##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: June 30, 2005
 Or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 333-85503
 Telecomunicaciones de Puerto Rico, Inc.
  Commonwealth of Puerto Rico
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    66-0566178
(IRS EMPLOYER IDENTIFICATION NO.)1515 FD Roosevelt AvenueGuaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 787-792-6052
   YES þ NO o
  YES o NO þ
    1




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INDEX
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 Part I. Financial InformationItem 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance SheetsJune 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations Three Months Ended June 30, 2005
and 2004; Six Months Ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Changes in Shareholders EquitySix
Months Ended June 30, 2005 and Year Ended December 31, 2004
    
    
    5Condensed Consolidated Statements of Cash FlowsSix Months Ended June 30, 2005
and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46Part II. Other InformationItem 1. Legal Proceedings
    
    
    47Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 3. Defaults Upon Senior Securities
    
    
    47Item 4. Submission of Matters to a Vote of Security Holders
    
    
    47Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    47Signatures
    
    
    48Exhibit Index
    
    
    49First Amendment to Revolving Credit AgreementCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350
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PART I            FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets
 (Unaudited)June 30,
    
    December 31,2005
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    89,712
    
    
    $
    63,346Accounts receivable, net of allowance for doubtful accounts
of $102,473 and $106,090 in 2005 and 2004, respectively
    
    
    224,586
    
    
    
    270,914Deferred income tax
    
    
    27,257
    
    
    
    28,054Inventory and supplies, net
    
    
    25,466
    
    
    
    28,158Prepaid expenses
    
    
    30,984
    
    
    
    26,616Total current assets
    
    
    398,005
    
    
    
    417,088PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,417,375
    
    
    
    1,459,459GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    195,840
    
    
    
    196,820DEFERRED INCOME TAX
    
    
    219,981
    
    
    
    235,886OTHER ASSETS
    
    
    100,681
    
    
    
    109,102TOTAL ASSETS
    
    $
    2,458,809
    
    
    $
    2,545,282LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    493,096
    
    
    $
    93,168Other current liabilities
    
    
    206,381
    
    
    
    216,187Total current liabilities
    
    
    699,477
    
    
    
    309,355LONG-TERM DEBT, excluding current portion
    
    
    301,288
    
    
    
    703,556PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    544,553
    
    
    
    607,115OTHER NON-CURRENT LIABILITIES
    
    
    158,777
    
    
    
    186,781Total liabilities
    
    
    1,704,095
    
    
    
    1,806,807MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    16,417
    
    
    
    15,010SHAREHOLDERS EQUITY:Common stock
    
    
    704,386
    
    
    
    704,386Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    (25,172
    )Retained earnings
    
    
    225,788
    
    
    
    210,956Accumulated other comprehensive loss, net of taxes
    
    
    (166,705
    )
    
    
    (166,705
    )Total shareholders equity
    
    
    738,297
    
    
    
    723,465TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,458,809
    
    
    $
    2,545,282
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations
  For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Unaudited)
    
    (Unaudited)REVENUES:Local services
    
    $
    149,595
    
    
    $
    145,996
    
    
    $
    298,844
    
    
    $
    291,173Access services
    
    
    52,207
    
    
    
    73,278
    
    
    
    117,989
    
    
    
    146,581Long distance services
    
    
    13,830
    
    
    
    24,827
    
    
    
    32,204
    
    
    
    54,455Cellular services
    
    
    57,608
    
    
    
    47,620
    
    
    
    113,358
    
    
    
    95,457Directory services and other
    
    
    22,397
    
    
    
    20,017
    
    
    
    45,585
    
    
    
    40,896Total revenues
    
    
    295,637
    
    
    
    311,738
    
    
    
    607,980
    
    
    
    628,562OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    94,341
    
    
    
    92,686
    
    
    
    187,088
    
    
    
    192,181Other operating expenses
    
    
    109,600
    
    
    
    54,807
    
    
    
    220,724
    
    
    
    155,665Early retirement and voluntary separation provision
    
    
    1,687
    
    
    
    
    
    
    
    1,687
    
    
    
    1,635Depreciation and amortization
    
    
    60,060
    
    
    
    65,907
    
    
    
    121,909
    
    
    
    130,385Total operating costs and expenses
    
    
    265,688
    
    
    
    213,400
    
    
    
    531,408
    
    
    
    479,866OPERATING INCOME
    
    
    29,949
    
    
    
    98,338
    
    
    
    76,572
    
    
    
    148,696OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (11,380
    )
    
    
    (11,110
    )
    
    
    (22,468
    )
    
    
    (21,458
    )Equity income from joint venture
    
    
    248
    
    
    
    678
    
    
    
    1,112
    
    
    
    1,335Minority interest in consolidated subsidiary
    
    
    (746
    )
    
    
    (658
    )
    
    
    (1,407
    )
    
    
    (1,218
    )Total other income (expense), net
    
    
    (11,878
    )
    
    
    (11,090
    )
    
    
    (22,763
    )
    
    
    (21,341
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    18,071
    
    
    
    87,248
    
    
    
    53,809
    
    
    
    127,355INCOME TAX EXPENSE
    
    
    7,104
    
    
    
    34,093
    
    
    
    20,854
    
    
    
    49,428NET INCOME
    
    $
    10,967
    
    
    $
    53,155
    
    
    $
    32,955
    
    
    $
    77,927
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Changes in Shareholders Equity
  AccumulatedOtherCommon
    
    Deferred ESOP
    
    Subscription
    
    Retained
    
    ComprehensiveStock
    
    Compensation
    
    Receivable
    
    Earnings
    
    Loss
    
    TotalBALANCE, DECEMBER 31, 2003
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    (39,515
    )
    
    $
    164,520
    
    
    $
    (101,385
    )
    
    $
    701,351Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,953
    )
    
    
    
    
    
    
    (61,953
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    502
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,389
    
    
    
    
    
    
    
    108,389Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,320
    )
    
    
    (65,320
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,069BALANCE,
DECEMBER 31, 2004 (UNAUDITED)
    
    $
    704,386
    
    
    $
    (25,172
    )
    
    $
    
    
    
    $
    210,956
    
    
    $
    (166,705
    )
    
    $
    723,465Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,248
    )
    
    
    
    
    
    
    (3,248
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,875
    )
    
    
    
    
    
    
    (14,875
    )Net income for the six months ended June 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,955
    
    
    
    
    
    
    
    32,955BALANCE JUNE 30, 2005
    
    $
    704,386
    
    
    $
    (25,172
    )
    
    $
    
    
    
    $
    225,788
    
    
    $
    (166,705
    )
    
    $
    738,297
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 For the Six Months Ended June 30,2005
    
    2004CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    32,955
    
    
    $
    77,927Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    121,909
    
    
    
    130,385Provision for uncollectible accounts
    
    
    24,129
    
    
    
    29,374Deferred income tax
    
    
    16,701
    
    
    
    33,700Accretion of discount on subscription receivable
    
    
    
    
    
    
    (485
    )Equity income from joint venture
    
    
    (1,112
    )
    
    
    (1,335
    )Early retirement and voluntary separation provision
    
    
    1,687
    
    
    
    1,635Gain on sale of building
    
    
    (207
    )
    
    
    (248
    )Minority interest in consolidated subsidiary
    
    
    1,407
    
    
    
    1,218Changes in assets and liabilities:Accounts receivable
    
    
    22,199
    
    
    
    (14,884
    )Inventory and supplies
    
    
    2,692
    
    
    
    3,335Prepaid expenses and other assets
    
    
    4,839
    
    
    
    6,143Other current and non-current liabilities
    
    
    (56,440
    )
    
    
    (107,533
    )Pension and other post-employment benefits
    
    
    (62,561
    )
    
    
    (47,376
    )Net cash provided by operating activities
    
    
    108,198
    
    
    
    111,856CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (79,720
    )
    
    
    (65,931
    )Proceeds from sale of building
    
    
    1,136
    
    
    
    930Net cash used in investing activities
    
    
    (78,584
    )
    
    
    (65,001
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    
    
    
    
    40,000Net issuance (repayments) of short-term debt, including
capital leases
    
    
    
    
    
    
    (29,580
    )Dividends paid
    
    
    (3,248
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (3,248
    )
    
    
    10,420NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    26,366
    
    
    
    57,275CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    63,346
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    89,712
    
    
    $
    79,007
 The accompanying notes are an integral part of these financial statements.
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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)
 1.
    
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the Companyor we),
holds 100% of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga
Distancia, Inc. (PRTLD), and Datacom Caribe, Inc. (Datacom). The Company also holds a 67%
interest in Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of 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 also holds a 36% interest. The Company is the largest
telecommunications service provider in Puerto Rico. PRTC is the incumbent local exchange
carrier for the island of Puerto Rico. Wireline service is provided by PRTC and cellular
service is provided by the wireless division of PRTC, under the brand of Verizon Wireless Puerto
Rico (Verizon Wireless). The Companys off-island long distance service is provided by PRTLD.
The Companys dial-up Internet access service is provided by Coqui.net and the directory
publishing revenues are generated by VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest and management control over the Company on March 2, 1999 from the Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In the
Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and Bell Atlantic
Corporation merged on June 30, 2000 to form Verizon Communications Inc. (Verizon). On January
25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an additional 12% and 3%
interest in the Company, respectively, by exercising an option each held since the Acquisition
(the Option Exercise). Verizon and Popular, Inc. obtained the additional ownership interest
from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and Popular, Inc.
paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172 million in
cash for the additional 3,750,000 shares at a $45.9364 per share price established in the Share
Option Agreement, an agreement entered into at the time of the Acquisition. As a result,
Verizon now owns 52%, PRTA owns 28%, Popular Inc. owns 13% and the Employee Stock Ownership Plan
owns 7% of the outstanding capital stock of the Company. The Company is an affiliate of
Verizon, which consolidates the Companys financial results with its own financial results.2.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information
and the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles for annual financial statements
have been condensed or omitted pursuant to such rules and regulations. Management believes the
financial statements include all adjustments and recurring accruals necessary to present fairly
the results of its operations and financial condition for the interim periods shown. The
Condensed Consolidated Balance Sheet at December 31, 2004 was derived from audited financial
statements and should be read in conjunction with the notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.Impairment or Disposal of Long-lived AssetsAssets are assessed for impairment when changes in circumstances indicate that their carrying
values are not recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Losses are recognized in circumstances where impairment exists,
at the amount by which the carrying value of assets exceeds fair value. Fair value is
determined based on quoted market prices, if not available, the estimate of fair value is based
on various valuation techniques, including a discounted value of estimated future cash flows and
fundamental analysis.For the last three years, the Company has been operating a TDMA network and CDMA network for its
wireless subscribers. During 2003, management decided to migrate all TDMA subscribers to the
CDMA network and subsequently dispose of the TDMA network. The expected undiscounted future
cash flow from operations on the
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TDMA network was estimated to be $27 million ($47 million
estimated cash flows from operations less $20 million of related expenses). The discounted fair
value of the network was estimated to be $26 million and was determined by the sum of
anticipated discounted future cash flows at 3.76%.Business 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 using a fair value approach.Intangible assets that do not have indefinite lives 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 is currently undergoing its annual
evaluation of assets, using the fair value approach for each reporting unit, to determine if
there is an impairment exposure and any impact it would have on the Companys results of
operations for 2005.ReclassificationsReclassifications of prior periods data have been made to conform to the current periods
presentation.3.
    
    Summary of Recent Accounting PronouncementsAccounting for Conditional Asset Retirement ObligationsIn March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN)
No. 47, Accounting for Conditional Asset Retirement Obligations  an interpretation of FASB
Statement No. 143. FIN No. 47 clarifies SFAS No 143, Accounting for Asset Retirement
Obligations, such that conditional asset retirement obligations require recognition at fair
value if they can be reasonably estimated. These rules are effective December 31, 2005, we are
currently evaluating the impact, if any, on our results of operations and financial
position.
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4.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of:
 RemainingUsefulLives (Yrs)
    
    June 30,
    
    December 31,Current
    
    Previous
    
    2005
    
    2004(In thousands)Outside plant
    
    
    9.2
    
    
    
    9.2
    
    
    $
    2,177,679
    
    
    $
    2,148,244Central office and transmission equipment
    
    
    4.4
    
    
    
    4.4
    
    
    
    1,253,935
    
    
    
    1,228,001Equipment and other
    
    
    2.7
    
    
    
    2.7
    
    
    
    293,215
    
    
    
    304,716Buildings
    
    
    11.0
    
    
    
    11.0
    
    
    
    324,253
    
    
    
    321,928Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    25,861
    
    
    
    26,003Gross plant in service
    
    
    
    
    
    
    
    
    
    
    4,074,943
    
    
    
    4,028,892Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,720,949
    
    
    
    2,637,434Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,353,994
    
    
    
    1,391,458Construction in progress
    
    
    
    
    
    
    
    
    
    
    63,381
    
    
    
    68,001Total
    
    
    
    
    
    
    
    
    
    $
    1,417,375
    
    
    $
    1,459,459
 Effective July 2004, the Company performed its periodic review of plant useful lives estimates
based on a comprehensive analysis of the useful lives underlying the depreciation rates. The
review incorporates the impact of technology, future competition and assumptions employed in the
industry relative to depreciation and retirement rates. The revision resulted in a decrease in
depreciation expense by approximately $3.3 million for the year ended December 31, 2004
and for the six months ended June 30, 2005, respectively.5.
    
    GoodwillThe following is a breakdown of our goodwill.
 Carrying ValueJune 30,
    
    December 31,2005
    
    2004(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
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6. Intangibles
 Carrying ValueJune 30,
    
    December 31,2005
    
    2004(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 June 30, 2005
    
    December 31, 2004(In thousands)Cost
    
    Acc. Amort
    
    Book Value
    
    Cost
    
    Acc. Amort
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    12,250
    
    
    $
    36,150
    
    
    $
    48,400
    
    
    $
    11,282
    
    
    $
    37,118Software licenses
    
    
    101,125
    
    
    
    50,410
    
    
    
    50,715
    
    
    
    91,759
    
    
    
    41,032
    
    
    
    50,727Total Definite Life
    
    
    149,525
    
    
    
    62,660
    
    
    
    86,865
    
    
    
    140,159
    
    
    
    52,314
    
    
    
    87,845Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    149,525
    
    
    $
    62,660
    
    
    $
    195,840
    
    
    $
    140,159
    
    
    $
    52,314
    
    
    $
    196,820
 SFAS No. 142, Goodwill and Other Intangible Assets, no longer permits the amortization of
goodwill and other indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or, under certain conditions, more frequently) for impairment in accordance with this
statement. This impairment test uses a fair value approach.Intangible assets that do not have indefinite lives continue to be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. For 2004, the Company has evaluated its assets
using the fair value approach for the wireline and wireless reporting units to determine if
there is an impairment exposure and the impact it would have on the Companys results of
operations. The evaluation of the reporting units revealed no impairment exposure.The Company is currently undergoing its annual evaluation of assets to determine if there is an
impairment exposure and related impact, if any, to the Companys 2005 results of operations.The following table presents current and expected amortization expense of existing intangible
assets as of June 30, 2005 and for each of the following years:
 Aggregate amortization expense:For the six months ended June 30, 2005
    
    
    
    
    
    $
    10,391Expected amortization expense:For the remainder of 2005
    
    
    
    
    
    $
    6,817For the years ending December 31,2006
    
    
    
    10,8782007
    
    
    
    8,7492008
    
    
    
    4,8372009
    
    
    
    4,837
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##### Table of Contents



7. Other assets
  June 30,
    
    December 31,2005
    
    2004(In thousands)Deferred activation and installation costs
    
    $
    66,991
    
    
    $
    72,775Notes receivable-equipment sales
    
    
    4,291
    
    
    
    5,675Deferred pension asset
    
    
    23,744
    
    
    
    23,747Deferred financing costs, net
    
    
    1,853
    
    
    
    2,307Other deferred costs
    
    
    2,093
    
    
    
    1,516Other assets
    
    
    1,709
    
    
    
    3,082Total
    
    $
    100,681
    
    
    $
    109,102
 8.
    
    Pension PlanThe Company has noncontributory pension plans for full-time employees, which are tax qualified
as they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements.
Pension plan contributions are tax deductible and deposited in a trust. The trusts invest in
equity and fixed income securities to meet the benefit obligations.The pension benefit is composed of two elements. First, an employee receives an annuity at
retirement when they reach the rule of 85 (age plus years of service). The annuity is
calculated by applying a percentage times years of service to the last three years of salary.
The second element is a lump sum based on years of service, up to a maximum of nine months of
salary for hourly employees, and twelve months of salary for salaried employees.There are separate trusts for the annuity and the lump sum benefit, with a further separation of
the annuity benefit into a plan for the UIET union, the HIETEL union, and management employees.
Health care and life insurance benefits are provided to retirees.The components of the net pension and other post-employment benefit expenses for the quarters
ended June 30, 2005 and 2004 are presented below.
 Pension and Lump Sum Benefits
    
    Post-Retirement BenefitsFor the Three Months Ended
    
    For the Six Months Ended
    
    For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(In thousands)
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Service cost
    
    $
    5,714
    
    
    $
    5,186
    
    
    $
    11,428
    
    
    $
    10,372
    
    
    $
    1,556
    
    
    $
    2,565
    
    
    $
    3,112
    
    
    $
    5,130Interest cost
    
    
    18,259
    
    
    
    17,567
    
    
    
    36,518
    
    
    
    35,134
    
    
    
    8,218
    
    
    
    9,652
    
    
    
    16,436
    
    
    
    19,304Expected return on plan assets
    
    
    (18,135
    )
    
    
    (14,910
    )
    
    
    (36,270
    )
    
    
    (29,820
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    90
    
    
    
    90
    
    
    
    180
    
    
    
    180
    
    
    
    551
    
    
    
    551
    
    
    
    1,102
    
    
    
    1,102Prior service cost (benefit)
    
    
    783
    
    
    
    1,179
    
    
    
    1,566
    
    
    
    2,358
    
    
    
    (2,463
    )
    
    
    (628
    )
    
    
    (4,926
    )
    
    
    (1,256
    )Actuarial loss, net
    
    
    5,549
    
    
    
    3,518
    
    
    
    11,098
    
    
    
    7,036
    
    
    
    4,579
    
    
    
    4,421
    
    
    
    9,158
    
    
    
    8,842Net amortization and deferral
    
    
    12,260
    
    
    
    12,630
    
    
    
    24,520
    
    
    
    25,260
    
    
    
    12,441
    
    
    
    16,561
    
    
    
    24,882
    
    
    
    33,122Effect of early retirement program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    696Total
    
    $
    12,260
    
    
    $
    12,630
    
    
    $
    24,520
    
    
    $
    26,199
    
    
    $
    12,441
    
    
    $
    16,561
    
    
    $
    24,882
    
    
    $
    33,818
 11




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##### Table of Contents



Cash FlowsThe Company expects to contribute $128 million to the pension and lump sum plans, and $31
million for post-retirement benefits in year 2005. As of June 30, 2005, the Company has
contributed $98 million to the pension plan and has sufficient liquid resources to fund the
remainder of the expected contribution.Medicare Drug ActOn December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003
(Medicare Drug Act) was signed into law. The Medicare Drug Act introduces a prescription drug
benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. The Companys plan provides prescription drug benefits that are deemed
actuarially equivalent to the Medicare Part D and elected to recognize the impact of the federal
subsidy on our accumulated postretirement benefit obligation and net postretirement benefit
costs in the third quarter of 2004. The reduction in the APBO for the subsidy related to
benefits attributed to past service is $77.4 million for year 2004. The effect of the subsidy
on the measurement of net periodic postretirement benefit cost of $10.7 million for the current
period 2004 consists of the following (in millions):
 Amortization of the actuarial experience gain
    
    $
    4.3Reduction in current period service cost
    
    
    1.6Resulting reduction in interest cost on APBO
    
    
    4.8Total
    
    $
    10.7
 9.
    
    Early Retirement and Voluntary Separation ProvisionIn May 2005, 33 eligible HIETEL employees accepted the voluntary separation program offered by
the Company in March 2005. In March 2005, 46 eligible management employees accepted the
voluntary separation program offered by the Company in December 2004. These programs resulted
in a provision of $1.7 million during the quarter ended June 30, 2005.In September 30, 2004, the Company offered a voluntary separation program, expiring on December
3, 2004, to eligible management employees, resulting in a provision of $1.2 million covering 24
employees who accepted the separation plan.In January 2004, the Company recorded a provision of $1.6 million associated with 19 eligible
management employees who accepted the early retirement program offered by the Company in
December 2003.10.
    
    Deferred ESOP CompensationThe Employee Stock Ownership Plan (ESOP) acquired a 3% interest in the Company in 1999 with a
$26 million, twenty-year note borrowed from the Company to establish a contributory investment
fund for employees. The ESOP only invests in shares of the Companys common stock. Shares are
held by the ESOPs trustee and maintained in a suspense account until they are released to
employee participants. The yearly release of shares to participants is based on the greater of
participant contributions plus a Company match of 30% up to 5% of wages or a minimum based on an
amortization schedule. The minimum is based on the ratio of annual debt service to total debt
service multiplied by the initial 750,000 shares.Also, during the year 2000 and 2001, subsequent to ESOPs commencement, the ESOP entered into
various loan agreements with the Company amounting to $4.9 million to finance the ESOPs
acquisition of Company stock from former employees.
 12




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##### Table of Contents



Salaried, regular, full and part-time employees of the Company actively employed on March 2,
1999 were eligible to receive a portion of the Initial Grant of the Companys stock. Employees
that were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant
provided that they met the condition below.Employees who were on short-term disability, workers compensation, Family and Medical Care
Leave Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence;
and the employees returned to active employment with the Company as soon as they were eligible
to do so and within 180 days after March 2, 1999.Compensation expense is recorded based on the release of shares at market value, which is based
on an independent appraisal performed annually. The ESOP released approximately 32,000 shares in
2004. This release resulted in compensation expense of $1 million for the year ended December
31, 2004 reflecting the market value of the shares. The release of shares, based upon the per
share price established at the Acquisition, amounted to $1.5 million for December 31, 2004,
which is reflected as a reduction of deferred ESOP compensation in equity.11.
    
    Other Current LiabilitiesOther current liabilities consist of:
 June 30,
    
    December 31,2005
    
    2004(In thousands)Accounts payable
    
    $
    32,096
    
    
    $
    35,367Accrued expenses
    
    
    89,708
    
    
    
    105,128Employee benefit accruals
    
    
    64,160
    
    
    
    52,630Carrier payables
    
    
    13,468
    
    
    
    14,825Taxes
    
    
    278
    
    
    
    1,868Interest
    
    
    6,671
    
    
    
    6,369Total
    
    $
    206,381
    
    
    $
    216,187
 12.
    
    DebtDebt consists of:
 June 30,
    
    December 31,2005
    
    2004(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    
    399,979
    
    
    
    399,966Due May 15, 2009 at 6.80%
    
    
    299,919
    
    
    
    299,910Term credit facilities:Due July 29, 2005 at 57 basis points over LIBOR
    
    
    30,000
    
    
    
    30,000Due August 19, 2005 at 70 basis points over LIBOR
    
    
    63,000
    
    
    
    63,000Deferred derivative and Interest rate swap
    
    
    1,369
    
    
    
    3,657Capital leases
    
    
    117
    
    
    
    191Total
    
    
    794,384
    
    
    
    796,724Less short-term debt
    
    
    493,096
    
    
    
    93,168Long-term debt
    
    $
    301,288
    
    
    $
    703,556
 The senior notes and term credit facilities are unsecured and non-amortizing. PRTC is the
guarantor of these debt instruments. The senior notes indentures and term credit facility
agreements do not contain dividend restrictions.The Company has a $400 million commercial paper program with maturities not to exceed 364 days,
which is backed by one of our working capital facilities.
 13




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##### Table of Contents



In March 2005, the Companys existing $360 million bank note credit facility matured. On March
1, 2005 the Company entered into a new unsecured, $400 million 364-day revolving credit facility
with a syndicate of banks and other lenders for whom Citibank, N.A. acts as administrative
agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Bank of Nova Scotia act as co-syndication
agents and Banco Popular de Puerto Rico and FirstBank Puerto Rico act as co-documentation
agents. Amounts borrowed under this facility are guaranteed by PRTC, and bear interest at the
applicable LIBOR rate plus a margin or at the base rate; which is the higher of the base rate
publicly announced by the administrative agent from time to time or the Federal Funds rate plus
0.5%, plus a margin. The Company is also required to pay a quarterly facility fee on
commitments under the facility and a quarterly utilization fee on borrowed amounts that exceed
50% of the commitments under the facility. Accrued interest on Eurodollar rate borrowings is
payable based on elected intervals of one, two, three or six months or other interest period as
the Company may select, subject to certain conditions. Accrued interest on base rate borrowings
is payable quarterly. This facility matures on February 28, 2006, on which date the Company has
the right to convert outstanding amounts into a term loan that mature on February 28, 2007.
This facility contains negative covenants, including covenants which limit the Companys ability
to grant or permit liens on its or subsidiaries properties, merge or sell all or substantially
all of its assets and permit its subsidiaries to incur debt. This facility also requires that
the Company maintain certain financial ratios. Upon the occurrence of a default or an event of
default, the lenders have various remedies or rights, which may include termination of the
lenders obligations to make advances and declare all borrowed amounts and interest thereon
immediately due and payable. The intended purpose of this facility is for working capital
purposes and serves as backstop facility for the commercial paper program. At June 30, 2005, the
Company had no outstanding debt balance under this facility.The Company has a $40 million working capital credit facility with Banco Popular de Puerto Rico,
an affiliate of Popular, Inc. that matured on June 30, 2005. In June 2005, the Company renewed
the undrawn $40 million working capital credit facility maturing on June 30, 2006. Amounts
outstanding under this facility bear interest at a rate of 40 basis points over LIBOR. This
facility also serves as additional backstop for the commercial paper program. At June 30, 2005,
the Company had no outstanding debt balance under this facility.At December 31, 2002, the Company had $225 million in term credit facilities with maturities
ranging from two to three years, and bearing interest from 60 to 100 basis points over LIBOR.
By October 29, 2003, the Company repaid one of the $50 million term loans, and prepaid principal
in an aggregate amount of $52 million of the outstanding term credit loans, while reducing
interest rate to 70 basis points over LIBOR. By November 22, 2004, the Company repaid the $30
million term loan with a maturity due on June 24, 2005. One of the $30 million term loans
matured on May 16, 2005. The Company renewed the $30 million term loan at an interest rate of
57 basis points over LIBOR maturity due on July 29, 2005.On August 31, 2001, the Company entered into an interest rate swap contract with a notional
amount of $150 million. In September 2002, the Company drew the value out of the hedge position
without changing the fixed/floating funding mix of the original swap transaction. This
transaction resulted in cash proceeds of $11 million, reflected in cash from operations as
required by SFAS No. 104, and created a deferred derivative, which will be amortized until 2006.
As of June 30, 2005, the unamortized balance of the deferred derivative is $2 million. The
purpose of the swap is to hedge against changes in the fair market value of the Companys senior
notes to achieve a targeted mix of fixed and variable rate debt. The swap receives interest at a
fixed rate of 6.65% and pays interest at a net variable rate equal to six month LIBOR plus 170
basis points, with semiannual settlements and reset dates every May 15 and November 15 until
maturity of the May 15, 2006 senior notes. The swap was entered into at market and as a
result, there was no exchange of premium at the initial date of the swap. The Company
designates the swap as a hedge of the changes in fair market value
of the senior notes due to changes in the designated benchmark interest rate. PRTC is the
guarantor of the interest rate swap.
 14




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##### Table of Contents



Aggregate maturities of the senior notes and term credit facilities are as follow:
 Year
    
    
    
    Amount(In thousands)2005
    
    Term credit facilities
    
    $
    93,0002006
    
    6.65% Senior note
    
    
    400,0002009
    
    6.80% Senior note
    
    
    300,000Total
    
    
    
    $
    793,000
 The Company is in compliance with debt covenant agreements and with the financial ratios as
specified by term facilities.13.
    
    Other Non-Current LiabilitiesOther non-current liabilities consist of:
 June 30,
    
    December 31,2005
    
    2004(In thousands)Deferred activation and installation revenues
    
    $
    66,991
    
    
    $
    72,775Deferred directory-publishing revenues
    
    
    4,384
    
    
    
    14,065Customer deposits
    
    
    27,795
    
    
    
    26,521Other liabilities
    
    
    59,607
    
    
    
    73,420Total
    
    $
    158,777
    
    
    $
    186,781
 14.
    
    Shareholders EquityCommon StockCommon stock consists of fifty million authorized shares, no par value, of which twenty five
million shares were outstanding at June 30, 2005 and December 31, 2004.Subscription ReceivableThe subscription receivable reflects receipts from the PRTA originally recorded at its present
value (at an 8% discount
rate). As part of the Acquisition agreement, the PRTA agreed to contribute a total of $200
million in cash or stock as a capital contribution in equal installments of $40 million over
five years beginning on March 2, 2000. The Company employed the $200 million capital
contribution to partially fund its underfunded pension and other post-employment benefit
obligations, as agreed. The stock purchase agreement required the Company to contribute $66
million, including the $40 million received from PRTA, to the pension plan immediately upon
receipt of the proceeds. The Company received the fifth and final $40 million installment in
March 2004 and made the required pension payment of $66 million. All installments were made in
cash.Accumulated Other Comprehensive LossThe accumulated other comprehensive loss represents unrecognized losses, other than unrecognized
prior service costs which are reflected as an other asset, associated with the hourly employee
pension fund since the accumulated benefit
 15




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##### Table of Contents



Dividends
   2005
    
    2004(In thousands)
    
    (In thousands)4th Quarter
    
    $
    
    
    
    4th Quarter
    
    $
    49,5673rd Quarter
    
    
    
    
    
    3rd Quarter
    
    
    12,3862nd Quarter
    
    
    14,875
    
    
    2nd Quarter
    
    
    1st Quarter
    
    
    3,248
    
    
    1st Quarter
    
    
    Total
    
    $
    18,123
    
    
    Total
    
    $
    61,953
  15.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial instruments are as follows:
 June 30,
    
    December 31,2005
    
    2004Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    89,712
    
    
    $
    89,712
    
    
    $
    63,346
    
    
    $
    63,346Accounts receivable
    
    
    224,586
    
    
    
    224,586
    
    
    
    270,914
    
    
    
    270,914Liabilities:Other current liabilities
    
    $
    206,381
    
    
    $
    206,381
    
    
    $
    216,187
    
    
    $
    216,187Short-term debt
    
    
    493,096
    
    
    
    502,677
    
    
    
    93,168
    
    
    
    93,168Long-term debt, including interest rate swap
    
    
    301,288
    
    
    
    323,118
    
    
    
    703,556
    
    
    
    739,470
 16




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##### Table of Contents



16.
    
    Segment ReportingThe Company has two reportable segments: Wireline and Wireless.The Wireline segment consists of:
 
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed private line services, Internet access and public
phone service;
    
    Access services to long distance carriers, competitive local exchange carriers, and
cellular and paging operators to originate and terminate calls on our network;
    
    Long distance services, including direct dial on-island and off-island, operator
assisted calls, 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.
  
    
    Cellular service; and
    
    Wireless equipment sales.
  17




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##### Table of Contents



For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(In thousands)Wireline:RevenuesLocal services
    
    $
    153,805
    
    
    $
    148,456
    
    
    $
    306,233
    
    
    $
    296,161Access services
    
    
    53,221
    
    
    
    74,001
    
    
    
    120,637
    
    
    
    147,678Long distance services
    
    
    13,069
    
    
    
    22,910
    
    
    
    30,657
    
    
    
    52,655Directory services and other
    
    
    15,412
    
    
    
    16,268
    
    
    
    29,900
    
    
    
    32,847Total revenues
    
    $
    235,507
    
    
    $
    261,635
    
    
    $
    487,427
    
    
    $
    529,341Operating income
    
    $
    28,487
    
    
    $
    98,230
    
    
    $
    75,100
    
    
    $
    150,202Wireless:RevenuesCellular services
    
    $
    57,470
    
    
    $
    47,566
    
    
    $
    114,127
    
    
    $
    95,717Equipment sales and other
    
    
    8,044
    
    
    
    6,627
    
    
    
    17,950
    
    
    
    10,741Total revenues
    
    $
    65,514
    
    
    $
    54,193
    
    
    $
    132,077
    
    
    $
    106,458Operating income (loss)
    
    $
    1,462
    
    
    $
    108
    
    
    $
    1,472
    
    
    $
    (1,506
    )Consolidated:Revenues for reportable segments
    
    $
    301,021
    
    
    $
    315,828
    
    
    $
    619,504
    
    
    $
    635,799Elimination of intersegment revenues
    
    
    (5,384
    )
    
    
    (4,090
    )
    
    
    (11,524
    )
    
    
    (7,237
    )Consolidated revenues
    
    $
    295,637
    
    
    $
    311,738
    
    
    $
    607,980
    
    
    $
    628,562Operating income
    
    $
    29,949
    
    
    $
    98,338
    
    
    $
    76,572
    
    
    $
    148,696
 As of
    
    As ofJune 30,
    
    December 31,2005
    
    2004(In thousands)AssetsWireline assets
    
    $
    2,365,535
    
    
    $
    2,474,296Wireless assets
    
    
    388,854
    
    
    
    357,290Segment assets
    
    $
    2,754,389
    
    
    $
    2,831,586Elimination of intersegment assets
    
    
    (295,580
    )
    
    
    (286,304
    )Consolidated assets
    
    $
    2,458,809
    
    
    $
    2,545,282
 18




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##### Table of Contents



17.
    
    Condensed Consolidating InformationThe following summarizes the unaudited condensed consolidating financial information as of June
30, 2005 and December 31, 2004 and for the quarters then ended presents the financial position,
results of operations and cash flows of (i) the Company as if it had accounted for its
subsidiaries using the equity method, (ii) the Guarantor Subsidiary (as defined below); and
(iii) the Non-Guarantor Subsidiaries (as defined below) on a combined basis. The consolidation
entries eliminate investments in subsidiaries and intercompany balances and transactions.The Notes are guaranteed by PRTC (the Guarantor Subsidiary), a wholly-owned subsidiary of the
Company, but not guaranteed by the Companys other subsidiaries, Coqui.net, PRTLD and Datacom
(the Non-Guarantor Subsidiaries). The guarantee by the Guarantor Subsidiary is full and
unconditional.
 19




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##### Table of Contents



Condensed Consolidating Balance Sheets
 
 Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    63,405
    
    
    $
    26,307
    
    
    $
    
    
    
    $
    89,712Intercompany accounts receivable
    
    
    743,231
    
    
    
    89,155
    
    
    
    48,897
    
    
    
    (881,283
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    223,744
    
    
    
    842
    
    
    
    
    
    
    
    224,586Deferred income tax
    
    
    718
    
    
    
    26,506
    
    
    
    33
    
    
    
    
    
    
    
    27,257Inventory and supplies, net
    
    
    
    
    
    
    25,465
    
    
    
    1
    
    
    
    
    
    
    
    25,466Prepaid expenses
    
    
    
    
    
    
    30,109
    
    
    
    875
    
    
    
    
    
    
    
    30,984Total current assets
    
    
    743,949
    
    
    
    458,384
    
    
    
    76,955
    
    
    
    (881,283
    )
    
    
    398,005PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,408,040
    
    
    
    9,335
    
    
    
    
    
    
    
    1,417,375GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    298,242
    
    
    
    24,525
    
    
    
    
    
    
    
    322,767DEFERRED INCOME TAX
    
    
    
    
    
    
    221,029
    
    
    
    (33
    )
    
    
    (1,015
    )
    
    
    219,981INVESTMENT IN SUBSIDIARIES
    
    
    565,003
    
    
    
    
    
    
    
    
    
    
    
    (565,003
    )
    
    
    OTHER ASSETS
    
    
    304,064
    
    
    
    100,748
    
    
    
    (1
    )
    
    
    (304,130
    )
    
    
    100,681TOTAL ASSETS
    
    $
    1,613,016
    
    
    $
    2,486,443
    
    
    $
    110,781
    
    
    $
    (1,751,431
    )
    
    $
    2,458,809LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    493,000
    
    
    $
    493,096
    
    
    $
    
    
    
    $
    (493,000
    )
    
    $
    493,096Intercompany accounts payable
    
    
    74,532
    
    
    
    281,150
    
    
    
    38,721
    
    
    
    (394,403
    )
    
    
    Other current liabilities
    
    
    4,976
    
    
    
    193,788
    
    
    
    7,544
    
    
    
    73
    
    
    
    206,381Total current liabilities
    
    
    572,508
    
    
    
    968,034
    
    
    
    46,265
    
    
    
    (887,330
    )
    
    
    699,477LONG-TERM DEBT, excluding current portion
    
    
    301,266
    
    
    
    299,917
    
    
    
    
    
    
    
    (299,895
    )
    
    
    301,288OTHER NON-CURRENT LIABILITIES
    
    
    945
    
    
    
    700,335
    
    
    
    1,249
    
    
    
    801
    
    
    
    703,330Total liabilities
    
    
    874,719
    
    
    
    1,968,286
    
    
    
    47,514
    
    
    
    (1,186,424
    )
    
    
    1,704,095MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,417
    
    
    
    16,417SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    704,386
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    704,386Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,172
    )Retained earnings
    
    
    225,788
    
    
    
    199,272
    
    
    
    22,124
    
    
    
    (221,396
    )
    
    
    225,788Accumulated other comprehensive loss
    
    
    (166,705
    )
    
    
    (166,705
    )
    
    
    
    
    
    
    166,705
    
    
    
    (166,705
    )Total shareholders equity
    
    
    738,297
    
    
    
    518,157
    
    
    
    63,267
    
    
    
    (581,424
    )
    
    
    738,297TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,613,016
    
    
    $
    2,486,443
    
    
    $
    110,781
    
    
    $
    (1,751,431
    )
    
    $
    2,458,809
 20




---



##### Table of Contents



Condensed Consolidating Balance Sheets
 
 Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    (149
    )
    
    $
    44,658
    
    
    $
    18,837
    
    
    $
    
    
    
    $
    63,346Intercompany accounts receivable
    
    
    342,749
    
    
    
    86,340
    
    
    
    47,423
    
    
    
    (476,512
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    270,807
    
    
    
    107
    
    
    
    
    
    
    
    270,914Deferred income tax
    
    
    718
    
    
    
    27,303
    
    
    
    33
    
    
    
    
    
    
    
    28,054Inventory and supplies, net
    
    
    
    
    
    
    28,157
    
    
    
    1
    
    
    
    
    
    
    
    28,158Prepaid expenses
    
    
    
    
    
    
    25,228
    
    
    
    1,388
    
    
    
    
    
    
    
    26,616Total current assets
    
    
    343,318
    
    
    
    482,493
    
    
    
    67,789
    
    
    
    (476,512
    )
    
    
    417,088PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,449,809
    
    
    
    9,650
    
    
    
    
    
    
    
    1,459,459GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    299,164
    
    
    
    24,583
    
    
    
    
    
    
    
    323,747DEFERRED INCOME TAX
    
    
    
    
    
    
    236,755
    
    
    
    
    
    
    
    (869
    )
    
    
    235,886INVESTMENT IN SUBSIDIARIES
    
    
    550,178
    
    
    
    
    
    
    
    
    
    
    
    (550,178
    )
    
    
    OTHER ASSETS
    
    
    706,035
    
    
    
    108,986
    
    
    
    
    
    
    
    (705,919
    )
    
    
    109,102TOTAL ASSETS
    
    $
    1,599,531
    
    
    $
    2,577,207
    
    
    $
    102,022
    
    
    $
    (1,733,478
    )
    
    $
    2,545,282LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    93,000
    
    
    $
    93,168
    
    
    $
    
    
    
    $
    (93,000
    )
    
    $
    93,168Intercompany accounts payable
    
    
    73,335
    
    
    
    280,296
    
    
    
    36,298
    
    
    
    (389,929
    )
    
    
    Other current liabilities
    
    
    6,195
    
    
    
    202,879
    
    
    
    7,218
    
    
    
    (105
    )
    
    
    216,187Total current liabilities
    
    
    172,530
    
    
    
    576,343
    
    
    
    43,516
    
    
    
    (483,034
    )
    
    
    309,355LONG-TERM DEBT, excluding current portion
    
    
    703,536
    
    
    
    699,895
    
    
    
    
    
    
    
    (699,875
    )
    
    
    703,556OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    793,177
    
    
    
    1,103
    
    
    
    (384
    )
    
    
    793,896Total liabilities
    
    
    876,066
    
    
    
    2,069,415
    
    
    
    44,619
    
    
    
    (1,183,293
    )
    
    
    1,806,807MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,010
    
    
    
    15,010SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    704,386
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    704,386Deferred ESOP compensation
    
    
    (25,172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,172
    )Retained earnings
    
    
    210,956
    
    
    
    188,905
    
    
    
    16,260
    
    
    
    (205,165
    )
    
    
    210,956Accumulated other comprehensive loss, net of taxes
    
    
    (166,705
    )
    
    
    (166,703
    )
    
    
    
    
    
    
    166,703
    
    
    
    (166,705
    )Total shareholders equity
    
    
    723,465
    
    
    
    507,792
    
    
    
    57,403
    
    
    
    (565,195
    )
    
    
    723,465TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,599,531
    
    
    $
    2,577,207
    
    
    $
    102,022
    
    
    $
    (1,733,478
    )
    
    $
    2,545,282
 21




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##### Table of Contents



Condensed Consolidating Statements of Operations
 
 Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    143,777
    
    
    $
    8,224
    
    
    $
    (2,406
    )
    
    $
    149,595Access services
    
    
    
    
    
    
    53,711
    
    
    
    
    
    
    
    (1,504
    )
    
    
    52,207Long distance services
    
    
    
    
    
    
    7,680
    
    
    
    6,582
    
    
    
    (432
    )
    
    
    13,830Cellular services
    
    
    
    
    
    
    57,608
    
    
    
    
    
    
    
    
    
    
    
    57,608Directory and other services and sales
    
    
    
    
    
    
    25,098
    
    
    
    419
    
    
    
    (3,120
    )
    
    
    22,397Total revenues
    
    
    
    
    
    
    287,874
    
    
    
    15,225
    
    
    
    (7,462
    )
    
    
    295,637OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    93,737
    
    
    
    1,023
    
    
    
    (419
    )
    
    
    94,341Other operating expenses
    
    
    (6
    )
    
    
    105,453
    
    
    
    11,196
    
    
    
    (7,043
    )
    
    
    109,600Early retirement provision
    
    
    
    
    
    
    1,687
    
    
    
    
    
    
    
    
    
    
    
    1,687Depreciation and amortization
    
    
    
    
    
    
    59,573
    
    
    
    487
    
    
    
    
    
    
    
    60,060Total operating costs and expenses
    
    
    (6
    )
    
    
    260,450
    
    
    
    12,706
    
    
    
    (7,462
    )
    
    
    265,688OPERATING INCOME
    
    
    6
    
    
    
    27,424
    
    
    
    2,519
    
    
    
    
    
    
    
    29,949OTHER INCOME (EXPENSE), NET
    
    
    10,961
    
    
    
    (11,466
    )
    
    
    335
    
    
    
    (11,708
    )
    
    
    (11,878
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    10,967
    
    
    
    15,958
    
    
    
    2,854
    
    
    
    (11,708
    )
    
    
    18,071INCOME TAX EXPENSE
    
    
    
    
    
    
    6,065
    
    
    
    1,039
    
    
    
    
    
    
    
    7,104NET INCOME
    
    $
    10,967
    
    
    $
    9,893
    
    
    $
    1,815
    
    
    $
    (11,708
    )
    
    $
    10,967
 22




---



##### Table of Contents



Condensed Consolidating Statements of Operations
 
 Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    140,570
    
    
    $
    8,556
    
    
    $
    (3,130
    )
    
    $
    145,996Access services
    
    
    
    
    
    
    75,018
    
    
    
    
    
    
    
    (1,740
    )
    
    
    73,278Long distance services
    
    
    
    
    
    
    16,567
    
    
    
    8,283
    
    
    
    (23
    )
    
    
    24,827Cellular services
    
    
    
    
    
    
    47,620
    
    
    
    
    
    
    
    
    
    
    
    47,620Directory and other services and sales
    
    
    
    
    
    
    22,474
    
    
    
    
    
    
    
    (2,457
    )
    
    
    20,017Total revenues
    
    
    
    
    
    
    302,249
    
    
    
    16,839
    
    
    
    (7,350
    )
    
    
    311,738OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    91,852
    
    
    
    834
    
    
    
    
    
    
    
    92,686Other operating expenses
    
    
    178
    
    
    
    48,789
    
    
    
    13,190
    
    
    
    (7,350
    )
    
    
    54,807Depreciation and amortization
    
    
    
    
    
    
    65,341
    
    
    
    566
    
    
    
    
    
    
    
    65,907Total operating costs and expenses
    
    
    178
    
    
    
    205,982
    
    
    
    14,590
    
    
    
    (7,350
    )
    
    
    213,400OPERATING INCOME
    
    
    (178
    )
    
    
    96,267
    
    
    
    2,249
    
    
    
    
    
    
    
    98,338OTHER INCOME (EXPENSE), NET
    
    
    53,263
    
    
    
    (10,543
    )
    
    
    111
    
    
    
    (53,921
    )
    
    
    (11,090
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    53,085
    
    
    
    85,724
    
    
    
    2,360
    
    
    
    (53,921
    )
    
    
    87,248INCOME TAX EXPENSE (BENEFIT)
    
    
    (70
    )
    
    
    33,171
    
    
    
    992
    
    
    
    
    
    
    
    34,093NET INCOME
    
    $
    53,155
    
    
    $
    52,553
    
    
    $
    1,368
    
    
    $
    (53,921
    )
    
    $
    53,155
 23




---



##### Table of Contents



Condensed Consolidating Statements of Operations
 
 Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    287,726
    
    
    $
    16,081
    
    
    $
    (4,963
    )
    
    $
    298,844Access services
    
    
    
    
    
    
    120,831
    
    
    
    
    
    
    
    (2,842
    )
    
    
    117,989Long distance services
    
    
    
    
    
    
    15,802
    
    
    
    17,199
    
    
    
    (797
    )
    
    
    32,204Cellular services
    
    
    
    
    
    
    113,358
    
    
    
    
    
    
    
    
    
    
    
    113,358Directory and other services and sales
    
    
    
    
    
    
    50,282
    
    
    
    784
    
    
    
    (5,481
    )
    
    
    45,585Total revenues
    
    
    
    
    
    
    587,999
    
    
    
    34,064
    
    
    
    (14,083
    )
    
    
    607,980OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    185,933
    
    
    
    1,939
    
    
    
    (784
    )
    
    
    187,088Other operating expenses
    
    
    (6
    )
    
    
    211,819
    
    
    
    22,210
    
    
    
    (13,299
    )
    
    
    220,724Early retirement provision
    
    
    
    
    
    
    1,687
    
    
    
    
    
    
    
    
    
    
    
    1,687Depreciation and amortization
    
    
    
    
    
    
    120,856
    
    
    
    1,053
    
    
    
    
    
    
    
    121,909Total operating costs and expenses
    
    
    (6
    )
    
    
    520,295
    
    
    
    25,202
    
    
    
    (14,083
    )
    
    
    531,408OPERATING INCOME
    
    
    6
    
    
    
    67,704
    
    
    
    8,862
    
    
    
    
    
    
    
    76,572OTHER INCOME (EXPENSE), NET
    
    
    32,949
    
    
    
    (21,861
    )
    
    
    511
    
    
    
    (34,362
    )
    
    
    (22,763
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    32,955
    
    
    
    45,843
    
    
    
    9,373
    
    
    
    (34,362
    )
    
    
    53,809INCOME TAX EXPENSE
    
    
    
    
    
    
    17,345
    
    
    
    3,509
    
    
    
    
    
    
    
    20,854NET INCOME
    
    $
    32,955
    
    
    $
    28,498
    
    
    $
    5,864
    
    
    $
    (34,362
    )
    
    $
    32,955
 24




---



##### Table of Contents



Condensed Consolidating Statements of Operations
 
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    TotalREVENUES:Local services
    
    $
    
    
    
    $
    280,662
    
    
    $
    16,788
    
    
    $
    (6,277
    )
    
    $
    291,173Access services
    
    
    
    
    
    
    150,334
    
    
    
    
    
    
    
    (3,753
    )
    
    
    146,581Long distance services
    
    
    
    
    
    
    34,718
    
    
    
    19,779
    
    
    
    (42
    )
    
    
    54,455Cellular services
    
    
    
    
    
    
    95,457
    
    
    
    
    
    
    
    
    
    
    
    95,457Directory and other services and sales
    
    
    
    
    
    
    45,487
    
    
    
    
    
    
    
    (4,591
    )
    
    
    40,896Total revenues
    
    
    
    
    
    
    606,658
    
    
    
    36,567
    
    
    
    (14,663
    )
    
    
    628,562OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    190,511
    
    
    
    1,670
    
    
    
    
    
    
    
    192,181Other operating expenses
    
    
    178
    
    
    
    143,445
    
    
    
    26,705
    
    
    
    (14,663
    )
    
    
    155,665Early retirement provision
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    
    
    
    
    129,252
    
    
    
    1,133
    
    
    
    
    
    
    
    130,385Total operating costs and expenses
    
    
    178
    
    
    
    464,843
    
    
    
    29,508
    
    
    
    (14,663
    )
    
    
    479,866OPERATING INCOME
    
    
    (178
    )
    
    
    141,815
    
    
    
    7,059
    
    
    
    
    
    
    
    148,696OTHER INCOME (EXPENSE), net
    
    
    77,211
    
    
    
    (20,296
    )
    
    
    173
    
    
    
    (78,429
    )
    
    
    (21,341
    )INCOME BEFORE INCOME TAX
    
    
    77,033
    
    
    
    121,519
    
    
    
    7,232
    
    
    
    (78,429
    )
    
    
    127,355INCOME TAX EXPENSE (BENEFIT)
    
    
    (894
    )
    
    
    47,504
    
    
    
    2,818
    
    
    
    
    
    
    
    49,428NET INCOME
    
    $
    77,927
    
    
    $
    74,015
    
    
    $
    4,414
    
    
    $
    (78,429
    )
    
    $
    77,927
 25




---



##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 
 Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    100,051
    
    
    $
    8,147
    
    
    $
    108,198CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (79,041
    )
    
    
    (679
    )
    
    
    (79,720
    )Proceeds from sale of building
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    1,136Net salvage on retirements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    (77,905
    )
    
    
    (679
    )
    
    
    (78,584
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net repayments of short-term debt, including
capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid
    
    
    (3,248
    )
    
    
    
    
    
    
    
    
    
    
    (3,248
    )Borrowings/(repayment) intercompany loans
    
    
    3,397
    
    
    
    (3,397
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    149
    
    
    
    (3,397
    )
    
    
    
    
    
    
    (3,248
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    149
    
    
    
    18,748
    
    
    
    7,469
    
    
    
    26,366CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (149
    )
    
    
    44,658
    
    
    
    18,837
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (0
    )
    
    $
    63,405
    
    
    $
    26,307
    
    
    $
    89,712
 26




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 
 Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (1,934
    )
    
    $
    110,413
    
    
    $
    3,377
    
    
    $
    111,856CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (66,120
    )
    
    
    (13
    )
    
    
    (66,133
    )Proceeds from sale of building
    
    
    
    
    
    
    930
    
    
    
    
    
    
    
    930Net salvage on retirements
    
    
    
    
    
    
    203
    
    
    
    (1
    )
    
    
    202Net cash used in investing activities
    
    
    
    
    
    
    (64,987
    )
    
    
    (14
    )
    
    
    (65,001
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (29,480
    )
    
    
    (100
    )
    
    
    
    
    
    
    (29,580
    )Borrowings/(repayment) intercompany loans
    
    
    (8,577
    )
    
    
    8,577
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    1,943
    
    
    
    8,477
    
    
    
    
    
    
    
    10,420NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    9
    
    
    
    53,903
    
    
    
    3,363
    
    
    
    57,275CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    
    
    
    
    12,438
    
    
    
    9,294
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    9
    
    
    $
    66,341
    
    
    $
    12,657
    
    
    $
    79,007
 
 27




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##### Table of Contents



18.
    
    Contingencies and Regulatory and Other MattersThe Company is involved in various legal matters and regulatory proceedings arising in the
ordinary course of business. Management, after consultation with legal counsel, believes at
this time that, except as disclosed in the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations  Regulatory and Other Matters, the
resolution of these matters will not have a material adverse effect on the Companys financial
condition and results of operations.The Company is regulated by the United States Federal Communications Commission (the FCC) for
inter-state wireline services and by the Telecommunications Regulatory Board of Puerto Rico
(TRB) for intra-island wireline services.
 28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    
    
    Revenue Growth  Our emphasis is on revenue transformation, devoting more resources from
traditional services, where we have been experiencing access line erosion, to higher growth
markets such as wireless and local data services, including digital subscriber lines (DSL);
as well as expanded data services to enterprise markets. In the quarter ended June 30,
2005, revenues from the growth of wireless areas, in particular post-paid cellular services
and sale of wireless equipment increased by 30% compared to the same period in 2004. In
the six months ended June 30, 2005, revenue from post-paid cellular services and the sale
of wireless equipment increased by 31% compared to the same period in 2004. The local data
service revenues for the quarter ended June 30, 2005, decreased by 3% compared to the same
period in 2004, driven by lower revenues from private lines; however, for the six months
ended June 30, 2005, local data service revenues increased by 2% compared to the same
period in 2004, driven by strong DSL revenue growth. The wireless and local data services
revenues represented 32% of the total revenues, up from 27% of total revenues for the three
and six months ended June 30, 2004. The revenue growth was driven by the addition of
approximately 98,000 post-paid wireless customers, approximately 31,000 DSL customers and
approximately 13,000 internet dial-up lines compared to the six months period ended June
30, 2004. For the quarter ended June 30, 2005, the revenue growth was driven by the
addition of approximately 24,000 post-paid wireless customers, approximately 7,000 DSL
customers and approximately 6,000 internet dial-up lines compared to the same period in
2004.
    
    Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to lower expenses, particularly through technology-assisted
productivity improvements. The Company has significantly lower workforce levels compared
to the same period in 2004, which will provide ongoing expense benefits. At June 30, 2004,
the Company had approximately 5,223 employees compared to 4,867 at June 30, 2005. Labor
and benefits expenses declined by approximately $5 million, or 2.4%, for the six months
ended June 30, 2005 compared to the same period in 2004, largely as a result of 2004s
early retirement and 2005s voluntary separation programs.
    
    Capital Allocation  Capital spending has been, and will continue to be, directed toward
growth markets, such as High-speed wireless data or Evolution Data Optimized (EV-DO)
technologies. Replacement of the TDMA network, as well as voice over the Internet (VoIP),
and expanded services offered to enterprise markets are some examples of areas of capital
spending which support theses growth markets.
    
    Cash Flow Generation  The financial statements reflect the managements focus on using
cash provided by our operating and investing activities to strategically reduce debt and to
fund our pension plans.
 29




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CONSOLIDATED RESULTS OF OPERATIONS
   For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % Change(In millions)
    
    (In millions)Local
    
    $
    150
    
    
    $
    146
    
    
    
    3
    %
    
    $
    299
    
    
    $
    291
    
    
    
    3
    %Network Access
    
    
    52
    
    
    
    73
    
    
    
    (29
    )
    
    
    118
    
    
    
    147
    
    
    
    (20
    )Long Distance
    
    
    14
    
    
    
    25
    
    
    
    (44
    )
    
    
    32
    
    
    
    54
    
    
    
    (41
    )Cellular
    
    
    58
    
    
    
    48
    
    
    
    21
    
    
    
    113
    
    
    
    95
    
    
    
    19Directory and Other
    
    
    22
    
    
    
    20
    
    
    
    10
    
    
    
    46
    
    
    
    41
    
    
    
    12Consolidated revenues
    
    $
    296
    
    
    $
    312
    
    
    
    (5
    )
    
    $
    608
    
    
    $
    628
    
    
    
    (3
    )
    30




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##### Table of Contents



For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    %Change(In millions)
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    94
    
    
    $
    93
    
    
    
    1
    %
    
    $
    187
    
    
    $
    192
    
    
    
    (3
    )%Other operating expenses
    
    
    110
    
    
    
    55
    
    
    
    100
    
    
    
    221
    
    
    
    156
    
    
    
    42Total consolidated operating expenses
    
    $
    204
    
    
    $
    148
    
    
    
    38
    
    
    $
    408
    
    
    $
    348
    
    
    
    17
    31




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##### Table of Contents



For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    %Change(In millions)
    
    (In millions)Retirement and voluntary separation provision
    
    $
    2
    
    
    $
    
    
    
    
    
    %
    
    $
    2
    
    
    $
    2
    
    
    
    
    %Depreciation and amortization
    
    
    60
    
    
    
    66
    
    
    
    (9
    )
    
    
    122
    
    
    
    130
    
    
    
    (6
    )Interest expense and others
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    22
    
    
    
    22
    
    
    
    Equity income in joint venture
    
    
    
    
    
    
    (1
    )
    
    
    (100
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Income tax (benefit) expense
    
    
    7
    
    
    
    34
    
    
    
    (79
    )
    
    
    21
    
    
    
    49
    
    
    
    (57
    )Total Other Consolidated Results
    
    $
    81
    
    
    $
    111
    
    
    
    (27
    )
    
    $
    167
    
    
    $
    203
    
    
    
    (18
    )
 Retirement and voluntary separation provisions
   Depreciation and amortization expense
  Interest expense, net
  Equity income from joint venture
  Minority interest in consolidated subsidiary
  Income taxes
  32




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SEGMENT RESULTS OF OPERATIONS
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed data services, Internet access and public phone
service;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.The Wireless segment consists of:
    
    Postpaid and Prepaid services; and
    
    Wireless equipment sales.
 33




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For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Local
    
    $
    154
    
    
    $
    148
    
    
    
    4
    %
    
    $
    306
    
    
    $
    296
    
    
    
    3
    %Network Access
    
    
    53
    
    
    
    74
    
    
    
    (28
    )
    
    
    121
    
    
    
    148
    
    
    
    (18
    )Long Distance
    
    
    13
    
    
    
    23
    
    
    
    (43
    )
    
    
    31
    
    
    
    53
    
    
    
    (42
    )Directory and Other
    
    
    15
    
    
    
    16
    
    
    
    (6
    )
    
    
    30
    
    
    
    33
    
    
    
    (9
    )Total Wireline
    
    $
    235
    
    
    $
    261
    
    
    
    (10
    )
    
    $
    488
    
    
    $
    529
    
    
    
    (8
    )
  For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Access Lines in Service (000s):Residential
    
    
    878
    
    
    
    909
    
    
    
    (3
    )%
    
    
    878
    
    
    
    909
    
    
    
    (3
    )%Business
    
    
    277
    
    
    
    285
    
    
    
    (3
    )
    
    
    277
    
    
    
    285
    
    
    
    (3
    )Total
    
    
    1,155
    
    
    
    1,194
    
    
    
    (3
    )
    
    
    1,155
    
    
    
    1,194
    
    
    
    (3
    )
  Local Services
   34




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##### Table of Contents



Network Access
   Long Distance
   Directory and Other
    For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    %Change(In millions)
    
    (In millions)Labor an d benefits
    
    $
    86
    
    
    $
    85
    
    
    
    1
    %
    
    $
    170
    
    
    $
    176
    
    
    
    (3
    )%Other operating expenses
    
    
    67
    
    
    
    26
    
    
    
    158
    
    
    
    136
    
    
    
    98
    
    
    
    39Total Wireline
    
    $
    153
    
    
    $
    111
    
    
    
    38
    
    
    $
    306
    
    
    $
    274
    
    
    
    12
 35




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##### Table of Contents



.
 Labor and benefits
   Other operating expenses
    For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    %Change
    
    2005
    
    2004
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Postpaid Cellular
    
    $
    53
    
    
    $
    42
    
    
    
    26
    %
    
    $
    106
    
    
    $
    85
    
    
    
    25
    %Prepaid Cellular
    
    
    4
    
    
    
    5
    
    
    
    (20
    )
    
    
    9
    
    
    
    11
    
    
    
    (18
    )Total Cellular
    
    
    57
    
    
    
    47
    
    
    
    21
    
    
    
    115
    
    
    
    96
    
    
    
    20Wireless Equipment and Other
    
    
    8
    
    
    
    7
    
    
    
    14
    
    
    
    18
    
    
    
    11
    
    
    
    64Total Wireless
    
    $
    65
    
    
    $
    54
    
    
    
    20
    
    
    $
    133
    
    
    $
    107
    
    
    
    24
  For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Cellular Customers (000s):Postpaid
    
    
    344
    
    
    
    246
    
    
    
    40
    %
    
    
    344
    
    
    
    246
    
    
    
    40
    %Prepaid
    
    
    100
    
    
    
    103
    
    
    
    (3
    )
    
    
    100
    
    
    
    103
    
    
    
    (3
    )Total
    
    
    444
    
    
    
    349
    
    
    
    27
    
    
    
    444
    
    
    
    349
    
    
    
    27Postpaid Cellular Average
Revenue Per Unit (ARPU)
    
    $
    51
    
    
    $
    58
    
    
    
    (12
    )%
    
    $
    53
    
    
    $
    56
    
    
    
    (5
    )%Prepaid Cellular ARPU
    
    
    14
    
    
    
    17
    
    
    
    (18
    )
    
    
    14
    
    
    
    16
    
    
    
    (13
    )Combined Cellular ARPU
    
    
    43
    
    
    
    46
    
    
    
    (7
    )
    
    
    44
    
    
    
    44
    
    
    
    
  36




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##### Table of Contents



Cellular Services
  Wireless Equipment and other
   For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    %Change(In millions)
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    8
    
    
    $
    7
    
    
    
    14
    %
    
    $
    17
    
    
    $
    15
    
    
    
    13
    %Other operating expenses
    
    
    47
    
    
    
    33
    
    
    
    43
    
    
    
    96
    
    
    
    65
    
    
    
    48Total Wireless
    
    $
    55
    
    
    $
    40
    
    
    
    38
    
    
    $
    113
    
    
    $
    80
    
    
    
    41
  Labor and benefits
   Other operating expenses
   37




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004
 Six Months Ended June 30,2005
    
    2004
    
    Change(in millions)Cash flows from (used in):Operations
    
    $
    108
    
    
    $
    112
    
    
    ($
    4
    )Investing
    
    
    (79
    )
    
    ($
    65
    )
    
    ($
    14
    )Financing
    
    
    (3
    )
    
    $
    10
    
    
    ($
    13
    )
           38




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##### Table of Contents



39




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##### Table of Contents



REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE (K-2)
  SINGLE ZONE
    PUBLIC
TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS
  TOUCHTONE CHARGES
  40




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##### Table of Contents



th
  CTI ASSET TRANSFER
   PRICE CAP REGULATION
   41




---



##### Table of Contents



42




---



##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     CRITICAL ACCOUNTING POLICIES
 General
    Allowance for Doubtful Accounts
  43




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##### Table of Contents



Deferred Taxes
    Property, Plant and Equipment and Depreciation
    RECENT ACCOUNTING PRONOUNCEMENTS
  44




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointBook Value
    
    Fair Value
    
    Increase
    
    DecreaseIn ThousandsJune 30, 2005Senior Notes
    
    $
    699,898
    
    
    $
    731,310
    
    
    $
    717,112
    
    
    $
    746,014Interest rate swap
    
    
    (945
    )
    
    
    (945
    )
    
    
    (2,038
    )
    
    
    153Total
    
    $
    698,953
    
    
    $
    730,365
    
    
    $
    715,074
    
    
    $
    746,167December 31, 2004Senior Notes
    
    $
    699,876
    
    
    $
    735,790
    
    
    $
    718,569
    
    
    $
    753,663Interest rate swap
    
    
    3
    
    
    
    3
    
    
    
    (1,813
    )
    
    
    1,834Total
    
    $
    699,879
    
    
    $
    735,793
    
    
    $
    716,756
    
    
    $
    755,497
 45




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   46




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  47




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##### Table of Contents



SIGNATURES
   By:
    
    /s/ Cristina M. LambertName: Cristina M. LambertTitle: President and Chief Executive OfficerDate: August 15, 2005By:
    
    /s/ Adail OrtizName: Adail OrtizTitle: Vice President Finance and Chief
Financial OfficerDate: August 15, 2005By:
    
    /s/ Raúl E. GarcíaName: Raúl E. GarcíaTitle: ControllerDate: August 15, 2005
 48




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##### Table of Contents



EXHIBIT INDEX
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on
Form 10-K for the year ended December 31, 1999 (File
333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.2
    
    Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.3
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.4
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.13 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.5
    
    Pledge Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.15 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.6
    
    Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.16 of
the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.7
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.8
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.26
of the Companys Annual Report on Form 10-K for the year
ended December 31, 2000 (File 333-85503)).10.9
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Banc of America Securities LLC.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.27 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.10
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Popular Securities, Inc., as Dealer for
notes with maturities up to 365 days. Concerning notes to be
issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.28 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.11
    
    Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc.,
as Issuer, Puerto Rico Telephone Company and Celulares
Telefónica, Inc., as Guarantors, and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.12
    
    Letter Amendment, to the March 2, 1999 Shareholders
Agreement, dated as of May 25, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., and the Puerto Rico Telephone Authority.
(Incorporated by reference to Exhibit 10.25 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30,
2001 (File 333-85503)).10.13
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Bank of America, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.27 of the Companys
Quarterly Report on Form 10-Q for the period ended September
31, 2001 (File 333-85503)).10.14
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Citibank, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.28 of the Companys
Quarterly Report on Form 10-Q for the period ended September
31, 2001 (File 333-85503)).10.15
    
    $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)).10.16
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2003
until January 17, 2006. Approved on February 13, 2003.
(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)).10.17
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
(Incorporated by reference to Exhibit 10.29 of the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File 333-85503)).
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    $40,000,000 working capital revolving credit agreement dated
as of June 30, 2004, among Telecomunicaciones de Puerto Rico,
Inc., as Borrower, Puerto Rico Telephone Company, Inc., as
Guarantor and Banco Popular de Puerto Rico, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit
10.30 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.19
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2003
until January 17, 2006. Approved on February 13, 2003.
English Version. (Incorporated by reference to Exhibit 10.31
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.20
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
English Version. (Incorporated by reference to Exhibit 10.32
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.21
    
    $30,000,000 1-Year term credit agreement dated as of May 17,
2004, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor
and Banco Bilbao Vizcaya Argentaria Puerto Rico, as
Administrative Agent. (Incorporated by reference to Exhibit
10.33 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.22
    
    364-Day Credit Agreement dated as of March 1, 2005, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, the Initial
Lenders named therein, Citibank, N.A., as Administrative
Agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Bank
of Nova Scotia, as Syndication Agents, and Banco Popular de
Puerto Rico and Firstbank Puerto Rico, as Co-documentation
Agents. (Incorporated by reference to Exhibit 10.34 of the
Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (File 333-85503)).10.23
    
    First amendment dated June 30, 2005 to the $40,000,000
revolving credit agreement dated as of June 30, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor and Banco Popular
de Puerto Rico, as Lender and Administrative Agent. (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).
 51