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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, 2004 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
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    66-0566178
(IRS EMPLOYER IDENTIFICATION NO.)1515 FD Roosevelt Ave.
Guaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 Registrants telephone number, including area code 787-792-6052 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ   NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer. YES o NO þ At June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $56 million. This amount represents the value of the vested shares
under the Employee Stock Ownership Plan (ESOP) at a stated price of $57.77. The stated price was
established under a share option agreement, dated as of March 2, 1999, which was entered into as
part of the acquisition by GTE Corporation of a 40% interest in the registrant. For a description
of the acquisition and share ownership of the registrant, see Part I, Item 1, Business and Part
III, Item 12, Security Ownership of Certain Beneficial Owners and Management. At March 31, 2005, 25 million shares of no par common stock of the registrant were outstanding.   1




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INDEX PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESEXHIBIT INDEXCredit AgreementSubsidiariesIndependent Auditors' ConsentCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
  2




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ITEM 1. BUSINESS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS In this Annual Report on 10-K, the Company has made forward-looking statements. These
statements are based on the Companys estimates and assumptions and are subject to certain risks
and uncertainties. Forward-looking statements include information concerning possible or assumed
future results of operations, as well as those statements preceded or followed by such words as
anticipates, believes, estimates, expects, hopes, targets or similar expressions. Future results could be affected by subsequent events and could differ materially from those
expressed in the forward-looking statements. If future events and actual performance differ from
the Companys assumptions, the actual results could vary significantly from the performance
projected in the forward-looking statements. The following important factors could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements: (1) materially adverse
changes in economic and industry conditions in Puerto Rico, and labor matters, including workforce
levels and labor negotiations, and any resulting financial and/or operational impact, in the
markets served by us; (2) material changes in available technology; (3) the final resolution of
regulatory initiatives and proceedings, including arbitration proceedings pertaining to, among
other matters, the terms of interconnection, access charges, universal service, unbundled network
elements and resale rates; (4) changes in our accounting policies that may be required by
regulatory agencies, including the Securities and Exchange Commission (SEC) or that result from
changes in the accounting policies or their application, which could result in an impact on
earnings; and (5) the extent, timing, success and overall effects of competition from others in the
Puerto Rico telecommunications service industry. Although the Company believes the expectations reflected in its forward-looking statements are
reasonable, the Company cannot guarantee its future performance or results of operations. All
forward-looking statements in this filing are based on information available to the Company on the
date of this filing; however, the Company is not obligated to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. The risks
described above and elsewhere in this report, including in Item 7, Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of Operations, should be considered
when reading any forward-looking statements in this filing. Given these uncertainties and risks,
the reader should not place undue reliance on these forward-looking statements. OVERVIEW We are the largest telecommunications service provider in Puerto Rico and the seventh largest
local exchange carrier in the United States as measured by access lines in service. Wireline
service, which has been provided since 1914, is marketed under the PRT brand. At December 31, 2004,
we had approximately 1.2 million access lines in service, including 887,000 residential and 281,000
business lines. We market our cellular service under the Verizon Wireless brand. We have invested approximately $1.2 billion from the date of the Acquisition (as defined
below) through December 31, 2004 to expand and enhance our network. In 2005, we expect to invest
an additional $155 million in capital expenditures. Our digital switching wireline network
encompasses over 83,000 fiber miles with speeds of up to OC-192 and supplies direct fiber optic
connections to more office buildings than any other service provider on the island. Our cellular
network utilizes the code division multiple access (CDMA) standard and the time division multiple
access (TDMA) standard. During 2003, the Company decided to migrate all TDMA clients to the CDMA
network. We have invested approximately $113 million since 2001 in a network overlay using the
CDMA standard. STRATEGY During 2004, the Company was reorganized, consolidating previously separate wireline and
wireless operations. The reorganization will enable the Company to better focus on delivering
integrated customer solutions, while fully leveraging our assets and human resources across the
organization. Management will continue to monitor our wireline and wireless reportable segments. We expect to maintain our wireline market leadership position by improving customer service,
providing value, and meeting increasing customer bandwidth requirements. Customer value will
continue to be delivered through bundled plans, including offerings of long distance, Internet,
Digital Subscriber Line (DSL), wireless access, and value-added local services, such as caller 3




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ID, call forwarding and call waiting. Our network deployment plans are designed to meet
business and government requirements for dedicated high-speed bandwidth access, as well as
residential consumer demand for DSL service. Our wireless strategy is to provide the best customer value in wireless services with the
highest quality of network. We plan to invest $40 million in 2005 to add the capacity needed to
meet our growing customer base and to extend our high speed EV-DO service beyond the Metro Area.
We believe we will continue to improve the customer experience by providing the latest wireless
entertainment and productivity service. Also during 2004, the company reduced the number of local calling areas in Puerto Rico from 68
to 10. The calling areas were extended based on customer calling patterns and commercial zones and
will enable the company to better compete in the market, while benefiting the subscriber base. BUSINESS OVERVIEW AND CORPORATE RESTRUCTURING Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (weor the Company),
holds 100% of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga
Distancia, Inc. (PRTLD), and Datacom Caribe, Inc. (Datacom). The Company holds a 67% interest
in Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of our shareholders, holds the
remaining 33% interest. The Company also holds a 24% interest in Verizon Information Services
Puerto Rico, Inc. S en C. (VISI), in which GTE Holdings (Puerto Rico) LLC, our majority
shareholder, holds a 36% interest. Wireline service is provided by PRTC, the incumbent local
exchange carrier for the island of Puerto Rico, and wireless services are provided by Verizon
Wireless Puerto Rico, Inc. (Verizon Wireless), a division of PRTC. The Companys off-island long
distance service is provided by PRTLD and its dial-up Internet access service is provided by
Coqui.net. Directory publishing revenues are generated through VISI. GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In
connection with the Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and
Bell Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc. (Verizon).
On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an additional 12%
and 3% interest in the Company, respectively, by exercising an option each had held since the
Acquisition (the Option Exercise). Verizon and Popular, Inc. acquired 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 a
share option agreement entered into at the time of the Acquisition. As a result, Verizon owns 52%,
Popular owns 13%, PRTA owns 28% and the Employee Stock Ownership Plan (ESOP) owns 7% of the
outstanding capital stock of the Company. The Company is an affiliate of Verizon, which
consolidates the Companys financial results with its own financial results. PRTC/VERIZON WIRELESS MERGER On May 1, 2002, the Company completed a tax-free reorganization whereby it merged Verizon
Wireless into PRTC. Prior to the merger, the Company created a new wholly-owned subsidiary, PRTLD,
to carry the off-island long distance business previously provided by Verizon Wireless. The
objectives of the reorganization were: to enable the Company to integrate its wireline and wireless
operations without jeopardizing the continuity of its off-island long distance license; to simplify
the Companys overall corporate structure to reduce administrative costs; and to provide better
control and monitoring of the Companys off-island long distance business and increase its
potential for growth in Puerto Rico. PUBLIC TELEPHONES OPERATIONS In December 2004, the Company entered into an agreement to sell the public telephone assets,
subject to certain terms and conditions, to a local public telephone service provider. The
transaction is currently being reviewed by the Department of Justice to ensure compliance with
applicable antitrust regulations. The disposition of the public telephone assets will enable
management to focus on higher growth areas, such as wireless and broadband. 4




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BUSINESS SEGMENTS We have two reportable segments: Wireline and Wireless. For additional information on our
reportable segments, see Note 18 to our consolidated financial statements included under Part II,
Item 8, Financial Statements and Supplementary Data. The Wireline segment consists of:  
    Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services,
high-speed data services, Internet access and public phone service;
    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 our network;
    Directory publishing rights revenues; and
    Telecommunication equipment sales and billing and collection services to competing long distance operators in Puerto Rico.The Wireless segment consists of:
    Postpaid and prepaid cellular service; and
    Wireless equipment sales. CONSOLIDATED YEARS ENDED DECEMBER 31,(DOLLARS IN MILLIONS)2004
    
    2003
    
    2002WIRELINE:Local
    
    $
    587
    
    
    
    48
    %
    
    $
    605
    
    
    
    47
    %
    
    $
    607
    
    
    
    47
    %Network Access
    
    
    269
    
    
    
    22
    
    
    
    295
    
    
    
    23
    
    
    
    325
    
    
    
    25Long Distance
    
    
    64
    
    
    
    5
    
    
    
    112
    
    
    
    9
    
    
    
    117
    
    
    
    9Directory and Other
    
    
    71
    
    
    
    6
    
    
    
    68
    
    
    
    5
    
    
    
    67
    
    
    
    5Total Wireline
    
    $
    991
    
    
    
    81
    %
    
    $
    1,080
    
    
    
    84
    %
    
    $
    1,116
    
    
    
    86
    %WIRELESS:Postpaid Cellular
    
    $
    177
    
    
    
    15
    %
    
    
    161
    
    
    
    13
    %
    
    
    146
    
    
    
    11
    %Prepaid Cellular
    
    
    19
    
    
    
    2
    
    
    
    26
    
    
    
    2
    
    
    
    27
    
    
    
    2Long Distance
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paging
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    5
    
    
    
    Wireless Equipment and Other
    
    
    22
    
    
    
    2
    
    
    
    13
    
    
    
    1
    
    
    
    7
    
    
    
    1Total Wireless
    
    $
    223
    
    
    
    19
    
    
    
    201
    
    
    
    16
    
    
    
    185
    
    
    
    14Revenues
    
    $
    1,214
    
    
    
    100
    %
    
    $
    1,281
    
    
    
    100
    %
    
    $
    1,301
    
    
    
    100
    %
 Reclassifications of prior years data have been made to conform to the 2004 consolidated
presentation. For further information, refer to Note 2 to our consolidated financial statements
included under Part II, Item 8, Financial Statements and Supplementary Data. 5




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WIRELINE LOCAL SERVICES OVERVIEW Local services include basic voice services, value-added services, high speed data services,
Internet, and deferred activation and installation services. The following table reflects the
breakdown of residential and business access lines in service, excluding public phones, direct
inward dialed business lines, wide area telecommunications services lines, and private branch
exchange trunks: ACCESS LINES IN SERVICE Year Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands )Residential
    
    
    887
    
    
    
    940
    
    
    
    957Business/Government
    
    
    281
    
    
    
    290
    
    
    
    303Total Access Lines in Service
    
    
    1,168
    
    
    
    1,230
    
    
    
    1,260Growth
    
    
    (5.3
    %)
    
    
    (2.4
    %)
    
    
    (1.0
    %)
 BASIC VOICE SERVICE Basic voice service is the largest component of local service revenues, generating $330
million, or 27%, of total revenues for the year ended December 31, 2004, representing a decrease of
$14 million, or 4%, as compared to the same period in 2003. The decrease is mainly attributed to
line substitution due to customer migration to the wireless network. Basic voice is a regulated
service and rate structures have not changed since 1982. Rates are categorized as either
residential or business/government and are further divided into four zones based on town
boundaries. Residential customers have a choice of selecting an unlimited local calling plan or a
measured service plan at a fixed price of 13 cents per message unit within a local calling area. As
of December 31, 2004 there were 10 local calling areas. Business customers must be on a measured
service plan. In 2004, as part of the Companys value added services, the Company reduced its local calling
areas from 68 to 10 larger calling areas as part of a four-phased reduction plan resulting from a
study of customers calling patterns and the commercial zones movement. Business and Government customers pay basic local rate by principal line ranging from $35.00
to $38.25 per month. In 2004, Business and Government average revenue per user (ARPU) was $54.64,
excluding Internet and long distance services. The unlimited local service plan for residential
customers varies significantly by zone. San Juan and Ponce residential customers, who are in zone
1, pay $18.80 per month while customers in the rural area, who are in zone 4, pay $8.45 per month,
excluding applicable Expanded Area Service (EAS) surcharges. The EAS surcharge of $2.50 per line
is being gradually phased in, with complete implementation by December 2006. In 2004, residential
basic ARPU was approximately $23.33, excluding Internet and long distance services and a Federal
Communications Commission (FCC) imposed subscriber line charge of $6.50 per month to primary
residential customers. For single-line business customers the subscriber line charge is also equal
to $6.50, while $9.20 per month is charged to multi-line business customers. These subscriber line
revenues are classified as access revenues. These rates also exclude other enhanced services such
as directory assistance and white-page directory listings. 6




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TELEPHONE RENTAL Approximately 14% of single-line business customers and 43% of residential customers rent
telephones. We generated $14 million in revenues from telephone rentals for the year ended
December 31, 2004, representing a decrease of $2 million, or 13%, as compared to the same period in
2003 as customers increasingly prefer to purchase the equipment, versus renting. Rental levels are
high compared to those of U.S. mainland operators, as we own the inside wire on many of our
customers premises and must maintain the inside wire and phone. VALUE  ADDED SERVICES Value-added services include over 15 voice features, such as caller ID, call waiting, call
forward, anonymous call reject and voice mail. Charges for these features range from $1.50 to $7.50
per month. Some of these features are also sold in discounted bundled packages. Approximately 42%
of our residential customers purchase at least one of these features. Our revenues from value-added
services were $46 million for the year ended December 31, 2004, representing a decrease of $1
million, or 2%, as compared to the same period in 2003, attributed primarily to our decrease in
access lines. SPECIAL SERVICES Special services include private high-speed dedicated lines marketed to businesses, wireless
carriers and other service providers for data transport and network connectivity. Our revenues
from special services were $90 million for the year ended December 31, 2004, representing an
increase of $10 million, or 13%, as compared to the same period in 2003. The increase in revenue
is reflected of the increase in demand, primarily from expanded network coverage by wireless
carriers. INTERNET ACCESS We market unlimited dial-up Internet access through Coqui.net, one of our subsidiaries, under
two brands (PRT.net and Coqui.net) which averaged $16 per month for 2004. We generated $33 million
of revenue in 2004 from approximately 168,000 Internet access customers at December 31, 2004, an
increase of $4 million and approximately 4,000 customers over prior year, or 14% in revenues and 2%
in customers, respectively. The increase in year 2004 is mainly due to the increase in customers
as we continue to penetrate the Internet dial-up market and take customers looking for faster
services at a lower rate. PUBLIC PHONES Public telephone revenues in 2004 were $5 million, a decrease of $4 million, or 44%, from the
prior year. This decrease is mainly due to 1,000 fewer phones as compared to the prior year, while
the market share is at 53% of the public phone market at December 31, 2004. The Company is
expected to conclude negotiations and regulatory reviews to sell its public telephone assets during
2005. NETWORK ACCESS Network access services are provided to long distance carriers, resellers, other local
exchange carriers, cellular and paging companies for the origination and termination of calls on
our network. These entities pay access charges based on specific agreements, which some have
durations of one to three years. We also collect network access fees directly from our customers
from FCC-mandated line charges. Network access revenues for the years ended December 2004, 2003 and 2002 were $269 million,
$295 million and $325 million, respectively, and included the following amounts: 7




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Year Ended December 31,2004
    
    
    2003
    
    
    2002(In millions)O Federal long-term support subsidies
    
    $
    82
    
    
    $
    81
    
    
    $
    86O Subscriber line charge
    
    
    95
    
    
    
    97
    
    
    
    91O Federal High Cost subsidies & Local
Universal Service Fund Charge
    
    
    2
    
    
    
    5
    
    
    
    4O Per minute wireline access charges:o On-island switched
    
    
    24
    
    
    
    49
    
    
    
    59o Off-island switched & common carrier line
    
    
    30
    
    
    
    20
    
    
    
    40o Off-island special
    
    
    21
    
    
    
    24
    
    
    
    23o Wireless interconnection
    
    
    15
    
    
    
    19
    
    
    
    22$
    269
    
    
    $
    295
    
    
    $
    325
 Long-term and High Cost federal subsidies are received through pooling arrangements
administered by the National Exchange Carriers Association (NECA). On October 21, 1999, the FCC
adopted a new high cost support mechanism, which has resulted in the phase out of the Companys
High Cost Subsidy revenues. Revenue from the subscriber line charge increased in 2003 due to an
increase from $6.00 per month to $6.50 per month for primary residential and single line business
customers, while multi-line business customers monthly charge remained constant at $9.20. For
2004, the subscriber line charge rates remained constant. The decrease of $26 million in year 2004
was mainly due to a decrease in on-island switched revenue due to 531 million lower minutes of use
and a $.03 reduction in the access rates. LONG DISTANCE Long distance revenues include direct dial on-island and off-island calls, operator-assisted
calls, and prepaid calling cards. The following chart shows our minutes of use (MOU) in the
on-island and off-island long distance market for the years ended December 31, 2004, 2003 and 2002,
respectively: Year Ended December 31,2004
    
    
    2003
    
    
    2002(In millions)Long distance MOU:On-island Long Distance minutes
    
    
    549
    
    
    
    757
    
    
    
    811Off-island Long Distance minutes
    
    
    178
    
    
    
    170
    
    
    
    171
 Long distance revenues of $69 million in 2004 reflected a decrease of $42 million, or
38%, as compared with 2003 due mainly to the introduction of lower calling rates associated with
bundled plans, the reduction in the number of local calling areas from 68 to 10 during 2004, and
lower traffic as customers migrate traffic to other networks, primarily cellular. The reduction
in revenues in 2004 also incorporates an adjustment of receivable balances reflecting billed
activity for current and prior periods. The prior periods amounts do not have a material impact in
the financial statements. DIRECTORY SERVICES We received $20 million in publishing revenue in 2004 under a revenue sharing arrangement with
VNU World Directories, Inc. (VNU). VNU is the publisher of white and yellow page directories
distributed in Puerto Rico, for which there is no other significant competitive product. We entered
into a 95-year agreement in 1999 with Verizon Information Services, Inc. a joint venture among VNU,
Verizon, and ourselves which provides us with a right of 35% of yellow page advertising revenues,
plus billing and collection fees. 8




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BILLING AND COLLECTION SERVICES We generated revenues of $7 million in 2004 from billing and collection services primarily
from AT&T and TLD, the two largest competitive off-island long distance carriers. This is a
decrease of $4 million from the prior year due to lower retail long distance messages processed for
these carriers. Our contracts with TLD and AT&T expire in May 1, 2006 and June 30, 2007,
respectively. Both carriers represented approximately 93% of our total billing and collection fees
for 2004. WIRELESS The following table shows the breakdown of our cellular and paging customers: CELLULAR AND PAGING CUSTOMERS Year Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands except percentages)Cellular Customers:Postpaid
    
    
    290
    
    
    
    240
    
    
    
    228Prepaid
    
    
    97
    
    
    
    113
    
    
    
    123Total Cellular Customers
    
    
    387
    
    
    
    353
    
    
    
    351Growth
    
    
    10
    %
    
    
    1
    %
    
    
    16
    %Paging Customers
    
    
    
    
    
    
    
    
    
    
    16
 CELLULAR SERVICE Cellular demand has grown rapidly in recent years due to increased competition, attractive
price plans, prepaid calling cards, and wide market acceptance. We offer digital cellular service
under the Verizon Wireless brand in the B block 800-megahertz frequency using both TDMA and CDMA.
We have invested $113 million since 2001 in a CDMA overlay network and commenced selling this
service in December 2001, which $31 million corresponds to current year 2004. At December 31, 2004, there were six facility-based cellular providers offering service with
varying coverage in Puerto Rico. Competition in the market has resulted in the emergence of a
variety of plans with large bundles of free night and weekend minutes as well as free incoming
calls and nation-wide long distance. We have 25 stores and kiosks throughout the island, which generate approximately half of our
postpaid and prepaid gross additions. The balance is sold through various dealers and agent
outlets. Roaming agreements have been signed with various cellular carriers, including Verizon
Wireless and BellSouth to increase coverage for our customers on the U.S. mainland. We are also
offering roaming in other countries, including the Dominican Republic, through Verizon Dominicana
(formerly Codetel), a Verizon affiliate, and in the U.S. Virgin Islands. Postpaid customer grew by 21% over the prior year. Also, we experienced a decrease in Prepaid
customers of 14%. The decrease in Prepaid customers reflects our focus on quality, long-term
Postpaid customers, while still maintaining a substantial Prepaid subscriber base. In late 2001,
we began marketing our cellular service under the Verizon Wireless brand as part of our strategy to
align our product and service offerings with those of Verizon Wireless in the U.S. ARPU for all cellular customers was $43 in 2004, unchanged from the prior year. Postpaid ARPU
was $54 in 2004, a $1 decrease from the prior year and prepaid ARPU was $15 in 2004, a $4 decrease
from the prior year. Postpaid customer churn was 2.4% per month in 2004, a decrease of approximately 0.8% from the
prior year. We believe churn is relatively high compared to U.S. mainland standards mainly due to
the intensity of competition with six facilities-based competitors and higher involuntary
disconnections as a result of non-payment. 9




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LONG DISTANCE On April 2004, PRTC and PRTLD entered into a reseller agreement regarding long distance
revenues generated by cellular customers, resulting in revenue of $5 million during year 2004. NETWORK INFRASTRUCTURE We have invested approximately $1.2 billion from the Acquisition date through 2004 to expand
and enhance our networks, including $168 million in 2004. WIRELINE NETWORK Our network has evolved into a multi-protocol network, handling SONET, ATM and IP with the
following characteristics:  o
    Our 100% digital switching network includes 29 local host central offices and two access
tandems to ensure redundancy and network reliability. Also, we have a long distance switch
to provide access to national and international long distance calls.o
    Approximately 90% of our transmission circuits use fiber optic systems consisting of
90,000 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 250 office buildings for
business and residential customers. Also, a MAN (Metro Area Network) installed in the
Metropolitan Area to provide Ethernet services.o
    Approximately 39% of the outside cable serving the local loop is underground and buried.o
    Our network is monitored by a network monitoring center, which operates 24 hours per day,
with the capabilities to monitor customers IP based networks.o
    Our Remote Access Server (RAS) network includes 28 nodes located throughout the island
connecting Internet customers of various ISP providers through more than 40,000 modems.o
    DSL service has been extended to 220 sites equipped with an aggregate of 63,800 ports.
As of December 31, 2004, we had approximately 40,000 DSL customers, representing an increase
of 19,000 customers as compared to last year.o
    Our ATM network provides ATM and Frame Relay services and also serves as the transport
medium for DSL and RAS networks. This network also provides PRTC with IP capability. WIRELESS NETWORK We operate a CDMA and TDMA digital network through 278 wireless cell sites covering the entire
island. We have invested $113 million since 2001 in a CDMA overlay network as part of our business
strategic plan to fully migrate our customers to CDMA network by end 2004. See item 8 Financial
Statements and Supplementary Data. We commenced selling CDMA service in December 2001. EMPLOYEES The Companys workforce totaled 5,100 full-time employees at December 31, 2004
of which 77 % are represented by two unions, the Union of Independent Telephone
Workers, known as UIET, and the Brotherhood of Independent Telephone Workers,
known as HIETEL. 10




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A new 3-year contract was signed with the UIET union effective January 17, 2003, which
covers approximately 1,500 member-employees. The UIET contract contains wage increases of 4.4% in
2003, 4.2% in 2004, and 4.0% in 2005. If the union workforce remained unchanged, these increases,
together with benefit improvements, payroll taxes and offsetting concessions, would have resulted
in increases of labor costs of $1.5 million for 2003, $5.9 million for 2004, and $9.9 million for
2005. With the HIETEL union, a new 4-year contract was signed effective January 1, 2004, involving
approximately 2,400 member-employees. A total of $2.8 million and $17.3 million were recorded for early retirement and voluntary
separation programs offered during 2004 and 2003, respectively summarized below: Period
    
    
    Employee
    
    
    Non-cashProgram
    
    Offer Date
    
    
    Recorded
    
    
    Acceptance
    
    
    provisionEligible management employees -Voluntary separation program
    
    1st Q 2003
    
    1st Q 2003
    
    
    29
    
    
    $
    1.4Eligible union employees -Voluntary separation program
    
    2nd Q 2003
    
    2nd Q 2003
    
    
    44Early retirement program
    
    2nd Q 2003
    
    2nd Q 2003
    
    
    147191
    
    
    
    3.3Eligible management employees -Early retirement program
    
    4th Q 2003
    
    4th Q 2003
    
    
    147
    
    
    
    12.6Total 2003 Charge
    
    
    
    
    
    
    
    
    
    
    367
    
    
    $
    17.3Eligible management employees -Early retirement program
    
    4th Q 2003
    
    1st Q 2004
    
    
    19
    
    
    $
    1.6Eligible management employees -Voluntary separation program
    
    3rd Q 2004
    
    4th Q 2004
    
    
    24
    
    
    
    1.2Total 2004 Charge
    
    
    
    
    
    
    
    
    
    
    43
    
    
    $
    2.8
 As a result of the voluntary separation and retirement program mentioned above, the
reduction in workforce totaled 43 in 2004 and 367 in 2003, or 1% and 6% of the 2004 and 2003
workforce, respectively. In February 2005, the Company offered a voluntary separation program to eligible management
employees. Those employees have until March 25th to decide on this offer. CONCESSION AND LICENSES We hold concessions, licenses and permits adequate for the conduct of our business in the
markets which we serve. Advances in technology, together with a number of regulatory, legislative
and judicial actions, continue to accelerate and increase competition in those markets we serve. ENVIRONMENTAL REGULATIONS Our operations are subject to federal and local laws and regulations governing the use,
storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the
environment and the remediation of contamination. As an owner or operator of facilities in which
hazardous materials are used, we could be subject to environmental laws that impose liability for
the entire cost of cleanup at contaminated sites, regardless of fault or the lawfulness of the
activity that resulted in the contamination. We believe, however, that our operations are in
substantial compliance with applicable environmental laws and regulations. Many of our properties contain underground and aboveground storage tanks used for the storage
of fuel. Some of these tanks may have leaked or otherwise caused contamination. We have remediated
known contamination at a number of properties. We cannot be certain, however, that we have
discovered all contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation. 11




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Our cellular operations are also subject to regulations and guidelines that impose a variety
of operational requirements relating to radio frequency emissions. The potential connection between
radio frequency emissions and certain negative health effects, including some forms of cancer, has
been the subject of substantial study by the scientific community in recent years. To date, the
results of these studies have been inconclusive. Although we have not been named in any lawsuits
alleging damages from radio frequency emissions, it is possible that we could be sued in the
future, particularly if scientific studies conclusively determine that radio frequency emissions
are harmful. REGULATORY ENVIRONMENT IN PUERTO RICO We are regulated by the FCC and the Telecommunications Regulatory Board of Puerto Rico
(TRB), and are subject to the Federal Telecommunications Act of 1996 (the Act) and the Puerto
Rico Telecommunications Act. The Act opened our local exchange market to competition. There is one
facility-based competitive local exchange carrier and two resellers of wireline local service on
the island. The average discount offered to resellers was approximately 24% from retail rates
based on negotiated agreements. Dialing parity, which opened up the on-island long distance market
to competition, was introduced in February 1999. Our intra-island access charges are based on
rate-of-return methodology. Basic local rates have remained unchanged since 1982 at $18.80 per month for residential
unlimited service in the metro area. Additionally customers are billed a subscriber line charge of
$6.50 per month and off-island long distance rates are similar to interstate rates in the US
mainland at $.07 per minute. Our local tariff structure has historically had 68 local calling area
zones. At the end of 2003 we agreed to expand our local calling zones to respond to customer
demand, and in February instituted a four phase program to reduce the number of local calling areas
to 10 by the end of 2004. See Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Regulatory and Other Matters  Intra-Island Long Distance
Access rate Dispute. The TRB has adopted a forward looking economic model to set intra-island access charges and
reductions in those rates are being implemented in phases which will be completed in April 2005 in
accordance with commitments made to the major carriers and the TRB. In addition to ordering
significant reductions in intra-island access charges, the TRB ordered a $68 million refund to
end-user customers relating to this dispute for which, in September 2003, the Company has
established a pre-tax reserve of $73 million, including interest. As a result of the TRBs support
of the revision to the end-user refund order through agreed rate reductions and consolidation of
calling areas, the final settlement of carrier access rate disputes and the PR Supreme Court issued
resolution rendering the litigation moot; during year 2004, the Company revised the pre-established
contingency at $14 million, associated with the expected June 2005 single line credit. For more
information, see Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations  Regulatory and Other Matters  Intra-Island Long Distance Access rate
Dispute. On January 1, 2002, the TRB adopted a local universal service fund for qualified low-income
customers. This lifeline program is funded by all intra-island telecommunications providers
through contributions to the TRB based on intra-island retail revenues. Qualified lifeline
customers receive a local $3.50 per month credit along with an additional federal $1.75 per month
credit from the Company. These credits together with existing federal credits of $8.25 per month
result in total credits for a lifeline customer of $13.50 per month. Contributions made by the
Company to the TRB are recovered through an end-user charge that commenced on March 1, 2002. The
Company is reimbursed from the TRB for credits given to Lifeline customers. The wireless business is not subject to price regulation. INFORMATION ON OUR INTERNET WEBSITE Our website address is www.telefonicapr.com and contains links to our SEC filings.
Information contained on our website is not incorporated by reference in, and should not be
considered a part of, this Annual Report on Form 10-K. We have adopted a written Code of Ethics
applicable to all directors, officers and employees which is also available on our website. The
Company intends to disclose any amendments to or waivers of the code of ethics on behalf of the
Companys Chief Executive Officer, Chief Financial Officer, Controller, and persons performing
similar functions, on the Companys website at the Internet website address set forth above. 12




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ITEM 2. PROPERTIES PROPERTY, PLANT AND EQUIPMENT Gross investment in property, plant and equipment is $4.0 billion at December 31, 2004 and
2003, as follows: 2004
    
    
    2003Wireline
    
    
    Wireless
    
    
    Total
    
    
    Wireline
    
    
    Wireless
    
    
    TotalOutside Plant
    
    
    52.4
    %
    
    
    0.0
    %
    
    
    52.4
    %
    
    
    52.3
    %
    
    
    0.0
    %
    
    
    52.3
    %Central office and transmission equipment
    
    
    27.2
    %
    
    
    2.8
    %
    
    
    30.0
    %
    
    
    26.9
    %
    
    
    2.6
    %
    
    
    29.5
    %Other equipment
    
    
    6.6
    %
    
    
    0.8
    %
    
    
    7.4
    %
    
    
    7.1
    %
    
    
    1.0
    %
    
    
    8.1
    %Land and Buildings
    
    
    7.8
    %
    
    
    0.7
    %
    
    
    8.5
    %
    
    
    7.8
    %
    
    
    0.7
    %
    
    
    8.5
    %Plant under Construction
    
    
    0.9
    %
    
    
    0.8
    %
    
    
    1.7
    %
    
    
    1.1
    %
    
    
    0.5
    %
    
    
    1.6
    %Total
    
    
    94.9
    %
    
    
    5.1
    %
    
    
    100.0
    %
    
    
    95.2
    %
    
    
    4.8
    %
    
    
    100.0
    %
 Outside plant consists primarily of aerial cable, underground cable, conduit and
wiring, and telephone poles. Central office and transmission equipment mainly consists of
switching equipment, transmission equipment and related facilities. Other equipment includes
public telephones, motor vehicles, special purpose vehicles, furniture, and capital leases. Land
and buildings consists of land, buildings and leasehold improvements. PROPERTIES We have facilities in all the major population centers of San Juan, Mayagüez, Ponce, Fajardo,
Humacao, Arecibo, Aguadilla, and Guayama and in some other smaller towns. Facilities as of
December 31, 2004 include the following: Owned
    
    
    Leasedo Administrative Offices
    
    
    9
    
    
    
    14o Commercial & Customer Service stores & offices
    
    
    0
    
    
    
    5o Standalone Wireline Switching Center Buildings
    
    
    82
    
    
    
    1o Inside & Outside Remote Switching Units
    
    
    158
    
    
    
    244o Standalone Operational Centers (repair, dispatch, assignment)
    
    
    15
    
    
    
    8o Warehouses
    
    
    2
    
    
    
    2o Wireless Stores and Kiosks
    
    
    0
    
    
    
    25o Wireless Cell Sites
    
    
    19
    
    
    
    259
 We believe that all of these properties are generally in good operating condition and are
adequate to satisfy the needs of the business. 13




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ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various legal matters arising in the ordinary course of
business. Management, after consultation with legal counsel, believes at this time that the
resolution of these matters will not have a material adverse effect on the Companys financial
position and results of operations. See Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Regulatory and Other Matters for more information
regarding legal and regulatory matters, including a regulatory dispute regarding intra-island
access fees charged to long distance carriers. The Company has been a party to proceedings regarding the access rates the Company charges to
long distance carriers to originate and terminate intra-island long distance calls through the
Companys network. In October 2001, the TRB issued an order to reduce these access rates, and the
Company subsequently requested a reconsideration of the order. On February 28, 2002, the TRB
issued an order (the February 2002 Order) denying the Companys request and requiring that PRTC
pay a $68 million refund to end-user customers. The Company has filed tariffs implementing the
reduction in intra-island access charges as required by the February 2002 Order. On October 30,
2003, the Company filed a petition for a writ of certiorari before the Puerto Rico Supreme Court,
challenging the refund portion of the February 2002 Order. In November 2003, the Company proposed
a plan to revise the refund portion of the February 2002 Order. Although the TRB has yet to issue
an order revising the refund portion of the February 2002 Order, the Company revised the
pre-established contingency at $14 million, associated with the expected June 2005 single line
credit based on subsequent events. For a more detailed description of this dispute, see Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
Regulatory and Other Matters  Intra-Island Long Distance Access Rate Dispute. On November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the largest competitive
provider of public pay phones in Puerto Rico, filed a suit in the United States District Court of
Puerto Rico, claiming predatory, exclusionary and anticompetitive acts. The claim is for $75
million in damages. The Company filed a motion to dismiss the lawsuit which was largely denied by
the Court on August 2004. The lawsuit is currently in the discovery stage and trial began on
November 22, 2004. The Companys management believes that TPPRs claim is without merit. On September 4, 2002, Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three other competitive providers of public pay phones in Puerto
Rico, filed a similar suit in the United States District Court of Puerto Rico. On January 13,
2005, the Court dismissed the case with prejudice for lack of prosecution. 14




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK There is no established trading market for the Companys common stock. The shares are valued
annually by the ESOP trustees financial advisors. The appraisal is used to value cash
distributions to ESOP participants and measure the Companys share performance for employees who
participate in the ESOP Plan. HOLDERS There were 25 million outstanding shares of common stock and four shareholders of record at
March 31, 2004. See Part II, Item 12 Security Ownership of Certain Beneficial Owners and
Management for shareholder information. DIVIDENDS Under the Companys shareholders agreement, to the extent funds are legally available; the
Company is required to pay quarterly dividends on its common stock equal to at least 50% of
consolidated net income. During 2004, the Company paid dividends of approximately $62 million, or
$2.631 per share, which were declared in the second, third and fourth quarters of 2004. During
2003, the Company paid dividends of $68 million, or $2.725 per share, which were declared in the
first quarter of 2003 and the fourth quarter of 2002. 16




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ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA YEARS ENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(DOLLARS IN MILLIONS)INCOME STATEMENT DATA (1):Revenues
    
    $
    1,214
    
    
    $
    1,281
    
    
    $
    1,301
    
    
    $
    1,397
    
    
    $
    1,393Operating Costs and Expenses
    
    
    994
    
    
    
    1,191
    
    
    
    1,054
    
    
    
    1,150
    
    
    
    1,163Operating Income
    
    
    220
    
    
    
    90
    
    
    
    247
    
    
    
    247
    
    
    
    230Other Expense, Net
    
    
    (44
    )
    
    
    (64
    )
    
    
    (47
    )
    
    
    (59
    )
    
    
    (75
    )Income Tax Expense
    
    
    (68
    )
    
    
    (8
    )
    
    
    (29
    )
    
    
    (70
    )
    
    
    (40
    )Income Before Extraordinary
Charge and Cumulative Effect of
Accounting Change
    
    
    108
    
    
    
    18
    
    
    
    171
    
    
    
    118
    
    
    
    115Cumulative Effect of Accounting
Change, net of tax
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    11Net Income
    
    $
    108
    
    
    $
    77
    
    
    $
    171
    
    
    $
    118
    
    
    $
    126OTHER FINANCIAL DATA:Depreciation and Amortization
    
    $
    261
    
    
    $
    252
    
    
    $
    262
    
    
    $
    271
    
    
    $
    298Cash Flows from Operations
    
    
    289
    
    
    
    357
    
    
    
    405
    
    
    
    216
    
    
    
    486Capital Expenditures, including removal costs
    
    
    172
    
    
    
    177
    
    
    
    209
    
    
    
    246
    
    
    
    213Cash Flows used in Investing
    
    
    (166
    )
    
    
    (170
    )
    
    
    (206
    )
    
    
    (220
    )
    
    
    (207
    )Cash Flows (used in) provided by Financing
    
    
    (81
    )
    
    
    (198
    )
    
    
    (200
    )
    
    
    8
    
    
    
    (293
    )Cash dividends per share (2)
    
    
    2.63
    
    
    
    2.73
    
    
    
    2.75
    
    
    
    2.32
 AS OF DECEMBER 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(DOLLARS IN MILLIONS)BALANCE SHEET DATA:Current Assets
    
    $
    417
    
    
    $
    392
    
    
    $
    430
    
    
    $
    431
    
    
    $
    416Property, Plant and Equipment, Net
    
    
    1,459
    
    
    
    1,558
    
    
    
    1,575
    
    
    
    1,632
    
    
    
    1,657Total Assets
    
    
    2,545
    
    
    
    2,621
    
    
    
    2,717
    
    
    
    2,748
    
    
    
    2,767Current Liabilities
    
    
    309
    
    
    
    273
    
    
    
    366
    
    
    
    841
    
    
    
    610Total Debt
    
    
    797
    
    
    
    862
    
    
    
    1,035
    
    
    
    1,196
    
    
    
    1,168Shareholders Equity
    
    
    723
    
    
    
    701
    
    
    
    665
    
    
    
    538
    
    
    
    498
 AS OF DECEMBER 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000OPERATING DATA:Access Lines in Service (000)
    
    
    1,168
    
    
    
    1,230
    
    
    
    1,260
    
    
    
    1,273
    
    
    
    1,283Wireless subscribers:Cellular (000)
    
    
    387
    
    
    
    353
    
    
    
    351
    
    
    
    302
    
    
    
    335Paging (000)
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    49
    
    
    
    126Total Access Lines (per 100 households)
    
    
    65
    
    
    
    69
    
    
    
    71
    
    
    
    73
    
    
    
    74Number of Employees
    
    
    5,275
    
    
    
    5,381
    
    
    
    5,750
    
    
    
    6,250
    
    
    
    6,417Access Lines/Wireline Employee
    
    
    262
    
    
    
    260
    
    
    
    250
    
    
    
    232
    
    
    
    226Cellular Average Monthly Service Revenue Per User
    
    $
    43
    
    
    $
    43
    
    
    $
    43
    
    
    $
    44
    
    
    $
    38
   (1)
    
    Reclassifications of prior years data have been made to conform to current year
presentation.(2)
    
    The Company paid dividends of $62 and $68 million during 2004 and 2003, or $2.631 and $2.725
per share, respectively. Dividends were paid for the first time during 2001. There were 25
million outstanding shares of common stock and four shareholders of record both at December 31, 2004 and 2003. 17




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are the largest telecommunications service provider in Puerto Rico and the seventh largest
local exchange carrier in the United States as measured by access lines in service. We have two
reportable segments: Wireline and Wireless. Wireline service, which has been provided since 1914,
is marketed under the PRT brand. At December 31, 2004, we had approximately 1.2 million access
lines in service, including 887,000 residential and 281,000 business lines. We market our cellular
service under the Verizon Wireless brand. The Companys off-island long distance service is
provided by PRTLD and its dial-up Internet access service is provided by Coqui.net. Directory
publishing revenues are generated by VISI. We have invested approximately $1.2 billion from the date of the Acquisition through December
31, 2004 to expand and enhance our network. In 2005, we expect to invest an additional $155
million in capital expenditures. Our digital switching wireline network encompasses over 83,000
fiber miles with speeds of up to OC-192 and supplies direct fiber optic connections to more office
buildings than any other service provider on the island. Our cellular network utilizes the code
division multiple access (CDMA) standard and the time division multiple access (TDMA) standard.
During 2003, the Company decided to migrate all TDMA clients to the CDMA network. We have
invested approximately $113 million since 2001 in a network overlay using the CDMA standard. The sections that follow provide information aspects of our operations and investments, both
at the consolidated and segment levels, and include discussions of our results of operations,
financial position and sources and uses of cash, as well as significant future commitments. In
addition, we have highlighted key trends and uncertainties to the extent practicable. The content
and organization of the financial and non-financial data presented in these sections are consistent
with information used by our chief operating decision makers for, among other purposes, evaluating
performance and allocating resources. We also monitor several key economic indicators as well as
the state of the economy in general, primarily in Puerto Rico, in evaluating our operating results
and analyzing and understanding business trends. While most key economic indicators impact our
operations to some degree, including gross domestic product, we have noted correlations to housing
starts, personal consumption expenditures and capital spending, as well as more macroeconomic
indicators such as inflation and unemployment rates. Our results of operations, financial position and sources and uses of cash in the current and
future periods reflect the managements focus on the following four key areas:  
    Revenue Growth  Our emphasis is on revenue transformation, devoting more resources to
higher growth markets such as wireless as well as expanded services to enterprise markets.
In the year ended December 31, 2004, revenues from the growth of wireless areas, in
particular post-paid cellular services increased by 11% compared to the year ended
December 31, 2003 and wireless represented 15% of the total revenues, up from 14% of total
revenues in the year ended December 31, 2003. The Company added approximately 50,000
post-paid wireless customers during the year ended December 31, 2004.
    Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to lower expenses in all segments through
technology-assisted productivity improvements. The effect of these and other efforts, such
as labor agreements and early retirement and voluntary separation plans, has significantly
changed the Companys cost structure. The Company has significantly lower workforce
levels, in comparison with prior year 2003, which will provide ongoing expense benefits.
Labor and benefits expenses declined by approximately $15 million in the year ended
December 31, 2004 compared to the same period in 2003, largely as a result of year 2004s
early retirement and voluntary separation plans.
    Capital Allocation  Capital spending has been, and will continue to be directed toward
growth markets. Also, the Capital spending is focused on High-speed wireless data,
replacement of the TDMA network as well as voice over the Internet and expanded services
offered to large business customers.
    Cash Flow Generation  The financial statements reflect the emphasis of management on
using cash provided by our operating and investing activities to significantly reduce debt
and to fund our pension plans. Supporting these key focus areas are continuing initiatives to more effectively package and
add value to our products and services. Innovative product bundles include local wireline
services, long distance, wireless and DSL for consumer and general business retail customers. 18




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CONSOLIDATED RESULTS OF OPERATIONS In this section, we discuss our overall results of operations and highlight special and
non-recurring items. In the following section, we review the performance of our two segments. We
believe that this presentation will assist readers in better understanding our results of
operations and trends from period to period. CONSOLIDATED REVENUES For the Year Ended December 312004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    587
    
    
    $
    605
    
    
    
    (3
    )%
    
    $
    605
    
    
    $
    607
    
    
    
    
    %Network Access
    
    
    269
    
    
    
    295
    
    
    
    (9
    )
    
    
    295
    
    
    
    325
    
    
    
    (9
    )Long Distance
    
    
    69
    
    
    
    112
    
    
    
    (38
    )
    
    
    112
    
    
    
    117
    
    
    
    (4
    )Cellular
    
    
    196
    
    
    
    187
    
    
    
    5
    
    
    
    187
    
    
    
    173
    
    
    
    8Paging
    
    
    
    
    
    
    1
    
    
    
    (100
    )
    
    
    1
    
    
    
    5
    
    
    
    (80
    )Directory and Other
    
    
    93
    
    
    
    81
    
    
    
    15
    
    
    
    81
    
    
    
    74
    
    
    
    9Consolidated revenues
    
    $
    1,214
    
    
    $
    1,281
    
    
    
    (5
    )%
    
    $
    1,281
    
    
    $
    1,301
    
    
    
    (2
    )%
 Consolidated revenues for the year 2004 decreased $67 million, or 5%, to $1,214 million
from $1,281 million for the same period in 2003. For the year ended December 31, 2003,
consolidated revenues decreased $20 million, or 2%, to $1,281 million from $1,301 million for the
same period in 2002. These decreases were primarily the result of lower revenues in network access
revenues and in long distance revenues, partially offset by higher cellular revenues. Network access revenues for the year ended December 31, 2004 decreased $26 million, or 9%, to
$269 million compared to $295 million for the same period in 2003. For the year ended December 31,
2003 network access revenues decreased $30 million, or 9%, to $295 million compared to $325 million
for the same period in 2002. These decreases were mainly driven by a decrease in intra-island
access revenues due to the implementation of phase rate reduction required by the TRB in its
Resolution and Order issued on February 28, 2002 (the February 2002 Order). See Regulatory and
Other Matters  Intra-Island Long Distance Access Rate Dispute. Long distance revenues for the year ended December 31, 2004 decreased $43 million, or 38%, to
$69 million compared to $112 million for the same period in 2003. For the year ended December 31,
2003 long distance revenues decreased $5 million, or 4%, to $112 million compared to $117 million
for the same period in 2002. These decreases were mainly the result of the impact of the Extended
Area Service (EAS) implementation. See Regulatory and Other Matters  Intra-Island Long Distance
Access Rate Dispute. The reduction in revenues in 2004 also incorporates an adjustment of
receivable balances reflecting billed activity. The prior periods amounts do not have a material
impact in the financial statements. Cellular revenues for the year ended December 31, 2004 increased $9 million, or 5%, to $196
million from $187 million for the same period in 2003. For the year ended December 31, 2003
cellular revenues increased $14 million, or 8%, to $187 million compared to $173 million for the
same period in 2002. These increases were mainly the result of an increase in the number of
cellular customers due to attractive price plans and the implementation of marketing strategies to
align the Companys product and service offerings with those of Verizon Wireless in the United
States. CONSOLIDATED OPERATING EXPENSES For the Year Ended December 312004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    387
    
    
    $
    402
    
    
    
    (4
    )%
    
    $
    402
    
    
    $
    365
    
    
    
    10
    %Other operating expenses
    
    
    343
    
    
    
    519
    
    
    
    (34
    )
    
    
    519
    
    
    
    427
    
    
    
    22Total consolidated operating expenses
    
    $
    730
    
    
    $
    921
    
    
    
    (21
    )%
    
    $
    921
    
    
    $
    792
    
    
    
    16
    %
 Consolidated operating expenses for the year ended December 31, 2004 decreased $191
million, or 21%, to $730 million from $921 million for the same period in 2003. For the year ended
December 31, 2003 consolidated operating expenses increased $129 million, or 16%, to $921 million
from $792 million for the same period in 2002. 19




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##### Table of Contents



Labor and benefit expenses for the year ended December 31, 2004 decreased $15 million, or 4%,
to $387 million from $402 million for the same period in 2003. This increase was mainly due to
lower salary expense and expatriate expense as a result of the reduction in workforce and to a
decrease in pension and OPEBs expenses mainly associated with the Companys recognition of the
impact of the federal subsidy under Medicare Drug Act of 2003 on the Companys accumulated
post-retirement benefit obligations and net post-retirement benefit costs in the third quarter of
2004. See note 9 to the audited consolidated financial statements. This decrease was partially
offset by higher post-employment benefits. Labor and benefit expenses for the year ended December 31, 2003 increased $37 million, or 10%,
to $402 million from $365 million for the same period in 2002, due to increases in pension and
OPEBs expense recognition which resulted from a decrease in the rate of return on plan assets and
in the discount rate applied. See note 9 to the audited consolidated financial statements. Other operating expenses for the year ended December 31, 2004 decreased $176 million, or 34%,
to $343 million from $519 million for the same period in 2003, primarily due to the absence of the
pre-tax reserve for the end-user and AT&T refund referred to in the February 2002 Order recognized
during the quarter ended September 30, 2003 and the reversal of the reserve during year 2004. See
-Regulatory and Other Matters  Intra-Island Long Distance Access Rate Dispute. Other factors
contributing to the reduction were a decrease in bad debt expense due to the agreement with the
PRDOE to settle the amounts owed out of court, and the absence of a cancelled project that required
the write-off of the billing software system abandoned by the Company. For the year ended December 31, 2003, other operating expenses increased $92 million, or 22%,
to $519 million from $427 for the same period in 2002. The increase was due to cancelled capital
projects during 2003, which required the write-off of the billing software system abandoned by the
Company and the establishment of the pre-tax reserve for the end-user and AT&T refund referred to
in the TRB Resolution and Order of February 2002. OTHER CONSOLIDATED RESULTS For the Year Ended December 312004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Retirement and voluntary separation provision
    
    $
    3
    
    
    $
    17
    
    
    
    (84
    )%
    
    $
    17
    
    
    $
    
    
    
    
    
    %Depreciation and amortization
    
    
    261
    
    
    
    252
    
    
    
    4
    
    
    
    252
    
    
    
    262
    
    
    
    (4
    )Interest expense, net
    
    
    43
    
    
    
    53
    
    
    
    (19
    )
    
    
    53
    
    
    
    48
    
    
    
    11Equity income in joint venture
    
    
    (2
    )
    
    
    (2
    )
    
    
    14
    
    
    
    (2
    )
    
    
    (3
    )
    
    
    (28
    )Minority interest in consolidated subsidiary
    
    
    3
    
    
    
    2
    
    
    
    80
    
    
    
    2
    
    
    
    1
    
    
    
    53Asset impairment charge
    
    
    
    
    
    
    12
    
    
    
    (100
    )
    
    
    12
    
    
    
    
    
    
    
    Income tax expense
    
    
    68
    
    
    
    8
    
    
    
    729
    
    
    
    8
    
    
    
    29
    
    
    
    (72
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (59
    )
    
    
    (100
    )
    
    
    (59
    )
    
    
    
    
    
    
    Total Other Consolidated Results
    
    $
    376
    
    
    $
    283
    
    
    
    33
    %
    
    $
    283
    
    
    $
    337
    
    
    
    (16
    )%
 Retirement and voluntary separation provisions In January 2004, 19 eligible management employees accepted the early retirement program
offered by the Company in December 2003, which resulted in a provision of $1.6 million. During the
fourth quarter of 2004, 24 eligible management employees accepted the voluntary separation program
offered by the Company in October 2004, which resulted in a provision of $1.2 million. In January 2003, 29 eligible management employees accepted the voluntary separation program
offered by the Company in December 2002, which resulted in a provision of $1.4 million. During the
second quarter of 2003, 191 union employees accepted a combined voluntary separation program and
retirement program offered by the Company that closed on June 20, 2003 and June 30,
2003, respectively, which resulted in an additional provision of $3.3 million. In December
2003, the Company offered an early retirement program to eligible management employees, for which,
a non-cash provision of $12.6 million was recorded relating to 147 employees who had accepted as of
December 31, 2003. 20




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##### Table of Contents



Depreciation and amortization expense Depreciation and amortization expense of $261 million for the year ended December 31, 2004 was
$9 million, or 4%, higher than for the comparable 2003 period due to accelerated depreciation of
the TDMA network resulting from managements decision during 2003 to migrate all TDMA customers to
the CDMA platform in 2004 and an increase in software amortization expense due to the
implementation of various operational support systems. Depreciation and amortization expense of $252 million for the year ended December 31, 2003 was
$10 million, or 4% lower, than for the comparable 2002 period. The decrease in depreciation and
amortization expense was mainly due to a revision in wireline asset retirements and depreciation
useful lives, which became effective July 1, 2002, reducing depreciation expense by $12 million for
the year ended December 31, 2003, and to the adoption of SFAS No. 143, effective January 1, 2003,
which required the exclusion of the costs of removal from the Companys depreciation rates for
assets for which the removal costs exceed salvage value. The decrease was partially offset by
higher gross plant balances. Interest expense, net Interest expense of $43 million for the year ended December 31, 2004 was $10 million, or 19%,
lower for the comparable 2003 period. The decrease was primarily due to the absence of $7 million
of interest associated with the pre-tax reserve recognized during the same period in 2003 for the
end-user and AT&T refund referred to in the February 2002 Order and the absence of $3 million of
interest associated with the write-off for the billing software system abandoned by the Company
during year ended December 31, 2003. Interest expense of $53 million for the year ended December 31, 2003 was $5 million higher
than for the comparable 2002 period due to an additional $7 million in interest on the pre-tax
reserve of $66 million established in September 2003 as a result of the TRB Resolution and Order of
February 2002, an additional $3 million of interest associated with the write-off for the billing
software system abandoned by the Company during year ended December 31, 2003, and a decrease of $3
million in the accretion of discount on subscription receivable, partially offset by a $10 million
reduction in interests of bonds and banks debt related to a decrease in short term borrowings. Equity income from joint venture The $2 million, $2 million, and $3 million equity income from joint venture for the year ended
December 31, 2004, 2003, and 2002, respectively, were generated from our 24% interest in VISI, the
largest yellow page publishing company in Puerto Rico. Minority interest in consolidated subsidiary The $3 million, $2 million, and $1 million minority interest included in the Companys results
of operations for the year ended December 31, 2004, 2003, and 2002, respectively, reflects the 33%
interest in Coqui.net, held by Popular, Inc., one of our shareholders. Asset Impairment Charge. Management decided to migrate in 2004 all TDMA clients to the CDMA network and dispose of the
TDMA network. The Company determined that an indicator of impairment existed because the expected
undiscounted cash flows from TDMA network were lower than its carrying amount. Since the estimated
fair value of $26 million is less than the $37.8 million carrying amount of the TDMA network as of
December 31, 2003, the Company recorded an impairment loss of $11.8 million. Income taxes The effective income tax rate is the provision for income taxes as a percentage of income
before tax from continuing operations. A $67.8 million tax provision for the year ended December
31, 2004 reflects a 37.9% effective tax rate. The difference of $2 million between the effective
and the statutory tax rate of 39%, primarily represents permanent differences related to
recognition of equity income from the joint venture and amortization of tax deductible goodwill. 21




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##### Table of Contents



An $8 million tax provision for the year ended December 31, 2003 reflects a 32% effective tax
rate. The difference between the effective tax rate and the statutory tax rate of 39% equates to
$2 million, primarily reflecting permanent differences related to interest accretion on the PRTA
subscription receivable and equity income in subsidiary. The decrease of $21 million when compared
to the $29 million provision reported for the year ended December 31, 2002 was due to lower
earnings in 2003. Cumulative effect of accounting change Under the provisions of SFAS No. 143, we are required to exclude costs of removal from our
depreciation rates for assets for which the removal costs exceed salvage value. Accordingly, in
connection with the initial adoption of this standard on January 1, 2003, we have reversed accrued
costs of removal in excess of salvage value from our accumulated depreciation accounts for these
assets. The adjustment was recorded as a cumulative effect of an accounting change, resulting in
the recognition of an estimated gain of $117 million ($71 million after tax). Effective January 1,
2003, we began expensing costs of removal in excess of salvage value for these assets in the period
in which they are incurred. Effective January 1, 2003, the Company changed its method of accounting for revenues derived
from directory publishing rights and related expenses from the point-of-publication method to the
amortization method. Although both methods fully comply with accounting principles generally
accepted in the United States, the Company adopted the amortization method because it is becoming
the industry standard. The cumulative effect of applying this accounting change to prior years was
recognized as of January 1, 2003 as a one-time, non-cash loss of $17 million ($13 million, after
tax). 22




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##### Table of Contents



SEGMENT RESULTS OF OPERATIONS The Company has two reportable segments, Wireline and Wireless. See Note 17 to the unaudited
condensed consolidated financial statements for additional information on the Companys segments.
Reclassifications of prior periods data have been made to conform to the current periods
presentation. The Wireline segment consists of:  
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed data services, Internet access and public phone
service;
    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.The Wireless segment consists of:
    Postpaid and Prepaid services; and
    Wireless equipment sales. 23




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##### Table of Contents



RESULTS OF OPERATIONS REVENUE WIRELINE For the Year Ended December 31,2004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    596
    
    
    $
    612
    
    
    
    (3
    )%
    
    $
    612
    
    
    $
    613
    
    
    
    
    %Network Access
    
    
    271
    
    
    
    296
    
    
    
    (8
    )
    
    
    296
    
    
    
    331
    
    
    
    (11
    )Long Distance
    
    
    66
    
    
    
    114
    
    
    
    (42
    )
    
    
    114
    
    
    
    118
    
    
    
    (3
    )Directory and Other
    
    
    71
    
    
    
    67
    
    
    
    6
    
    
    
    67
    
    
    
    66
    
    
    
    2Total Wireline
    
    $
    1,004
    
    
    $
    1,089
    
    
    
    (8
    )%
    
    $
    1,089
    
    
    $
    1,128
    
    
    
    (3
    )%
 OPERATING DATA For the Year Ended December 31,2004
    
    
    2003
    
    
    %Change
    
    
    2003
    
    
    2002
    
    
    % ChangeAccess Lines in Service (000s):Residential
    
    
    887
    
    
    
    940
    
    
    
    (6
    )%
    
    
    940
    
    
    
    957
    
    
    
    (2
    )%Business
    
    
    281
    
    
    
    290
    
    
    
    (3
    )
    
    
    290
    
    
    
    303
    
    
    
    (4
    )Total
    
    
    1,168
    
    
    
    1,230
    
    
    
    (5
    )%
    
    
    1,230
    
    
    
    1,260
    
    
    
    (2
    )%
 Wireline revenues include local service, network access, long distance, directory and
other revenues. For the year ended December 31, 2004, wireline revenues decreased $85 million, or
8%, to $1,004 million from $1,089 million for the same period in 2003. For the year ended December
31, 2003 decreased $39 million, or 3%, to $1,089 million from $1,128 million in 2002. Local Services Local service revenues include revenues from basic voice, telephone and telecommunications
equipment rental, value-added services, high-speed private line services, Internet access, and
public phone service. Local service revenues for the year ended December 31, 2004 decreased $16
million, or 3%, to $596 million from $612 million for the comparable 2003 period. The decrease is
due to decreased revenues from local voice services of $31 million partially offset by increased
revenues from local data services of $15 million. The decrease in revenues from local voice
services was driven mainly by fewer access lines, absence of touch tone charges, and decrease in
business measured services. The increase in local data services was primarily driven by an
increase in the number of customers requesting our high-speed special services and internet
services, which resulted in a $21 million increase in both high-speed special services and internet
service revenue, partially offset by absence of Edunet billing of $7 million. Local service revenues for the year ended December 31, 2003 decreased $1 million, or less than
1%, to $612 million from $613 million in 2002. The decrease is mainly due to decreased revenues
from local voice services of $2 million driven by a decrease in revenues from basic voice of $4
million offset by an increase in deferred activation charges of $5 million. Network Access Network access revenues include revenues from services provided to long distance carriers,
competitive local exchange carriers, and cellular and paging operators to originate and terminate
calls on our network. These revenues for the year ended December 31, 2004 decreased $25 million,
or 8%, to $271 million compared to $296 million for the same 2003 period. The decrease was driven
by a decrease in intra-island access revenues of $22 million due to the implementation of the phase
rate reduction required by the TRB in the February 2002 Order, previously defined and included in
the integrated plan. These revenues for the year ended December 31, 2003 decreased $35 million, or 11%, to $296
million compared to $331 million for 2002. The decrease was driven by lower intra-island access
revenues of $13 million, a decrease in off-island switching and special access revenues of $11
million and lower carrier common line access revenues of $12 million. 24




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##### Table of Contents



Long Distance Long distance revenues include direct dial on-island and off-island, operator-assisted calls
and prepaid calling cards revenues. Long distance revenues for the year ended December 31, 2004
decreased $48 million, or 42%, to $66 million from $114 million for the comparable 2003 period due
to a decrease in intra-island long distance revenues as a result of the impact of the Extended Area
Service (EAS) implementation and a decrease in long distance call volumes. The reduction in
revenues in 2004 also incorporates an adjustment of receivable balances reflecting billed activity.
The prior periods amounts do not have a material impact in the financial statements. Long distance revenues decreased $4 million, or 3%, to $114 million for the year ended
December 31, 2003 from $118 million for the comparable 2002 period. The decrease was due to a
decrease in intra-island long distance revenues of $8 million, which decrease was partially offset
by an increase in prepaid long distance card revenues of $2 million. Intra-island long distance
revenues have decreased mainly due to customer traffic migration to the cellular network and
general economic conditions. Directory and Other Directory and other revenues include revenues from directory publishing rights,
telecommunication equipment sales and billing and collection services provided to competing long
distance operators in Puerto Rico. Directory and other revenues for the year ended December 31,
2004 increased $4 million, or 6%, to $71 million from $67 million for the same period in 2003 due
to an increase in late payment fees of $7 million, which was partially offset by a decrease in
billing and collections revenues of $3 million. Directory and other revenues for the year ended December 31, 2003 increased $1 million, or 2%,
to $67 million from $66 million for the year ended December 31, 2002, mainly due to an increase in
wireline equipment sales of $2 million partially offset by a decrease in customer premises
equipment (CPE) maintenance revenues of $1 million. RESULTS OF OPERATIONS EXPENSE WIRELINE For the Year Ended December 31,2004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    355
    
    
    $
    370
    
    
    
    (4
    )%
    
    $
    370
    
    
    $
    334
    
    
    
    11
    %Other operating expenses
    
    
    209
    
    
    
    397
    
    
    
    (47
    )%
    
    
    397
    
    
    
    327
    
    
    
    21
    %Total Wireline
    
    $
    564
    
    
    $
    767
    
    
    
    (26
    )%
    
    $
    767
    
    
    $
    661
    
    
    
    16
    %
 Wireline expenses for the year ended December 31, 2004 decreased $203 million, or 26%, to
$564 million from $767 million for the same period in 2003. Wireline expenses for the year ended
December 31, 2003 increased $106 million, or 16%, to $767 from the $661 million reported for the
same period in 2002. Labor and benefits Labor and benefit expenses for the year ended December 31, 2004 decreased $15 million, or 4%,
to $355 million from $370 million for the same period in 2003, due to a decrease in pension and
OPEB expenses of $13 million and a headcount reduction which resulted in a decrease in salary
expenses of $8 million and a decrease in expatriate expenses of $4 million. This decrease was
partially offset by higher post-retirement benefits of $9 million. Labor and benefit expenses for the year ended December 31, 2003 increased $36 million, or 11%,
to $370 million from $334 million reported for the year ended December 31, 2002, due to increases
in Pension and OPEBs expense recognition of $34 million, which resulted from a decrease in the rate
of return on plan assets in addition to a decrease in the discount rate, which reflects a softening
economy. 25




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##### Table of Contents



Other operating expenses Other operating expenses for the year ended December 31, 2004 decreased $188 million, or 47%,
to $209 million from $397 for the same period in 2003. The decrease was due to the fact that the
2003 results included $29 million associated with the write-off of the billing software system,
which was abandoned by the Company and recognized for the year ended December 31, 2003, and to a
$66 million pretax reserve for the end user and AT&T refund previously referred to. Of the latter
reserve, $43 million was reversed during the year ended December 30, 2004. See -Regulatory and
Other Matters  Intra-Island Long Distance Access Rate Dispute. Two other changes contributed to
the reduction in expenses: a decrease in management fees of $12 million as the Verizon Management
and Technology License Agreements expired on March 2, 2004 and were replaced by a new Service
Agreement and a decrease in bad debt expense of $38 million due to a settlement with the PRDOE
regarding amounts owed. See -Regulatory and Other Matters  Puerto Rico Department of Education
(The PRDOE) Debt. Other operating expenses of $397 million for the year ended December 31, 2003, increased $70
million, or 21%, compared to the same period in 2002. The increase is due to cancelled capital
projects of $29 million, which required the write-off of the billing software system abandoned by
the Company (an additional $3 million write-off is included as interest), a pre-tax reserve of $66
million (an additional $7 million is included as interest) for the end-user and AT&T refund
referred to in the TRB February 2002 Order and the net cost of removal of $4 million due to the
adoption of SFAS No. 143, Accounting for Asset Retirement Obligations on January 1, 2003. Under
the provisions of SFAS No. 143, we are required to exclude costs of removal from our depreciation
rates for assets for which the removal costs exceed salvage value. Effective January 1, 2003, we
began expensing costs of removal in excess of salvage value for these assets in the period in which
they are incurred. This increase was partially offset by a decrease in interconnection charges of
$16 million that resulted from an interconnection settlement agreement coupled with a decrease in
rates and a decrease in management fees of $15 million. RESULTS OF OPERATIONS REVENUE WIRELESS For the Year Ended December 31,2004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Postpaid Cellular
    
    $
    180
    
    
    $
    162
    
    
    
    11
    %
    
    $
    162
    
    
    $
    148
    
    
    
    9
    %Prepaid Cellular
    
    
    19
    
    
    
    26
    
    
    
    (27
    )
    
    
    26
    
    
    
    27
    
    
    
    (4
    )Total Cellular
    
    
    199
    
    
    
    188
    
    
    
    6
    
    
    
    188
    
    
    
    175
    
    
    
    7Long Distance
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Paging
    
    
    
    
    
    
    1
    
    
    
    (100
    )
    
    
    1
    
    
    
    5
    
    
    
    (79
    )Wireless Equipment
    
    
    22
    
    
    
    13
    
    
    
    69
    
    
    
    13
    
    
    
    7
    
    
    
    91Total Wireless
    
    $
    226
    
    
    $
    202
    
    
    
    12
    %
    
    $
    202
    
    
    $
    187
    
    
    
    8
    %
 OPERATING DATA For the Year Ended December 31,2004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Cellular Customers (000s):Postpaid
    
    
    290
    
    
    
    240
    
    
    
    21
    %
    
    
    240
    
    
    
    228
    
    
    
    5
    %Prepaid
    
    
    97
    
    
    
    113
    
    
    
    (14
    )
    
    
    113
    
    
    
    123
    
    
    
    (8
    )Total
    
    
    387
    
    
    
    353
    
    
    
    10
    %
    
    
    353
    
    
    
    351
    
    
    
    1
    %Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    54
    
    
    $
    55
    
    
    
    (2
    )%
    
    $
    55
    
    
    $
    55
    
    
    
    
    %Prepaid Cellular ARPU
    
    
    15
    
    
    
    19
    
    
    
    (21
    )
    
    
    19
    
    
    
    20
    
    
    
    (5
    )Combined Cellular ARPU
    
    
    43
    
    
    
    43
    
    
    
    
    
    
    
    43
    
    
    
    43
    
    
    
    
 Revenues from cellular services and related equipment sales for the year ended December
31, 2004 increased $24 million, or 12%, to $226 million from $202 million for the comparable 2003
period. Revenues from cellular services and related equipment sales for the year ended December
31, 2003, increased $15 million, or 8%, to $202 million from $187 million reported for the year
ended December 31, 2002. 26




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##### Table of Contents



Cellular Services Cellular service revenues for the year ended December 31, 2004 increased $11 million, or 6%,
to $199 million from $188 million for the same period in 2003. This increase was primarily the
result of an increase of 50,000 post paid cellular customers for 2004 compared to the same period
in 2003 due to attractive price plans and the implementation of marketing strategies to align the
Companys product and service offerings with those of Verizon Wireless in the United States. Revenues from cellular services for the year ended December 31, 2003 increased $13 million, or
7%, to $188 million from $175 million for 2002. The increase was primarily the result of an
increase of 12,000 post paid cellular customers compared to the year ended December 31, 2002 due to
attractive price plans and the implementation of a marketing strategy to align the Companys
product and service offerings with those of Verizon Wireless in the United States. Long Distance On April 2004, PRTC and PRTLD entered into a reseller agreement regarding long distance
revenues generated by cellular customers, resulting in revenue of $5 million during year 2004. Paging Revenues Paging revenues declined $1 million and $4 million for the year ended December 31, 2004 and
2003, respectively. The decrease was related to a complete reduction of paging customers. The
Company entered into an agreement to sell its paging division and received approval from the FCC of
the negotiated agreement in July 2003. The Company closed its paging operations in August 2003. Wireless Equipment Revenues from wireless equipment sales increased $9 million, or 64%, to $22 million for the
year ended December 31, 2004 from $13 million for the comparable 2003 period. These increases are
the result of postpaid contract renewals. Wireless equipment sales increased $6 million, or 91%, to $13 million for year ended December
31, 2003 from $7 million for 2002. This increase is a result of the increase in customers who
subscribed for wireless services in 2003 and to post paid contract renewals. RESULTS OF OPERATIONS EXPENSE WIRELESS For the Year Ended December 31,2004
    
    
    2003
    
    
    % Change
    
    
    2003
    
    
    2002
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    32
    
    
    $
    32
    
    
    
    
    %
    
    $
    32
    
    
    $
    31
    
    
    
    3
    %Other operating expenses
    
    
    150
    
    
    
    132
    
    
    
    14
    
    
    
    132
    
    
    
    115
    
    
    
    15Total Wireless
    
    $
    182
    
    
    $
    164
    
    
    
    11
    %
    
    $
    164
    
    
    $
    146
    
    
    
    12
    %
 Wireless expenses for the year ended December 31, 2004 increased $18 million, or 11%, to
$182 million from $164 million for the same period in 2003. Wireless expenses for the year ended
December 31, 2003, increased $18 million, or 12%, to $164 million from $146 million reported for
the year ended December 31, 2002. Labor and benefits Labor and benefit expenses for the year ended December 31, 2004 and 2003 were constant at $32
million. Labor and benefit expenses for the year ended December 31,2003 increased $1 million, or 3%, to
$32 million from the $31 million reported for the year ended December 31, 2002. The increase in
labor and benefits expenses is mainly due to higher contractor expenses. 27




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Other operating expenses Other operating expenses for the year ended December 31, 2004 increased $18 million, or 14%,
to $150 million from $132 million for the comparable 2003 period. The increase was due to a higher
subsidy on equipment sales of $12 million, higher bad debt expense of $3 million, and higher
network management fees of $2 million. Other operating expenses increased $17 million, or 15%, to $132 million from the $115 million
reported for the comparable 2002 period. The increase was due to a higher subsidy on equipment
sales of $11 million, the absence of a gain on the sale of land of $3 million recognized during
year ended December 31, 2002, higher network management fees of $3 million, higher commission
expenses of $2 million and higher inventory obsolescence expense of $2 million. 28




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LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED FINANCIAL CONDITION Years Ended December 31,2004
    
    
    2003
    
    
    2002(in millions)Cash flows provided
by (used in):Operations
    
    $
    289
    
    
    $
    357
    
    
    $
    405Investing
    
    
    (166
    )
    
    
    (170
    )
    
    
    (206
    )Financing
    
    
    (81
    )
    
    
    (198
    )
    
    
    (200
    )
 OVERALL LIQUIDITY ASSESSMENT The Company believes that cash from operations is sufficient to meet working capital needs.
Current assets exceeded current liabilities at December 31, 2004 by $108 million. We believe our
sources of funds, from operations and from readily available external financing arrangements, are
sufficient to meet ongoing operating, financing and investing requirements. We expect that
presently foreseeable capital requirements will continue to be financed through internally
generated funds. On March 1, 2005, the Company entered into a new unsecured, undrawn $400 million 364-day
revolving credit facility, which matures in March 2006 and replaced the prior undrawn facility
which matured on March 2, 2005. The Company also has an undrawn $40 million working capital credit
facility, which matures on June 29, 2005 and replaced the prior facility which matured in June
2004. See Note 11 to the unaudited condensed consolidated financial statements for more detailed
information. During the year ended December 31, 2002, we refinanced our notes and the related
interest payment through the issuance of term loans in an aggregate principal amount of $225
million. OPERATIONS Cash from operations continued to be our primary source of funds. For year ended December 31,
2004, net cash provided by operating activities was $289 million compared to $357 million for the
same period in 2003. The $68 million decrease was primarily due to higher pension contributions of
$55 million, which are part of managements strategy to fully fund the pension plans by 2007 and
higher OPEBs disbursements of $4 million associated with the Companys recognition of the effects
of the Medicare Drug Act of 2003. The $48 million decrease in cash from operations for the year ended December 31, 2003 as
compared to the prior year was primarily due to higher pension and OPEBs contributions of $46
million. Pension plan payments increased by $46 million due to managements strategy to fully fund
the pension plans by 2007. INVESTING Net cash used in investing activities for the year ended December 31, 2004 was $166 million
compared to $170 million for the same period in 2003. The $4 million decrease in net cash used in
investing activities was due to a $3 million decrease in capital expenditures and costs of removal
as a result of decreased spending on specific software projects, as well as a general decrease in
spending as the Company aligned its capital spending with softening demand for new wireline
service, offset by $1 million decrease in proceeds from the sale of buildings in 2003. Net cash used in investing activities for the year ended December 31, 2003 was $170 million
compared to $206 million for the same period in 2002. The decrease in cash used in investing
activities of $36 million is mainly due to a decrease in capital
expenditures and costs of removal as a result of decreased spending on specific software
projects, as well as a general decrease in spending as the Company aligned its capital spending
with softening demand for new wireline service. Also, effective January 1, 2003, under SFAS No.
143, costs of removal are expensed in the period in which they are incurred. 29




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##### Table of Contents



We have invested approximately $1.2 billion from the date of the Acquisition through
December 31, 2004 to expand and enhance our networks. Our planned capital expenditures for 2005
are approximately $155 million, which we expect to finance with internally generated funds. FINANCING Net cash used in financing activities for the year ended December 31, 2004 and 2003 was $81
million and $198 million, respectively. We reduced outstanding debt, including capital leases by
$60 million for the year ended December 30, 2004 and by $170 million for the year ended December
31, 2003. Borrowings under term credit facilities, working capital facilities and commercial paper
decreased from $153 million at December 31, 2003 to $93 million at December 31, 2004 and from $324
million at December 31, 2002 to $153 million at December 30, 2003. During 2002, the Company
refinanced $300 million of senior notes, which matured on May 15, 2002, with new term credit
agreements. The aggregate principal amount of the term loans was $225 million, with maturities
ranging from two to three years, bearing interest at 60 to 100 basis points over the London
Interbank Offered Rate (LIBOR) at December 31, 2002. During the year ended December 31, 2004,
the Company prepaid $30 million of principal of term loans, reducing the outstanding balance to $93
million at December 31, 2004. During the year ended December 31, 2003, the Company prepaid $102
million of principal of term loans, reducing the outstanding balance to $123 million at December
31, 2003 and reduced the interest rate thereon to 70 basis points over LIBOR. In connection with the Acquisition, PRTA agreed to contribute cash or stock worth a total of
$200 million as a capital contribution in five equal $40 million installments over five years
beginning on March 2, 2000 to partially fund its under funded pension and other post-employment
benefit obligations. In March 2004, the Company received the fifth and final $40 million
installment in cash from PRTA. See Note 15 to the unaudited condensed consolidated financial
statements for more information. The shareholders agreement requires the payment of dividends equal to at least 50% of
consolidated net income, payable quarterly to the extent funds are legally available. For the year
ended December 31, 2004, the Company paid dividends amounting to $62 million corresponding to the
first, second, and third quarters of 2004. For the year ended December 31, 2003, the Company paid
dividends amounting to $68 million corresponding to the first quarter of 2003 and the fourth
quarter of 2002. The senior note indentures and credit facility agreements do not contain
restrictions on the payment of dividends. OFF-BALANCE SHEET ARRANGEMENTS The Company currently does not have any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on the Companys financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The following table provides a summary of our contractual obligations and commercial commitments at
December 31, 2004. Additional detail about these items is included in the notes to the
consolidated financial statements. Contractual Obligations &Other Commercial Commitments:
    
    Payments Due In Period(in millions)Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong Term Debt, including interest rate swap
    
    $
    703
    
    
    $
    
    
    
    $
    403
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    300Term Credit Facilities
    
    
    93
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit Obligations
    
    
    351
    
    
    
    127
    
    
    
    111
    
    
    
    87
    
    
    
    16
    
    
    
    10
    
    
    
    Operating Leases
    
    
    34
    
    
    
    12
    
    
    
    9
    
    
    
    6
    
    
    
    4
    
    
    
    3
    
    
    
    Total
    
    $
    1,181
    
    
    $
    232
    
    
    $
    523
    
    
    $
    93
    
    
    $
    20
    
    
    $
    13
    
    
    $
    300
 30




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REGULATORY AND OTHER MATTERS REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels has been primarily directed at meeting
challenges in maintaining support for local exchange rates and Universal Service while effecting
the rate rebalancing and restructuring required by an increasingly competitive environment. Among
the issues generating regulatory activity are the expansion of local calling areas, local number
portability requirements, interconnection agreements, the FCCs triennial review and the
elimination of reverse toll billing. We have continued to meet the wholesale requirements of new competitors and have signed
agreements with wireless and wireline carriers. These agreements permit carriers to purchase
unbundled network elements, resell retail services, and interconnect their networks with ours. INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE On February 28, 2002, the TRB issued a Resolution and Order (the February 2002 Order) with
respect to the reconsideration requested by the Company of the TRBs October 10, 2001 order to
reduce the access rates the Company charges to long distance carriers to originate and terminate
intra-island long distance calls on the Companys network. The February 2002 Order required new rates for intra-island access to be implemented through
phased-rate reductions over four years. The prospective access rate reductions (on a two-way
basis) were ordered to go into effect on April 1st of each year as follows: April 2002: From 9.3 cents per minute to 7.9 cents per minute April 2003: From 7.9 cents per minute to 6.5 cents per minute April 2004: From 6.5 cents per minute to 5.0 cents per minute April 2005: From 5.0 cents per minute to 2.1 cents per minute The February 2002 Order also requires PRTC to pay a $68 million refund to end-user customers.
The TRB calculated this amount based on the difference between the 9.3 cents and 7.9 cents rate for
TRB estimated traffic for the period April 1, 2000 through March 31, 2002. The refund can be made
in 12 quarterly, equal installments starting April 1, 2002. The Company filed with the Puerto Rico
Circuit Court of Appeals (the Court) an appeal of the February 2002 Order in which the Company
alleges that the TRB made errors of law and procedure in its determination of access charges and
its order to make the cash refund. On April 2, 2002, AT&T, Sprint and LTD (the Carriers) filed a petition with the Court for
review of the February 2002 Order, requesting that the Court to order the rate reduction without a
phase-in period, remand the case back to the TRB and direct the TRB to calculate the refund from
and after April 1997 instead of April 2000, with the Carriers receiving the refund instead of the
end-user customers. The hearing involving oral presentations by the parties was held on February 19, 2003. On
April 22, 2003, the parties filed their corresponding post-hearing final briefs submitting the case
for final adjudication. On August 19, 2003, the Court issued its final decision on the proceeding
confirming the February 2002 Order on Reconsideration of February 28, 2002 in all respects and
rejecting the claims of PRTC and the Carriers. On September 4, 2003, PRTC requested
reconsideration of the Courts determination on the grounds that although the Court correctly
described the applicable legal standards the Court erred in applying those standards to the facts
of the case. On October 2, 2003, the Court denied PRTCs reconsideration request. As a result of
the Courts decision, the Company established a pre-tax reserve of $73 million, including interest,
in September 2003 (3rd quarter) for the end-user and AT&T refund referred to in the February 2002
Order. This reserve is in addition to the reserve established in connection with the stay of the
TRB Order on Reconsideration issued by the Court. On October 30, 2003, the Company filed a petition for a writ of certiorari before the Puerto
Rico Supreme Court (the Supreme Court) challenging the $68 million refund portion of the February
2002 Order. The phased-rate reduction portion of the February 2002 Order was settled with the
major carriers. See Carrier Access Billing. In November 2003, the Company proposed, and two members of the TRB indicated their support
for, a plan to revise the TRBs end-user refund order and end the dispute over this issue. First,
PRTC has filed tariffs implementing the reduction in intra-island access charges ordered by the TRB
in its Order on Reconsideration of February 27, 2002. The composite per minute access rate 31




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was reduced from 9.3 cents to 6.5 cents on January 1, 2004 and will continue to decrease in accordance
with the TRB phase reduction schedule, which will end on April 1, 2005. In addition, PRTC agreed
to implement a phased reduction in the number of local exchange calling areas from 68 to 10, the
first phase of which became effective in February 2004, coupled with the deferred implementation of
a flat charge designed to offset the resulting revenue losses. The plan included a number of other
elements benefiting consumers, including the elimination of touchtone charges, one time credits for
single line residential customers equal to their basic monthly service rate in December 2003 and
June 2005 of approximately $14 million, and a commitment not to raise residential rates through
December 2006 without providing certain information to the TRB in advance. The 2003 cash flow
impact was a reduction of $16 million to the pre-tax reserve associated with one of the two
one-time single line credits. On February 4, 2004, Centennial filed with the Supreme Court an opposition to PRTCs request
that the Court hold the case in abeyance until the TRB issued a Resolution and Order confirming the
commitments negotiated in November 2003. On April 6, 2004, Centennial filed a motion requesting
dismissal of the case, arguing that the settlement between the TRB and PRTC rendered the case moot.
In the alternative, Centennial also argued that the TRB lacked jurisdiction to modify the end-user
refund order, pending the petition for certiorari before the Supreme Court. Centennial claimed
that the commitment negotiated in November 2003 with respect to the $68 million refund was null and
void. On April 15, 2004, PRTC responded to and opposed Centennials filing. On April 23, 2004, PRTC and Centennial entered into a settlement agreement and on April 29,
2004, jointly filed a motion with the Supreme Court informing the Supreme Court of the settlement.
Centennial withdrew its opposition to PRTCs petition and on April 30, 2004, the Puerto Rico
Supreme Court issued a Resolution denying PRTCs petition for certiorari on the grounds of that the
issue was moot. As a result of the TRBs support of the revision to the end-user refund order through agreed
rate reductions and consolidation of calling areas, the final settlement of carrier access rate
disputes and the Supreme Court resolution rendering the litigation moot; the Company revised the
pre-established contingency at $14 million, associated with the expected June 2005 single line
credit. EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE In December 2003, AT&T and Sprint, (later followed by TLD) challenged PRTCs actions in
implementing the reduction of calling areas before the TRB, and sought an injunction to further
reductions in the number of calling areas. PRTC has opposed the request for the injunction and
intends to fulfill its commitments to the TRB. The TRB considered the matter in hearings held on
April 28 and 30 and on May 3, 2004 and determined that the carriers request for injunctive relief
should not proceed. The TRB allowed PRTC to implement its EAS Phase IV as scheduled on May 4, 2004
and ordered PRTC to sustain from further EAS implementation until an expedited investigation
process had been completed. On May 6, 2004, PRTC submitted to the TRB and to the carriers a proposed expedited schedule in
an effort to resolve the investigation prior to the next phase of the EAS implementation, which was
scheduled for June 7, 2004 and covered Puerto Ricos metro area. A hearing on the investigation
was held on June 2, 2004. After the hearing, the TRB terminated the stay it had issued and allowed PRTC to continue to
the next phase of the EAS implementation, subject to the satisfaction of certain customer
information and data collection requirements relating to the impact of the EAS implementation on
measured service customers. On June 7, 2004, the TRB allowed the Company to continue with the
implementation of the metro area zone, which is the largest zone. As a result of the TRBs determination subsequent to the hearing of June 2, 2004, the Company
reduced the reserve originally established in September 2003 to $14 million. On July 8, 2004, the TRB issued a Resolution and Order initiating the investigation process
regarding the EAS implementation impact on measured service customers. The TRB ordered PRTC to
submit monthly reports that would reflect the impact on measured service customers. PRTC complied
with the filing of the first two reports on September 7 and October 7, 2004. PRTC is also required
to file a report on its customer information program with respect to EAS on that date. On September 20 and September 22, 2004, AT&T and Sprint filed a motion requesting
authorization to amend the complaint and to obtain discovery from PRTC. On October 4, 2004, PRTC
filed a motion opposing both motions. A resolution on both motions is pending. As of October 4, 2004, PRTC had completed all phases of its EAS implementation program. 32




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However, on October 21, 2004, AT&T and Sprint, made a joint filing before the TRB requesting
the initiation of a rulemaking proceeding for PRTs new local calling zones. This request for
rule-making aims to obstruct any future local zone reductions by PRTC. On December 1, 2004, PRT
submitted its opposition to the petition. CARRIER ACCESS BILLING During the first and second quarters of 2003, certain carriers made a series of billing claims
against the Company regarding tariff interpretation, traffic routing at the network level and
misclassification of access traffic for determination of applicable access elements. The Company entered into negotiations with the major carriers and settled the billing claims
and phased-rate reductions required by the February 2002 Order. The Company does not believe that
the impact of these settlements will have a material effect on the Companys results of operations. PUBLIC TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS On November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the largest competitive
provider of public pay phones in Puerto Rico filed a lawsuit against us in the United States
District Court of Puerto Rico, claiming predatory, exclusionary and anticompetitive acts and
seeking $75 million in damages. The Company filed a motion to dismiss the lawsuit which was
largely denied by the Court on August 2004. The lawsuit is currently in the discovery stage and
trial is scheduled to begin November 22, 2004. The Companys management believes that TPPRs claim
is without merit. Pan American Telephone, Inc., Intouch Telecommunications, Inc., and Choicetel Communications,
Inc., three other competitive providers of public pay phones in Puerto Rico, also filed a similar
lawsuit against us in the United States District Court of Puerto Rico on September 4, 2002 on the
same grounds. On November 8, 2002, we filed a motion to dismiss the lawsuit and/or in the
alternative to consolidate the lawsuit with TPPRs lawsuit. The Court denied the motion to dismiss
without prejudice. On September 7, 2004, the parties filed a joint motion for dismissal with
prejudice after reaching a settlement agreement, which put an end to all claims and controversies
between them in the proceeding. On January 13, 2005, the Court dismissed the case with prejudice
for lack of prosecution. On August 16, 2002, PSA, the parent company of Phoenix of Puerto Rico, filed a lawsuit against
PRTC in the United States Bankruptcy Court for the District of Delaware, claiming anti competitive
acts. The claims have since been transferred to the United States District Court of Delaware and
the disputes between the two parties include PRTCs amended administrative claim against PSA, and
PSAs claim for over $9 million from PRTC. PRTCs motion to change venue to Puerto Rico was
granted by the United States District Court of Delaware and the motion to dismiss is currently
pending before the United States District Court of Puerto Rico. On September 24, 2004, the Court
issued an Opinion and Order granting PRTCs motion to dismiss. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the Puerto Rico Superior
Court, seeking collection of fees due for services rendered under the PRDOEs Reeducate Program,
which is based on the Federal E-Rate Program, from 1999 to June 30, 2003. The Reeducate Program
funds Internet connections for schools throughout Puerto Rico and PRTC has provided contracted
services to the PRDOE. Based on PRTCs review of its services rendered under the Reeducate
Program, the outstanding amount that PRDOE currently owes to PRTC is $34 million. Under the E-Rate
program, 89% of this amount is to be paid by the FCCs School & Libraries Division (SLD), which
administers the Federal E-Rate Program, if the funding for the fourth and fifth years under the
program is released. PRTC is currently evaluating the outstanding amounts owed by PRDOE for the
third year under the program, which we believe is approximately $1.2 million, after SLD paid its
corresponding percentage (87%) under the program. On March 4, 2004, PRTC filed a motion to dismiss the complaint based on an agreement with the
PRDOE to attempt to settle the amounts owed out of court. On March 24, 2004, the court dismissed
the case without prejudice. In November 2003, the FCC directed SLD to audit the PRDOEs compliance with the E-Rate program
rules as well as billings for the Reeducate Program for years one through three of the program
before the funds will be released. The audit of the PRDOE began on May 15, 2004. The auditor has
contacted PRTC and PRTC is cooperating with the audit. There is no scheduled timetable for the
completion of the audit process. Upon completion of that audit, SLD will determine if there is a
need to recover any, or all, of the funds that were distributed during those years to the PRDOE and
its vendors, including PRTC. 33




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##### Table of Contents



On June 17, 2004, the United States House Energy and Commerce Committee Subcommittee on
Oversight and Investigations held a hearing entitled Problems with the E-Rate Program: Waste,
Fraud, and Abuse Concerns in the Wiring of Our Nations Schools to the Internet. Representatives
from PRTC, as well as representatives from the PRDOE testified at the hearing. This hearing was
one of a series of ongoing hearings focused on the E-Rate program. At the beginning of July, 2004, the Universal Service Administrative Company (USAC), the
E-Rate programs administrator commenced the audit directed by the FCC. The audit was divided into
two time periods: Years 1 to 3 (1999 to June 2001) and Years 4 and 5 (July 2001 to June 2003).
PRTC has been providing information with respect to contracts, billing, payments and the network
designed and installed by PRTC, and service levels provided in response to requests from the
auditors. On July 30, 2004, the FCC released its Fourth Report and Order addressing the manner in which
funds would be recovered under the E-Rate program. On August 13, 2004, the FCC released its Fifth
Report and Order (Order) in the same proceeding adopting measures to address issues raised in the
audit conducted as part of ongoing oversight of the schools and libraries support mechanisms and
program concerns noted by its Office of Inspector General. Based on the standards established by
the FCC, PRTC does not believe that amounts it has received from the E-Rate program are subject to
recovery. PRTC is implementing procedures to ensure compliance with the requirements established
by the Order. TOUCHTONE CHARGES On November 17, 2003, six residential subscribers and eight business service subscribers filed
a class action suit with the Superior Court of Puerto Rico (the Superior Court) under the Puerto
Rico Telecommunications Act of 1996 (Act) and the Puerto Rico Class Action Act of 1971. The
plaintiffs have claimed that the Companys charges for touchtone service are not based on cost, and
therefore violate of the Act. The plaintiffs have requested that the Superior Court (i) issue an
order certifying the case as a class action, (ii) designate the plaintiffs as representative of the
class, (iii) find that the charges are illegal, and (iv) order the Company to reimburse every
subscriber for excess payments made since September 1996. On December 30, 2003, PRTC filed its
answer to the complaint and requested dismissal on the grounds that the claim is not a legitimate
class action suit. On February 17, 2004, the plaintiffs filed their first set of interrogatories
and request for admissions to initiate discovery. A status conference was held on April 30, 2004 and the Superior Court ruled that at this
stage of the proceedings the discovery process would be addressed, but not limited to the
determination of the class. On June 28, 2004, a second hearing was held. During this hearing PRTC was ordered to submit
responses to the plaintiffs request for admissions and to their first and second sets of
interrogatories. PRTC submitted its responses to the plaintiffs request for admissions and to
their first and second sets of interrogatories on July 6 and July 16, 2004, respectively. However,
these responses were limited to the issue of class certifications, and the interrogatories and
requests for admissions relating to the merits of the case were objected and a protective order was
requested. The Superior Court denied PRTCs requests and ordered full responses. On July 16,
2004, PRTC filed a writ of certiorari with the Puerto Rico Court of Appeals seeking reversal of the
Superior Courts order allowing discovery concerning the merits of the case before the class
certification issue is resolved. On October 13, 2004, plaintiffs filed a motion opposing PRTCs
writ of certiorari. A determination is pending before the Court of Appeals. On October 8, 2004, plaintiffs filed with the Superior Court a motion requesting the dismissal
and substitution of one of the plaintiffs. The PR Court of Appeals denied PRTCs writ of certiorari requesting the reversal of a Superior
Court order allowing unlimited discovery. PRTC had intended to limit discovery to the class
certification issue. On November 15, 2004, the Superior Court held an evidentiary hearing in order to determine if
this case will be certified as a class action. Even though the Court has not yet reached a
determination, at the hearing, the Judge ordered PRTC to comply with the plaintiffs merits
discovery requests and PRTC has now done so. CTI ASSET TRANSFER Prior to the Acquisition, PRTC transferred its net wireless assets on September 1, 1998 to CTI
(which became Verizon Wireless, a division of PRTC, on May 1, 2002). Our predecessors later filed
a waiver request in 1998 with the FCC to record this 34




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##### Table of Contents



transfer at book value instead of fair value. Since our predecessors had not included the costs of wireless operations in the regulated rate
setting process, we believe that ratepayers did not bear the cost of our predecessors wireless
investment. The FCC denied the Companys petition in April 2001, but recognized that while there were
questions concerning certain costs and expenses, the cellular and paging assets had been removed
from the interstate rate base. In the February 2002 Order, the TRB provided that any prospective rate increase must first be
applied against the gain from the wireless asset transfer, equating to $56 million applicable to
intrastate. We plan to contest this position on the grounds that the wireless entity was set up
after the last regulated intrastate rate increase in 1982 and therefore these costs were not
included in setting such rates. Currently, the TRB is performing an agreed upon procedures audit, which includes an audit of
the CTI asset transfer. The audit is in the field work stage. While we believe that the
resolution of this matter and any related proceedings will not have a material impact on the
Companys financial condition and results of operations, we cannot predict the effect of any
further regulatory actions. PRICE CAP REGULATION Under the FCCs all or nothing rule, telecommunications carriers that set interstate access
rates based on a price cap formula are required to use the price cap formula for all of their
affiliates. The price cap formula is based on a plan adopted by the FCC called the Coalition of
Affordable Local and Long Distance Service (CALLS), which uses rate-of-return as a basis for
setting rates. The Company would have been required to implement price caps by March 2, 2000 under
the FCCs rules. Prior to March 2, 2000, the Company had set its interstate access rates based on
rate-of-return principles. The FCC delayed conversion to price cap regulation until June 30, 2002, and the Company
requested an extension until June 30, 2003. Under an order issued by the FCC on April 18, 2002, the
Company is no longer required to file a waiver request until the FCC completes its review of the
all-or-nothing rule. In addition, upon the issuance of an Order and Second Further Notice of
Proposed Rulemaking (the Order) by the FCC on February 28, 2004, the FCC deferred further action
on the all-or-nothing rule until it reviews the record compiled in response to the further notice
included in the Order. Additionally, in the Order the FCC stated that all outstanding interim
waivers of the all-or-nothing rule that depend on the FCCs decision shall continue to be effective
until the FCC issues a final order on this matter. As a result, the Company currently continues to
set its interstate access rates based on rate-of-return principles. On May 10, 2004, PRTC filed comments in response to the Order, requesting that the FCC
eliminate the all or nothing rule or, in the alternative, if the rule is not eliminated, that the
FCC grant PRTCs 1999 waiver request to permit PRTC to remain a carrier that sets its interstate
access rates based on rate-of-return principles. The basis of PRTCs request is that if PRTC were
no longer eligible to receive Interstate Common Line Support (ICLS), PRTC would require $139
million in additional universal service support to offset lost ICLS revenues and that the CALLS
plan cannot accommodate PRTC since there is a $650 million cap on the equivalent support in the
CALLS plan, which was based on the anticipated universal service needs of price cap carriers that
were participating in the plan at the time of its adoption. There has been no announcement
regarding the expected timing for the completion of this proceeding. INTERSTATE HIGH COST SUBSIDY On October 21, 1999, the FCC adopted a new high cost loop support mechanism for non-rural
companies, which has resulted in the phase out of the Companys high cost loop subsidy revenues.
The Company is classified as a non-rural telephone company under the United States
Telecommunications Act of 1996. The Companys high cost loop revenues were $49 million in 2000,
$33 million in 2001 and $4 million in 2002. On February 28, 2003, PRTC sent a letter to the FCC,
requesting that the FCC take action to restore the high-cost loop universal service support that
the Company lost due to FCC policies adopted for non-rural telephone companies and arguing that the
non-rural telephone company mechanism is based on cost characteristics of mainland telephone
companies. PRTC requested that the FCC address the loss of its high cost loop universal service
support by adopting rules for insular areas that are similar to those applied to rural carriers.
If rural carrier rules were applied to PRTC it would continue to receive high
cost loop support as it had prior to the adoption of the FCCs 1999 rules for non-rural telephone
companies. On October 27, 2003, the FCC issued an order rejecting PRTCs request for
reconsideration of its classification as a non-rural carrier. However, the order did not address
PRTCs request to restore the high-cost universal service support based on the establishment of a
new high cost loop support mechanism for insular carriers. On January 14, 2004, PRTC filed a
petition for clarification and/or reconsideration of several 35




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portions of the FCC Order of October 27, 2003 on the grounds that the FCC has not acted upon the specific mandate of Section 254 to
provide support for insular areas. No announcement has been made regarding the expected timing for
addressing this issue. On November 29, 2004, the FCC released an Order on Reconsideration denying PRTs petition.
The Order, specifically mentioned that the FCC did not address PRTCs petition of the Qwest Remand
Order (filed on January 2004), or its ex-parte request on February 2003 seeking the adoption of a
non-rural insular mechanism. WORLDNET ARBITRATION PROCEEDING Recently, an arbitrator resolved a dispute related to an interconnection contract between PRTC
and WorldNet and rendered a decision which, among other things, requires PRTC to agree to contract
terms establishing numerous service quality metrics, liquidated damages provisions, reduced prices
for certain network elements, continuation of wholesale discounts, certain Operational Support
System parity standards, and certain requirements with respect to bundled services. PRTC is
examining the impact of this decision. In accordance with the applicable arbitration rules, the
parties have executed and filed the arbitrated contract with the TRB. On June 7, 2004, PRTC filed a request for reconsideration of the TRBs Resolution and Order
adopting the arbitrators decision and a request for a stay of the new interconnection agreement
until the reconsideration was finally resolved. WorldNet also filed a request for reconsideration.
On June 17, 2004, the TRB issued a Resolution and Order accepting both motions for reconsideration
and notified the parties that a final decision on both motions would be issued within ninety days
from the date of the filing, (i.e., by September 7, 2004). On June 25, 2004, PRTCs motion for a
stay was granted. On September 7, 2004, the TRB issued an Order on Reconsideration requiring PRTC and WorldNet
to submit a revised interconnection agreement by October 22, 2004, which was subsequently extended
to October 29, 2004. The new agreement must be implemented within a period of six (6) months
following the date on which it is filed with the TRB. PRTC believes that some of the TRBs determinations in the Order on Reconsideration are
contrary to law, and on October 7, 2004, filed before the Federal District Court for the District
of Puerto Rico an appeal of the TRBs Order on Reconsideration of September 7, 2004. In addition,
we filed an emergency motion for a partial stay of the Order with the TRB. Worldnet has also
appealed the TRBs Order of September 7, 2004 to the Federal District Court for the District of
Puerto Rico. On November 12, 2004, PRTC and WorldNet completed the negotiations for a conforming
interconnection and commercial agreement. The conforming interconnection agreement was submitted
to the TRB for approval on November 12, 2004. On November 23, 2004, the TRB approved the
agreement. Both petitions were consolidated by the Court on October 21, 2004. The TRB requested a remand
on the bundling issue. A remand hearing was held on November 12, 2004. The parties notified the
Court of the agreement reached and the Court approved the agreement. The agreement consisted of a
remand order of the bundling controversy to the TRB. All the other issues will be considered by
the Court through the filing of summary judgment by the parties which were due on January 14, 2005. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS In this Annual Report on 10-K, the Company has made forward-looking statements. These
statements are based on the Companys estimates and assumptions and are subject to certain risks
and uncertainties. Forward-looking statements include information concerning possible or assumed
future results of operations, as well as those statements preceded or followed by such words as
anticipates, believes, estimates, expects, hopes, targets or similar expressions. Future results could be affected by subsequent events and could differ materially from those
expressed in the forward-looking statements. If future events and actual performance differ from
the Companys assumptions, the actual results could vary significantly from the performance
projected in the forward-looking statements. The following important factors could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements: (1) materially adverse
changes in economic and industry conditions in Puerto Rico, and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or
operational impact, in the markets served by us;; (2) material changes in available technology; (3)
the final resolution of regulatory initiatives and proceedings, including arbitration proceedings
pertaining to, among other matters, the terms of interconnection, access charges, universal
service, unbundled network elements and resale rates; (4) changes in our accounting policies that
may be required by regulatory agencies, including the 36




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Securities and Exchange Commission (SEC) or that result from changes in the accounting policies or their application, which could result in an
impact on earnings; and (5) the extent, timing, success and overall effects of competition from
others in the Puerto Rico telecommunications service industry. Although the Company believes the expectations reflected in its forward-looking statements are
reasonable, the Company cannot guarantee its future performance or results of operations. All
forward-looking statements in this filing are based on information available to the Company on the
date of this filing; however, the Company is not obligated to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. The risks
described above and elsewhere in this report, including in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, should be considered when reading any
forward-looking statements in this filing. Given these uncertainties and risks, the reader should
not place undue reliance on these forward-looking statements. CRITICAL ACCOUNTING POLICIES General The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, intangible assets, income taxes, financing
operations, pensions and other post-retirement benefits, contingencies and litigation. The
Companys management bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Because of uncertainties inherent in the estimation
process, the Companys estimate of losses and the related allowance may change. The Company does
not depend on any single customer for its business. Deferred Taxes The Company uses an asset and liability approach in accounting for income taxes following the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are
established for temporary differences between the way certain income and expense items are reported
for financial reporting and tax purposes. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is
more likely than not to be realized. While the Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event the Company were to determine that it would be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made. Likewise, should the Company
determine that it would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in the period such
determination was made. As provided by law, the Puerto Rico Treasury Department is currently conducting an ordinary audit
of our corporate income tax returns. We do not expect the results of this audit to have a material impact on the Companys
financial condition and result of operations. 37




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Property, Plant and Equipment and Depreciation Property, plant and equipment is stated at original cost, including interest on funds borrowed to
finance the acquisition of capital additions. Repairs and maintenance are expensed as incurred.
Depreciable property disposed of in the ordinary course of business, less salvage value, is charged
to accumulated depreciation with no gain or loss recognized. Gains or losses from the sale of land
are recorded in results of operations. The Companys depreciation expense is based on the composite group remaining life method using
straight-line composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant over the remaining asset lives. This method also
requires a periodic evaluation of the average remaining useful lives related to the expected
recoverability of the carrying value of assets based on changes in technology, environmental
factors, the federal and local regulatory environment, industry and other competitive forces.
Effective July 1, 2002, the Company revised its accounting estimates relating to depreciation based
on a detailed review of the lives underlying the depreciation rates. The depreciation rate
revisions reflect expected useful lives resulting from the impact of technology and future
competition and more closely approximate the assumptions used by other telephone companies. These
revisions resulted in a decrease in depreciation expense of approximately $12 million for the year
ended December 31, 2003. Effective July 2004, the Company revised its plant useful lives estimates
based on a detailed review of the lives underlying the depreciation rates. The revision resulted
in a decrease in depreciation expense by approximately $3.3 million for the year 2004. Refer to
Note 4 to the consolidated financial statements for further details. The Company revised the method to calculate the composite useful lives to be consistent with the
current depreciation study. Pensions The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87,
Employers Accounting for Pensions which requires that amounts recognized in financial statements
be determined on an actuarial basis. SFAS No. 87 and the policies used by the Company, notably the
use of a calculated value of plan assets (which is further described below), generally reduced the
volatility of pension income (expense) from changes in pension liability discount rates and the
performance of the pension plans assets. The most significant element in determining the Companys pension income (expense) in accordance
with SFAS No. 87 is the expected return on plan assets. At December 31, 2004, the Company assumed
that the expected long-term rate of return on plan assets is 8.5%, which remained constant in
comparison with prior year. Historically, the Companys pension plan assets have earned in excess
of 8.5%; therefore, the Company believes that its assumption of future returns of 8.5% is
reasonable. At the end of each year, the Company determines the rate used to discount plan liabilities. The
discount rate reflects the current rate at which the pension liabilities could be effectively
settled at the end of the year. In estimating this rate, the Company looks to rates of return on
high quality, fixed-income investments that receive one of the two highest ratings given by a
recognized ratings agency. At December 31, 2004, the Company determined this rate to be 5.75%,
which is 0.5% lower than the prior year. The increase in the pension liability resulting from the
change has been deferred in accordance with the amortization provisions of SFAS No. 87. Other Post Employment Benefits We provide retiree health benefits for employees that retire under our Pension Plan. We use
various actuarial assumptions including the discount rate and the expected trend in health care
costs to estimate the costs and benefit obligations for our retiree health plan. At December 31, 2004, we assumed a discount rate of 5.75%, which is 0.5% lower than the prior year
and increased our retiree health benefit liability. A large portion of this loss has been deferred
in accordance with the amortization provisions of SFAS No. 106. RECENT ACCOUNTING PRONOUNCEMENTS For disclosure of recent accounting pronouncements, see Note 4 to our consolidated financial
statements included under Part II, Item 8, Financial Statements and Supplementary Data. 38




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY We are exposed to market risk in the normal course of business, resulting primarily from
changes in the interest rates on our senior notes and interest rate swap agreements. The following table summarizes the fair value of our senior notes and interest rate swap
agreements at December 31, 2004 and December 31, 2003 and provides a sensitivity analysis of the
fair values of these instruments assuming a 100 basis point increase or decrease in the yield
curve. The sensitivity analysis does not include the fair values of our floating-rate debt since
they are not significantly affected by changes in market interest rates. Fair ValueAssuming 100 Basis PointBook Value
    
    
    Fair Value
    
    
    Increase
    
    
    Decrease(In thousands)December 31, 2004:Senior notes
    
    $
    699,876
    
    
    $
    735,790
    
    
    $
    718,569
    
    
    $
    753,663Interest rate swap
    
    
    3
    
    
    
    3
    
    
    
    (1,813
    )
    
    
    1,834Total
    
    $
    699,879
    
    
    $
    735,793
    
    
    $
    716,756
    
    
    $
    755,497December 31, 2003:Senior notes
    
    $
    699,839
    
    
    $
    770,526
    
    
    $
    746,165
    
    
    $
    795,974Interest rate swap
    
    
    2,811
    
    
    
    2,811
    
    
    
    (467
    )
    
    
    6,133Total
    
    $
    702,650
    
    
    $
    773,337
    
    
    $
    745,698
    
    
    $
    802,107
 39




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Operations for the Years Ended December 31,
2004, 2003 and 2002Consolidated Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2004, 2003 and 2002Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002Notes to Consolidated Financial Statements for the Years Ended December 31,
2004, 2003 and 2002Schedule I  Condensed Consolidating Information for the Years Ended December
31,2004 and 2003Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31,
2004, 2003 and 2002
 40




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Telecomunicaciones de Puerto Rico, Inc.: We have audited the accompanying consolidated balance sheet of Telecomunicaciones de Puerto Rico,
Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders equity, and cash flows for the
years then ended. Our audit also included the financial statement schedule listed in the Index at
Item 15 for the years ended December 31, 2004 and 2003. These financial statements and the
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on the financial statements and financial statement schedule based on our
audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Telecomunicaciones de Puerto Rico, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly in all material
respects the information set forth therein. As discussed in Note 3 and 4 to the consolidated financial statements, the Company changed its
methods of accounting for directory revenues and expenses, and asset retirement obligations
effective January 1, 2003; as discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible assets effective January
1, 2002. Ernst & Young LLP
San Juan, Puerto Rico March 11, 2005 41




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Balance Sheets
 December 31,2004
    
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    63,346
    
    
    $
    21,732Accounts receivable, net of allowance for doubtful accounts
of $106,090 and $131,106 in 2004 and 2003, respectively
    
    
    270,914
    
    
    
    287,247Deferred income tax
    
    
    28,054
    
    
    
    26,158Inventory and supplies, net
    
    
    28,158
    
    
    
    21,202Prepaid expenses
    
    
    26,616
    
    
    
    35,255Total current assets
    
    
    417,088
    
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,459,459
    
    
    
    1,558,246GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    196,820
    
    
    
    189,136DEFERRED INCOME TAX
    
    
    235,886
    
    
    
    246,794OTHER ASSETS
    
    
    109,102
    
    
    
    108,541TOTAL ASSETS
    
    $
    2,545,282
    
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    93,168
    
    
    $
    59,729Other current liabilities
    
    
    216,187
    
    
    
    213,480Total current liabilities
    
    
    309,355
    
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    703,556
    
    
    
    802,135PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    607,115
    
    
    
    594,113OTHER NON-CURRENT LIABILITIES
    
    
    186,781
    
    
    
    237,405Total liabilities
    
    
    1,806,807
    
    
    
    1,906,862MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    15,010
    
    
    
    13,025SHAREHOLDERS EQUITY:Common stock
    
    
    704,386
    
    
    
    703,884Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    (26,153
    )Subscription receivable
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    210,956
    
    
    
    164,520Accumulated other comprehensive loss, net of taxes
    
    
    (166,705
    )
    
    
    (101,385
    )Total shareholders equity
    
    
    723,465
    
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,545,282
    
    
    $
    2,621,238
 The accompanying notes are an integral part of these financial statements. 42




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Operations
  For the Years Ended December 31,2004
    
    
    2003
    
    
    2002REVENUES:Local services
    
    $
    586,598
    
    
    $
    605,259
    
    
    $
    606,621Access services
    
    
    268,974
    
    
    
    295,801
    
    
    
    325,453Long distance services
    
    
    68,890
    
    
    
    111,416
    
    
    
    117,357Cellular services
    
    
    196,426
    
    
    
    187,084
    
    
    
    172,940Paging services
    
    
    
    
    
    
    1,026
    
    
    
    5,241Directory services
    
    
    19,920
    
    
    
    19,868
    
    
    
    19,928Other services and sales
    
    
    73,116
    
    
    
    60,965
    
    
    
    53,735Total revenues
    
    
    1,213,924
    
    
    
    1,281,419
    
    
    
    1,301,275OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    386,948
    
    
    
    402,008
    
    
    
    365,311Other operating expenses
    
    
    343,424
    
    
    
    519,466
    
    
    
    427,419Early retirement and voluntary separation provision
    
    
    2,786
    
    
    
    17,347
    
    
    
    467Depreciation and amortization
    
    
    261,036
    
    
    
    251,735
    
    
    
    261,543Total operating costs and expenses
    
    
    994,194
    
    
    
    1,190,556
    
    
    
    1,054,740OPERATING INCOME
    
    
    219,730
    
    
    
    90,863
    
    
    
    246,535OTHER (EXPENSE) INCOME:Interest expense, net
    
    
    (43,284
    )
    
    
    (53,175
    )
    
    
    (47,540
    )Equity income from joint venture
    
    
    2,454
    
    
    
    2,151
    
    
    
    2,878Minority interest in consolidated subsidiary
    
    
    (2,749
    )
    
    
    (1,529
    )
    
    
    (1,469
    )Asset impairment charge
    
    
    
    
    
    
    (11,800
    )
    
    
    Total other expense, net
    
    
    (43,579
    )
    
    
    (64,353
    )
    
    
    (46,131
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    176,151
    
    
    
    26,510
    
    
    
    200,404INCOME TAX EXPENSE
    
    
    67,762
    
    
    
    8,183
    
    
    
    29,371INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    108,389
    
    
    
    18,327
    
    
    
    171,033CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax provision of $40,672
    
    
    
    
    
    
    58,529
    
    
    
    NET INCOME
    
    $
    108,389
    
    
    $
    76,856
    
    
    $
    171,033
 The accompanying notes are an integral part of these financial statements. 43




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Changes in Shareholders Equity
  AccumulatedOtherCommon
    
    
    Deferred ESOP
    
    
    Subscription
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Compensation
    
    
    Receivable
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE, DECEMBER 31, 2001
    
    $
    701,952
    
    
    $
    (28,793
    )
    
    $
    (109,959
    )
    
    $
    53,592
    
    
    $
    (78,477
    )
    
    $
    538,315Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,836
    )
    
    
    
    
    
    
    (68,836
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (6,134
    )
    
    
    
    
    
    
    
    
    
    
    (6,134
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    1,318
    
    
    
    1,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,703Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,033
    
    
    
    
    
    
    
    171,033Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,705
    )
    
    
    (11,705
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,328BALANCE, DECEMBER 31, 2002
    
    $
    703,270
    
    
    $
    (27,408
    )
    
    $
    (76,093
    )
    
    $
    155,789
    
    
    $
    (90,182
    )
    
    $
    665,376Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,125
    )
    
    
    
    
    
    
    (68,125
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (3,422
    )
    
    
    
    
    
    
    
    
    
    
    (3,422
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    614
    
    
    
    1,255
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,869Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,856
    
    
    
    
    
    
    
    76,856Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,203
    )
    
    
    (11,203
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,653BALANCE, DECEMBER 31, 2003
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    (39,515
    )
    
    $
    164,520
    
    
    $
    (101,385
    )
    
    $
    701,351Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,953
    )
    
    
    
    
    
    
    (61,953
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    502
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,389
    
    
    
    
    
    
    
    108,389Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,320
    )
    
    
    (65,320
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,069BALANCE, DECEMBER 31, 2004
    
    $
    704,386
    
    
    $
    (25,172
    )
    
    $
    
    
    
    $
    210,956
    
    
    $
    (166,705
    )
    
    $
    723,465
 The accompanying notes are an integral part of these financial statements. 44




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows
  For the Years Ended December 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTVITIES:Net income
    
    $
    108,389
    
    
    $
    76,856
    
    
    $
    171,033Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    261,036
    
    
    
    251,735
    
    
    
    261,543Provision for uncollectible accounts
    
    
    29,746
    
    
    
    64,536
    
    
    
    73,195Abandoned software project
    
    
    
    
    
    
    32,262
    
    
    
    Wireless asset impairment charge
    
    
    
    
    
    
    11,800
    
    
    
    Deferred income tax
    
    
    9,012
    
    
    
    (2,385
    )
    
    
    (28,527
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (58,529
    )
    
    
    Accretion of discount on subscription receivable
    
    
    (485
    )
    
    
    (3,422
    )
    
    
    (6,134
    )Equity income from joint venture
    
    
    (2,454
    )
    
    
    (2,151
    )
    
    
    (2,878
    )Early retirement and voluntary separation provision
    
    
    2,786
    
    
    
    17,347
    
    
    
    467Release of ESOP shares
    
    
    1,483
    
    
    
    1,869
    
    
    
    2,703Gain on sale of building
    
    
    (3,349
    )
    
    
    (824
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    2,749
    
    
    
    1,529
    
    
    
    1,469Changes in assets and liabilities:Accounts receivable
    
    
    (13,413
    )
    
    
    (8,264
    )
    
    
    (56,800
    )Inventory and supplies
    
    
    (6,956
    )
    
    
    (3,163
    )
    
    
    6,716Prepaid expenses and other assets
    
    
    8,639
    
    
    
    (13,491
    )
    
    
    (4,187
    )Other current and non-current liabilities
    
    
    (12,514
    )
    
    
    21,815
    
    
    
    1,019Pension and other post-employment benefits
    
    
    (95,400
    )
    
    
    (30,703
    )
    
    
    (14,764
    )Net cash provided by operating activities
    
    
    289,269
    
    
    
    356,817
    
    
    
    404,855CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (171,638
    )
    
    
    (176,278
    )
    
    
    (205,585
    )Proceeds from sale of building
    
    
    5,436
    
    
    
    6,000
    
    
    
    Net cash used in investing activities
    
    
    (166,202
    )
    
    
    (170,278
    )
    
    
    (205,585
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (59,500
    )
    
    
    (170,349
    )
    
    
    (396,564
    )Borrowings of long-term debt
    
    
    
    
    
    
    
    
    
    
    225,000Dividends Paid
    
    
    (61,953
    )
    
    
    (68,125
    )
    
    
    (68,836
    )Net cash (used in) provided by financing activities
    
    
    (81,453
    )
    
    
    (198,474
    )
    
    
    (200,400
    )NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    41,614
    
    
    
    (11,935
    )
    
    
    (1,130
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    21,732
    
    
    
    33,667
    
    
    
    34,797CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    63,346
    
    
    $
    21,732
    
    
    $
    33,667
 The accompanying notes are an integral part of these financial statements. 45




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##### Table of Contents



TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002   1.
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (weor the Company), holds
100% of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga Distancia,
Inc. (PRTLD), and Datacom Caribe, Inc. (Datacom). The Company holds a 67% interest in
Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of our shareholders, holds the
remaining 33% interest. The Company also holds a 24% interest in Verizon Information Services
Puerto Rico, Inc. S en C. (VISI), in which GTE Holdings (Puerto Rico) LLC, our majority
shareholder, holds a 36% interest. Wireline service is provided by PRTC, the incumbent local
exchange carrier for the island of Puerto Rico, and wireless services are provided by Verizon
Wireless, a division of PRTC. The Companys off-island long distance service is provided by
PRTLD and its dial-up Internet access service is provided by Coqui.net. Directory publishing
revenues are generated through VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest and management control over the Company on March 2, 1999 from Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In the
Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and Bell Atlantic
Corporation merged on June 30, 2000 to form Verizon Communications Inc. (Verizon). On January
25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an additional 12% and 3%
interest in the Company, respectively, by exercising an option each held since the Acquisition
(the Option Exercise). Verizon and Popular, Inc. obtained the additional ownership interest
from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and Popular, Inc.
paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172 million in
cash for the additional 3,750,000 shares at a $45.9364 per share price established in the Share
Option Agreement, an agreement entered into at the time of the Acquisition. As a result,
Verizon now owns 52%, PRTA owns 28%, Popular 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.PRTC/Verizon Wireless MergerOn May 1, 2002, the Company completed a tax-free reorganization whereby it merged Verizon
Wireless Puerto Rico, Inc. (Verizon Wireless) into PRTC. Prior to the merger, the Company
created a new wholly-owned subsidiary, PRTLD, to carry the off-island long distance business
previously provided by Verizon Wireless. The objectives of the reorganization enabled the
Company to integrate the wireline and wireless operations without jeopardizing the continuity of
the off-island long distance license, simplify the overall corporate structure to reduce
administrative costs, and provide better control and monitoring of the off-island long distance
business and increase its potential for growth in Puerto Rico. As a result of this merger, the
Company released a deferred tax valuation allowance related to the Acquisition of $93 million,
approximately $51 million of which was recorded against goodwill and $42 million was recorded as
a deferred tax benefit in the Companys consolidated statement of income for the second quarter
of 2002 in accordance with Statements of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes.2.
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying audited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and with the rules and regulations
of the Securities and Exchange Commission (SEC). In the opinion of management the financial
statements include all adjustments consisting of normal recurring accruals, necessary to fairly
present the results of operations and financial condition. The Company is a holding company with
no significant assets or operations other than its investment in its subsidiaries. PRTC is a
wholly owned subsidiary of the Company, and fully and unconditionally guarantee payment of the
senior notes, term loans and the commercial paper. 46




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##### Table of Contents



Principles of Consolidation The 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 Estimates The preparation of financial statements in conformity with generally accepted accounting
principles in the United States, 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. Revenue Recognition Revenues are recognized when services are rendered or products are delivered to customers. Common carrier line access revenues are generated based on the participation by the PRTC in
revenue pools with other telephone companies managed by the 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. Directory revenues are recognized over the lives of the directories, which is generally one year
(see Note 3). Activation and installation revenues and certain related costs are deferred and amortized over
the estimated life of the customer relationship, which are 5 years for wireline and 3 years for
wireless. In 2004 the Company reduce
is revenues to incorporate an adjustment to its receivable balances
to reflect billed activity from prior year. The prior periods amounts
do not have a material impact in the financial statements. Cash and Cash Equivalents Short-term investments with original maturities of three months or less are classified as cash
equivalents. Allowance for Doubtful Accounts The allowance for doubtful accounts is an amount that management believes will be adequate to
absorb possible losses on existing receivables that may become uncollectible based on evaluations
of the collectibility of the receivables and prior loss experience. Because of uncertainties
inherent in the estimation process, managements estimate of losses and the related allowance may
change. The Company is not dependent on any single customer. Inventory and Supplies Inventory and supplies are stated at average cost, net of obsolescence reserves. Property, Plant and Equipment and Depreciation Property, plant and equipment is stated at original cost, including interest on funds borrowed to
finance the acquisition of capital additions. Repairs and maintenance are expensed as incurred.
Depreciable property disposed of in the ordinary course of business, less salvage value, is
charged to accumulated depreciation with no gain or loss recognized. Gains or losses from the
sale of land are recorded in results of operations. The Companys depreciation expense is based on the composite group remaining life method 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 47




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##### Table of Contents



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, 2002, the Company changed its accounting estimates
relating to depreciation. Refer to Note 4 to the consolidated financial statements for further
details. Intangible Assets Intangible assets consist principally of goodwill, trade names, wireline concessions, cellular
licenses, customer base and software licenses. Effective January 1, 2002, the Company adopted SFAS No. 142 and therefore discontinued the
amortization of goodwill and other long-lived assets such as cellular licenses and wireline
concessions. The Company amortizes trade names and software licenses on a straight-line basis
over 25 and 5 years, respectively. Refer to Note 4 of the consolidated financial statements for
further information. Software Costs The Company defers and amortizes software development project costs over a five-year period
beginning at the project completion date. Advertising Costs The Company expenses advertising costs as incurred, and recorded advertising costs of $16 million
in 2004 and $15 million in 2003 and 2002, respectively. Employee Benefit Plans Pension 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. Impairment or Disposal of Long-lived Assets Assets are assessed for impairment when changes in circumstances indicate that their carrying
values are not recoverable. Effective, January 1, 2002, the Company adopted 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 three years, the Company has been operating a TDMA network and CDMA network for its
wireless clients. During 2003 management decided to migrate in 2004 all TDMA clients to the CDMA
network and subsequently dispose of the TDMA network. The expected undiscounted future cash flow
from operations on the TDMA network was estimated to be $27 million ($47.4 million estimated cash
flows from operations less $20.4 million of related expenses). The discounted fair value of the
network was estimated to $26 million and was determined by discounting anticipated discounted
future cash flows at a risk free rate of 3.76%. Since the estimated fair value of $26 million is lower than the $37.8 million carrying amount of
the TDMA network as of December 31, 2003, the Company recorded an impairment loss of $11.8
million. Income Taxes The Company uses an asset and liability approach in accounting for income taxes following the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are established for temporary differences between the way certain income and
expense items are reported for financial reporting and tax purposes. Deferred tax assets and
liabilities are adjusted, to the extent necessary, to reflect tax rates expected to be in
effect when the temporary differences reverse. A valuation allowance is established for
deferred tax assets for which realization is not likely.   48




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##### Table of Contents



Interest Rate RiskThe Company uses interest rate swap agreements to manage exposures to changes in the fair
value of its senior notes to achieve a targeted mix of fixed and variable rate debt. The
Company does not hold interest rate swaps for trading purpose. Interest rate swaps are
marked-to-market in the consolidated balance sheet as a component of other assets.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. Accounting Change for Directory Revenue RecognitionEffective January 1, 2003, the Company changed its method of accounting for directory-publishing
revenues and related expenses from the point-of-publication method to the amortization method.Under the point-of-publication method, such revenues and related expenses are recognized on the
date that the directory is published and substantially delivered. Under the amortization method,
pre-publication revenues and expenses are deferred and capitalized, respectively. Subsequent to
publication, revenues are recognized and expenses amortized over the lives of the directories,
which is generally one year.While both methods fully comply with accounting principles generally accepted in the United
States, the Company adopted the amortization method because it is becoming the industry
standard.The cumulative effect of applying this accounting change to prior years was recognized as of
January 1, 2003 as a one-time, non-cash loss of $17 million ($13 million, after tax). The effect
of applying the new method for the year ended December 31, 2003 was a one-time non-cash revenue
increase of $13 million, which was included in operating income.The following table shows the pro forma effect on operating results for the year ended December
31, 2002 had the Company applied the amortization method: December 31, 2002(In thousands)Before
    
    
    AfterDirectory
    
    
    DirectoryAccounting
    
    
    AccountingChange
    
    
    ChangeOperating revenues
    
    $
    1,301,275
    
    
    $
    1,301,039Operating expenses
    
    $
    1,054,740
    
    
    $
    1,054,723Income before cumulative
effect of accounting change
    
    $
    171,033
    
    
    $
    170,899Net income
    
    $
    171,033
    
    
    $
    170,899
 49




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##### Table of Contents



4.
    Summary of Recent Accounting PronouncementsBusiness Combinations and Accounting for Goodwill and Other IntangiblesThe Company adopted SFAS No. 142 Goodwill and Other Intangible Assets, effective January 1,
2002, which provides guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 142 no longer permits the
amortization of goodwill and other indefinite-lived intangible assets. Instead, these assets
must be reviewed annually (or, under certain conditions, more frequently) for impairment in
accordance with this statement. This impairment test uses fair value approach rather than the
undiscounted cash flow approach previously required by SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.Intangible assets that do not have indefinite lives will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The Company has evaluated its assets using the
fair value approach for each reporting unit to determine if there is an impairment exposure
(transitional impairment test) and the impact it would have on the Companys results of
operations for 2003. The evaluation of the two reporting units revealed no impairment exposure.Asset Retirement ObligationsOn January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations. This
statement provides the accounting for the cost of legal obligations associated with the
retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value
of a liability for asset retirement obligations in the period in which the obligations are
incurred and capitalize that amount as part of the book value of the long-lived asset. We have
determined that PRT does not have a material legal obligation to remove long-lived assets as
described by this statement. However, we have included estimated removal costs in our group
depreciation models. These costs have increased depreciation expense and accumulated
depreciation for future removal costs for existing assets. These removal costs are recorded as a
reduction to accumulated depreciation when the assets are retired and removal costs are incurred.For some assets, such as telephone poles, the removal costs exceed salvage value. Under the
provisions of SFAS No. 143, we are required to exclude costs of removal from our depreciation
rates for assets for which the removal costs exceed salvage. Accordingly, in connection with the
initial adoption of this standard on January 1, 2003, we have reversed accrued costs of removal
in excess of salvage from our accumulated depreciation accounts for these assets. The adjustment
was recorded as a cumulative effect of an accounting change, resulting in the recognition of an
estimated gain of $117 million ($71 million after-tax). Effective January 1, 2003, we began
expensing costs of removal in excess of salvage for these assets as incurred. The impact of this
change in accounting resulted in a decrease in depreciation expense and an increase in
operational and support expenses. The net increase to operating income in 2003, excluding the
cumulative effect adjustment, was approximately $12 million ($7 million after-tax).Accounting for Costs Associated with Exit or Disposal ActivitiesIn July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other costs
to Exit an Activity (including Certain Costs Incurred in Restructuring). EITF Issue No. 94-3
required accrual of liabilities related to exit and disposal activities be recognized at a plan
(commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December 31, 2002. The
Company believes that the adoption of SFAS No. 146 will not have a material effect on its results
of operations and financial condition.Amendments of Statement 133 on Derivative Instruments and Hedging ActivitiesIn April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments 50




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##### Table of Contents



and Hedging Activities. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all
provisions of SFAS No. 149 should be applied prospectively. However, the provisions of this
statement that relate to SFAS 133 Implementation Issues that have been effective for fiscal
quarters beginning prior to June 15, 2003 continue to be applied in accordance with their
respective effective dates. The Company evaluated the impact of the adoption of SFAS No. 149 and
concluded that there is no material effect on its results of operations and financial condition.Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and EquityIn May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This standard clarifies the accounting for
certain financial instruments that, under previous guidance, issuers could account for as equity.
SFAS No. 150 requires that those instruments be classified as liabilities in statements of
financial position. The requirements of this statement apply to issuers classification and
measurement of freestanding financial instruments, including those that comprise more than one
option or forward contract. SFAS No. 150 is effective for all financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company evaluated the impact of the adoption of SFAS
No. 150 and concluded that there is no material effect on its results of operations and financial
condition.Accounting for Revenue Arrangements with Multiple DeliverablesIn November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No. 00-21
addresses how to account for arrangements that may involve multiple revenue-generating
activities. Specifically, the issue addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting. The consensus guidance will be
applicable to agreements entered into in quarters beginning after June 15, 2003. The Company
evaluated the impact of the adoption of EITF No. 00-21 and concluded that there is no material
effect on its results of operations and financial condition.5.
    Property, Plant and EquipmentProperty, plant and equipment consist of: Remaining Useful
    
    December 31
    
    
    December 31Lives (Yrs)
    
    2004
    
    
    2003(In thousands)Current
    
    PreviousOutside plant
    
    
    9.2
    
    
    
    8.5
    
    
    $
    2,148,244
    
    
    $
    2,097,902Central office and transmission equipment
    
    
    4.4
    
    
    
    4.1
    
    
    
    1,228,001
    
    
    
    1,184,357Equipment and other
    
    
    2.7
    
    
    
    3.2
    
    
    
    304,716
    
    
    
    321,972Buildings
    
    
    11.0
    
    
    
    14.3
    
    
    
    321,928
    
    
    
    317,309Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    26,003
    
    
    
    26,400Gross plant in service
    
    
    
    
    
    
    
    
    
    
    4,028,892
    
    
    
    3,947,940Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,637,434
    
    
    
    2,455,127Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,391,458
    
    
    
    1,492,813Construction in progress
    
    
    
    
    
    
    
    
    
    
    68,001
    
    
    
    65,433Total
    
    
    
    
    
    
    
    
    
    $
    1,459,459
    
    
    $
    1,558,246
  Under the provisions of SFAS No. 143, we are required to exclude costs of removal from our
depreciation rates for assets for which the removal costs exceed salvage. Accordingly, in
connection with the initial adoption of this standard on January 1, 2003, we have reversed
accrued costs of removal in excess of salvage from our accumulated depreciation accounts for
these assets. The adjustment was recorded as a cumulative effect of an accounting change,
resulting in the recognition of an estimated gain of $117 million ($71 million after-tax).
Effective January 1, 2003, the Company began expensing costs of removal in excess of salvage for
these assets as incurred. The impact of this change in accounting will result in a decrease in
depreciation expense and an increase 51




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in operational and support expenses. The net increase to operating income in 2003, excluding the
cumulative effect adjustment, was approximately $12 million ($7 million after-tax).During the fourth quarter of 2003, the board of directors approved the replacement of the
Companys General Ledger System and Inventory Management System. The new systems have been
implemented and are currently operating. The projected capitalized costs for software and labor
are approximately $11 million. As of December 31, 2004, the Company had capitalized costs of $10
million associated with the new systems.Effective July 2004, the Company performed its periodic review of plant useful lives estimates
based on a comprehensive analysis detailed review of the 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. The revision resulted in a decrease
in depreciation expense by approximately $3.3 million for the year ended December 31, 2004.The Company revised the method to calculate the composite useful lives to be consistent with the
current depreciation study.6.
    GoodwillFollowing is a breakdown of goodwill. Carrying ValueDecember 31
    
    
    December 312004
    
    
    2003(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
  7.
    Intangibles Carrying ValueDecember 31
    
    
    December 312004
    
    
    2003(In thousands)Indefinite
Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 December 31, 2004
    
    
    December 31, 2003(In thousands)Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    BooValueDefinite
Life:Wireline trade name
    
    $
    48,400
    
    
    $
    11,282
    
    
    $
    37,118
    
    
    $
    48,400
    
    
    $
    9,502
    
    
    $
    38,898Software licenses
    
    
    91,759
    
    
    
    41,032
    
    
    
    50,727
    
    
    
    67,068
    
    
    
    25,805
    
    
    
    41,263Total Definite Life
    
    $
    140,159
    
    
    $
    52,314
    
    
    $
    87,845
    
    
    $
    115,468
    
    
    $
    35,307
    
    
    $
    80,161Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    140,159
    
    
    $
    52,314
    
    
    $
    196,820
    
    
    $
    115,468
    
    
    $
    35,307
    
    
    $
    189,136
 52




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##### Table of Contents



SFAS No. 142, Goodwill and Other Intangible Assets, no longer permits the amortization of
goodwill and other indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or, under certain conditions, more frequently) for impairment in accordance with this
statement. This impairment test uses fair value approach.Intangible assets that do not have indefinite lives will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. For 2003 and 2004, the Company has evaluated its
assets using the fair value approach for each reporting unit to determine if there is an
impairment exposure (transitional impairment test) and the impact it would have on the Companys
results of operations. The evaluation of the two reporting units revealed no impairment
exposure.The following table presents current and expected amortization expense of existing intangible
assets as of December 31, 2004 and for each of the following years: Aggregate Amortization expense:For the year ended December 31, 2004
    
    $
    17,373Expected amortization expense for the years ending December 31,:2005
    
    $
    17,2082006
    
    
    10,8782007
    
    
    8,7492008
    
    
    4,8372009
    
    
    4,837
  8.
    Other assets December 31
    
    
    December 312004
    
    
    2003(In thousands)Deferred activation and installation costs
    
    $
    72,775
    
    
    $
    69,347Notes receivable-equipment sales
    
    
    5,675
    
    
    
    10,446Deferred pension asset
    
    
    23,747
    
    
    
    19,785Deferred financing costs, net
    
    
    2,307
    
    
    
    3,146Other deferred costs
    
    
    1,516
    
    
    
    1,426Interest rate swap
    
    
    3
    
    
    
    2,811Investment in Verizon Information Services
    
    
    88
    
    
    
    Other assets
    
    
    2,991
    
    
    
    1,580Total
    
    $
    109,102
    
    
    $
    108,541
  9.
    Pension PlanThe Company has noncontributory pension plans for full-time employees, which are tax qualified as
they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements. The
Company realizes tax deductions when contributions are made to the trusts. The trusts invest in
equity and fixed income securities to meet benefit obligation.The pension benefit is composed of two elements. An employee receives an annuity at
retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated
by applying a percentage times years of service to the last three years of salary. The second
element is a lump sum based on years of service, approximating nine to twelve months of salary. 53




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There are separate trusts for the annuity and the lump sum benefit with a further separation
of the annuity benefit into a plan for the UIET union, for the HIETEL union and management
employees. Health care and life insurance benefits are provided to retirees.The following table sets forth the status of the plans and the amounts in the financial
statements as of December 31, 2004 and 2003: Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Change in benefit obligation:Benefit obligation at beginning
of period
    
    $
    1,142,433
    
    
    $
    1,021,735
    
    
    $
    622,770
    
    
    $
    576,241Service cost
    
    
    20,551
    
    
    
    18,092
    
    
    
    6,321
    
    
    
    8,701Interest cost
    
    
    72,600
    
    
    
    67,299
    
    
    
    32,226
    
    
    
    35,511Actuarial loss
    
    
    139,900
    
    
    
    104,500
    
    
    
    (24,110
    )
    
    
    45,163Plan amendments-ERW
    
    
    939
    
    
    
    8,714
    
    
    
    696
    
    
    
    6,222Plan amendments-Other
    
    
    6,239
    
    
    
    3,460
    
    
    
    (66,605
    )
    
    
    (25,843
    )Expected expenses
    
    
    (4,809
    )
    
    
    (2,762
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (90,921
    )
    
    
    (78,605
    )
    
    
    (27,908
    )
    
    
    (23,225
    )Benefit obligation at end of
period
    
    $
    1,286,932
    
    
    $
    1,142,433
    
    
    $
    543,390
    
    
    $
    622,770Change in plan assets:Fair value of plan assets at
beginning of period
    
    
    718,192
    
    
    
    558,161
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    65,365
    
    
    
    116,390
    
    
    
    
    
    
    
    Employer contributions
    
    
    177,473
    
    
    
    122,247
    
    
    
    27,908
    
    
    
    23,225Benefits paid
    
    
    (90,921
    )
    
    
    (78,605
    )
    
    
    (27,908
    )
    
    
    (23,225
    )Fair value of plan assets at end
of period
    
    $
    870,109
    
    
    $
    718,193
    
    
    $
    
    
    
    $
    Funded status:Funded status at end of year
    
    
    (416,822
    )
    
    
    (424,240
    )
    
    
    (543,390
    )
    
    
    (622,770
    )Unrecognized actuarial loss, net
    
    
    372,442
    
    
    
    260,340
    
    
    
    315,323
    
    
    
    353,684Unrecognized prior service cost (benefit)
    
    
    22,267
    
    
    
    21,286
    
    
    
    (79,822
    )
    
    
    (18,590
    )Unrecognized net transition
obligation
    
    
    1,480
    
    
    
    1,839
    
    
    
    18,127
    
    
    
    20,329Net amount recognized
    
    $
    (20,633
    )
    
    $
    (140,775
    )
    
    $
    (289,762
    )
    
    $
    (267,347
    )Balance sheet amounts consist of:Accrued benefit liability
    
    $
    (317,353
    )
    
    $
    (326,766
    )
    
    $
    (289,762
    )
    
    $
    (267,347
    )Other asset (Note 7)
    
    
    23,747
    
    
    
    19,785
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    272,973
    
    
    
    166,206
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (20,633
    )
    
    $
    (140,775
    )
    
    $
    (289,762
    )
    
    $
    (267,347
    )
  Changes in benefit obligations were caused by factors including changes in actuarial
assumptions (see Assumptions).The accumulated benefit obligation for all defined benefit pension plans was $1,187 million
and $1,045 million at December 31, 2004 and 2003, respectively. 54




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Additional InformationAn additional minimum pension liability adjustment, net of taxes, of $65 million and $11
million was recorded at December 31, 2004 and 2003. The adjustment is necessary to reflect as a
net liability at a minimum the fair value of benefit obligation less plan assets with the fair
value of benefit obligation calculated on an accumulated benefit obligation basis. An offsetting
deferred pension asset of $24 million and $20 million was recorded at December 31, 2004 and 2003
as part of this calculation to recognize all unrecognized prior service costs. The difference
between the additional liability adjustment and the additional asset was recorded as a component
of other comprehensive income and all accumulated amounts recorded in other comprehensive income
is reflected as a separate account within shareholders equity. Pension and Lump Sum Benefits(In thousands)
    
    2004
    
    
    2003Increase in minimum liability included in othercomprehensive income
    
    
    65,128
    
    
    
    11,203
  In the Acquisition agreement, the PRTA agreed to contribute cash or stock worth a total of
$200 million as a capital contribution in even $40 million installments over five years beginning
on March 2, 2000. The Company will use the $200 million to fund its underfunded pension and other
post-employment benefit obligations. The contribution must be in cash for the first two
installments and cash or stock of the Company for the last three installments. During the year
ended December 31, 2004, $40 million in cash was received corresponding to the fifth and final
installment. Future receipts were originally recorded at their discounted present value of
$159.7 million (at 8% discount rate) as a specific component of shareholders equity in 1999.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)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Service cost
    
    $
    20,551
    
    
    $
    18,092
    
    
    $
    15,856
    
    
    $
    6,321
    
    
    $
    8,701
    
    
    $
    6,751Interest cost
    
    
    72,600
    
    
    
    67,299
    
    
    
    67,180
    
    
    
    32,226
    
    
    
    35,511
    
    
    
    28,963Expected return on plan assets
    
    
    (59,384
    )
    
    
    (46,311
    )
    
    
    (56,890
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    359
    
    
    
    430
    
    
    
    512
    
    
    
    2,202
    
    
    
    2,202
    
    
    
    2,202Prior service cost (benefit)
    
    
    5,257
    
    
    
    4,743
    
    
    
    4,423
    
    
    
    (5,373
    )
    
    
    (2,513
    )
    
    
    896Actuarial loss, net
    
    
    17,008
    
    
    
    13,124
    
    
    
    5,008
    
    
    
    14,251
    
    
    
    15,704
    
    
    
    8,186Net amortization and deferral
    
    
    56,391
    
    
    
    57,377
    
    
    
    36,089
    
    
    
    49,627
    
    
    
    59,605
    
    
    
    46,998Effect of early retirement program
    
    
    939
    
    
    
    8,714
    
    
    
    
    
    
    
    696
    
    
    
    6,222
    
    
    
    Total
    
    $
    57,330
    
    
    $
    66,091
    
    
    $
    36,089
    
    
    $
    50,323
    
    
    $
    65,827
    
    
    $
    46,998
  AssumptionsThe weighted-average assumptions used in determining benefit obligations at December 31, Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Discount rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.75
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
  The weighted-average assumptions used in determining net periodic cost for years ended
December 31, 55




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##### Table of Contents



Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.25
    %
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    6.25
    %
    
    
    6.75
    %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 returned 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.The assumed health care cost trend rates at December 31, Post-Retirement Benefits2004
    
    
    2003
    
    
    2002Health care cost trend rate assumed for next year
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    11.00
    %Rate to which cost trend rate gradually declines
    
    
    5.00
    %
    
    
    4.75
    %
    
    
    5.00
    %Year the rate reaches level it is assumed to remain thereafter
    
    
    2008
    
    
    
    2007
    
    
    
    2009
  Assumed health care trend rates have a significant effect on the amounts reported for the
health care plan. A one-percentage-point change in the assumed health care cost trend rate would
have the following effects: One-percentage-point
    
    Post-Retirement Benefits(In thousands)
    
    Increase
    
    
    DecreaseEffect on 2004 total service and interest cost
    
    $
    5,915
    
    
    $
    (5,076
    )Effect on post-retirement benefit obligation as of December 31, 2004
    
    
    70,945
    
    
    
    (62,472
    )
  Medicare Drug ActOn December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003
(Medicare Drug Act) was signed into law. The Medicare Drug Act introduces a prescription drug
benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. The Companys plan provides prescription drug benefits that are deemed
actuarially equivalent to the Medicare Part D and elected to recognize the impact of the federal
subsidy on our accumulated postretirement benefit obligation and net postretirement benefit costs
in the third quarter of 2004. The reduction in the APBO for the subsidy related to benefits
attributed to past service is $77.4 million for year 2004. The effect of the subsidy on the
measurement of net periodic postretirement benefit cost of $10.7 million for the current period
2004 consists of the following (in millions): Amortization of the actuarial experience gain
    
    $
    4.3Reduction in current period service cost
    
    
    1.6Resulting reduction in interest cost on APBO
    
    
    4.8Total
    
    $
    10.7
  The expected gross benefit payments, including prescription drug benefits, are $9 million
for 2004. 56




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Plan AssetsThe weighted-average assets allocation for the pension plans assets at December 31, 2004 and
2003 by category are as follows: 2004
    
    
    2003Equity securities
    
    
    60.0
    %
    
    
    60.2
    %Debt securities
    
    
    37.0
    %
    
    
    36.9
    %Other
    
    
    3.0
    %
    
    
    2.9
    %100.0
    %
    
    
    100.0
    %
  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 FlowsThe Company expects to contribute $128 million for pension and lump sum plans and $31
million for post-retirement plan in year 2005. We have adequate liquidity resources to fund this
amount.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
    
    
    Benefits2005
    
    $
    78,037
    
    
    $
    30,8312006
    
    
    76,033
    
    
    
    30,9542007
    
    
    77,066
    
    
    
    32,1382008
    
    
    75,865
    
    
    
    33,1642009
    
    
    74,440
    
    
    
    33,9982010-2014
    
    
    372,723
    
    
    
    181,744
  Early Retirement and Voluntary Separation ProvisionIn January 2003, 29 eligible management employees accepted the voluntary separation program,
offered by the Company to eligible management employees during the fourth quarter of 2002,
representing an expense of $1.4 million, which was recorded in the first quarter 2003. During
the second quarter of 2003, the Company offered to members of one of the unions a voluntary
separation program that closed on June 20, 2003, which 44 eligible employees accepted. Also,
during the second quarter of 2003, an additional 147 employees in the craft union accepted a
retirement program offered by the Company that closed on June 30, 2003. As a result of these two
programs, an additional non-cash provision of $3.3 million was recorded in the second quarter
2003.In December 2003, the Company offered an early retirement program to eligible management
employees. A non-cash provision of $12.6 million was recorded relating to 147 employees who had
accepted as of December 31, 2003. In January 2004, an additional 19 eligible management
employees accepted the early retirement program offered by the Company in December 2003, which
resulted in a provision of $1.6 million.In September 30, 2004, the Company offered a voluntary separation program, closing on December 3,
2004, to eligible management employees, which resulted in a provision of $1.2 million. 57




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10.
    Other Current Liabilities December 31
    
    
    December 312004
    
    
    2003(In thousands)Accounts payable
    
    $
    35,367
    
    
    $
    58,625Accrued expenses
    
    
    105,128
    
    
    
    75,999Employee benefit accruals
    
    
    52,630
    
    
    
    44,697Carrier payables
    
    
    14,825
    
    
    
    26,388Taxes
    
    
    1,868
    
    
    
    1,420Interest
    
    
    6,369
    
    
    
    6,351Total
    
    $
    216,187
    
    
    $
    213,480
  11.
    Debt December 31
    
    
    December 312004
    
    
    2003(In thousands)Senior notesDue
May 15, 2006 at 6.65%
    
    $
    399,966
    
    
    $
    399,943Due
May 15, 2009 at 6.80%
    
    
    299,910
    
    
    
    299,896Term credit facilities:Due May 16, 2005 at 57 basis points over LIBOR
    
    
    30,000
    
    
    
    30,000Due June 24, 2005 at 70 basis points over LIBOR
    
    
    
    
    
    
    30,000Due August 19, 2005 at 70 basis points over
    
    
    63,000
    
    
    
    63,000LIBORCommercial paper
    
    
    
    
    
    
    29,500Deferred derivative
    
    
    3,654
    
    
    
    6,337Interest rate swap
    
    
    3
    
    
    
    2,811Capital leases
    
    
    191
    
    
    
    377Total
    
    
    796,724
    
    
    
    861,864Less short-term debt
    
    
    93,168
    
    
    
    59,729Long-term debt
    
    $
    703,556
    
    
    $
    802,135
  11.
    DebtThe senior notes, commercial paper, term credit facilities, working capital facility, and bank
notes are unsecured and non-amortizing. PRTC is the guarantor of these debt instruments. The
senior notes indentures and credit facility agreements do not contain dividend restrictions.The Company has a $400 million commercial paper program with maturities not to exceed 364 days,
which is backed by two working capital facilities. The commercial paper agreement was signed in
November 2000. In March 2005, the Companys existing $360 million bank note credit facility
matured.On March 1, 2005 the Company entered into a new unsecured, $400 million 364-day revolving credit
facility with a syndicate of banks and other lenders for whom Citibank, N.A. acts as
administrative agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Bank of Nova Scotia act as
co-syndication agents and Banco Popular de Puerto Rico and FirstBank Puerto Rico act as
co-documentation agents. Amounts borrowed under this facility are guaranteed by PRTC, and bear
interest at the applicable LIBOR rate plus a margin 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 a margin. The Company is also required to pay a quarterly facility
fee on commitments under the facility and a quarterly utilization fee on borrowed amounts that
exceed 50% of the commitments under the 58




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##### Table of Contents



facility. Accrued interest on Eurodollar rate borrowings is payable based on elected intervals
of one, two, three or six months or other interest period as the Company may select, subject to
certain conditions. Accrued interest on base rate borrowings is payable quarterly. This
facility matures on February 28, 2006, on which date the Company has the right to convert
outstanding amounts into a term loan that mature on February 28, 2007. This facility contains
negative covenants, including covenants which limit the Companys ability to grant or permit
liens on its or subsidiaries properties, merge or sell all or substantially all of its assets
and permit its subsidiaries to incur debt. This facility also requires that the Company maintain
certain financial ratios. Upon the occurrence of a default or an event of default, the lenders
have various remedies or rights, which may include termination of the lenders obligations to
make advances and declare all borrowed amounts and interest thereon immediately due and payable.
The intended purpose of this facility is for working purposes and serves as backstop facility for
commercial paper program.The Company has a $40 million working capital credit facility with Banco Popular de Puerto Rico,
an affiliate of Popular, Inc. that matured on June 2004. On June 2004, the Company renewed the
undrawn $40 million working capital credit facility maturing on June 30, 2005. Amounts
outstanding under this facility bear interest at a rate of 40 basis points over LIBOR. This
facility serves as additional backstop for the commercial paper program. At December 31, 2004
and 2003, the Company had no outstanding balance under this facility.At December 31, 2002, the Company had $225 million in term credit facilities with maturities
ranging from two to three years, and bearing interest from 60 to 100 basis points over LIBOR. By
October 29, 2003, the Company repaid one of the $50 million term loans, and prepaid principal in
an aggregate amount of $62 million of the outstanding term credit loans, while reducing interest
rate to 70 basis points over LIBOR. One of the $30 million term loans matured on May 16, 2004.
The Company renewed the $30 million term loan at an interest rate of 57 basis points over LIBOR
maturity due on May 17, 2005.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, 2004, the unamortized balance of the deferred derivative is $4 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 is the guarantor of the interest rate swap.Aggregate maturities of the senior notes and term credit facilities are as follow: Year
    
    
    
    
    Amount(In thousands)2005
    
    
    Term credit facilities
    
    $
    93,0002006
    
    
    Senior note
    
    
    400,0002009
    
    
    Senior note
    
    
    300,000Total
    
    

    
    
    $
    793,000
 59




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12.
    Other Non-Current LiabilitiesOther non-current liabilities consist of: December 31
    
    
    December 312004
    
    
    2003(In thousands)Deferred activation and installation revenues
    
    $
    72,775
    
    
    $
    69,347Deferred directory-publishing revenues
    
    
    14,065
    
    
    
    12,877Customer deposits
    
    
    26,521
    
    
    
    26,954Other liabilities
    
    
    73,420
    
    
    
    128,227Total
    
    $
    186,781
    
    
    $
    237,405
  13.
    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.Also, during year 2000 and 2001, subsequent to ESOPs commencement, the ESOP entered into various
loan agreements amounting to $4.9 with the Company to finance the ESOPs acquisition of Company
stocks from former employees.Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999
were eligible to receive a portion of the Initial Grant of the Companys stock. Employees that
were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant
provided that they met the following condition:Employees who were on short-term disability, workers compensation, Family and Medical Care Leave
Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence; and the
employees returned to active employment with the Company as soon as they were eligible to do so
and within 180 days after March 2, 1999.Compensation expense is recorded based on the release of shares at market value, which is based
on an independent appraisal performed annually. The ESOP released approximately 32,000 and 36,000
shares in 2004 and 2003, respectively. This release resulted in compensation expense of $1 and
$2 million for the years ended December 31, 2004 and 2003, respectively, reflecting the market
value of the shares. The release of shares, based upon the per share price established at the
Acquisition, amounted to $1.5 and $1.3 million for December 31, 2004 and 2003, respectively,
which is reflected as a reduction of deferred ESOP compensation in equity.14.
    Shareholders EquityCommon StockCommon stock consisted of fifty million authorized no par value shares, of which twenty five
million shares were outstanding at December 31, 2004 and 2003.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 its under funded pension and other
post-employment benefit obligations, as agreed. The stock 60




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purchase agreement required the Company to contribute $66 million, which included the $40 million
received from PRTA, to the pension plan immediately upon receipt of the proceeds each year. The
Company received the final $40 million installment in March 2004 and made the required pension
payment of $66 million. All installments were made in cash.Accumulated Other Comprehensive LossThe accumulated other comprehensive loss represents unrecognized losses, other than unrecognized
prior service costs which are reflected as an other asset, associated with the hourly employee
pension fund, since the accumulated benefit obligation exceeds the fair value of plan assets.The accumulated other comprehensive loss amount as of December 31, 2004 and 2003 has been
adjusted in the amount of $106.5 million and $64.8 million, respectively, in order to reflect the
after-tax amount in accordance with the provisions of SFAS No.130, Reporting Comprehensive
Income.DividendsThe 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 to the extent funds are legally
available.Dividend payments were made in the following periods: 2004
    
    
    2003(In thousands)
    
    
    (In thousands)4th Quarter
    
    $
    49,567
    
    
    4th Quarter
    
    $
    3rd Quarter
    
    
    12,386
    
    
    3rd Quarter
    
    
    2nd Quarter
    
    
    
    
    
    2nd Quarter
    
    
    68,1251st Quarter
    
    
    
    
    
    1st Quarter
    
    
    Total
    
    $
    61,953
    
    
    Total
    
    $
    68,125
  The senior notes indentures and credit facility agreements do not contain dividend restrictions.15.
    Income TaxesThe Company and its subsidiaries file separate income tax returns, as consolidated returns are
not allowed under the provisions of the 1994 Puerto Rico Internal Revenue Code, as amended (the
Code).Provision for income tax is determined by applying the maximum statutory tax rate of 39% to
pretax income. During the year 2004, 2003 and 2002, the Company recorded an income tax provision
of $68 million, $8 million and $29 million, respectively, as set forth below: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Current
    
    $
    17,267
    
    
    $
    5,812
    
    
    $
    24,444Deffered
    
    
    50,495
    
    
    
    2,371
    
    
    
    4,927Total
    
    $
    67,762
    
    
    $
    8,183
    
    
    $
    29,371
 61




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A reconciliation of the provision to the amount computed by applying the statutory rate for the
year ended December 31, 2004, 2003 and 2002 is as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Provision computed at statutory rate
    
    
    39.0
    %
    
    
    39.0
    %
    
    
    39.0
    %Effect of income tax provision (benefit) as a result of:Book income not subject to tax
    
    
    (0.7
    )
    
    
    (9.5
    )
    
    
    (0.9
    )Additional deduction for tax purposes
    
    
    (0.5
    )
    
    
    (1.5
    )
    
    
    (1.5
    )Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (21.5
    )Other
    
    
    0.1
    
    
    
    0.6
    
    
    
    37.9
    %
    
    
    28.6
    %
    
    
    15.1
    %
  The amount of deferred income tax asset as of December 31, 2004 and 2003 is as follows: 2004
    
    
    2003(In thousands)Goodwill and intangibles
    
    $
    62,250
    
    
    $
    76,849Employee benefit liabilities
    
    
    251,357
    
    
    
    226,176Other net
    
    
    (49,667
    )
    
    
    (30,073
    )Total
    
    $
    263,940
    
    
    $
    272,952
  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 2001, the Company had a valuation allowance of approximately $28 million, against
accumulated net operating losses reflected as a deferred tax asset, which relates to the
Companys wireless business. This allowance was established since management did not believe
that it was more likely than not that Verizon Wireless would generate a sufficient level and
proper mix of taxable income within the appropriate period to utilize these tax benefits.During the year 2002, as a result of the merger of Verizon Wireles into PRTC (see Note 1 of the
consolidated financial statements for disclosure on business / corporate structure), management
determined that it was more likely than not that the net operating losses will be utilized and,
accordingly, reduced such valuation allowance to zero.16.
    Related Party TransactionsDuring the years ended December 31, 2004 and 2003, the Company had the following significant
transactions with affiliated companies:  
    At December 31, 2004, the Company maintained an outstanding $40 million working capital
credit facility with an affiliate. No balance was outstanding under this facility as of
December 31, 2004. This affiliate provides the Company with general banking services, such
as lock-box and payroll. In addition, the Company has a contract with this affiliate by
which they print and send the monthly billings to the Companys wireless customers. The
charges for all of these services amounted to approximately $10 million for each of the
years 2004 and 2003.
    As a result of the Acquisition, the Company entered into a five-year Management and
Technology License Agreement with Verizon which expired on March 1, 2004. Under this
agreement, affiliates of Verizon provided advice and direction related to the
administration and operations of the Company, as well as intellectual property or software.
Fees for these services amounted to $10 million and $24 million for the year ended
December 31, 2004 and 2003, respectively. On April 2004 was signed a new Services
Agreement with a one year term which provides for the provision of such services as the
Corporation may request, and for the continuation of the technology license previously
granted on March 2, 1999. 62




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
    In January 2000, the Company entered into a joint venture agreement with VISI the
largest yellow page publishing company in Puerto Rico. The Company generated earnings of
$3 million and $2 million during years ended December 31, 2004 and 2003, respectively, 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.  17.
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial instruments at December 31 are
as follows: December 31
    
    
    December 312004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    63,346
    
    
    
    63,346
    
    
    $
    21,732
    
    
    $
    21,732,000Accounts receivable
    
    
    270,914
    
    
    
    270,914
    
    
    
    287,247
    
    
    
    287,247,000Liabilities:Other current liabilities
    
    
    216,187
    
    
    
    216,187
    
    
    $
    213,480
    
    
    $
    213,480Short-term debt
    
    
    93,168
    
    
    
    93,168
    
    
    
    59,729
    
    
    
    59,729,000Long-term debt, including interest rate swap
    
    $
    703,556
    
    
    
    739,470
    
    
    
    802,135
    
    
    
    872,822
 63




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18.
    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. 64




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Segment results for the Company are as follows: For the Year Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Wireline:Revenues-Local services
    
    $
    596,214
    
    
    $
    612,114
    
    
    $
    612,969Access services
    
    
    271,127
    
    
    
    296,506
    
    
    
    330,739Long distance services
    
    
    65,704
    
    
    
    113,761
    
    
    
    117,901Directory services and other
    
    
    71,062
    
    
    
    66,820
    
    
    
    66,330Total revenues
    
    $
    1,004,107
    
    
    $
    1,089,201
    
    
    $
    1,127,939Operating income
    
    $
    232,703
    
    
    $
    102,984
    
    
    $
    247,262Wireless:Revenues-Cellular services
    
    $
    199,071
    
    
    $
    187,676
    
    
    $
    174,542Long distance services
    
    
    4,697
    
    
    
    
    
    
    
    Paging services
    
    
    
    
    
    
    1,026
    
    
    
    5,241Equipment sales and other
    
    
    21,961
    
    
    
    13,389
    
    
    
    6,925Total revenues
    
    $
    225,729
    
    
    $
    202,091
    
    
    $
    186,708Operating loss
    
    $
    (12,973
    )
    
    $
    (12,121
    )
    
    $
    (727
    )Consolidated:Revenues for reportable segments
    
    $
    1,229,836
    
    
    $
    1,291,292
    
    
    $
    1,314,647Elimination of intersegment revenues
    
    
    (15,912
    )
    
    
    (9,873
    )
    
    
    (13,372
    )Consolidated revenues
    
    $
    1,213,924
    
    
    $
    1,281,419
    
    
    $
    1,301,275Operating income
    
    $
    219,730
    
    
    $
    90,863
    
    
    $
    246,535
 As of December 31,2004
    
    
    2003AssetsWireline assets
    
    $
    2,474,296
    
    
    $
    2,599,277Wireless assets
    
    
    357,290
    
    
    
    314,172Segment assets
    
    $
    2,831,586
    
    
    $
    2,913,449Elimination of intersegment assets
    
    
    (286,304
    )
    
    
    (292,211
    )Consolidated assets
    
    $
    2,545,282
    
    
    $
    2,621,238
 65




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19.
    Supplemental Cash Flow InformationCash paid for interest for the year ended December 31, 2004 and 2003 amounted to approximately
$23 million and $49 million, respectively. During the years ended December 31, 2004 and 2003, the
Company paid income taxes amounting to $6 million and $33 million, respectively.20.
    LeasesThe Company has capital and operating leases for certain facilities and equipment. Future minimum
lease payments under non-cancelable capital and operating leases are as follows: Capital
    
    
    Operating(In thousands)Year ending December 31,2005
    
    $
    187
    
    
    $
    12,1162006
    
    
    18
    
    
    
    8,7332007
    
    
    
    
    
    
    6,2612008
    
    
    
    
    
    
    4,2782009
    
    
    
    
    
    
    2,640Thereafter
    
    
    
    
    
    
    Total minimum lease payments
    
    
    205
    
    
    
    34,028Less amount representing interest
    
    
    10
    
    
    
    Present value of minimum lease payments
    
    $
    195
    
    
    $
    34,028
  Lease costs for the years ended December 31, 2004, 2003 and 2002 amounted to approximately
$14 million, $14 million and $12 million, respectively.21.
    Contingencies and Regulatory Matters REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels has been primarily directed at meeting
challenges in maintaining support for local exchange rates and Universal Service while effecting
the rate rebalancing and restructuring required by an increasingly competitive environment. Among
the issues generating regulatory activity are the expansion of local calling areas, local number
portability requirements, interconnection agreements, the FCCs triennial review and the
elimination of reverse toll billing. We have continued to meet the wholesale requirements of new competitors and have signed
agreements with wireless and wireline carriers. These agreements permit these carriers to purchase
unbundled network elements, resell retail services, and interconnect their networks with ours. INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE On February 28, 2002, the TRB issued a Resolution and Order (the February 2002 Order) with
respect to the reconsideration requested by the Company of the TRBs October 10, 2001 order to
reduce the access rates the Company charges to long distance carriers to originate and terminate
intra-island long distance calls on the Companys network. The February 2002 Order required new rates for intra-island access to be implemented through
phased-rate reductions over four years. The prospective access rate reductions (on a two-way
basis) were ordered to go into effect on April 1st of each year as follows: 66




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April 2002: From 9.3 cents per minute to 7.9 cents per minute
April 2003: From 7.9 cents per minute to 6.5 cents per minute
April 2004: From 6.5 cents per minute to 5.0 cents per minute
April 2005: From 5.0 cents per minute to 2.1 cents per minute The February 2002 Order also requires PRTC to pay a $68 million refund to end-user customers.
The TRB calculated this amount based on the difference between the 9.3 cents and 7.9 cents rate for
TRB estimated traffic for the period April 1, 2000 through March 31, 2002. The refund can be made
in 12 quarterly, equal installments starting April 1, 2002. The Company filed with the Puerto Rico
Circuit Court of Appeals (the Court) an appeal of the February 2002 Order in which the Company
alleges that the TRB made errors of law and procedure in its determination of access charges and
its order to make the cash refund. On April 2, 2002, AT&T, Sprint and LTD (the Carriers) filed a petition with the Court for
review of the February 2002 Order, requesting that the Court to order the rate reduction without a
phase-in period, remand the case back to the TRB and direct the TRB to calculate the refund from
and after April 1997 instead of April 2000, with the Carriers receiving the refund instead of the
end-user customers. The hearing involving oral presentations by the parties was held on February 19, 2003. On
April 22, 2003, the parties filed their corresponding post-hearing final briefs submitting the case
for final adjudication. On August 19, 2003, the Court issued its final decision on the proceeding
confirming the February 2002 Order on Reconsideration of February 28, 2002 in all respects and
rejecting the claims of PRTC and the Carriers. On September 4, 2003, PRTC requested
reconsideration of the Courts determination on the grounds that although the Court correctly
described the applicable legal standards the Court erred in applying those standards to the facts
of the case. On October 2, 2003, the Court denied PRTCs reconsideration request. As a result of
the Courts decision, the Company established a pre-tax reserve of $73 million, including interest,
in September 2003 (3rd quarter) for the end-user and AT&T refund referred to in the February 2002
Order. This reserve is in addition to the reserve established in connection with the stay of the
TRB Order on Reconsideration issued by the Court. On October 30, 2003, the Company filed a petition for a writ of certiorari before the Puerto
Rico Supreme Court (the Supreme Court) challenging the $68 million refund portion of the February
2002 Order. The phased-rate reduction portion of the February 2002 Order was settled with the
major carriers. See Carrier Access Billing. In November 2003, the Company proposed, and two members of the TRB indicated their support
for, a plan to revise the TRBs end-user refund order and end the dispute over this issue. First,
PRTC has filed tariffs implementing the reduction in intra-island access charges ordered by the TRB
in its Order on Reconsideration of February 27, 2002. The composite per minute access rate was
reduced from 9.3 cents to 6.5 cents on January 1, 2004 and will continue to decrease in accordance
with the TRB phase reduction schedule, which will end on April 1, 2005. In addition, PRTC agreed
to implement a phased reduction in the number of local exchange calling areas from 68 to 10, the
first phase of which became effective in February 2004, coupled with the deferred implementation of
a flat charge designed to offset the resulting revenue losses. The plan included a number of other
elements benefiting consumers, including the elimination of touchtone charges, one time credits for
single line residential customers equal to their basic monthly service rate in December 2003 and
June 2005 of approximately $14 million, and a commitment not to raise residential rates through
December 2006 without providing certain information to the TRB in advance. The 2003 cash flow
impact was a reduction of $16 million to the pre-tax reserve associated with one of the two
one-time single line credits. On February 4, 2004, Centennial filed with the Supreme Court an opposition to PRTCs request
that the Court hold the case in abeyance until the TRB issued a Resolution and Order confirming the
commitments negotiated in November 2003. On April 6, 2004, Centennial filed a motion requesting
dismissal of the case, arguing that the settlement between the TRB and PRTC rendered the case moot.
In the alternative, Centennial also argued that the TRB lacked jurisdiction to modify the end-user
refund order, pending the petition for certiorari before the Supreme Court. Centennial claimed
that the commitment negotiated in November 2003 with respect to the $68 million refund was null and
void. On April 15, 2004, PRTC responded to and opposed Centennials filing. On April 23, 2004, PRTC and Centennial entered into a settlement agreement and on April 29,
2004, jointly filed a motion with the Supreme Court informing the Supreme Court of the settlement.
Centennial withdrew its opposition to PRTCs petition and on April 30, 2004, the Puerto Rico
Supreme Court issued a Resolution denying PRTCs petition for certiorari on the grounds of that the
issue was moot. 67




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As a result of the TRBs support of the revision to the end-user refund order through agreed
rate reductions and consolidation of calling areas, the final settlement of carrier access rate
disputes and the Supreme Court resolution rendering the litigation moot; the Company revised the
pre-established contingency at $14 million, associated with the expected June 2005 single line
credit. EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE In December 2003, AT&T and Sprint, (later followed by TLD) challenged PRTCs actions in
implementing the reduction of calling areas before the TRB, and sought an injunction to further
reductions in the number of calling areas. PRTC has opposed the request for the injunction and
intends to fulfill its commitments to the TRB. The TRB considered the matter in hearings held on
April 28 and 30 and on May 3, 2004 and determined that the carriers request for injunctive relief
should not proceed. The TRB allowed PRTC to implement its EAS Phase IV as scheduled on May 4, 2004
and ordered PRTC to sustain from further EAS implementation until an expedited investigation
process had been completed. On May 6, 2004, PRTC submitted to the TRB and to the carriers a proposed expedited schedule in
an effort to resolve the investigation prior to the next phase of the EAS implementation, which was
scheduled for June 7, 2004 and covered Puerto Ricos metro area. A hearing on the investigation
was held on June 2, 2004. After the hearing, the TRB terminated the stay it had issued and allowed PRTC to continue to
the next phase of the EAS implementation, subject to the satisfaction of certain customer
information and data collection requirements relating to the impact of the EAS implementation on
measured service customers. On June 7, 2004, the TRB allowed the Company to continue with the
implementation of the metro area zone, which is the largest zone. As a result of the TRBs determination subsequent to the hearing of June 2, 2004, the Company
reduced the reserve originally established in September 2003 to $14 million. On July 8, 2004, the TRB issued a Resolution and Order initiating the investigation process
regarding the EAS implementation impact on measured service customers. The TRB ordered PRTC to
submit monthly reports that would reflect the impact on measured service customers. PRTC complied
with the filing of the first two reports on September 7 and October 7, 2004. PRTC is also required
to file a report on its customer information program with respect to EAS on that date. On September 20 and September 22, 2004, AT&T and Sprint filed a motion requesting
authorization to amend the complaint and to obtain discovery from PRTC. On October 4, 2004, PRTC
filed a motion opposing both motions. A resolution on both motions is pending. As of October 4, 2004, PRTC had completed all phases of its EAS implementation program. However, on October 21, 2004, AT&T and Sprint, made a joint filing before the TRB requesting
the initiation of a rulemaking proceeding for PRTs new local calling zones. This request for
rule-making aims to obstruct any future local zone reductions by PRTC. On December 1, 2004, PRT
submitted its opposition to the petition. CARRIER ACCESS BILLING During the first and second quarters of 2003, certain carriers made a series of billing claims
against the Company regarding tariff interpretation, traffic routing at the network level and
misclassification of access traffic for determination of applicable access elements. The Company entered into negotiations with the major carriers and settled the billing claims
and phased-rate reductions required by the February 2002 Order. The Company does not believe that
the impact of these settlements will have a material effect on the Companys results of operations. PUBLIC TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS On November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the largest competitive
provider of public pay phones in Puerto Rico filed a lawsuit against us in the United States
District Court of Puerto Rico, claiming predatory, exclusionary and anticompetitive acts and
seeking $75 million in damages. The Company filed a motion to dismiss the lawsuit which was
largely 68




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denied by the Court on August 2004. The lawsuit is currently in the discovery stage and trial
is scheduled to begin November 22, 2004. The Companys management believes that TPPRs claim is
without merit. Pan American Telephone, Inc., Intouch Telecommunications, Inc., and Choicetel Communications,
Inc., three other competitive providers of public pay phones in Puerto Rico, also filed a similar
lawsuit against us in the United States District Court of Puerto Rico on September 4, 2002 on the
same grounds. On November 8, 2002, we filed a motion to dismiss the lawsuit and/or in the
alternative to consolidate the lawsuit with TPPRs lawsuit. The Court denied the motion to dismiss
without prejudice. On September 7, 2004, the parties filed a joint motion for dismissal with
prejudice after reaching a settlement agreement, which put an end to all claims and controversies
between them in the proceeding. On January 13, 2005, the Court dismissed the case with prejudice
for lack of prosecution. On August 16, 2002, PSA, the parent company of Phoenix of Puerto Rico, filed a lawsuit against
PRTC in the United States Bankruptcy Court for the District of Delaware, claiming anti competitive
acts. The claims have since been transferred to the United States District Court of Delaware and
the disputes between the two parties include PRTCs amended administrative claim against PSA, and
PSAs claim for over $9 million from PRTC. PRTCs motion to change venue to Puerto Rico was
granted by the United States District Court of Delaware and the motion to dismiss is currently
pending before the United States District Court of Puerto Rico. On September 24, 2004, the Court
issued an Opinion and Order granting PRTCs motion to dismiss. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the Puerto Rico Superior
Court, seeking collection of fees due for services rendered under the PRDOEs Reeducate Program,
which is based on the Federal E-Rate Program, from 1999 to June 30, 2003. The Reeducate Program
funds Internet connections for schools throughout Puerto Rico and PRTC has provided contracted
services to the PRDOE. Based on PRTCs review of its services rendered under the Reeducate
Program, the outstanding amount that PRDOE currently owes to PRTC is $34 million. Under the E-Rate
program, 89% of this amount is to be paid by the FCCs School & Libraries Division (SLD), which
administers the Federal E-Rate Program, if the funding for the fourth and fifth years under the
program is released. PRTC is currently evaluating the outstanding amounts owed by PRDOE for the
third year under the program, which we believe is approximately $1.2 million, after SLD paid its
corresponding percentage (87%) under the program. On March 4, 2004, PRTC filed a motion to dismiss the complaint based on an agreement with the
PRDOE to attempt to settle the amounts owed out of court. On March 24, 2004, the court dismissed
the case without prejudice. In November 2003, the FCC directed SLD to audit the PRDOEs compliance with the E-Rate program
rules as well as billings for the Reeducate Program for years one through three of the program
before the funds will be released. The audit of the PRDOE began on May 15, 2004. The auditor has
contacted PRTC and PRTC is cooperating with the audit. There is no scheduled timetable for the
completion of the audit process. Upon completion of that audit, SLD will determine if there is a
need to recover any, or all, of the funds that were distributed during those years to the PRDOE and
its vendors, including PRTC. On June 17, 2004, the United States House Energy and Commerce Committee Subcommittee on
Oversight and Investigations held a hearing entitled Problems with the E-Rate Program: Waste,
Fraud, and Abuse Concerns in the Wiring of Our Nations Schools to the Internet. Representatives
from PRTC, as well as representatives from the PRDOE testified at the hearing. This hearing was
one of a series of ongoing hearings focused on the E-Rate program. At the beginning of July, 2004, the Universal Service Administrative Company (USAC), the
E-Rate programs administrator commenced the audit directed by the FCC. The audit was divided into
two time periods: Years 1 to 3 (1999 to June 2001) and Years 4 and 5 (July 2001 to June 2003).
PRTC has been providing information with respect to contracts, billing, payments and the network
designed and installed by PRTC, and service levels provided in response to requests from the
auditors. On July 30, 2004, the FCC released its Fourth Report and Order addressing the manner in which
funds would be recovered under the E-Rate program. On August 13, 2004, the FCC released its Fifth
Report and Order (Order) in the same proceeding adopting measures to address issues raised in the
audit conducted as part of ongoing oversight of the schools and libraries support mechanisms and
program concerns noted by its Office of Inspector General. Based on the standards established by
the FCC, PRTC does not believe that amounts it has received from the E-Rate program are subject to
recovery. PRTC is implementing procedures to ensure compliance with the requirements established
by the Order. 69




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TOUCHTONE CHARGES On November 17, 2003, six residential subscribers and eight business service subscribers filed
a class action suit with the Superior Court of Puerto Rico (the Superior Court) under the Puerto
Rico Telecommunications Act of 1996 (Act) and the Puerto Rico Class Action Act of 1971. The
plaintiffs have claimed that the Companys charges for touchtone service are not based on cost, and
therefore violate of the Act. The plaintiffs have requested that the Superior Court (i) issue an
order certifying the case as a class action, (ii) designate the plaintiffs as representative of the
class, (iii) find that the charges are illegal, and (iv) order the Company to reimburse every
subscriber for excess payments made since September 1996. On December 30, 2003, PRTC filed its
answer to the complaint and requested dismissal on the grounds that the claim is not a legitimate
class action suit. On February 17, 2004, the plaintiffs filed their first set of interrogatories
and request for admissions to initiate discovery. A status conference was held on April 30, 2004 and the Superior Court ruled that at this
stage of the proceedings the discovery process would be addressed, but not limited to the
determination of the class. On June 28, 2004, a second hearing was held. During this hearing PRTC was ordered to submit
responses to the plaintiffs request for admissions and to their first and second sets of
interrogatories. PRTC submitted its responses to the plaintiffs request for admissions and to
their first and second sets of interrogatories on July 6 and July 16, 2004, respectively. However,
these responses were limited to the issue of class certifications, and the interrogatories and
requests for admissions relating to the merits of the case were objected and a protective order was
requested. The Superior Court denied PRTCs requests and ordered full responses. On July 16,
2004, PRTC filed a writ of certiorari with the Puerto Rico Court of Appeals seeking reversal of the
Superior Courts order allowing discovery concerning the merits of the case before the class
certification issue is resolved. On October 13, 2004, plaintiffs filed a motion opposing PRTCs
writ of certiorari. A determination is pending before the Court of Appeals. On October 8, 2004, plaintiffs filed with the Superior Court a motion requesting the dismissal
and substitution of one of the plaintiffs. The PR Court of Appeals denied PRTCs writ of certiorari requesting the reversal of a Superior
Court order allowing unlimited discovery. PRTC had intended to limit discovery to the class
certification issue. On November 15, 2004, the Superior Court held an evidentiary hearing in order to determine if
this case will be certified as a class action. Even though the Court has not yet reached a
determination, at the hearing, the Judge ordered PRTC to comply with the plaintiffs merits
discovery requests and PRTC has now done so. CTI ASSET TRANSFER Prior to the Acquisition, PRTC transferred its net wireless assets on September 1, 1998 to CTI
(which became Verizon Wireless, a division of PRTC, on May 1, 2002). Our predecessors later filed
a waiver request in 1998 with the FCC to record this transfer at book value instead of fair value.
Since our predecessors had not included the costs of wireless operations in the regulated rate
setting process, we believe that ratepayers did not bear the cost of our predecessors wireless
investment. The FCC denied the Companys petition in April 2001, but recognized that while there were
questions concerning certain costs and expenses, the cellular and paging assets had been removed
from the interstate rate base. In the February 2002 Order, the TRB provided that any prospective rate increase must first be
applied against the gain from the wireless asset transfer, equating to $56 million applicable to
intrastate. We plan to contest this position on the grounds that the wireless entity was set up
after the last regulated intrastate rate increase in 1982 and therefore these costs were not
included in setting such rates. Currently, the TRB is performing an agreed upon procedures audit, which includes an audit of
the CTI asset transfer. The audit is in the field work stage. While we believe that the
resolution of this matter and any related proceedings will not have a material impact on the
Companys financial condition and results of operations, we cannot predict the effect of any
further regulatory actions. 70




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PRICE CAP REGULATION Under the FCCs all or nothing rule, telecommunications carriers that set interstate access
rates based on a price cap formula are required to use the price cap formula for all of their
affiliates. The price cap formula is based on a plan adopted by the FCC called the Coalition of
Affordable Local and Long Distance Service (CALLS), which uses rate-of-return as a basis for
setting rates. The Company would have been required to implement price caps by March 2, 2000 under
the FCCs rules. Prior to March 2, 2000, the Company had set its interstate access rates based on
rate-of-return principles. The FCC delayed conversion to price cap regulation until June 30, 2002, and the Company
requested an extension until June 30, 2003. Under an order issued by the FCC on April 18, 2002, the
Company is no longer required to file a waiver request until the FCC completes its review of the
all-or-nothing rule. In addition, upon the issuance of an Order and Second Further Notice of
Proposed Rulemaking (the Order) by the FCC on February 28, 2004, the FCC deferred further action
on the all-or-nothing rule until it reviews the record compiled in response to the further notice
included in the Order. Additionally, in the Order the FCC stated that all outstanding interim
waivers of the all-or-nothing rule that depend on the FCCs decision shall continue to be effective
until the FCC issues a final order on this matter. As a result, the Company currently continues to
set its interstate access rates based on rate-of-return principles. On May 10, 2004, PRTC filed comments in response to the Order, requesting that the FCC
eliminate the all or nothing rule or, in the alternative, if the rule is not eliminated, that the
FCC grant PRTCs 1999 waiver request to permit PRTC to remain a carrier that sets its interstate
access rates based on rate-of-return principles. The basis of PRTCs request is that if PRTC were
no longer eligible to receive Interstate Common Line Support (ICLS), PRTC would require $139
million in additional universal service support to offset lost ICLS revenues and that the CALLS
plan cannot accommodate PRTC since there is a $650 million cap on the equivalent support in the
CALLS plan, which was based on the anticipated universal service needs of price cap carriers that
were participating in the plan at the time of its adoption. There has been no announcement
regarding the expected timing for the completion of this proceeding. INTERSTATE HIGH COST SUBSIDY On October 21, 1999, the FCC adopted a new high cost loop support mechanism for non-rural
companies, which has resulted in the phase out of the Companys high cost loop subsidy revenues.
The Company is classified as a non-rural telephone company under the United States
Telecommunications Act of 1996. The Companys high cost loop revenues were $49 million in 2000,
$33 million in 2001 and $4 million in 2002. On February 28, 2003, PRTC sent a letter to the FCC,
requesting that the FCC take action to restore the high-cost loop universal service support that
the Company lost due to FCC policies adopted for non-rural telephone companies and arguing that the
non-rural telephone company mechanism is based on cost characteristics of mainland telephone
companies. PRTC requested that the FCC address the loss of its high cost loop universal service
support by adopting rules for insular areas that are similar to those applied to rural carriers.
If rural carrier rules were applied to PRTC it would continue to receive high cost loop support as
it had prior to the adoption of the FCCs 1999 rules for non-rural telephone companies. On October
27, 2003, the FCC issued an order rejecting PRTCs request for reconsideration of its
classification as a non-rural carrier. However, the order did not address PRTCs request to
restore the high-cost universal service support based on the establishment of a new high cost loop
support mechanism for insular carriers. On January 14, 2004, PRTC filed a petition for
clarification and/or reconsideration of several portions of the FCC Order of October 27, 2003 on
the grounds that the FCC has not acted upon the specific mandate of Section 254 to provide support
for insular areas. No announcement has been made regarding the expected timing for addressing this
issue. On November 29, 2004, the FCC released an Order on Reconsideration denying PRTs petition.
The Order, specifically mentioned that the FCC did not address PRTCs petition of the Qwest Remand
Order (filed on January 2004), or its ex-parte request on February 2003 seeking the adoption of a
non-rural insular mechanism. WORLDNET ARBITRATION PROCEEDING Recently, an arbitrator resolved a dispute related to an interconnection contract between PRTC
and WorldNet and rendered a decision which, among other things, requires PRTC to agree to contract
terms establishing numerous service quality metrics, liquidated damages provisions, reduced prices
for certain network elements, continuation of wholesale discounts, certain Operational Support
System parity standards, and certain requirements with respect to bundled services. PRTC is
examining the impact of this decision. In accordance with the applicable arbitration rules, the
parties have executed and filed the arbitrated contract with the TRB. On June 7, 2004, PRTC filed a request for reconsideration of the TRBs Resolution and Order
adopting the arbitrators 71




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decision and a request for a stay of the new interconnection agreement until the
reconsideration was finally resolved. WorldNet also filed a request for reconsideration. On June
17, 2004, the TRB issued a Resolution and Order accepting both motions for reconsideration and
notified the parties that a final decision on both motions would be issued within ninety days from
the date of the filing, (i.e., by September 7, 2004). On June 25, 2004, PRTCs motion for a stay
was granted. On September 7, 2004, the TRB issued an Order on Reconsideration requiring PRTC and WorldNet
to submit a revised interconnection agreement by October 22, 2004, which was subsequently extended
to October 29, 2004. The new agreement must be implemented within a period of six (6) months
following the date on which it is filed with the TRB. PRTC believes that some of the TRBs determinations in the Order on Reconsideration are
contrary to law, and on October 7, 2004, filed before the Federal District Court for the District
of Puerto Rico an appeal of the TRBs Order on Reconsideration of September 7, 2004. In addition,
we filed an emergency motion for a partial stay of the Order with the TRB. Worldnet has also
appealed the TRBs Order of September 7, 2004 to the Federal District Court for the District of
Puerto Rico. On November 12, 2004, PRTC and WorldNet completed the negotiations for a conforming
interconnection and commercial agreement. The conforming interconnection agreement was submitted
to the TRB for approval on November 12, 2004. On November 23, 2004, the TRB approved the
agreement. Both petitions were consolidated by the Court on October 21, 2004. The TRB requested a remand
on the bundling issue. A remand hearing was held on November 12, 2004. The parties notified the
Court of the agreement reached and the Court approved the agreement. The agreement consisted of a
remand order of the bundling controversy to the TRB. All the other issues will be considered by
the Court through the filing of summary judgment by the parties which were due on January 14, 2005. RECENT ACCOUNTING PRONOUNCEMENTS For disclosure of recent accounting pronouncements, see Note 4 to our consolidated financial
statements included under Part II, Item 8, Financial Statements and Supplementary Data. 72




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22. Quarterly Financial Data The following table reflects the unaudited quarterly results of the Company for the years ended
December 31, 2004, 2003 and 2002. As Reported
    
    
    Restated
    
    
    As Reported
    
    
    Restated
    
    
    As Reported
    
    
    Restated
    
    
    As Reported
    
    
    Restated(In thousands)
    
    First Quarter
    
    
    First Quarter
    
    
    Second Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Third Quarter
    
    
    Fourth Quarter
    
    
    Fourth Quarter2004Revenues
    
    $
    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
    
    
    
    
    
    
    $
    21,572Income before cumulative effect of
accounting change
    
    $
    24,772
    
    
    
    
    
    
    $
    53,155
    
    
    
    
    
    
    $
    23,960
    
    
    
    
    
    
    $
    6,502Cumulative effect of accounting
change, net of tax
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income
    
    $
    24,772
    
    
    
    
    
    
    $
    53,155
    
    
    
    
    
    
    $
    23,960
    
    
    
    
    
    
    $
    6,5022003Revenues (1)
    
    $
    320,492
    
    
    $
    325,442
    
    
    $
    331,617
    
    
    $
    326,667
    
    
    $
    308,836
    
    
    
    
    
    
    $
    320,474Operating costs and expenses (1)
    
    
    262,927
    
    
    
    263,257
    
    
    
    300,809
    
    
    
    300,479
    
    
    
    339,456
    
    
    
    
    
    
    
    287,364Operating income (1)
    
    $
    57,565
    
    
    $
    62,185
    
    
    $
    30,808
    
    
    $
    26,188
    
    
    $
    (30,620
    )
    
    
    
    
    
    $
    33,110Income before cumulative effect of
accounting change (1)
    
    $
    29,592
    
    
    $
    32,410
    
    
    $
    11,086
    
    
    $
    8,268
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    7,356Cumulative effect of accounting
change, net of tax (1)
    
    $
    71,082
    
    
    $
    58,529
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income (1)
    
    $
    100,674
    
    
    $
    90,939
    
    
    $
    11,086
    
    
    $
    8,268
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    7,3562002Revenues
    
    $
    320,697
    
    
    
    
    
    
    $
    333,386
    
    
    
    
    
    
    $
    318,408
    
    
    
    
    
    
    $
    328,784Operating costs and expenses
    
    
    270,198
    
    
    
    
    
    
    
    261,502
    
    
    
    
    
    
    
    259,145
    
    
    
    
    
    
    
    263,895Operating income
    
    $
    50,499
    
    
    
    
    
    
    $
    71,884
    
    
    
    
    
    
    $
    59,263
    
    
    
    
    
    
    $
    64,889Income before cumulative effect of
accounting change
    
    $
    23,004
    
    
    
    
    
    
    $
    80,602
    
    
    
    
    
    
    $
    31,852
    
    
    
    
    
    
    $
    35,575Cumulative effect of accounting
change, net of tax
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income
    
    $
    23,004
    
    
    
    
    
    
    $
    80,602
    
    
    
    
    
    
    $
    31,852
    
    
    
    
    
    
    $
    35,575
   (1)
    
    During the second quarter of 2003, the Company changed its method of accounting for
directory-publishing revenues and related expenses from the point of publication method to the
amortization method, effective January 1, 2003 (see Note3). The quarterly information for the
first quarter of 2003, which had been previously reported, has been restated. No restatement of
2002 and 2001 information was necessary. 73




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Telecomunicaciones de Puerto Rico, Inc. 
 Schedule I Condensed Consolidating Information for the Years Ended December 31, 2004 and 2003 The following summarizes the condensed consolidating financial information as of December 31,
2004 and 2003 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. 74




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Condensed Consolidating Balance Sheets 
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    (149
    )
    
    $
    44,658
    
    
    $
    18,837
    
    
    $
    
    
    
    $
    63,346Intercompany accounts receivable
    
    
    342,749
    
    
    
    86,340
    
    
    
    47,423
    
    
    
    (476,512
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    270,807
    
    
    
    107
    
    
    
    
    
    
    
    270,914Deferred income tax
    
    
    718
    
    
    
    27,336
    
    
    
    
    
    
    
    
    
    
    
    28,054Inventory and supplies, net
    
    
    
    
    
    
    28,157
    
    
    
    1
    
    
    
    
    
    
    
    28,158Prepaid expenses
    
    
    0
    
    
    
    25,228
    
    
    
    1,388
    
    
    
    
    
    
    
    26,616Total current assets
    
    
    343,318
    
    
    
    482,526
    
    
    
    67,756
    
    
    
    (476,512
    )
    
    
    417,088PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,449,809
    
    
    
    9,650
    
    
    
    
    
    
    
    1,459,459GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    299,164
    
    
    
    24,583
    
    
    
    
    
    
    
    323,747DEFERRED INCOME TAX
    
    
    
    
    
    
    235,886
    
    
    
    
    
    
    
    
    
    
    
    235,886INVESTMENT IN SUBSIDIARIES
    
    
    550,178
    
    
    
    
    
    
    
    
    
    
    
    (550,178
    )
    
    
    OTHER ASSETS
    
    
    706,035
    
    
    
    109,831
    
    
    
    
    
    
    
    (706,764
    )
    
    
    109,102TOTAL ASSETS
    
    $
    1,599,531
    
    
    $
    2,577,216
    
    
    $
    101,989
    
    
    $
    (1,733,454
    )
    
    $
    2,545,282LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    93,000
    
    
    $
    93,168
    
    
    $
    
    
    
    $
    (93,000
    )
    
    $
    93,168Intercompany accounts payable
    
    
    73,337
    
    
    
    280,295
    
    
    
    36,298
    
    
    
    (389,930
    )
    
    
    0Other current liabilities
    
    
    6,195
    
    
    
    202,878
    
    
    
    7,218
    
    
    
    (105
    )
    
    
    216,187Total current liabilities
    
    
    172,532
    
    
    
    576,342
    
    
    
    43,516
    
    
    
    (483,035
    )
    
    
    309,355LONG-TERM DEBT, excluding current portion
    
    
    703,534
    
    
    
    699,895
    
    
    
    
    
    
    
    (699,874
    )
    
    
    703,555OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    793,186
    
    
    
    1,070
    
    
    
    (360
    )
    
    
    793,896Total liabilities
    
    
    876,066
    
    
    
    2,069,423
    
    
    
    44,586
    
    
    
    (1,183,269
    )
    
    
    1,806,806MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,010
    
    
    
    15,010SHAREHOLDERS EQUITY:Common stock, Additional paid in
capital and Treasury stock
    
    
    704,386
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    704,386Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,172
    )Retained earnings
    
    
    210,956
    
    
    
    188,905
    
    
    
    16,260
    
    
    
    (205,165
    )
    
    
    210,956Accumulated other comprehensive loss
    
    
    (166,705
    )
    
    
    (166,703
    )
    
    
    
    
    
    
    166,703
    
    
    
    (166,705
    )Total shareholders equity
    
    
    723,465
    
    
    
    507,793
    
    
    
    57,403
    
    
    
    (565,195
    )
    
    
    723,466TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,599,531
    
    
    $
    2,577,216
    
    
    $
    101,989
    
    
    $
    (1,733,454
    )
    
    $
    2,545,282$
    0
    
    
    $
    0
    
    
    $
    
    
    
    $
    
    
    
    $
    0
 75




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Condensed Consolidating Balance Sheets
December 31, 2003
(In thousands) Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    12,438
    
    
    $
    9,294
    
    
    $
    
    
    
    $
    21,732Intercompany accounts receivable
    
    
    1,059,752
    
    
    
    85,610
    
    
    
    40,608
    
    
    
    (1,185,970
    )
    
    
    Accounts receivable, net
    
    
    1
    
    
    
    287,193
    
    
    
    53
    
    
    
    
    
    
    
    287,247Deferred income tax
    
    
    
    
    
    
    26,158
    
    
    
    
    
    
    
    
    
    
    
    26,158Inventory and supplies, net
    
    
    
    
    
    
    21,202
    
    
    
    
    
    
    
    
    
    
    
    21,202Prepaid expenses
    
    
    
    
    
    
    34,489
    
    
    
    766
    
    
    
    
    
    
    
    35,255Total current assets
    
    
    1,059,753
    
    
    
    467,090
    
    
    
    50,721
    
    
    
    (1,185,970
    )
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,546,503
    
    
    
    11,743
    
    
    
    
    
    
    
    1,558,246INTANGIBLES, net
    
    
    
    
    
    
    291,362
    
    
    
    24,701
    
    
    
    
    
    
    
    316,063DEFERRED INCOME TAX
    
    
    
    
    
    
    247,276
    
    
    
    (482
    )
    
    
    
    
    
    
    246,794INVESTMENT IN SUBSIDIARIES
    
    
    570,870
    
    
    
    
    
    
    
    
    
    
    
    (570,870
    )
    
    
    OTHER ASSETS
    
    
    12,633
    
    
    
    105,390
    
    
    
    (2
    )
    
    
    (9,480
    )
    
    
    108,541TOTAL ASSETS
    
    $
    1,643,256
    
    
    $
    2,657,621
    
    
    $
    86,681
    
    
    $
    (1,766,320
    )
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    59,500
    
    
    $
    59,729
    
    
    $
    
    
    
    $
    (59,500
    )
    
    $
    59,729Intercompany accounts payable
    
    
    73,844
    
    
    
    233,531
    
    
    
    29,399
    
    
    
    (336,774
    )
    
    
    Other current liabilities
    
    
    6,574
    
    
    
    200,512
    
    
    
    6,394
    
    
    
    
    
    
    
    213,480Total current liabilities
    
    
    139,918
    
    
    
    493,772
    
    
    
    35,793
    
    
    
    (396,274
    )
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    801,987
    
    
    
    792,987
    
    
    
    
    
    
    
    (792,839
    )
    
    
    802,135OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    837,855
    
    
    
    
    
    
    
    (6,337
    )
    
    
    831,518Total liabilities
    
    
    941,905
    
    
    
    2,124,614
    
    
    
    35,793
    
    
    
    (1,195,450
    )
    
    
    1,906,862MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,025
    
    
    
    13,025COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    703,884
    
    
    
    485,591
    
    
    
    41,143
    
    
    
    (526,734
    )
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )Subscription receivable
    
    
    (39,515
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,515
    )Retained earnings (deficit)
    
    
    164,520
    
    
    
    148,801
    
    
    
    9,745
    
    
    
    (158,546
    )
    
    
    164,520Accumulated other comprehensive loss
    
    
    (101,385
    )
    
    
    (101,385
    )
    
    
    
    
    
    
    101,385
    
    
    
    (101,385
    )Total shareholders equity
    
    
    701,351
    
    
    
    533,007
    
    
    
    50,888
    
    
    
    (583,895
    )
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,643,256
    
    
    $
    2,657,621
    
    
    $
    86,681
    
    
    $
    (1,766,320
    )
    
    $
    2,621,238
 76




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Condensed Consolidating Statements of Income
For the year Ended December 31, 2004
(In thousands) Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    564,480
    
    
    $
    33,143
    
    
    $
    (11,025
    )
    
    $
    586,598Access services
    
    
    
    
    
    
    275,753
    
    
    
    
    
    
    
    (6,779
    )
    
    
    268,974Long distance services
    
    
    
    
    
    
    31,976
    
    
    
    37,246
    
    
    
    (332
    )
    
    
    68,890Cellular services
    
    
    
    
    
    
    196,426
    
    
    
    
    
    
    
    
    
    
    
    196,426Directory and other services and sales
    
    
    
    
    
    
    108,175
    
    
    
    1,125
    
    
    
    (16,264
    )
    
    
    93,036Total revenues
    
    
    
    
    
    
    1,176,810
    
    
    
    71,514
    
    
    
    (34,400
    )
    
    
    1,213,924OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    384,570
    
    
    
    3,597
    
    
    
    (1,219
    )
    
    
    386,948Other operating expenses
    
    
    (57
    )
    
    
    324,618
    
    
    
    52,044
    
    
    
    (33,181
    )
    
    
    343,424Early retirement provision
    
    
    
    
    
    
    2,786
    
    
    
    
    
    
    
    
    
    
    
    2,786Depreciation and amortization
    
    
    
    
    
    
    258,772
    
    
    
    2,264
    
    
    
    
    
    
    
    261,036Total operating costs and expenses
    
    
    (57
    )
    
    
    970,746
    
    
    
    57,905
    
    
    
    (34,400
    )
    
    
    994,194OPERATING INCOME
    
    
    57
    
    
    
    206,064
    
    
    
    13,609
    
    
    
    
    
    
    
    219,730OTHER INCOME (EXPENSE), NET
    
    
    108,043
    
    
    
    (41,197
    )
    
    
    437
    
    
    
    (110,862
    )
    
    
    (43,579
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    108,100
    
    
    
    164,867
    
    
    
    14,046
    
    
    
    (110,862
    )
    
    
    176,151INCOME TAX EXPENSE (BENEFIT)
    
    
    (289
    )
    
    
    62,835
    
    
    
    5,216
    
    
    
    
    
    
    
    67,762INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE
    
    
    108,389
    
    
    
    102,032
    
    
    
    8,830
    
    
    
    (110,862
    )
    
    
    108,389CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME
    
    $
    108,389
    
    
    $
    102,032
    
    
    $
    8,830
    
    
    $
    (110,862
    )
    
    $
    108,389
 77




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Condensed Consolidating Statements of Income
For the year ended December 31, 2003
(In thousands) Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    560,024
    
    
    $
    29,769
    
    
    $
    (10,937
    )
    
    $
    578,856Long distance services
    
    
    
    
    
    
    100,635
    
    
    
    37,292
    
    
    
    (108
    )
    
    
    137,819Access services
    
    
    
    
    
    
    301,681
    
    
    
    
    
    
    
    (5,880
    )
    
    
    295,801Cellular services
    
    
    
    
    
    
    187,084
    
    
    
    
    
    
    
    
    
    
    
    187,084Paging services
    
    
    
    
    
    
    1,026
    
    
    
    
    
    
    
    
    
    
    
    1,026Directory services
    
    
    
    
    
    
    19,868
    
    
    
    
    
    
    
    
    
    
    
    19,868Other services and sales
    
    
    
    
    
    
    68,166
    
    
    
    
    
    
    
    (7,201
    )
    
    
    60,965Total revenues
    
    
    
    
    
    
    1,238,484
    
    
    
    67,061
    
    
    
    (24,126
    )
    
    
    1,281,419OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    398,418
    
    
    
    3,590
    
    
    
    
    
    
    
    402,008Other operating expenses
    
    
    
    
    
    
    496,680
    
    
    
    46,912
    
    
    
    (24,126
    )
    
    
    519,466Early retirement provision
    
    
    
    
    
    
    17,347
    
    
    
    
    
    
    
    
    
    
    
    17,347Depreciation and amortization
    
    
    
    
    
    
    248,845
    
    
    
    2,890
    
    
    
    
    
    
    
    251,735Total operating costs and expenses
    
    
    
    
    
    
    1,161,290
    
    
    
    53,392
    
    
    
    (24,126
    )
    
    
    1,190,556OPERATING INCOME
    
    
    
    
    
    
    77,194
    
    
    
    13,669
    
    
    
    
    
    
    
    90,863OTHER INCOME (EXPENSE), NET
    
    
    76,856
    
    
    
    (63,061
    )
    
    
    237
    
    
    
    (78,385
    )
    
    
    (64,353
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    76,856
    
    
    
    14,133
    
    
    
    13,906
    
    
    
    (78,385
    )
    
    
    26,510INCOME TAX EXPENSE
    
    
    
    
    
    
    2,692
    
    
    
    5,491
    
    
    
    
    
    
    
    8,183INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    76,856
    
    
    
    11,441
    
    
    
    8,415
    
    
    
    (78,385
    )
    
    
    18,327CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    76,856
    
    
    $
    69,970
    
    
    $
    8,415
    
    
    $
    (78,385
    )
    
    $
    76,856
 78




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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 PERIOD
    
    
    (1
    )
    
    
    12,434
    
    
    
    9,299
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (149
    )
    
    $
    44,657
    
    
    $
    18,838
    
    
    $
    63,346
 79




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Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2003
(In thousands) Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCASH
PROVIDED BY OPERATING ACTIVITIES:
    
    $
    (3,038
    )
    
    $
    356,740
    
    
    $
    3,115
    
    
    $
    356,817CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (176,803
    )
    
    
    (423
    )
    
    
    (177,226
    )Proceeds from sale of building
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Net salvage on retirements
    
    
    
    
    
    
    1,003
    
    
    
    (55
    )
    
    
    948Net cash used in investing activities
    
    
    
    
    
    
    (169,800
    )
    
    
    (478
    )
    
    
    (170,278
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (170,162
    )
    
    
    (187
    )
    
    
    
    
    
    
    (170,349
    )Borrowings of long-term debt
    
    
    
    
    
    
    Dividends paid
    
    
    (68,125
    )
    
    
    
    
    
    
    
    
    
    
    (68,125
    )Borrowings/(repayment) intercompany loans
    
    
    201,324
    
    
    
    (201,324
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,037
    
    
    
    (201,511
    )
    
    
    
    
    
    
    (198,474
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1
    )
    
    
    (14,571
    )
    
    
    2,637
    
    
    
    (11,935
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    1
    
    
    
    27,009
    
    
    
    6,657
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    
    
    
    $
    12,438
    
    
    $
    9,294
    
    
    $
    21,732
 80




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Telecomunicaciones de Puerto Rico, Inc. 
 Schedule II Valuation and Qualifying Accounts for Years Ended December 31, 2004, 2003 and 2002 AdditionsBalance at
    
    
    
    
    
    
    Charged
    
    
    DeductionsBeginning
    
    
    Charged to
    
    
    (Credited) to
    
    
    From
    
    
    Balance atDescription
    
    of Year
    
    
    Income
    
    
    Other Accounts (b)
    
    
    Reserves (a)
    
    
    Close of Year(Dollars in Million)December 31, 2004Allowance for uncollectible
accounts
    
    $
    131
    
    
    $
    30
    
    
    $
    
    
    
    $
    (55
    )
    
    $
    106December 31, 2003Allowance for uncollectible
accounts
    
    $
    133
    
    
    $
    65
    
    
    $
    
    
    
    $
    (67
    )
    
    $
    131December 31, 2002Allowance for uncollectible
accounts
    
    $
    107
    
    
    $
    73
    
    
    $
    13
    
    
    $
    (60
    )
    
    $
    133
 AdditionsBalance at
    
    
    
    
    
    
    Charged
    
    
    DeductionsBeginning
    
    
    Charged to
    
    
    (Credited) to
    
    
    From
    
    
    Balance atDescription
    
    of Year
    
    
    Income
    
    
    Other Accounts (b)
    
    
    Reserves (a)
    
    
    Close of Year(Dollars in Million)December 31, 2004Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    6December 31, 2003Allowance for Inventory
Obsolescence
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    6December 31, 2002Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    4
 NOTES:  (a)
    Reserved write-offs.(b)
    Other adjustments and recoveries of amounts written off in prior years. 81




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 82




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##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure that
information required to be disclosed in the Companys reports is recorded, processed, summarized
and reported, within the time periods specified in the SECs rules and forms. In designing and
evaluating the Companys disclosure controls and procedures, the Companys Chief Executive Officer
and Chief Financial Officer recognized that any controls and procedures, no matter how
well-designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. The Companys Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Companys disclosure controls and procedures, as of the end of the period
covered by this report (the Evaluation Date). They have concluded that as of the Evaluation
Date, the Companys disclosure controls and procedures were effective at the reasonable assurance
level. There has been no change in the Companys internal control over financial reporting during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. 83




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS As of March 30, 2005, the directors of the Company, all of whom serve until their successors
are appointed are as follows: NAME
    
    AGE
    
    PRINCIPAL OCCUPATION
    
    NOMINATED BY
    
    DIRECTOR SINCEDaniel C. Petri
    
    
    56
    
    
    Group President-International, Verizon
    
    GTE Holdings (Puerto Rico)
    
    
    2002Edward J. McQuaid
    
    
    49
    
    
    Vice President and Chief Financial
Officer, Verizon International
    
    GTE Holdings (Puerto Rico)
    
    
    2005Jeanne M. Dennison
    
    
    48
    
    
    Group Vice President International
Human Resources and Public Affairs
    
    GTE Holdings (Puerto Rico)
    
    
    2003Cristina M. Lambert
    
    
    56
    
    
    President and Chief Executive Officer,
    
    GTE Holdings (Puerto Rico)
    
    
    2003Telecomunicaciones de Puerto Rico, Inc.John J. Lack
    
    
    48
    
    
    Senior VP Verizon International
    
    GTE Holdings (Puerto Rico)
    
    
    2003Richard L. Carrión
    
    
    52
    
    
    Chairman, President and Chief
    
    Popular, Inc.
    
    
    1999Executive Officer, Popular, Inc.William Lockwood
    
    
    44
    
    
    President, Government Development
    
    PRTA Holdings Corporation
    
    
    2005Bank for Puerto RicoJosé F. Rodríguez Perelló
    
    
    55
    
    
    Insurance Broker
    
    PRTA Holdings Corporation
    
    
    2005Rafael Martínez Margarida
    
    
    56
    
    
    Business Consultant
    
    PRTA Holdings Corporation
    
    
    2005
 Daniel C. Petri is the Group President-International responsible for Verizons wireless
and wireline operations around the world. Prior to this appointment he served as
President-International Europe & Asia. During his communications career of more than 30 years, Mr.
Petri has held a number of key positions in domestic as well as international operations. He holds
a bachelors degree in mechanical engineering from Rutgers University and a masters degree in
management science from Long Island University. He has also completed management programs in
General Management, Finance and Marketing at the Columbia University Graduate School. Edward J. McQuaid is Vice President and Chief Financial Officer for Verizon International
since February 2005. He is responsible for Verizon Internationals finance, strategy and business
development opportunities. He was Vice President of Finance in Verizons Domestic Telecom Finance
organization. During 2004 he was responsible for all financial matters for Verizons Network
Services Group including financial planning, analysis, resource allocation and management and
financial reporting. He had similar responsibilities for the Enterprise Solutions Group in 2003
and for the National Operations organization in 2002. Also, was Vice President of Corporate
Financial Planning & Analysis at Verizon Communications. Ed received a Bachelors Degree in 1977
and Masters Degree in 1981 both from Babson College. He received his CMA in 1983. Jeanne M. Dennison leads the Human Resources and Public Affairs function for Verizon
International. In this capacity, Ms. Dennison is responsible for providing value-added strategies
and solutions in support of Verizon Internationals objectives. Prior to this role, she led the
international Human Resources merger integration efforts for both the Bell Atlantic/GTE and the
Bell Atlantic/NYNEX mergers. Ms. Dennisons career spans nearly 20 years focusing on global human
resources policies and practices. She holds a masters degree in business administration from the
University of Connecticut and a bachelors degree in communications from Albertus Magnus College in
New Haven, Connecticut where she serves on the Board of Trustees. Cristina M. Lambert was appointed our President and Chief Executive Officer in September,
2003. Prior to assuming her current role, Ms. Lambert served as Vice President and General Manager
of Wireline Services for PRTC since June 3, 1999. In this capacity, she was responsible for
managing the sales/marketing and network operations functions, leading a team of 2,400 employees
and serving more than 1.2 million customers. Before joining the leadership team in Puerto Rico,
she was the assistant vice-president  Customer Care for GTE. Her telecommunications career began
in 1974 with Contel. Ms. Lambert earned a bachelors degree in Business Management from Indiana
University and an MBA from Indiana Wesleyan University. 84




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John J. Lack is Senior Vice President of Verizon International Operations. As such, he is
responsible for supporting international units in the areas of wireline, wireless, advanced
communications and Internet protocol, information technology, operations and engineering and
marketing and sales. Formerly, he was vice president  Asia for Verizon, responsible for
investment management, partnership management, regional business development activities, and
operations management, including oversight of new ventures and investments. Prior to the Bell
Atlantic/GTE merger, Mr. Lack was vice president and regional manager  Asia/Pacific Operations for
Bell Atlantic International Wireless (BAIW). He was responsible for Bell Atlantics wireless
operations and future business development in the worlds most populous region. He also served as
the chief operating officer and a member of the board for Bell Atlantics investment in Indonesia,
Excelcomindo Pratama, since 1995. Richard L. Carrión has been Chairman, President and Chief Executive Officer of Popular, Inc.,
since 1990 and has been a director since 1982. He chairs the Committee for the Economic
Development of Puerto Rico and actively participates in other business boards and civic
organizations, including Banco Popular Foundation, Verizon, Telecomunicaciones de Puerto Rico, Inc.
and Wyeth. A member of the International Olympic Committee since 1990, Carrión is Chairman of its
Finance Commission and a member of the Marketing Commission and the TV & Internet Rights
Commission. He earned a bachelors degree from The Wharton School of Finance and Commerce at the
University of Pennsylvania and a masters degree in Management Information Systems from the
Massachusetts Institute of Technology. William Lockwood, President of the Government Development Bank for Puerto Rico (GDB) since
February 1, 2005. Managing Director of Lockwood Financial Advisors since 1993 and of Generans Life
Sciences since 2000. Mr. Lockwood is a development finance economist specialized in financing
strategy, economic policy innovation, private equity, and life sciences. He has been a key
advisor and founder of asset management, investment consulting, local mutual funds, capital markets
legislative reform, risk management, and corporate banking innovation for various recognized
groups, as well as trustee of private and public endowments. Served as founding Vice President of
the Puerto Rico Biotech Alliance and was a member of the UPR System Technology Commercialization
Advisory Committee and the Industrial Biotechnology Program at UPR  Mayagüez. In 2002, Mr.
Lockwood was appointed Chairman of the Board of Grupo Guayacán. Also, served as Director of the
Center for the New Economy and Secretary of the PR Community Foundation. He is a graduate of Brown
University and the Institute of Development Studies at the University of Sussex , where he
specialized in industrial technology and the strategies of Singapore and Ireland. José
F. Rodríguez Perelló is an insurance broker with a
successful trajectory in the financial world and the industry of
insurances. He has been executive and director of Ledesma & Rodriguez Insurance Group, Inc. since February 1990. Mr. Rodríguez served as
President of Prudential Bache Puerto Rico, Inc. from 1980 thru 1990.
Currently, he is Vice President of the Board of Directors of CDB and Director
and Secretary of the board of directors of the foundation of the Levis family, Chana & Samuel Levis
Foundation, Inc. Mr. Rodríguez holds a bachelors degree from Marquette University in Wisconsin. Rafael F. Martínez Margarida is a certified public accountant
with more than 30 years of experience advising local and
multinational companies, and public organizations in the areas of
planning and financial analysis. Currently, is a member of the board
of directors of GDB. He is a business consultant since 2004. Mr.
Martínez was a partner of Pricewaterhouse Coopers LLP in Puerto
Rico from 1988 to the 2004. He holds a bachelors degree from
Fairfield University and a masters degree from Columbia
University. Since March 17, 1999, the Board of Directors has had a standing Audit Committee. Currently,
the Audit Committee is comprised of John J. Lack, Edward McQuaid, and William Lockwood. The Audit
Committee oversees the financial reporting process for which management is responsible, approves
the engagement of the independent auditors for audit and non-audit services, monitors the
independence of the independent auditors and reviews and approves all audit and non-audit services
and fees, consults with the independent auditors in regard to our audits and proposed audits,
reviews the need for internal auditing procedures and the adequacy of internal controls and
performs other fiduciary oversight responsibilities including but not limited to significant
business transactions. The Board of Directors has determined that no current member of the Audit
Committee qualifies as an audit committee financial expert, as that term is defined under the
rules and regulations of the Securities and Exchange Commission, although each member of the Audit
Committee possesses the requisite knowledge and experience in financial affairs to effectively
perform his or her duties. The Company has no present plans to conduct a search for an audit
committee financial expert because the Board of Directors has determined that the absence of an
audit committee financial expert will not impair the ability of the Audit Committee to provide
effective oversight of the Companys financial reporting and to perform the other duties for which
it is responsible. 85




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EXECUTIVE OFFICERS The executive officers of the Company as of March 30, 2005, are as follows: NAME
    
    AGE
    
    TITLECristina M. Lambert
    
    
    56
    
    
    President and Chief Executive OfficerWalter C. Forwood
    
    
    41
    
    
    Vice President Operations and Chief Operations OfficerAdail Ortiz
    
    
    47
    
    
    Vice President Finance and Chief Financial OfficerThomas Pérez-Ducy
    
    
    38
    
    
    Vice President Sales & Marketing and Chief Marketing OfficerRoberto García Rodriguez
    
    
    41
    
    
    Vice President Legal and Regulatory AffairsBenito Fernández
    
    
    58
    
    
    Vice President Human ResourcesIleana Molina de Bachman
    
    
    49
    
    
    Vice President Corporate CommunicationsRoberto A. Correa
    
    
    47
    
    
    Vice President and General Manager Coqui.netJorge Samalot
    
    
    45
    
    
    Vice President Information Technology SolutionsManny Hernández
    
    
    49
    
    
    Vice President Network Services, Engineering and Technical PlanningHector Rosario
    
    
    52
    
    
    Vice President Network OperationsRaúl E. García
    
    
    35
    
    
    ControllerMaría E. De La Cruz
    
    
    36
    
    
    Treasurer
 Cristina M. Lambert was appointed our President and Chief Executive Officer in September,
2003. Prior to assuming her current role, Ms. Lambert served as Vice President and General Manager
of Wireline Services for PRTC since June 3, 1999. In this capacity, she was responsible for
managing the sales/marketing and network operations functions, leading a team of 2,400 employees
and serving more than 1.2 million customers. Before joining the leadership team in Puerto Rico,
she was the assistant vice-president  Customer Care for GTE. Her telecommunications career began
in 1974 with Contel. Ms. Lambert earned a bachelors degree in Business Management from Indiana
University and an MBA from Indiana Wesleyan University. Walter Forwood was appointed as Vice President Operations and Chief Operations
Officer in January 2005. He joined PRTC in June 2003 as CFO and subsequently became Vice President
Wireless Services, building upon his recent experience as President and CEO of CTI, a Verizon
wireless affiliate in Argentina. Mr. Forwood has worked in a number of finance and senior
management positions in the United States and in Latin America including COO at El Sitio, the
leading Internet network content provider for Spanish and Portuguese speaking audiences. He served
as the CFO for Cisneros Television Group and Corporation IMPSA. Mr. Forwood holds a bachelors
degree in Economics from the Universidad Argentina de la Empresa and a Master of Science degree in
Finance from Florida International University. Adail Ortiz was appointed Vice President Finance and Chief Financial Officer of the Company in
September 2003. Since joining PRTC over 23 years ago, Mr. Ortiz has held a variety of positions of
increasing responsibility in the Finance organization. His roles have included Corporate
Accounting Manager, Billing and Collections Director, Senior Director of Revenue Accounting, and
Assistant Comptroller. Prior to joining PRTC, Mr. Ortiz worked for Price Waterhouse & Co. and was
a Professor of Accounting at the Interamerican University. He is a Certified Public Accountant,
and holds a bachelors degree in Accounting from the University of Puerto Rico. Thomas Pérez-Ducy was appointed Vice President Sales & Marketing and Chief Marketing Officer
in January 2005. He joined PRTC in 2004 as Vice President of Sales & Marketing of the Company.
Prior to joining PRTC, Thomas Pérez-Ducy was the Executive Vice President-Mobile Services at Cable
& Wireless. Previously, Mr. Pérez-Ducy spent ten years with Verizon Dominicana, formerly Codetel,
in a variety of roles including Vice President-Mobile Communications and Customer Service, Senior
Director-International Services, Director-Strategic Projects and Product Development,
Director-Corporate Communications and Government Affairs. Prior to his telecommunications career,
Mr. Pérez-Ducy worked in the financial services industry. He holds a bachelors degree in
Economics from Pontificia Universidad Católica Madre y Maestra, as well as a Master of Science
degree in International Finance and Accounting from the London School of Economics. Mr. Pérez-Ducy
also obtained a diploma in Total Quality Management from the Japanese Union of Scientists and
Engineers in Tokyo, Japan. Roberto García Rodríguez was appointed Vice President of Legal Affairs on September 7, 2004.
Prior to joining the Company, Mr. García served as legal counsel for Mountain Union Telecom of
Puerto Rico, Inc. Previously, Mr. García was an associate at the law firm Pietrantoni, Méndez &
Alvarez. Mr. García holds a bachelors degree from Harvard University, a MBA from Stanford
University and a J.D. also from Stanford University in California. Benito Fernández was appointed Vice President Human Resources in June 2001. Prior to joining
the Company, Mr. Fernández held the position of Vice President Human Resources for Montefiore
Medical Center. Prior to that, he was Vice President Columbia Presbyterian Medical Center and
Labor Counsel for Westvaco Corporation and also served as an associate in the law firm Arthur, Dry
& Kalish. Mr. Fernández holds a bachelors degree from the College of the City of New York, a juris
doctorate from Brooklyn Law School and an L.L.M. from New York University School of Law. 86




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Ileana Molina de Bachman is the Vice President of Corporate Communications. She joined PRTC
in August 1999 following a successful 22-year career in marketing and strategic planning. Her
experience includes working for Procter a& Gamble, Johnson & Johnson, Pepsico and Suiza Foods in
diverse markets such as Mexico, the Dominican Republic, and the U.S. Hispanic market in addition to
Puerto Rico. Ms. Bachman is a graduate of the Boston College School of Management. Roberto A. Correa was appointed Vice President and General Manager Coqui.net in January 2005.
On February 2, 2000, Mr. Correa was appointed Vice President Engineering and Technical Planning.
Mr. Correa was previously the Director of Network Planning and Network Engineering and has held
various management positions in his 22 years with the Company. He holds a bachelors degree in
Electrical Engineering from the University of Puerto Rico and a masters degree in Electrical
Engineering from Georgia Tech. Jorge Samalot was appointed Vice President Information Technology on October 2003. He has
been working with the Company for over 24 years. Mr. Samalot has held various positions of
increased responsibilities within the Information Technology Department. Prior to his current
position, he was the Director of Business Support in the IT organization, where he was responsible
for the implementation of critical applications including the local number portability project. Manuel E. Hernández was appointed Vice President of Network Services, Engineering and
Technical Planning in January 2005. During the last 27 years Mr. Hernández has contributed to
PRTCs network development in a variety of roles including Director of Data Engineering and Private
Networks, Director of Operations, and Telephone Network Planning Director. He holds a bachelors
degree in Electrical Engineering from the University of Puerto Rico, Mayaguez Campus. Hector Rosario was appointed as Vice President Network Operations on January 2005. Mr. Rosario
was previously the Director of Network Configuration & Special Services Engineering and Director of
Technology Planning. His telecommunications career began in 1975 in the Puerto Rico Communications
Authority. Before joining Puerto Rico Telephone, he held various management positions as Network
Operations Consultant and Senior Manager, Network and Technology Plannign with GTE-Overseas
Corporations at CODETEL in Santo Domingo, Dominican Republic. He holds a bachelors degree in
Sciences in Electrical Engineering from the University of Puerto Rico-Mayaguez Campus and a
masters degree in Business Administration from University of Phoenix, Guaynabo. Raúl E. García was appointed Controller on February 19, 2004. He has been working for Verizon
since 1992 and has held numerous positions of increased responsibility. Mr. García joined the
Company in February 2000 as Manager of Planning, Budget & Analysis and later held the position of
Assistant Controller and then Director of Planning, Budget and Analysis. Prior to joining the
Company, Mr. García spent three years at Verizon Dominicana (formerly CODETEL) as Assistant
Controller. He also worked in other long-term international assignments in Venezuela and
Argentina; and domestic assignments in Telecom and Wireless (formerly GTE Mobinet). Mr. García
holds a bachelors degree in Finance and Accounting from the University of Texas at Austin. María E. De La Cruz was appointed Treasurer of the Company on December 3, 2002. Ms. De La Cruz
has been with the Company in the Treasury Department since May 2002 serving as Assistant Treasurer.
Ms. De La Cruz has over 12 years of banking and financial management experience in private
industry and public accounting. She holds a bachelors degree in Finance from the University of
Puerto Rico and is a Certified Public Accountant. 87




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ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth compensation for the periods indicated for the Companys chief
executive officer and its five most highly compensated executive officers (the Named Executive
Officers): Summary Compensation TableLong-Term CompensationAnnual Compensation
    
    
    Awards
    
    
    Payouts(a)
    
    
    
    
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)Restricted
    
    
    SecuritiesOther Annual
    
    
    Stock
    
    
    Underlying
    
    
    LTIP
    
    
    All OtherName and
    
    
    
    
    
    
    
    
    
    Salary
    
    
    Bonus
    
    
    Compensation
    
    
    Award(s)
    
    
    Options/SARs
    
    
    Payouts
    
    
    CompensationPrincipal Position
    
    
    
    
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    Granted (#)
    
    
    ($)
    
    
    ($)(1)
    
    
    
    
    
    
    
    (2)
    
    
    
    (3)
    
    
    
    
    
    
    
    
    
    
    
    (4)Cristina M. Lambert
    
    
    
    
    
    
    2004
    
    
    
    278,000
    
    
    
    205,900
    
    
    
    22,025
    
    
    
    281,505
    
    
    
    21,000
    
    
    
    
    
    
    
    117,412President & Chief Executive Officer
    
    
    
    
    
    
    2003
    
    
    
    222,115
    
    
    
    130,600
    
    
    
    13,917
    
    
    
    153,100
    
    
    
    13,400
    
    
    
    
    
    
    
    90,0022002
    
    
    
    209,231
    
    
    
    117,600
    
    
    
    108,810
    
    
    
    
    
    
    
    21,200
    
    
    
    57,800
    
    
    
    51,553Gary Butler
    
    
    (5
    )
    
    
    2004
    
    
    
    287,327
    
    
    
    212,800
    
    
    
    16,000
    
    
    
    291,060
    
    
    
    21,700
    
    
    
    
    
    
    
    129,357Chief Operations Officer
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Walter Forwood
    
    
    
    
    
    
    2004
    
    
    
    242,731
    
    
    
    145,800
    
    
    
    11,775
    
    
    
    161,700
    
    
    
    12,000
    
    
    
    
    
    
    
    77,049VP Operations & Chief Operations Officer
    
    
    
    
    
    
    2003
    
    
    
    117,865
    
    
    
    129,000
    
    
    
    3,000
    
    
    
    108,000
    
    
    
    12,300
    
    
    
    
    
    
    
    14,8582002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,700
    
    
    
    
    
    
    
    Benito Fernandez
    
    
    
    
    
    
    2004
    
    
    
    206,198
    
    
    
    126,000
    
    
    
    8,025
    
    
    
    211,313
    
    
    
    10,300
    
    
    
    
    
    
    
    91,882VP Human Resources
    
    
    
    
    
    
    2003
    
    
    
    193,231
    
    
    
    127,000
    
    
    
    6,000
    
    
    
    92,500
    
    
    
    10,500
    
    
    
    
    
    
    
    80,5622002
    
    
    
    186,250
    
    
    
    105,000
    
    
    
    83,289
    
    
    
    
    
    
    
    13,500
    
    
    
    
    
    
    
    51,553Ileana Molina de Bachman
    
    
    
    
    
    
    2004
    
    
    
    194,639
    
    
    
    64,985
    
    
    
    9,702
    
    
    
    101,063
    
    
    
    7,500
    
    
    
    
    
    
    
    2,709VP Corporate Communications
    
    
    
    
    
    
    2003
    
    
    
    199,227
    
    
    
    53,338
    
    
    
    12,039
    
    
    
    67,500
    
    
    
    10,900
    
    
    
    
    
    
    
    10,8732002
    
    
    
    191,123
    
    
    
    66,000
    
    
    
    
    
    
    
    
    
    
    
    12,600
    
    
    
    
    
    
    
    8,128Adail Ortiz
    
    
    (6
    )
    
    
    2004
    
    
    
    149,238
    
    
    
    42,983
    
    
    
    9,825
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    3,622VP Finance & Chief Financial Officer
    
    
    
    
    
    
    2003
    
    
    
    131,963
    
    
    
    32,312
    
    
    
    9,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,2562002
    
    
    
    113,780
    
    
    
    24,436
    
    
    
    4,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,852
   (1)   In 2004, all Verizon employees paid on a bi-weekly pay cycle received an additional paycheck.
The column Salary includes this additional salary earned in 2004 as a result of the additional
pay cycle during the year for Ms Lambers, Messrs. Butler, Forwood, and Fernandez in the amounts of
$10,000; $10,327; $8,731; and $7,442, respectively.(2)   For 2004, the column Other Annual Compensation includes: flexible spending allowances for Ms.
Lambert and Messrs. Butler, Forwood, Fernandez, and Ortiz in the amounts of: $16,000; $16,000;
$6,000; $6,000; and $6,300, respectively; imputed income for use of the financial planning benefits
for Mr. Forwood in the amount of $3,750; and incremental costs for the personal use of company
vehicle by Ms. Molina de Bachman in the amount of $9,702.(3)   The data reflects the dollar value of the Performance Stock Unit grant of restricted stock
units based on the average price of Verizon common stock on the grant date, February 4, 2004. These
units vest in three years subject to meeting certain performance measures. For Mr. Fernandez, this
value also reflects an additional grant of time-vested restricted stock units that also vest in
three years. On each dividend payment date, additional restricted units are credited to the
participants account. The number of restricted stock units is determined by dividing the dividend
that would have been paid on the shares represented by the restricted stock units in the
participants account by the average price of the Companys common stock on the New York Stock
Exchange Composite Transaction Tape on the dividend payment date. Ms. Lambert and Messrs. Butler,
Forwood, Fernandez, Ms. Molina de Bachman hold a total of: 7,891; 8160; 4533; 5,924; and 2833
restricted stock units, respectively, which had a dollar value of: $319,681; $330,533; $183,629;
$239,970; and $114,768, respectively, based upon the closing price of Verizon common stock on
December 31, 2004.(4)   For 2004, the column All Other Compensation includes: Company contributions to qualified
plans for Ms. Lambert, Messrs. Butler, Forwood, and Fernandez and Ms. Molina de Bachman in the
amounts of $9,870; 9,870; $,9870; $9,874; and $2,709, respectively; and contributions by the
Company and its related companies to the non-qualified Income Deferral Plan accounts of Ms. Lambert
and Messrs. Butler, Forwood, and Fernandez in the amounts of $75,218; $105,857; $61,343; and
$47,634, respectively; and the value of the premiums paid by the company for executive life
insurance polices for Ms. Lambert and Messrs. Butler, Forwood, and Fernandez in the amounts of
$32,323; $13,629; $5,836; and $34,373, respectively.(5)   Mr. Butler resigned on December 2004 to accept a position with Verizon Communications Inc.(6)   Mr. Ortiz is a local VP considered under the Companys payroll and benefits plan. 88




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The following table shows grants of options in Verizon shares to the Named Executive
Officers during 2004. The table also
shows the value of the options at the date of grant, which was determined using the
Black-Scholes valuation method. Option/SAR Grants in Last Fiscal YearIndividual Grants
    
    
    
    
    
    
    Value ($000s)(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)# of
    
    
    % of TotalSecurities
    
    
    Options/SARsUnderlying
    
    
    Granted to
    
    
    Exercise orOptions/SARs
    
    
    Employees in
    
    
    Base Price
    
    
    Expiration
    
    
    Grant DateName
    
    Granted
    
    
    Fiscal Year
    
    
    ($/Sh)
    
    
    Date
    
    
    Present Value (3)Cristina M. Lambert
    
    
    21,000
    1
    
    
    0.125
    %
    
    
    36.7500
    
    
    
    2/3/2014
    
    
    
    188.4Benito Fernandez
    
    
    10,300
    1
    
    
    0.061
    %
    
    
    36.7500
    
    
    
    2/3/2014
    
    
    
    92.4Gary Butler
    
    
    21,700
    1
    
    
    0.129
    %
    
    
    36.7500
    
    
    
    2/3/2014
    
    
    
    194.6Ileana Molina de Bachman
    
    
    7,500
    1
    
    
    0.045
    %
    
    
    36.7500
    
    
    
    2/3/2014
    
    
    
    67.3Walter Forwood
    
    
    12,000
    1
    
    
    0.071
    %
    
    
    36.7500
    
    
    
    2/3/2014
    
    
    
    107.6
   (1)
    
    One-third of the options are exercisable on February 4, 2005; two thirds are exercisable on February 4, 2006; and the balance
are exercisable on February 4, 2007.(2)
    
    Options became fully exercisable following separation, with a 5-year term remaining per plan provisions.(3)
    
    Grant date present value of the options was determined based upon the Black-Scholes valuation method using the following
assumptions: expected volatility, risk-free rate of return, dividend yield, time of exercise, reload and share gain deferral features,
and adjustments for non-transferability and risk of forfeiture. The following table provides information as to options and stock appreciation rights (referred
to as SARs) for Verizon shares exercised by each of the Named Executive Officers during 2004. The
table also sets forth the value of options and SARs for Verizon shares held by such officers at
2004 year-end. Aggregated Option/SAR Exercisesin Last Fiscal Year and FY-End Option/SAR Values(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)Number of Securities
    
    
    Value of UnexercisedShares
    
    
    Value
    
    
    Underlying Options/SARs
    
    
    In-the-Money Options/SARsAcquired on
    
    
    Realized
    
    
    at F-Y-End (#)
    
    
    at F-Y-End ($000s)Name
    
    Exercise (#)
    
    
    ($000s)
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableCristina M. Lambert
    
    
    1,342
    
    
    
    14.3
    
    
    
    79,292
    
    
    
    37,001
    
    
    
    26.8
    
    
    
    84.7Benito Fernandez
    
    
    
    
    
    
    
    
    
    
    20,400
    
    
    
    21,800
    
    
    
    6.9
    
    
    
    52.5Ileana Molina de Bachman
    
    
    
    
    
    
    
    
    
    
    35,977
    
    
    
    18,978
    
    
    
    7.1
    
    
    
    42.5Gary Butler
    
    
    
    
    
    
    
    
    
    
    157,257
    
    
    
    47,933
    
    
    
    36.1
    
    
    
    110.6Walter Forwood
    
    
    
    
    
    
    
    
    
    
    28,416
    
    
    
    26,434
    
    
    
    3.7
    
    
    
    52.5
 89




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VERIZON RETIREMENT PROGRAMS VERIZON PENSION PLANS Effective January 1, 2002, Verizon merged the management pension plans of the Verizons
predecessor companies to form the Verizon Management Pension Plan. The plan is a noncontributory,
tax-qualified pension plan for salaried employees that provides for distribution of benefits in a
lump sum or an annuity, at the participants election. Pension benefits under this plan are
calculated for all participants using a cash balance formula that provides for pay credits equal to
four to seven percent (depending on age and service) of annual eligible pay up to the statutory
limit on compensation ($205,000 in 2004), for each year of service following the conversion to cash
balance. Messrs. Butler, Fernández, and Forwood, and Mses. Lambert, and Molina began participating
in the Verizon Management Pension Plan as of January 1, 2002. Mr. Ortiz participates in the
Companys Pension Plan. In general, eligible pay includes base salary, commissions and short-term incentives,
exclusive of overtime, certain senior manager or other incentive compensation, and other similar
types of payments. Additionally, monthly interest credits are made to the participants account
balance based upon the prevailing market yields on certain U.S. Treasury obligations. In order to
record these pay and interest credits, the plan administrator maintains a hypothetical account
balance for each participant. However, as part of the transition to a cash balance formula,
participants with at least 10 years of service with Verizon as of January 1, 2002, receive benefits
under an alternative formula, referred to as the highest average pay formula, if that formula
provides a higher benefit than the cash balance formula. Under this formula, pensions are computed
until 2008 on 1.35% of eligible pay for average annual salary for the five highest consecutive
years up to the statutory limit on compensation ($205,000 in 2004), for each year of service. In
2008, the Verizon Management Pension Plan shifts from this highest average pay formula to a career
average pay formula under which an employees pension is computed on 1.35% of eligible pay for
average annual salary over the remainder of the employees career with Verizon up to the statutory
limit on compensation, for each year of service. As of December 31, 2004, or the executives date
of separation in 2002, the actual years of service credited under the Verizon Management Pension
Plan for Messrs. Butler, Forwood, Fernández,, and Mses. Lambert, and Molina are 17, 3, 3, 30 and 5,
respectively. The following table illustrates the estimated annual benefits payable pursuant to the highest
average pay formula under the Verizon Management Pension Plan based on a maximum compensation limit
of $205,000. The table assumes normal retirement at age 65 and is calculated on a single life
annuity basis, based upon final average earnings and years of service: Pension Plan TableFINAL AVERAGE
    
    YEARS OF SERVICEEARNINGS
    
    15
    
    
    20
    
    
    25
    
    
    30
    
    
    35
    
    
    40$205,000
    
    $
    41,513
    
    
    $
    55,350
    
    
    $
    69,188
    
    
    $
    83,025
    
    
    $
    96,863
    
    
    $
    110,700
 All former GTE employees with at least 10 years of service with Verizon as of
January 1, 2002, are eligible to receive benefits under a variant to the highest average pay
formula described above if that formula provides a higher benefit. This formula provides a benefit
that was integrated with social security and is available through May 31, 2004. In 2004, for
compensation under $41,700, which is the limit under the Federal Social Security Act, the formula
was based on 1.15% of eligible pay, while the formula for pay above that amount was based on 1.45%
of eligible pay. The following table illustrates the estimated annual benefits payable pursuant to this
alternative highest average pay formula, integrated with social security, under the Verizon
Management Pension Plan based on a maximum compensation limit of $205,000. The table assumes
normal retirement at age 65 and is calculated on a single life annuity basis, based upon final
average earnings and years of service: Pension Plan TableFINAL AVERAGE
    
    YEARS OF SERVICEEARNINGS
    
    15
    
    
    20
    
    
    25
    
    
    30
    
    
    35
    
    
    40$205,000
    
    $
    42,711
    
    
    $
    56,948
    
    
    $
    71,185
    
    
    $
    85,422
    
    
    $
    99,659
    
    
    $
    113,896
 Employees who do not have at least 10 years of service generally do not qualify
for the highest average pay formula under the plan. Accordingly, Messrs. Forwoods and Fernándezs
and Ms. Molinas cash balance accounts were $31,824; $48,009; and $76,613, respectively, as of
December 31, 2004. 90




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Section 415 of the Internal Revenue Code places certain limitations on pension benefits that
may be paid from the trusts of tax-qualified plans, such as the Verizon Management Pension Plan.
Pension amounts for certain executive officers that exceed such Section 415 limitations will be
paid from Verizons assets under the Verizon Income Deferral Plan. Messrs. Butler, Fernández, and
Forwood, and Mses. Lambert and Moljna began participating in the Verizon Income Deferral Plan as of
January 1, 2002. This plan is a nonqualified, unfunded, supplemental retirement and deferred
compensation plan under which an individual account is maintained for each participant. The plan
allows the participants to defer voluntarily the receipt of up to 100% of their eligible
compensation, and also provides retirement and other benefits to certain executives through Verizon
credits to the participants account under the plan. Eligible compensation consists of:  I.
    a participants base salary in excess of the Internal Revenue Code limit on compensation for
qualified retirement plans ($205,000 in 2004);II.
    all of the participants short-term incentive award; andIII.
    other bonuses that the plan administrator determines are eligible for deferral. If a participant elects to defer eligible income, Verizon provides a matching contribution
equal to the rate of match under the qualified savings plan for management employees. That rate is
100% of the first 4% of eligible compensation deferred and 50% of the next 2% of eligible
compensation deferred. In addition, for the first 20 years of participation in the plan for certain
executives of Verizon, the Company makes retirement contributions to a participants account equal
to 32% of the base salary, in excess of $205,000 and short-term incentive award components of the
participants eligible compensation. Thereafter, Verizon makes retirement contributions equal to 7%
of such eligible compensation. The following table shows the aggregate portion of each participating named executive
officers account attributable to the Verizons contributions as of December 31, 2004. In 2004,
Messrs. Butler, Fernández, and Ms. Lambert, and all other former GTE executives, had their Verizon
Supplemental Executive Retirement Plan benefit converted to a present value and transferred to the
Verizon Income Deferral Plan. As a result, Messrs. Butler, Fernandez, and Ms. Lambert are no
longer entitled to receive a benefit under the Verizon Supplemental Executive Retirement Plan and
instead began participating in the Verizon Income Deferral Plan along with all other Verizon
executives effective January 1, 2002. Generally, the Verizon Income Deferral Plan provides a
benefit at retirement comparable to the benefit provided under the Verizon Supplemental Executive
Retirement Plan. Executive
    
    
    Aggregate Account
BalanceMs. Lambert
    
    
    $
    838,938
    
    
    
    
    *Mr. Butler
    
    
    $
    754,707
    
    
    
    
    *Mr. Forwood
    
    
    $
    111,549
    
    
    
    
    *Mr. Fernandez
    
    
    $
    122,546
    
    
    
    
    *Ms. Molina de Bachman
    
    
    $
    4,092
   *
    
    Includes $3,862; $5,954; $8,476 and $580,317 for Messrs. Butler, Forwood, Fernández and
Ms. Lambert, respectively, representing a present value conversion and transfer of their
earned benefits from the Verizon Supplemental Executive Retirement Plan. The actual annual Company contribution for 2004 has been reflected in the All
Other Compensation column of the Summary Compensation Table. Pension benefits for Ms. Molina were calculated only under the Verizon Management Pension Plan
using a cash balance formula that provides for pay credits equal to four to seven percent
(depending on age and service) of annual eligible pay both up to and greater than the statutory
limit on compensation ($205,000 in 2004) for each year of service following the conversion. As of
December 31, 2004, Ms. Molinas cash balance accounts was $76,613. As of December 31, 2004, the actual years of service credited under the Verizon Management
Pension Plan for Ms. Molina is 5 years. 91




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EXECUTIVE RETIRED LIFE INSURANCE PLAN Verizons Executive Retired Life Insurance Plan provides executives a postretirement life
insurance benefit of up to three times final base salary. Benefits may be paid as life insurance
or, alternatively, an equivalent amount equal to the present value of the life insurance amount as
a lump sum payment, as an annuity or in installment payments. COMPANYS PENSION PLAN The following table illustrates the estimated annual benefits payable under the Companys
defined benefit pension plan. The table assumes normal retirement age 65 and is calculated on a
single life annuity basis, based upon final average earnings (integrated with social security as
described below) and years of service: PENSION PLAN TABLEFINAL AVERAGE
    
    YEARS OF SERVICESALARY
    
    15
    
    
    20
    
    
    25
    
    
    30$100,000
    
    $
    26,851
    
    
    $
    38,611
    
    
    $
    48,264
    
    
    $
    55,417125,000
    
    
    34,351
    
    
    
    48,611
    
    
    
    60,764
    
    
    
    69,792150,000
    
    
    41,851
    
    
    
    58,611
    
    
    
    73,264
    
    
    
    84,167175,000
    
    
    44,851
    
    
    
    62,611
    
    
    
    78,264
    
    
    
    89,917200,000
    
    
    44,851
    
    
    
    62,611
    
    
    
    78,264
    
    
    
    89,917
 The retirement plan for salaried employees is a noncontributory pension plan for the
benefit of all our employees who are not covered by the collective bargaining agreements, unless
the agreement provides for coverage under the retirement plan for salaried employees. It provides a
benefit based on a participants years of service and earnings. Our pension benefits and
contributions to the retirement plan for salaried employees are related to basic salary
differentials, exclusive of overtime differentials, incentive compensation and other similar types
of payments. Under the retirement plan for salaried employees, participants are entitled to annual
pension benefits at normal retirement age (65) equal to the sum of: (a) 2% of the average salary
highest 36 months during their ten consecutive calendar employment years multiplied by their years
of credited service (not over 25 years), plus (b) 1.5% of such average multiplied by credited
service over 25 years (but not greater than 15 years), (c) minus an offset factor, varying form .21% to .635% depending upon age at retirement, multiplied by the covered compensation and further
multiplied by credited service (up to 35 years). Under federal law, an employees benefits under a qualified pension plan, such as the
retirement plan for salaried employees, are limited to certain maximum amounts. We maintain a
supplemental executive retirement plan, which supplements the benefits of any participant in the
retirement plan for salaried employees in an amount by which any participants benefits under the
retirement plan for salaried employees are limited by law. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has a Compensation Committee comprised of: Richard L. Carrión, Daniel C. Petri and
Rafael Martínez Margarida. This Committee is responsible for establishing and administering the
policies and plans related to compensation of the Companys management, including the executives
listed in the Executive Officers table included in Item 10 of this Form 10-K. Richard L. Carrión, a Director of the Company, serves as Chairman of the Compensation
Committee. Mr. Carrión is Chairman, President and Chief Executive Officer of Popular, Inc. He
also serves as Director of Verizon. 92




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SHAREHOLDERS AND SHAREHOLDER RELATIONSHIPS SHARE OWNERSHIP At December 31, 2003, there were 50 million authorized shares of the Companys no par value
common stock, 25 million of which were issued and outstanding. As of March 30, 2004, the
beneficial owners of the Companys common stock are as follows: SHARESNAME OF BENEFICIAL OWNER
    
    ADDRESS
    
    NUMBER
    
    PERCENTAGEGTE Holdings (Puerto Rico) LLC 
(Verizon)
    
    GTE Holdings (Puerto Rico) LLC
5221 North OConnor Boulevard
Irving, Texas 75039
    
    
    13,003,276
    
    
    
    52.01Popular, 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 Executive (17 persons)
Officers as a Group
    
    
    
    
    0
    
    
    
    0
 CHANGE OF SHAREHOLDER OWNERSHIP PERCENTAGE On January 25, 2002, Verizon, through its subsidiary GTE Holdings (Puerto Rico) LLC, and
Popular, Inc. acquired an additional 12% and 3% interest in the Company, respectively, by
exercising an option each held since the Acquisition on March 2, 1999. Verizon and Popular
obtained the additional ownership interest from PRTA Holdings. Verizon and Popular paid PRTA Holdings $138 million and $34 million, respectively, for a total
of $172 million in cash for the additional 3,750,000 shares at a $45.936 per share price
established in the Share Option Agreement. OWNERSHIP REQUIREMENTS Verizon must maintain at least a 35% ownership interest through March 2, 2004. If Verizon
proposes to transfer shares as permitted by the shareholders agreement, other than to any of its
affiliates or other than in a public offering or widely distributed private placement, which is for
more than 7.5% of the total number of our shares or which would result in the transferee owning
over 20% of our shares, then the Government of Puerto Rico shall have the right to participate in
this sale, by selling the applicable pro-rata portion of the aggregate number of shares then owned
by all of the Puerto Rico Entities. If the Puerto Rico Entities would own 5% or less of our shares
after exercising this right, Verizon shall have the option of requiring that the Puerto Rico
Entities sell all of their remaining shares to the buyer, or requiring that the Puerto Rico
Entities sell to the buyer the shares that the buyer is willing to purchase and sell any remaining
shares owned by the Puerto Rico Entities to Verizon. Under the Popular Shareholders Agreement, Popular, Inc. has the right to require Verizon to
permit Popular, Inc. to participate on a pro-rata basis in any transfer of shares to non-affiliates
by Verizon, other than an underwritten public offering or widely distributed private placement. The Company has agreed to use all commercially reasonable efforts to support an initial public
offering of the Government of Puerto Ricos remaining 28% interest. 93




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SHAREHOLDERS AGREEMENT The board of directors has 9 members, who are appointed as follows: five directors are
appointed by Verizon; one director is appointed by Popular, Inc., pursuant to an agreement with
Verizon; and three directors are appointed by PRTA Holdings, a subsidiary of an entity of the
Government of Puerto Rico. The ESOP does not have the right to appoint any directors. The number
of directors that the Government of Puerto Rico can appoint is related to its share ownership in
the Company. The Government of Puerto Rico is entitled to appoint three, two or one director(s) as
long as it (or its successor) holds at least a 25%, 15%, or 4% ownership interest, respectively.
Unanimous approval is required for the following actions:  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. Unanimous approval is required for the additional following matters as long as the Government
of Puerto Rico holds at least a 10% ownership interest:  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. Verizon and the Government of Puerto Rico agreed that neither party, nor a Verizon affiliate,
will compete in the telecommunications business (subject to certain exceptions) until the earlier
of:  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. 94




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH VERIZON MANAGEMENT AND TECHNOLOGY LICENSE AGREEMENTS Verizon, which owns 52% of the outstanding capital stock of the Company, provides advice and
direction regarding the administration and operations of our business, as well as providing us with
its existing intellectual property and software that is not restricted by patents or copyrights
under a 5-year agreement, expiring March 2, 2004. Verizon is reimbursed for transportation,
lodging, and meals and receives royalties and fees based on the following percentages of EBITDA,
excluding provisions for voluntary severance programs:  o
    8% for years one and two of the agreement;o
    7% for years three and four of the agreement;o
    6% for year five of the agreement. Total royalties and fees accrued for the year ended December 31, 2004 and 2003 were $10
million and $24 million, respectively. On April 2004 was signed a new Services Agreement with a one year term which provides for the
provision of such services as the Corporation may request, and for the continuation of the
technology license previously granted on March 2, 1999. Fees for these new agreement amounted to
$9 million and $7 million for the year ended December 31, 2004 and 2003, respectively. REIMBURSEMENT AGREEMENT The Company has a reimbursement agreement with Verizon, under which actual out-of-pocket
expatriate salaries and related benefit expenses are billed to the Company. Total expatriate
expenses for the year ended December 31, 2004 and 2003 amounted to $3 million and $8 million,
respectively. For further details, refer to Part III, Item 11, Executive Compensation. OTHER AFFILIATED TRANSACTIONS The Company also enters into transactions with affiliates for the purchase of materials and
supplies used in construction and expansion of its telecommunications network. Such transactions
are subject to conditions similar to transactions with independent third parties. The Company also
participates with affiliates of shareholders in sharing the cost of development of computer
software programs by third party vendors. The shareholders receive no compensation for arranging
the development of such systems. DIRECTORY AGREEMENTS We entered into a 95-year agreement in 1999 with VISI, a joint venture among VNU, Verizon, and
the Company, which provides us a publishing right of 35% of yellow page advertising revenues, plus
billing and collection fees which generated $20 million of directory advertising revenues for the
year ended December 31, 2004. TRANSACTIONS WITH POPULAR, INC. Popular, Inc., which owns 13% of the outstanding capital stock of the Company, provides
wireline bill collection, lock-box, cash management, and wireless bill processing services at a
cost of approximately $10 million for each of the years 2004 and 2003. These services are
negotiated at arms-length market value rates. At December 31, 2004, the Company maintained a $40 million working capital credit facility
with Banco Popular de Puerto Rico, which is a subsidiary of Popular, Inc. No balance was
outstanding under this facility as of December 31, 2004. 95




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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES INDEPENDENT AUDITOR FEE INFORMATION Audit Fees Fees for audit services totaled approximately $490,000 and $412,000 for the years ended December
31, 2004 and 2003, respectively, including services for the audit of the Companys annual financial
statements for SEC and local statutory reporting purposes, reviews of the Companys quarterly
reports on Form 10-Q, audit of the Companys ARMIS 43-03 reports filed with the FCC. Audit-Related Fees Fees for audit-related services totaled approximately $61,000 and $104,000 for the years ended
December 31, 2004 and 2003, respectively. Audited-related services principally include the audit
of the Employee Benefit Plan and ESOP in connection with annual reports on Form 11-K, audit
schedules for specific purposes and accounting consultations. All Other Fees Fees for all other services not included under Audit Fees or Audit Related Fees above totaled
approximately $3,000 for the year ended December 31, 2003, principally relating to finance
conferences and technical updates. No fees were paid for other services for year ended December
31, 2004. Audit Committee Pre-approval Policies and Procedures The Audit Committee reviews and approves audit and permissible non-audit services performed by our
independent auditors, Ernst & Young LLP, as well as the fees billed by Ernst & Young LLP for such
services. In its review of non-audit service fees and its appointment of Ernst & Young LLP as our
independent accountants, the Audit Committee considered whether the provision of such services is
compatible with maintaining Ernst & Young LLPs independence. 96




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) and (2) List of Financial Statements and Financial Statements Schedules: See Index to Consolidated Financial Statements under Part II, Item 8, Financial Statements
and Supplementary Data. (All other schedules for which provision is made in the applicable accounting regulations of
the SEC are not required under the related instructions or are inapplicable and, therefore, have
been omitted.) (3) Exhibits See Exhibit Index. 97




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SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized. TELECOMUNICACIONES DE PUERTO RICO, INC. By:
    
    /s/ Cristina M. LambertName:
    
    Cristina M. LambertTitle:
    
    President and Chief Executive OfficerDate:
    
    March 31, 2005By:
    
    /s/ Adail OrtizName:
    
    Adail OrtizTitle:
    
    Vice President Finance and Chief Financial OfficerDate:
    
    March 31, 2005By:
    
    /s/ Raúl E. GarcíaName:
    
    Raúl E. GarcíaTitle:
    
    ControllerDate:
    
    March 31, 2005
 98




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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated. Date
    
    Signature
    
    CapacityMarch 31, 2005
    
    /s/
Cristina M. Lambert
    
    President and Chief Executive Officer (Principal Executive Officer)Cristina M. LambertMarch 31, 2005



    
    /s/ Adail Ortiz
    
    Vice President Finance and Chief Financial Officer (Principal Financial Officer)Adail OrtizMarch 31, 2005

    
    /s/ Raúl E. García
    
    Chief Accounting Officer (Principal Accounting Officer)Raúl E. GarcíaMarch 31, 2005
    
    
    
    DirectorDaniel C. PetriMarch 31, 2005
    
    
    
    DirectorEduard J. McQuaidMarch 31, 2005
    
    
    
    DirectorJeanne M. DennisonMarch 31, 2005
    
    
    
    DirectorCristina M. LambertMarch 31, 2005
    
    /s/ John J. Lack
    
    DirectorJohn J. LackMarch 31, 2005
    
    
    
    DirectorRichard L. CarriónMarch 31, 2005
    
    /s/ William Lockwood
    
    DirectorWilliam LockwoodMarch 31, 2005
    
    /s/ José F. Rodríguez Perelló
    
    DirectorJosé F. Rodríguez PerellóMarch 31, 2005
    
    /s/ Rafael F. Martínez Margarida
    
    DirectorRafael F. Martínez Margarida
 99




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EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on
Form 10-K for the year ended December 31, 1999 (File
333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.2
    
    Amended and Restated Puerto Rico Management Agreement, dated
as of March 2, 1999, by and among Telecomunicaciones de
Puerto Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated.
(Incorporated by reference to Exhibit 10.6 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.3
    
    Amended and Restated U.S. Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated.
(Incorporated by reference to Exhibit 10.7 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.4
    
    Amended and Restated Technology Transfer Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated.
(Incorporated by reference to Exhibit 10.8 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.5
    
    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)).10.6
    
    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)).10.7
    
    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)).10.8
    
    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)).
 100




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EXHIBITNUMBER
    
    DESCRIPTION10.9
    
    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)).10.10
    
    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 Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.11
    
    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)).10.12
    
    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)).10.13
    
    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)).10.14
    
    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)).10.15
    
    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)).10.16
    
    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
31, 2001 (File 333-85503)).10.17
    
    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
31, 2001 (File 333-85503)).
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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Plan of Reorganization and Agreement of Merger, dated as of
May 1, 2002, between Puerto Rico Telephone Company, Inc. and
Verizon Wireless Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.25 of the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2002 (File
333-85503)).10.19
    
    $90,000,000 working capital revolving credit agreement dated
as of May 16, 2002, 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
10.26 of the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).10.20
    
    $50,000,000 2-Year term credit agreement dated as of May 16,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Banco Bilbao Vizcaya Argentaria, S.A., as Lender and
Banco Bilbao Vizcaya Puerto Rico, as Administrative Agent.
(Incorporated by reference to Exhibit 10.27 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30,
2002 (File 333-85503)).10.21
    
    $50,000,000 2-Year term credit agreement dated as of May 31,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and HSBC Bank USA, as Lender. (Incorporated by reference to
Exhibit 10.28 of the Companys Quarterly Report on Form 10-Q
for the period ended June 30, 2002 (File 333-85503)).10.22
    
    $50,000,000 3-Year term credit agreement dated as of June 24,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Australia and New Zealand Banking Group Limited, as
Lender and Administrative Agent. (Incorporated by reference
to Exhibit 10.29 of the Companys Quarterly Report on Form
10-Q for the period ended June 30, 2002 (File 333-85503)).10.23
    
    $75,000,000 3-Year term credit agreement dated as of August
19, 2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and The Bank of Nova Scotia, as Lender and Administrative
Agent. (Incorporated by reference to Exhibit 10.28 of the
Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2002 (File 333-85503)).10.24
    
    Letter Amendment to the $90 million working capital revolving
credit agreement dated as of December 31, 2002. (Incorporated
by reference to Exhibit 10.28 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2002 (File
333-85503)).10.25
    
    Assignment and Acceptance agreement, dated as of December 31,
2002, relating to the $50 million 3-Year Term Credit
Agreement, dated as of June 24, 2002. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2002 (File
333-85503)).10.26
    
    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.
(Incorporated by reference to Exhibit 10.30 of the Companys
Annual Report on Form 10-K for the year ended December 31,
2002 (File 333-85503)).10.27
    
    Second Allonge to the $90 million working capital revolving
credit agreement dated as of June 30, 2003. (Incorporated by
reference to Exhibit 10.31 of the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2003 (File
333-85503)).10.28
    
    364-Day Credit Agreement dated as of March 2, 2004, 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, as
Syndication Agent, and Banco Popular de Puerto Rico,
Firstbank Puerto Rico and Scotiabank de Puerto Rico, as
Co-documentation Agents. (Incorporated by reference to
Exhibit 10.29 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2003 (File 333-85503)).
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.29
    
    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)).10.30
    
    $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
10.29 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.31
    
    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 10.29
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.32
    
    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 10.29
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.33
    
    $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
10.29 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.34
    
    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. (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