##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X]
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the fiscal year ended: December 31, 2003 or [  ]
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the transition period from to Commission File Number 333-85503 Telecomunicaciones de Puerto Rico, Inc.  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 [X] NO [  ] 1




---



##### Table of Contents



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. [X] Indicate by check mark whether the registrant is an accelerated filer. YES [  ] NO [X] At June 30, 2003, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $47 million. This amount
represents the value of the vested shares under the Employee Stock Ownership
Plan (ESOP) at a stated price of $51.81. 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 30, 2004, 25 million shares of no par common stock of the registrant
were outstanding.    2




---



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 INDEX364-Day Credit AgreementComputation of Ratio of Earnings to Fixed ChargesSubsidiaries of the RegistrantIndependent Auditors' ConsentCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
  3




---



##### Table of Contents



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
conditions in Puerto Rico; (2) material changes in available technology; (3)
the final resolution of regulatory initiatives and proceedings, including
arbitration proceedings pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; (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. 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, 2003, we had approximately 1.2
million access lines in service, including 940,000 residential and 290,000
business lines. Since November 2001, we have been marketing our cellular
service under the Verizon Wireless brand as part of a strategy to align our
product and service offerings with those of Verizon Wireless in the U.S. We have invested approximately $1.1 billion from the date of the
Acquisition (as defined below) through December 31, 2003 to expand and enhance
our network. In 2004, we expect to invest an additional $160 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 switch all TDMA clients to the CDMA
network. We have invested approximately $81 million since 2001 in a new
network overlay using the CDMA standard. We commenced selling CDMA service in
December 2001. STRATEGY We expect to maintain our wireline market leadership position by improving
customer service, providing value, and meeting increasing customer bandwidth
requirements. We are focused on reducing service and repair provisioning,
repair intervals and improving the responsiveness of our customer care
personnel. Customer value will 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 ID, call forwarding and
call waiting. Our network deployment plans are designed to meet business and
government expectations for dedicated high-speed bandwidth access, as well as
residential consumer demand for DSL service to enhance Internet access speed. Our wireless strategy seeks to retain our significant base of postpaid
cellular customers as well as targeting our competitors high-value customers
focus on the reliability of our network and the coverage of our network
together with innovative products and pricing offerings. 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 4




---



##### Table of Contents



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. PRTC is the
incumbent local exchange carrier for the island of Puerto Rico. Wireline
service is provided by PRTC 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 by 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 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 were to (i) integrate the
wireline and wireless operations without jeopardizing the continuity of the
off-island long distance license, (ii) simplify the overall corporate structure
to reduce administrative costs, and (iii) provide better control and monitoring
of the off-island long distance business and increase its potential for growth
in Puerto Rico. 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
private line services, Internet access and public phone service;  
    
    Long distance services including direct dial on-island and off-island, operator assisted calls, prepaid calling card and
high-speed private line services;  
    
    Access services to long distance carriers, competitive local exchange carriers, and cellular and paging operators to
originate and terminate 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:  
    
    Cellular service; and  
    
    Wireless equipment sales. 5




---



##### Table of Contents



REVENUES YEARS ENDED DECEMBER 31,(DOLLARS IN MILLIONS)2003
    
    2002
    
    2001WIRELINE:Local
    
    $
    579
    
    
    
    45
    %
    
    $
    578
    
    
    
    45
    %
    
    $
    566
    
    
    
    41
    %Long Distance
    
    
    138
    
    
    
    11
    
    
    
    146
    
    
    
    11
    
    
    
    186
    
    
    
    13Network Access
    
    
    295
    
    
    
    23
    
    
    
    325
    
    
    
    25
    
    
    
    355
    
    
    
    25Directory and Other
    
    
    68
    
    
    
    5
    
    
    
    67
    
    
    
    5
    
    
    
    84
    
    
    
    6Total Wireline
    
    
    1,080
    
    
    
    84
    %
    
    
    1,116
    
    
    
    86
    %
    
    
    1,191
    
    
    
    85
    %WIRELESS:Postpaid Cellular
    
    
    161
    
    
    
    13
    
    
    
    146
    
    
    
    11
    
    
    
    152
    
    
    
    11Prepaid Cellular
    
    
    26
    
    
    
    2
    
    
    
    27
    
    
    
    2
    
    
    
    25
    
    
    
    2Paging
    
    
    1
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    15
    
    
    
    1Wireless Equipment
and Other
    
    
    13
    
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    14
    
    
    
    1Total Wireless
    
    
    201
    
    
    
    16
    %
    
    
    185
    
    
    
    14
    %
    
    
    206
    
    
    
    15
    %Revenues
    
    $
    1,281
    
    
    
    100
    %
    
    $
    1,301
    
    
    
    100
    %
    
    $
    1,397
    
    
    
    100
    %
 Reclassifications of prior years data have been made to conform to the
2003 presentation. For further information, refer to Note 2 to our
consolidated financial statements included under Part II, Item 8, Financial
Statements and Supplementary Data. WIRELINE LOCAL SERVICES OVERVIEW Local services include basic voice services, value-added services, special
services, Internet and data access, 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, private branch
exchange trunks, and cellular and paging customers: ACCESS LINES IN SERVICE Year Ended December 31,2003
    
    2002
    
    2001(In thousands except percentages)Residential
    
    
    940
    
    
    
    957
    
    
    
    965Business/Government
    
    
    290
    
    
    
    303
    
    
    
    308Total Access Lines in Service
    
    
    1,230
    
    
    
    1,260
    
    
    
    1,273Growth
    
    
    (2.4
    )%
    
    
    (1.0
    )%
    
    
    (0.8
    )%
 BASIC VOICE SERVICE Basic voice service is the largest component of local service revenues,
generating $356 million, or 28%, of total revenues for the year ended December
31, 2003. 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, 2003 there were 68
local calling areas. Business customers must be on a measured service plan. As part of the Companys value added services, the Company will reduce in
2004 from 68 to 10 larger local calling areas as part of a four phased
reduction plan resulting from a study of the customers calling patterns and the
commercial zones movement. 6




---



##### Table of Contents



Business/government customers pay basic local rate ranging from $36.65 to
$38.25 per month and $68.00 average revenue per user (ARPU) when measured
service is included. 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. Residential basic ARPU
approximates $22.00 excluding 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 enhance services as directory assistance and
white-page directory listings. TELEPHONE RENTAL Approximately 56% of single-line business customers and 31% of residential
customers rent telephones. We generated $16 million in revenues from telephone
rentals for the year ended December 31, 2003, representing a decrease of $3
million, or 16%, as compared to the same period in 2002 mainly due to customer
tendency to purchase equipment. Rental levels are still 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, and voice mail. Charges for these features range from $1.50 to
$6.25 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 $47 million for
the year ended December 31, 2003, representing an increase of $2 million, or
5%, as compared to the same period in 2002. SPECIAL SERVICES Special services include private high-speed dedicated lines marketed to
businesses for data transport. Our revenues from special services remained
constant at $54 million for the year ended December 31, 2003, as compared to
the same period in 2002. 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 2003. We generated $29 million of revenue in 2003 from 164,000
dial-up Internet access customers at December 31, 2003, an increase of $4
million and 29,000 customers over prior year, or 16% in revenues and 22% in
customers, respectively. PUBLIC PHONES Public telephone revenues in 2003 were $9 million, an increase of $1
million, or 13%, from the prior year. This increase is mainly due to an FCC
mandated dial around compensation refund of $2 million that we received from
one of our carriers, partially offset by a decrease in revenues of $1 million
due to 2,000 fewer phones as compared to prior year. The Company continues to
focus on rationalizing margin locations and the impact of customers traffic
migration to the cellular network. We hold less than 50% of the public phone
market at December 31, 2003. 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. 7




---



##### Table of Contents



Network access revenues for the years ended December 2003, 2002 and 2001
were $295 million, $325 million and $355 million, respectively, and included
the following amounts: Year Ended December 31,2003
    
    2002
    
    2001(In millions)O Federal long-term support subsidies
    
    $
    81
    
    
    $
    86
    
    
    $
    91O Subscriber line charge
    
    
    97
    
    
    
    91
    
    
    
    61O Federal High Cost subsidies & Local
Universal Service Fund Charge
    
    
    5
    
    
    
    4
    
    
    
    33O Per minute wireline access charges:o On-island switched
    
    
    49
    
    
    
    59
    
    
    
    69o Off-island switched & common
carrier line
    
    
    20
    
    
    
    40
    
    
    
    64o Off-island special
    
    
    24
    
    
    
    23
    
    
    
    18o Wireless interconnection
    
    
    19
    
    
    
    22
    
    
    
    19$
    295
    
    
    $
    325
    
    
    $
    355
 Long-term and High Cost federal subsidies are received through pooling
arrangements administered by the National Exchange Carriers Association
(NECA). 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. This increase was offset by a decrease in off-island
switched and common carrier line charges directly associated with the increase
in subscriber line charges and in on-island switched charges. 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. LONG DISTANCE Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. 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, 2003, 2002
and 2001, respectively: Year Ended December 31,2003
    
    2002
    
    2001(In millions)Long distance MOU:On-island Long Distance minutes
    
    
    757
    
    
    
    811
    
    
    
    1,021Off-island Long Distance minutes
    
    
    170
    
    
    
    171
    
    
    
    191
 Long distance revenues of $138 million in 2003 reflected a decrease of $8
million as compared with 2002 due mainly to the introduction of value-added
plans and lower traffic as customers calling migrated to other networks,
primarily cellular. DIRECTORY SERVICES We received $20 million in publishing revenue in 2003 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 and
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 a publishing right of 35% of
yellow page advertising revenues, plus billing and collection fees. BILLING AND COLLECTION SERVICES We generated revenues of $11 million in 2003 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 $2 million from the prior year
due to lower retail long distance traffic as customer traffic migrates to
cellular technology. Both carriers represented approximately 89% of our total
billing and connection fees for 2003. Our contract with TLD expired in October
2003, and we are currently negotiating a new contract with TLD. Our contract
with AT&T expires in June 2004. 8




---



##### Table of Contents



WIRELESS The following table shows the breakdown of our cellular and paging
customers: CELLULAR AND PAGING CUSTOMERS Year Ended December 31,2003
    
    2002
    
    2001(In thousands except percentages)Cellular Customers:Postpaid
    
    
    240
    
    
    
    228
    
    
    
    200Prepaid
    
    
    113
    
    
    
    123
    
    
    
    102Total Cellular Customers
    
    
    353
    
    
    
    351
    
    
    
    302Growth
    
    
    0.6
    %
    
    
    16
    %
    
    
    (10
    )%Paging Customers
    
    
    0
    
    
    
    16
    
    
    
    49
 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 $81 million since 2001 in a CDMA overlay network and commenced selling
this service in December 2001. At December 31, 2003, there were six facility-based cellular operators
providing 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. We have 19 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 AT&T, 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 growth of 5% is below prior year growth. We also
experienced a decrease in prepaid customers of 8%. In late 2001, we began
marketing our cellular service under the Verizon Wireless brand as part of a
strategy to align our product and service offerings with those of Verizon
Wireless in the U.S. ARPU was $40 in 2003, a $1 decrease from the prior year. Postpaid ARPU was
$51 in 2003, a $1 decrease from the prior year and prepaid ARPU was $19 in
2003, a $1 decrease from prior year. Postpaid customer churn was 3.2% per month in 2003, an increase of
approximately 0.3% 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 disconnections as a result of
non-payment. NETWORK INFRASTRUCTURE We have invested approximately $1.1 billion from the Acquisition date
through 2003 including $176 million in 2003 to expand and enhance our networks. WIRELINE NETWORK Our network has evolved into a multi-protocol network, handling SONET, ATM
and IP with the following characteristics: 9




---



##### Table of Contents




    
    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.
    
    Approximately 90% of our transmission circuits use fiber optic
systems consisting of 83,000 miles of fiber optic cable in fiber-ring
and point-to-point configurations.
    
    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 200 office buildings for business
and residential customers.
    
    Approximately 39% of the outside cable serving the local loop is
underground and buried.
    
    Our network is monitored by a network monitoring center, which
operates 24 hours per day, with the capabilities to monitor customers
IP based networks.
    
    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.
    
    DSL service has been extended to 287 sites equipped with an aggregate
of 37,160 ports. As of December 31, 2003, we had approximately 21,000
DSL customers, representing an increase of 7,000 customers as compared
to last year.
    
    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 320 wireless cell sites
covering the entire island. We have invested $81 million since 2001 in a CDMA
overlay network as part of our business strategic plan to fully migrate our
customers to CDMA network. See item 8 Financial Statements and Supplementary
Data. We commenced selling CDMA service in December 2001. EMPLOYEES The workforce totaled 5,381 full-time employees at December 31, 2003 of
which 76 % are represented by two unions, the Union of Independent Telephone
Workers, known as UIET, and the Brotherhood of Independent Telephone Workers,
known as HIETEL. A new 3-year contract was signed effective January 17, 2003, with the UIET
union, involving approximately 2,800 members. The UIET contract contains wage
increases of 4.4% in 2003, 4.2% in 2004, and 4.0% in 2005. If the union
workforce remains unchanged, these increases, together with benefit
improvements, payroll taxes and offsetting concessions, will result in
increases of labor costs of $1.5 million for 2003, $5.9 million for 2004 and
$9.9 million for 2005. The HIETEL contract, involving approximately 1,300
members, expired in October 2003 and we are currently negotiating a new
contract. At this time, we can not determine when and upon what terms the
negotiations will be completed. The Company offered a voluntary separation program to qualified management
employees during the fourth quarter of 2002 and recorded a $0.5 million
non-cash provision as a result of 8 employees accepting the program. In January 2003, an additional 29 qualified management employees accepted
the voluntary separation program, representing an expense of $1.4 million,
which was recorded in the first quarter of 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 qualified employees
accepted. Also, during the second quarter of 2003, an additional 147 employees
in the UIET union accepted a retirement program offered by the Company that
closed on June 30, 2003. As a result of these two programs, an additional
provision of $3.3 million was recorded. In December 2003, the Company offered an early retirement program to
qualified management employees. A non-cash provision of $12.6 million was
recorded relating to 147 employees who had accepted as of December 31, 2003. As a result of the voluntary separation and retirement program mentioned
above, the reduction in workforce totaled 367 in 2003, or 6%. 10




---



##### Table of Contents



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. 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 blended discount rate to resellers was approximately 24%
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 has ordered a $68 million refund to
end-user customers relating to this dispute for which the Company has
established a pre-tax reserve of $73 million, including interest. 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. 11




---



##### Table of Contents



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. We have adopted a written Code of Ethics applicable to all directors,
officers and employees and is also available on our website. 12




---



##### Table of Contents



ITEM 2. PROPERTIES PROPERTY, PLANT AND EQUIPMENT Gross investment in property, plant and equipment is $4.0 billion at
December 31, 2003 and 2002, as follows: 2003
    
    2002Wireline
    
    Wireless
    
    Total
    
    Wireline
    
    Wireless
    
    TotalOutside plant
    
    
    52.3
    %
    
    
    
    %
    
    
    52.3
    %
    
    
    49.2
    %
    
    
    
    %
    
    
    49.2
    %Central office and transmission equipment
    
    
    26.9
    
    
    
    2.6
    
    
    
    29.5
    
    
    
    25.3
    
    
    
    6.0
    
    
    
    31.3Other equipment
    
    
    7.1
    
    
    
    1.0
    
    
    
    8.1
    
    
    
    7.5
    
    
    
    0.9
    
    
    
    8.4Land and buildings
    
    
    7.8
    
    
    
    0.7
    
    
    
    8.5
    
    
    
    7.6
    
    
    
    0.7
    
    
    
    8.3Plant under construction
    
    
    1.1
    
    
    
    0.5
    
    
    
    1.6
    
    
    
    2.0
    
    
    
    0.8
    
    
    
    2.895.2
    %
    
    
    4.8
    %
    
    
    100.0
    %
    
    
    91.6
    %
    
    
    8.4
    %
    
    
    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, 2003 include the following: Owned
    
    Leasedo Administrative Offices
    
    
    11
    
    
    
    12o Commercial & Customer Service stores & offices
    
    
    2
    
    
    
    15o Standalone Wireline Switching Center Buildings
    
    
    91
    
    
    
    5o Inside & Outside Remote Switching Units
    
    
    148
    
    
    
    220o Standalone Operational Centers (repair, dispatch, assignment)
    
    
    13
    
    
    
    11o Warehouses
    
    
    1
    
    
    
    o Wireless Stores and Kiosks
    
    
    
    
    
    
    19o Wireless Cell Sites
    
    
    19
    
    
    
    301
 We believe that all of these properties are generally in good operating
condition and are adequate to satisfy the needs of the business. 13




---



##### Table of Contents



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. In connection with the privatization of the Company, PRTA agreed to
indemnify, defend and hold the Company harmless from specified litigation in
excess of $50 million in the aggregate, including one environmental matter. The Company is regulated by the United States Federal Communications
Commission (the FCC) for inter-state wireline services and by the Puerto Rico
Telecommunications Board (TRB) for intra-island wireline services. The Company has an agreement with a provider for the implementation of a
traffic polling and billing software system for its wireline operations. While
the traffic polling portion has been implemented, management has determined
that it is in the Companys best interests to abandon the billing portion of
the software system. The amount of capitalized costs for software and labor
related to the billing portion of $32.3 million was written off and included in
operating expenses during the second quarter of 2003. In September 2003, the Company established a pre-tax reserve of $73
million, including interest, for the end-user and AT&T refund referred to in
the TRB Resolution and Order of February 28, 2002. See Managements
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory and Other Matters  Intra-Island Long Distance Access Rate Dispute
for more information regarding the TRB Resolution and Order of February 28,
2002. In November 2003, the Company proposed, and two members of the TRB
indicated their support for, a plan to revise the Boards end-user refund order
and end the dispute over this issue. As a result, the 2003 cash flow impact
was a reduction of $16 million to the pre-tax reserve. 14




---



##### Table of Contents



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




---



##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK While 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 Our 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. During 2003, the Company paid dividends
of $68 million, or $2.725 per share, applicable to the first quarter of 2003
and the fourth quarter of 2002. During 2002, the Company paid dividends of $69
million, or $2.753 per share, applicable to the first three quarters of 2002
and the fourth quarter of 2001. 16




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA The following table was derived from our audited consolidated financial
statements and the audited financial statements of PRTC and Verizon Wireless
(Predecessors) for the designated periods. You should read the following data
together with (a) our Predecessors historical financial statements and the
notes thereto for the period from January 1, 1999 to March 1, 1999; and (b) our
historical consolidated financial statements and the notes thereto as of and
for the year ended December 31, 2000 and for the period from March 2, 1999 to
December 31, 1999, all of which have been audited by Deloitte & Touche LLP,
except for the consolidated financial statements and notes thereto as of and
for the years ended December 31, 2003, 2002 and 2001, which have been audited
by Ernst & Young LLP, independent auditors, and appear elsewhere in this
report. Our current results of operations and financial condition differ
materially from those prior to the Acquisition due primarily to:  
    
    The incurrence of $1.6 billion of debt and related interest expense in connection with and at the time of Acquisition;  
    
    The Company becoming a tax paying entity;  
    
    Voluntary early retirement and separation programs introduced since 1999;  
    
    The management fees and royalties paid to Verizon;  
    
    The introduction of dialing parity in the on-island long distance market and our entrance into the off-island long distance
market;  
    
    Revaluation of assets and liabilities to reflect purchase accounting relating to the Acquisition;  
    
    The discontinuation of regulatory accounting principles, as described in Statement of Financial Accounting Standards
(SFAS) No. 71, accounting for the Effects of Certain Types of Regulation; and  
    
    The impact of various regulatory initiatives, related to the reduction of the Federal High Cost Funding. 17




---



##### Table of Contents



COMPANY
    
    PREDECESSORSMARCH 2,
    
    JANUARY 1YEARS ENDED DECEMBER 31,


    
    THROUGHDECEMBER 31,
    
    THROUGHMARCH 1,2003
    
    2002
    
    2001
    
    2000
    
    1999
    
    1999(DOLLARS IN MILLIONS)INCOME STATEMENT DATA (1):Revenues
    
    $
    1,281
    
    
    $
    1,301
    
    
    $
    1,397
    
    
    $
    1,393
    
    
    $
    1,103
    
    
    $
    221Operating Costs and Expenses
    
    
    1,191
    
    
    
    1,054
    
    
    
    1,150
    
    
    
    1,163
    
    
    
    1,157
    
    
    
    219Operating Income (Loss)
    
    
    90
    
    
    
    247
    
    
    
    247
    
    
    
    230
    
    
    
    (54
    )
    
    
    2Other Income (Expense), Net
    
    
    (64
    )
    
    
    (47
    )
    
    
    (59
    )
    
    
    (75
    )
    
    
    (65
    )
    
    
    Income Tax (Expense) Benefit
    
    
    (8
    )
    
    
    (29
    )
    
    
    (70
    )
    
    
    (40
    )
    
    
    46
    
    
    
    Income (Loss) Before Extraordinary
Charge and Cumulative Effect of
Accounting Change
    
    
    18
    
    
    
    171
    
    
    
    118
    
    
    
    115
    
    
    
    (73
    )
    
    
    2Extraordinary Charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    Cumulative Effect of Accounting
Change, net of tax
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    Net Income (Loss)
    
    $
    77
    
    
    $
    171
    
    
    $
    118
    
    
    $
    126
    
    
    $
    (133
    )
    
    $
    2OTHER FINANCIAL DATA:Depreciation and Amortization
    
    $
    252
    
    
    $
    262
    
    
    $
    271
    
    
    $
    298
    
    
    $
    242
    
    
    $
    50Cash Flows from Operations
    
    
    357
    
    
    
    405
    
    
    
    216
    
    
    
    486
    
    
    
    316
    
    
    
    56Capital Expenditures, including
removal costs
    
    
    177
    
    
    
    209
    
    
    
    246
    
    
    
    213
    
    
    
    240
    
    
    
    33Cash Flows (used in) from Investing
    
    
    (170
    )
    
    
    (206
    )
    
    
    (220
    )
    
    
    (207
    )
    
    
    246
    
    
    
    33Cash Flows (used in) from Financing
    
    
    (198
    )
    
    
    (200
    )
    
    
    8
    
    
    
    (293
    )
    
    
    (97
    )
    
    
    14Ratio of Earnings to Fixed Charges (2)
    
    
    2.8
    
    
    
    5.2
    
    
    
    4.1
    
    
    
    3.0
    
    
    
    (0.8
    )Cash dividends per share (3)
    
    
    2.73
    
    
    
    2.75
    
    
    
    2.32
 AS OF DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(DOLLARS IN MILLIONS)BALANCE SHEET DATA:Current Assets
    
    $
    392
    
    
    $
    430
    
    
    $
    431
    
    
    $
    416
    
    
    $
    412Property, Plant and Equipment, Net
    
    
    1,558
    
    
    
    1,575
    
    
    
    1,632
    
    
    
    1,657
    
    
    
    1,743Total Assets
    
    
    2,621
    
    
    
    2,717
    
    
    
    2,748
    
    
    
    2,767
    
    
    
    2,828Current Liabilities
    
    
    273
    
    
    
    366
    
    
    
    841
    
    
    
    610
    
    
    
    846Total Debt
    
    
    862
    
    
    
    1,035
    
    
    
    1,196
    
    
    
    1,168
    
    
    
    1,497Shareholders Equity
    
    
    701
    
    
    
    665
    
    
    
    538
    
    
    
    498
    
    
    
    370
 AS OF DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999OPERATING DATA:Access Lines in Service (000)
    
    
    1,230
    
    
    
    1,260
    
    
    
    1,273
    
    
    
    1,283
    
    
    
    1,265Wireless subscribers:Cellular (000)
    
    
    353
    
    
    
    351
    
    
    
    302
    
    
    
    335
    
    
    
    285Paging (000)
    
    
    
    
    
    
    16
    
    
    
    49
    
    
    
    126
    
    
    
    184Total Access Lines (per 100 households)
    
    
    69
    
    
    
    71
    
    
    
    73
    
    
    
    74
    
    
    
    74Number of full-time Employees
    
    
    5,381
    
    
    
    5,750
    
    
    
    6,250
    
    
    
    6,417
    
    
    
    6,614Access Lines/Wireline Employee
    
    
    260
    
    
    
    250
    
    
    
    232
    
    
    
    226
    
    
    
    207Cellular Average Monthly Service Revenue Per User
    
    $
    40
    
    
    $
    41
    
    
    $
    44
    
    
    $
    38
    
    
    $
    43
   (1)
    
    Reclassifications of prior years data have been made to conform to current
year presentation.(2)
    
    The ratio of earnings to fixed charges of the Predecessors has not been
presented, as the fixed charges were nominal prior to the Acquisition since
there was no significant indebtedness.(3)
    
    The Company paid dividends of $68 million during 2003 and $69 million
during 2002, or $2.725 and $2.753 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, 2003 and
2002. 18




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 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, and
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 discussed in Note 1 to the consolidated financial statements, the Company
executed a reorganization plan, which became effective May 1, 2002, whereby
Verizon Wireless merged into PRTC. As a result of this merger, the Company
released a deferred tax valuation allowance, related to the Acquisition, of $93
million, of which $51 million was recorded against goodwill and $42 million was
recorded as a deferred tax benefit in the Companys consolidated statement of
income during the second quarter of 2002 in accordance with SFAS No. 109,
Accounting for Income Taxes. Management believes that sufficient book and
taxable income will be generated by the merged company to realize the benefits
of these tax assets. 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. 19




---



##### Table of Contents



The Companys depreciation expense is based on the composite group remaining
life method and straight-line composite rates. This method provides for the
recognition of the cost of the remaining net investment in telephone plant,
less anticipated net salvage value, over the remaining asset lives. This
method also requires a periodic evaluation of the average remaining useful
lives related to the expected recoverability of the carrying value of assets
based on changes in technology, environmental factors, the federal and local
regulatory environment, and other competitive forces. Effective July 1, 2002,
the Company changed its accounting estimates relating to depreciation resulting
from a detailed review of the lives underlying the depreciation rates. The rate
changes reflect expected useful lives resulting from the impact of technology
and future competition as well as more closely approximating the assumptions
used by other telephone companies. These charges resulted in decreasing
depreciation expense by approximately $6 million for the second half of 2002
and approximately $12 million for the year ended December 31, 2003. Refer to
Note 4 to the consolidated financial statements for further details. 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, 2003, 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, 2003, the Company determined this rate to be
6.25%, 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, 2003, we assumed a discount rate of 6.25%, 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. 20




---



##### Table of Contents



RESULTS OF OPERATIONS  The Company has two reportable segments, Wireline and Wireless.The Wireline segment consists of:
    
    Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed
private line services, 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, prepaid calling card and
high-speed private line services;
    
    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:
    
    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. 21




---



##### Table of Contents



REVENUES YEARS ENDED DECEMBER 31,(DOLLARS IN MILLIONS)2003
    
    2002
    
    2001WIRELINE:Local
    
    $
    579
    
    
    
    45
    %
    
    $
    578
    
    
    
    45
    %
    
    $
    566
    
    
    
    41
    %Long Distance
    
    
    138
    
    
    
    11
    
    
    
    146
    
    
    
    11
    
    
    
    186
    
    
    
    13Network Access
    
    
    295
    
    
    
    23
    
    
    
    325
    
    
    
    25
    
    
    
    355
    
    
    
    25Directory and Other
    
    
    68
    
    
    
    5
    
    
    
    67
    
    
    
    5
    
    
    
    84
    
    
    
    6Total Wireline
    
    
    1,080
    
    
    
    84
    %
    
    
    1,116
    
    
    
    86
    %
    
    
    1,191
    
    
    
    85
    %WIRELESS:Postpaid Cellular
    
    
    161
    
    
    
    13
    
    
    
    146
    
    
    
    11
    
    
    
    152
    
    
    
    11Prepaid Cellular
    
    
    26
    
    
    
    2
    
    
    
    27
    
    
    
    2
    
    
    
    25
    
    
    
    2Total Cellular
    
    
    187
    
    
    
    15
    
    
    
    173
    
    
    
    13
    
    
    
    177
    
    
    
    13Paging
    
    
    1
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    15
    
    
    
    1Wireless Equipment
    
    
    13
    
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    14
    
    
    
    1Total Wireless
    
    
    201
    
    
    
    16
    %
    
    
    185
    
    
    
    14
    %
    
    
    206
    
    
    
    15
    %Revenues
    
    $
    1,281
    
    
    
    100
    %
    
    $
    1,301
    
    
    
    100
    %
    
    $
    1,397
    
    
    
    100
    %
 EXPENSES AND CHARGES YEARS ENDED DECEMBER 31,(DOLLARS IN MILLIONS)2003
    
    2002
    
    2001WIRELINE:Labor and benefits
    
    $
    370
    
    
    $
    334
    
    
    $
    350Other operating expenses
    
    
    396
    
    
    
    329
    
    
    
    311Total Wireline
    
    
    766
    
    
    
    663
    
    
    
    661WIRELESS:Labor and benefits
    
    $
    32
    
    
    $
    31
    
    
    $
    34Other operating expenses
    
    
    123
    
    
    
    100
    
    
    
    131Total Wireless
    
    
    155
    
    
    
    131
    
    
    
    165OPERATING COSTS AND EXPENSES
    
    
    921
    
    
    
    794
    
    
    
    826OTHER:Early retirement and voluntary separation provisions
    
    
    17
    
    
    
    
    
    
    
    52Depreciation and amortization
    
    
    252
    
    
    
    262
    
    
    
    271Interest expense, net
    
    
    53
    
    
    
    47
    
    
    
    62Equity income in joint venture
    
    
    (2
    )
    
    
    (3
    )
    
    
    (3
    )Minority interest in consolidated subsidiary
    
    
    2
    
    
    
    1
    
    
    
    Asset impairment charge
    
    
    12
    
    
    
    
    
    
    
    1Income tax expense
    
    
    8
    
    
    
    29
    
    
    
    70Cumulative effect of accounting change  net of tax
    
    
    (59
    )
    
    
    
    
    
    
    Net income
    
    $
    77
    
    
    $
    171
    
    
    $
    118
 OPERATING DATA YEARS ENDED DECEMBER 31,2003
    
    2002
    
    2001Access Lines in Service (000s):Residential
    
    
    940
    
    
    
    957
    
    
    
    965Business
    
    
    290
    
    
    
    303
    
    
    
    308Total
    
    
    1,230
    
    
    
    1,260
    
    
    
    1,273On-island LD Minutes (millions)
    
    
    757
    
    
    
    811
    
    
    
    1,021Off-island LD Minutes (millions)
    
    
    170
    
    
    
    171
    
    
    
    191Cellular Customers (000s):Postpaid
    
    
    240
    
    
    
    228
    
    
    
    200Prepaid
    
    
    113
    
    
    
    123
    
    
    
    102Total
    
    
    353
    
    
    
    351
    
    
    
    302Postpaid Cellular ARPU
    
    $
    51
    
    
    $
    52
    
    
    $
    60Prepaid Cellular ARPU
    
    $
    19
    
    
    $
    20
    
    
    $
    17Combined Cellular ARPU
    
    $
    40
    
    
    $
    41
    
    
    $
    44
 22




---



##### Table of Contents



YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002 REVENUES. Revenues for the year ended December 31, 2003 decreased $20
million, or 2%, to $1,281 million from $1,301 million in 2002. WIRELINE: Wireline revenues include local service, long distance, network access,
directory revenues and other services. Wireline revenues for the year ended
December 31, 2003 decreased $36 million, or 3%, to $1,080 million from $1,116
million in 2002. Local service revenues include 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, 2003 increased $1 million, to $579
million from $578 million in 2002. The increase is due to increased revenues
from local data services of $3 million offset by decreased revenues from local
voice services of $2 million. The increase in revenues from local data
services was driven by an increase in revenues from Internet access of $3
million. The decrease in revenues from local voice services was driven by a
decrease in revenues from basic voice of $14 million offset by an increase in
deferred activation revenues of $12 million. Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $8 million, or 6%, to $138 million
for the year ended December 31, 2003 from $146 million for the 2002. The
decrease was due to a decrease in intra-island long distance revenues of $8
million. Intra-island long distance revenues have decreased mainly due to
customer traffic migration to the cellular network and general economic
conditions. Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging
operators to originate and terminate calls on the Companys network. These
revenues for the year ended December 31, 2003 decreased $30 million, or 9%, to
$295 million compared to $325 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 that were partially offset by higher
subscriber line charges of $6 million resulting from a rate increase in July
2003. Directory and other revenues include directory publishing rights,
telecommunication equipment sales and billing and collection services to
competitor long distance operators. Directory and other revenues for the year
ended December 31, 2003 increased $1 million, or 2%, to $68 million from $67
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. WIRELESS: Revenues from cellular and paging services and related equipment sales for
the year ended December 31, 2003 increased $16 million, or 9%, to $201 million
from $185 million for 2002. Cellular service revenues increased $14 million,
or 8%, to $187 million from $173 million in 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 U.S. Paging revenues declined $4 million for the year ended December 31, 2003.
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 sales increased $6 million, or 86%, 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. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the year
ended December 31, 2003 increased $127 million, or 16%, to $921 million from
$794 million reported for the year 2002. 23




---



##### Table of Contents



WIRELINE: Wireline expenses for the year ended December 31, 2003 increased $103
million, or 16%, to $766 from the $663 million reported in 2002. Labor and benefit expenses 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. Other operating expenses of $396 million for the year ended December 31,
2003, increased $67 million, or 20%, compared to 2002. The increase is due to
cancelled capital projects of $29 million, which is mainly due to the write-off
for 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 Resolution and Order of February 2002 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. Effective January
1, 2003, we began expensing costs of removal in excess of salvage for these
assets as 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. WIRELESS: Wireless expenses for the year ended December 31, 2003, increased $24
million, or 18%, to $155 million from $131 million reported for the year ended
December 31, 2002. Labor and benefit expenses increased $1 million, or 3%, to $32 million
from the $31 million reported for the year ended 2002. The increase in labor
and benefits expenses is mainly due to higher contractor expenses. Other operating expenses increased $23 million, or 23%, to $123 million
from the $100 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, higher inventory obsolescence expense of $2 million,
higher rent expense of $1 million and higher outsource billing expense of $1
million. EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. In January 2003, an
additional 29 qualified 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 qualified management
employees. A non-cash provision of $12.6 million was recorded relating to 147
employees who had accepted as of December 31, 2003. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $252 million for the year ended December 31, 2003 was $10 million
lower than for 2002, a decrease of 4%. The decrease in depreciation and
amortization expense is mainly due to a revision in wireline depreciation
rates, which became effective July 1, 2002, reducing depreciation expense by
$12 million for the year ended December 31, 2003, and 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. Interest expense of $53 million for the year ended
December 31, 2003 was $6 million higher than 2002 due to additional $7 million
in interest of the pre-tax reserve of $66 million established in September 2003
as a result of the TRB Resolution and Order of February 2002, partially offset
by a $1 million reduction related to a decrease in short term borrowings. EQUITY INCOME FROM JOINT VENTURE. Equity income from joint venture of $2
million for the year ended December
31, 2003 decreased $1 million as compared with the same period in 2002.
This equity income was generated from the Companys 24




---



##### Table of Contents



approximate 24% interest in
VISI, the largest yellow page publishing company in Puerto Rico. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $2 million minority
interest included in the Companys results of operations for the year ended
December 31, 2003 represents the minority share of the income or loss of
Popular, Inc.s 33% investment in Coqui.net. 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 that its carrying amount.
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. A $8 million tax provision for the year ended December 31,
2003 reflects a 32% effective tax rate. The difference between the effective
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 $8 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, the Company is required to exclude costs of removal from the Companys
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, the Company has reversed accrued costs of removal in excess of
salvage value from the Companys accumulated depreciation accounts for these
assets. The adjustment was recorded as a cumulative effect of an accounting
change, resulting in the recognition of a non-cash gain of $117 million ($71
million after tax). Effective January 1, 2003, the Company began expensing
costs of removal in excess of salvage value for these assets as incurred. Effective January 1, 2003, the Company changed its method of accounting
for revenues 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 is recognized as of January 1, 2003 as a one-time, non-cash loss of
$17 million ($13 million, after tax). 25




---



##### Table of Contents



YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 REVENUES. Revenues for the year ended December 31, 2002 decreased $96
million, or 7%, to $1,301 million from $1,397 million in 2001. WIRELINE: Wireline revenues include local service, long distance, network access,
directory revenues and other services. Wireline revenues for the year ended
December 31, 2002 decreased $75 million, or 6%, to $1,116 million from $1,191
million in 2001. Local service revenues include 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, 2002 increased $12 million, or 2%, to
$578 million from $566 million 2001. The increase is due to higher local data
services while local voice services remained constant. The increase in local
data services was mainly driven by an increase in Internet access revenues of
$3 million, an increase in DSL revenues of $2 million, and an increase in frame
relay revenues of $4 million. Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $40 million, or 22%, to $146 million
for the year ended December 31, 2002 from $186 million for the 2001. The
decrease was mainly due to a decrease in intra-island long distance revenues of
$28 million, a decrease in operator service revenues of $6 million and a
decrease in off-island long distance revenues of $6 million. Long distance
revenues have decreased mainly due to customer traffic migration to the
cellular network. Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging
operators to originate and terminate calls on other network. These revenues
for the year ended December 31, 2002 decreased $30 million, or 8%, to $325
million compared to $355 million for 2001. The decrease was primarily caused
by a decrease in interstate high cost fund subsidies of $33 million, reflecting
a phasing out of this subsidy (see Regulatory Matters-Interstate High Cost
Subsidy). The decrease was partially offset by an increase in local USF
charges of $4 million. Directory and other revenues include directory publishing rights,
telecommunication equipment sales and billing and collection services to
competitor long distance operators. Directory and other revenues for the year
ended December 31, 2002 decreased $17 million, or 20%, to $67 million from $84
million for the year ended December 31, 2001, mainly due to a decrease in
equipment sales of $13 million and a decrease in billing and collection service
revenues of $4 million, reflecting lower long distance traffic from
competitors. WIRELESS: Revenues from cellular and paging services and related equipment sales for
the year ended December 31, 2002 decreased $21 million, or 10%, to $185 million
from $206 million for 2001. Cellular service revenues decreased $4 million, or
2%, to $173 million from $177 million in 2001. This was primarily the result
of combined cellular ARPU declining from $44 to $41 as new price plans with
larger bundles of minutes were introduced into the market, which was partially
offset by customer growth. Paging revenues declined $10 million, or 67%, to $5 million for the year
ended December 31, 2002 from $15 million for 2001. The decrease was related to
a reduction of 33,000 customers. Wireless equipment sales decreased $7 million, or 50%, to $7 million for
year ended December 31, 2002 from $14 million for 2001. This decrease is mainly
due to lower prepaid gross additions associated with lower promotional
activities during the year ended December 31, 2002. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the year
ended December 31, 2002 decreased $33 million, or 4%, to $793 million from $826
million reported for the year 2001. WIRELINE: Wireline expenses for the year ended December 31, 2002 increased $2
million to $663 from the $661 million reported in 26




---



##### Table of Contents



2001. Labor and benefit expenses decreased $16 million, or 5%, to $334 million
from $350 million reported for the year ended December 31, 2001. This decrease
in labor and benefit expense primarily reflects headcount reductions including
the effect of early retirements and voluntary separation programs, as well as a
reduction in overtime, contractor and expatriate expenses. Other operating expenses of $329 million for the year ended December 31,
2002, increased $18 million, or 6%, compared to 2001. The increase is
primarily due to higher property and municipal tax provisions of $16 million
and higher bad debt provisions of $10 million, offset in part by lower
consulting and advertising expenses of $6 million and $5 million, respectively. WIRELESS: Wireless expenses for the year ended December 31, 2002, decreased $34
million, or 21%, to $131 million from the $165 million reported for the year
ended December 31, 2001. Labor and benefit expenses decreased $3 million, or 9%, to $31 million
from the $34 million reported for the year ended 2001. The decrease in labor
and benefits expenses is mainly due to lower overtime, expatriate and temporary
employee expenses. Other operating expenses decreased $31 million, or 24%, to $100 million
from the $131 million reported for the comparable 2001 period. The decrease was
due to lower costs from equipment sold of $21 million and lower bad debt
provisions of $10 million and a $3 million gain on the sale of land. These
decreases were offset by an increase in facilities expenses of $3 million
associated with the new CDMA network. EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. In December 2002,
the Company offered a voluntary separation program to qualified management
employees. A non-cash provision of $0.5 million was recorded relating to 8
employee acceptances. A total of $52 million was recorded for early retirement and voluntary
separation programs during 2001 associated with four separate offerings to a
total of 567 employees. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $262 million for the year ended December 31, 2002 was $9 million
lower than for 2001, a decrease of 3%. The decrease in depreciation and
amortization expense is mainly due to a change in wireline depreciation rates,
which became effective July 1, 2002, reducing depreciation expense by $6
million and the discontinued amortization of goodwill and other indefinite life
intangibles, as a result of the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets which reduced amortization expense by $16 million for the
year ended December 31, 2002. This decrease of $22 million was offset in part
by higher gross plant balances, which produced approximately $13 million in
depreciation expense. INTEREST EXPENSE. Interest expense of $47 million for the year ended
December 31, 2002 was $15 million lower than 2001 due to lower interest rates
and lower debt balances. EQUITY INCOME FROM JOINT VENTURE. Earnings of $3 million were generated
for the year ended December 31, 2002 from our approximate 25% interest in VISI. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $1 million minority
interest included in the Companys results of operations for the year ended
December 31, 2002 represents the minority share of the income or loss of
Popular, Inc.s 33% investment in Coqui.net. INCOME TAXES. A $29 million tax provision for the year ended December 31,
2002 reflects the tax effect of the merger of Verizon Wireless into PRTC. See
Note 1 to our consolidated financial statements included under Part II, Item 8,
Financial Statements and Supplementary Data. As a result of this merger, the
Company released a deferred tax valuation allowance of $93 million, of which
$51 million was recorded against goodwill and $42 million of which was recorded
as a deferred tax benefit during the second quarter of 2002. The difference
between the statutory tax and the effective rate of 15%, or $48 million,
primarily reflects permanent differences related to the $42 million release of
the valuation allowance and other permanent differences such as the internal
accretion on the government subscription receivable and joint venture equity
income. 27




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED FINANCIAL CONDITION YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002 Years Ended December 31,2003
    
    2002
    
    Change(in millions)Cash flows from (used in):Operations
    
    $
    357
    
    
    $
    405
    
    
    $
    (48
    )Investing
    
    
    (170
    )
    
    
    (206
    )
    
    
    36Financing
    
    
    (198
    )
    
    
    (200
    )
    
    
    2
 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, 2003 by $119 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. We have an undrawn $400 million bank note facility maturing in March 2004,
as well as, an undrawn $40 million working capital capital credit facility
maturing in June 2004. An aggregate principal amount of $300 million of the
Companys senior notes matured on May 15, 2002. During the year ended December
31, 2002, we refinanced these 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. 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 a management strategy to fully fund the pension plans. INVESTING 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 when incurred. We have invested approximately $1.1 billion from the date of the
Acquisition through December 31, 2003 to expand and enhance our networks. In
2004, we expect to make up to approximately $160 million in capital
expenditures, which will be financed from internally generated funds. FINANCING Debt outstanding, excluding capital leases, decreased $173 million for the
year ended December 31, 2003 and decreased $161 million for the year ended
December 31, 2002. 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
year 2003, the Company prepaid principal of term loans by $102 million reducing
the outstanding balance to $123 million at December 31, 2003 and reduced
interest rate to 70 basis point over LIBOR. 28




---



##### Table of Contents



In 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
underfunded pension and other post-employment benefit obligations. In March
2004, $40 million was received in cash from PRTA for the fifth and final
installment. See Note 14 to the condensed consolidated financial statements. 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, 2003, the Company paid
dividends amounting to $68 million corresponding to the first quarter of 2003
and the fourth quarter of 2002. For the year ended December 31, 2002, the
Company paid dividends of $69 million corresponding to the first three quarters
of 2002 first and the fourth quarter of 2001. The senior note indentures and
credit facility agreements do not contain restrictions on the payment of
dividends. OFF-BALANCE SHEET ARRANGEMENTS CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The following table provides a summary of our contractual obligations and
commercial commitment at December 31, 2003. 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
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong Term Debt, including interest rate swap
    
    $
    709
    
    
    $
    
    
    
    $
    
    
    
    $
    409
    
    
    $
    
    
    
    $
    
    
    
    $
    300Term Credit Facilities
    
    
    123
    
    
    
    30
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit Obligations
    
    
    423
    
    
    
    153
    
    
    
    141
    
    
    
    89
    
    
    
    32
    
    
    
    8
    
    
    
    Operating Leases
    
    
    47
    
    
    
    12
    
    
    
    10
    
    
    
    7
    
    
    
    4
    
    
    
    2
    
    
    
    12Total
    
    $
    1,302
    
    
    $
    195
    
    
    $
    244
    
    
    $
    505
    
    
    $
    36
    
    
    $
    10
    
    
    $
    312
 29




---



##### Table of Contents



REGULATORY AND OTHER MATTERS REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels was primarily directed
at meeting challenges in maintaining support for local exchange rates and
Universal Service while affecting the rate rebalancing and regulatory
restructuring required by an increasingly competitive environment. Among the
issues generating regulatory activity are: local number portability
requirements, interconnection agreements, the FCCs triennial review and
reverse toll billing elimination. We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to 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 through the Companys network. The February 2002 Order requires 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 take place 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 from the
period beginning on April 1, 2000 through March 31, 2002. The refund can be
made in 12 equal quarterly installments beginning on 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 requiring the Company to make the cash refund. On March 27, 2002, the
Court stayed the refund and the rate reduction until the hearing of the appeal. 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 the Court to
order the rate reduction without a phase-in period, remand the case back to the
TRB, direct the TRB to calculate the refund from the period beginning on April
1997 instead of April 2000, and require that the refund be paid to the Carriers
instead of 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 therefore finally submitting the case for
adjudication. On August 19, 2003, the Court issued its final decision on the
proceeding confirming the TRB 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. As a result of
the Courts decision, the Company established a pre-tax reserve of $73 million,
including interest, in September 2003 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 for
certiorari before PR Supreme Court challenging the $68 million refund portion
of the Order. The phased down portion of the Order was settled with the major
carriers and implementing tariffs filed with the TRB as noted in the next
paragraph. 30




---



##### Table of Contents



In November 2003, the Company proposed, and two members of the TRB
indicated their support for, a plan to revise the Boards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
decrease according to the TRB phase reduction schedule which will end on April
1, 2005. See above. Second, 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 on February 2004, coupled with the deferred
implementation of a flat charge designed to offset the resulting revenue
losses. Third, the plan included a number of other elements benefiting
consumers; 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; and a commitment not to raise residential rates through
December 2006, without providing certain information to the TRB in advance.
While the TRB has accepted and approved these commitments, it has not issued a
final resolution and order to terminate the refund provisions in the Order and
there has been litigation relating to aspects of the plan at the TRB and Puerto
Rico Supreme Court. The 2003 cash flow impact was a reduction of $16 million
to the pre-tax reserve. CARRIER ACCESS BILLING During the first and second quarter of 2003, some carriers established a
series of billing claims with 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 cash flow effect of the settlement will be approximately $27
million. Management deems there are no other material impacts to the Companys
financial results. 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 suit
in the United States District Court of Puerto Rico, claiming predatory,
exclusionary and anticompetitive acts and seeking $75 million in damages. We
filed a motion to dismiss the case and are awaiting a decision from the court. Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three additional competitive providers also
filed a similar suit in the United States District Court of Puerto Rico on
September 4, 2002 on the same grounds. On November 8, 2002, after having
evaluated and determined that this suit is similar to TPPR s suit, we filed a
motion to dismiss the case. We are currently awaiting a decision from the
court. On August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico
filed a suit in the United States bankruptcy court in 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
complaint for over $9 million against PRTC. PRTC motion to change of venue was
granted by the U.S. District Court of Delaware and now the motion to dismiss is
pending before the United States District Court of Puerto Rico. The Companys management believes that all of these claims are without
merit. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the
Superior Court, seeking collection of monies for $31 million due for services
rendered under the 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 services
under contract to the PRDOE. The outstanding amount that PRDOE currently owes
to PRTC is $34 million. PRTC intends to amend the complaint to reflect the
proper amount owed. From the amount claimed, 89% would be paid by the Federal
Communications Commissions School & Libraries Division (SLD), who
administered 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 is approximately $1.2 million, after SLD
paid its corresponding percentage (87%) under the program. 31




---



##### Table of Contents



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 ico Class Action Act of 1971. The plaintiffs claim
that the Companys charges for touchtone service are not based on cost, and are
therefore in violation of the Act. They have requested that the Court (i)
issue an Order certifying the case as a class action, (ii) designate the
plaintiffs as representative of the class, (iii) find that the charges are
illegal, and (iv) order the Company to reimburse every subscriber for excess
payments made since September 1996. On December 30, 2003, PRTC filed its
corresponding answer to the complaint and requested the dismissal of the same
based 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 as to initiate a discovery proceeding. PRTC will ask the
Court that the threshold issue to decide first must be the class certification. 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. The TRB stated in the February 2002 Order that for any prospective rate
increase that the Company may pursue to compensate for revenue deficiencies it
must first be applied against the gain in the wireless asset transfer, equating
to $56 million applicable to intrastate. We will contest this position based
on the fact 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. Neither the FCC nor the TRB has commenced any further proceedings to
address this issue. While we believe that the resolution of this matter and
any related proceedings will not have a material effect on the Companys
financial condition and results of operations, we cannot provide assurance that
any further regulatory actions will be favorable to the Company. PRICE CAP REGULATION The FCC requires that companies that set interstate access rates based on
a price cap formula must use the price cap formula for all of their affiliates.
The price cap formula is based on a plan called Coalition of Affordable Local
and Long Distance Service that uses rate-of-return as a basis for setting
rates. The Company was previously required to implement price caps by March 2,
2000. However, the FCC delayed conversion to price cap regulation until June 30,
2002, and the Company has requested a further 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. INTERSTATE HIGH COST SUBSIDY 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. These revenues were $49 million in 2000, $33 million in 2001 and $4
million for 2002. On February 28, 2003, PRTC sent a letter to the FCC,
requesting that the FCC take action to restore the high-cost universal service
support that the Company lost due to FCC policies adopted for non-rural
companies based on the cost characteristics of mainland companies. PRTC
requested that the FCC address the loss of its universal service support by
adopting rules for insular areas that are similar to those applied to rural
carriers. In an order dated October 16, 2003 and released October 27, 2003,
the FCC rejected PRTCs request for reconsideration of its non-rural high cost
support mechanism, but did not deal with its February 28, 2003 request. On
January 14, 2004, PRTC filed a petition for clarification and/or
reconsideration of several portions of the FCC Order of October 27, 2003 based
on the grounds that the FCC has not acted upon the specific mandate of Section
254 to provide support for insular areas. 32




---



##### Table of Contents



MESSAGE PROCESSING AND BILLING SYSTEM The Company has an agreement with a provider for the implementation of a
traffic polling and billing software system for its wireline operations. While
the traffic polling portion has been implemented, management has determined
that it is in the Companys best interests to abandon the billing portion of
the software system. The amount of capitalized costs for software and labor
related to the billing portion of $32.3 million was written off and included in
operating expenses during the second quarter of 2003. BROTHERHOOD OF INDEPENDENT TELEPHONE WORKERS (HIETEL) UNION CONTRACT In October 2003, one of our union contracts, a collective bargaining
agreement with the HIETEL expired. The Company is currently in negotiations
for a new agreement with the HIETEL. TRB AUDIT As provided by law, the TRB is currently conducting an ordinary audit of
our affiliate transactions and regulatory accounting. We do not expect to have
a material impact in the Companys financial conditions and results. 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. 33




---



##### 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 interest rate changes on our senior notes and interest rate swap
agreements. The following table summarizes the fair value of our senior notes and
interest rate swap at December 31, 2003 and 2002 and provides a sensitivity
analysis of the fair values of these instruments assuming a 100 basis point
increase or decrease in the yield curve. The sensitivity analysis does not
include the fair values of our floating-rate debt since it is not significantly
affected by changes in market interest rates. Fair ValueAt 100 Basis PointsBook Value
    
    Fair Value
    
    Increase
    
    Decrease(In thousands)December 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
    
    
    $
    802,107December 31, 2002:Senior Notes
    
    $
    699,802
    
    
    $
    747,000
    
    
    $
    724,420
    
    
    $
    783,860Interest Rate Swap
    
    
    2,883
    
    
    
    2,883
    
    
    
    359
    
    
    
    5,405Total
    
    $
    702,685
    
    
    $
    749,883
    
    
    $
    724,779
    
    
    $
    789,265
 34




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES Independent Auditors ReportConsolidated Balance Sheets as of December 31, 2003 and 2002Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002 and 2001Consolidated Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2003, 2002 and 2001Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001Notes to Consolidated Financial Statements for the Years Ended December 31,
2003, 2002 and 2001Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31,
2003, 2002 and 2001
 35




---



##### Table of Contents



INDEPENDENT AUDITORS REPORT 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, 2003 and 2002, 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 14 for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted
in the 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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, 2003 and 2002, 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 February 28, 2004 36




---



##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Balance Sheets (In thousands) December 31,2003
    
    2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    21,732
    
    
    $
    33,667Accounts receivable, net of allowance for doubtful accounts
of $131,106 and $132,894 in 2003 and 2002, respectively
    
    
    287,247
    
    
    
    343,519Deferred income tax
    
    
    26,158
    
    
    
    23,502Inventory and supplies, net
    
    
    21,202
    
    
    
    18,039Prepaid expenses
    
    
    35,255
    
    
    
    10,876Total current assets
    
    
    391,594
    
    
    
    429,603PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,558,246
    
    
    
    1,575,334GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    189,136
    
    
    
    180,848DEFERRED INCOME TAX
    
    
    246,794
    
    
    
    285,349OTHER ASSETS
    
    
    108,541
    
    
    
    119,336TOTAL ASSETS
    
    $
    2,621,238
    
    
    $
    2,717,397LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    59,729
    
    
    $
    97,932Other current liabilities
    
    
    213,480
    
    
    
    268,034Total current liabilities
    
    
    273,209
    
    
    
    365,966LONG-TERM DEBT, excluding current portion
    
    
    802,135
    
    
    
    937,035PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    594,113
    
    
    
    590,157OTHER NON-CURRENT LIABILITIES
    
    
    237,405
    
    
    
    146,634Total liabilities
    
    
    1,906,862
    
    
    
    2,039,792MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    13,025
    
    
    
    12,229COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock
    
    
    703,884
    
    
    
    703,270Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    (27,408
    )Subscription receivable
    
    
    (39,515
    )
    
    
    (76,093
    )Retained earnings
    
    
    164,520
    
    
    
    155,789Accumulated other comprehensive loss, net of tax
    
    
    (101,385
    )
    
    
    (90,182
    )Total shareholders equity
    
    
    701,351
    
    
    
    665,376TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,621,238
    
    
    $
    2,717,397
 The accompanying notes are an integral part of these financial
statements. 37




---



##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Operations (In thousands) For the Years Ended December 31,2003
    
    2002
    
    2001REVENUES:Local services
    
    $
    578,856
    
    
    $
    578,332
    
    
    $
    566,591Long distance services
    
    
    137,819
    
    
    
    145,646
    
    
    
    185,720Access services
    
    
    295,801
    
    
    
    325,453
    
    
    
    354,736Cellular services
    
    
    187,084
    
    
    
    172,940
    
    
    
    177,071Paging services
    
    
    1,026
    
    
    
    5,241
    
    
    
    14,906Directory services
    
    
    19,868
    
    
    
    19,928
    
    
    
    20,292Other services and sales
    
    
    60,965
    
    
    
    53,735
    
    
    
    77,279Total revenues
    
    
    1,281,419
    
    
    
    1,301,275
    
    
    
    1,396,595OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    402,008
    
    
    
    365,311
    
    
    
    384,231Other operating expenses
    
    
    519,466
    
    
    
    427,419
    
    
    
    442,637Early retirement and voluntary separation provision
    
    
    17,347
    
    
    
    467
    
    
    
    51,971Depreciation and amortization
    
    
    251,735
    
    
    
    261,543
    
    
    
    270,974Total operating costs and expenses
    
    
    1,190,556
    
    
    
    1,054,740
    
    
    
    1,149,813OPERATING INCOME
    
    
    90,863
    
    
    
    246,535
    
    
    
    246,782OTHER INCOME (EXPENSE):Interest (expense) income, net
    
    
    (53,175
    )
    
    
    (47,540
    )
    
    
    (60,679
    )Equity income from joint venture
    
    
    2,151
    
    
    
    2,878
    
    
    
    2,966Minority interest in consolidated subsidiary
    
    
    (1,529
    )
    
    
    (1,469
    )
    
    
    195Asset impairment charge
    
    
    (11,800
    )
    
    
    
    
    
    
    (1,300
    )Total other income (expense), net
    
    
    (64,353
    )
    
    
    (46,131
    )
    
    
    (58,818
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    26,510
    
    
    
    200,404
    
    
    
    187,964INCOME TAX EXPENSE
    
    
    8,183
    
    
    
    29,371
    
    
    
    69,508INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE
    
    
    18,327
    
    
    
    171,033
    
    
    
    118,456CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, net of income tax provision of $40,672
    
    
    58,529
    
    
    
    
    
    
    
    NET INCOME
    
    $
    76,856
    
    
    $
    171,033
    
    
    $
    118,456
 The accompanying notes are an integral part of these financial statements. 38




---



##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Changes in Shareholders Equity (In thousands) AccumulatedDeferred
    
    
    
    
    
    Retained
    
    OtherCommon
    
    ESOP
    
    Subscription
    
    Earnings
    
    ComprehensiveStock
    
    Compensation
    
    Receivable
    
    (Deficit)
    
    Loss
    
    TotalBALANCE, DECEMBER 31, 2000
    
    $
    700,220
    
    
    $
    (28,653
    )
    
    $
    (141,323
    )
    
    $
    (7,002
    )
    
    $
    (25,475
    )
    
    $
    497,767Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,862
    )
    
    
    
    
    
    
    (57,862
    )Accretion of discount on subscription receivable
    
    
    
    
    
    
    
    
    
    
    (8,636
    )
    
    
    
    
    
    
    
    
    
    
    (8,636
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    1,732
    
    
    
    1,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,152Advance to ESOP
    
    
    
    
    
    
    (1,535
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,535
    )Other ESOP contribution
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,456
    
    
    
    
    
    
    
    118,456Other comprehensive loss:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,002
    )
    
    
    (53,002
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,454BALANCE, 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
    )
    
    $
    701,351
 The accompanying notes are an integral part of these financial statements. 39




---



##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows (In thousands) For the Years Ended December 31,2003
    
    2002
    
    2001CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    76,856
    
    
    $
    171,033
    
    
    $
    118,456Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    251,735
    
    
    
    261,543
    
    
    
    270,974Provision for uncollectible accounts
    
    
    64,536
    
    
    
    73,195
    
    
    
    73,422Abandoned software project
    
    
    32,262
    
    
    
    
    
    
    
    Wireless asset impairment charge
    
    
    11,800
    
    
    
    
    
    
    
    1,300Deferred income tax
    
    
    (2,385
    )
    
    
    (28,527
    )
    
    
    13,619Cumulative effect of accounting change
    
    
    (58,529
    )
    
    
    
    
    
    
    Accretion of discount on subscription receivable
    
    
    (3,422
    )
    
    
    (6,134
    )
    
    
    (8,636
    )Equity income from joint venture
    
    
    (2,151
    )
    
    
    (2,878
    )
    
    
    (2,966
    )Early retirement and voluntary separation provision
    
    
    17,347
    
    
    
    467
    
    
    
    51,971Release of ESOP shares
    
    
    1,869
    
    
    
    2,703
    
    
    
    3,152Gain on sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    (5,413
    )Gain on sale of building
    
    
    (824
    )
    
    
    
    
    
    
    Minority interest in consolidated subsidiary
    
    
    1,529
    
    
    
    1,469
    
    
    
    (195
    )Changes in assets and liabilities:Accounts receivable
    
    
    (8,264
    )
    
    
    (56,800
    )
    
    
    (87,841
    )Inventory and supplies
    
    
    (3,163
    )
    
    
    6,716
    
    
    
    3,716Prepaid expenses and other assets
    
    
    (13,491
    )
    
    
    (4,187
    )
    
    
    (15,265
    )Other current and non-current liabilities
    
    
    21,815
    
    
    
    1,019
    
    
    
    (73,632
    )Pension and other post-employment benefits
    
    
    (30,703
    )
    
    
    (14,764
    )
    
    
    (126,805
    )Net cash provided by operating activities
    
    
    356,817
    
    
    
    404,855
    
    
    
    215,857CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (177,226
    )
    
    
    (208,855
    )
    
    
    (246,329
    )Net salvage on retirements and other
    
    
    948
    
    
    
    3,270
    
    
    
    10,342Proceeds from sale of building
    
    
    6,000
    
    
    
    
    
    
    
    Proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    16,367Net cash used in investing activities
    
    
    (170,278
    )
    
    
    (205,585
    )
    
    
    (219,620
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000Advance to ESOP
    
    
    
    
    
    
    
    
    
    
    (1,560
    )Net issuance (repayments) of short-term debt, including
capital leases
    
    
    (170,349
    )
    
    
    (396,564
    )
    
    
    27,148Borrowings of long-term debt
    
    
    
    
    
    
    225,000
    
    
    
    Dividends Paid
    
    
    (68,125
    )
    
    
    (68,836
    )
    
    
    (57,862
    )Net cash (used in) provided by financing activities
    
    
    (198,474
    )
    
    
    (200,400
    )
    
    
    7,726NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    (11,935
    )
    
    
    (1,130
    )
    
    
    3,963CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    33,667
    
    
    
    34,797
    
    
    
    30,834CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    21,732
    
    
    $
    33,667
    
    
    $
    34,797
 The accompanying notes are an integral part of these financial statements. 40




---



##### Table of Contents



TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001  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 also 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.
The Company is the largest telecommunications service provider in Puerto
Rico. PRTC is the incumbent local exchange carrier for the island of Puerto
Rico. Wireline service is provided by PRTC and cellular service is provided
by the wireless division of PRTC, under the brand of Verizon Wireless Puerto
Rico, Inc. (Verizon Wireless). The Companys off-island long distance
service is provided by PRTLD. The Companys dial-up Internet access service
is provided by Coqui.net. The Companys directory-publishing revenues are
generated by 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 the share option 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, a wholly owned subsidiary of the
Company, 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 (i) integrate the wireline and wireless operations
without jeopardizing the continuity of the off-island long distance license,
(ii) simplify the overall corporate structure to reduce administrative costs,
and (iii) 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. 41




---



##### Table of Contents



Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and
its controlled subsidiary companies, which are wholly owned or majority
owned. All significant intercompany accounts and transactions have been
eliminated.Use of EstimatesThe preparation of financial statements in conformity with 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 RecognitionRevenues are recognized when services are rendered or products are delivered
to customers.Common carrier line access revenues are generated based on the participation
by the PRTC in revenue pools with other telephone companies managed by the
National Exchange Carriers Association (NECA), which are funded by access
charges authorized by the Federal Communications Commission (FCC) and
long-term support amounts received from the Universal Service Fund. Pooled
amounts are divided among telephone companies based on allocations of costs
and investments in providing interstate services. Revenues are based on
preliminary allocations and cost studies and are subject to final settlement
in subsequent periods.Revenues from prepaid cellular cards are recognized based upon usage with any
residual balances recognized at the expiration date.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.Cash and Cash EquivalentsShort-term investments with original maturities of three months or less are
classified as cash equivalents.Allowance for Doubtful AccountsThe allowance for doubtful accounts is an amount that management believes
will be adequate to absorb possible losses on existing receivables that may
become uncollectible based on evaluations of the collectibility of the
receivables and prior loss experience. Because of uncertainties inherent in
the estimation process, managements estimate of losses and the related
allowance may change. The Company is not dependent on any single customer.Inventory and SuppliesInventory and supplies are stated at average cost, net of obsolescence
reserves.Property, Plant and Equipment and DepreciationProperty, plant and equipment is stated at original cost, including interest
on funds borrowed to finance the acquisition of capital additions. Repairs
and maintenance are expensed as incurred. Depreciable property disposed of
in the ordinary course of business, less salvage value, is charged to
accumulated depreciation with no gain or loss recognized. Gains or losses
from the sale of land are recorded in results of operations.The Companys depreciation expense is based on the composite group remaining
life method and straight-line composite rates.
This method provides for the recognition of the cost of the remaining net
investment in telephone plant, less anticipated net salvage value, over the
remaining asset lives. This method also requires a periodic evaluation of
the average remaining useful 42




---



##### 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 AssetsIntangible 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 CostsThe Company defers and amortizes software development project costs over a
five-year period beginning at the project completion date.Advertising CostsThe Company expenses advertising costs as incurred, and recorded advertising
costs of $15 million in 2003 and 2002.Employee Benefit PlansPension and post-employment health care and life insurance benefits earned
interest on projected benefit obligations are accrued currently. Prior
service costs and credits resulting from changes in plan benefits are
amortized over the average remaining service period of the employees expected
to receive the benefits.Impairment or Disposal of Long-lived AssetsAssets 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.In December 2001, the Company recorded an impairment charge of $1.3
million related to its paging business. In addition, in November 2001,
the Company recorded a write-off charge of $2.2 million related to its
wireless brand name intangible. This resulted from the change of name
of the Companys wireless business from Celulares Telefónica to Verizon
Wireless.Income TaxesThe Company uses an asset and liability approach in accounting for income
taxes following the provisions of SFAS No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are
established for temporary differences between the way certain income and
expense items are reported for financial reporting and tax purposes. Deferred
tax assets and liabilities are 43




---



##### Table of Contents



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.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 RecognitionDuring 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.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
is 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 is
a one-time non-cash revenue increase of $13 million, which has been 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
 44




---



##### 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.The following financial information represents the adjusted consolidated
results of operations as if adoption of SFAS No. 142 had been applied to the
prior period presented. Adjusted results presented below exclude the effects
(net of tax) of the amortization of goodwill and other indefinite life
intangibles. For the Years Ended December 31,(Adjusted)
    
    (As Reported)2003
    
    2002
    
    2001
    
    2001(In thousands)Revenues
    
    $
    1,281,419
    
    
    $
    1,301,275
    
    
    $
    1,396,595
    
    
    $
    1,396,595Operating costs and expenses
    
    
    1,190,556
    
    
    
    1,054,740
    
    
    
    1,134,165
    
    
    
    1,149,813Operating income
    
    
    90,863
    
    
    
    246,535
    
    
    
    262,430
    
    
    
    246,782Other expense, net
    
    
    64,353
    
    
    
    46,131
    
    
    
    58,818
    
    
    
    58,818Income before income tax
    
    
    26,510
    
    
    
    200,404
    
    
    
    203,612
    
    
    
    187,964Income tax expense
    
    
    8,183
    
    
    
    29,371
    
    
    
    73,868
    
    
    
    69,508Net Income before cumulative
effect
    
    
    18,327
    
    
    
    171,033
    
    
    
    129,744
    
    
    
    118,456Cumulative effect of
accounting Change
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    Net Income
    
    $
    76,856
    
    
    $
    171,033
    
    
    $
    129,744
    
    
    $
    118,456
  The following table reconciles net income reported for the year December 31,
2001 to the adjusted net income, as required by the provisions of SFAS No.
142. Reconciliation:
    
    2001(in thousands)Net income, as reported
    
    $
    118,456Discontinued amortization of goodwill
    
    
    9,446Discontinued amortization of other
indefinite life intangibles
    
    
    6,202Tax effect
    
    
    (4,360
    )Adjusted net income
    
    $
    129,744
 45




---



##### Table of Contents



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 PRTC 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, 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 in operational and support expenses.
The Company estimates that the net increase to operating income in 2003,
excluding the cumulative effect adjustment, will be approximately $12 million
($7 million after-tax).Accounting for Impairment or Disposal of Long-Lived AssetsIn August 2001, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
with regard to reporting the effects of a disposal of a segment of a
business. SFAS No. 144 establishes a single accounting model for assets to
be disposed of by sale and addresses several SFAS No. 121 implementation
issues. The Company adopted SFAS No. 144 effective January 1, 2002 and the
adoption did not have any material impact on its financial statements.Extinguishments of Debt and Accounting for Certain Capital Lease ObligationsIn April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections. For most companies, SFAS No. 145 will require gain and losses
on extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
SFAS No. 4. However, extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. This statement also
amends SFAS No. 13 to require that certain modifications to capital leases be
treated as sale-leaseback transactions and modifies the accounting for
sub-leases. In addition, the FASB rescinded SFAS No. 44, which addressed the
accounting for intangible assets of motor carriers and made numerous
technical corrections. The Company believes that the adoption of SFAS No.
145 will not have a material effect on its results of operations and
financial condition.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 46




---



##### Table of Contents



instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments 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 31,Lives (Yrs)
    
    2003
    
    2002Current
    
    Previous
    
    (In thousands)Outside plant
    
    
    8.5
    
    
    
    8.9
    
    
    $
    2,097,902
    
    
    $
    2,039,412Central office and transmission equipment
    
    
    4.1
    
    
    
    4.7
    
    
    
    1,184,357
    
    
    
    1,297,454Equipment and other
    
    
    3.2
    
    
    
    3.0
    
    
    
    323,459
    
    
    
    349,832Buildings
    
    
    14.3
    
    
    
    21.5
    
    
    
    316,052
    
    
    
    314,345Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    26,400
    
    
    
    27,541Gross plant in service
    
    
    
    
    
    
    
    
    
    
    3,948,170
    
    
    
    4,028,584Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,455,127
    
    
    
    2,568,380Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,493,043
    
    
    
    1,460,204Construction in progress
    
    
    
    
    
    
    
    
    
    
    65,203
    
    
    
    115,130Total
    
    
    
    
    
    
    
    
    
    $
    1,558,246
    
    
    $
    1,575,334
  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 as well
as more closely approximating the assumptions used by other telephone
companies. These revisions resulted in a decrease in depreciation expense by
approximately $6 million for the second half of 2002 and
approximately $12 million for the year ended December 31, 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. Accordingly, in connection with the initial adoption of this
standard on January 1, 2003, 47




---



##### Table of Contents



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 in operational and support expenses.
The Company estimates that the net increase to operating income in 2003,
excluding the cumulative effect adjustment, will be 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. The new system is
expected to be operational during year 2004 at projected capitalized costs
for software and labor of approximately $13.2 million. As of December 31,
2003, the Company had capitalized cost of $1.4 million for the General Ledger
New System project.6.
    
    GoodwillFollowing is a breakdown of goodwill by reporting unit. CarryingValueDecember 31,
    
    December 31,2003
    
    2002(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
  7.
    
    Intangibles CarryingValueDecember 31,
    
    December 31,2003
    
    2002(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 December 31, 2003
    
    December 31, 2002(In thousands)Cost
    
    Acc. Amort
    
    Book Value
    
    Cost
    
    Acc. Amort
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    9,502
    
    
    $
    38,898
    
    
    $
    48,400
    
    
    $
    7,417
    
    
    $
    40,983Software licenses
    
    
    67,068
    
    
    
    25,805
    
    
    
    41,263
    
    
    
    45,708
    
    
    
    15,525
    
    
    
    30,183Customer base
    
    
    15,544
    
    
    
    15,544
    
    
    
    
    
    
    
    15,544
    
    
    
    14,837
    
    
    
    707Other
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    500
    
    
    
    Total Definite Life
    
    $
    131,512
    
    
    $
    51,351

    
    
    $
    80,161
    
    
    $
    110,152
    
    
    $
    38,279
    
    
    $
    71,873Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    $
    108,975
    
    
    
    
    
    
    
    
    
    
    $
    108,975Total
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    189,136
    
    
    $
    110,152
    
    
    $
    38,279
    
    
    $
    180,848
 48




---



##### Table of Contents



The following table presents current and expected amortization expense of
existing intangible assets as of December 31, 2003 and for each of the
following years: Amount(In thousands)Aggregate amortization expense:For the year ended December 31, 2003
    
    $
    13,765Expected amortization expense for the years ending
December 31:2004
    
    
    13,6462005
    
    
    12,7022006
    
    
    10,8772007
    
    
    6,2522008
    
    
    1,936
  8.
    
    Other assets December 31,
    
    December 31,2003
    
    2002(In thousands)Deferred activation and installation costs
    
    $
    69,347
    
    
    $
    65,351Notes receivable-equipment sales
    
    
    10,446
    
    
    
    15,396Deferred pension asset
    
    
    19,785
    
    
    
    20,646Investment in VISI
    
    
    
    
    
    
    4,823Deferred financing costs, net
    
    
    3,146
    
    
    
    3,970Other deferred costs
    
    
    1,426
    
    
    
    3,709Interest rate swap
    
    
    2,811
    
    
    
    2,883Other assets
    
    
    1,580
    
    
    
    2,558Total
    
    $
    108,541
    
    
    $
    119,336
  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.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. 49




---



##### Table of Contents



The following table sets forth the status of the plans and the amounts
in the financial statements as of December 31, 2003 and 2002: (In thousands) Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2003
    
    2002
    
    2003
    
    2002Change in benefit obligation:Benefit obligation at beginning
of period
    
    $
    1,021,735
    
    
    $
    968,948
    
    
    $
    576,241
    
    
    $
    397,216Service cost
    
    
    18,092
    
    
    
    15,856
    
    
    
    8,701
    
    
    
    6,751Interest cost
    
    
    67,299
    
    
    
    67,180
    
    
    
    35,511
    
    
    
    28,963Actuarial loss
    
    
    104,500
    
    
    
    52,923
    
    
    
    45,163
    
    
    
    163,600Plan amendments-ERW
    
    
    8,714
    
    
    
    
    
    
    
    6,222
    
    
    
    Plan amendments-Other
    
    
    3,460
    
    
    
    
    
    
    
    (25,843
    )
    
    
    Expected expenses
    
    
    (2,762
    )
    
    
    (856
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (78,605
    )
    
    
    (82,316
    )
    
    
    (23,225
    )
    
    
    (20,289
    )Benefit obligation at end of
period
    
    $
    1,142,433
    
    
    $
    1,021,735
    
    
    $
    622,770
    
    
    $
    576,241Change in plan assets:Fair value of plan assets at
beginning of period
    
    
    558,161
    
    
    
    623,229
    
    
    
    
    
    
    
    Actual return (loss) on plan assets
    
    
    116,390
    
    
    
    (61,172
    )
    
    
    
    
    
    
    Employer contributions
    
    
    122,247
    
    
    
    78,420
    
    
    
    23,225
    
    
    
    20,289Benefits paid
    
    
    (78,605
    )
    
    
    (82,316
    )
    
    
    (23,225
    )
    
    
    (20,289

    )Fair value of plan assets at end
of period
    
    $
    718,193
    
    
    $
    558,161
    
    
    $
    
    
    
    $
    Funded status:Funded status at end of year
    
    
    (424,240
    )
    
    
    (463,574
    )
    
    
    (622,770
    )
    
    
    (576,241
    )Unrecognized actuarial loss, net
    
    
    260,340
    
    
    
    241,810
    
    
    
    353,684
    
    
    
    324,225Unrecognized prior service cost
(benefit)
    
    
    21,286
    
    
    
    22,569
    
    
    
    (18,590
    )
    
    
    4,740Unrecognized net transition
obligation
    
    
    1,839
    
    
    
    2,269
    
    
    
    20,329
    
    
    
    22,531Net amount recognized
    
    $
    (140,775
    )
    
    $
    (196,926
    )
    
    $
    (267,347
    )
    
    $
    (224,745
    )Balance sheet amounts consist of:Accrued benefit liability
    
    $
    (326,766
    )
    
    $
    (365,412
    )
    
    $
    (267,347
    )
    
    $
    (224,745
    )Other asset (Note 7)
    
    
    19,785
    
    
    
    20,646
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    166,206
    
    
    
    147,840
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (140,775
    )
    
    $
    (196,926
    )
    
    $
    (267,347
    )
    
    $
    (224,745
    )
  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 $1,045 million and $915 million at December 31, 2003 and 2002,
respectively.Additional InformationAn additional minimum pension liability adjustment, net of taxes, of $11
million and $12 million was recorded at December 31, 2003 and 2002. 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 $20 million and $21 million was recorded
at December 31, 2003 and 2002 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)
    
    2003
    
    2002Increase in minimum
liability included in other
comprehensive income
    
    
    11,203
    
    
    
    11,705
 50




---



##### Table of Contents



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, 2003, $40 million in cash
was received corresponding to the fourth 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 Cost The 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)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Service cost
    
    $
    18,092
    
    
    $
    15,856
    
    
    $
    16,482
    
    
    $
    8,701
    
    
    $
    6,751
    
    
    $
    5,098Interest cost
    
    
    67,299
    
    
    
    67,180
    
    
    
    67,820
    
    
    
    35,511
    
    
    
    28,963
    
    
    
    22,908Expected return on plan assets
    
    
    (46,311
    )
    
    
    (56,890
    )
    
    
    (58,168
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    430
    
    
    
    512
    
    
    
    641
    
    
    
    2,202
    
    
    
    2,202
    
    
    
    2,202Prior service cost (benefit)
    
    
    4,743
    
    
    
    4,423
    
    
    
    4,398
    
    
    
    (2,513
    )
    
    
    896
    
    
    
    896Actuarial loss, net
    
    
    13,124
    
    
    
    5,008
    
    
    
    522
    
    
    
    15,704
    
    
    
    8,186
    
    
    
    3,363Net amortization and deferral
    
    
    57,377
    
    
    
    36,089
    
    
    
    31,695
    
    
    
    59,605
    
    
    
    46,998
    
    
    
    34,467Effect of early retirement
program
    
    
    8,714
    
    
    
    
    
    
    
    33,220
    
    
    
    6,222
    
    
    
    
    
    
    
    1,829Total
    
    $
    66,091
    
    
    $
    36,089
    
    
    $
    64,915
    
    
    $
    65,827
    
    
    $
    46,998
    
    
    $
    36,296
 Assumptions The weighted-average assumptions used in determining benefit obligations
at December 31, Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2003
    
    2002
    
    2003
    
    2002Discount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    6.75
    %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, Pension and Lump Sum Benefits
    
    Post-Retirement Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Discount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    5.00
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    9.25
    %
    
    
    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 Benefits2003
    
    2002
    
    2001Health care cost trend rate assumed for next year
    
    
    10.00
    %
    
    
    11.00
    %
    
    
    10.00
    %Rate to which cost trend rate gradually declines
    
    
    4.75
    %
    
    
    5.00
    %
    
    
    5.00
    %Year the rate reaches level it is assumed to remain thereafter
    
    
    2007
    
    
    
    2009
    
    
    All futureYears
 51




---



##### Table of Contents



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 2003 total service and interest cost
    
    $
    7,433
    
    
    $
    (6,274
    )Effect on post-retirement benefit obligation as of December 31, 2003
    
    
    84,637
    
    
    
    (73,796
    )
 Medicare Drug Act On 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. Any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on the plan. Specific
authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the sponsor to change previously reported information. The sponsor would need to amend
the plan in order to benefit from the new legislation as part of the Acts possible economic consequences. Plan Assets The weighted-average assets allocation for the pension plans assets at
December 31, 2003 and 2002 by category are as follows: 2003
    
    2002Equity securities
    
    
    60.2
    %
    
    
    57.7
    %Debt securities
    
    
    36.9
    %
    
    
    41.0
    %Other
    
    
    2.9
    %
    
    
    1.3
    %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 Flows The Company expects to contribute $153 million for pension and lump sum
plans and $30 million for post-retirement plan in year 2004. We have
adequate liquidity resources to fund this amount. Estimated Future Benefit Payments The benefits payments, which reflect expected future service, are expected
to be paid as follows: Pension and Lump
    
    Post-Retirement(In thousands)
    
    Sum Benefits
    
    Benefits2004
    
    $
    84,502
    
    
    $
    29,9402005
    
    
    73,970
    
    
    
    31,5682006
    
    
    72,035
    
    
    
    32,8632007
    
    
    69,975
    
    
    
    33,7902008
    
    
    67,771
    
    
    
    34,4572009-2013
    
    
    344,804
    
    
    
    179,398
 Early Retirement and Voluntary Separation Provision The Company offered a voluntary separation program to qualified management
employees during the fourth quarter of 2002 and recorded a $0.5 million
non-cash provision as a result of 8 employees accepting the program. In January 2003, an additional 29 qualified management employees accepted the
voluntary separation program 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 qualified 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. 52




---



##### Table of Contents



In December 2003, the Company offered an early retirement program to
qualified management employees. A non-cash provision of $12.6 million was
recorded relating to 147 employees who had accepted as of December 31, 2003. 10. Other Current Liabilities Other current liabilities consist of: December 31,
    
    December 31,2003
    
    2002(In thousands)Accounts payable
    
    $
    34,064
    
    
    $
    80,137Accrued expenses
    
    
    75,999
    
    
    
    86,078Employee benefit accruals
    
    
    44,697
    
    
    
    39,954Carrier payables
    
    
    50,949
    
    
    
    46,540Taxes
    
    
    1,420
    
    
    
    8,622Interest
    
    
    6,351
    
    
    
    6,703Total
    
    $
    213,480
    
    
    $
    268,034
 11. Debt December 31,
    
    December 31,2003
    
    2002(In thousands)Senior notes:Due May 15, 2006 at 6.65%
    
    $
    399,943
    
    
    $
    399,921Due May 15, 2009 at 6.80%
    
    
    299,896
    
    
    
    299,881Term credit facilities:Due May 16, 2004 at 70 basis points over LIBOR
    
    
    30,000
    
    
    
    50,000Due May 31, 2004 at 60 basis points over LIBOR
    
    
    
    
    
    
    50,000Due June 24, 2005 at 70 basis points over LIBOR
    
    
    30,000
    
    
    
    50,000Due August 19, 2005 at 70 basis points over LIBOR
    
    
    63,000
    
    
    
    75,000Commercial paper
    
    
    29,500
    
    
    
    57,700Working capital credit facility
    
    
    
    
    
    
    40,000Deferred derivative
    
    
    6,337
    
    
    
    9,018Interest rate swap
    
    
    2,811
    
    
    
    2,883Capital leases
    
    
    377
    
    
    
    564Total
    
    
    861,864
    
    
    
    1,034,967Less short-term debt
    
    
    59,729
    
    
    
    97,932Long-term debt
    
    $
    802,135
    
    
    $
    937,035
 The senior notes, commercial paper, term credit facilities, working capital
facility, and bank notes are unsecured and non-amortizing. PRTC is the
guarantor of these instruments. The Company has a $400 million commercial paper program with maturities not
to exceed 365 days, which is backed by two working capital facilities. The
commercial paper dealer agreement was signed in November 2000. In March
2004, the Companys existing $400 million bank note credit facility matured.
On March 2, 2004 the Company entered into a new unsecured, $360 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 acts as syndication agent and Banco Popular de Puerto
Rico, FirstBank Puerto Rico and Scotiabank de Puerto Rico act as
co-documentation agents. Amounts borrowed under this facility are guaranteed
by PRTC and the Companys significant subsidiaries and bear interest at the
applicable Eurodollar 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 facility. Accrued interest on Eurodollar rate
borrowings is payable based on elected intervals of one, two, three or six
months or other interest period 53




---



##### Table of Contents



as the Company may select, subject to certain conditions. Accrued interest
on base rate borrowings is payable quarterly. This facility matures on March
1, 2005, on which date the Company has the right to convert outstanding
amounts into a term loan that matures on March 1, 2006. 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 facility purposes and serves as backstop
facility for commercial paper program. At December 31, 2003, the Company had a $40 million working capital credit
facility with Banco Popular de Puerto Rico, an affiliate of Popular, Inc.
Amounts outstanding under this facility bear interest at a rate of 30 basis
points over LIBOR. At December 31, 2003, the Company had no outstanding
balance under this facility. This facility serves as additional backstop for
the commercial paper program. 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. 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. 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: Amount(In thousands)2004
    
    $
    59,5002005
    
    
    93,0002006
    
    
    400,0002009
    
    
    300,000Total
    
    $
    852,500
 12. Other Non-Current Liabilities Other non-current liabilities consist of: December 31,
    
    December 31,2003
    
    2002(In thousands)Deferred activation and installation revenues
    
    $
    69,347
    
    
    $
    65,352Deferred directory-publishing revenues
    
    
    12,877
    
    
    
    Customer deposits
    
    
    26,954
    
    
    
    27,490Other liabilities
    
    
    128,227
    
    
    
    53,792Total
    
    $
    237,405
    
    
    $
    146,634
 54




---



##### Table of Contents



13. Deferred ESOP Compensation The Employee Stock Ownership Plan (ESOP) acquired a 3% interest in the
Company in 1999, which was financed by a $26 million, twenty-year note
borrowed from the Company to establish a contributory investment fund for
employees. The ESOP only invests in shares of the Companys common stock.
Shares are held by the ESOPs trustee and maintained in a suspense account
until they are released to employee participants. The yearly release of
 shares to participants is based on the greater of participant contributions
plus a Company match of 30% up to 5% of wages or a minimum based on an
amortization schedule. The minimum is based on the ratio of annual debt
service to total debt service multiplied by the initial 750,000 shares. 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 36,072 and 39,800 shares in 2003 and 2002,
respectively. This release resulted in compensation expense of $2 and $3
million for the years ended December 31, 2003 and 2002, respectively,
reflecting the market value of the shares. The release of shares, based upon
the per share price established at the Acquisition, amounted to $1.3 and $1.4
million for December 31, 2003 and 2002, respectively, which is reflected as a
reduction of deferred ESOP compensation in equity. 14. Shareholders Equity Common Stock Common stock consisted of fifty million authorized no par value shares, of
which twenty five million shares were outstanding at December 31, 2003 and
2002. Subscription Receivable The subscription receivable reflects future receipts from PRTA at its present
value using 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 will use the $200 million capital
contribution to partially fund its underfunded pension and other
post-employment benefit obligations. The stock purchase agreement requires
that the Company contribute $66 million, which includes the $40 million
received from PRTA, to the pension plan immediately upon receipt of the
proceeds each year. The Company received the fifth and final $40 million
installment in March 2004 and made the required pension payment of $66
million. Accumulated Other Comprehensive Loss The accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs which are reflected as an other
asset, associated with the hourly employee pension fund, since the
accumulated benefit obligation exceeds the fair value of plan assets. The accumulated other comprehensive loss amount as of December 31, 2003 and
2002 has been adjusted in the amount of $64.8 million and $57.6 million,
respectively, in order to reflect the after-tax amount in accordance with the
provisions of SFAS No.130, Reporting Comprehensive Income. Dividends The Companys shareholders agreement requires the payment of dividends equal
to at least 50% of consolidated net income to be paid in the following
quarter to the extent funds are legally available. 55




---



##### Table of Contents



Dividends payments were made in the following periods: 2003
    
    2002(In thousands)
    
    (In thousands)4th Quarter
    
    $
    
    
    
    4th  Quarter
    
    $
    15,9263rd Quarter
    
    
    
    
    
    3rd  Quarter
    
    
    40,3012nd Quarter
    
    
    68,125
    
    
    2nd Quarter
    
    
    11,5021st Quarter
    
    
    
    
    
    1st  Quarter
    
    
    1,107Total
    
    $
    68,125
    
    
    Total
    
    $
    68,836
 15. Income Taxes The 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 (benefit) for income tax is determined by applying the maximum
statutory tax rate of 39% to pretax income. During the year 2003, 2002 and
2001, the Company recorded an income tax provision of $8 million, $29 million
and $70 million, respectively, as set forth below: Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001(In thousands)Current
    
    $
    5,812
    
    
    $
    24,444
    
    
    $
    ,55,889Deferred
    
    
    2,371
    
    
    
    4,927
    
    
    
    13,619Total
    
    $
    8,183
    
    
    $
    29,371
    
    
    $
    69,508
 A reconciliation of the provision (benefit) to the amount computed by
applying the statutory rate for the year ended December 31, 2003, 2002 and
2001 is as follows: Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Provision 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
    
    
    (9.5
    )
    
    
    (0.9
    )
    
    
    (2.3
    )Additional deduction for tax purposes
    
    
    (1.5
    )
    
    
    (1.5
    )
    
    
    (0.1
    )Change in valuation allowance
    
    
    
    
    
    
    (21.5
    )
    
    
    Other
    
    
    0.6
    
    
    
    
    
    
    
    0.5Income tax provision (benefit)
    
    
    28.6
    %
    
    
    15.1
    %
    
    
    37.1
    %
 The amount of deferred income tax asset as of December 31, 2003 and 2002
is as follows: 2003
    
    2002(In thousands)Goodwill and intangibles
    
    $
    76,849
    
    
    $
    91,460Employee benefit liabilities
    
    
    226,176
    
    
    
    227,495Net loss carry-forward and other
    
    
    (30,073
    )
    
    
    (10,104
    )Total
    
    $
    272,952
    
    
    $
    308,851
 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. 56




---



##### Table of Contents



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 Transactions During the years ended December 31, 2003 and 2002, the Company had the
following significant transactions with affiliated companies:  
    
    At December 31, 2003, 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, 2003. 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 2003 and
2002.
    
    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 $24 million and $39 million for the year ended
December 31, 2003 and 2002, respectively.
    
    In January 2000, the Company entered into a joint venture agreement
with VISI the largest yellow page publishing company in Puerto Rico.
The Company generated earnings of $2 million during both years ended
December 31, 2003 and 2002 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 Instruments The carrying amounts and fair values of the Companys financial
instruments at December 31 are as follows: December 31,
    
    December 31,2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    21,732
    
    
    $
    21,732
    
    
    $
    33,667
    
    
    $
    33,667Accounts receivable
    
    
    287,247
    
    
    
    287,247
    
    
    
    342,359
    
    
    
    342,359Liabilities:Other current liabilities
    
    $
    213,480
    
    
    $
    213,480
    
    
    $
    268,034
    
    
    $
    268,034Short-term debt
    
    
    59,729
    
    
    
    59,729
    
    
    
    97,932
    
    
    
    97,932Long-term debt,
including interest rate
swap
    
    
    802,135
    
    
    
    872,822
    
    
    
    937,035
    
    
    
    984,233
 57




---



##### Table of Contents



18. Segment Reporting The Company has two reportable segments: Wireline and Wireless. The Wireline segment consists of:  
    
    Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services, high-speed
private line services, 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, prepaid calling card and high-speed
private line services;
    
    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. 58




---



##### Table of Contents



Segment results for the Company are as follows (in thousands): For the Year
    
    For the Year
    
    For the YearEnded
    
    Ended
    
    EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Wireline:RevenuesLocal services
    
    $
    585,711
    
    
    $
    584,680
    
    
    $
    570,959Long distance services
    
    
    140,164
    
    
    
    146,190
    
    
    
    187,360Access services
    
    
    296,506
    
    
    
    330,739
    
    
    
    361,762Directory services and other
    
    
    66,820
    
    
    
    66,330
    
    
    
    82,826Total revenues
    
    $
    1,089,201
    
    
    $
    1,127,939
    
    
    $
    1,202,907Operating Income
    
    $
    102,984
    
    
    $
    247,262
    
    
    $
    264,266Wireless:Revenues and salesCellular services
    
    $
    187,676
    
    
    $
    174,542
    
    
    $
    179,173Paging services
    
    
    1,026
    
    
    
    5,241
    
    
    
    14,913Equipment sales and other
    
    
    13,389
    
    
    
    6,925
    
    
    
    14,425Total revenues and sales
    
    $
    202,091
    
    
    $
    186,708
    
    
    $
    208,511Operating Income
    
    $
    (12,121
    )
    
    $
    (727
    )
    
    $
    (17,484
    )Consolidated:Revenues for reportable segments
    
    $
    1,291,292
    
    
    $
    1,314,647
    
    
    $
    1,411,418Elimination of intersegment
revenues
    
    
    (9,873
    )
    
    
    (13,372
    )
    
    
    (14,823
    )Consolidated revenues
    
    $
    1,281,419
    
    
    $
    1,301,275
    
    
    $
    1,396,595Operating income
    
    $
    90,863
    
    
    $
    246,535
    
    
    $
    246,782
 As of
    
    As ofDecember 31,
    
    December 31,Assets
    
    2003
    
    2002Wireline assets
    
    $
    2,599,277
    
    
    $
    2,645,088Wireless assets
    
    
    314,172
    
    
    
    290,891Segment assets
    
    $
    2,913,449
    
    
    $
    2,935,979Elimination of intersegment assets
    
    
    (292,211
    )
    
    
    (218,582
    )Consolidated assets
    
    $
    2,621,238
    
    
    $
    2,717,397
 59




---



##### Table of Contents



19. Supplemental Cash Flow Information Cash paid for interest for the year ended December 31, 2003 and 2002 amounted
to approximately $49 million and $60 million, respectively. During the years
ended December 31, 2003 and 2002, the Company paid income taxes amounting to
$33 million and $34 million, respectively. 20. Leases The 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 31,2004
    
    $
    256
    
    
    $
    11,7612005
    
    
    143
    
    
    
    9,8562006
    
    
    15
    
    
    
    7,0212007
    
    
    
    
    
    
    4,6712008
    
    
    
    
    
    
    2,513Thereafter
    
    
    
    
    
    
    11,671Total minimum lease payments
    
    
    414
    
    
    
    47,493Less amount representing interest
    
    
    37
    
    
    
    Present value of minimum lease payments
    
    $
    377
    
    
    $
    47,493
 Lease costs for the years ended December 31, 2003, 2002 and 2001 amounted to
approximately $14 million, $12 million and $11 million, respectively. 21. Contingencies and Regulatory Matters REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels was primarily directed
at meeting challenges in maintaining support for local exchange rates and
Universal Service while affecting the rate rebalancing and regulatory
restructuring required by an increasingly competitive environment. Among the
issues generating regulatory activity are: local number portability
requirements, interconnection agreements, the FCCs triennial review and
reverse toll billing elimination. We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to 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 through the Companys network. The February 2002 Order requires 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 take place 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 60




---



##### Table of Contents



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 from the
period beginning on April 1, 2000 through March 31, 2002. The refund can be
made in 12 equal quarterly installments beginning on 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 requiring the Company to make the cash refund. On March 27, 2002, the
Court stayed the refund and the rate reduction until the hearing of the appeal. 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 the Court to
order the rate reduction without a phase-in period, remand the case back to the
TRB, direct the TRB to calculate the refund from the period beginning on April
1997 instead of April 2000, and require that the refund be paid to the Carriers
instead of 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 therefore finally submitting the case for
adjudication. On August 19, 2003, the Court issued its final decision on the
proceeding confirming the TRB 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. As a result of
the Courts decision, the Company established a pre-tax reserve of $73 million,
including interest, in September 2003 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 for
certiorari before PR Supreme Court challenging the $68 million refund portion
of the Order. The phased down portion of the Order was settled with the major
carriers and implementing tariffs filed with the TRB as noted in the next
paragraph. In November 2003, the Company proposed, and two members of the TRB
indicated their support for, a plan to revise the Boards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
decrease according to the TRB phase reduction schedule which will end on April
1, 2005. See above. Second, 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 on February 2004, coupled with the deferred
implementation of a flat charge designed to offset the resulting revenue
losses. Third, the plan included a number of other elements benefiting
consumers; 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; and a commitment not to raise residential rates through
December 2006, without providing certain information to the TRB in advance.
While the TRB has accepted and approved these commitments, it has not issued a
final resolution and order to terminate the refund provisions in the Order and
there has been litigation relating to aspects of the plan at the TRB and Puerto
Rico Supreme Court. The 2003 cash flow impact was a reduction of $16 million
to the pre-tax reserve. CARRIER ACCESS BILLING During the first and second quarter of 2003, some carriers established a
series of billing claims with 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 2003 cash flow effect of the settlement was approximately $27
million. Management deems there are no other material impacts to the Companys
financial results. 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 suit
in the United States District Court of Puerto Rico, claiming predatory,
exclusionary and 61




---



##### Table of Contents



anticompetitive acts and seeking $75 million in damages. We filed a
motion to dismiss the case and are awaiting a decision from the court. Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three additional competitive providers also
filed a similar suit in the United States District Court of Puerto Rico on
September 4, 2002 on the same grounds. On November 8, 2002, after having
evaluated and determined that this suit is similar to TPPR s suit, we filed a
motion to dismiss the case. We are currently awaiting a decision from the
court. On August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico
filed a suit in the United States bankruptcy court in 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
complaint for over $9 million against PRTC. PRTC motion to change of venue was
granted by the U.S. District Court of Delaware and now the motion to dismiss is
pending before the United States District Court of Puerto Rico. The Companys management believes that all of these claims are without
merit. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the
Superior Court, seeking collection of monies for $31 million due for services
rendered under the 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 services
under contract to the PRDOE. The outstanding amount that PRDOE currently owes
to PRTC is $34 million. PRTC intends to amend the complaint to reflect the
proper amount owed. From the amount claimed, 89% would be paid by the Federal
Communications Commissions School & Libraries Division (SLD), who
administered 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 is approximately $1.2 million, after SLD
paid its corresponding percentage (87%) under the program. 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 ico Class Action Act of 1971. The plaintiffs claim
that the Companys charges for touchtone service are not based on cost, and are
therefore in violation of the Act. They have requested that the Court (i)
issue an Order certifying the case as a class action, (ii) designate the
plaintiffs as representative of the class, (iii) find that the charges are
illegal, and (iv) order the Company to reimburse every subscriber for excess
payments made since September 1996. On December 30, 2003, PRTC filed its
corresponding answer to the complaint and requested the dismissal of the same
based 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 as to initiate a discovery proceeding. PRTC will ask the
Court that the threshold issue to decide first must be the class certification. 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. The TRB stated in the February 2002 Order that for any prospective rate
increase that the Company may pursue to compensate for revenue deficiencies it
must first be applied against the gain in the wireless asset transfer, equating
to $56 million applicable to intrastate. We will contest this position based
on the fact 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. 62




---



##### Table of Contents



Neither the FCC nor the TRB has commenced any further proceedings to
address this issue. While we believe that the resolution of this matter and
any related proceedings will not have a material effect on the Companys
financial condition and results of operations, we cannot provide assurance that
any further regulatory actions will be favorable to the Company. PRICE CAP REGULATION The FCC requires that companies that set interstate access rates based on
a price cap formula must use the price cap formula for all of their affiliates.
The price cap formula is based on a plan called Coalition of Affordable Local
and Long Distance Service that uses rate-of-return as a basis for setting
rates. The Company was previously required to implement price caps by March 2,
2000. However, the FCC delayed conversion to price cap regulation until June 30,
2002, and the Company has requested a further 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. INTERSTATE HIGH COST SUBSIDY 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. These revenues were $33 million in 2001,$4 million for 2002 and $5
million for 2003. On February 28, 2003, PRTC sent a letter to the FCC,
requesting that the FCC take action to restore the high-cost universal service
support that the Company lost due to FCC policies adopted for non-rural
companies based on the cost characteristics of mainland companies. PRTC
requested that the FCC address the loss of its universal service support by
adopting rules for insular areas that are similar to those applied to rural
carriers. In an order dated October 16, 2003 and released October 27, 2003,
the FCC rejected PRTCs request for reconsideration of its non-rural high cost
support mechanism, but did not deal with its February 28, 2003 request. On
January 14, 2004, PRTC filed a petition for clarification and/or
reconsideration of several portions of the FCC Order of October 27, 2003 based
on the grounds that the FCC has not acted upon the specific mandate of Section
254 to provide support for insular areas. MESSAGE PROCESSING AND BILLING SYSTEM The Company has an agreement with a provider for the implementation of a
traffic polling and billing software system for its wireline operations. While
the traffic polling portion has been implemented, management has determined
that it is in the Companys best interests to abandon the billing portion of
the software system. The amount of capitalized costs for software and labor
related to the billing portion of $32.3 million was written off and included in
operating expenses during the second quarter of 2003. BROTHERHOOD OF INDEPENDENT TELEPHONE WORKERS (HIETEL) UNION CONTRACT In October 2003, one of our union contracts, a collective bargaining
agreement with the HIETEL expired. The Company is currently in negotiations
for a new agreement with the HIETEL. TRB AUDIT As provided by law, the TRB is currently conducting an ordinary audit of
our affiliate transactions and regulatory accounting. We do not expect to have
a material impact in the Companys financial conditions and results. RECENT ACCOUNTING PRONOUNCEMENTS For disclosure of recent accounting pronouncements, see Note 4 to our condensed
consolidated financial statements included under Part II, Item 8, Financial
Statements and Supplementary Data. 63




---



##### Table of Contents



22. Quarterly Financial Data The following table reflects the unaudited quarterly results of the Company for
the years ended December 31, 2003, 2002 and 2001. 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 Quarter2003Revenues (1)
    
    $
    320,492
    
    
    $
    325,442
    
    
    $
    331,617
    
    
    
    
    
    
    $
    308,836
    
    
    
    
    
    
    $
    315,524Operating costs and expenses (1)
    
    
    262,927
    
    
    
    263,257
    
    
    
    300,809
    
    
    
    
    
    
    
    339,456
    
    
    
    
    
    
    
    287,034Operating income (1)
    
    $
    57,565
    
    
    $
    62,185
    
    
    $
    30,808
    
    
    
    
    
    
    $
    (30,620
    )
    
    
    
    
    
    $
    28,490Income before cumulative effect of
accounting change (1)
    
    $
    29,592
    
    
    $
    32,410
    
    
    $
    11,086
    
    
    
    
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    4,538Cumulative effect of accounting
change, net of tax (1)
    
    $
    71,082
    
    
    $
    58,529
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income (1)
    
    $
    100,674
    
    
    $
    90,939
    
    
    $
    11,086
    
    
    
    
    
    
    $
    (29,707
    )
    
    
    
    
    
    $
    4,5382002Revenues
    
    $
    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
    
    
    
    
    
    
    $
    35,5752001Revenues
    
    $
    340,506
    
    
    
    
    
    
    $
    367,796
    
    
    
    
    
    
    $
    345,410
    
    
    
    
    
    
    $
    342,883Operating costs and expenses
    
    
    263,586
    
    
    
    
    
    
    
    283,875
    
    
    
    
    
    
    
    276,369
    
    
    
    
    
    
    
    325,983Operating income
    
    $
    76,920
    
    
    
    
    
    
    $
    83,921
    
    
    
    
    
    
    $
    69,041
    
    
    
    
    
    
    $
    16,900Income before cumulative effect of
accounting change
    
    $
    36,463
    
    
    
    
    
    
    $
    46,325
    
    
    
    
    
    
    $
    33,455
    
    
    
    
    
    
    $
    2,213Cumulative effect of accounting
change, net of tax
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Net income
    
    $
    36,463
    
    
    
    
    
    
    $
    46,325
    
    
    
    
    
    
    $
    33,455
    
    
    
    
    
    
    $
    2,213
  (1)
    
    During the second quarter of 2003, the Company changed its method of
accounting for directory-publishing revenues and related expenses from the
point of publication method to the amortization method, effective January 1,
2003 (see Note 3). The quarterly information for the first quarter of 2003,
which had been previously reported, has been restated. No restatement of 2002
and 2001 information was necessary. 64




---



##### Table of Contents



23. Condensed Consolidating Information The Notes are guaranteed by PRTC, a wholly owned subsidiary of the Company
(the Guarantor Subsidiaries), 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. The following condensed consolidating financial information as of December
31, 2003 and 2002 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; and (iii) the Non-Guarantor Subsidiaries on a combined basis. The
consolidation entries eliminate investments in subsidiaries and intercompany
balances and transactions. 65




---



##### Table of Contents



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
    
    
    
    
    
    
    
    34,255Total 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
 66




---



##### Table of Contents



Condensed Consolidating Balance Sheets
December 31, 2002
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1
    
    
    $
    27,009
    
    
    $
    6,657
    
    
    $
    
    
    
    $
    33,667Intercompany accounts receivable
    
    
    1,187,799
    
    
    
    196,889
    
    
    
    21,694
    
    
    
    (1,406,382
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    343,307
    
    
    
    212
    
    
    
    
    
    
    
    343,519Deferred income tax
    
    
    
    
    
    
    23,474
    
    
    
    28
    
    
    
    
    
    
    
    23,502Inventory and supplies, net
    
    
    
    
    
    
    18,039
    
    
    
    
    
    
    
    
    
    
    
    18,039Prepaid expenses
    
    
    
    
    
    
    10,467
    
    
    
    409
    
    
    
    
    
    
    
    10,876Total current assets
    
    
    1,187,800
    
    
    
    619,185
    
    
    
    29,000
    
    
    
    (1,406,382
    )
    
    
    429,603PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,561,866
    
    
    
    13,468
    
    
    
    
    
    
    
    1,575,334INTANGIBLES, net
    
    
    
    
    
    
    282,393
    
    
    
    25,382
    
    
    
    
    
    
    
    307,775DEFERRED INCOME TAX
    
    
    
    
    
    
    285,291
    
    
    
    58
    
    
    
    
    
    
    
    285,3491INVESTMENT IN SUBSIDIARIES
    
    
    574,833
    
    
    
    
    
    
    
    
    
    
    
    (574,833
    )
    
    
    OTHER ASSETS
    
    
    16,187
    
    
    
    116,138
    
    
    
    (1
    )
    
    
    (12,988
    )
    
    
    119,336TOTAL ASSETS
    
    $
    1,778,820
    
    
    $
    2,864,873
    
    
    $
    67,907
    
    
    $
    (1,994,203
    )
    
    $
    2,717,397LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    97,700
    
    
    $
    97,932
    
    
    $
    
    
    
    $
    (97,700
    )
    
    $
    97,932Intercompany accounts payable
    
    
    71,062
    
    
    
    299,064
    
    
    
    17,724
    
    
    
    (387,850
    )
    
    
    Other current liabilities
    
    
    7,979
    
    
    
    254,570
    
    
    
    5,485
    
    
    
    
    
    
    
    268,034Total current liabilities
    
    
    176,741
    
    
    
    651,566
    
    
    
    23,209
    
    
    
    (485,550
    )
    
    
    365,966LONG-TERM DEBT, excluding current portion
    
    
    936,703
    
    
    
    925,133
    
    
    
    
    
    
    
    (924,801
    )
    
    
    937,035OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    745,810
    
    
    
    
    
    
    
    (9,019
    )
    
    
    736,791Total liabilities
    
    
    1,113,444
    
    
    
    2,322,509
    
    
    
    23,209
    
    
    
    (1,419,370
    )
    
    
    2,039,792MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,229
    
    
    
    12,229COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    703,270
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    703,270Deferred ESOP compensation
    
    
    (27,408
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,408
    )Subscription receivable
    
    
    (76,093
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,093
    )Retained earnings (deficit)
    
    
    155,789
    
    
    
    146,956
    
    
    
    3,555
    
    
    
    (150,511
    )
    
    
    155,789Accumulated other comprehensive loss
    
    
    (90,182
    )
    
    
    (90,182
    )
    
    
    
    
    
    
    90,182
    
    
    
    (90,182
    )Total shareholders equity
    
    
    665,376
    
    
    
    542,364
    
    
    
    44,698
    
    
    
    (587,062
    )
    
    
    665,376TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,778,820
    
    
    $
    2,864,873
    
    
    $
    67,907
    
    
    $
    (1,994,203
    )
    
    $
    2,717,397
 67




---



##### Table of Contents



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 (LOSS)
    
    
    
    
    
    
    77,194
    
    
    
    13,669
    
    
    
    
    
    
    
    90,863OTHER INCOME (EXPENSE), NET
    
    
    76,856
    
    
    
    (63,061
    )
    
    
    237
    
    
    
    (78,385
    )
    
    
    (64,353
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    76,856
    
    
    
    14,133
    
    
    
    13,906
    
    
    
    (78,385
    )
    
    
    26,510INCOME TAX EXPENSE
    
    
    
    
    
    
    2,692
    
    
    
    5,491
    
    
    
    
    
    
    
    8,183INCOME BEFORE CUMMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    76,856
    
    
    
    11,441
    
    
    
    8,415
    
    
    
    (78,385
    )
    
    
    18,327CUMMULATIVE EFFECT OF ACCOUNTING
CHANGES
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME (LOSS)
    
    $
    76,856
    
    
    $
    69,970
    
    
    $
    8,415
    
    
    $
    (78,385
    )
    
    $
    76,856
 68




---



##### Table of Contents



Condensed Consolidating Statements of Income
For the year ended December 31, 2002
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    563,417
    
    
    $
    25,615
    
    
    $
    (10,700
    )
    
    $
    578,332Long distance services
    
    
    
    
    
    
    124,956
    
    
    
    22,182
    
    
    
    (1,427
    )
    
    
    145,711Access services
    
    
    
    
    
    
    335,508
    
    
    
    
    
    
    
    (10,055
    )
    
    
    325,453Cellular services
    
    
    
    
    
    
    174,542
    
    
    
    
    
    
    
    (1,602
    )
    
    
    172,940Paging services
    
    
    
    
    
    
    5,241
    
    
    
    
    
    
    
    
    
    
    
    5,241Directory services
    
    
    
    
    
    
    19,928
    
    
    
    
    
    
    
    
    
    
    
    19,928Other services and sales
    
    
    
    
    
    
    66,237
    
    
    
    
    
    
    
    (12,502
    )
    
    
    53,735Total revenues
    
    
    
    
    
    
    1,289,829
    
    
    
    47,797
    
    
    
    (36,286
    )
    
    
    1,301,340OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    362,708
    
    
    
    2,603
    
    
    
    
    
    
    
    365,311Other operating expenses
    
    
    (1,860
    )
    
    
    433,916
    
    
    
    31,714
    
    
    
    (36,286
    )
    
    
    427,484Early retirement provision
    
    
    
    
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    467Depreciation and amortization
    
    
    
    
    
    
    258,534
    
    
    
    3,009
    
    
    
    
    
    
    
    261,543Total operating costs and expenses
    
    
    (1,860
    )
    
    
    1,055,625
    
    
    
    37,326
    
    
    
    (36,286
    )
    
    
    1,054,805OPERATING INCOME (LOSS)
    
    
    1,860
    
    
    
    234,204
    
    
    
    10,471
    
    
    
    
    
    
    
    246,535OTHER INCOME (EXPENSE), NET
    
    
    169,173
    
    
    
    (44,664
    )
    
    
    2
    
    
    
    (170,642
    )
    
    
    (46,131
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    171,033
    
    
    
    189,540
    
    
    
    10,473
    
    
    
    (170,642
    )
    
    
    200,404INCOME TAX EXPENSE
    
    
    
    
    
    
    25,499
    
    
    
    3,872
    
    
    
    
    
    
    
    29,371NET INCOME (LOSS)
    
    $
    171,033
    
    
    $
    164,041
    
    
    $
    6,601
    
    
    $
    (170,642
    )
    
    $
    171,033
 69




---



##### Table of Contents



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 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
 70




---



##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2002
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedCASH
PROVIDED BY OPERATING ACTIVITIES:
    
    $
    11,294
    
    
    $
    384,969
    
    
    $
    8,592
    
    
    $
    404,855CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (204,714
    )
    
    
    (4,141
    )
    
    
    (208,855
    )Net salvage on retirements
    
    
    
    
    
    
    3,270
    
    
    
    
    
    
    
    3,270Net cash used in investing activities
    
    
    
    
    
    
    (201,444
    )
    
    
    (4,141
    )
    
    
    (205,585
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (396,361
    )
    
    
    (203
    )
    
    
    
    
    
    
    (396,564
    )Borrowings of long-term debt
    
    
    225,000
    
    
    
    
    
    
    
    
    
    
    
    225,000Dividends paid
    
    
    (68,836
    )
    
    
    
    
    
    
    
    
    
    
    (68,836
    )Borrowings/(repayment) intercompany loans
    
    
    188,904
    
    
    
    (188,904
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (11,293
    )
    
    
    (189,107
    )
    
    
    
    
    
    
    (200,400
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    1
    
    
    
    (5,582
    )
    
    
    4,451
    
    
    
    (1,130
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    
    
    
    
    32,591
    
    
    
    2,206
    
    
    
    34,797CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    1
    
    
    $
    27,009
    
    
    $
    6,657
    
    
    $
    33,667
 71




---



##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. 
 Schedule II -Valuation and Qualifying Accounts For Years Ended December 31,
2003, 2002 and 2001 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, 2003
Allowance for uncollectible
accounts
    
    $
    133
    
    
    $
    65
    
    
    $
    
    
    
    $
    (67
    )
    
    $
    131December 31, 2002
Allowance for uncollectible
accounts
    
    $
    107
    
    
    $
    73
    
    
    $
    13
    
    
    $
    (60
    )
    
    $
    133December 31, 2001
Allowance for uncollectible
accounts
    
    $
    86
    
    
    $
    73
    
    
    $
    26
    
    
    $
    (78
    )
    
    $
    107
 AdditionsBalance at
    
    
    
    
    
    Charged
    
    DeductionsBeginning
    
    Charged to
    
    (Credited) to
    
    From
    
    Balance atDescription
    
    of Year
    
    Income
    
    Other Accounts
    
    Reserves (a)
    
    Close of Year(Dollars in Million)December 31,
2003
Allowance for Inventory
Obsolescence
    
    $
    4
    
    
    $
    4
    
    
    $
    0
    
    
    $
    (2
    )
    
    $
    6December 31,
2002
Allowance for Inventory
Obsolescence
    
    $
    6
    
    
    $
    1
    
    
    $
    0
    
    
    $
    (3
    )
    
    $
    4December 31,
2001
Allowance for Inventory
Obsolescence
    
    $
    9
    
    
    $
    3
    
    
    $
    0
    
    
    $
    (6
    )
    
    $
    6
 NOTES: (a)Reserved write-offs. (b)Other adjustments and recoveries of amounts written off in prior years. 72




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 73




---



##### 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. 74




---



##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS As of March 30, 2004, 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
    
    
    55
    
    
    Group President-International, Verizon
    
    GTE Holdings (Puerto
Rico)
    
    
    2002John N. Doherty
    
    
    39
    
    
    Vice President and Chief Financial
Officer International, Verizon
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Jeanne M. Dennison
    
    
    47
    
    
    Group Vice President International
Human Resources and Public Affairs
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Cristina M. Lambert
    
    
    55
    
    
    President and Chief Executive Officer,
Telecomunicaciones de Puerto Rico, Inc.
    
    GTE Holdings (Puerto Rico)
    
    
    2003John J. Lack
    
    
    47
    
    
    Senior VP Verizon International
    
    GTE Holdings (Puerto
Rico)
    
    
    2003Richard L. Carrión
    
    
    51
    
    
    Chairman, President and Chief
Executive Officer, Popular, Inc.
    
    Popular, Inc.
    
    
    1999Antonio Faría Soto
    
    
    55
    
    
    President, Government Development
Bank for Puerto Rico
    
    PRTA Holdings Corporation
    
    
    2003Samuel H. Jové
    
    
    55
    
    
    Private Investor
    
    PRTA Holdings Corporation
    
    
    2001
 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. John N. Doherty is the Vice President and Chief Financial
Officer-International responsible for Verizons finance, strategy and business
development activities outside of the domestic United States. Prior to this
appointment he was responsible for International Business Development. Mr.
Doherty has over 17 years of experience in the telecommunications industry. He
has held positions in finance, strategy, corporate development and marketing in
the United States, Europe and Asia. Mr. Doherty has earned a Bachelor of Arts
Degree in Economics from Stonybrook University and an MBA in Finance from
Baruch College. He has also completed executive programs at The Wharton School
of the University of Pennsylvania. 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. 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, 75




---



##### Table of Contents



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. Antonio Faría Soto has been the President of the Government Development
Bank for Puerto Rico since November 2003, after presiding Economic Development
Bank (EDB) and serving as Commissioner of Financial Institutions. As GDB
President, he sits on the governing boards of the EDB, PRTA, PRTA Holdings
Corp., PRIDCO, PRASA, and Commonwealth Employees Retirement System, among
others. Mr. Faría entered public service in 2001 after a 30-year career in the
private banking industry, where he moved from executive trainee at the branch
level at Citibank to Executive Vice President and Chief Operating Officer in
Banco Central Hispano. In 1998 he joined PaineWebber, Inc. PR as Senior Vice
President of Investment Banking and as a member of the Board of Directors of
PaineWebber Trust Co of PR. Samuel H. Jové is a private investor and has been President of BMJ Foods
PR, Inc. since the company was founded in 1984. Mr. Jové serves as President
of the Metromedia International Franchisees Advisory Board. Mr. Jové also
serves on the boards of the GDB and Puerto Rico Housing Finance Corporation. Since March 17, 1999, the Board of Directors has had a standing Audit
Committee. Currently, the Audit Committee is comprised of John J. Lack, John
N. Doherty, and Antonio Faría Soto. The Audit Committee oversees the financial
reporting process for which management is responsible, reviews the services
provided by our independent auditors, 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 limiting to significant
business transactions. EXECUTIVE OFFICERS The executive officers of the Company as of March 30, 2004, are as
follows: NAME
    
    AGE
    
    TITLECristina M. Lambert
    
    
    55
    
    
    President and Chief Executive OfficerGary S. Butler
    
    
    46
    
    
    Chief Operations OfficerAdail Ortiz
    
    
    46
    
    
    Vice President Finance and Chief Financial OfficerJosé E. Arroyo
    
    
    40
    
    
    Vice President Legal and Regulatory AffairsWalter C. Forwood
    
    
    40
    
    
    Vice President and General Manager of WirelessFrancisco M. Arroyo
    
    
    43
    
    
    Vice President Sales and Customer ContactBenito Fernández
    
    
    57
    
    
    Vice President Human ResourcesIleana Molina de Bachman
    
    
    48
    
    
    Vice President Corporate CommunicationsRoberto A. Correa
    
    
    46
    
    
    Vice President Network Services, Engineering and Technical PlanningJorge Samalot
    
    
    44
    
    
    Vice President Information Technology SolutionsThomas Pérez-Ducy
    
    
    37
    
    
    Vice President Sales & MarketingRaúl E. García
    
    
    34
    
    
    ControllerMaría E. De La Cruz
    
    
    35
    
    
    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. 76




---



##### Table of Contents



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. José E. Arroyo was appointed Vice President Legal and Regulatory Affairs
on March 17, 1999. He joined the Company in 1995 as Legal Counsel to the
President and was later appointed as Vice President Human Resources, Legal and
Regulatory Affairs. Prior to joining the Company, he was Associate Counsel for
two law firms in Puerto Rico and also served as Special Assistant to the
Attorney General of Puerto Rico. Mr. Arroyo holds a bachelors degree in Science
and a juris doctorate from the University of Puerto Rico. Gary S. Butler is the Chief Operations Officer of the Company. Prior to
assuming his current role, he was Group Vice President International
responsible for strategic and operational initiatives for Verizon Wireless and
Wireline operations in Mexico, Venezuela, the Dominican Republic, Puerto Rico
and Canada. With 18 years in the telecommunications industry, Mr. Butler has a
broad background in all aspects of telecommunication operations. He began his
career with NYNEX with Customer Services responsibilities and moved to an
operations role in New York. Mr. Butler was promoted to Vice President
Operations Assurance serving as the process owner for the provisioning and
infrastructure functions. He spent several years in Bangkok, Thailand as the
Executive Vice President and COO of TelecomAsia, a 2.6 million fixed line
network. Also, he served as the Vice President-Europe and Asia and as a member
of the boards of PRTC and Gibraltar Telecom. Mr. Butler earned a bachelors
degree from the U.S. Military Academy at West Point and an MBA from Golden Gate
University in California. Walter Forwood 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. Francisco M. Arroyo was appointed Vice President Sales and Customer
Contact in November 2002. Mr. Arroyo has extensive experience in the
telecommunication industry. Prior to joining the Company, Mr. Arroyo served as
Senior Director of Calling Centers for WorldCom-Brazil. Previously, Mr. Arroyo
worked for WorldCom International where he held several positions since 1993.
Mr. Arroyo holds a bachelors degree in Biology from the University of Puerto
Rico and a masters degree in Latin American Studies from the University of New
Mexico. 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. 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 Engineering and Technical
Planning on February 2, 2000. 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. Thomas Pérez-Ducy is the 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 77




---



##### Table of Contents



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. 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. 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. 78




---



##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth compensation of the highest compensated
company executives. ANNUAL COMPENSATION
    
    LONG-TERM COMPENSATIONAWARDS
    
    PAYOUTSSECURITIESOTHER
    
    RESTRICTED
    
    UNDERLYINGANNUAL
    
    STOCK
    
    OPTIONS/
    
    LTIP
    
    ALL OTHERNAME AND PRINCIPAL
    
    
    
    
    
    SALARY
    
    BONUS
    
    COMPENSATION
    
    AWARD(S)
    
    SARS(#)
    
    PAYOUTS
    
    COMPPOSITION
    
    YEAR
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    
    
    
    
    ($)
    
    ($)(5)
    
    (6)
    
    
    
    
    
    (7)
    
    (8)Jon E. Slater (Retired)
President & Chief Executive Officer
(1)
    
    
    2003
    
    
    
    296,346
    
    
    
    210,800
    
    
    
    20,792
    
    
    
    227,400
    
    
    
    26,400
    
    
    
    
    
    
    
    127,4202002
    
    
    
    310,096
    
    
    
    207,700
    
    
    
    158,201
    
    
    
    
    
    
    
    34,100
    
    
    
    183,900
    
    
    
    138,9782001
    
    
    
    310,000
    
    
    
    201,000
    
    
    
    143,200
    
    
    
    
    
    
    
    34,340
    
    
    
    155,000
    
    
    
    14,300Cristina M. Lambert
President & 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
    
    
    
    51,5532001
    
    
    
    203,500
    
    
    
    114,700
    
    
    
    100,900
    
    
    
    
    
    
    
    14,300
    
    
    
    47,000
    
    
    
    8,800Ileana Molina de Bachean
VP Corporate Communications
    
    
    2003
    
    
    
    199,227
    
    
    
    53,338
    
    
    
    12,039
    
    
    
    67,500
    
    
    
    10,900
    
    
    
    
    
    
    
    10,8732002
    
    
    
    191,123
    
    
    
    66,000
    
    
    
    
    
    
    
    
    
    
    
    12,600
    
    
    
    
    
    
    
    8,1282001
    
    
    
    182,500
    
    
    
    55,200
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    
    
    
    
    Benito Fernández
VP Human Resources
(2)
    
    
    2003
    
    
    
    193,231
    
    
    
    127,000
    
    
    
    6,000
    
    
    
    92,500
    
    
    
    10,500
    
    
    
    
    
    
    
    80,5622002
    
    
    
    186,250
    
    
    
    105,000
    
    
    
    83,289
    
    
    
    
    
    
    
    13,500
    
    
    
    
    
    
    
    51,5532001
    
    
    
    170,128
    
    
    
    50,800
    
    
    
    
    
    
    
    
    
    
    
    7,900
    
    
    
    
    
    
    
    Beth De Winter (Retired)
VP and General Manager of Wireless
(1)
    
    
    2003
    
    
    
    189,192
    
    
    
    33,120
    
    
    
    
    
    
    
    67,500
    
    
    
    10,900
    
    
    
    
    
    
    
    11,2262002
    
    
    
    194,615
    
    
    
    70,000
    
    
    
    96,501
    
    
    
    
    
    
    
    12,600
    
    
    
    
    
    
    
    8,4622001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kathy A. Thompson (Retired)
VP Information Technology Solutions(1)
    
    
    2003
    
    
    
    158,535
    
    
    
    21,606
    
    
    
    
    
    
    
    67,500
    
    
    
    7,900
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,600
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,040
    
    
    
    
    
    
    
    Walter C. Forwood
VP and General Manager of Wireless
(3)
    
    
    2003
    
    
    
    117,865
    
    
    
    129,000
    
    
    
    3,000
    
    
    
    108,000
    
    
    
    12,300
    
    
    
    
    
    
    
    14,8582002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,700
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,850
    
    
    
    
    
    
    
    José E. Arroyo
VP Legal and Regulatory Affairs
(4)
    
    
    2003
    
    
    
    147,856
    
    
    
    49,781
    
    
    
    6,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,7382002
    
    
    
    140,056
    
    
    
    44,465
    
    
    
    6,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    130,385
    
    
    
    60,583
    
    
    
    6,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  (1)
    
    Mr. Slater, Mses. De Winter and Thompson retired from Verizon on
November 23, 2003.  (2)
    
    Mr. Fernández joined the Company on June 11, 2001. His 2001 bonus
reflects a prorated amount based on this start date.  (3)
    
    Mr. Forwood joined the Company in June 2003.  (4)
    
    Mr. Arroyo is a local executive considered under the Companys
payroll and benefits plan.  (5)
    
    For 2003, the column Other Annual Compensation includes:
incremental costs for the personal use of a company vehicle by Ms.
Bachman in the amount of $10,164; executive financial planning
allowances for Mr. Slater and Ms. Lambert in the amounts of: $6,125 and
$6,250, respectively; and flexible spending allowances for Messrs.
Slater, Fernandez, Forwood, Arroyo and Ms. Lambert in the amounts of
$14,667; $6,000; $3,000; $6,300 and $7,667, respectively.  (6)
    
    The data reflects the dollar value of the one-time grant of
restricted stock units based on the closing price of Verizon common
stock on the grant date, September 7, 2000. These units vest over the
next three years subject to meeting certain performance and time
measures. 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 closing price of Verizons common stock on
the New York Stock Exchange Composite Transactions Tape on the dividend
payment date. Mr. Slater, Fernandez and Forwood and Ms. Lambert,
Bachman, De Winter and Thompson hold a total of: 2,000; 2,480; 2,864;
4,090; 1,809; 594 and 594 restricted stock units, respectively, which
had a dollar value of: $70,160; $86,998; $100,469; $143,477; $63,460;
$20,838; and $20,838, respectively, based upon the closing price of
Verizon common stock on December 31, 2003.  (7)
    
    Mr. Slater and Ms. Lambert, as former GTE executives, received
payments for the 2000 to 2002 award cycle, under the GTE Long-Term
Incentive Plan of: $183,900; and $57,800, respectively.  (8)
    
    All Other Compensation column includes Verizon contributions to
qualified 401(k) plans for Messrs. Slater, Fernández, and Forwood and
Mses. Lambert, Bachman and De Winter of: $9,231; $10,034; $5,411;
$10,380; $7,573; and $9,126, respectively; contributions by the Company
and its related companies to the non-qualified income deferral plan
accounts of Messrs. Slater, Fernández, and Forwood and Mses. Lambert,
Bachman and De Winter in the amounts of: $118,189; $38,850; $4,320;
$54,584; $3,300; and $2,100, respectively; and the value of premiums
paid by the Company for executive life insurance policies for Messrs.
Fernández, and Forwood and Ms. Lambert, in the amounts of: $31,678;
$5,127; and $25,038, respectively. 79




---



##### Table of Contents



The following table shows grants of options in Verizon shares to the named
executive officers during 2003. Pursuant to SEC rules, the table also shows
the value of the options granted at the end of the option terms if the stock
price were to appreciate annually by 5% and 10%, respectively. There is no
assurance that the stock price will appreciate at the rates shown in the table
below. The table also indicates that, if the stock price does not appreciate,
the potential realized value of the options granted would be zero. Option/SAR Grants in Last Fiscal Year Potential Realizable
Value atAssumed Annual Rates of Stock PriceAppreciation for Option TermIndividual Grants
    
    ($ 000s)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)# of
    
    % of TotalSecurities
    
    Options/SARsUnderlying
    
    Granted to
    
    Exercise orOptions/SARs
    
    Employees in
    
    Base Price
    
    ExpirationName
    
    Granted
    
    Fiscal Year
    
    ($/Sh)
    
    Date
    
    0%
    
    5%
    
    10%Jon E. Slater
    
    
    26,400
    (2)
    
    
    0.125
    %
    
    
    38.5400
    
    
    
    11/23/2008
    
    
    
    
    
    
    
    639.9
    
    
    
    1,621.6Cristina M. Lambert
    
    
    11,800
    (1)
    
    
    0.056
    %
    
    
    38.5400
    
    
    
    02/02/2013
    
    
    
    
    
    
    
    286.0
    
    
    
    724.81,600
    (5)
    
    
    0.008
    %
    
    
    35.1000
    
    
    
    02/02/2013
    
    
    
    Ileana Molina de Bachean
    
    
    10,900
    (1)
    
    
    0.052
    %
    
    
    38.5400
    
    
    
    02/02/2013
    
    
    
    
    
    
    
    264.2
    
    
    
    669.5Benito Fernández
    
    
    10,500
    (1)
    
    
    0.050
    %
    
    
    38.5400
    
    
    
    02/02/2013
    
    
    
    
    
    
    
    254.5
    
    
    
    644.9Beth De Winter
    
    
    10,900
    (2)
    
    
    0.052
    %
    
    
    38.5400
    
    
    
    11/23/2008
    
    
    
    
    
    
    
    264.2
    
    
    
    669.5Kathy A. Thompson
    
    
    7,900
    (2)
    
    
    0.037
    %
    
    
    38.5400
    
    
    
    11/23/2008
    
    
    
    
    
    
    
    191.5
    
    
    
    485.2Walter C. Forwood
    
    
    12,300
    (1,4)
    
    
    0.058
    %
    
    
    39.6100
    
    
    
    02/02/2013
    
    
    
    
    
    
    
    306.4
    
    
    
    776.5José E. Arroyo
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  (1)
    
    One-third of the options are exercisable on February 3, 2004; two thirds are exercisable on February 3, 2005; and the balances are exercisable on February 3, 2006.  (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.  (4)
    
    Granted on June 30, 2003 based on re-hire date of June 16, 2003.  (5)
    
    Granted on December 31, 2003 based on promotion effective of November 9, 2003. The following table provides information as to options and stock
appreciation rights (referred to as SARs) exercised by each of the named
executive officers during 2003. The table sets forth the value of options and
stock appreciation rights held by such officers at 2003 year-end. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Value of UnexercisedNumber of Securities
    
    In-the-Money Options/SARsUnderlying Options/SARs
    
    at F-Y-EndSharesAcquired on
    
    ValueRealized
    
    at F-Y-End (#)
    
    ($ 000s)Name
    
    Exercise (#)
    
    ($000s)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJon E. Slater
    
    
    
    
    
    
    
    
    
    
    231,838
    
    
    
    
    
    
    
    
    
    
    
    Cristina M. Lambert
    
    
    610
    
    
    
    5.1
    
    
    
    64,334
    
    
    
    30,701
    
    
    
    10.4
    
    
    
    Ileana Molina de Bachean
    
    
    
    
    
    
    
    
    
    
    24,488
    
    
    
    22,967
    
    
    
    
    
    
    
    Benito Fernández
    
    
    
    
    
    
    
    
    
    
    9,766
    
    
    
    22,134
    
    
    
    
    
    
    
    Beth De Winter
    
    
    
    
    
    
    
    
    
    
    23,500
    
    
    
    
    
    
    
    
    
    
    
    Kathy A. Thompson
    
    
    
    
    
    
    
    
    
    
    70,270
    
    
    
    
    
    
    
    13.5
    
    
    
    Walter C. Forwood
    
    
    
    
    
    
    
    
    
    
    30,550
    
    
    
    12,300
    
    
    
    
    
    
    
    José E. Arroyo
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 80




---



##### Table of Contents



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 ($200,000 in
2003), for each year of service following the conversion to cash balance.
Messrs. Slater, Fernández, and Forwood, and Mses. Lambert, DeWinter, Thompson
and Bachman began participating in the Verizon Management Pension Plan as of
January 1, 2002. Mr. Slater and Ms. De Winter and Thompson retired on November
23, 2003. Mr. Arroyo 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 ($200,000 in 2003), 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, 2003, or the executives date of
separation in 2002, the actual years of service credited under the Verizon
Management Pension Plan for Messrs. Slater, Fernández,, and Mses. Lambert,
DeWinter, Thompson and Bachman are 32, 2, 29, 1, 26 and 4, 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 $200,000. 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 Table YEARS OF SERVICEFINAL AVERAGEEARNINGS
    
    15
    
    20
    
    25
    
    30
    
    35
    
    40$200,000
    
    $
    40,500
    
    
    $
    54,000
    
    
    $
    67,500
    
    
    $
    81,000
    
    
    $
    94,500
    
    
    $
    108,000
 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 2003, for compensation
under $39,400, 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 $200,000. 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 Table YEARS OF SERVICEFINAL AVERAGEEARNINGS
    
    15
    
    20
    
    25
    
    30
    
    35
    
    40$200,000
    
    $
    41,727
    
    
    $
    55,636
    
    
    $
    69,545
    
    
    $
    83,454
    
    
    $
    97,363
    
    
    $
    111,272
 81




---



##### Table of Contents



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. Fernándezs and Forwoods and Mses. DeWinters,and Bachmans cash
balance accounts were $34,966; $20,875; $20,505; and $49,013, respectively, as
of December 31, 2003. 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. Slater, Fernández, and
Forwood, and Mses. Lambert, DeWinter, Thompson and Bachman 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 ($200,000 in 2003);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 $200,000,
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, 2003. In 2003, Messrs. Slater, 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. Slater, 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 BalanceMr. Slater
    
    $
    2,662,528
    *Ms. Lambert
    
    $
    661,420
    *Mr. Forwood
    
    $
    40,019Mr. Fernandez
    
    $
    30,835
    *Ms. De Winter
    
    $
    2,170Ms. Bachman
    
    $
    3,410
 *Includes $2,037,275; $10,979 and $476,717 for Messrs. Slater, 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 2003 has been reflected in the
All Other Compensation column of the Summary Compensation Table. Pension benefits for Mses. DeWinter and Bachman 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 ($200,000 in 2003), for each year of service following the
conversion. As of December 31, 2003, Mses. DeWinters and Bachmans cash
balance accounts were $20,505 and $49,013, respectively. As of December 31, 2003, the actual years of service credited under the
Verizon Management Pension Plan for Mses. DeWinter and Bachman are 26 and 4,
respectively. 82




---



##### Table of Contents



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 TABLE YEARS OF SERVICEFINAL AVERAGESALARY
    
    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, pensions are computed on an offset formula basis of 2% of
average annual salary for the three highest consecutive years for each year of
service between 25 and 40 years, offset by a percentage (based on age and
service) of average annual salary up to the social security wage base for the
last three years of service, but not in excess of social security covered
compensation. 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 Samuel H. Jové. 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. 83




---



##### Table of Contents



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
    
    
    13,003,276
    
    
    
    52.015221 North O'Connor BoulevardIrving, Texas 75039Popular, Inc.
    
    209 Muñoz Rivera Avenue
    
    
    3,246,749
    
    
    
    12.99Hato Rey, Puerto Rico 00918PRTA Holdings Corporation
    
    Government Development Bank
    
    
    6,999,975
    
    
    
    28.00For Puerto RicoMinillas Government CenterSan Juan, Puerto Rico  00940Employee Stock Ownership Plan
    
    U.S. Trust Company National Association
    
    
    1,750,000
    
    
    
    7.00c/o Dennis M. Kunisaki515 South Flower StreetLos Angeles, California 90171Total
    
    
    
    
    25,000,000
    
    
    
    100.00All Directors and 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. 84




---



##### Table of Contents



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:  
    
    an acquisition, strategic alliance, or joint venture exceeding
15% of the Companys assets;
    
    issuance of equity, convertible equity securities, or debt;
    
    changes in the dividend policy; and
    
    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:  
    
    asset sales of 25% or more of the Companys assets;
    
    amendments to the Certificate of Incorporation, which adversely
affect the Government of Puerto Rico; and
    
    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:  
    
    the date when the Government of Puerto Rico ceases to own at
least 5% of the shares; and
    
    the later of seven years after the sale or one year after an initial
public offering. 85




---



##### Table of Contents



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:  
    
    8% for years one and two of the agreement;
    
    7% for years three and four of the agreement;
    
    6% for year five of the agreement. Total royalties and fees accrued for the year ended December 31, 2003 and
2002 were $24 million and $39 million, 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, 2003
and 2002 amounted to $8 million for both years. 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, 2003. 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 2003 and 2002. These services are negotiated at arms-length
market value rates. At December 31, 2003, 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, 2003. 86




---



##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES INDEPENDENT AUDITOR FEE INFORMATION Audit Fees Fees for audit services totaled approximately $412 thousand for the year ended
December 31, 2003 and approximately $380 thousand for the year ended December
31, 2002, 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 and attestation as required by Section 404 of the
Sarbanes-Oxley Act of 2002. Audit-Related Fees Fees for audit-related services totaled approximately $104 thousand for the
year ended December 31, 2003 and approximately $101 thousand for the year ended
December 31, 2002. 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, Audit Related
Fees, or Tax Fees totaled approximately above totaled approximately $3
thousand for the year ended December 31, 2003 and $20 thousand for the year
ended December 31 2002, principally including finance conferences and technical
updates. 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. 87




---



##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (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) ExhibitsSee Exhibit Index.(b)
    
    Reports on Form 8-KA Current Report on Form 8-K, dated October 23, 2003, was filed
regarding a press release announcing the retirement of Jon E. Slater as
President and Chief Executive Officer and the naming of Cristina M. Lambert
as his successor. 88




---



##### Table of Contents



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 30, 2004By:
    
    /s/ Adail OrtizName:
    
    Adail OrtizTitle:
    
    Vice President Finance and Chief Financial OfficerDate:
    
    March 30, 2004By:
    
    /s/ Raúl E. GarcíaName:
    
    Raúl E. GarcíaTitle:
    
    ControllerDate:
    
    March 30, 2004
 89




---



##### Table of Contents



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 30, 2004
    
    /s/ Cristina M. Lambert
Cristina M. Lambert
    
    President and Chief Executive Officer (Principal Executive Officer)March 30, 2004
    
    /s/ Adail Ortiz
Adail Ortiz
    
    Vice President Finance and Chief Financial Officer (Principal
Financial Officer)March 30, 2004
    
    /s/ Raúl E. García
Raúl E. García
    
    Chief Accounting Officer (Principal Accounting Officer)March 30, 2004
    
    /s/ Daniel C. Petri
Daniel C. Petri
    
    DirectorMarch 30, 2004
    
    /s/ John N. Doherty
John N. Doherty
    
    DirectorMarch 30, 2004
    
    /s/ Jeanne M. Dennison
Jeanne M. Dennison
    
    DirectorMarch 30, 2004
    
    /s/ Cristina M. Lambert
Cristina M. Lambert
    
    DirectorMarch 30, 2004
    
    /s/ John J. Lack
John J. Lack
    
    DirectorMarch 30, 2004
    
    /s/ Richard L. Carrión
Richard L. Carrión
    
    DirectorMarch 30, 2004
    
    /s/ Antonio Faría Soto
Antonio Faría Soto
    
    DirectorMarch 30, 2004
    
    /s/ Samuel H. Jové
Samuel H. Jové
    
    Director
 90




---



##### Table of Contents



EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto Rico,
Inc. (Incorporated by reference to Exhibit 3.1 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation of
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference
to Exhibit 3.2 of the Companys Annual Report on Form 10-K for the
year ended December 31, 1999 (File 333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc. (Incorporated
by reference to Exhibit 3.4 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New York.
(Incorporated by reference to Exhibit 4.1 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., Puerto Rico Telephone Authority and the
shareholders of Telecomunicaciones de Puerto Rico, Inc., who shall
from time to time be parties thereto as provided therein.
(Incorporated by reference to Exhibit 10.5 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.2
    
    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)).
 91




---



##### Table of Contents



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
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Brotherhood of Telephone Company
Employees effective from October 23, 1999 until October 22, 2003.
Approved on October 20, 2000. (Incorporated by reference to
Exhibit 10.24 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 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)).10.12
    
    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 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)).10.13
    
    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 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)).10.14
    
    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)).10.15
    
    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)).10.16
    
    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)).10.17
    
    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 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)).10.18
    
    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
 92




---



##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTIONCompanys Quarterly Report on
Form 10-Q for the period ended September 31, 2001 (File
333-85503)).10.19
    
    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)).10.20
    
    $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)).10.21
    
    $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)).10.22
    
    $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)).10.23
    
    $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)).10.24
    
    $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)).10.25
    
    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)).10.26
    
    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)).10.27
    
    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)).10.28
    
    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)).10.29
    
    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. (Filed herewith).
 93




---



##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION12
    
    Statement Regarding Computation of Ratio of Earnings to Fixed
Charges (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).
 94