    108,100
    
    
    
    164,867
    
    
    
    14,046
    
    
    
    (110,862
    )
    
    
    176,151INCOME TAX EXPENSE (BENEFIT)
    
    
    (289
    )
    
    
    62,835
    
    
    
    5,216
    
    
    
    
    
    
    
    67,762NET INCOME
    
    $
    108,389
    
    
    $
    102,032
    
    
    $
    8,830
    
    
    $
    (110,862
    )
    
    $
    108,389
 74




---



##### Table of Contents



Condensed Consolidating Statements of Income
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    586,427
    
    
    $
    29,769
    
    
    $
    (10,937
    )
    
    $
    605,259Access services
    
    
    
    
    
    
    301,681
    
    
    
    
    
    
    
    (5,880
    )
    
    
    295,801Long distance services
    
    
    
    
    
    
    74,232
    
    
    
    37,292
    
    
    
    (108
    )
    
    
    111,416Cellular services
    
    
    
    
    
    
    187,084
    
    
    
    
    
    
    
    
    
    
    
    187,084Directory services and other
    
    
    
    
    
    
    89,060
    
    
    
    
    
    
    
    (7,201
    )
    
    
    81,859Total revenues
    
    
    
    
    
    
    1,238,484
    
    
    
    67,061
    
    
    
    (24,126
    )
    
    
    1,281,419OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    
    
    
    
    1,161,290
    
    
    
    53,392
    
    
    
    (24,126
    )
    
    
    1,190,556OPERATING INCOME
    
    
    
    
    
    
    77,194
    
    
    
    13,669
    
    
    
    
    
    
    
    90,863OTHER INCOME (EXPENSE), NET
    
    
    76,856
    
    
    
    (63,061
    )
    
    
    237
    
    
    
    (78,385
    )
    
    
    (64,353
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    76,856
    
    
    
    14,133
    
    
    
    13,906
    
    
    
    (78,385
    )
    
    
    26,510INCOME TAX EXPENSE
    
    
    
    
    
    
    2,692
    
    
    
    5,491
    
    
    
    
    
    
    
    8,183INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    76,856
    
    
    
    11,441
    
    
    
    8,415
    
    
    
    (78,385
    )
    
    
    18,327CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    76,856
    
    
    $
    69,970
    
    
    $
    8,415
    
    
    $
    (78,385
    )
    
    $
    76,856
 75




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (2,623
    )
    
    $
    236,260
    
    
    $
    5,741
    
    
    $
    239,378CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (145,043
    )
    
    
    (757
    )
    
    
    (145,800
    )Proceeds from sale of building
    
    
    
    
    
    
    2,778
    
    
    
    
    
    
    
    2,778Net cash used in investing activities
    
    
    
    
    
    
    (142,265
    )
    
    
    (757
    )
    
    
    (143,022
    )CASH FLOWS FROM FINANCING ACTIVITIES:Loan to ESOP
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Net repayments of short-term debt, including
capital leases
    
    
    (41,000
    )
    
    
    (149
    )
    
    
    
    
    
    
    (41,149
    )Dividends paid
    
    
    (61,467
    )
    
    
    
    
    
    
    
    
    
    
    (61,467
    )Borrowings/(repayment) intercompany loans
    
    
    107,374
    
    
    
    (107,374
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    2,907
    
    
    
    (107,523
    )
    
    
    
    
    
    
    (104,616
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    284
    
    
    
    (13,528
    )
    
    
    4,984
    
    
    
    (8,260
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (149
    )
    
    
    44,658
    
    
    
    18,837
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    55,086
 76




---



##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (2,789
    )
    
    $
    282,571
    
    
    $
    9,487
    
    
    $
    289,269CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (171,690
    )
    
    
    52
    
    
    
    (171,638
    )Proceeds from sale of building
    
    
    
    
    
    
    5,436
    
    
    
    
    
    
    
    5,436Net cash provided by (used in) investing activities
    
    
    
    
    
    
    (166,254
    )
    
    
    52
    
    
    
    (166,202
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (59,463
    )
    
    
    (37
    )
    
    
    
    
    
    
    (59,500
    )Dividends paid
    
    
    (61,953
    )
    
    
    
    
    
    
    
    
    
    
    (61,953
    )Borrowings/(repayment) intercompany loans
    
    
    84,057
    
    
    
    (84,057
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    2,641
    
    
    
    (84,094
    )
    
    
    
    
    
    
    (81,453
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (148
    )
    
    
    32,223
    
    
    
    9,539
    
    
    
    41,614CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (1
    )
    
    
    12,434
    
    
    
    9,299
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (149
    )
    
    $
    44,657
    
    
    $
    18,838
    
    
    $
    63,346
 77




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCASH
PROVIDED BY OPERATING ACTIVITIES:
    
    $
    (3,038
    )
    
    $
    356,740
    
    
    $
    3,115
    
    
    $
    356,817CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (175,800
    )
    
    
    (478
    )
    
    
    (176,278
    )Proceeds from sale of building
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Net cash used in investing activities
    
    
    
    
    
    
    (169,800
    )
    
    
    (478
    )
    
    
    (170,278
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (170,162
    )
    
    
    (187
    )
    
    
    
    
    
    
    (170,349
    )Dividends paid
    
    
    (68,125
    )
    
    
    
    
    
    
    
    
    
    
    (68,125
    )Borrowings/(repayment) intercompany loans
    
    
    201,324
    
    
    
    (201,324
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,037
    
    
    
    (201,511
    )
    
    
    
    
    
    
    (198,474
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1
    )
    
    
    (14,571
    )
    
    
    2,637
    
    
    
    (11,935
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    1
    
    
    
    27,009
    
    
    
    6,657
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    
    
    
    $
    12,438
    
    
    $
    9,294
    
    
    $
    21,732
 78




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Telecomunicaciones de Puerto Rico, Inc.
 
 Schedule II
 AdditionsBalance at
    
    
    
    
    
    
    Charged
    
    
    DeductionsBeginning
    
    
    Charged to
    
    
    (Credited) to
    
    
    From
    
    
    Balance atDescription
    
    of Year
    
    
    Income
    
    
    Other Accounts (b)
    
    
    Reserves (a)
    
    
    Close of Year(Dollars in Million)December 31, 2005Allowance for uncollectible
accounts
    
    $
    106
    
    
    $
    47
    
    
    $
    
    
    
    $
    (76
    )
    
    $
    77December 31, 2004Allowance for uncollectible
accounts
    
    $
    131
    
    
    $
    30
    
    
    $
    
    
    
    $
    (55
    )
    
    $
    106December 31, 2003Allowance for uncollectible
accounts
    
    $
    133
    
    
    $
    65
    
    
    $
    
    
    
    $
    (67
    )
    
    $
    131
 AdditionsBalance at
    
    
    
    
    
    
    Charged
    
    
    DeductionsBeginning
    
    
    Charged to
    
    
    (Credited) to
    
    
    From
    
    
    Balance atDescription
    
    of Year
    
    
    Income
    
    
    Other Accounts (b)
    
    
    Reserves (a)
    
    
    Close of Year(Dollars in Million)December 31, 2005Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6December 31, 2004Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6December 31, 2003Allowance for Inventory
Obsolescence
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    6
 
 NOTES:(a)
    
    Reserved write-offs.(b)
    
    Other adjustments and recoveries of amounts written off in prior years. 79




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  80




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   NAME
    
    AGE
    
    PRINCIPAL OCCUPATION
    
    NOMINATED BY
    
    DIRECTOR SINCEDaniel C. Petri
    
    
    57
    
    
    Group President-International, Verizon
    
    GTE Holdings (Puerto
Rico)
    
    
    2002Edward J. McQuaid
    
    
    50
    
    
    Vice President and Chief Financial
Officer, Verizon International
    
    GTE Holdings (Puerto
Rico)
    
    
    2005Jeanne M. Dennison
    
    
    49
    
    
    Group Vice President International Human
Resources and Public Affairs
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Cristina M. Lambert
    
    
    57
    
    
    President and Chief Executive Officer,
Telecomunicaciones de Puerto Rico, Inc.
    
    GTE Holdings (Puerto
Rico)
    
    
    2003John J. Lack
    
    
    49
    
    
    Senior VP Verizon International
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Richard L. Carrión
    
    
    53
    
    
    Chairman, President and Chief
Executive Officer, Popular, Inc.
    
    Popular, Inc.
    
    
    1999Alfredo Salazar
    
    
    63
    
    
    Acting President, Government Development
Bank for Puerto Rico
    
    PRTA Holdings Corporation
    
    
    2005José F. Rodríguez Perelló
    
    
    56
    
    
    Insurance Broker
    
    PRTA Holdings Corporation
    
    
    2005Rafael Martínez Margarida
    
    
    57
    
    
    Business Consultant
    
    PRTA Holdings Corporation
    
    
    2005
     81




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82




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NAME
    
    AGE
    
    TITLECristina M. Lambert
    
    
    57
    
    
    President and Chief Executive OfficerAldo Figueroa
    
    
    50
    
    
    Vice President Operations and Chief Operations OfficerHéctor Houssay
    
    
    53
    
    
    Vice President Finance and Chief Financial OfficerAdail Ortiz
    
    
    48
    
    
    Vice President Revenue Assurance and BillingThomas Pérez-Ducy
    
    
    39
    
    
    Vice President Marketing and Chief Marketing OfficerMari Evelyn Rodríguez
    
    
    35
    
    
    Vice President SalesRoberto García Rodriguez
    
    
    42
    
    
    Vice President Legal and Regulatory AffairsBenito Fernández
    
    
    59
    
    
    Vice President Human ResourcesIleana Molina
    
    
    50
    
    
    Vice President Corporate CommunicationsRoberto A. Correa
    
    
    48
    
    
    Vice President and General Manager Coqui.netJorge Samalot
    
    
    46
    
    
    Vice President Information Technology SolutionsManny Hernández
    
    
    50
    
    
    Vice President Network Services, Engineering and Technical PlanningHector Rosario
    
    
    53
    
    
    Vice President Network OperationsRafael Otaño
    
    
    41
    
    
    ControllerMaría E. De La Cruz
    
    
    37
    
    
    Treasurer
       83




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84




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www.telefonicapr.com
 85




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ITEM 11. EXECUTIVE COMPENSATION
   Summary Compensation TableLong-Term CompensationAnnual Compensation
    
    Awards
    
    Payouts(a)
    
    
    
    
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)SecuritiesOther Annual
    
    Restricted Stock
    
    Underlying
    
    LTIP
    
    All OtherName and
    
    
    
    
    
    
    
    
    
    Salary
    
    Bonus
    
    Compensation
    
    Award(s)
    
    Options/SARs
    
    Payouts
    
    CompensationPrincipal Position
    
    
    
    
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Granted (#)
    
    ($)
    
    ($)Cristina M. Lambert
    
    
    
    
    
    
    2005
    
    
    
    293,379
    
    
    
    203,700
    
    
    
    4,000
    1
    
    
    659,537
    2
    
    
    
    
    
    
    
    
    
    
    131,907
    3President & Chief Executive Officer
    
    
    
    
    
    
    2004
    
    
    
    278,000
    
    
    
    205,900
    
    
    
    20,000
    
    
    
    281,505
    
    
    
    21,000
    
    
    
    
    
    
    
    117,4122003
    
    
    
    222,115
    
    
    
    130,600
    
    
    
    13,917
    
    
    
    153,100
    
    
    
    13,400
    
    
    
    
    
    
    
    90,002Benito Fernandez
    
    
    
    
    
    
    2005
    
    
    
    213,100
    
    
    
    130,667
    
    
    
    
    
    
    
    319,852
    2
    
    
    
    
    
    
    
    
    
    
    93,485
    3VP Human Resources
    
    
    
    
    
    
    2004
    
    
    
    206,198
    
    
    
    126,000
    
    
    
    6,000
    
    
    
    211,313
    
    
    
    10,300
    
    
    
    
    
    
    
    91,8822003
    
    
    
    193,231
    
    
    
    127,000
    
    
    
    6,000
    
    
    
    92,500
    
    
    
    10,500
    
    
    
    
    
    
    
    80,562Tomas H. Pérez Ducy
    
    
    4
    
    
    
    2005
    
    
    
    164,796
    
    
    
    83,496
    
    
    
    6,300
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,252VP/Marketing and Chief Marketing Officer
    
    
    
    
    
    
    2004
    
    
    
    144,616
    
    
    
    8,123
    
    
    
    5,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,2672003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adail Ortiz
    
    
    4
    
    
    
    2005
    
    
    
    154,788
    
    
    
    49,748
    
    
    
    36,945
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,852VP/Revenue Assurance and Billing
    
    
    
    
    
    
    2004
    
    
    
    149,238
    
    
    
    42,983
    
    
    
    9,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,6222003
    
    
    
    131,963
    
    
    
    32,312
    
    
    
    9,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,256Roberto Correa
    
    
    4
    
    
    
    2005
    
    
    
    154,883
    
    
    
    44,186
    
    
    
    10,554
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,852VP and General manager Coqui.net
    
    
    
    
    
    
    2004
    
    
    
    148,323
    
    
    
    38,555
    
    
    
    9,604
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,9532003
    
    
    
    138,988
    
    
    
    37,403
    
    
    
    9,535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,297
 
 (1)
    
    For 2005, the column Other Annual Compensation includes: flexible spending allowances
for Ms. Lambert in the amount of $4,000; car allowances for Messrs. Pérez, Ortiz and Correa in the
amount of $6,300, respectively; vacations for Mr. Ortiz in the amount of $27,039; and sickleave
for Messrs. Ortiz and Correa in the amount of: $3,605 and $4,254, respectively.(2)
    
    The data reflects the dollar value of the performance stock units and restricted stock
units based on the average price of Verizons common stock on the grant date, February 2, 2005.
Actual payment of the performance stock units will be determined based on Verizons Total
Shareholder Return (TSR) relative to the TSR of the companies that make up the Standard and Poors
500 and to the TSR of certain companies in Verizons telecommunications, broadband, wireless and
cable industry peer group. On each dividend payment date, restricted units are credited to the
participants account. The number of restricted stock units is determined by dividing the dividend
that would have been paid on the shares represented by the stock units in the participants
account by the average price of the Companys common stock on the New York Stock Exchange
Composite Transaction Tape on the dividend payment
date. Ms. Lambert and Mr. Fernandez hold a total of: 18,960 and 9,195 restricted stock units,
respectively, which had an aggregate dollar value of: $571,075 and $275,953, respectively, based
upon the closing price of Verizon common stock on December 31, 2005.(3)
    
    For 2005, the column All Other Compensation includes: Verizons contributions to
qualified plans for Ms. Lambert and Mr. Fernandez in the amount of $10,500, respectively;
contributions by Verizon to the non-qualified Income Deferral Plan accounts of Ms. Lambert and Mr.
Fernandez in the amounts of $80,328 and $46,652, respectively; Verizons contributions to excess
pension plan of Ms. Lambert and Mr. Fernandez in the amounts of $5,830 and $186, respectively; and
the value of the premiums paid by Verizon for executive life insurance polices for Ms. Lambert and
Mr. Fernandez in the amounts of $35,249 and $36,147, respectively.(4)
    
    Messrs. Pérez, Ortiz and Correa are local VP considered under the Companys payroll and
benefits plan.
 86




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Aggregated Option/SAR Exercises
in Last Fiscal Year and FY-End Option/SAR Values
 (a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)Number of Securities
    
    
    Value of UnexercisedShares
    
    
    Value
    
    
    Underlying Options/SARs
    
    
    In-the-Money Options/SARsAcquired on
    
    
    Realized
    
    
    at F-Y-End (#)
    
    
    at F-Y-End ($000s)Name
    
    Exercise (#)
    
    
    ($000s)
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableCristina M. Lambert
    
    
    
    
    
    
    
    
    
    
    97,825
    
    
    
    18,468
    
    
    
    
    
    
    
    Benito Fernandez
    
    
    
    
    
    
    
    
    
    
    31,833
    
    
    
    10,367
    
    
    
    
    
    
    
    
 VERIZON RETIREMENT PROGRAMS
     Pension Plan TableFINAL AVERAGE
    
    YEARS OF SERVICEEARNINGS
    
    15
    
    
    20
    
    
    25
    
    
    30
    
    
    35
    
    
    40$210,000
    
    $
    42,525
    
    
    $
    56,700
    
    
    $
    70,875
    
    
    $
    85,050
    
    
    $
    99,225
    
    
    $
    113,400
  87




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I.
    
    a participants base salary in excess of the Internal Revenue Code limit on compensation for
qualified retirement plans ($210,000 in 2005);II.
    
    all of the participants short-term incentive award; andIII.
    
    other bonuses that the plan administrator determines are eligible for deferral.
  Executive
    
    Aggregate Account BalanceMs. Lambert
    
    $
    919,266Mr. Fernandez
    
    $
    169,166
    COMPANYS PENSION PLAN
  PENSION PLAN TABLE
 FINAL AVERAGE
    
    YEARS OF SERVICESALARY
    
    15
    
    
    20
    
    
    25
    
    
    30$100,000
    
    $
    26,851
    
    
    $
    38,611
    
    
    $
    48,264
    
    
    $
    55,417125,000
    
    
    34,351
    
    
    
    48,611
    
    
    
    60,764
    
    
    
    69,792150,000
    
    
    41,851
    
    
    
    58,611
    
    
    
    73,264
    
    
    
    84,167175,000
    
    
    44,851
    
    
    
    62,611
    
    
    
    78,264
    
    
    
    89,917200,000
    
    
    44,851
    
    
    
    62,611
    
    
    
    78,264
    
    
    
    89,917
 88




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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
   89




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
    SHARESNAME OF BENEFICIAL OWNER
    
    ADDRESS
    
    NUMBER
    
    
    PERCENTAGEGTE Holdings (Puerto Rico) LLC 
(Verizon)
    
    GTE Holdings (Puerto Rico) LLC
    
    
    13,003,276
    
    
    
    52.015221 North O Connor BoulevardIrving, Texas 75039Popular, Inc.
    
    209 Muñoz Rivera Avenue
    
    
    3,246,749
    
    
    
    12.99Hato Rey, Puerto Rico 00918PRTA Holdings Corporation
    
    Government Development Bank
    
    
    6,999,975
    
    
    
    28.00For Puerto RicoMinillas Government CenterSan Juan, Puerto Rico  00940Employee Stock Ownership Plan
    
    U.S. Trust Company National Association
    
    
    1,750,000
    
    
    
    7.00c/o Dennis M. Kunisaki515 South Flower StreetLos Angeles, California 90171Total
    
    
    
    
    25,000,000
    
    
    
    100.00All Directors and Named (17 persons)
Executive Officers as a Group
    
    
    
    
    0
    
    
    
    0
        90




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o
    
    an acquisition, strategic alliance, or joint venture exceeding 15% of the Companys
assets;o
    
    issuance of equity, convertible equity securities, or debt;o
    
    changes in the dividend policy; ando
    
    transactions with Verizon and Popular, Inc. exceeding $1 million, annually.
  o
    
    asset sales of 25% or more of the Companys assets;o
    
    amendments to the Certificate of Incorporation, which adversely affect the
Government of Puerto Rico; ando
    
    the liquidation, merger or consolidation of the Company.
  o
    
    the date when the Government of Puerto Rico ceases to own at least 5% of the shares;
ando
    
    the later of seven years after the sale or one year after an initial public offering.
 91




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
             92




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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
          93




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    (3)
    
    Exhibits
  94




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SIGNATURES
   By:
    
    /s/ Cristina M. LambertName:     Cristina M. LambertTitle:      President and Chief Executive OfficerDate:      March 31, 2006By:
    
    /s/ Héctor HoussayName:     Héctor HoussayTitle:      Vice President Finance and Chief Financial OfficerDate:      March 31, 2006By:
    
    /s/ Rafael OtañoName:     Rafael OtañoTitle:      ControllerDate:      March 31, 2006
 95




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##### Table of Contents



Date
    
    Signature
    
    CapacityMarch 31, 2006
    
    /s/ Cristina M. Lambert
    
    President and Chief Executive Officer (Principal Executive Officer)Cristina M. LambertMarch 31, 2006
    
    /s/ Héctor Houssay
    
    Vice President Finance and Chief Financial Officer (Principal Financial Officer)Héctor HoussayMarch 31, 2006
    
    /s/ Rafael Otaño
    
    Chief Accounting Officer (Principal Accounting Officer)Rafael OtañoMarch 31, 2006
    
    /s/ Daniel C. Petri
    
    DirectorDaniel C. PetriMarch 31, 2006
    
    /s/ Edward J. McQuaid
    
    DirectorEdward J. McQuaidMarch 31, 2006
    
    /s/ Jeanne M. Dennison
    
    DirectorJeanne M. DennisonMarch 31, 2006
    
    /s/ Cristina M. Lambert
    
    DirectorCristina M. LambertMarch 31, 2006
    
    
    
    DirectorJohn J. LackMarch 31, 2006
    
    /s/ Richard L. Carrión
    
    DirectorRichard L. CarriónMarch 31, 2006
    
    /s/ Alfredo Salazar
    
    DirectorAlfredo SalazarMarch 31, 2006
    
    /s/ José F. Rodriguez Perelló
    
    DirectorJosé F. Rodríguez PerellóMarch 31, 2006
    
    
    
    DirectorRafael Martínez Margarida
 96




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EXHIBIT INDEX
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    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)).
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EXHIBITNUMBER
    
    DESCRIPTION10.8
    
    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)).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
    
    $40,000,000 working capital revolving credit agreement dated
as of June 30, 2004, among Telecomunicaciones de Puerto Rico,
Inc., as Borrower, Puerto Rico Telephone Company, Inc., as
Guarantor and Banco Popular de Puerto Rico, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit
10.30 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 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)).
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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    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)).10.19
    
    $30,000,000 1-Year term credit agreement dated as of May 17,
2004, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor
and Banco Bilbao Vizcaya Argentaria Puerto Rico, as
Administrative Agent. (Incorporated by reference to Exhibit
10.33 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.20
    
    364-Day Credit Agreement dated as of March 1, 2005, 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 Bank
of Nova Scotia, as Syndication Agents, and Banco Popular de
Puerto Rico and Firstbank Puerto Rico, as Co-documentation
Agents. (Incorporated by reference to Exhibit 10.34 of the
Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (File 333-85503)).10.21
    
    First amendment dated June 30, 2005 to the $40,000,000
revolving credit agreement dated as of June 30, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor and Banco Popular
de Puerto Rico, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.23 of the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 (File 333-85503)).10.22
    
    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)).10.23
    
    $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. (Filed herewith).10.24
    
    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. (Filed herewith).21
    
    Subsidiaries of the Registrant (Filed herewith).23
    
    Independent Auditors Consent (Filed herewith).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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