##### 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, 2006
 Or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 333-85503
 Telecomunicaciones de Puerto Rico, Inc.
  Commonwealth of Puerto Rico
(STATE OR OTHER JURISDICTION OF
    
    66-0566178
(IRS EMPLOYER IDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)1515 FD Roosevelt AvenueGuaynabo, Puerto Rico
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    00968
(ZIP CODE)
 787-792-6052
   þ o
  o o þ
  o þ




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INDEX
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 Part I. Financial InformationItem  1.
    
    Financial Statements (Unaudited)
    
    
    3Consolidated Balance SheetsJune 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations Three Months Ended June 30, 2006 and 2005; Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders EquitySix Months Ended June 30, 2006
    
    
    5Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item  2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item  3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item  4.
    
    Controls and Procedures
    
    
    45Part II. Other InformationItem  1.
    
    Legal Proceedings
    
    
    46Item  1A.
    
    Risk Factors
    
    
    46Item  2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item  3.
    
    Defaults Upon Senior Securities
    
    
    46Item  4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    46Item  5.
    
    Other Information
    
    
    46Item  6.
    
    Exhibits
    
    
    46Signatures
    
    
    47Exhibit Index
    
    
    48Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
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PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
  (Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    159,465
    
    
    $
    55,086Accounts receivable, net of allowance for doubtful accounts
of $82,531 and $76,815 in 2006 and 2005, respectively
    
    
    196,285
    
    
    
    227,629Deferred income tax
    
    
    26,754
    
    
    
    18,324Inventory and supplies, net
    
    
    31,276
    
    
    
    47,431Prepaid expenses
    
    
    18,487
    
    
    
    20,571Total current assets
    
    
    432,267
    
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,297,236
    
    
    
    1,351,510GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    202,256
    
    
    
    209,357DEFERRED INCOME TAX
    
    
    182,256
    
    
    
    205,853OTHER ASSETS
    
    
    95,129
    
    
    
    115,271TOTAL ASSETS
    
    $
    2,336,071
    
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    452,042Other current liabilities
    
    
    259,693
    
    
    
    172,961Total current liabilities
    
    
    259,693
    
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    574,939
    
    
    
    299,812PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    534,495
    
    
    
    563,395OTHER NON-CURRENT LIABILITIES
    
    
    121,481
    
    
    
    136,345Total liabilities
    
    
    1,490,608
    
    
    
    1,624,555MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    17,641
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock
    
    
    705,516
    
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    (26,042
    )Retained earnings
    
    
    319,659
    
    
    
    228,877Accumulated other comprehensive loss, net of taxes
    
    
    (171,311
    )
    
    
    (171,502
    )Total shareholders equity
    
    
    827,822
    
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,336,071
    
    
    $
    2,377,959
 The accompanying notes are an integral part of these financial statements
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)REVENUES:Local services
    
    $
    146,077
    
    
    $
    149,596
    
    
    $
    303,841
    
    
    $
    298,845Access services
    
    
    54,307
    
    
    
    52,207
    
    
    
    108,145
    
    
    
    117,989Long distance services
    
    
    15,761
    
    
    
    13,012
    
    
    
    32,967
    
    
    
    30,513Cellular services
    
    
    91,301
    
    
    
    65,410
    
    
    
    176,316
    
    
    
    130,836Directory services and other
    
    
    10,642
    
    
    
    15,412
    
    
    
    194,061
    
    
    
    29,797Total revenues
    
    
    318,088
    
    
    
    295,637
    
    
    
    815,330
    
    
    
    607,980OPERATING COSTS AND EXPENSES:Cost of Services and Sales
    
    
    80,209
    
    
    
    80,047
    
    
    
    175,576
    
    
    
    155,543Selling, general and administrative expenses
    
    
    131,075
    
    
    
    123,894
    
    
    
    269,178
    
    
    
    252,269Early retirement and voluntary separation provision
    
    
    
    
    
    
    1,687
    
    
    
    
    
    
    
    1,687Depreciation and amortization
    
    
    61,569
    
    
    
    60,060
    
    
    
    123,656
    
    
    
    121,909Total operating costs and expenses
    
    
    272,853
    
    
    
    265,688
    
    
    
    568,410
    
    
    
    531,408OPERATING INCOME
    
    
    45,235
    
    
    
    29,949
    
    
    
    246,920
    
    
    
    76,572OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (9,467
    )
    
    
    (11,380
    )
    
    
    (21,515
    )
    
    
    (22,468
    )Equity (loss) income from joint venture
    
    
    (86
    )
    
    
    248
    
    
    
    28,198
    
    
    
    1,112Minority interest in consolidated subsidiary
    
    
    (389
    )
    
    
    (746
    )
    
    
    (1,087
    )
    
    
    (1,407
    )Total other income (expense), net
    
    
    (9,942
    )
    
    
    (11,878
    )
    
    
    5,596
    
    
    
    (22,763
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    35,293
    
    
    
    18,071
    
    
    
    252,516
    
    
    
    53,809INCOME TAX EXPENSE
    
    
    13,668
    
    
    
    7,104
    
    
    
    61,459
    
    
    
    20,854NET INCOME
    
    $
    21,625
    
    
    $
    10,967
    
    
    $
    191,057
    
    
    $
    32,955
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
  AccumulatedOtherCommon
    
    
    Deferred ESOP
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Compensation
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE DECEMBER 31, 2005
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    228,877
    
    
    $
    (171,502
    )
    
    $
    736,849(UNAUDITED)Dividends paid
    
    
    
    
    
    
    
    
    
    
    (15,559
    )
    
    
    
    
    
    
    (15,559
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    (84,716
    )
    
    
    
    
    
    
    (84,716
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    191,057
    
    
    
    
    
    
    
    191,057Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,248BALANCE JUNE 30, 2006
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    319,659
    
    
    $
    (171,311
    )
    
    $
    827,822
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
  For the Six Months Ended June 30,2006
    
    
    2005(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    191,057
    
    
    $
    32,955Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    123,656
    
    
    
    121,909Provision for uncollectible accounts
    
    
    26,744
    
    
    
    24,129Deferred income tax expense
    
    
    15,167
    
    
    
    16,701Employee retirement benefits expense
    
    
    55,751
    
    
    
    49,401Equity income from joint venture
    
    
    (665
    )
    
    
    (1,112
    )Early retirement and voluntary separation provision
    
    
    
    
    
    
    1,687Gain on sale of building
    
    
    
    
    
    
    (207
    )Gain on sale of interest in joint venture
    
    
    (27,533
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    1,087
    
    
    
    1,407Changes in assets and liabilities:Accounts receivable
    
    
    4,600
    
    
    
    22,199Inventory and supplies
    
    
    16,155
    
    
    
    2,692Prepaid expenses and other assets
    
    
    23,968
    
    
    
    4,839Other current and non-current liabilities
    
    
    (12,769
    )
    
    
    (56,440
    )Pension and other post-employment benefits
    
    
    (84,652
    )
    
    
    (111,962
    )Net cash provided by operating activities
    
    
    332,566
    
    
    
    108,198CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (62,279
    )
    
    
    (79,720
    )Proceeds from sale of investment
    
    
    26,651
    
    
    
    1,136Net cash used in investing activities
    
    
    (35,628
    )
    
    
    (78,584
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of short-term debt, including
capital leases
    
    
    (452,000
    )
    
    
    Borrowings of long-term debt
    
    
    275,000
    
    
    
    Dividends Paid
    
    
    (15,559
    )
    
    
    (3,248
    )Net cash used in financing activities
    
    
    (192,559
    )
    
    
    (3,248
    )NET INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    104,379
    
    
    
    26,366CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    55,086
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    159,465
    
    
    $
    89,712
 The accompanying notes are an integral part of these financial statements.
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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
    
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (The Company), holds 100%
of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga Distancia, Inc.
(PRTLD), and Datacom Caribe, Inc. (Datacom). The Company holds a 67% interest in Coqui.net
Corporation (Coqui.net), in which Popular, Inc., one of our shareholders, holds the remaining
33% interest. The Company also held a 24% interest in Verizon Information Services Puerto Rico,
Inc. S en C. (VISI), in which GTE Holdings (Puerto Rico) LLC, our majority shareholder, held a
36% interest. On March 31, 2006, the Company sold its equity interest in the Puerto Rico
directory operation and its right to receive 35% of the revenues from the publication of
directory advertising. The Company will continue sharing data for the publication of
directories under a new amended publishing agreement, and will also offer billing and collection
services for the directory advertising sales to its service subscribers. Directory publishing
revenues were generated through VISI until March 31, 2006. As incumbent local exchange carrier
for the island of Puerto Rico, we provide both wireline and wireless services (the latter using
the Verizon Wireless brand name). The Companys off-island long distance service is provided by
PRTLD and its Internet access service is provided by Coqui.net.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In
connection with the Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and
Bell Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc.
(Verizon). On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an
additional 12% and 3% interest in the Company, respectively, by exercising an option each had
held since the Acquisition. Verizon and Popular, Inc. acquired the additional ownership
interest from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and
Popular, Inc. paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172
million in cash for the additional 3,750,000 shares at a $45.9364 per share price established in
a share option agreement entered into at the time of the Acquisition. As a result, Verizon owns
52%, Popular owns 13%, PRTA owns 28% and the Employee Stock Ownership Plan (ESOP) owns 7% of
the outstanding capital stock of the Company.
 2.
    
    Summary of Significant Accounting Policies
 Basis of PresentationThe accompanying unaudited 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 results for the interim
periods are not necessarily indicative of results for the full year. The Consolidated Balance
Sheet at December 31, 2005 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, 2005.Recent Accounting PronouncementsUncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 requires the use of a two-step approach for
recognizing and measuring tax benefits taken or expected to be taken in a tax return and
disclosures regarding uncertainties in income tax positions. The Company is required to adopt FIN
48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48
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will be recorded
as an adjustment to opening retained earnings in the year of adoption and will be presented
separately. Only tax positions that meet the more likely than not recognition threshold at the
effective date may be recognized upon adoption of FIN 48. The Company is currently evaluating the
impact this new standard will have on our future results of operations and financial position.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.Goodwill and Other IntangiblesGoodwillGoodwill is the excess of the acquisition cost of businesses over the fair value of the
identifiable net assets acquired. SFAS No. 142 Goodwill and Other Intangible Assets no longer
permits the amortization of goodwill and other indefinite-lived intangible assets acquired in a
business combination. Impairment testing for goodwill is performed at least annually unless
indicators of impairment exist according to SFAS No. 142. The impairment test for goodwill uses
a two-step approach, which is performed at the reporting unit level. Step one compares the fair
value of the reporting unit (calculated using a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a potential impairment and step
two must be performed. Step two compares the carrying value of the reporting units goodwill to
its implied fair value (i.e., fair value of reporting unit less the fair value of the units
assets and liabilities, including identifiable intangible assets). If the carrying value of
goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment.
The Company is currently undergoing its annual evaluation of goodwill using the fair value
approach for each reporting unit to determine if there is an impairment exposure and the impact
it would have on the Companys results of operations for 2006.Indefinite Life Intangible AssetsThe indefinite life intangible assets are those intangibles not subject to amortization and
consist principally of wireline concessions and FCC cellular licenses.A significant portion of the intangible assets are cellular licenses that provide wireless
operations with the exclusive right to utilize designated radio frequency spectrum to provide
cellular communication services. While licenses are issued for only a fixed time, generally ten
years, such licenses are subject to renewal by the Federal Communications Commission (FCC).
Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined
that there are currently no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful life of the wireless licenses. As a result, we treat the wireless
licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142.We have tested the indefinite life intangible assets for impairment at least annually unless
indicators of impairment exist. We began using the direct value approach in 2005 to perform the
annual impairment test on the indefinite life intangible assets in accordance with a September
29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), Use
of the Residual Method to Value Acquired Assets Other Than Goodwill. The direct value approach
determines fair value using estimates of future cash flows associated specifically with the
licenses. Previously, we used a residual method, which determined the fair value of the business
by estimating future cash flows of the operations. The fair value of aggregate licenses was
determined by subtracting from the fair value of the business the fair value of all of the other
net tangible and intangible (primarily recognized and unrecognized customer relationship
intangible assets) assets of our operations. We determined the fair value of the customer
relationship intangible assets based on the average customer acquisition costs. Under either the
direct method or the residual method, if the fair value
of the aggregated licenses was less than the aggregated carrying amount of the licenses, an
impairment would have been recognized. The Company is currently undergoing its annual evaluation
of the indefinite life intangible assets using the direct value approach for each reporting unit
to determine if there is an impairment exposure and the impact it would have
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Definite Life Intangible Assets
   Reclassifications
  3.
    
    Gain on sale of interest in joint venture
  4.
    
    Property, Plant and Equipment
  Remaining Useful
    
    
    June 30,
    
    
    December 31,Lives (Yrs)
    
    
    2006
    
    
    2005(In thousands)Outside plant
    
    
    9.0
    
    
    $
    2,217,551
    
    
    $
    2,198,892Central office and transmission equipment
    
    
    3.8
    
    
    
    1,281,443
    
    
    
    1,282,713Equipment and other
    
    
    2.7
    
    
    
    271,724
    
    
    
    273,245Buildings
    
    
    14.6
    
    
    
    326,920
    
    
    
    324,988Land
    
    
    N/A
    
    
    
    25,547
    
    
    
    25,500Gross plant in service
    
    
    
    
    
    
    4,123,185
    
    
    
    4,105,338Less: accumulated depreciation
    
    
    
    
    
    
    2,858,450
    
    
    
    2,772,489Net plant in service
    
    
    
    
    
    
    1,264,735
    
    
    
    1,332,849Construction in progress
    
    
    
    
    
    
    32,501
    
    
    
    18,661Total
    
    
    
    
    
    $
    1,297,236
    
    
    $
    1,351,510
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5.
    
    Goodwill
  Carrying ValueJune 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
 6.
    
    Intangibles
  Carrying ValueJune 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 June 30, 2006
    
    
    December 31, 2005(In thousands)Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    14,186
    
    
    $
    34,214
    
    
    $
    48,400
    
    
    $
    13,218
    
    
    $
    35,182Software licenses
    
    
    132,344
    
    
    
    73,277
    
    
    
    59,067
    
    
    
    126,720
    
    
    
    61,520
    
    
    
    65,200Total Definite Life
    
    $
    180,744
    
    
    $
    87,463
    
    
    $
    93,281
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    100,382Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    180,744
    
    
    $
    87,463
    
    
    $
    202,256
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    209,357
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Aggregate Amortization expense:For the six months ended June 30, 2006
    
    
    
    
    
    $
    12,718Expected amortization expense:For the remainder of 2006
    
    
    
    
    
    $
    13,501For the years ending December 31,
    
    
    2007
    
    
    
    24,1772008
    
    
    
    19,7622009
    
    
    
    14,8122010
    
    
    
    7,456
  7.
    
    Other assets
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation costs
    
    $
    48,553
    
    
    $
    68,422Notes receivable-equipment sales
    
    
    666
    
    
    
    1,995Deferred pension asset
    
    
    41,729
    
    
    
    41,729Deferred financing costs, net
    
    
    976
    
    
    
    1,359Other assets
    
    
    3,205
    
    
    
    1,766Total
    
    $
    95,129
    
    
    $
    115,271
  8.
    
    Pension Plan
   11




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##### Table of Contents



Pension and Lump Sum Benefits
    
    Post- Retirement BenefitsFor the Three Months Ended June 30,
    
    

For
the Six Months Ended June 30,
    
    

For
the Six Months Ended June 30,
    
    

For the Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    6,560
    
    
    
    5,714
    
    
    $
    13,121
    
    
    $
    11,428
    
    
    $
    1,985
    
    
    $
    1,556
    
    
    
    3,970
    
    
    
    3,112Interest cost
    
    
    19,300
    
    
    
    18,259
    
    
    
    38,601
    
    
    
    36,518
    
    
    
    9,214
    
    
    
    8,218
    
    
    
    18,428
    
    
    
    16,436Expected return on plan assets
    
    
    (19,474
    )
    
    
    (18,135
    )
    
    
    (38,947
    )
    
    
    (36,270
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transition obligation
    
    
    90
    
    
    
    90
    
    
    
    180
    
    
    
    180
    
    
    
    551
    
    
    
    551
    
    
    
    1,102
    
    
    
    1,102Prior service cost (benefit)
    
    
    912
    
    
    
    783
    
    
    
    1,824
    
    
    
    1,566
    
    
    
    (2,306
    )
    
    
    (2,463
    )
    
    
    (4,612
    )
    
    
    (4,926
    )Actuarial loss, net
    
    
    5,922
    
    
    
    5,549
    
    
    
    11,844
    
    
    
    11,098
    
    
    
    5,120
    
    
    
    4,579
    
    
    
    10,240
    
    
    
    9,158Total net
amortization and deferral
    
    $
    13,310
    
    
    $
    12,260
    
    
    $
    26,623
    
    
    $
    24,520
    
    
    $
    14,564
    
    
    $
    12,441
    
    
    $
    29,128
    
    
    $
    24,882
 Cash Flows
  9.
    
    Deferred ESOP Compensation
       12




---



##### Table of Contents



10. Other Current Liabilities
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Accounts payable
    
    $
    99,149
    
    
    $
    43,719Accrued expenses
    
    
    89,280
    
    
    
    74,805Employee benefit accruals
    
    
    49,919
    
    
    
    39,991Carrier payables
    
    
    9,887
    
    
    
    7,812Taxes
    
    
    7,146
    
    
    
    730Interest
    
    
    4,312
    
    
    
    5,904Total
    
    $
    259,693
    
    
    $
    172,961
 11. Debt
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    
    
    
    
    
    399,990Due May 15, 2009 at 6.80%
    
    
    299,939
    
    
    
    299,929Term credit facilities:Due February 28, 2011 at 55 basis points over
    
    
    275,000
    
    
    
    LIBOR - 5.84% at June 30, 2006Commercial paper
    
    
    
    
    
    
    52,000Deferred derivative and Interest rate swap
    
    
    
    
    
    
    (107
    )Capital leases
    
    
    
    
    
    
    42Total
    
    
    574,939
    
    
    
    751,854Less short-term debt
    
    
    
    
    
    
    452,042Long-term debt
    
    $
    574,939
    
    
    $
    299,812
     13




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##### Table of Contents



Year
    
    
    
    Amount(In thousands)2009
    
    Senior note
    
    $
    300,0002011
    
    Term Loan
    
    
    275,000Total
    
    
    
    $
    575,000
  12. Other Non-Current Liabilities
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation revenues
    
    $
    48,553
    
    
    $
    68,422Customer deposits
    
    
    26,172
    
    
    
    26,297Other liabilities
    
    
    46,756
    
    
    
    41,626Total
    
    $
    121,481
    
    
    $
    136,345
 14




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##### Table of Contents



13. Shareholders Equity
 Common Stock
  Accumulated Other Comprehensive Loss
  Dividends
   2006
    
    
    
    2005(In thousands)
    
    
    
    (In thousands)4th Quarter
    
    
    $
    
    
    
    
    4th Quarter
    
    
    $
    27,1443rd Quarter
    
    
    
    
    
    
    
    3rd Quarter
    
    
    
    16,2002nd Quarter
    
    
    
    84,716
    
    
    
    2nd Quarter
    
    
    
    14,8751st Quarter
    
    
    
    15,559
    
    
    
    1st Quarter
    
    
    
    3,248Total
    
    
    $
    100,275
    
    
    
    Total
    
    
    $
    61,467
  14. Fair Value of Financial Instruments
  June 30,
    
    December 31,2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    159,465
    
    
    $
    159,465
    
    
    $
    55,086
    
    
    $
    55,086Accounts receivable
    
    
    196,285
    
    
    
    196,285
    
    
    
    227,629
    
    
    
    227,629Liabilities:Other current liabilities
    
    $
    259,693
    
    
    $
    259,693
    
    
    $
    172,961
    
    
    $
    172,961Short-term debt
    
    
    
    
    
    
    
    
    
    
    452,042
    
    
    
    454,172Long-term debt, including interest rate swap in 2005
    
    
    574,939
    
    
    
    581,438
    
    
    
    299,812
    
    
    
    308,883
 15




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##### Table of Contents



15. Segment Reporting
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed private line services, and Internet access;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
  
    
    Postpaid and Prepaid services; and
    
    Wireless equipment sales.
  For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Wireline:Revenues -Local services
    
    $
    151,016
    
    
    $
    153,805
    
    
    $
    313,607
    
    
    $
    306,233Access services
    
    
    55,406
    
    
    
    53,221
    
    
    
    110,326
    
    
    
    120,637Long distance services
    
    
    16,216
    
    
    
    13,069
    
    
    
    33,877
    
    
    
    30,657Directory services and other
    
    
    10,847
    
    
    
    15,412
    
    
    
    194,376
    
    
    
    29,900Total revenues
    
    $
    233,485
    
    
    $
    235,507
    
    
    $
    652,186
    
    
    $
    487,427Operating income
    
    $
    23,305
    
    
    $
    28,487
    
    
    $
    211,595
    
    
    $
    75,100Wireless:Revenues-Cellular services
    
    $
    92,120
    
    
    $
    65,514
    
    
    $
    177,938
    
    
    $
    132,077Operating income
    
    $
    21,930
    
    
    $
    1,462
    
    
    $
    35,325
    
    
    $
    1,472Consolidated:Revenues for reportable segments
    
    $
    325,605
    
    
    $
    301,021
    
    
    $
    830,124
    
    
    $
    619,504Elimination of intersegment revenues
    
    
    (7,517
    )
    
    
    (5,384
    )
    
    
    (14,794
    )
    
    
    (11,524
    )Consolidated revenues
    
    $
    318,088
    
    
    $
    295,637
    
    
    $
    815,330
    
    
    $
    607,980Operating income
    
    $
    45,235
    
    
    $
    29,949
    
    
    $
    246,920
    
    
    $
    76,572
 16




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##### Table of Contents



As of
    
    
    As ofJune 30,
    
    
    December 31,Assets
    
    2006
    
    
    2005Wireline assets
    
    $
    2,304,912
    
    
    $
    2,331,252Wireless assets
    
    
    385,504
    
    
    
    422,557Segment assets
    
    $
    2,690,416
    
    
    $
    2,753,809Elimination of intersegment assets
    
    
    (354,345
    )
    
    
    (375,850
    )Consolidated assets
    
    $
    2,336,071
    
    
    $
    2,377,959
 17




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##### Table of Contents



16. Condensed Consolidating Information
   18




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##### Table of Contents



Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    135
    
    
    $
    134,513
    
    
    $
    24,817
    
    
    $
    
    
    
    $
    159,465Intercompany accounts receivable
    
    
    50,940
    
    
    
    46,553
    
    
    
    65,752
    
    
    
    (163,245
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    196,461
    
    
    
    (176
    )
    
    
    
    
    
    
    196,285Deferred income tax
    
    
    
    
    
    
    26,721
    
    
    
    33
    
    
    
    
    
    
    
    26,754Inventory and supplies, net
    
    
    
    
    
    
    31,275
    
    
    
    1
    
    
    
    
    
    
    
    31,276Prepaid expenses
    
    
    
    
    
    
    17,164
    
    
    
    1,323
    
    
    
    
    
    
    
    18,487Total current assets
    
    
    51,075
    
    
    
    452,687
    
    
    
    91,750
    
    
    
    (163,245
    )
    
    
    432,267PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,289,432
    
    
    
    7,804
    
    
    
    
    
    
    
    1,297,236GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    304,776
    
    
    
    24,407
    
    
    
    
    
    
    
    329,183DEFERRED INCOME TAX
    
    
    
    
    
    
    182,407
    
    
    
    809
    
    
    
    (960
    )
    
    
    182,256INVESTMENT IN SUBSIDIARIES
    
    
    811,683
    
    
    
    
    
    
    
    
    
    
    
    (811,683
    )
    
    
    OTHER ASSETS
    
    
    575,937
    
    
    
    95,127
    
    
    
    
    
    
    
    (575,935
    )
    
    
    95,129TOTAL ASSETS
    
    $
    1,438,695
    
    
    $
    2,324,429
    
    
    $
    124,770
    
    
    $
    (1,551,823
    )
    
    $
    2,336,071LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Intercompany accounts payable
    
    
    31,733
    
    
    
    85,878
    
    
    
    50,802
    
    
    
    (168,413
    )
    
    
    Other current liabilities
    
    
    4,390
    
    
    
    247,636
    
    
    
    7,662
    
    
    
    5
    
    
    
    259,693Total current liabilities
    
    
    36,123
    
    
    
    333,514
    
    
    
    58,464
    
    
    
    (168,408
    )
    
    
    259,693LONG-TERM DEBT, excluding current portion
    
    
    574,939
    
    
    
    574,935
    
    
    
    
    
    
    
    (574,935
    )
    
    
    574,939OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    651,593
    
    
    
    1,180
    
    
    
    3,203
    
    
    
    655,976Total liabilities
    
    
    611,062
    
    
    
    1,560,042
    
    
    
    59,644
    
    
    
    (740,140
    )
    
    
    1,490,608MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,641
    
    
    
    17,641SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    705,516
    
    
    
    646,783
    
    
    
    41,143
    
    
    
    (687,926
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    319,659
    
    
    
    288,913
    
    
    
    23,983
    
    
    
    (312,896
    )
    
    
    319,659Accumulated other comprehensive loss
    
    
    (171,500
    )
    
    
    (171,309
    )
    
    
    
    
    
    
    171,498
    
    
    
    (171,311
    )Total shareholders equity
    
    
    827,633
    
    
    
    764,387
    
    
    
    65,126
    
    
    
    (829,324
    )
    
    
    827,822TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,438,695
    
    
    $
    2,324,429
    
    
    $
    124,770
    
    
    $
    (1,551,823
    )
    
    $
    2,336,071
 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
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    
    
    
    $
    55,086Intercompany accounts receivable
    
    
    504,484
    
    
    
    46,610
    
    
    
    54,995
    
    
    
    (606,089
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    227,804
    
    
    
    (175
    )
    
    
    
    
    
    
    227,629Deferred income tax
    
    
    718
    
    
    
    17,573
    
    
    
    33
    
    
    
    
    
    
    
    18,324Inventory and supplies, net
    
    
    
    
    
    
    47,430
    
    
    
    1
    
    
    
    
    
    
    
    47,431Prepaid expenses
    
    
    
    
    
    
    19,814
    
    
    
    757
    
    
    
    
    
    
    
    20,571Total current assets
    
    
    505,337
    
    
    
    390,361
    
    
    
    79,432
    
    
    
    (606,089
    )
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,342,915
    
    
    
    8,595
    
    
    
    
    
    
    
    1,351,510GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    311,819
    
    
    
    24,465
    
    
    
    
    
    
    
    336,284DEFERRED INCOME TAX
    
    
    
    
    
    
    207,038
    
    
    
    (33
    )
    
    
    (1,152
    )
    
    
    205,853INVESTMENT IN SUBSIDIARIES
    
    
    720,228
    
    
    
    
    
    
    
    
    
    
    
    (720,228
    )
    
    
    OTHER ASSETS
    
    
    300,977
    
    
    
    115,542
    
    
    
    
    
    
    
    (301,248
    )
    
    
    115,271TOTAL ASSETS
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    452,000
    
    
    $
    452,042
    
    
    $
    
    
    
    $
    (452,000
    )
    
    $
    452,042Intercompany accounts payable
    
    
    32,136
    
    
    
    86,430
    
    
    
    41,370
    
    
    
    (159,936
    )
    
    
    Other current liabilities
    
    
    5,745
    
    
    
    161,143
    
    
    
    5,793
    
    
    
    280
    
    
    
    172,961Total current liabilities
    
    
    489,881
    
    
    
    699,615
    
    
    
    47,163
    
    
    
    (611,656
    )
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    299,812
    
    
    
    299,917
    
    
    
    
    
    
    
    (299,917
    )
    
    
    299,812OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    695,273
    
    
    
    1,383
    
    
    
    3,084
    
    
    
    699,740Total liabilities
    
    
    789,693
    
    
    
    1,694,805
    
    
    
    48,546
    
    
    
    (908,489
    )
    
    
    1,624,555MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,555
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and
Treasury stock
    
    
    705,516
    
    
    
    645,298
    
    
    
    41,143
    
    
    
    (686,441
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    228,877
    
    
    
    199,074
    
    
    
    22,770
    
    
    
    (221,844
    )
    
    
    228,877Accumulated other comprehensive loss
    
    
    (171,502
    )
    
    
    (171,502
    )
    
    
    
    
    
    
    171,502
    
    
    
    (171,502
    )Total shareholders equity
    
    
    736,849
    
    
    
    672,870
    
    
    
    63,913
    
    
    
    (736,783
    )
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959
 20




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##### Table of Contents



Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    140,557
    
    
    $
    7,927
    
    
    $
    (2,407
    )
    
    $
    146,077Access services
    
    
    
    
    
    
    55,349
    
    
    
    
    
    
    
    (1,042
    )
    
    
    54,307Long distance services
    
    
    
    
    
    
    7,228
    
    
    
    9,020
    
    
    
    (487
    )
    
    
    15,761Cellular services
    
    
    
    
    
    
    91,421
    
    
    
    
    
    
    
    (120
    )
    
    
    91,301Directory and other services and sales
    
    
    
    
    
    
    13,453
    
    
    
    402
    
    
    
    (3,213
    )
    
    
    10,642Total revenues
    
    
    
    
    
    
    308,008
    
    
    
    17,349
    
    
    
    (7,269
    )
    
    
    318,088OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (57
    )
    
    
    267,250
    
    
    
    12,929
    
    
    
    (7,269
    )
    
    
    272,853OPERATING INCOME
    
    
    57
    
    
    
    40,758
    
    
    
    4,420
    
    
    
    
    
    
    
    45,235OTHER INCOME (EXPENSE), NET
    
    
    21,568
    
    
    
    (9,860
    )
    
    
    315
    
    
    
    (21,965
    )
    
    
    (9,942
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    21,625
    
    
    
    30,898
    
    
    
    4,735
    
    
    
    (21,965
    )
    
    
    35,293INCOME TAX EXPENSE
    
    
    
    
    
    
    10,572
    
    
    
    3,096
    
    
    
    
    
    
    
    13,668NET INCOME
    
    $
    21,625
    
    
    $
    20,326
    
    
    $
    1,639
    
    
    $
    (21,965
    )
    
    $
    21,625
 21




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    292,746
    
    
    $
    15,902
    
    
    $
    (4,807
    )
    
    $
    303,841Access services
    
    
    
    
    
    
    110,071
    
    
    
    
    
    
    
    (1,926
    )
    
    
    108,145Long distance services
    
    
    
    
    
    
    15,025
    
    
    
    18,915
    
    
    
    (973
    )
    
    
    32,967Cellular services
    
    
    
    
    
    
    176,756
    
    
    
    
    
    
    
    (440
    )
    
    
    176,316Directory and other services
    
    
    
    
    
    
    205,527
    
    
    
    786
    
    
    
    (12,252
    )
    
    
    194,061Total revenues
    
    
    
    
    
    
    800,125
    
    
    
    35,603
    
    
    
    (20,398
    )
    
    
    815,330OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (61
    )
    
    
    556,523
    
    
    
    32,346
    
    
    
    (20,398
    )
    
    
    568,410OPERATING INCOME
    
    
    61
    
    
    
    243,602
    
    
    
    3,257
    
    
    
    
    
    
    
    246,920OTHER INCOME
    
    
    190,229
    
    
    
    6,034
    
    
    
    661
    
    
    
    (191,328
    )
    
    
    5,596INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
    
    
    190,290
    
    
    
    249,636
    
    
    
    3,918
    
    
    
    (191,328
    )
    
    
    252,516INCOME TAX EXPENSE (BENEFIT)
    
    
    (767
    )
    
    
    59,522
    
    
    
    2,704
    
    
    
    
    
    
    
    61,459NET INCOME
    
    $
    191,057
    
    
    $
    190,114
    
    
    $
    1,214
    
    
    $
    (191,328
    )
    
    $
    191,057
 22




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    143,778
    
    
    $
    8,224
    
    
    $
    (2,406
    )
    
    $
    149,596Access services
    
    
    
    
    
    
    53,711
    
    
    
    
    
    
    
    (1,504
    )
    
    
    52,207Long distance services
    
    
    
    
    
    
    6,862
    
    
    
    6,582
    
    
    
    (432
    )
    
    
    13,012Cellular services
    
    
    
    
    
    
    65,410
    
    
    
    
    
    
    
    
    
    
    
    65,410Directory and other services and sales
    
    
    
    
    
    
    18,113
    
    
    
    419
    
    
    
    (3,120
    )
    
    
    15,412Total revenues
    
    
    
    
    
    
    287,874
    
    
    
    15,225
    
    
    
    (7,462
    )
    
    
    295,637OPERATING COSTS AND EXPENSES:Total 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
 23




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    287,727
    
    
    $
    16,081
    
    
    $
    (4,963
    )
    
    $
    298,845Access services
    
    
    
    
    
    
    120,831
    
    
    
    
    
    
    
    (2,842
    )
    
    
    117,989Long distance services
    
    
    
    
    
    
    14,111
    
    
    
    17,199
    
    
    
    (797
    )
    
    
    30,513Cellular services
    
    
    
    
    
    
    130,836
    
    
    
    
    
    
    
    
    
    
    
    130,836Directory and other services
    
    
    
    
    
    
    34,494
    
    
    
    784
    
    
    
    (5,481
    )
    
    
    29,797Total revenues
    
    
    
    
    
    
    587,999
    
    
    
    34,064
    
    
    
    (14,083
    )
    
    
    607,980OPERATING COSTS AND EXPENSES:Total 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 (BENEFIT)
    
    
    
    
    
    
    17,345
    
    
    
    3,509
    
    
    
    
    
    
    
    20,854NET INCOME
    
    $
    32,955
    
    
    $
    28,498
    
    
    $
    5,864
    
    
    $
    (34,362
    )
    
    $
    32,955
 24




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\

Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    358,163
    
    
    $
    (25,597
    )
    
    $
    332,566CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (62,222
    )
    
    
    (57
    )
    
    
    (62,279
    )Net proceed from sales of interests in joint venture
    
    
    
    
    
    
    
    
    
    
    26,651
    
    
    
    26,651Net cash (used in) provided by investing activities
    
    
    
    
    
    
    (62,222
    )
    
    
    26,594
    
    
    
    (35,628
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (177,000
    )
    
    
    
    
    
    
    
    
    
    
    (177,000
    )Dividends paid
    
    
    (15,559
    )
    
    
    
    
    
    
    
    
    
    
    (15,559
    )Borrowings/(repayment) intercompany loans
    
    
    192,559
    
    
    
    (192,559
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    
    
    
    
    (192,559
    )
    
    
    
    
    
    
    (192,559
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    
    
    
    
    103,382
    
    
    
    997
    
    
    
    104,379CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    135
    
    
    
    31,130
    
    
    
    23,821
    
    
    
    55,086CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    135
    
    
    $
    134,512
    
    
    $
    24,818
    
    
    $
    159,465
 25




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY 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 cash (used in) provided by investing activities
    
    
    
    
    
    
    (77,905
    )
    
    
    (679
    )
    
    
    (78,584
    )CASH FLOWS FROM FINANCING ACTIVITIES: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 IN CASH AND CASH EQUIVALENTS
    
    
    149
    
    
    
    18,749
    
    
    
    7,468
    
    
    
    26,366CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (149
    )
    
    
    44,658
    
    
    
    18,837
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    
    
    
    $
    63,407
    
    
    $
    26,305
    
    
    $
    89,712
 26




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##### Table of Contents



17. Contingencies and Regulatory and Other Matters
    27




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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 markets, where we have been experiencing access line erosion, to higher
growth markets such as wireless and broadband, including digital subscriber lines (DSL),
as well as expanded data services to enterprise markets. For the quarter ended June 30,
2006, our wireless and broadband services increased by 8% compared to the same period in
2005.For the quarter ended June 30, 2006, the growth of wireless areas, in particular post-paid
cellular services increased revenues by 40% compared to the same period in 2005. This
increase was driven by the net increase of approximately 68,000 post-paid wireless
customers as of June 30, 2006 compared to the number of customers as of June 30, 2005. The
data and broadband services revenues for the quarter ended June 30, 2006 increased by 14%
compared to the same period in 2005. This increase was driven by strong DSL revenue growth.
The number of the DSL customers as of June 30, 2006 increased by approximately 40,000
compared to the number of customers as of June 30, 2005.Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to reduce expenses, particularly through
technology-assisted productivity improvements. As of June 30, 2006, the Company had reduced
workforce levels compared to the same period in 2005, which we expect will provide future
benefits. At June 30, 2006, the Company had approximately 4,826 full-time employees
compared to 4,975 at June 30, 2005.
    
    Capital Allocation  Capital spending has been, and will continue to be, directed toward
growth markets, such as High-speed wireless data or Evolution Data Optimized (EV-DO)
technologies. Replacement of the TDMA network and expanded services offered to
enterprise markets are some examples of areas of capital spending which support these
growth markets.
    
    Cash Flow Generation  The financial statements reflect the emphasis of management on
using cash provided by our operating and investing activities to significantly reduce
debt and to fund our pension plans.
  28




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29




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##### Table of Contents



CONSOLIDATED RESULTS OF OPERATIONS
  CONSOLIDATED REVENUES
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    146
    
    
    $
    150
    
    
    
    (3)
    %
    
    $
    304
    
    
    $
    299
    
    
    
    2
    %Network Access
    
    
    54
    
    
    
    52
    
    
    
    4
    
    
    
    108
    
    
    
    118
    
    
    
    (8
    )Long Distance
    
    
    16
    
    
    
    13
    
    
    
    23
    
    
    
    33
    
    
    
    30
    
    
    
    10Cellular
    
    
    91
    
    
    
    65
    
    
    
    40
    
    
    
    176
    
    
    
    131
    
    
    
    34Directory and Other
    
    
    11
    
    
    
    16
    
    
    
    (31
    )
    
    
    194
    
    
    
    30
    
    
    
    547Consolidated revenues
    
    $
    318
    
    
    $
    296
    
    
    
    7
    
    
    $
    815
    
    
    $
    608
    
    
    
    34
    CONSOLIDATED OPERATING EXPENSES
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)Cost of services and sales
    
    $
    80
    
    
    $
    80
    
    
    
    0
    %
    
    $
    176
    
    
    $
    156
    
    
    
    13
    %Selling, general and administrative expenses
    
    
    131
    
    
    
    126
    
    
    
    4
    
    
    
    269
    
    
    
    253
    
    
    
    6Total consolidated operating expenses
    
    $
    211
    
    
    $
    206
    
    
    
    2
    
    
    $
    445
    
    
    $
    409
    
    
    
    9
    30




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##### Table of Contents



OTHER CONSOLIDATED RESULTS
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    
    
    
    
    
    
    
    
    
    (In millions)Retirement and voluntary separation provision
    
    $
    
    
    
    $
    2
    
    
    
    (100
    )%
    
    $
    
    
    
    $
    2
    
    
    
    (100
    )%Depreciation and amortization
    
    
    62
    
    
    
    60
    
    
    
    3
    
    
    
    124
    
    
    
    122
    
    
    
    2Interest expense and others
    
    
    9
    
    
    
    11
    
    
    
    (18
    )
    
    
    22
    
    
    
    22
    
    
    
    Equity income in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    Gain on sale of interest in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    Minority interest in consolidated subsidiary
    
    
    
    
    
    
    1
    
    
    
    (100
    )
    
    
    1
    
    
    
    1
    
    
    
    Income tax (benefit) expense
    
    
    14
    
    
    
    7
    
    
    
    100
    
    
    
    61
    
    
    
    21
    
    
    
    190Total Other Consolidated Results
    
    $
    85
    
    
    $
    81
    
    
    
    5
    
    
    $
    179
    
    
    $
    167
    
    
    
    8
 Retirement and Voluntary Separation Provisions
  Depreciation and amortization expense
  Interest expense, net
  Equity income from joint venture
  Gain on sale of interest in joint venture
  Minority interest in consolidated subsidiary
  31




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##### Table of Contents



Income taxes
  SEGMENT RESULTS OF OPERATIONS
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed data services, and Internet access;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
  
    
    Postpaid and prepaid services; and
    
    Wireless equipment sales.
 32




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##### Table of Contents



WIRELINE REVENUES
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)Local
    
    $
    151
    
    
    $
    154
    
    
    
    (2
    )%
    
    $
    314
    
    
    $
    306
    
    
    
    3
    %Network Access
    
    
    55
    
    
    
    53
    
    
    
    4
    
    
    
    110
    
    
    
    121
    
    
    
    (9
    )Long Distance
    
    
    16
    
    
    
    13
    
    
    
    23
    
    
    
    34
    
    
    
    31
    
    
    
    10Directory and Other
    
    
    11
    
    
    
    15
    
    
    
    (27
    )
    
    
    194
    
    
    
    30
    
    
    
    547Total Wireline
    
    $
    233
    
    
    $
    235
    
    
    
    (1
    )
    
    $
    652
    
    
    $
    488
    
    
    
    34
 OPERATING DATA
 For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2006
    
    2005
    
    
    
    2006
    
    2005
    
    % ChangeAccess Lines in Service (000s):Residential
    
    
    808
    
    
    
    878
    
    
    
    -8
    %
    
    
    808
    
    
    
    878
    
    
    
    -8
    %Business
    
    
    259
    
    
    
    277
    
    
    
    -6
    %
    
    
    259
    
    
    
    277
    
    
    
    -6
    %Total
    
    
    1,067
    
    
    
    1,155
    
    
    
    -8
    %
    
    
    1,067
    
    
    
    1,155
    
    
    
    -8
    %
  Local Services
   Network Access
   33




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##### Table of Contents



Long Distance
   Directory and Other
   WIRELINE
EXPENSES AND CHARGES
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    
    
    
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    52
    
    
    $
    55
    
    
    
    (5)
    %
    
    $
    116
    
    
    $
    107
    
    
    
    8
    %Selling, general and administrative expenses
    
    
    106
    
    
    
    100
    
    
    
    6
    
    
    
    220
    
    
    
    202
    
    
    
    9Total Wireline
    
    $
    158
    
    
    $
    155
    
    
    
    2
    
    
    $
    336
    
    
    $
    309
    
    
    
    9
  Cost of services and sales
  Selling, general and administrative expenses
  34




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##### Table of Contents



WIRELESS REVENUES
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)Postpaid Cellular
    
    $
    64
    
    
    $
    50
    
    
    
    28
    %
    
    $
    125
    
    
    $
    98
    
    
    
    28
    %Prepaid Cellular
    
    
    5
    
    
    
    4
    
    
    
    25
    
    
    
    9
    
    
    
    9
    
    
    
    0Total Cellular
    
    
    69
    
    
    
    54
    
    
    
    28
    
    
    
    134
    
    
    
    107
    
    
    
    25Wireless Equipment and Other
    
    
    23
    
    
    
    11
    
    
    
    109
    
    
    
    44
    
    
    
    25
    
    
    
    76Total Wireless
    
    $
    92
    
    
    $
    65
    
    
    
    42
    
    
    $
    178
    
    
    $
    132
    
    
    
    35
 OPERATING DATA
 For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % ChangeCellular Customers (000s):Postpaid
    
    
    412
    
    
    
    344
    
    
    
    20
    %
    
    
    412
    
    
    
    344
    
    
    
    20
    %Prepaid
    
    
    104
    
    
    
    100
    
    
    
    4
    
    
    
    104
    
    
    
    100
    
    
    
    4Total
    
    
    516
    
    
    
    444
    
    
    
    16
    
    
    
    516
    
    
    
    444
    
    
    
    16Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    54
    
    
    $
    51
    
    
    
    5
    %
    
    $
    53
    
    
    $
    53
    
    
    
    
    %Prepaid Cellular ARPU
    
    
    17
    
    
    
    14
    
    
    
    16
    
    
    
    15
    
    
    
    14
    
    
    
    2Combined Cellular ARPU
    
    
    46
    
    
    
    43
    
    
    
    8
    
    
    
    45
    
    
    
    44
    
    
    
    3
  Wireless Service Revenues
   Wireless Equipment and other
  35




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For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)Cost of services and sales
    
    $
    30
    
    
    $
    27
    
    
    
    11
    %
    
    $
    60
    
    
    $
    52
    
    
    
    15
    %Selling, general and administrative expenses
    
    
    31
    
    
    
    29
    
    
    
    7
    
    
    
    63
    
    
    
    60
    
    
    
    5Total Wireless
    
    $
    61
    
    
    $
    56
    
    
    
    9
    
    
    $
    123
    
    
    $
    112
    
    
    
    10
    %
  Cost of services and sales
   Selling, general and administrative expenses
   36




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LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 For the Six Months Ended June 30,2006
    
    2005
    
    Change(in millions)Cash flows from (used in):Operations
    
    $
    333
    
    
    $
    108
    
    
    $
    225Investing
    
    
    (36
    )
    
    
    (79
    )
    
    $
    43Financing
    
    
    (193
    )
    
    
    (3
    )
    
    $
    (190
    )
            37




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REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   RATE REBALANCING
    TOUCHTONE CHARGES
   38




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CTI ASSET TRANSFER
   PRICE CAP REGULATION
   39




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HIGH COST SUPPORT FOR INSULAR RELIEF
  MUNICIPAL RIGHT OF WAY FEES
  PRT v. Guayanilla
  40




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INTERCONNECTION DISPUTE
  SUBSCRIBER LINE CHARGE (SLC)
   CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     41




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CRITICAL ACCOUNTING POLICIES
 General
    Allowance for Doubtful Accounts
  Deferred Taxes
       42




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Property, Plant and Equipment and Depreciation
   43




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointCarrying Amount
    
    Fair Value
    
    Increase
    
    Decrease(In thousands)June 30, 2006:Senior notes
    
    $
    299,939
    
    
    $
    306,438
    
    
    $
    298,636
    
    
    $
    314,493December 31, 2005:Senior notes
    
    $
    699,919
    
    
    $
    711,120
    
    
    $
    700,558
    
    
    $
    722,038Interest rate swap
    
    
    (1,080
    )
    
    
    (1,080
    )
    
    
    (1,446
    )
    
    
    (713
    )Total
    
    $
    698,839
    
    
    $
    710,040
    
    
    $
    699,112
    
    
    $
    721,325
 44




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ITEM 4. CONTROLS AND PROCEDURES
   45




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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
  46




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SIGNATURES
   By :
Name:
    
    /s/ Cristina M. Lambert

Cristina M. LambertTitle:
    
    President and Chief Executive OfficerDate:
    
    August 14, 2006By:
Name:
    
    /s/ Héctor Houssay

Héctor HoussayTitle:
    
    Vice President Finance and Chief
Financial OfficerDate:
    
    August 14, 2006By:
Name:
    
    /s/ Rafael Otaño

Rafael OtañoTitle:
    
    ControllerDate:
    
    August 14, 2006
 47




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EXHIBIT INDEX
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on
Form 10-K for the year ended December 31, 1999 (File
333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.2
    
    Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.3
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.4
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.13 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.5
    
    Pledge Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.15 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.6
    
    Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.16 of
the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.7
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).
 48




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EXHIBITNUMBER
    
    DESCRIPTION10.8
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.26
of the Companys Annual Report on Form 10-K for the year
ended December 31, 2000 (File 333-85503)).10.9
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Banc of America Securities LLC.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.27 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.10
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Popular Securities, Inc., as Dealer for
notes with maturities up to 365 days. Concerning notes to be
issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.28 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.11
    
    Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc.,
as Issuer, Puerto Rico Telephone Company and Celulares
Telefónica, Inc., as Guarantors, and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.12
    
    Letter Amendment, to the March 2, 1999 Shareholders
Agreement, dated as of May 25, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., and the Puerto Rico Telephone Authority.
(Incorporated by reference to Exhibit 10.25 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30,
2001 (File 333-85503)).10.13
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Bank of America, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.27 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.14
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Citibank, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.28 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.15
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
(Incorporated by reference to Exhibit 10.29 of the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File 333-85503)).10.16
    
    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)).10.17
    
    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.
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)).
 49




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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2006
until January 17, 2011. Approved on October 20, 2005.
(Incorporated by reference to Exhibit 10.24 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005 (File 333-85503)).10.19
    
    $600,000,000 Credit Agreement dated as of February 28, 2006,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, the
Initial Lenders named therein, Citibank, N.A., as
Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto
Rico and Scotiabank of Puerto Rico, as Co-Syndication Agents,
and Banco Popular de Puerto Rico and The Bank of
Tokyo-Mitsubishi UFG, LTD., New York Branch, as
Co-documentation Agents. (Incorporated by reference to
Exhibit 10.23 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2005 (File 333-85503)).10.20
    
    ESOP Loan Agreement dated as of November 4, 2005, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.24 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2005 (File
333-85503)).10.21
    
    Share and publication rights purchase agreement dated as of
February 28, 2006 by an d between PRTC Directories, Inc.,
Puerto Rico Telephone Company, Inc. and CII Acquisition Corp
(Incorporated by reference to Exhibit 10.24 of the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006 (File 333-85503)).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).
 50