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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, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 333-85503
 Telecomunicaciones de Puerto Rico, Inc.
  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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##### Table of Contents



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
    
    
    36Item 8.    Financial Statements and Supplementary Data
    
    
    37Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    77Item 9A. Controls and Procedures
    
    
    77Item 9B. Other Information
    
    
    77PART IIIItem 10.  Directors Executive Officers and Corporate Governance
    
    
    78Item 11.  Executive Compensation
    
    
    83Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    94Item 13.  Certain Relationships and Related Transactions, and Director Independence
    
    
    96Item 14.  Principal Accounting Fees and Services
    
    
    97PART IVItem 15.  Exhibits and Financial Statement Schedules
    
    
    98SIGNATURES
    
    
    99EXHIBIT INDEX
    
    
    101Letter Waiver and Amendment of Credit AgreementSubsidiaries of the RegistrantIndependent Auditors' ConsentCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
 2




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ITEM 1. BUSINESS
 GENERAL
   BUSINESS OVERVIEW AND CORPORATE RESTRUCTURING
    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: High quality customer service is essential to ensure the retention
and loyalty of our existing customer base and to attract new customers.
    
    Product Development: We are committed to continue evolving our portfolio with new
services, products and devices that take full advantage 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 improving profitability. PRT continues to expand its channel base to extend
our reach and maximize business opportunities.
    
    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 a result of our competitive environment, the Company has been mandated to
introduce new service offerings at lower prices, to increase advertising expenditures, to
offer equipment at significant discounts, and to increase the capital investment to
ensure we maintain and enhance our overall service quality.
 BUSINESS SEGMENTS
   
    
    Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed
data services and Internet access;
 4




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
    
    Long distance services including direct dial on-island and off-island calls, 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 (until March 31, 2006); 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
   Year Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands except percentages)Residential
    
    
    769
    
    
    
    841
    
    
    
    887Business/Government
    
    
    253
    
    
    
    269
    
    
    
    281Total Access Lines in Service
    
    
    1,022
    
    
    
    1,110
    
    
    
    1,168Growth
    
    
    (7.9
    %)
    
    
    (5.0
    %)
    
    
    (5.0
    %)
     5




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6




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NETWORK ACCESS REVENUES
 Year Ended December 31,2006
    
    
    2005
    
    
    2004(In millions)O Federal long-term support subsidies &
common carrier line
    
    $
    52
    
    
    $
    54
    
    
    $
    72O Subscriber line charge
    
    
    89
    
    
    
    95
    
    
    
    95O Federal High Cost subsidies & Local
Universal Service Fund Charge
    
    
    1
    
    
    
    1
    
    
    
    2O Per minute wireline access charges:o On-island switched
    
    
    4
    
    
    
    7
    
    
    
    24o Off-island switched
    
    
    31
    
    
    
    36
    
    
    
    40o Off-island special
    
    
    16
    
    
    
    19
    
    
    
    21o Wireless interconnection
    
    
    12
    
    
    
    17
    
    
    
    15$
    205
    
    
    $
    229
    
    
    $
    269
     Year Ended December 31,2006
    
    2005
    
    2004(In millions)Long distance MOU:On-island Long Distance minutes
    
    
    210
    
    
    
    206
    
    
    
    549Off-island Long Distance minutes
    
    
    121
    
    
    
    149
    
    
    
    178
    7




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WIRELESS
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands except percentages)Cellular Customers:Postpaid
    
    
    448
    
    
    
    382
    
    
    
    290Prepaid
    
    
    106
    
    
    
    103
    
    
    
    97Total Cellular Customers
    
    
    554
    
    
    
    485
    
    
    
    387Growth
    
    
    14.2
    %
    
    
    25.3
    %
    
    
    9.6
    %
        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 92% of our transmission circuits use fiber optic systems consisting of
approximately 90,350 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 buildings for business
and residential customers.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 244 sites equipped with an aggregate of 137,000 ports.
As of December 31, 2006, we had approximately 116,000 DSL customers, representing an
increase of 39,000 customers as compared to the prior 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.o
    
    The IP Network Metro Area Network (MAN) / Wide Area Network (WAN) consists of 19
nodes located throughout the island to offer high bandwidth services up to 1 billion bits
per second (Gbps).
 WIRELESS NETWORK
   EMPLOYEES
   9




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CONCESSION AND LICENSES
  ENVIRONMENTAL REGULATIONS
    REGULATORY ENVIRONMENT IN PUERTO RICO
   INFORMATION ON OUR INTERNET WEBSITE
 www.telefonicapr.com
 10




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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
   2006
    
    2005Wireline
    
    Wireless
    
    Total
    
    Wireline
    
    Wireless
    
    TotalOutside Plant
    
    
    52.9
    %
    
    
    0.0
    %
    
    
    52.9
    %
    
    
    53.3
    %
    
    
    0.0
    %
    
    
    53.3
    %Central office and transmission equipment
    
    
    27.2
    %
    
    
    4.0
    %
    
    
    31.2
    %
    
    
    27.6
    %
    
    
    3.5
    %
    
    
    31.1
    %Other equipment
    
    
    5.6
    %
    
    
    0.8
    %
    
    
    6.4
    %
    
    
    5.7
    %
    
    
    0.9
    %
    
    
    6.6
    %Land and Buildings
    
    
    7.5
    %
    
    
    1.0
    %
    
    
    8.5
    %
    
    
    7.6
    %
    
    
    0.9
    %
    
    
    8.5
    %Plant under Construction
    
    
    0.8
    %
    
    
    0.2
    %
    
    
    1.0
    %
    
    
    0.3
    %
    
    
    0.2
    %
    
    
    0.5
    %Total
    
    
    94.0
    %
    
    
    6.0
    %
    
    
    100.0
    %
    
    
    94.5
    %
    
    
    5.5
    %
    
    
    100.0
    %
    PROPERTIES OWNED AND LEASED
 Owned
    
    Leasedo Administrative Offices
    
    
    9
    
    
    
    11o Commercial & Customer Service stores & offices
    
    
    
    
    
    
    5o Standalone Wireline Switching Center Buildings
    
    
    82
    
    
    
    1o Inside & Outside Remote Switching Units
    
    
    159
    
    
    
    239o Standalone Operational Centers (repair,
dispatch, assignment)
    
    
    13
    
    
    
    9o Warehouses
    
    
    2
    
    
    
    2o Wireless Stores and Kiosks
    
    
    
    
    
    
    31o Wireless Cell Sites
    
    
    19
    
    
    
    333
  14




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ITEM 3. LEGAL PROCEEDINGS
  TOUCHTONE CHARGES
    MUNICIPAL RIGHT OF WAY FEES
  PRTC v. Guayanilla
 PRT v Municipality of Caguas PRTC v Municipality of Ponce PRTC v.
Municipality of Utuado PRT v. Municipality of Cidra PRT v. Municipality of Vega
Baja PRT v. Municipality of Cataño
  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
  COMPANYYEARS ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(DOLLARS IN MILLIONS)INCOME STATEMENT DATA (1):Revenues
    
    $
    1,444
    
    
    $
    1,253
    
    
    $
    1,214
    
    
    $
    1,281
    
    
    $
    1,301Operating Costs and Expenses
    
    
    1,099
    
    
    
    1,076
    
    
    
    994
    
    
    
    1,191
    
    
    
    1,054Operating Income
    
    
    345
    
    
    
    177
    
    
    
    220
    
    
    
    90
    
    
    
    247Other Expense, Net
    
    
    13
    
    
    
    47
    
    
    
    44
    
    
    
    64
    
    
    
    47Income Tax Expense
    
    
    91
    
    
    
    51
    
    
    
    68
    
    
    
    8
    
    
    
    29Income Before ExtraordinaryCharge and Cumulative Effect of Accounting
Change
    
    
    241
    
    
    
    79
    
    
    
    108
    
    
    
    18
    
    
    
    171Cumulative Effect of Accounting Change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    Net Income
    
    $
    241
    
    
    $
    79
    
    
    $
    108
    
    
    $
    77
    
    
    $
    171OTHER FINANCIAL DATA:Depreciation and Amortization
    
    $
    248
    
    
    $
    242
    
    
    $
    261
    
    
    $
    252
    
    
    $
    262Cash Flows from Operations
    
    
    549
    
    
    
    239
    
    
    
    289
    
    
    
    357
    
    
    
    405Capital Expenditures, including removal costs
    
    
    152
    
    
    
    146
    
    
    
    172
    
    
    
    176
    
    
    
    209Cash Flows used in Investing
    
    
    (126
    )
    
    
    (143
    )
    
    
    (166
    )
    
    
    (170
    )
    
    
    (206
    )Cash Flows used in Financing
    
    
    (299
    )
    
    
    (105
    )
    
    
    (81
    )
    
    
    (198
    )
    
    
    (200
    )Cash dividends per share (2)
    
    
    4.98
    
    
    
    2.53
    
    
    
    2.63
    
    
    
    2.73
    
    
    
    2.75
 AS OF DECEMBER 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(DOLLARS IN MILLIONS)BALANCE SHEET DATA:Current Assets
    
    $
    453
    
    
    $
    369
    
    
    $
    417
    
    
    $
    392
    
    
    $
    430Property, Plant and Equipment, Net
    
    
    1,269
    
    
    
    1,352
    
    
    
    1,459
    
    
    
    1,558
    
    
    
    1,575Total Assets
    
    
    2,384
    
    
    
    2,378
    
    
    
    2,545
    
    
    
    2,621
    
    
    
    2,717Current Liabilities
    
    
    215
    
    
    
    625
    
    
    
    309
    
    
    
    273
    
    
    
    366Total Debt
    
    
    575
    
    
    
    752
    
    
    
    797
    
    
    
    862
    
    
    
    1,035Shareholders Equity
    
    
    553
    
    
    
    737
    
    
    
    723
    
    
    
    701
    
    
    
    665AS OF DECEMBER 31,2006
    
    2005
    
    2004
    
    2003
    
    2002OPERATING DATA:Access Lines in Service (000)
    
    
    1,022
    
    
    
    1,110
    
    
    
    1,168
    
    
    
    1,230
    
    
    
    1,260Wireless subscribers:Cellular (000)
    
    
    554
    
    
    
    485
    
    
    
    387
    
    
    
    353
    
    
    
    351Total Access Lines (per 100 households)
    
    
    55
    
    
    
    62
    
    
    
    65
    
    
    
    69
    
    
    
    71Number of full-time Employees
    
    
    4,649
    
    
    
    4,953
    
    
    
    5,250
    
    
    
    5,548
    
    
    
    5,881Access Lines/Wireline Employee
    
    
    250
    
    
    
    261
    
    
    
    262
    
    
    
    260
    
    
    
    250Cellular Average Monthly Service
Revenue Per User
    
    $
    45
    
    
    $
    44
    
    
    $
    43
    
    
    $
    43
    
    
    $
    43
 
  
 18




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##### Table of Contents



ITEM
7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 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 the year ended December 31, 2006, our
wireless and broadband services represented 35% of the total revenues, up from 33% for the
year ended December 31, 2005 and from 28% for the year ended December 31,2004.For the year ended December 31, 2006, revenues from the growth of wireless areas, in
particular post-paid cellular services and sale of wireless equipment increased by 36% and
9%, respectively, compared to the same period in 2005. These increases were driven by the
net addition of approximately 66,000 post-paid wireless customers during the year ended
December 31, 2006. The broadband services revenues for the year ended December 31, 2006
increased by 6% compared to the same period in 2005. This increase was driven by strong DSL
revenue growth. For the year ended December 31, 2006, the net addition of DSL customers was
approximately 38,000.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.
    
    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 2005, which we expect will provide future
benefits. At December 31, 2006, the Company had approximately 4,649 employees compared to
4,953 at December 31, 2005. Labor and benefits
 19




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expenses declined by approximately $4 million, or 1%, for the year ended December 31, 2006
compared to the same period in 2005.
 
    
    Capital Allocation  Capital spending has been, and will continue to be, directed toward
growth markets, such as high-speed wireless data or Evolution Data Optimized (EV-DO)
technologies. Replacement of the TDMA network and expanded services offered to enterprise
markets are some examples of areas of capital spending which support these growth markets.
    
    Cash Flow Generation  The financial statements reflect the emphasis of management on
using cash provided by our operating and investing activities to significantly reduce debt
and to fund our pension plans.
     20




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CONSOLIDATED RESULTS OF OPERATIONS
  CONSOLIDATED REVENUES
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    585
    
    
    $
    596
    
    
    
    (2
    )%
    
    $
    596
    
    
    $
    587
    
    
    
    2
    %Network Access
    
    
    205
    
    
    
    229
    
    
    
    (11
    )
    
    
    229
    
    
    
    269
    
    
    
    (15
    )Long Distance
    
    
    63
    
    
    
    63
    
    
    
    (0
    )
    
    
    63
    
    
    
    64
    
    
    
    (2
    )Cellular
    
    
    365
    
    
    
    286
    
    
    
    28
    
    
    
    286
    
    
    
    223
    
    
    
    28Directory and Other
    
    
    226
    
    
    
    79
    
    
    
    186
    
    
    
    79
    
    
    
    71
    
    
    
    11Consolidated revenues
    
    $
    1,444
    
    
    $
    1,253
    
    
    
    15
    
    
    $
    1,253
    
    
    $
    1,214
    
    
    
    3
       21




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CONSOLIDATED OPERATING EXPENSES
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of Services ans Sales
    
    $
    338
    
    
    $
    308
    
    
    
    10
    %
    
    $
    308
    
    
    $
    274
    
    
    
    12
    %Selling, general and administrative expenses
    
    
    513
    
    
    
    524
    
    
    
    (2
    )
    
    
    524
    
    
    
    456
    
    
    
    15Total consolidated operating expenses
    
    $
    851
    
    
    $
    832
    
    
    
    2
    
    
    $
    832
    
    
    $
    730
    
    
    
    14
      22




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OTHER CONSOLIDATED RESULTS
 For the Year Ended December 31,2006
    
    
    2005
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Retirement and voluntary separation provision
    
    $
    
    
    
    $
    2
    
    
    
    (100
    )%
    
    $
    2
    
    
    $
    3
    
    
    
    (33
    )%Depreciation and amortization
    
    
    248
    
    
    
    242
    
    
    
    2
    
    
    
    242
    
    
    
    261
    
    
    
    (7
    )Interest expense and others
    
    
    39
    
    
    
    46
    
    
    
    (16
    )
    
    
    46
    
    
    
    43
    
    
    
    7Equity income in joint venture
    
    
    (28
    )
    
    
    (3
    )
    
    
    947
    
    
    
    (3
    )
    
    
    (2
    )
    
    
    8Minority interest in consolidated subsidiary
    
    
    3
    
    
    
    3
    
    
    
    (14
    )
    
    
    3
    
    
    
    3
    
    
    
    6Income tax expense
    
    
    91
    
    
    
    51
    
    
    
    79
    
    
    
    51
    
    
    
    68
    
    
    
    (25
    )Total Other Consolidated Results
    
    $
    353
    
    
    $
    341
    
    
    
    4
    
    
    $
    341
    
    
    $
    376
    
    
    
    (9
    ).
 Retirement and voluntary separation provisions
   Depreciation and amortization expense
    Interest expense, net
   Equity income from joint venture
    Minority interest in consolidated subsidiary
  23




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Income taxes
    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.
 24




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##### Table of Contents



RESULTS OF OPERATIONS REVENUE WIRELINE
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    605
    
    
    $
    615
    
    
    
    (2
    )%
    
    $
    615
    
    
    $
    596
    
    
    
    3
    %Network Access
    
    
    209
    
    
    
    234
    
    
    
    (11
    )
    
    
    234
    
    
    
    271
    
    
    
    (14
    )Long Distance
    
    
    65
    
    
    
    65
    
    
    
    (0
    )
    
    
    65
    
    
    
    66
    
    
    
    (2
    )Directory and Other
    
    
    226
    
    
    
    80
    
    
    
    183
    
    
    
    80
    
    
    
    71
    
    
    
    13Total Wireline
    
    $
    1,105
    
    
    $
    994
    
    
    
    11
    
    
    $
    994
    
    
    $
    1,004
    
    
    
    (1
    )
  Local Services
   Network Access
   Long Distance
   Directory and Other
  25




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##### Table of Contents



RESULTS OF OPERATIONS EXPENSE WIRELINE
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of Services and Sales
    
    $
    213
    
    
    $
    207
    
    
    
    3
    %
    
    $
    207
    
    
    $
    200
    
    
    
    3
    %Selling, general and
administrative expenses
    
    
    406
    
    
    
    414
    
    
    
    (2
    )
    
    
    414
    
    
    
    364
    
    
    
    14Total Wireline
    
    $
    619
    
    
    $
    621
    
    
    
    
    
    
    $
    621
    
    
    $
    564
    
    
    
    10
      26




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##### Table of Contents



RESULTS OF OPERATIONS REVENUE WIRELESS
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Postpaid Cellular
    
    $
    262
    
    
    $
    216
    
    
    
    21
    %
    
    $
    216
    
    
    $
    172
    
    
    
    26
    %Prepaid Cellular
    
    
    20
    
    
    
    17
    
    
    
    18
    
    
    
    17
    
    
    
    19
    
    
    
    (11
    )Total Cellular
    
    
    282
    
    
    
    233
    
    
    
    21
    
    
    
    233
    
    
    
    191
    
    
    
    22Wireless Equipment and Other
    
    
    86
    
    
    
    56
    
    
    
    54
    
    
    
    56
    
    
    
    35
    
    
    
    60Total Wireless
    
    $
    368
    
    
    $
    289
    
    
    
    27
    
    
    $
    289
    
    
    $
    226
    
    
    
    28
 OPERATING DATA
 For the Year Ended December 31,2006
    
    
    2005
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Cellular Customers (000s):Postpaid
    
    
    448
    
    
    
    382
    
    
    
    17
    %
    
    
    382
    
    
    
    290
    
    
    
    32
    %Prepaid
    
    
    106
    
    
    
    103
    
    
    
    3
    
    
    
    103
    
    
    
    97
    
    
    
    6Total
    
    
    554
    
    
    
    485
    
    
    
    14
    
    
    
    485
    
    
    
    387
    
    
    
    25Postpaid Cellular Average
Revenue Per Unit (ARPU)
    
    $
    52
    
    
    $
    53
    
    
    
    (2
    )%
    
    $
    53
    
    
    $
    54
    
    
    
    (2
    )%Prepaid Cellular ARPU
    
    
    16
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    15
    
    
    
    (7
    )Combined Cellular ARPU
    
    
    45
    
    
    
    44
    
    
    
    2
    
    
    
    44
    
    
    
    43
    
    
    
    2
  Cellular Services
   Wireless Equipment and other
   27




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RESULTS OF OPERATIONS EXPENSE WIRELESS
 For the Year Ended December 31,2006
    
    
    2005
    
    

% Change
    
    
    2005
    
    
    2004
    
    

% Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of Services
    
    $
    132
    
    
    $
    109
    
    
    
    21
    %
    
    $
    109
    
    
    $
    78
    
    
    
    40
    %Selling, general and administrative expenses
    
    
    130
    
    
    
    132
    
    
    
    (2
    )
    
    
    132
    
    
    
    104
    
    
    
    27Total Wireless
    
    $
    262
    
    
    $
    241
    
    
    
    9
    
    
    $
    241
    
    
    $
    182
    
    
    
    32
      28




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 For the Years Ended December 31,2006
    
    2005
    
    2004(in millions)Cash flows from (used in):Operating
    
    $
    549
    
    
    $
    239
    
    
    $
    289Investing
    
    
    (126
    )
    
    
    (143
    )
    
    
    (166
    )Financing
    
    
    (299
    )
    
    
    (105
    )
    
    
    (81
    )
           29




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##### Table of Contents



Contractual Obligations & Other Commercial Commitments:
 Payments Due In Period(in millions)Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterLong Term Debt, including interest rate swap (Note 10)
    
    $
    575
    
    
    
    
    
    
    
    
    
    
    $
    300
    
    
    
    
    
    
    $
    275
    
    
    $
    Interest on Long Term Debt ( Note 10)
    
    
    127
    
    
    
    38
    
    
    
    38
    
    
    
    29
    
    
    
    18
    
    
    
    4
    
    
    
    Pension Benefit Obligations (Note 8)
    
    
    332
    
    
    
    156
    
    
    
    58
    
    
    
    109
    
    
    
    6
    
    
    
    3
    
    
    
    Operating
Leases (Note 20)
    
    $
    101
    
    
    
    18
    
    
    
    17
    
    
    
    18
    
    
    
    19
    
    
    
    20
    
    
    
    9Total
    
    $
    1,410
    
    
    $
    212
    
    
    $
    113
    
    
    $
    456
    
    
    $
    43
    
    
    $
    302
    
    
    $
    284
 30




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##### Table of Contents



REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   TOUCHTONE CHARGES
    MUNICIPAL RIGHT OF WAY FEES
  PRTC v. Guayanilla
 PRT v Municipality of Caguas PRTC v Municipality of Ponce PRTC v.
Municipality of Utuado PRT v. Municipality of Cidra PRT v. Municipality of Vega
Baja PRT v. Municipality of Cataño
  31




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##### Table of Contents



INTERCONNECTION DISPUTE
  SUBSCRIBER LINE CHARGE (SLC)
   32




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     33




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
 General
    Allowance for Doubtful Accounts
  Deferred Taxes
    Property, Plant and Equipment and Depreciation
   34




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##### Table of Contents



Pensions and Other Post Employment Benefits
  Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106
and 132(R)
  
 35




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointBook Value
    
    
    Fair Value
    
    
    Increase
    
    
    Decrease(In thousands)December 31, 2006:Senior notes
    
    $
    299,947
    
    
    $
    310,113
    
    
    $
    303,451
    
    
    $
    316,959December 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
    
    
    $
    721,325
 36




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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, 2006 and 2005Consolidated Statements of Operations for the Years Ended December 31,
2006, 2005 and 2004Consolidated Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2006, 2005 and 2004Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and 2004Notes to Consolidated Financial Statements for the Years Ended December 31,
2006, 2005 and 2004Schedule I  Condensed Consolidating Information for the Years Ended December 31,
2006, 2005 and 2004Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31,
2006, 2005 and 2004
 37




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##### Table of Contents



Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans-an amendment of FASB Statements No. 87, 88 and 106 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in the Current Year Financial Statements
 
  38




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    179,138
    
    
    $
    55,086Accounts receivable, net of allowance for doubtful accounts
of $85,100 and $76,815 in 2006 and 2005, respectively
    
    
    194,562
    
    
    
    227,629Deferred income tax
    
    
    32,593
    
    
    
    18,324Inventory and supplies, net
    
    
    35,113
    
    
    
    47,431Prepaid expenses
    
    
    12,092
    
    
    
    20,571Total current assets
    
    
    453,498
    
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,269,280
    
    
    
    1,351,510GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    196,756
    
    
    
    209,357DEFERRED INCOME TAX
    
    
    287,760
    
    
    
    205,853OTHER ASSETS
    
    
    49,890
    
    
    
    115,271TOTAL ASSETS
    
    $
    2,384,111
    
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    452,042Other current liabilities
    
    
    214,811
    
    
    
    172,961Total current liabilities
    
    
    214,811
    
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    574,947
    
    
    
    299,812PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    911,490
    
    
    
    563,395OTHER NON-CURRENT LIABILITIES
    
    
    112,540
    
    
    
    136,345Total liabilities
    
    
    1,813,788
    
    
    
    1,624,555MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    17,608
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock
    
    
    706,495
    
    
    
    705,516Deferred ESOP compensation
    
    
    (24,739
    )
    
    
    (26,042
    )Retained earnings
    
    
    330,275
    
    
    
    228,877Accumulated other comprehensive loss, net of taxes
    
    
    (459,316
    )
    
    
    (171,502
    )Total shareholders equity
    
    
    552,715
    
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,384,111
    
    
    $
    2,377,959
 The accompanying notes are an integral part of these financial statements.
 39




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004REVENUES:Local services
    
    $
    584,847
    
    
    $
    595,823
    
    
    $
    586,598Access services
    
    
    204,963
    
    
    
    229,197
    
    
    
    268,974Long distance services
    
    
    63,080
    
    
    
    63,103
    
    
    
    64,194Cellular services
    
    
    365,159
    
    
    
    285,640
    
    
    
    223,084Directory services and other
    
    
    225,671
    
    
    
    78,761
    
    
    
    71,074Total revenues
    
    
    1,443,720
    
    
    
    1,252,524
    
    
    
    1,213,924OPERATING COSTS AND EXPENSES:Cost of services and sales
    
    
    338,218
    
    
    
    307,754
    
    
    
    274,156Selling, general and administrative expenses
    
    
    512,719
    
    
    
    524,057
    
    
    
    456,216Early retirement and voluntary separation provision
    
    
    
    
    
    
    1,687
    
    
    
    2,786Depreciation and amortization
    
    
    247,691
    
    
    
    242,229
    
    
    
    261,036Total operating costs and expenses
    
    
    1,098,628
    
    
    
    1,075,727
    
    
    
    994,194OPERATING INCOME
    
    
    345,092
    
    
    
    176,797
    
    
    
    219,730OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (38,778
    )
    
    
    (46,362
    )
    
    
    (43,284
    )Equity income from joint venture
    
    
    27,851
    
    
    
    2,660
    
    
    
    2,454Minority interest in consolidated subsidiary
    
    
    (2,512
    )
    
    
    (2,919
    )
    
    
    (2,749
    )Total other income (expense), net
    
    
    (13,439
    )
    
    
    (46,621
    )
    
    
    (43,579
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    331,653
    
    
    
    130,176
    
    
    
    176,151INCOME TAX EXPENSE
    
    
    91,087
    
    
    
    50,788
    
    
    
    67,762NET INCOME
    
    $
    240,566
    
    
    $
    79,388
    
    
    $
    108,389
 The accompanying notes are an integral part of these financial statements.
 40




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
 AccumulatedOtherCommon
    
    
    Deferred ESOP
    
    
    Subscription
    
    
    Retained
    
    
    ComprehensiveStock
    
    
Compensation
    
    
Receivable
    
    
Earnings
    
    
Loss
    
    

TotalBALANCE 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,260Advance to ESOP
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,388
    
    
    
    
    
    
    
    79,388Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,796
    )
    
    
    (4,796
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,592BALANCE DECEMBER 31, 2005
    
    
    705,516
    
    
    
    (26,042
    )
    
    
    
    
    
    
    228,877
    
    
    
    (171,502
    )
    
    
    736,849Cumulative
effect of adjustments resulting from the adoption of SAB 108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,212
    )
    
    
    
    
    
    
    (17,212
    )Adjusted balance at January 1, 2006
    
    
    705,516
    
    
    
    (26,042
    )
    
    
    
    
    
    
    211,665
    
    
    
    (171,502
    )
    
    
    719,637Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121,956
    )
    
    
    
    
    
    
    (121,956
    )Release of ESOP shares
    
    
    979
    
    
    
    1,303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,282Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240,566
    
    
    
    
    
    
    
    240,566Other comprehensive income, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,907
    
    
    
    27,907Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268,473Impact of adoption of SFAS No.158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315,721
    )
    
    
    (315,721
    )BALANCE DECEMBER 31, 2006
    
    $
    706,495
    
    
    $
    (24,739
    )
    
    $
    
    
    
    $
    330,275
    
    
    $
    (459,316
    )
    
    $
    552,715
 The accompanying notes are an integral part of these financial statements.
 41




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    240,566
    
    
    $
    79,388
    
    
    $
    108,389Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    247,691
    
    
    
    242,229
    
    
    
    261,036Provision for uncollectible accounts
    
    
    50,827
    
    
    
    47,273
    
    
    
    29,746Deferred income tax expense
    
    
    37,723
    
    
    
    42,828
    
    
    
    50,495Employee retirement benefits expense
    
    
    110,086
    
    
    
    102,119
    
    
    
    106,018Accretion of discount on subscription receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )Equity income from joint venture
    
    
    (665
    )
    
    
    (2,660
    )
    
    
    (2,454
    )Early retirement and voluntary separation provision
    
    
    
    
    
    
    1,687
    
    
    
    2,786Release of ESOP shares
    
    
    2,282
    
    
    
    2,260
    
    
    
    1,483Gain on sale of building
    
    
    
    
    
    
    (1,096
    )
    
    
    (3,349
    )Gain on sale of interest in joint venture
    
    
    (27,186
    )Minority interest in consolidated subsidiary
    
    
    2,512
    
    
    
    2,919
    
    
    
    2,749Changes in assets and liabilities:Accounts receivable
    
    
    (17,761
    )
    
    
    (3,989
    )
    
    
    (13,413
    )Inventory and supplies
    
    
    12,318
    
    
    
    (19,273
    )
    
    
    (6,956
    )Prepaid expenses and other assets
    
    
    32,131
    
    
    
    17,854
    
    
    
    10,888Other current and non-current liabilities
    
    
    (10,975
    )
    
    
    (100,481
    )
    
    
    (52,283
    )Pension and other post-employment benefits
    
    
    (130,775
    )
    
    
    (171,680
    )
    
    
    (205,381
    )Net cash provided by operating activities
    
    
    548,774
    
    
    
    239,378
    
    
    
    289,269CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (152,417
    )
    
    
    (145,800
    )
    
    
    (171,638
    )Proceeds from sale of investment
    
    
    26,651
    
    
    
    2,778
    
    
    
    5,436Net cash used in investing activities
    
    
    (125,766
    )
    
    
    (143,022
    )
    
    
    (166,202
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000Loan to ESOP
    
    
    
    
    
    
    (2,000
    )
    
    
    Net repayments of short-term debt, including
capital leases
    
    
    (452,000
    )
    
    
    (41,149
    )
    
    
    (59,500
    )Borrowings of long-term debt
    
    
    275,000
    
    
    
    
    
    
    
    Dividends paid
    
    
    (121,956
    )
    
    
    (61,467
    )
    
    
    (61,953
    )Net cash used in financing activities
    
    
    (298,956
    )
    
    
    (104,616
    )
    
    
    (81,453
    )NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    124,052
    
    
    
    (8,260
    )
    
    
    41,614CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
    
    
    55,086
    
    
    
    63,346
    
    
    
    21,732CASH AND
CASH EQUIVALENTS AT END OF YEAR
    
    $
    179,138
    
    
    $
    55,086
    
    
    $
    63,346
 The accompanying notes are an integral part of these financial statements.
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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 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%
interests in Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of the Companys
shareholders, holds the remaining 33% 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 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. On March 31, 2006, the Company sold its 24% interest in Verizon Information Services,
Puerto Rico, Inc. S en C (VISI). The directory publishing revenues were generated by VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC (GTE Holdings),
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 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 investments 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.
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Revenue RecognitionRevenues are recognized when services are rendered or products are delivered to customers.Common carrier line access revenues are generated based on the participation by the PRTC in
revenue pools with other telephone companies managed by the National Exchange Carriers
Association (NECA), which are funded by access charges authorized by the Federal Communications
Commission (FCC) and long-term support amounts received from the Universal Service Fund. Pooled
amounts are divided among telephone companies based on allocations of costs and investments in
providing interstate services. Revenues are based on preliminary allocations and cost studies
and are subject to final settlement in subsequent periods.Revenues from prepaid cellular cards are recognized based upon usage with any residual balances
recognized at the expiration date.Customer activation fees, along with the related costs up to but not exceeding the activation
fees, are deferred and amortized over the customer relationship period, which are 4 years for
wireline and 2 years for wireless, as required by Staff Accounting Bulletin SAB 104. However,
customer activation fees are subject to additional consideration when wireless handsets are sold
to the customers at a discount and recorded as equipment sales revenue.Equipment sales consist principally of revenues from the sale of wireless handsets and
accessories to new and existing subscribers and to agents and other third-party distributors. The
revenue and related expenses associated with the sale of wireless handsets and accessories
through our indirect sales channels are recognized when the products are delivered and accepted
by the agent or third-party distributor, as this is considered to be a separate earnings process
from the sale of wireless services and probability of collection is likely. Shipping and
handling costs for wireless handsets sold to agents and other third-party distributors are
classified as costs of equipment sales.The Company has determined that the sale of wireless services through its direct sales channels
with an accompanying handset constitutes a revenue arrangement with multiple deliverables in
accordance with Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. The Company accounts for these arrangements as separate units of
accounting, including the wireless service and handset. Arrangement consideration received for
the handset is recognized as equipment sales when the handset is delivered and accepted by the
subscriber. Arrangement consideration received for the wireless service is recognized as service
revenues when earned. As the non-refundable, up-front activation fee charged to the subscriber
does not meet the criteria as a separate unit of accounting, the Company allocates the additional
arrangement consideration received from the activation fee to the handset (the delivered item) to
the extent that the aggregate handset and activation fee proceeds do not exceed the fair value of
the handset. Any activation fees not allocated to the handset would be deferred upon activation
and recognized as service revenue on a straight-line basis over the expected customer
relationship period. The Company determined that the sale of wireless services through its
indirect sales channels (agents) does not constitute a revenue arrangement with multiple
deliverables. For indirect channel sales, the Company continues to defer non-refundable, up-front
activation fees and associated costs to the extent of the related revenues in accordance with SAB
104. These deferred fees and costs are amortized on a straight-line basis over the estimated
customer relationship period. The Company has recorded deferred revenues and deferred expenses of
equal amounts in the consolidated balance sheets.Cash and Cash EquivalentsShort-term investments with original maturities of three months or less are classified as cash
equivalents.Allowance for Doubtful AccountsThe allowance for doubtful accounts is an amount that management believes will be adequate to
absorb possible losses on existing receivables that may become uncollectible based on evaluations
of the collectibility of the receivables and prior loss experience. Because of uncertainties
inherent in the estimation process, managements estimate of losses and the related allowance may
change. The Company is not dependent on any single customer.Inventory and SuppliesInventory and supplies are stated at lower of cost or market cost is determined using the average
cost, net of obsolescence reserves.
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Property, Plant and Equipment and DepreciationProperty, plant and equipment is stated at original cost, including interest on funds borrowed to
finance the acquisition of capital additions. Repairs and maintenance are expensed as incurred.
Depreciable property disposed of in the ordinary course of business, less salvage value, is
charged to accumulated depreciation with no gain or loss recognized. Gains or losses from the
sale of land are recorded in results of operations.The Companys depreciation expense is based on the composite group remaining life method and
straight-line composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant, less anticipated net salvage value, over the
remaining asset lives. This method also requires a periodic evaluation of the average remaining
useful lives related to the expected recoverability of the carrying value of assets based on
changes in technology, environmental factors, the Federal and local regulatory environment, and
other competitive forces. Effective on July 1, 2005, the Company changed its accounting
estimates relating to depreciation. Refer to Note 4 to the consolidated financial statements for
further details.Goodwill and Other Intangible AssetsGoodwillGoodwill is the excess of the acquisition cost of businesses over the fair value of the
identifiable net assets acquired. Impairment testing for goodwill is performed at least annually
unless indicators of impairment exist. The impairment test for goodwill uses a two-step
approach, which is performed at the reporting unit level. Reporting units may be operating
segments or one level below an operating segment, referred to as a component. Businesses for
which discrete financial information is available are generally considered to be components of an
operating segment. Components that are economically similar and managed by the same segment
management group are aggregated and considered a reporting unit under SFAS No. 142, Goodwill and
Other Intangible Assets. Step one compares the fair value of the reporting unit (calculated
using a discounted cash flow method) to its carrying value. If the carrying value exceeds the
fair value, there is a potential impairment and step two must be performed. Step two compares
the carrying value of the reporting units goodwill to its implied fair value (i.e., fair value
of reporting unit less the fair value of the units assets and liabilities, including
identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair
value, the excess is required to be recorded as an impairment. The Company has evaluated its
goodwill using the fair value approach for each reporting unit to determine if there is an
impairment exposure and the impact it would have on the Companys results of operations for 2006.
The evaluation of the two reporting units revealed no impairment exposure.Indefinite Life Intangible AssetsThe indefinite life intangible assets are those intangibles not subject to amortization and
consist principally of wireline concessions and FCC cellular licenses.A significant portion of our intangible assets are cellular licenses that provide our wireless
operations with the exclusive right to utilize designated radio frequency spectrum to provide
cellular communication services. While licenses are issued for only a fixed time, generally ten
years, such licenses are subject to renewal by the Federal Communications Commission (FCC).
Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined
that there are currently no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful life of our wireless licenses. As a result, we treat the wireless
licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142. We
reevaluate the useful life determination for cellular licenses each reporting period to determine
whether events and circumstances continue to support an indefinite useful life.We have tested our indefinite life intangible assets for impairment at least annually unless
indicators of impairment exist. We began using the direct value approach in 2005 performing our
annual impairment test on our indefinite life intangible assets in accordance with a September
29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), Use
of the Residual Method to Value Acquired Assets Other Than Goodwill. The direct value approach
determines fair value using estimates of future cash flows associated specifically with the
licenses. Previously, we used a residual method, which determined the fair value of the business
by estimating future cash flows of the operations. The fair value of aggregate licenses was
determined by subtracting from the fair value of the business the fair value of all of the other
net tangible and intangible (primarily recognized and unrecognized customer relationship
intangible assets) assets of our operations. We determined the fair value of our customer
relationship intangible assets based on our average customer acquisition costs. Under either the
direct method or the residual method, if the fair value of the aggregated licenses was less than
the aggregated carrying amount of the
licenses, an impairment would have been recognized. The Company has evaluated its indefinite
life intangible assets using the fair
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value approach for each reporting unit to determine if
there is an impairment exposure and the impact it would have on the Companys results of
operations for 2006. The evaluation revealed no impairment.Definite Life Intangible AssetsThe definite life intangible assets are those intangibles assets subject to amortization and
consist principally of trade names and software licenses. The Company amortizes trade names and
software licenses on a straight-line basis over 25 and 5 years, respectively.For information related to the breakdown of the carrying amount of goodwill as well as the major
components of our other intangible assets, see Note 5.Software CostsThe Company defers and amortizes software development project costs over a five-year period
beginning at the project completion date.Advertising CostsThe Company expenses advertising costs as incurred, and recorded advertising costs of $17 million
in 2006 and 2005, and $16 million in 2004.Repairs and MaintenanceThe Company charges the cost of repairs and maintenance as these costs are incurred.Employee Benefit PlansPension and post-employment health care and life insurance benefits earned interest on projected
benefit obligations are accrued currently. Prior service costs and credits resulting from
changes in plan benefits are amortized over the average remaining service period of the employees
expected to receive the benefits.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS No. 158). SFAS No. 158 requires the recognition of a defined benefit postretirement
plans funded status as either an asset or liability on the balance sheet. SFAS No. 158 also
requires the immediate recognition of the unrecognized actuarial gains and losses and prior
service costs and credits that arise during the period as a component of Other Accumulated
Comprehensive Income, net of applicable income taxes. Additionally, the fair value of plan assets
must be determined as of the companys year-end. We adopted SFAS No. 158 effective December 31,
2006, which resulted in a net decrease to shareholders equity
of $316 million. See Note 8 for
further discussion of the effect of adopting SFAS No. 158 on the Companys consolidated financial
statements for the year ended December 31, 2006.Impairment or Disposal of Long-lived AssetsAssets are assessed for impairment when changes in circumstances indicate that their carrying
values are not recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Losses are recognized in circumstances where impairment exists,
at the amount by which the carrying value of assets exceeds fair value. Fair value is determined
based on quoted market prices, if not available, the estimate of fair value is based on various
valuation techniques, including a discounted value of estimated future cash flows and fundamental
analysis.For the last four years, the Company has been operating a TDMA network and CDMA network for its
wireless clients. During 2003 management decided to migrate the TDMA clients to the CDMA network.
On December 31, 2003, the Company recorded an impairment loss associated to the TDMA network
investment of $11.8 million.
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Income TaxesThe Company uses an asset and liability approach in accounting for income taxes following the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are established for temporary differences between the way certain income and
expense items are reported for financial reporting and tax purposes. Deferred tax assets and
liabilities are adjusted, to the extent necessary, to reflect tax rates expected to be in
effect when the temporary differences reverse. A valuation allowance is established for
deferred tax assets for which realization is more likely than not.Minority Interest in Consolidated SubsidiaryThe minority interest in the consolidated balance sheet reflects Popular Inc.s 33% net
investment in Coqui.net at year-end.ReclassificationsReclassifications of prior years data have been made to conform to the current years
presentation.3. Recent Accounting PronouncementsUncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 requires the use of a two-step
approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return
and disclosures regarding uncertainties in income tax positions. The Company is required to
adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will
be recorded as an adjustment to opening retained earnings in the year of adoption and will be
presented separately. Only tax positions that meet the more likely than not recognition
threshold at the effective date may be recognized upon adoption of FIN 48. The Company believes
that the adoption of FIN 48 will not have a material effect on its results of operations and
financial condition.Fair Value MeasurementsIn September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS No. 157). SFAS No. 157 expands disclosures about fair value
measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value. We are required to adopt SFAS No. 157
effective January 1, 2008 on a prospective basis. The Company believes that the adoption of SFAS
No. 157 will not have a material effect on its results of operations and financial condition.
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4.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of:
 Remaining Useful
    
    
    December 31
    
    
    December 31Lives (Yrs)
    
    
    2006
    
    
    2005(In thousands)Outside plant
    
    
    9.0
    
    
    $
    2,238,371
    
    
    $
    2,198,892Central office and transmission equipment
    
    
    3.8
    
    
    
    1,317,882
    
    
    
    1,282,713Equipment and other
    
    
    2.7
    
    
    
    271,031
    
    
    
    273,245Buildings
    
    
    14.6
    
    
    
    334,185
    
    
    
    324,988Land
    
    
    N/A
    
    
    
    25,500
    
    
    
    25,500Gross plant in service
    
    
    
    
    
    
    4,186,969
    
    
    
    4,105,338Less: accumulated depreciation
    
    
    
    
    
    
    2,958,118
    
    
    
    2,772,489Net plant in service
    
    
    
    
    
    
    1,228,851
    
    
    
    1,332,849Construction in progress
    
    
    
    
    
    
    40,429
    
    
    
    18,661Total
    
    
    
    
    
    $
    1,269,280
    
    
    $
    1,351,510
 Effective July 2005, the Company performed its periodic review of plant useful lives
estimates based on a comprehensive analysis of the useful lives underlying the depreciation
rates. The review incorporates the impact of technology, future competition and assumptions
employed in the industry relative to depreciation and retirement rates. For the year ended
December 31, 2005, the revision resulted in lower depreciation expense of approximately $6.5
million than would have been recognized under the previous useful lives estimate.5.
    
    GoodwillFollowing is a breakdown of goodwill:
 CarryingValueDecember 31
    
    
    December 312006
    
    
    2005(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
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6.
    
    IntangiblesFollowing is a breakdown of intangibles:
 CarryingValueDecember 31
    
    
    December 312006
    
    
    2005(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 December 31, 2006
    
    
    December 31, 2005(In thousands)Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    15,154
    
    
    $
    33,246
    
    
    $
    48,400
    
    
    $
    13,218
    
    
    $
    35,182Software licenses
    
    
    138,757
    
    
    
    84,222
    
    
    
    54,535
    
    
    
    126,720
    
    
    
    61,520
    
    
    
    65,200Total Definite Life
    
    
    187,157
    
    
    
    99,376
    
    
    
    87,781
    
    
    
    175,120
    
    
    
    74,738
    
    
    
    100,382Plus: Total
Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    187,157
    
    
    $
    99,376
    
    
    $
    196,756
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    209,357
 Intangible asset amortization expense was $25 million, $23 million and $17 million for the years
ended December 31, 2006, 2005 and 2004, respectively. The following table presents expected
amortization expense of existing intangible assets as of December 31, 2006 for each of the
following years (in thousands):
 For the year ended December 31, 2006
    
    $
    24,638Expected amortization expense for the years ending December 31,:2007
    
    
    20,0622008
    
    
    15,6482009
    
    
    10,6972010
    
    
    4,7052011
    
    
    1,9362012 and thereafter
    
    
    34,733
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7.
    
    Other assetsOther assets consist of:
 December 31
    
    
    December 312006
    
    
    2005(In thousands)Deferred activation and installation costs
    
    $
    48,128
    
    
    $
    68,422Notes receivable-equipment sales
    
    
    
    
    
    
    1,995Deferred pension asset
    
    
    
    
    
    
    41,729Deferred financing costs, net
    
    
    1,519
    
    
    
    1,359Other assets
    
    
    243
    
    
    
    1,766Total
    
    $
    49,890
    
    
    $
    115,271
 8.
    
    Pension PlanAdoption of SFAS No. 158On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS
No.158. SFAS No.158 required the Company to recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit obligations) of its pension plan
in the December 31, 2006 statement of financial position, with a corresponding adjustment to
accumulated other comprehensive income, net of taxes. The adjustment to accumulate other
comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized
prior service costs, and unrecognized transition obligation remaining from the initial adoption
of SFAS No. 87, all of which were previously netted against the plans funded status in the
Companys statement of financial position pursuant to the provisions of SFAS No. 87.The Company has noncontributory pension plans for full-time employees, which are tax qualified as
they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements. The
Company realizes tax deductions when contributions are made to the trusts. The trusts invest in
equity and fixed income securities to meet benefit 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 pension 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 reconciles balance sheet figures as of December 31, 2006 to show the
effect of the adoption of SFAS No. 158.
 At December 31, 2006Prior to Adoption
    
    Effect of Adopting
    
    As Reported atStatement 158
    
    Statement 158
    
    December 31, 2006Intangible pension asset
    
    $
    41,729
    
    
    $
    (41,729
    )
    
    $
    Accrued pension liability
    
    
    542,902
    
    
    
    368,213
    
    
    
    911,115Deferred income taxes
    
    
    228,225
    
    
    
    122,128
    
    
    
    350,353Accumulated other comprehensive income
    
    
    143,595
    
    
    
    315,721
    
    
    
    459,316
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The following table sets forth the status of the plans and the amounts in the financial
statements as of December 31, 2006 and 2005:
 Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Change in benefit obligation:Benefit obligation at beginning
of period
    
    $
    1,354,075
    
    
    $
    1,286,932
    
    
    $
    627,801
    
    
    $
    543,390Service cost
    
    
    24,741
    
    
    
    23,825
    
    
    
    7,498
    
    
    
    7,061Interest cost
    
    
    78,044
    
    
    
    73,694
    
    
    
    35,429
    
    
    
    32,258Actuarial loss
    
    
    29,734
    
    
    
    33,311
    
    
    
    635
    
    
    
    72,445Plan amendments-ERW
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan amendments-Other
    
    
    
    
    
    
    21,990
    
    
    
    
    
    
    
    Expected expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (95,554
    )
    
    
    (85,677
    )
    
    
    (28,196
    )
    
    
    (27,353
    )Benefit obligation at end of
period
    
    $
    1,391,040
    
    
    $
    1,354,075
    
    
    $
    643,167
    
    
    $
    627,801Change in plan assets:Fair value of plan assets at
beginning of period
    
    
    989,492
    
    
    
    870,110
    
    
    
    
    
    
    
    Actual return (loss) on plan assets
    
    
    126,575
    
    
    
    60,732
    
    
    
    
    
    
    
    Employer contributions
    
    
    102,579
    
    
    
    144,327
    
    
    
    28,196
    
    
    
    27,353Benefits paid
    
    
    (95,554
    )
    
    
    (85,677
    )
    
    
    (28,196
    )
    
    
    (27,353
    )Fair value of plan assets at end
of period
    
    $
    1,123,092
    
    
    $
    989,492
    
    
    $
    
    
    
    $
    Funded status:Funded status at end of year
    
    
    (267,948
    )
    
    
    (364,583
    )
    
    
    (643,167
    )
    
    
    (627,801
    )Unrecognized actuarial loss, net
    
    
    352,218
    
    
    
    395,179
    
    
    
    350,230
    
    
    
    369,317Unrecognized prior service cost (benefit)
    
    
    35,408
    
    
    
    40,608
    
    
    
    (61,371
    )
    
    
    (70,596
    )Unrecognized net transition
obligation
    
    
    762
    
    
    
    1,121
    
    
    
    13,723
    
    
    
    15,925Net amount recognized
    
    $
    120,440
    
    
    $
    72,325
    
    
    $
    (340,585
    )
    
    $
    (313,155
    )Balance sheet amounts consist of:(Before FAS 158)Accrued benefit liability
    
    $
    (151,131
    )
    
    $
    (250,240
    )
    
    
    (340,585
    )
    
    $
    (313,155
    )Other asset (Note 7)
    
    
    36,169
    
    
    
    41,729
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    235,402
    
    
    
    280,836
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    120,440
    
    
    $
    72,325
    
    
    $
    (340,585
    )
    
    $
    (313,155
    )
 Disclosure information required by FAS 158:
 At December 31,
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Projected benefit obligation
    
    $
    (1,391,040
    )
    
    $
    1,354,075
    
    
    $
    
    
    
    $
    Accumulated benefit obligation
    
    
    
    
    
    
    1,239,733
    
    
    
    (643,167
    )
    
    
    Fair value of plan assets
    
    
    1,123,092
    
    
    
    989,492
    
    
    
    
    
    
    
    Net pension liability
    
    
    (267,948
    )
    
    
    
    
    
    
    
    
    
    
    Balance sheet amounts consist of:Current liabilities
    
    
    
    
    
    
    
    
    
    
    (26,197
    )
    
    
    Non-current liabilities
    
    
    (267,948
    )
    
    
    
    
    
    
    (616,970
    )
    
    
    Net pension liability
    
    $
    (267,948
    )
    
    $
    
    
    
    $
    (643,167
    )
    
    $
    Amounts Recognized in Accumulated Other
Comprehensive IncomeNet Actuarial Loss
    
    $
    352,218
    
    
    
    
    
    
    $
    350,230Prior Service Cost
    
    
    35,408
    
    
    
    
    
    
    
    (61,371
    )Net Transition Obligation
    
    
    762
    
    
    
    
    
    
    
    13,723$
    388,388
    
    
    
    
    
    
    $
    302,582
 Changes in benefit obligations were caused by factors including changes in actuarial
assumptions (see Assumptions).
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Net Periodic CostThe components of the net pension and other post-employment benefit expenses for years ended
December 31,
 Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits(In thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Service cost
    
    $
    24,741
    
    
    $
    23,825
    
    
    $
    20,551
    
    
    $
    7,498
    
    
    $
    7,061
    
    
    $
    6,321Interest cost
    
    
    78,044
    
    
    
    73,694
    
    
    
    72,600
    
    
    
    35,429
    
    
    
    32,258
    
    
    
    32,226Expected return on plan assets
    
    
    (79,604
    )
    
    
    (72,875
    )
    
    
    (59,384
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    359
    
    
    
    359
    
    
    
    359
    
    
    
    2,202
    
    
    
    2,202
    
    
    
    2,202Prior service cost (benefit)
    
    
    5,200
    
    
    
    3,650
    
    
    
    5,257
    
    
    
    (9,225
    )
    
    
    (9,225
    )
    
    
    (5,373
    )Actuarial loss, net
    
    
    25,722
    
    
    
    22,719
    
    
    
    17,008
    
    
    
    19,720
    
    
    
    18,451
    
    
    
    14,251Net amortization and deferral
    
    
    54,462
    
    
    
    51,372
    
    
    
    56,391
    
    
    
    55,624
    
    
    
    50,747
    
    
    
    49,627Effect of early retirement program
    
    
    
    
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    
    
    
    
    696Total
    
    $
    54,462
    
    
    $
    51,372
    
    
    $
    57,330
    
    
    $
    55,624
    
    
    $
    50,747
    
    
    $
    50,323
 Additional InformationAs a result of the adoption of SFAS No. 158, we no longer record an additional minimum pension
liability. In prior years, as a result of changes in interest rates and changes in investment
returns, as indicated below, an adjustment to the additional minimum pension liability was
required for a number of plans, as indicated below. The adjustment in the liability was recorded
as a charge or (credit) to Accumulated Other Comprehensive Loss, net of taxes, in shareholders
equity in the consolidated balance sheets.AssumptionsThe weighted-average assumptions used in determining benefit obligations at December 31,
 Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2006
    
    2005
    
    2006
    
    2005Discount rate
    
    
    5.85
    %
    
    
    5.75
    %
    
    
    5.95
    %
    
    
    5.85
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
  Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2006
    
    2005
    
    2004
    
    2006
    
    2005
    
    2004Discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.85
    %
    
    
    5.75
    %
    
    
    5.75
    %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
 In order to project the long-term target investment return for the total portfolio,
estimates are prepared for the total return of each major asset class over the subsequent 10-year
period, or longer. Those estimates are based on a combination of factors including the
following: observable current market interest rates, consensus earnings expectations, historical
long-term performance and value-added, and the use of conventional long-term risk premiums. To
determine the aggregate return for the pension trust, the projected return of each individual
asset class is then weighted according to the allocation to that investment area in the Trusts
long-term asset allocation policy. The projected long-term results are then also compared to the
investment return earned over the
previous 10-years.
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The assumed health care cost trend rates at December 31,
 Post-Retirement Benefits2006
    
    2005
    
    2004Health 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
    %
    
    
    5.00
    %Year the rate reaches level it is assumed to remain thereafter
    
    
    2010
    
    
    
    2010
    
    
    
    2008
  One-percentage-point
    
    Post-Retirement Benefits(In thousands)
    
    Increase
    
    DecreaseEffect on 2006 total service and interest cost
    
    $
    7,125
    
    
    $
    (6,093
    )Effect on post-retirement benefit obligation as of December 31, 2006
    
    
    90,985
    
    
    
    (77,553
    )
 Plan AssetsThe weighted-average assets allocation for the pension plans assets at December 31, 2006 and
2005 by category are as follows:
 2006
    
    2005Equity securities
    
    
    62
    %
    
    
    61
    %Debt securities
    
    
    35
    %
    
    
    36
    %Other
    
    
    3
    %
    
    
    3
    %100
    %
    
    
    100
    %
 The portfolio strategy emphasizes a long-term equity orientation, significant global
diversification, the use of both public and private investments and professional financial and
operational risk controls. Assets are allocated according to a long-term policy neutral position
and held within a relatively narrow and pre-determined range. Both active and passive management
approaches are used depending on perceived market efficiencies and various other factors.Cash FlowsFederal legislation was enacted on April 10, 2004 that provides temporary pension funding relief
for the 2005 and 2006 plan years. The legislation replaced the 30-year treasury rate with a
higher corporate bond rate for determining the current liability. In 2006, we contributed $102
million to our qualified pension trusts, $800,000 to our nonqualified pension plans and $28
million to our other postretirement benefit plans. Our estimate of the amount and timing of
required qualified pension trust contributions for 2007 is based on current regulations,
including continued pension funding relief, and is approximately $155 million. We estimate
approximately $1 million in contributions to our non-qualified pension plans and approximately
$30 million to our other post-retirement benefit plans in 2007. We believe that we will have
adequate liquidity resources to fund these contributions. We believe our sources of funds
including from operations and from readily available external financing arrangements will be
sufficient to meet ongoing requirements.
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Estimated Future Benefit PaymentsThe benefits payments, which reflect expected future service, are expected to be paid as follows:
 Pension and Lump
    
    Post-Retirement(In thousands)
    
    Sum Benefits
    
    Benefits2007
    
    $
    83,687
    
    
    $
    30,3782008
    
    
    83,638
    
    
    
    32,9052009
    
    
    83,858
    
    
    
    35,0852010
    
    
    83,692
    
    
    
    36,9572011
    
    
    83,285
    
    
    
    38,6022012-2016
    
    
    436,043
    
    
    
    218,707
  Post-Retirement(In thousands)
    
    Benefits2007
    
    $
    4,1812008
    
    
    4,5302009
    
    
    4,8322010
    
    
    5,0902011
    
    
    5,3182012-2016
    
    
    30,156
 Early Retirement and Voluntary Separation ProvisionIn 2006, the Company did not offered a voluntary separation program to the employees.In May 2005, 33 eligible HIETEL employees accepted the voluntary separation program offered by
the Company in March 2005. In March 2005, 46 eligible management employees accepted the
voluntary separation program offered by the Company in December 2004. These programs resulted in
a provision of $1.7 million during year ended December 31, 2005.On September 30, 2004, the Company offered a voluntary separation program, expiring on December
3, 2004, to eligible management employees, resulting in a provision of $1.2 million covering 24
employees who accepted the separation plan. In January 2004, the Company recorded a provision of
$1.6 million associated with 19 eligible management employees who accepted the early retirement
program offered by the Company in December 2003. These programs resulted in a total provision of
$2.8 million during year ended December 31, 2004.
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9.
    
    Other Current LiabilitiesOther Current Liabilities consist of:
 December 31
    
    
    December 312006
    
    
    2005(In thousands)Accounts payable
    
    $
    84,388
    
    
    $
    43,719Accrued expenses
    
    
    66,478
    
    
    
    74,805Employee benefit accruals
    
    
    35,665
    
    
    
    39,991Carrier payables
    
    
    9,221
    
    
    
    7,812Taxes
    
    
    15,054
    
    
    
    730Interest
    
    
    4,005
    
    
    
    5,904Total
    
    $
    214,811
    
    
    $
    172,961
 10.
    
    DebtDebt consist of:
 December 31
    
    
    December 312006
    
    
    2005(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    
    
    
    $
    399,990Due May 15, 2009 at 6.80%
    
    
    299,947
    
    
    
    299,929Term credit facilities:Due Feb 28, 2011 at 55 basis points over LIBOR at
December 31, 2006
    
    
    275,000
    
    
    
    Commercial paper
    
    
    
    
    
    
    52,000Deferred derivative and Interest rate swap
    
    
    
    
    
    
    (107
    )Capital leases
    
    
    
    
    
    
    42Total
    
    
    574,947
    
    
    
    751,854Less short-term debt
    
    
    
    
    
    
    452,042Long-term debt
    
    $
    574,947
    
    
    $
    299,812
 The senior notes and term credit facilities are unsecured and non-amortizing. PRTC is the
guarantor of these debt instruments. See Schedule I for additional information about guarantees
of operating debt. The senior notes indentures and term credit facility agreements do not
contain dividend restrictions.The Company had a $400 million commercial paper program with maturities not to exceed 364 days,
backed by a working capital facility. As of February 28, 2006, the Company decreased the
commercial paper program to $275 million.The replacement facility consists of two related, unsecured credit facilities, a $275 million
revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility,
which is available to be drawn in one borrowing at any time until May 1, 2006 and will mature on
February 28, 2011. At the option of the Company, the maximum amount which may be borrowed under
the revolving credit facility may be increased at any time prior to maturity to $300 million, and
the amount borrowed on the term credit facility amounted to $275 million and funds were drawn on
May 1, 2006. Amounts borrowed under these facilities are guaranteed by PRTC, and bear interest
at the applicable LIBOR rate plus margins applicable to each facility or at the base rate;
which is the higher of the base rate publicly announced by the administrative agent from time to
time or the Federal Funds rate plus 0.5%, plus margins applicable to each facility. Accrued
interest on Eurodollar rate borrowings is payable based on elected
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intervals of one, two, three
or six months or other interest period as the Company may select, subject to certain conditions.
Accrued interest on base rate borrowings is payable quarterly. The Company is also required to
pay a quarterly facility fee on commitments under the revolving credit facility, irrespective of
usage, and a commitment fee on commitments under the term credit facility until utilized. The
revolving credit facility and the term credit facility contain covenants, including negative
covenants and financial ratios, and events of default which are substantially the same as those
which existed under the 364-day facility that was replaced. The revolving credit facility is for
working capital purposes and serves as backstop facility for the commercial paper program, and
the term credit facility was used to repay the senior notes that matured on May 15, 2006. On
February 5, 2007 the Company executed an authorization letter instructing Citibank to initiate
the waiver process of the Controlling Interest Provision with the banks in the syndicate under
the replacement credit facility and facilitate the amendments needed to change this provision in
the Credit Agreement dated February 28, 2006. This letter responds to a request received by the
Companys prospective buyer Sercotel S.A. de C.V., a subsidiary of América Móvil, S.A. de C.V, in
order to obtain a waiver of the above provision for the purposes of permitting the consummation
of the sale transaction and avoiding the credit facility to be declared in default. The banks
under the syndicate approved the amendments and it will be executed upon closing of the sale
transaction.On August 31, 2001, the Company entered into an interest rate swap contract with a notional
amount of $150 million. In September 2002, the Company drew the value out of the hedge position
without changing the fixed/floating funding mix of the original swap transaction. This
transaction resulted in cash proceeds of $11 million, reflected in cash from operations as
required by SFAS No. 104, and created a deferred derivative, which will be amortized until 2006.
As of December 31, 2005, the unamortized balance of the deferred derivative is $1 million. The
purpose of the swap is to hedge against changes in the fair market value of the Companys senior
notes to achieve a targeted mix of fixed and variable rate debt. The swap receives interest at a
fixed rate of 6.65% and pays interest at a net variable rate equal to six month LIBOR plus 170
basis points, with semiannual settlements and reset dates every May 15 and November 15 until
maturity of the May 15, 2006 senior notes. The swap was entered into at market and as a
result, there was no exchange of premium at the initial date of the swap. The Company designates
the swap as a hedge of the changes in fair market value of the senior notes due to changes in the
designated benchmark interest rate. PRTC was the guarantor of the interest rate swap. The
interest rate swap matured on May 15, 2006, and all interest payable due regarding the
transaction was paid in full at maturity. On May 15, 2006, the Company paid a total of $424
million, of principal and interest of the $400 million senior notes due on that date, of which
$275 million was refinanced with the Term Credit Facility that is due on February 28, 2011 and
$149 million was paid with cash from operations.Aggregate maturities of the senior notes and term credit facilities are as follow:
 Year
    
    
    
    Amount(In thousands)2009
    
    Senior note
    
    $
    300,0002011
    
    Term note
    
    
    275,000Total
    
    
    
    $
    575,000
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11.
    
    Other Non-Current LiabilitiesOther non-current liabilities consist of:
 December 31
    
    
    December 312006
    
    
    2005(In thousands)Deferred activation and installation revenues
    
    $
    48,128
    
    
    $
    68,422Customer deposits
    
    
    25,988
    
    
    
    26,297Other liabilities
    
    
    38,424
    
    
    
    41,626Total
    
    $
    112,540
    
    
    $
    136,345
 Deferred activation and installation revenues are amortized on a straight-line basis over
the estimated customer relationship period. Deferred activation and installation revenues
decreased $20 million to $48 million in year 2006 from previous year, mainly due to the change in
average customer relationship.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. As of December 31, 2006
and 2005, the Employee Stock Ownership Plan (ESOP) owns 7% of the outstanding capital stock of
the Company.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 the Companys stock. 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 the Companys stock from
former employees.Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999
were eligible to receive a portion of the Initial Grant of the Companys stock. Employees that
were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant
provided that they met the following condition:
 Employees who were on short-term disability, workers compensation, Family and Medical Care
Leave Act (FMLA) leave, layoff with recall rights, or other Company approved leave of
absence; and the employees returned to active employment with the Company as soon as they
were eligible to do so and within 180 days after March 2, 1999.
 Compensation expense is recorded based on the release of shares at market value, which is based
on an independent appraisal performed annually. The ESOP released or committed for release
approximately 37,000, 33,000 and 32,000 shares in 2006, 2005 and 2004, respectively. This
release resulted in compensation expense of $2 million for the years ended December 31, 2006,
2005, and 2004, 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, 2006, 2005 and 2004, respectively, which is reflected as a reduction of deferred
ESOP compensation in equity.On November 1, 2006 Sercotel S.A. de C.V., a subsidiary of América Móvil, S.A. de C.V,
offered to purchase the Companys stock held by the plan. Pursuant to section 14.03 of the plan
document each participant or beneficiary may direct the Trustee either, to sell or not to sell
the Companys stock allocated to the participants or beneficiarys account. The Trustee, on
behalf of Sercotel S.A. de C.V., sent all ESOP participants and beneficiaries an information
statement package disclosing the terms of the offer and voting card. On February 1st
2007, a Joinder Agreement was signed by Verizon, America Móvil and the US Trust, the trust of the
employee Stock Ownership Plan, where the Trustee agreed to sell 1,750,000 shares representing all
of the shares held in the plan. The buyer represented to the employees its intention to
terminate the plan following the closing of the Transaction and the allocation of the proceeds of
the sale to the ESOP.
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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, 2006 and 2005.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 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 adjustment to accumulated other comprehensive income at adoption represents the net
unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition
obligation remaining from the initial adoption of Statement 87, all of which were previously
netted against the plans funded status in the Companys statement of financial position pursuant
to the provisions of Statement 87. These amounts will be subsequently recognized as net periodic
pension cost pursuant to the Companys historical accounting policy for amortizing such amounts.
Further, actuarial gains and losses that arise in subsequent periods and are not recognized as
net periodic pension cost in the same periods will be recognized as a component of other
comprehensive income. Those amounts will be subsequently recognized as a component of net
periodic pension cost on the same basis as the amounts recognized in accumulated other
comprehensive income at adoption of Statement 158.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 and paid dividends for financial reporting purposes were the following:
 2006
    

    2005


    2004(In thousands)
    

    (In thousands)


    (In thousands)4th Quarter
    
    $
    10,868
    

    $
    27,144


    $
    22,9903rd Quarter
    
    
    15,559
    


    16,200



    26,5772nd Quarter
    
    
    84,717
    


    14,875



    12,3861st Quarter
    
    
    10,812
    


    3,248



    Total
    
    $
    121,956
    

    $
    61,467


    $
    61,953
 The senior notes indentures and credit facility agreements do not contain dividend
restrictions. The Company declared and paid legal dividends of $125 million, $63 million and $66
million during 2006, 2005 and 2004, respectively. However, these the legal dividends were
adjusted for the dividends of the ESOP unallocated shares by $3 million, $2 million and $4
million during 2006, 2005 and 2004, respectively, only for financial reporting purposes.
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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 41.5% to
pretax income for 2006 and 39% for 2005 and 2004. During the year 2006, 2005 and 2004, the
Company recorded an income tax provision of $80 million, $51 million and $68 million,
respectively, as set forth below:
 2006
    
    
    2005
    
    
    2004(In thousands)Current
    
    $
    53,365
    
    
    $
    7,960
    
    
    $
    17,267Deferred
    
    
    37,723
    
    
    
    42,828
    
    
    
    50,495Total
    
    $
    91,088
    
    
    $
    50,788
    
    
    $
    67,762
 A reconciliation of the provision to the amount computed by applying the statutory rate for
the year ended December 31, 2006, 2005 and 2004 is as follows:
 Year ended December 31,2006
    
    
    2005
    
    
    2004(In thousands)Provision computed at statutory rate
    
    
    41.5
    %
    
    
    39.0
    %
    
    
    39.0
    %Effect of income tax provision (benefit) as a result of:Book income not subject to tax
    
    
    (0.2
    )
    
    
    (0.7
    )
    
    
    (0.7
    )Additional deduction for tax purposes
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (0.5
    )Change in valuation allowance
    
    
    (0.3
    )
    
    
    
    
    
    
    Difference in tax rates
    
    
    (11.0
    )Other
    
    
    (2.5
    )
    
    
    0.3
    
    
    
    0.127.3
    %
    
    
    38.2
    %
    
    
    37.9
    %
  2006
    
    
    2005(In thousands)Goodwill and intangibles
    
    $
    33,063
    
    
    $
    47,657Employee benefit liabilities
    
    
    330,867
    
    
    
    227,712Net loss carry-forward and other
    
    
    (43,577
    )
    
    
    (51,192
    )Total
    
    $
    320,353
    
    
    $
    224,177
 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.At December 31, 2006, the Company had a net pre-tax operating loss carry forwards, available to
offset future taxable income expiring as follows:
 Year
    

Amount(In thousands)2012
    
    $
    34,2982013
    
    $
    19,932Total
    
    $
    54,230
 During the year ended December 31, 2006, the Company used net operating loss carry forwards of
approximately $24.5 million, to offset fully taxable operations. No net operating loss carry
forward were used during the years ended December 31, 2005 and 2004.On August 1, 2005, the Government of Puerto Rico approved Act No. 41 which imposes a transitory
additional surtax of 2.5% on taxable income. This transitory additional income tax is in effect for
taxable years 2005 and 2006. As of December 31, 2006, the deferred tax assets were valued at 39%, since any increase in the deferred tax assets related to
the transitional rate was reversed in 2006.
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15.
    
    Related Party TransactionsDuring the years ended December 31, 2006, 2005 and 2004, the Company had the following
significant transactions with affiliated companies:
 
    
    The Company has a contract with Popular Inc. by which the affiliate prints and sends the
monthly billings to the Companys customers. The charges for all of these services
amounted to approximately $8 million for 2006, $9 million for 2005 and $10 million for
2004. The affiliate also provides the Company with general banking services, such as lock
box and account collection services.
    
    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 $6 million,
$7 million and $10 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
    
    In January 2000, the Company entered into a joint venture agreement with VISI the
largest yellow page publishing company in Puerto Rico. On March 31, 2006, the Company
completed the sale of its participation in the equity interest in the Puerto Rico directory
operation and its right to receive 35% of the revenues from the publication of directory
advertising. The Company generated earnings of $3 million during year ended December 31,
2005 and $2 million during years ended 2004, for its approximate 24% share in VISI.
    
    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 are as follows:
 December 31
    
    December 312006
    

2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    179,138
    
    
    $
    179,138
    
    
    $
    55,086
    
    
    $
    55,086Accounts receivable
    
    
    194,562
    
    
    
    194,562
    
    
    
    227,629
    
    
    
    227,629Liabilities:Other current liabilities
    
    
    214,811
    
    
    
    214,811
    
    
    
    172,961
    
    
    
    172,961Short-term debt
    
    
    
    
    
    
    
    
    
    
    452,042
    
    
    
    454,172Long-term debt, including interest rate swap
    
    
    574,947
    
    
    
    585,113
    
    
    
    299,812
    
    
    
    308,883
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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.
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Segment results for the Company are as follows:
 For the Year Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands)Wireline:RevenuesLocal services
    
    $
    605,310
    
    
    $
    615,240
    
    
    $
    596,214Access services
    
    
    208,954
    
    
    
    233,896
    
    
    
    271,127Long distance services
    
    
    64,945
    
    
    
    65,175
    
    
    
    65,704Directory services and other
    
    
    226,121
    
    
    
    79,789
    
    
    
    71,059Total revenues
    
    $
    1,105,330
    
    
    $
    994,100
    
    
    $
    1,004,104Operating income
    
    $
    277,003
    
    
    $
    164,843
    
    
    $
    232,703Wireless:RevenuesCellular services
    
    $
    282,603
    
    
    $
    232,724
    
    
    $
    191,027Equipment sales and other
    
    
    85,708
    
    
    
    56,168
    
    
    
    34,705Total revenues
    
    $
    368,311
    
    
    $
    288,892
    
    
    $
    225,732Operating income (loss)
    
    $
    68,089
    
    
    $
    11,954
    
    
    $
    (12,973
    )Consolidated:Revenues for reportable segments
    
    $
    1,473,641
    
    
    $
    1,282,992
    
    
    $
    1,229,836Elimination of intersegment revenues
    
    
    (29,921
    )
    
    
    (30,468
    )
    
    
    (15,912
    )Consolidated revenues
    
    $
    1,443,720
    
    
    $
    1,252,524
    
    
    $
    1,213,924Operating income
    
    $
    345,092
    
    
    $
    176,797
    
    
    $
    219,730
 As ofDecember 31,2006
    
    
    2005AssetsWireline assets
    
    $
    2,396,484
    
    
    $
    2,331,252Wireless assets
    
    
    461,345
    
    
    
    422,558Segment assets
    
    $
    2,857,829
    
    
    $
    2,753,809Elimination of intersegment assets
    
    
    (473,718
    )
    
    
    (375,850
    )Consolidated assets
    
    $
    2,384,111
    
    
    $
    2,377,959
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18. Staff Accounting Bulletin No. 108
     Period in which the Misstatement originated (1)
    
    
    AdjustmentCumulative Prior to
    
    
    Year ended
    
    
    Year ended
    
    
    recorded as ofDecember 31, 2004
    
    
    December 31, 2004
    
    
    December 31, 2005
    
    
    January 1, 2006Accounts receivable & Other current
liabilities (2)
    
    
    16,671
    
    
    
    301
    
    
    
    240
    
    
    
    17,212Impact on net income (3)
    
    $
    16,671
    
    
    $
    301
    
    
    $
    240Retained earnings (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,212
 
 (1)
    
    Telpri had quantified these errors under the roll-over method and concluded that they were immaterial
both individually and in the aggregate to prior financial statements.(2)
    
    In conjunction with a review of its accounts receivable and deferred revenue balances related to rent
billed in advance, the Company detected an error in its estimate of billings for the last 20 days of the
month, which led to an overstatement of the accounts receivable as well as an understatement of the
deferred revenues. A significant portion of this adjustment related to pre-2002 fiscal years.(3)
    
    Represents the net overstatement of net income for the indicated periods resulting from this misstatement.(4)
    
    Represents the net decrease to retained earnings recorded as of January 1, 2006, the first day of
Telpris 2006 fiscal year, to record the transition provisions of SAB 108 misstatements. 19. Supplemental Cash Flow Information
 Cash paid for interest for the year ended December 31, 2006, 2005 and 2004 amounted to
approximately $44 million, $50 million, and $47 million, respectively. Cash paid for income
taxes during the year ended December 31, 2006 amounted to $33 million. For the years ended
December 31, 2005 and 2004, the Company paid income taxes amounting to $6 million in each year.
 63




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20. Leases
 The Company has operating leases for certain facilities and equipment. Future minimum lease
payments under operating leases are as follows:
 Operating(In thousands)Year ending December 31,2007
    
    $
    17,7772008
    
    
    17,2742009
    
    
    18,4912010
    
    
    19,4512011
    
    
    19,763Thereafter
    
    
    8,856Present value of minimum lease payments
    
    $
    101,612
 21. Subsequent Event
 On March 26, 2007 the Federal Communications Commission granted authorization for transfer of
control of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) from Verizon Communications, Inc. to
America Movil, S.A. de C.V.
 64




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22. Contingencies and Regulatory Matters
 REGULATORY AND COMPETITIVE TRENDS
   TOUCHTONE CHARGES
    MUNICIPAL RIGHT OF WAY FEES
  PRTC v. Guayanilla
 PRT v Municipality of Caguas PRTC
v Municipality of Ponce PRTC v. Municipality of Utuado PRT v. Municipality of
Cidra PRT v. Municipality of Vega Baja PRT v. Municipality of Cataño
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INTERCONNECTION DISPUTE
  SUBSCRIBER LINE CHARGE (SLC)
   66




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23. Quarterly Financial Data
  (In thousands)
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth Quarter2006Revenues
    
    $
    497,242
    
    
    $
    318,088
    
    
    $
    317,203
    
    
    $
    311,188Operating costs and expenses
    
    
    295,557
    
    
    
    272,853
    
    
    
    262,886
    
    
    
    267,332Operating income
    
    $
    201,685
    
    
    $
    45,235
    
    
    $
    54,317
    
    
    $
    43,856Net income
    
    $
    169,432
    
    
    $
    21,625
    
    
    $
    26,964
    
    
    $
    22,5452005Revenues
    
    $
    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
    
    
    $
    6,502
 Telecomunicaciones de Puerto Rico, Inc.
 
 Schedule I
 The following summarizes the condensed consolidating financial information as of December 31,
2006, 2005 and 2004, and for the years then ended, presents the financial position, results of
operations and cash flows of (i) the Company as if it accounted for its subsidiaries on the
equity method, (ii) the Guarantor Subsidiary (as defined below); and (iii) the Non-Guarantor
Subsidiaries (as defined below) on a combined basis. The consolidation entries eliminate
investments in subsidiaries and intercompany balances and transactions.The Notes are guaranteed by PRTC (the Guarantor Subsidiary), a wholly owned subsidiary of the
Company, but not guaranteed by the Companys other subsidiaries, Coqui.net, PRTLD, and Datacom
(the Non-Guarantor Subsidiaries). The guarantee by the guarantor subsidiary is full and
unconditional.
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Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    152,644
    
    
    $
    26,494
    
    
    $
    
    
    
    $
    179,138Intercompany accounts receivable
    
    
    53,391
    
    
    
    51,822
    
    
    
    68,278
    
    
    
    (173,491
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    193,830
    
    
    
    732
    
    
    
    
    
    
    
    194,562Deferred income tax
    
    
    
    
    
    
    32,534
    
    
    
    59
    
    
    
    
    
    
    
    32,593Inventory and supplies, net
    
    
    
    
    
    
    35,112
    
    
    
    1
    
    
    
    
    
    
    
    35,113Prepaid expenses
    
    
    
    
    
    
    11,523
    
    
    
    569
    
    
    
    
    
    
    
    12,092Total current assets
    
    
    53,391
    
    
    
    477,465
    
    
    
    96,133
    
    
    
    (173,491
    )
    
    
    453,498PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,262,259
    
    
    
    7,021
    
    
    
    
    
    
    
    1,269,280GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    299,334
    
    
    
    24,349
    
    
    
    
    
    
    
    323,683DEFERRED INCOME TAX
    
    
    
    
    
    
    280,685
    
    
    
    7,075
    
    
    
    
    
    
    
    287,760INVESTMENT IN SUBSIDIARIES
    
    
    531,568
    
    
    
    
    
    
    
    
    
    
    
    (531,568
    )
    
    
    OTHER ASSETS
    
    
    575,813
    
    
    
    49,887
    
    
    
    0
    
    
    
    (575,810
    )
    
    
    49,890TOTAL ASSETS
    
    $
    1,160,772
    
    
    $
    2,369,630
    
    
    $
    134,578
    
    
    $
    (1,280,869
    )
    
    $
    2,384,111LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Intercompany accounts payable
    
    
    28,990
    
    
    
    73,974
    
    
    
    75,074
    
    
    
    (178,038
    )
    
    
    Other current liabilities
    
    
    4,120
    
    
    
    206,673
    
    
    
    4,013
    
    
    
    5
    
    
    
    214,811Total current liabilities
    
    
    33,110
    
    
    
    280,647
    
    
    
    79,087
    
    
    
    (178,033
    )
    
    
    214,811LONG-TERM DEBT, excluding current portion
    
    
    574,947
    
    
    
    574,945
    
    
    
    
    
    
    
    (574,945
    )
    
    
    574,947OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    1,019,710
    
    
    
    642
    
    
    
    3,678
    
    
    
    1,024,030Total liabilities
    
    
    608,057
    
    
    
    1,875,302
    
    
    
    79,729
    
    
    
    (749,300
    )
    
    
    1,813,788MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,608
    
    
    
    17,608SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    706,495
    
    
    
    646,783
    
    
    
    41,142
    
    
    
    (687,925
    )
    
    
    706,495Deferred ESOP compensation
    
    
    (24,739
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,739
    )Retained earnings
    
    
    330,275
    
    
    
    306,861
    
    
    
    13,707
    
    
    
    (320,568
    )
    
    
    330,275Accumulated other comprehensive loss
    
    
    (459,316
    )
    
    
    (459,316
    )
    
    
    
    
    
    
    459,316
    
    
    
    (459,316
    )Total shareholders equity
    
    
    552,715
    
    
    
    494,328
    
    
    
    54,849
    
    
    
    (549,177
    )
    
    
    552,715TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,160,772
    
    
    $
    2,369,630
    
    
    $
    134,578
    
    
    $
    (1,280,869
    )
    
    $
    2,384,111
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Condensed Consolidating Balance Sheets
 Non-Guarantor
    
    
    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
    
    
    
    0
    
    
    
    (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
 69




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Condensed Consolidating Statements of Income
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    562,178
    
    
    $
    32,228
    
    
    $
    (9,559
    )
    
    $
    584,847Access services
    
    
    
    
    
    
    208,756
    
    
    
    
    
    
    
    (3,793
    )
    
    
    204,963Long distance services
    
    
    
    
    
    
    33,438
    
    
    
    31,628
    
    
    
    (1,986
    )
    
    
    63,080Cellular services
    
    
    
    
    
    
    365,608
    
    
    
    
    
    
    
    (449
    )
    
    
    365,159Directory and other services
    
    
    
    
    
    
    254,802
    
    
    
    1,827
    
    
    
    (30,958
    )
    
    
    225,671Total revenues
    
    
    
    
    
    
    1,424,782
    
    
    
    65,683
    
    
    
    (46,745
    )
    
    
    1,443,720OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    1
    
    
    
    1,070,611
    
    
    
    74,476
    
    
    
    (46,460
    )
    
    
    1,098,628OPERATING INCOME (LOSS)
    
    
    (1
    )
    
    
    354,171
    
    
    
    (8,793
    )
    
    
    (285
    )
    
    
    345,092OTHER INCOME (EXPENSE), NET
    
    
    239,801
    
    
    
    (12,949
    )
    
    
    1,737
    
    
    
    (242,028
    )
    
    
    (13,439
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    239,800
    
    
    
    341,222
    
    
    
    (7,056
    )
    
    
    (242,313
    )
    
    
    331,653INCOME TAX EXPENSE (BENEFIT)
    
    
    (766
    )
    
    
    94,271
    
    
    
    (2,418
    )
    
    
    
    
    
    
    91,087NET INCOME
(LOSS)
    
    $
    240,566
    
    
    $
    246,951
    
    
    $
    (4,638
    )
    
    $
    (242,313
    )
    
    $
    240,566
 70




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Condensed Consolidating Statements of Income
 Non-Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    573,214
    
    
    $
    32,599
    
    
    $
    (9,990
    )
    
    $
    595,823Access services
    
    
    
    
    
    
    234,695
    
    
    
    
    
    
    
    (5,498
    )
    
    
    229,197Long distance services
    
    
    
    
    
    
    28,227
    
    
    
    37,187
    
    
    
    (2,311
    )
    
    
    63,103Cellular services
    
    
    
    
    
    
    287,067
    
    
    
    
    
    
    
    (1,427
    )
    
    
    285,640Directory and other services and sales
    
    
    
    
    
    
    88,156
    
    
    
    1,603
    
    
    
    (10,998
    )
    
    
    78,761Total revenues
    
    
    
    
    
    
    1,211,359
    
    
    
    71,389
    
    
    
    (30,224
    )
    
    
    1,252,524OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    
    
    
    
    1,050,204
    
    
    
    55,748
    
    
    
    (30,225
    )
    
    
    1,075,727OPERATING INCOME
    
    
    
    
    
    
    161,155
    
    
    
    15,641
    
    
    
    1
    
    
    
    176,797OTHER INCOME (EXPENSE), NET
    
    
    79,388
    
    
    
    (45,066
    )
    
    
    1,377
    
    
    
    (82,320
    )
    
    
    (46,621
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    79,388
    
    
    
    116,089
    
    
    
    17,018
    
    
    
    (82,319
    )
    
    
    130,176INCOME TAX EXPENSE
    
    
    
    
    
    
    44,445
    
    
    
    6,343
    
    
    
    
    
    
    
    50,788NET INCOME
    
    $
    79,388
    
    
    $
    71,644
    
    
    $
    10,675
    
    
    $
    (82,319
    )
    
    $
    79,388
 71




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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
    
    
    
    
    
    
    27,280
    
    
    
    37,246
    
    
    
    (332
    )
    
    
    64,194Cellular services
    
    
    
    
    
    
    223,084
    
    
    
    
    
    
    
    
    
    
    
    223,084Directory and other services and sales
    
    
    
    
    
    
    86,213
    
    
    
    1,125
    
    
    
    (16,264
    )
    
    
    71,074Total 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 (LOSS)
    
    
    57
    
    
    
    206,064
    
    
    
    13,609
    
    
    
    0
    
    
    
    219,730OTHER INCOME (EXPENSE), NET
    
    
    108,043
    
    
    
    (41,197
    )
    
    
    437
    
    
    
    (110,862
    )
    
    
    (43,579
    )INCOME
BEFORE INCOME TAX EXPENSE (BENEFIT)
    
    
    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
 72




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    572,669
    
    
    $
    (23,893
    )
    
    $
    548,774CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (152,331
    )
    
    
    (86
    )
    
    
    (152,417
    )Proceeds from sale of investment
    
    
    
    
    
    
    
    
    
    
    26,651
    
    
    
    26,651Net cash
provided by (used in) investing activities
    
    
    
    
    
    
    (152,331
    )
    
    
    26,565
    
    
    
    (125,766
    )CASH FLOWS FROM FINANCING ACTIVITIES:Advance to ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net repayments of short-term debt, including
capital leases
    
    
    (177,000
    )
    
    
    
    
    
    
    
    
    
    
    (177,000
    )Dividends paid
    
    
    (121,956
    )
    
    
    
    
    
    
    
    
    
    
    (121,956
    )Borrowings/(repayment) intercompany loans
    
    
    298,821
    
    
    
    (298,821
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (135
    )
    
    
    (298,821
    )
    
    
    
    
    
    
    (298,956
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (135
    )
    
    
    121,517
    
    
    
    2,672
    
    
    
    124,052CASH AND
CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    135
    
    
    
    31,130
    
    
    
    23,821
    
    
    
    55,086CASH AND
CASH EQUIVALENTS AT END OF YEAR
    
    $
    
    
    
    $
    152,645
    
    
    $
    26,493
    
    
    $
    179,138
 73




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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 CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    284
    
    
    
    (13,528
    )
    
    
    4,984
    
    
    
    (8,260
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    (149
    )
    
    
    44,658
    
    
    
    18,837
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    55,086
 74




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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 salvage on retirements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net 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 YEAR
    
    
    (1
    )
    
    
    12,434
    
    
    
    9,299
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    (149
    )
    
    $
    44,657
    
    
    $
    18,838
    
    
    $
    63,346
 75




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##### Table of Contents



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 Millions)December 31, 2006Allowance for uncollectible
accounts
    
    $
    77
    
    
    $
    51
    
    
    $
    
    
    
    $
    (43
    )
    
    $
    85December 31, 2005Allowance for uncollectible
accounts
    
    $
    106
    
    
    $
    47
    
    
    $
    
    
    
    $
    (76
    )
    
    $
    77December 31, 2004Allowance for uncollectible
accounts
    
    $
    131
    
    
    $
    30
    
    
    $
    
    
    
    $
    (55
    )
    
    $
    106
 AdditionsBalance at
    
    
    
    
    
    
    Charged
    
    
    DeductionsBeginning
    
    
    Charged to
    
    
    (Credited) to
    
    
    From
    
    
    Balance atDescription
    
    of Year
    
    
    Income
    
    
    Other Accounts (b)
    
    
    Reserves (a)
    
    
    Close of Year(Dollars in Millions)December 31, 2006Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6December 31, 2005Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6December 31, 2004Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6
 NOTES: (a)
    
    Reserved write-offs.(b)
    
    Other adjustments and recoveries of amounts written off in prior years.
 76




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  77




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##### Table of Contents



PART III
 
 ITEM
10. DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   NAME
    
    AGE
    
    PRINCIPAL OCCUPATION
    
    NOMINATED BY
    
    DIRECTOR SINCEDaniel C. Petri
    
    
    58
    
    
    Group President-International, Verizon
    
    GTE Holdings (Puerto
Rico)
    
    
    2002Edward J. McQuaid
    
    
    51
    
    
    Vice President and Chief Financial
Officer, Verizon International
    
    GTE Holdings (Puerto
Rico)
    
    
    2005Jeanne M. Dennison
    
    
    50
    
    
    Group Vice President International Human
Resources and Public Affairs
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Cristina M. Lambert
    
    
    58
    
    
    President and Chief Executive Officer,
Telecomunicaciones de Puerto Rico, Inc.
    
    GTE Holdings (Puerto
Rico)
    
    
    2003John J. Lack
    
    
    50
    
    
    Senior VP Verizon International
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Richard L. Carrión
    
    
    54
    
    
    Chairman, President and Chief
Executive Officer, Popular, Inc.
    
    Popular, Inc.
    
    
    1999Alfredo Salazar
    
    
    64
    
    
    Acting President, Government Development
Bank for Puerto Rico
    
    PRTA Holdings Corporation
    
    
    2005Rafael Martínez Margarida
    
    
    58
    
    
    Business Consultant
    
    PRTA Holdings Corporation
    
    
    2005Vacant
    
    
    
    
    
    
    
    PRTA Holdings Corporation
    
    
    2005
     78




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79




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##### Table of Contents



NAME
    
    AGE
    
    TITLECristina M. Lambert
    
    
    58
    
    
    President and Chief Executive OfficerAldo Figueroa
    
    
    51
    
    
    Vice President Operations and Chief Operations OfficerHéctor Houssay
    
    
    54
    
    
    Vice President Finance and Chief Financial OfficerAdail Ortiz
    
    
    49
    
    
    Vice President Revenue Assurance and BillingLuis G Garcia Padilla
    
    
    46
    
    
    Vice President SalesMariano Doble
    
    
    36
    
    
    Vice President Marketing and Chief Marketing OfficerRoberto García Rodriguez
    
    
    43
    
    
    Vice President Legal and Regulatory AffairsBenito Fernández
    
    
    60
    
    
    Vice President Human ResourcesIleana Molina
    
    
    51
    
    
    Vice President Corporate CommunicationsRoberto A. Correa
    
    
    49
    
    
    Vice President Wholesales ServicesJorge Samalot
    
    
    47
    
    
    Vice President Information Technology SolutionsManny Hernández
    
    
    51
    
    
    Vice President Network Services, Engineering and Technical PlanningHector Rosario
    
    
    54
    
    
    Vice President Network OperationsAngel O Vega Santiago
    
    
    34
    
    
    ControllerMaría E. De La Cruz
    
    
    38
    
    
    Treasurer
      80




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##### Table of Contents



81




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##### Table of Contents



www.telefonicapr.com
 82




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##### Table of Contents



ITEM 11. EXCUTIVE COMPENSATION
 Compensation Discussion and Analysis
  http://www.sec.gov
  Company Compensation Objectives
  Components of Compensation for 2006
     Perquisites and Other Benefits
  83




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##### Table of Contents



Mr. Daniel C. PetriMrs. Cristina LambertMr. Richard Carrión
    2006 Summary Compensation Table
 NonqualifedNon-Stock
    
    DeferredStock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Awards1
    
    Awards
    
    Compensation
    
    Earnings($)2
    
    Compensation3
    
    TotalPrincipal Position
    
    Year
    
    ($000s)
    
    ($000s)
    
    ($000s)
    
    ($000s)
    
    ($000s)
    
    ($000s)
    
    ($000s)
    
    ($000s)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)Cristina Lambert
    
    
    2006
    
    
    
    300.0
    
    
    
    0.0
    
    
    
    953.4
    
    
    
    0.0
    
    
    
    246.0
    
    
    
    69.8
    
    
    
    73.9
    
    
    
    1,643.0President & Chief Executive OfficerHector Houssay
    
    
    2006
    
    
    
    220.0
    
    
    
    0.0
    
    
    
    199.0
    
    
    
    0.0
    
    
    
    160.0
    
    
    
    19.0
    
    
    
    42.1
    
    
    
    640.2VP- Finance & Chief Financial OfficerBenito Fernandez
    
    
    2006
    
    
    
    213.1
    
    
    
    0.0
    
    
    
    266.7
    
    
    
    0.0
    
    
    
    139.8
    
    
    
    34.4
    
    
    
    62.6
    
    
    
    716.6VP  Human ResourcesAldo Figueroa
    
    
    2006
    
    
    
    230.0
    
    
    
    0.0
    
    
    
    147.3
    
    
    
    0.0
    
    
    
    138.0
    
    
    
    29.9
    
    
    
    27.7
    
    
    
    572.9VP & Chief Operations OfficerIleana Molina
    
    
    2006
    
    
    
    189.6
    
    
    
    17.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    29.9
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    236.5VP-Corporate Communications
 
 1
    
    The data included in this column reflects the dollar value of the
performance stock units and/or restricted stock units based on the average price of Verizons
common stock on the grant date, February 1, 2006. The Committee will determine the actual payment
of the performance stock units based on Verizons Total Shareholder Return (TSR) relative to the
TSR of the companies that make up the S&P 500 Index and to the TSR of Verizons Industry Peers,
which consists of companies within the telecommunications, broadband, wireless and cable
industries. On each dividend payment date, a number of restricted stock 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. Based on the closing price of Verizons Common Stock
on December 29, 2006, the aggregate unit amounts and dollar value held by each named executive
officer are shown below:  PSUs
    
    RSUs
    
    Aggregate ValueName
    
    (#)
    
    (#)
    
    ($)Ms. Lambert
    
    
    13,794
    
    
    
    9,192
    
    
    
    856,016Mr. Houssay
    
    
    6,741
    
    
    
    7,680
    
    
    
    537,056Mr. Fernandez
    
    
    6,537
    
    
    
    4,354
    
    
    
    405,586Mr. Figueroa
    
    
    7,053
    
    
    
    4,698
    
    
    
    437,617Ms. Molina
    
    
    
    
    
    
    
    
    
    
    
 
 2
    
    The data included in this column reflects the incremental increase in
pension value for each named executive officer pursuant to FASB 87 (based upon the
executives earliest unreduced retirement age). Verizon does not provide preferential
earnings under any nonqualified deferral plans.3
    
    For 2006, the column All Other Annual Compensation includes: incremental costs
of the financial planning allowances benefit, Company contributions to the qualified
savings plans, the non-qualified Executive Deferral Plan, and the Executive Life
Insurance Plan. 84




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##### Table of Contents



FinancialPlanning
    
    Qualified
    
    Nonqualifed
    
    Life InsuranceAllowances
    
    Savings Plan
    
    Deferral Plan
    
    Bonus PlanName
    
    ($)
    
    ($)
    
    ($)
    
    ($)Ms. Lambert
    
    $
    7,750
    
    
    $
    12,097
    
    
    $
    14,571
    
    
    $
    39,432Mr. Fernandez
    
    $
    8,460
    
    
    $
    12,100
    
    
    $
    4,913
    
    
    $
    16,652Mr. Houssay
    
    $
    3,020
    
    
    $
    11,721
    
    
    $
    6,533
    
    
    $
    41,320Mr. Figueroa
    
    $
    
    
    
    $
    12,096
    
    
    $
    
    
    
    $
    15,591Ms. Molina
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Plan Based Awards
  2006 Grants of Plan-Based Awards
 All OtherAll Other
    
    Option Awards:
    
    ExerciseEstimated Future Payouts
    
    Estimated Future Payouts
    
    Stock Awards:
    
    Number of
    
    or Base
    
    Grant DateUnder Non-Equity Incentive
    
    Under Equity Incentive
    
    Number of
    
    Securities
    
    Price of
    
    Fair ValuePlan Awards1
    
    Plan Awards2
    
    Shares of
    
    Underlying
    
    Option
    
    of Stock andGrant
    
    Threshold
    
    Target
    
    Maximum
    
    Threshold
    
    Target
    
    Maximum
    
    Stock or Units3
    
    Options
    
    Awards
    
    Option AwardsName
    
    Date
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    ($/Sh)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)
    
    (k)
    
    (l)Ms. Lambert
    
    
    2/1/2006
    
    
    
    0
    
    
    
    225,000
    
    
    
    300,000
    
    
    
    5,169
    
    
    
    15,204
    
    
    
    30,408
    
    
    
    8,550
    
    
    
    0
    
    
    
    0
    
    
    
    675,180Mr. Houssay
    
    
    2/1/2006
    
    
    
    0
    
    
    
    132,000
    
    
    
    176,000
    
    
    
    2,526
    
    
    
    7,430
    
    
    
    14,860
    
    
    
    7,180
    
    
    
    0
    
    
    
    0
    
    
    
    424,751Mr. Fernandez
    
    
    2/1/2006
    
    
    
    0
    
    
    
    127,860
    
    
    
    170,480
    
    
    
    2,450
    
    
    
    7,205
    
    
    
    14,410
    
    
    
    4,050
    
    
    
    0
    
    
    
    0
    
    
    
    319,905Mr. Figueroa
    
    
    2/1/2006
    
    
    
    0
    
    
    
    138,000
    
    
    
    184,000
    
    
    
    2,643
    
    
    
    7,774
    
    
    
    15,548
    
    
    
    4,370
    
    
    
    0
    
    
    
    0
    
    
    
    345,169Ms. Molina
    
    
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 1
    
    As reflected in the table above, if pre-established goals under the
annual incentive plan are achieved, a payment of 150% of the individual executives target
award value or 75% of their maximum value will be made. This results in a payout of 75% of
base salary for Ms. Lambert, 60% of base salary for Messrs. Houssay, Fernandez and Figueroa.2
    
    The equity-based plan awards that were granted as part of the 2006 Long-Term
Incentive Award for each of the named executive officers may also accrue quarterly dividends
that will be reinvested into the participants account as additional units. For purposes of
estimating accrued dividends at threshold, target and maximum payouts for equity incentive plan
awards, the table assumes a quarterly dividend of 40.5 cents per outstanding share, the same
quarterly dividend per outstanding share that was paid to shareholders during 2006.3
    
    The number of stock units that were granted as part of the 2006 Long-Term
Incentive Award for each of the named executive officers may also accrue quarterly dividends
that will be reinvested into the participants account as additional units. In 2006, the
quarterly dividend was 40.5 cents per outstanding share, the same quarterly dividend per
outstanding share paid to shareholders during 2006. 85




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  2006 Outstanding Equity Awards at Fiscal Year-End Table
 Option Awards
    
    
    Stock AwardsEquityEquity
    
    IncentiveEquity Incentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incentive
    
    Plan Awards:Plan Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Plan Awards:
    
    Market orNumber of
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of
    
    Number of
    
    Payout ValueSecurities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    
    Number of
    
    Shares or
    
    Unearned
    
    of UnearnedUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    Shares or
    
    Units of
    
    Shares, Units
    
    Shares, UnitsUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    
    Units of Stock
    
    Stock That
    
    or Other Rights
    
    or Other RightsOptions
    
    Options1
    
    Unearned
    
    Exercise
    
    Option
    
    
    That Have
    
    Have Not
    
    That Have Not
    
    That Have Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    
    Not Vested1
    
    Vested
    
    Vested1
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    
    (#)
    
    ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    
    (g)
    
    (h)
    
    (i)
    
    (j)Ms. Lambert
    
    
    3,156
    
    
    
    0
    
    
    
    0
    
    
    
    38.52
    
    
    
    2/16/2007
    
    
    
    
    17,455
    
    
    
    650,042
    
    
    
    35,181
    
    
    
    1,310,1249,470
    
    
    
    0
    
    
    
    0
    
    
    
    43.07
    
    
    
    2/17/2008
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    09,743
    
    
    
    0
    
    
    
    0
    
    
    
    51.51
    
    
    
    2/15/2009
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    03,008
    
    
    
    0
    
    
    
    0
    
    
    
    58.14
    
    
    
    6/29/2009
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    012,753
    
    
    
    0
    
    
    
    0
    
    
    
    53.97
    
    
    
    2/9/2010
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    06,727
    
    
    
    0
    
    
    
    0
    
    
    
    41.88
    
    
    
    6/30/2010
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    014,800
    
    
    
    0
    
    
    
    0
    
    
    
    54.32
    
    
    
    1/10/2011
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    021,942
    
    
    
    0
    
    
    
    0
    
    
    
    47.03
    
    
    
    1/23/2012
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    012,213
    
    
    
    0
    
    
    
    0
    
    
    
    37.24
    
    
    
    2/2/2013
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01,656
    
    
    
    0
    
    
    
    0
    
    
    
    33.92
    
    
    
    2/2/2013
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    014,490
    
    
    
    7245
    
    
    
    0
    
    
    
    35.51
    
    
    
    2/3/2014
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Mr. Houssay
    
    
    5,444
    
    
    
    0
    
    
    
    0
    
    
    
    52.49
    
    
    
    1/10/2011
    
    
    
    
    11,794
    
    
    
    439,202
    
    
    
    14,380
    
    
    
    535,52613,041
    
    
    
    0
    
    
    
    0
    
    
    
    47.03
    
    
    
    1/23/2022
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,246
    
    
    
    0
    
    
    
    0
    
    
    
    37.24
    
    
    
    2/2/2013
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    05,174
    
    
    
    2,588
    
    
    
    0
    
    
    
    35.51
    
    
    
    2/3/2014
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Mr. Fernandez
    
    
    8,176
    
    
    
    0
    
    
    
    0
    
    
    
    52.05
    
    
    
    1/10/2011
    
    
    
    
    10,712
    
    
    
    398,930
    
    
    
    16,950
    
    
    
    631,21113,972
    
    
    
    0
    
    
    
    0
    
    
    
    47.03
    
    
    
    1/23/2012
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,867
    
    
    
    0
    
    
    
    0
    
    
    
    37.24
    
    
    
    2/2/2013
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    07,106
    
    
    
    3,554
    
    
    
    0
    
    
    
    35.51
    
    
    
    2/3/2014
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Mr. Figueroa
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    N/A
    
    
    
    
    5,373
    
    
    
    200,109
    
    
    
    8,055
    
    
    
    299,958Ms. Molina
    
    
    378
    
    
    
    0
    
    
    
    0
    
    
    
    54.46
    
    
    
    9/1/2009
    
    
    
    
    0
    
    
    
    0
    
    
    
    3,232
    
    
    
    120,37011,684
    
    
    
    0
    
    
    
    0
    
    
    
    53.97
    
    
    
    2/9/2010
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01,345
    
    
    
    0
    
    
    
    0
    
    
    
    41.88
    
    
    
    6/30/2010
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    011,385
    
    
    
    0
    
    
    
    0
    
    
    
    54.32
    
    
    
    1/10/2011
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    013,041
    
    
    
    0
    
    
    
    0
    
    
    
    47.03
    
    
    
    1/23/2012
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    011,281
    
    
    
    0
    
    
    
    0
    
    
    
    37.24
    
    
    
    2/2/2013
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    07,762
    
    
    
    2588
    
    
    
    0
    
    
    
    35.51
    
    
    
    2/3/2014
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 Value Realized from Stock Options and Stock Appreciation Awards
  86




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##### Table of Contents



Option Exercises and Stock Vested Table
 Option Awards
    
    Stock AwardsNumber of Shares
    
    
    
    
    
    Number of SharesAcquired on
    
    Value Realized
    
    Acquired on
    
    Value RealizedExercise
    
    on Exercise
    
    Vesting
    
    on VestingName
    
    (#)
    
    ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Ms. Lambert
    
    
    0
    
    
    
    0
    
    
    
    3,705
    
    
    
    111,594Mr. Houssay
    
    
    0
    
    
    
    0
    
    
    
    1,638
    
    
    
    49,340Mr. Fernandez
    
    
    0
    
    
    
    0
    
    
    
    2,247
    
    
    
    67,667Mr. Figueroa
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Ms. Molina
    
    
    0
    
    
    
    0
    
    
    
    1,638
    
    
    
    49,340
 Retirement Plans
  Pension Benefits
 PaymentNumber of
    
    Present
    
    Duringof years
    
    Value of
    
    LastCredited
    
    Accumulated
    
    FiscalService
    
    Benefit
    
    YearName
    
    Plan Name
    
    (#)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Ms. Lambert
    
    Verizon Management Pension Plan
    
    
    32
    
    
    
    1,287,608
    
    
    
    0Verizon Excess Pension Plan
    
    
    2
    
    
    
    54,488
    
    
    
    0Mr. Houssay
    
    Verizon Management Pension Plan
    
    
    10
    
    
    
    172,960
    
    
    
    0Verizon Excess Pension Plan
    
    
    2
    
    
    
    32,891
    
    
    
    0Mr. Fernandez
    
    Verizon Management Pension Plan
    
    
    5
    
    
    
    84,260
    
    
    
    0Verizon Excess Pension Plan
    
    
    2
    
    
    
    17,931
    
    
    
    0Mr. Figueroa
    
    Verizon Management Pension Plan
    
    
    1
    
    
    
    29,074
    
    
    
    0Verizon Excess Pension Plan
    
    
    1
    
    
    
    2,681
    
    
    
    0Ms. Molina
    
    Verizon Management Pension Plan
    
    
    0
    
    
    
    0
    
    
    
    0Verizon Excess Pension Plan
    
    
    0
    
    
    
    0
    
    
    
    0
   COMPANYS PENSION PLAN
  87




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##### Table of Contents



PENSION PLAN TABLE
 FINAL AVERAGE
    
    YEARS OF SERVICESALARY
    
    15
    
    20
    
    25
    
    30$
    100,000
    
    
    $
    24,873
    
    
    $
    37,739
    
    
    $
    47,174
    
    
    $
    54,109125,000
    
    
    
    32,373
    
    
    
    47,739
    
    
    
    59,674
    
    
    
    68,484150,000
    
    
    
    39,874
    
    
    
    57,739
    
    
    
    72,174
    
    
    
    82,859175,000
    
    
    
    47,373
    
    
    
    67,739
    
    
    
    84,674
    
    
    
    97,234200,000
    
    
    
    54,873
    
    
    
    77,739
    
    
    
    97,174
    
    
    
    111,609
   2006 Nonqualified Deferred Compensation
 AggregateExecutive
    
    Company
    
    Aggregate
    
    Withdrawals/
    
    AggregateContributions
    
    Contributions
    
    Earnings in
    
    Distributions
    
    Balance atin Last FY
    
    in Last FY
    
    Last FY
    
    in Last FY
    
    Last FYEName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)Ms. Lambert
    
    
    386,262
    
    
    
    14,571
    
    
    
    209,043
    
    
    
    0
    
    
    
    3,307,931Mr. Houssay
    
    
    98,250
    
    
    
    4,913
    
    
    
    28,618
    
    
    
    0
    
    
    
    223,045Mr. Fernandez
    
    
    7,840
    
    
    
    6,533
    
    
    
    21,078
    
    
    
    0
    
    
    
    232,881Mr. Figueroa
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Ms. Molina
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 Severance and Change in Control Benefits
  88




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##### Table of Contents



Cristina Lambert
 Change inExecutive Benefits and
    
    
    
    
    
    Involuntary
    
    Involuntary
    
    
    
    
    
    ControlPayments
    
    
    
    
    
    Termination
    
    Termination
    
    Change in
    
    WithoutUpon Termination
    
    Retirement
    
    Without Cause
    
    For Cause
    
    Control
    
    Termination
    
    Death
    
    DisabilityCompensation:Base Salary
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Short-term Incentive
    
    $
    150,000
    
    
    $
    150,000
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    150,000
    
    
    $
    150,000Long-term Incentives1
Performance Stock Units2005 PSU Grant
    
    $
    318,195
    
    
    $
    318,195
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    318,195
    
    
    $
    318,1952006 PSU Grant
    
    $
    431,499
    
    
    $
    431,499
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    431,499
    
    
    $
    431,499Restricted Stock Units2005 RSU Grant
    
    $
    307,715
    
    
    $
    307,715
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    307,715
    
    
    $
    307,7152006 RSU Grant
    
    $
    342,327
    
    
    $
    342,327
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    342,327
    
    
    $
    342,327Separation Pay2
    
    $
    0
    
    
    $
    450,000
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Benefits and Perquisites:Disability Benefits3
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    1,677,244Executive Life Insurance4
    
    $
    72,983
    
    
    $
    72,983
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    2,250,000
    
    
    $
    72,983Financial Planning5
    
    $
    7,750
    
    
    $
    7,750
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Outplacement Services6
    
    $
    0
    
    
    $
    7,850
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Tax Gross-up on Perquisites
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA280G Tax Gross-up
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
 
 1
    
    The estimated 2005 and 2006 performance stock unit (PSU) and restricted
stock unit (RSU) grant amounts were calculated using $37.24 as the price per share,
which was the closing price of Verizons stock on December 29, 2006. In addition to the
closing price, the PSU award values were calculated utilizing year to date projections of
TSR attainment. As of December 29, 2006 the performance attainment for the 2005 and 2006
award cycles were 34.5% and 42%, respectively, of their maximum award value.2
    
    Represents the value of separation benefits payable under the terms and
conditions of the Companys separation policy.3
    
    The assumptions used to calculate the benefit values include a discount rate of
6% and mortality and recovery based on 1987 Commissioners Group Disability Table (1987
CGDT) adjusted by .70. The qualified portion of the benefit is estimated at $480,443 and
the nonqualified portion of the benefit is estimated at $1,196,801. The qualified
portion of the benefit is employee paid.4
    
    The Executive Life Insurance values represent the bonus amount that would be
payable to Ms. Lambert under the Executive Life Insurance program through age 65. In the
event of her death, Ms. Lamberts beneficiaries will be eligible to receive a death
benefit of $2,250,000.5
    
    Represents the value of the financial planning allowance provided by the Company.6
    
    Represents the value of outplacement services provided by the Company. 89




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##### Table of Contents



Hector Houssay
 Change inExecutive Benefits and
    
    
    
    
    
    Involuntary
    
    Involuntary
    
    
    
    
    
    ControlPayments
    
    
    
    
    
    Termination
    
    Termination
    
    Change in
    
    WithoutUpon Termination
    
    Retirement
    
    Without Cause
    
    For Cause
    
    Control
    
    Termination
    
    Death
    
    DisabilityCompensation:Base Salary
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Short-term Incentive
    
    NA
    
    $
    88,000
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    88,000
    
    
    $
    88,000Long-term Incentives1Performance Stock Units2005 PSU Grant
    
    NA
    
    $
    113,241
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    113,241
    
    
    $
    113,2412006 PSU Grant
    
    NA
    
    $
    210,873
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    210,873
    
    
    $
    210,873Restricted Stock Units2005 RSU Grant
    
    NA
    
    $
    109,415
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    109,415
    
    
    $
    109,4152006 RSU Grant
    
    NA
    
    $
    123,151
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    123,151
    
    
    $
    123,151Separation Pay2
    
    NA
    
    $
    231,000
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Benefits and Perquisites:Disability Benefits3
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    1,844,706Executive Life Insurance4
    
    NA
    
    $
    12,750
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    1,540,000
    
    
    $
    100,751Financial Planning5
    
    NA
    
    $
    7,500
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Outplacement Services6
    
    NA
    
    $
    7,850
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Tax Gross-up on Perquisites
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA280G Tax Gross-up
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
 
 1
    
    The estimated 2005 and 2006 performance stock unit (PSU) and
restricted stock unit (RSU) grant amounts were calculated using $37.24 as the price per
share, which was the closing price of Verizons stock on December 29, 2006. In addition
to the closing price, the PSU award values were calculated utilizing year to date
projections of TSR attainment. As of December 29, 2006 the performance attainment for
the 2005 and 2006 award cycles were 34.5% and 42%, respectively, of their maximum award
value.2
    
    Represents the value of separation benefits payable under the terms and
conditions of the Companys separation policy.3
    
    The assumptions used to calculate the benefit values include a discount rate
of 6% and mortality and recovery based on 1987 Commissioners Group Disability Table (1987
CGDT) adjusted by .70. The qualified portion of the benefit is estimated at $586,691 and
the nonqualified portion of the benefit is estimated at $1,258,014. The qualified
portion of the benefit is employee paid.4
    
    The Executive Life Insurance values represent the bonus amount that would be
payable to Mr. Houssay under the Executive Life Insurance program through age 65. In the
event of his death, Mr. Houssay beneficiaries will be eligible to receive a death benefit
of $1,540,000.5
    
    Represents the value of the financial planning allowance provided by the
Company.6
    
    Represents the value of outplacement services provided by the Company. 90




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##### Table of Contents



Benito Fernandez
 Change inExecutive Benefits and
    
    
    
    
    
    Involuntary
    
    Involuntary
    
    
    
    
    
    ControlPayments
    
    
    
    
    
    Termination
    
    Termination
    
    Change in
    
    WithoutUpon Termination
    
    Retirement
    
    Without Cause
    
    For Cause
    
    Control
    
    Termination
    
    Death
    
    DisabilityCompensation:Base Salary
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Short-term Incentive
    
    NA
    
    $
    85,240
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    85,240
    
    
    $
    85,240Long-term Incentives1Performance Stock Units2005 PSU Grant
    
    NA
    
    $
    154,311
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    154,311
    
    
    $
    154,3112006 PSU Grant
    
    NA
    
    $
    204,483
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    204,483
    
    
    $
    204,483Restricted Stock Units2005 RSU Grant
    
    NA
    
    $
    149,234
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    149,234
    
    
    $
    149,2342006 RSU Grant
    
    NA
    
    $
    162,154
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    162,154
    
    
    $
    162,154Separation Pay2
    
    NA
    
    $
    223,755
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Benefits and Perquisites:Disability Benefits3
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    1,143,345Executive Life Insurance4
    
    NA
    
    $
    5,798
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    1,495,000
    
    
    $
    5,798Financial Planning5
    
    NA
    
    $
    7,250
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Outplacement Services7
    
    NA
    
    $
    7,850
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Tax Gross-up on Perquisites
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA280G Tax Gross-up
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
 
 1
    
    The estimated 2005 and 2006 performance stock unit (PSU) and restricted
stock unit (RSU) grant amounts were calculated using $37.24 as the price per share, which was
the closing price of Verizons stock on December 29, 2006. In addition to the closing price,
the PSU award values were calculated utilizing year to date projections of TSR attainment. As
of December 29, 2006 the performance attainment for the 2005 and 2006 award cycles were 34.5%
and 42%, respectively, of their maximum award value.2
    
    Represents the value of separation benefits payable under the terms and conditions
of the Companys separation policy.3
    
    The assumptions used to calculate the benefit values include a discount rate of 6%
and mortality and recovery based on 1987 Commissioners Group Disability Table (1987 CGDT)
adjusted by .70. The qualified portion of the benefit is estimated at $397,039 and the
nonqualified portion of the benefit is estimated at $746,306. The qualified portion of the
benefit is employee paid.4
    
    The Executive Life Insurance values represent the bonus amount that would be
payable to Mr. Fernandez under the Executive Life Insurance program through age 65. In the
event of his death, Mr. Fernandezs beneficiaries will be eligible to receive a death benefit of
$1,491,700.5
    
    Represents the value of the financial planning allowance provided by the Company.6
    
    Represents the value of outplacement services provided by the Company. 91




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##### Table of Contents



Aldo Figueroa
 Change inExecutive Benefits and
    
    
    
    
    
    Involuntary
    
    Involuntary
    
    
    
    
    
    ControlPayments
    
    
    
    
    
    Termination
    
    Termination
    
    Change in
    
    withoutUpon Termination
    
    Retirement
    
    Without Cause
    
    For Cause
    
    Control
    
    Termination
    
    Death
    
    DisabilityCompensation:Base Salary
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Short-term Incentive
    
    NA
    
    $
    92,000
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    92,000
    
    
    $
    92,000Long-term Incentives1Performance Stock Units2005 PSU Grant
    
    NA
    
    $
    25,742
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    25,742
    
    
    $
    25,7422006 PSU Grant
    
    NA
    
    $
    220,626
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    220,626
    
    
    $
    220,626Restricted Stock Units2005 RSU Grant
    
    NA
    
    $
    25,142
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    25,142
    
    
    $
    25,1422006 RSU Grant
    
    NA
    
    $
    174,967
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    174,967
    
    
    $
    174,967Separation Pay2
    
    NA
    
    $
    241,500
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Benefits and Perquisites:Disability Benefits3
    
    NA
    
    $
    0
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    1,986,402Executive Life Insurance4
    
    NA
    
    $
    9,575
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    1,610,000
    
    
    $
    133,581Financial Planning5
    
    NA
    
    
    N/A
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Outplacement Services6
    
    NA
    
    $
    7,850
    
    
    $
    0
    
    
    NA
    
    NA
    
    $
    0
    
    
    $
    0Tax Gross-up on Perquisites
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA280G Tax Gross-up
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
    
    
    
    NA
 
 1
    
    The estimated 2005 and 2006 performance stock unit (PSU) and restricted
stock unit (RSU) grant amounts were calculated using $37.24 as the price per share, which was
the closing price of Verizons stock on December 29, 2006. In addition to the closing price,
the PSU award values were calculated utilizing year to date projections of TSR attainment. As
of December 29, 2006 the performance attainment for the 2005 and 2006 award cycles were 34.5%
and 42%, respectively, of their maximum award value.2
    
    Represents the value of separation benefits payable under the terms and conditions
of the Companys separation policy.3
    
    The assumptions used to calculate the benefit values include a discount rate of 6%
and mortality and recovery based on 1987 Commissioners Group Disability Table (1987 CGDT)
adjusted by .70. The qualified portion of the benefit is estimated at $654,717 and the
nonqualified portion of the benefit is estimated at $1,331,685. The qualified portion of the
benefit is employee paid.4
    
    The Executive Life Insurance values represent the bonus amount that would be
payable to Mr. Figueroa under the Executive Life Insurance program through age 65. In the event
of his death, Mr. Figueroas beneficiaries will be eligible to receive a death benefit of
$1,610,000.5
    
    Represents the value of the financial planning allowance provided by the Company.6
    
    Represents the value of outplacement services provided by the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
   92




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##### Table of Contents



COMPENSATION OF DIRECTORS
  2006 DIRECTOR COMPENSATION
 Change in PensionValue andNon-Equity
    
    NonqualifiedIncentive
    
    DeferredFees Earned or
    
    Stock
    
    Option
    
    Plan
    
    Compensation
    
    All OtherPaid in Cash
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    Total ($)Name (a)
    
    ($) (b)
    
    ($) ( c )
    
    ($) (d)
    
    ($) (e)
    
    ($) (f)
    
    ($) (g)
    
    (j)Daniel C. Petri
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Edward J. McQuaid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jeanne M. Dennison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John J. Lack
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard L. Carrión
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Alfredo Salazar
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rafael Martínez Margarida
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vacant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  93




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##### Table of Contents



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
    
    
    
    52.01600 Hidden Ridge
Irving, Texas 75038Popular, Inc.
    
    209 Muñoz Rivera Avenue
Hato Rey, Puerto Rico 00918
    
    
    3,246,749
    
    
    
    12.99PRTA Holdings Corporation
    
    Government Development Bank
For Puerto Rico
Minillas Government Center
San Juan, Puerto Rico 00940
    
    
    6,999,975
    
    
    
    28.00Employee Stock Ownership Plan
    
    U.S. Trust Company National Association
c/o Dennis M. Kunisaki
515 South Flower Street
Los Angeles, California 90171
    
    
    1,750,000
    
    
    
    7.00Total
    
    
    
    
    25,000,000
    
    
    
    100.00All Directors and Named (17 persons)
Executive Officers as a Group
    
    
    
    
    0
    
    
    
    0
        94




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##### Table of Contents



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.
 95




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
           
    
    Popular, Inc., which owns 13% of the outstanding capital stock of the Company, provided
wireline bill collection, lock-box, cash management, and wireless bill processing services
at a cost of approximately $8 million for 2006, $9 million for 2005 and $10 million for
2004. These services were negotiated at arms-length market value rates.
 96




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
          97




---



##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
      98




---



##### Table of Contents



SIGNATURES
   By:
    
    /s/ Cristina M. LambertName: Cristina M. Lambert
Title: President and Chief Executive Officer
Date: March 30, 2007By:
    
    /s/ Héctor HoussayName: Héctor Houssay
Title: Vice President Finance and Chief Financial Officer
Date: March 30, 2007By:
    
    /s/ Angel O. VegaName: Angel O. Vega
Title: Controller and Chief Accounting Officer
Date: March 30, 2007
 99




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##### Table of Contents



Date
    
    Signature
    
    CapacityMarch 30, 2007
    
    /s/ Cristina M. Lambert
    
    President and Chief Executive Officer (Principal Executive Officer)Cristina M. LambertMarch 30, 2007
    
    /s/ Héctor Houssay
    
    Vice President Finance and Chief Financial Officer (Principal Financial Officer)Héctor HoussayMarch 30, 2007
    
    /s/ Angel O Vega
    
    Chief Accounting Officer (Principal Accounting Officer)Angel O VegaMarch 30, 2007
    
    /s/ Daniel C. Petri
    
    DirectorDaniel C. PetriMarch 30, 2007
    
    /s/ Edward J. McQuaid
    
    DirectorEdward J. McQuaidMarch 30, 2007
    
    /s/ Jeanne M. Dennison
    
    DirectorJeanne M. DennisonMarch 30, 2007
    
    /s/ Cristina M. Lambert
    
    DirectorCristina M. LambertMarch 30, 2007
    
    /s/ John Lack
    
    DirectorJohn J. LackMarch 30, 2007
    
    /s/ Richard L. Carrión
    
    DirectorRichard L. CarriónMarch 30, 2007
    
    /s/ Alfredo Salazar
    
    DirectorAlfredo SalazarMarch 30, 2007
    
    /s/ Rafel Martinez Margarida
    
    DirectorRafael Martínez Margarida
 100




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##### Table of Contents



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. Incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on Form
10-K for the year ended December 31, 2005 (File 333-85503)).10.24
    
    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. Incorporated by
reference to Exhibit 10.24 of the Company's Annual Report on Form
10-K for the year ended December 31, 2005 (File 333-85503)).10.25
    
    Letter Waiver and Amendment of Credit Agreement dated February 28, 2007 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,
temporarily waiving requirements of Section 6.01 (h)  and amending
Section 1.01 (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).
 103