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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 30, 2004 Or [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from  to Commission File Number 333-85503 Telecomunicaciones de Puerto Rico, Inc.  Commonwealth of Puerto Rico
    
    66-0566178(STATE OR OTHER JURISDICTION OF
    
    (IRS EMPLOYER IDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)1515 FD Roosevelt AvenueGuaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 Registrants telephone number, including area code: 787-792-6052 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer. YES [ ] NO [X] At November 15, 2004, 25 million shares of no par common stock of the
registrant were outstanding.    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September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations Three Months Ended September 30, 2004
and 2003; Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Changes in Shareholders EquityNine
Months Ended September 30, 2004 and Year Ended December 31, 2003
    
    
    5Condensed Consolidated Statements of Cash FlowsNine Months Ended September 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    50Part II. Other InformationItem 1. Legal Proceedings
    
    
    51Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    51Signatures
    
    
    52Exhibit Index
    
    
    53Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
  2




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Balance Sheets
  (Unaudited)September 30,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    121,449
    
    
    $
    21,732Accounts receivable, net of allowance for doubtful accounts
of $131,668 and $131,106 in 2004 and 2003, respectively
    
    
    270,284
    
    
    
    287,247Deferred income tax
    
    
    26,628
    
    
    
    26,158Inventory and supplies, net
    
    
    18,096
    
    
    
    21,202Prepaid expenses
    
    
    32,657
    
    
    
    35,255Total current assets
    
    
    469,114
    
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,467,202
    
    
    
    1,558,246GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    188,566
    
    
    
    189,136DEFERRED INCOME TAX
    
    
    203,595
    
    
    
    246,794OTHER ASSETS
    
    
    109,794
    
    
    
    108,541TOTAL ASSETS
    
    $
    2,565,198
    
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    123,082
    
    
    $
    59,729Other current liabilities
    
    
    209,186
    
    
    
    213,480Total current liabilities
    
    
    332,268
    
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    706,100
    
    
    
    802,135PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    516,518
    
    
    
    594,113OTHER NON-CURRENT LIABILITIES
    
    
    192,385
    
    
    
    237,405Total liabilities
    
    $
    1,747,271
    
    
    $
    1,906,862MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    14,135
    
    
    
    13,025SHAREHOLDERS EQUITY:Common stock
    
    $
    703,884
    
    
    $
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    (26,153
    )Subscription receivable
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    227,446
    
    
    
    164,520Accumulated other comprehensive loss, net of taxes
    
    
    (101,385
    )
    
    
    (101,385
    )Total shareholders equity
    
    
    803,792
    
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,565,198
    
    
    $
    2,621,238
 The accompanying notes are an integral part of these financial statements. 3




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Operations
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)REVENUES:Local services
    
    $
    137,240
    
    
    $
    142,385
    
    
    $
    410,374
    
    
    $
    434,923Access services
    
    
    59,469
    
    
    
    63,697
    
    
    
    206,050
    
    
    
    223,426Long distance services
    
    
    30,906
    
    
    
    35,580
    
    
    
    103,400
    
    
    
    102,260Cellular services
    
    
    49,425
    
    
    
    46,295
    
    
    
    144,882
    
    
    
    140,324Paging services
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    1,026Directory services and other
    
    
    23,901
    
    
    
    20,656
    
    
    
    64,797
    
    
    
    58,986Total revenues
    
    
    300,941
    
    
    
    308,836
    
    
    
    929,503
    
    
    
    960,945OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    88,456
    
    
    
    100,428
    
    
    
    280,637
    
    
    
    303,440Other operating expenses
    
    
    98,272
    
    
    
    175,177
    
    
    
    253,937
    
    
    
    407,922Early retirement and voluntary separation provision
    
    
    
    
    
    
    
    
    
    
    1,635
    
    
    
    4,700Depreciation and amortization
    
    
    64,751
    
    
    
    63,851
    
    
    
    195,136
    
    
    
    187,130Total operating costs and expenses
    
    
    251,479
    
    
    
    339,456
    
    
    
    731,345
    
    
    
    903,192OPERATING INCOME (LOSS)
    
    
    49,462
    
    
    
    (30,620
    )
    
    
    198,158
    
    
    
    57,753OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (11,195
    )
    
    
    (18,826
    )
    
    
    (32,653
    )
    
    
    (42,691
    )Equity income from joint venture
    
    
    737
    
    
    
    539
    
    
    
    2,072
    
    
    
    1,840Minority interest in consolidated subsidiary
    
    
    (656
    )
    
    
    (357
    )
    
    
    (1,874
    )
    
    
    (1,187
    )Total other income (expense), net
    
    
    (11,114
    )
    
    
    (18,644
    )
    
    
    (32,455
    )
    
    
    (42,038
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    38,348
    
    
    
    (49,264
    )
    
    
    165,703
    
    
    
    15,715INCOME TAX EXPENSE (BENEFIT)
    
    
    14,388
    
    
    
    (19,557
    )
    
    
    63,816
    
    
    
    4,744INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    23,960
    
    
    
    (29,707
    )
    
    
    101,887
    
    
    
    10,971CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax provision of $40,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME (LOSS)
    
    $
    23,960
    
    
    $
    (29,707
    )
    
    $
    101,887
    
    
    $
    69,500
 The accompanying notes are an integral part of these financial statements. 4




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Changes in Shareholders Equity (In thousands) AccumulatedOtherCommon
    
    Deferred ESOP
    
    Subscription
    
    Retained
    
    ComprehensiveStock
    
    Compensation
    
    Receivable
    
    Earnings
    
    Loss
    
    TotalBALANCE, DECEMBER 31, 2002
    
    $
    703,270
    
    
    $
    (27,408
    )
    
    $
    (76,093
    )
    
    $
    155,789
    
    
    $
    (90,182
    )
    
    $
    665,376Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,125
    )
    
    
    
    
    
    
    (68,125
    )Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (3,422
    )
    
    
    
    
    
    
    
    
    
    
    (3,422
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Release of ESOP shares
    
    
    614
    
    
    
    1,255
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,869Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,856
    
    
    
    
    
    
    
    76,856Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,203
    )
    
    
    (11,203
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,653BALANCE, DECEMBER 31, 2003
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    (39,515
    )
    
    $
    164,520
    
    
    $
    (101,385
    )
    
    $
    701,351(UNAUDITED)Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,386
    )
    
    
    
    
    
    
    (12,386
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,575
    )
    
    
    
    
    
    
    (26,575
    )Net income, for the nine months ended
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,887
    
    
    
    
    
    
    
    101,887Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000BALANCE, SEPTEMBER 30, 2004
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    
    
    
    $
    227,446
    
    
    $
    (101,385
    )
    
    $
    803,792
 The accompanying notes are an integral part of these financial statements. 5




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows
  For the Nine Months EndedSeptember 30,2004
    
    2003(Unaudited)CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    101,887
    
    
    $
    69,500Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    195,136
    
    
    
    187,130Provision for uncollectible accounts
    
    
    39,597
    
    
    
    55,414Cumulative effect of accounting change
    
    
    
    
    
    
    (58,529
    )Abandoned software project
    
    
    
    
    
    
    32,262Deferred income tax
    
    
    42,730
    
    
    
    (35,747
    )Accretion of discount on subscription receivable
    
    
    (485
    )
    
    
    (2,681
    )Equity income from joint venture
    
    
    (2,072
    )
    
    
    (1,840
    )Early retirement and voluntary separation provision
    
    
    1,635
    
    
    
    4,700Minority interest in consolidated subsidiary
    
    
    1,874
    
    
    
    1,187Gain on sale of land and building
    
    
    (353
    )
    
    
    (824
    )Changes in assets and liabilities:Accounts receivable
    
    
    (22,634
    )
    
    
    (59,837
    )Inventory and supplies
    
    
    3,106
    
    
    
    4,134Prepaid expenses and other assets
    
    
    2,362
    
    
    
    (15,182
    )Other current and non-current liabilities
    
    
    (78,664
    )
    
    
    89,029Pension and other post-employment benefits
    
    
    (79,230
    )
    
    
    (4,649
    )Net cash provided by operating activities
    
    
    204,889
    
    
    
    264,067CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (104,456
    )
    
    
    (110,059
    )Proceeds from sale of land and building
    
    
    1,073
    
    
    
    6,000Net salvage on retirements and other
    
    
    214
    
    
    
    552Net cash used in investing activities
    
    
    (103,169
    )
    
    
    (103,507
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (29,617
    )
    
    
    (141,799
    )Dividends paid
    
    
    (12,386
    )
    
    
    (68,125
    )Net cash used in financing activities
    
    
    (2,003
    )
    
    
    (169,924
    )NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    99,717
    
    
    
    (9,364
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    21,732
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    121,449
    
    
    $
    24,303
 The accompanying notes are an integral part of these financial statements. 6




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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  1.
    
    Business / Corporate Structure Telecomunicaciones 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 Puerto Rico Telephone Authority (PRTA), an entity of
the Commonwealth of Puerto Rico (the Acquisition). In the Acquisition,
Popular, Inc. acquired a 10% interest in the Company. GTE and Bell Atlantic
Corporation merged on June 30, 2000 to form Verizon Communications Inc.
(Verizon). On January 25, 2002, GTE Holdings (Puerto Rico) LLC and
Popular, Inc. acquired an additional 12% and 3% interest in the Company,
respectively, by exercising an option each held since the Acquisition (the
Option Exercise). Verizon and Popular, Inc. obtained the additional
ownership interest from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA
Holdings). Verizon and Popular, Inc. paid PRTA Holdings $138 million and
$34 million, respectively, for a total of $172 million in cash for the
additional 3,750,000 shares at a $45.9364 per share price established in the
Share Option Agreement, an agreement entered into at the time of the
Acquisition. As a result, Verizon now owns 52%, PRTA owns 28%, Popular owns
13% and the Employee Stock Ownership Plan owns 7% of the outstanding capital
stock of the Company. The Company is an affiliate of Verizon, which
consolidates the Companys financial results with its own financial results.  2.
    
    Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States 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 accounting principles generally
accepted in the United States 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 operations and financial
condition for the interim periods shown. The Condensed Consolidated Balance
Sheet at December 31, 2003 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,
2003. Impairment or Disposal of Long-lived Assets Assets are assessed for impairment when changes in circumstances indicate
that their carrying values
are not recoverable. Effective, January 1, 2002, the Company adopted SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Losses
are recognized in circumstances where impairment exists, at the amount by
which the carrying value of assets exceeds fair value. Fair value is
determined based on quoted market prices, if not available, the estimate of
fair value is based on various valuation techniques, including a discounted
value of estimated future cash flows and fundamental analysis. For the last three years, the Company has been operating a TDMA network and
CDMA network for its wireless clients. During 2003, management decided to
migrate in 2004 all TDMA clients to the CDMA network and subsequently dispose 7




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of the TDMA network. The expected undiscounted future cash flow from
operations on the TDMA network was estimated to be $27 million ($47.4 million
estimated cash flows from operations less $20.4 million of related expenses).
The discounted fair value of the network was estimated at $26 million
determined by discounting anticipated future cash flows at a risk free rate
of 3.76%. Since the estimated fair value of $26 million is lower than the $37.8 million
carrying amount of the TDMA network as of December 31, 2003, the Company
recorded an impairment loss of $11.8 million. Reclassifications Reclassifications of prior periods data have been made to conform to the
current periods presentation.  3.
    
    Accounting Change for Directory Revenue Recognition Effective January 1, 2003, the Company changed its method of accounting for
directory-publishing revenues and related expenses from the
point-of-publication method to the amortization method. Under the point-of-publication method, such revenues and related expenses are
recognized on the date that the directory is published and substantially
delivered. Under the amortization method, pre-publication revenues and
expenses are deferred and capitalized, respectively. Subsequent to
publication, revenues are recognized and expenses amortized over the lives of
the directories, which is generally one year. While both methods fully comply with accounting principles generally
accepted in the United States, the Company adopted the amortization
method because it is becoming the industry standard. The cumulative effect of applying this accounting change to prior years
was recognized as of January 1, 2003 as a one-time, non-cash loss of $17
million ($13 million, after tax). The effect of applying the new method for
the year ended December 31, 2003 was a one-time non-cash revenue increase of
$13 million, which was included in operating income.  4.
    
    Summary of Recent Accounting Pronouncements Asset Retirement Obligations On January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred
and capitalize that amount as part of the book value of the long-lived asset.
We have determined that PRT does not have a material legal obligation to
remove long-lived assets as described by this statement. However, we have
included estimated removal costs in our group depreciation models. These
costs have increased depreciation expense and accumulated depreciation for
future removal costs for existing assets. These removal costs are recorded
as a reduction to accumulated depreciation when the assets are retired and
removal costs are incurred. For some assets, such as telephone poles, the removal costs exceed salvage
value. Under the provisions of SFAS No. 143, we are required to exclude
costs of removal from our depreciation rates for assets for which the removal
costs exceed salvage. Accordingly, in connection with the initial adoption
of this standard on January 1, 2003, we have reversed accrued costs of
removal in excess of salvage from our accumulated depreciation accounts for
these assets. The adjustment was recorded as a cumulative effect of an
accounting change, resulting in the recognition of an estimated gain of $117
million ($71 million after-tax). Effective January 1, 2003, we began
expensing costs of removal in excess of salvage for these assets as incurred.
The impact of this change in accounting resulted in a decrease in
depreciation expense and an increase in operational and support expenses.
The net increase to operating income in 2003, excluding the cumulative effect
adjustment, was approximately $12 million ($7 million after-tax). 8




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Amendments of Statement 133 on Derivative Instruments and Hedging
Activities In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied
prospectively. However, the provisions of this statement that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters
beginning prior to June 15, 2003 continue to be applied in accordance with
their respective effective dates. The Company evaluated the impact of the
adoption of SFAS No. 149 and concluded that there is no material effect on
its results of operations and financial condition. Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
standard clarifies the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. The requirements of this statement apply to issuers
classification and measurement of freestanding financial instruments,
including those that comprise more than one option or forward contract. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company evaluated the
impact of the adoption of SFAS No. 150 and concluded that there is no
material effect on its results of operations and financial condition. Accounting for Revenue Arrangements with Multiple Deliverables In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF No. 00-21 addresses how to account for
arrangements that may involve multiple revenue-generating activities.
Specifically, the issue addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting.
The consensus guidance will be applicable to agreements entered into in
quarters beginning after June 15, 2003. The Company evaluated the impact of
the adoption of EITF No. 00-21 and concluded that there is no material effect
on its results of operations and financial condition.  5.
    
    Property, Plant and Equipment Property, plant and equipment consist of: Remaining Useful
    
    September 30,
    
    December 31,Lives (Yrs)
    
    2004
    
    2003(In thousands)Current
    
    PreviousOutside plant
    
    
    9.2
    
    
    
    8.5
    
    
    $
    2,129,633
    
    
    $
    2,097,902Central office and transmission equipment
    
    
    4.4
    
    
    
    4.1
    
    
    
    1,212,067
    
    
    
    1,184,357Equipment and other
    
    
    2.7
    
    
    
    3.2
    
    
    
    304,375
    
    
    
    323,459Buildings
    
    
    11.0
    
    
    
    14.3
    
    
    
    319,773
    
    
    
    316,052Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    26,325
    
    
    
    26,400Gross plant in service
    
    
    
    
    
    
    
    
    
    
    3,992,173
    
    
    
    3,948,170Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,588,147
    
    
    
    2,455,127Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,404,026
    
    
    
    1,493,043Construction in progress
    
    
    
    
    
    
    
    
    
    
    63,176
    
    
    
    65,203Total
    
    
    
    
    
    
    
    
    
    $
    1,467,202
    
    
    $
    1,558,246
 9




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##### Table of Contents



Under the provisions of SFAS No. 143, we are required to exclude costs of
removal from our depreciation rates for assets for which the removal costs
exceed salvage. Accordingly, in connection with the initial adoption of this
standard on January 1, 2003, we have reversed accrued costs of removal in
excess of salvage from our accumulated depreciation accounts for these
assets. The adjustment was recorded as a cumulative effect of an accounting
change, resulting in the recognition of an estimated gain of $117 million
($71 million after-tax). Effective January 1, 2003, the Company began
expensing costs of removal in excess of salvage for these assets as incurred.
The impact of this change in accounting will result in a decrease in
depreciation expense and an increase in operational and support expenses.
The net increase to operating income in 2003, excluding the cumulative effect
adjustment, was approximately $12 million ($7 million after-tax). During the fourth quarter of 2003, the board of directors approved the
replacement of the Companys General Ledger System and Inventory Management
System. The new systems have been implemented and are currently operating.
The projected capitalized costs for software and labor are approximately $11
million. As of September 30, 2004, the Company had capitalized costs of $10
million associated with the new systems. Effective July 2004, the Company performed its periodic review of plant
useful lives estimates based on a comprehensive analysis detailed review of
the lives underlying the depreciation rates. The review incorporates the
impact of technology, future competition and assumptions employed in the
industry relative to depreciation and retirement rates. The revision
resulted in a decrease in depreciation expense by approximately $1.7 million
for the quarter ended September 30, 2004 and approximately $3.3 million for
the year 2004. The Company revised the method to calculate the composite useful lives to be
consistent with the current depreciation study.  6.
    
    Goodwill Following is a breakdown of goodwill. CarryingValueSeptember 30,
    
    December 31,2004
    
    2003(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
 10




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##### Table of Contents



7.
    
    Intangibles CarryingValueSeptember 30,
    
    December 31,2004
    
    2003(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 September 30, 2004
    
    December 31, 2003(In thousands)Definite Life:
    
    Cost
    
    Acc. Amort
    
    Book Value
    
    Cost
    
    Acc. Amort
    
    Book ValueWireline trade name
    
    $
    48,400
    
    
    $
    10,798
    
    
    $
    37,602
    
    
    $
    48,400
    
    
    $
    9,502
    
    
    $
    38,898Software licenses
    
    
    78,780
    
    
    
    36,791
    
    
    
    41,989
    
    
    
    67,068
    
    
    
    25,805
    
    
    
    41,263Customer base
    
    
    15,544
    
    
    
    15,544
    
    
    
    
    
    
    
    15,544
    
    
    
    15,544
    
    
    
    Other
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    500
    
    
    
    Total Definite Life
    
    $
    143,224
    
    
    $
    63,633
    
    
    $
    79,591
    
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    80,161Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    $
    108,975
    
    
    
    
    
    
    
    
    
    
    $
    108,975Total
    
    $
    143,224
    
    
    $
    63,633
    
    
    $
    188,566
    
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    189,136
 SFAS No. 142, Goodwill and Other Intangible Assets, no longer permits the
amortization of goodwill and other indefinite-lived intangible assets.
Instead, these assets must be reviewed annually (or, under certain
conditions, more frequently) for impairment in accordance with this
statement. This impairment test uses fair value approach. Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. For 2003 and 2004, the Company has evaluated its assets using the
fair value approach for each reporting unit to determine if there is an
impairment exposure (transitional impairment test) and the impact it would
have on the Companys results of operations. The evaluation of the two
reporting units revealed no impairment exposure.  8.
    
    Other assets Other assets consist of: September 30,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation costs
    
    $
    72,692
    
    
    $
    69,347Notes receivable-equipment sales
    
    
    7,886
    
    
    
    10,446Deferred pension asset
    
    
    19,785
    
    
    
    19,785Deferred financing costs, net
    
    
    2,496
    
    
    
    3,146Other deferred costs
    
    
    2,165
    
    
    
    1,426Interest rate swap
    
    
    1,757
    
    
    
    2,811Investment in Verizon Information Services
    
    
    1,055
    
    
    
    Other assets
    
    
    1,958
    
    
    
    1,580Total
    
    $
    109,794
    
    
    $
    108,541
 11




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##### Table of Contents



9.
    
    Pension Plan The Company has noncontributory pension plans for full-time employees, which
are tax qualified as they meet Employee Retirement Income Security Act of
1974 (the ERISA) requirements. The Company realizes tax deductions when
contributions are made to the trusts. The trusts invest in equity and fixed
income securities to meet the benefit obligation. The pension benefit is composed of an annuity and a lump sum. 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
(craft union), the HIETEL union and management employees. Health care and
life insurance benefits are also provided to retirees. The components of the net pension and other post-employment benefit
expenses for the quarters ended September 30, (In thousands)
    
    Pension and Lump Sum Benefit
    
    Post-Retirement BenefitsThree months ended Sept. 30,
    
    Nine months ended Sept. 30,
    
    Three months ended Sept. 30,
    
    Nine months ended Sept. 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    5,041
    
    
    $
    4,523
    
    
    $
    15,413
    
    
    $
    13,569
    
    
    $
    (187
    )
    
    $
    2,175
    
    
    $
    4,943
    
    
    $
    6,525Interest cost
    
    
    19,316
    
    
    
    16,825
    
    
    
    54,450
    
    
    
    50,475
    
    
    
    5,193
    
    
    
    8,878
    
    
    
    24,497
    
    
    
    26,634Expected return on plan assets
    
    
    (14,718
    )
    
    
    (11,578
    )
    
    
    (44,538
    )
    
    
    (34,734
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    12,576
    
    
    
    108
    
    
    
    12,756
    
    
    
    324
    
    
    
    9,586
    
    
    
    551
    
    
    
    10,688
    
    
    
    1,653Prior service cost (benefit)
    
    
    1,585
    
    
    
    1,186
    
    
    
    3,943
    
    
    
    3,558
    
    
    
    (2,253
    )
    
    
    (628
    )
    
    
    (3,509
    )
    
    
    (1,884
    )Actuarial gain, net
    
    
    (6,767
    )
    
    
    3,281
    
    
    
    269
    
    
    
    9,843
    
    
    
    (7,190
    )
    
    
    3,926
    
    
    
    1,652
    
    
    
    11,778Net periodic benefit cost
    
    
    17,033
    
    
    
    14,345
    
    
    
    42,293
    
    
    
    43,035
    
    
    
    5,149
    
    
    
    14,902
    
    
    
    38,271
    
    
    
    44,706Effect of early retirement program
    
    
    
    
    
    
    2,179
    
    
    
    939
    
    
    
    6,536
    
    
    
    
    
    
    
    1,556
    
    
    
    696
    
    
    
    4,667Total
    
    $
    17,033
    
    
    $
    16,524
    
    
    $
    43,232
    
    
    $
    49,571
    
    
    $
    5,149
    
    
    $
    16,458
    
    
    $
    38,967
    
    
    $
    49,373
 Cash Flows The Company expects to contribute $177 million to the pension and lump
sum plans and $30 million to the post-retirement plan in 2004. We have
adequate liquidity resources to fund these amounts. As of September 30,
2004, the Company has contributed $140 million to the pension plan. Medicare Drug Act On December 8, 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (Medicare Drug Act) was signed into law. The
Medicare Drug Act introduces a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. 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: (a) the amortization of the actuarial experience gain from the
reduction in the APBO of $4.3 million, (b) the reduction in current period
service cost due to the subsidy of $1.6 million, and (c) the resulting
reduction in interest cost on the APBO as a result of the subsidy. During
the three months and nine months ended September 30, 2004, the Medicare Drug
Act has reduced our net postretirement benefit cost by $8 million. 12




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##### Table of Contents



10.
    
    Early Retirement and Voluntary Separation Provision In January 2003, 29 qualified management employees accepted the voluntary
separation program, offered by the Company to qualified management employees
during the fourth quarter of 2002, representing an expense of $1.4 million,
which was recorded in the first quarter 2003. During the
second quarter of 2003, the Company offered to members of one of the unions a
voluntary separation program that closed on June 20, 2003, which 44 qualified
employees accepted. Also, during the second quarter of 2003, an additional
147 employees in the craft union accepted a retirement program offered by the
Company that closed on June 30, 2003. As a result of these two programs, an
additional non-cash provision of $3.3 million was recorded in the second
quarter 2003. In December 2003, the Company offered an early retirement program to
qualified management employees. A non-cash provision of $12.6 million was
recorded relating to 147 employees who had accepted as of December 31, 2003.
In January 2004, an additional 19 qualified management employees accepted the
early retirement program offered by the Company in December 2003, which
resulted in a provision of $1.6 million. In September 30, 2004, the Company offered a voluntary separation program,
closing on December 3, 2004, to qualified management employees.  11.
    
    Deferred ESOP Compensation The 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. Compensation expense is recorded based on the release of shares at market
value, which is based on an independent appraisal performed annually. The
ESOP released approximately 36,072 shares in 2003. This release resulted in
compensation expense of $2 million for year ended December 31, 2003,
reflecting the market value of the shares. The release of shares, based upon
the per share price established at the Acquisition, amounted to $1.3 million
for December 31, 2003, which is reflected as a reduction of deferred ESOP
compensation in equity.  12.
    
    Other Current Liabilities Other current liabilities consist of: September 30,
    
    December 31,2004
    
    2003(In thousands)Accounts payable
    
    $
    28,011
    
    
    $
    58,625Accrued expenses
    
    
    79,001
    
    
    
    75,999Employee benefit accruals
    
    
    69,169
    
    
    
    44,697Carrier payables
    
    
    12,955
    
    
    
    26,388Taxes
    
    
    1,790
    
    
    
    1,420Interest
    
    
    18,260
    
    
    
    6,351Total
    
    $
    209,186
    
    
    $
    213,480
 13




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##### Table of Contents



13.
    
    Debt Debt consists of: September 30,
    
    December 31,2004
    
    2003(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    399,960
    
    
    $
    399,943Due May 15, 2009 at 6.80%
    
    
    299,909
    
    
    
    299,896Term credit facilities:Due May 16, 2005 at 57 basis points over LIBOR
    
    
    30,000
    
    
    
    30,000Due June 24, 2005 at 70 basis points over LIBOR
    
    
    30,000
    
    
    
    30,000Due August 19, 2005 at 70 basis points over LIBOR
    
    
    63,000
    
    
    
    63,000Commercial paper
    
    
    
    
    
    
    29,500Deferred derivative
    
    
    4,325
    
    
    
    6,337Interest rate swap
    
    
    1,757
    
    
    
    2,811Capital leases
    
    
    231
    
    
    
    377Total
    
    
    829,182
    
    
    
    861,864Less short-term debt
    
    
    123,082
    
    
    
    59,729Long-term debt
    
    $
    706,100
    
    
    $
    802,135
 The senior notes, commercial paper, term credit facilities, working capital
facility, and bank notes are unsecured and non-amortizing. PRTC is the
guarantor of these debt instruments. The senior notes indentures and credit
facility agreements do not contain dividend restrictions. The Company has a $360 million commercial paper program with maturities not
to exceed 364 days, which is backed by two working capital facilities. The
commercial paper agreement was signed in November 2000. In March 2004, the
Companys existing $400 million bank note credit facility matured. On March 2, 2004 the Company entered into a new unsecured, $360 million
364-day revolving credit facility with a syndicate of banks and other lenders
for whom Citibank, N.A. acts as administrative agent, Banco Bilbao Vizcaya
Argentaria Puerto Rico acts as syndication agent and Banco Popular de Puerto
Rico, FirstBank Puerto Rico and Scotiabank de Puerto Rico act as
co-documentation agents. Amounts borrowed under this facility are guaranteed
by PRTC, and bear interest at the applicable Eurodollar rate plus a margin or
at the base rate; which is the higher of the base rate publicly announced by
the administrative agent from time to time or the Federal Funds rate plus
0.5%, plus a margin. The Company is also required to pay a quarterly
facility fee on commitments under the facility and a quarterly utilization
fee on borrowed amounts that exceed 50% of the commitments under the
facility. Accrued interest on Eurodollar rate borrowings is payable based on
elected intervals of one, two, three or six months or other interest period
as the Company may select, subject to certain conditions. Accrued interest
on base rate borrowings is payable quarterly. This facility matures on March 1, 2005, on which date the Company has the
right to convert outstanding amounts into a term loan that matures on March
1, 2006. This facility contains negative covenants, including covenants
which limit the Companys ability to grant or permit liens on its or
subsidiaries properties, merge or sell all or substantially all of its
assets and permit its subsidiaries to incur debt. This facility also
requires that the Company maintain certain financial ratios. Upon the
occurrence of a default or an event of default, the lenders have various
remedies or rights, which may include termination of the lenders obligations
to make advances and declare all borrowed amounts and interest
thereon immediately due and payable. The intended purpose of this facility
is for working purposes and serves as backstop facility for commercial paper
program. The Company had a $40 million working capital credit facility with Banco
Popular de Puerto Rico, an affiliate of Popular, Inc. that matured on June
2004. On June 2004, the Company renewed the undrawn $40 million working
capital credit facility maturing on June 30, 2005. Amounts outstanding under
this facility bear interest at a rate of 30 basis points over LIBOR. This
facility serves as additional backstop for the commercial paper program. At
September 30, 2004, the Company had no outstanding balance under this
facility. 14




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##### Table of Contents



At December 31, 2002, the Company had $225 million in term credit facilities
with maturities ranging from two to three years, and bearing interest from 60
to 100 basis points over LIBOR. By October 29, 2003, the Company repaid one
of the $50 million term loans, and prepaid principal in an aggregate amount
of $62 million of the outstanding term credit loans, while reducing interest
rate to 70 basis points over LIBOR. One of the $30 million term loans
matured on May 16, 2004. The Company renewed the $30 million term loan at an
interest rate of 57 basis points over LIBOR maturity due on May 16, 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 September 30, 2004, the unamortized balance of the
deferred derivative is $4 million. The purpose of the swap is to hedge
against changes in the fair market value of the Companys senior notes to
achieve a targeted mix of fixed and variable rate debt. The swap receives
interest at a fixed rate of 6.65% and pays interest at a net variable rate
equal to six month LIBOR plus 170 basis points, with semiannual settlements
and reset dates every May 15 and November 15 until maturity of the May 15,
2006 senior notes. The swap was entered into at market and as a result,
there was no exchange of premium at the initial date of the swap. The
Company designates the swap as a hedge of the changes in fair market value of
the senior notes due to changes in the designated benchmark interest rate.
PRTC is the guarantor of the interest rate swap. Aggregate maturities of the senior notes and term credit facilities are as
follow: Year
    
    
    
    Amount(In thousands)2005
    
    Term credit facilities
    
    $
    123,0002006
    
    Senior note
    
    
    400,0002009
    
    Senior note
    
    
    300,000Total
    
    
    
    $
    823,000
 Currently, the Company is in compliance with debt covenant agreements and
financial ratios as specified by the term credit facilities.  14.
    
    Other Non-Current Liabilities Other non-current liabilities consist of: September 30,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation revenues
    
    $
    72,692
    
    
    $
    69,347Deferred directory-publishing revenues
    
    
    11,619
    
    
    
    12,877Customer deposits
    
    
    26,174
    
    
    
    26,954Other liabilities
    
    
    81,900
    
    
    
    128,227Total
    
    $
    192,385
    
    
    $
    237,405
 15




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##### Table of Contents



15.
    
    Shareholders Equity Common Stock Common stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at September 30, 2004 and
December 31, 2003. Subscription Receivable The subscription receivable reflects receipts from the PRTA originally
recorded at its present value (at an 8% discount rate). As part of the
Acquisition agreement, the PRTA agreed to contribute a total of $200 million
in cash or stock as a capital contribution in equal installments of $40
million over five years beginning on March 2, 2000. The Company employed the
$200 million capital contribution to partially fund its under funded pension
and other post-employment benefit obligations, as agreed. The stock purchase
agreement required the Company to contribute $66 million, which included the
$40 million received from PRTA, to the pension plan immediately upon receipt
of the proceeds each year. The Company received the 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 Loss The accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs which are reflected as an other
asset, associated with the hourly employee pension fund since the accumulated
benefit obligation exceeds the fair value of plan assets. The accumulated other comprehensive loss amount as of December 31, 2003 has
been adjusted in the amount of $64.8 million in order to reflect the
after-tax amount in accordance with the provisions of SFAS No.130 Reporting
Comprehensive Income. Dividends The Companys shareholders agreement requires the payment of dividends equal
to at least 50% of consolidated net income to be paid in the following
quarter to the extent funds are legally available. Dividend payments were made in the following periods: 2004
    
    2003(In thousands)
    
    (In thousands)4th Quarter
    
    $
    26,575
    
    
    4th Quarter
    
    $
    3rd Quarter
    
    
    12,386
    
    
    3rd Quarter
    
    
    2nd Quarter
    
    
    
    
    
    2nd Quarter
    
    
    68,1251st Quarter
    
    
    
    
    
    1st Quarter
    
    
    Total
    
    $
    38,961
    
    
    Total
    
    $
    68,125
 The senior notes indentures and credit facility agreements do not contain
dividend restrictions. Fourth quarter dividend payment was considered
through November 15, 2004. 16




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##### Table of Contents



16.
    
    Fair Value of Financial Instruments The carrying amounts and fair values of the Companys financial
instruments are as follows: September 30,
    
    December 31,2004
    
    2003Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    121,449
    
    
    $
    121,449
    
    
    $
    21,732
    
    
    $
    21,732Accounts receivable
    
    
    270,284
    
    
    
    270,284
    
    
    
    287,247
    
    
    
    287,247Liabilities:Other current liabilities
    
    $
    209,186
    
    
    $
    209,186
    
    
    $
    213,480
    
    
    $
    213,480Short-term debt
    
    
    123,082
    
    
    
    123,082
    
    
    
    59,729
    
    
    
    59,729Long-term debt, including interest rate swap
    
    
    706,100
    
    
    
    759,241
    
    
    
    802,135
    
    
    
    872,822
 17




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##### Table of Contents



17.
    
    Segment Reporting The Company has two reportable segments: Wireline and Wireless. The Wireline segment consists of:  
    
    Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services, high-speed
private line services, Internet access and public phone service;  
    
    Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;  
    
    Long distance services including direct dial on-island and
off-island, operator assisted calls, prepaid calling card and high-speed
private line services;  
    
    Directory publishing rights services; and  
    
    Telecommunication equipment sales and billing and collection services
to competing long distance operators in Puerto Rico. The Wireless segment consists of:  
    
    Cellular services; and  
    
    Wireless equipment sales. The accounting policies of the segments are the same as those followed by the
Company (see Note 2). The Company accounts for intersegment revenues at
market prices. 18




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##### Table of Contents



Segment results for the Company are as follow: For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Wireless:Revenues-Local services
    
    $
    139,283
    
    
    $
    144,602
    
    
    $
    417,403
    
    
    $
    439,524Long distance services
    
    
    31,291
    
    
    
    35,721
    
    
    
    104,683
    
    
    
    104,490Access services
    
    
    59,843
    
    
    
    63,997
    
    
    
    207,521
    
    
    
    225,158Directory services and other
    
    
    17,901
    
    
    
    16,954
    
    
    
    50,748
    
    
    
    49,129Total revenues
    
    $
    248,318
    
    
    $
    261,274
    
    
    $
    780,355
    
    
    $
    818,301Operating income (loss)
    
    $
    54,388
    
    
    $
    (28,082
    )
    
    $
    207,285
    
    
    $
    62,908Wireless:Revenues-Cellular services
    
    $
    50,840
    
    
    $
    46,519
    
    
    $
    146,557
    
    
    $
    140,661Paging services
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    1,026Equipment sales and other
    
    
    6,006
    
    
    
    3,525
    
    
    
    14,051
    
    
    
    9,400Total revenues
    
    $
    56,846
    
    
    $
    50,267
    
    
    $
    160,608
    
    
    $
    151,087Operating loss
    
    $
    (4,926
    )
    
    $
    (2,538
    )
    
    $
    (9,127
    )
    
    $
    (5,155
    )Consolidated:Revenues for reportable segments
    
    $
    305,164
    
    
    $
    311,541
    
    
    $
    940,963
    
    
    $
    969,388Elimination of intersegment revenues
    
    
    (4,223
    )
    
    
    (2,705
    )
    
    
    (11,460
    )
    
    
    (8,443
    )Consolidated revenues
    
    $
    300,941
    
    
    $
    308,836
    
    
    $
    929,503
    
    
    $
    960,945Operating income (loss)
    
    $
    49,462
    
    
    $
    (30,620
    )
    
    $
    198,158
    
    
    $
    57,753
 As of
    
    As ofSeptember 30,
    
    December 31,2004
    
    2003AssetsWireline assets
    
    $
    2,541,006
    
    
    $
    2,599,277Wireless assets
    
    
    342,226
    
    
    
    314,172Segment assets
    
    $
    2,883,232
    
    
    $
    2,913,449Elimination of intersegment assets
    
    
    (318,034
    )
    
    
    (292,211
    )Consolidated assets
    
    $
    2,565,198
    
    
    $
    2,621,238
 19




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##### Table of Contents



18.
    
    Condensed Consolidating Information The following summarizes the unaudited condensed consolidating financial
information as of September 30, 2004 and December 31, 2003 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. 20




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##### Table of Contents



Condensed Consolidating Balance Sheets
September 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9
    
    
    $
    105,742
    
    
    $
    15,698
    
    
    $
    
    
    
    $
    121,449Intercompany accounts receivable
    
    
    1,083,422
    
    
    
    86,292
    
    
    
    45,661
    
    
    
    (1,215,375
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    269,987
    
    
    
    297
    
    
    
    
    
    
    
    270,284Deferred income tax
    
    
    718
    
    
    
    25,866
    
    
    
    44
    
    
    
    
    
    
    
    26,628Inventory and supplies, net
    
    
    
    
    
    
    18,096
    
    
    
    
    
    
    
    
    
    
    
    18,096Prepaid expenses
    
    
    
    
    
    
    30,532
    
    
    
    2,125
    
    
    
    
    
    
    
    32,657Total current assets
    
    
    1,084,149
    
    
    
    536,515
    
    
    
    63,825
    
    
    
    (1,215,375
    )
    
    
    469,114PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,456,903
    
    
    
    10,299
    
    
    
    
    
    
    
    1,467,202GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    290,880
    
    
    
    24,613
    
    
    
    
    
    
    
    315,493DEFERRED INCOME TAX
    
    
    
    
    
    
    204,229
    
    
    
    (634
    )
    
    
    
    
    
    
    203,595INVESTMENT IN SUBSIDIARIES
    
    
    631,261
    
    
    
    
    
    
    
    
    
    
    
    (631,261
    )
    
    
    OTHER ASSETS
    
    
    10,154
    
    
    
    106,462
    
    
    
    (1
    )
    
    
    (6,821
    )
    
    
    109,794TOTAL ASSETS
    
    $
    1,725,564
    
    
    $
    2,594,989
    
    
    $
    98,102
    
    
    $
    (1,853,457
    )
    
    $
    2,565,198LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    123,000
    
    
    $
    123,082
    
    
    $
    
    
    
    $
    (123,000
    )
    
    $
    123,082Intercompany accounts payable
    
    
    74,434
    
    
    
    285,846
    
    
    
    34,722
    
    
    
    (395,002
    )
    
    
    Other current liabilities
    
    
    18,387
    
    
    
    180,915
    
    
    
    9,884
    
    
    
    
    
    
    
    209,186Total current liabilities
    
    
    215,821
    
    
    
    589,843
    
    
    
    44,606
    
    
    
    (518,002
    )
    
    
    332,268LONG-TERM DEBT, excluding current portion
    
    
    705,951
    
    
    
    700,018
    
    
    
    
    
    
    
    (699,869
    )
    
    
    706,100OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    713,227
    
    
    
    
    
    
    
    (4,324
    )
    
    
    708,903Total liabilities
    
    
    921,772
    
    
    
    2,003,088
    
    
    
    44,606
    
    
    
    (1,222,195
    )
    
    
    1,747,271MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,135
    
    
    
    14,135SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    703,884
    
    
    
    485,590
    
    
    
    41,143
    
    
    
    (526,733
    )
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )Retained earnings
    
    
    227,446
    
    
    
    207,696
    
    
    
    12,353
    
    
    
    (220,049
    )
    
    
    227,446Accumulated other comprehensive loss
    
    
    (101,385
    )
    
    
    (101,385
    )
    
    
    
    
    
    
    101,385
    
    
    
    (101,385
    )Total shareholders equity
    
    
    803,792
    
    
    
    591,901
    
    
    
    53,496
    
    
    
    (645,397
    )
    
    
    803,792TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,725,564
    
    
    $
    2,594,989
    
    
    $
    98,102
    
    
    $
    (1,853,457
    )
    
    $
    2,565,198
 21




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##### Table of Contents



Condensed Consolidating Balance Sheets
December 31, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    12,438
    
    
    $
    9,294
    
    
    $
    
    
    
    $
    21,732Intercompany accounts receivable
    
    
    1,059,752
    
    
    
    85,610
    
    
    
    40,608
    
    
    
    (1,185,970
    )
    
    
    Accounts receivable, net
    
    
    1
    
    
    
    287,193
    
    
    
    53
    
    
    
    
    
    
    
    287,247Deferred income tax
    
    
    
    
    
    
    26,158
    
    
    
    
    
    
    
    
    
    
    
    26,158Inventory and supplies, net
    
    
    
    
    
    
    21,202
    
    
    
    
    
    
    
    
    
    
    
    21,202Prepaid expenses
    
    
    
    
    
    
    34,489
    
    
    
    766
    
    
    
    
    
    
    
    35,255Total current assets
    
    
    1,059,753
    
    
    
    467,090
    
    
    
    50,721
    
    
    
    (1,185,970
    )
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,546,503
    
    
    
    11,743
    
    
    
    
    
    
    
    1,558,246GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    291,362
    
    
    
    24,701
    
    
    
    
    
    
    
    316,063DEFERRED INCOME TAX
    
    
    
    
    
    
    247,276
    
    
    
    (482
    )
    
    
    
    
    
    
    246,794INVESTMENT IN SUBSIDIARIES
    
    
    570,870
    
    
    
    
    
    
    
    
    
    
    
    (570,870
    )
    
    
    OTHER ASSETS
    
    
    12,633
    
    
    
    105,390
    
    
    
    (2
    )
    
    
    (9,480
    )
    
    
    108,541TOTAL ASSETS
    
    $
    1,643,256
    
    
    $
    2,657,621
    
    
    $
    86,681
    
    
    $
    (1,766,320
    )
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    59,500
    
    
    $
    59,729
    
    
    $
    
    
    
    $
    (59,500
    )
    
    $
    59,729Intercompany accounts payable
    
    
    73,844
    
    
    
    233,531
    
    
    
    29,399
    
    
    
    (336,774
    )
    
    
    Other current liabilities
    
    
    6,574
    
    
    
    200,512
    
    
    
    6,394
    
    
    
    
    
    
    
    213,480Total current liabilities
    
    
    139,918
    
    
    
    493,772
    
    
    
    35,793
    
    
    
    (396,274
    )
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    801,987
    
    
    
    792,987
    
    
    
    
    
    
    
    (792,839
    )
    
    
    802,135OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    837,855
    
    
    
    
    
    
    
    (6,337
    )
    
    
    831,518Total liabilities
    
    
    941,905
    
    
    
    2,124,614
    
    
    
    35,793
    
    
    
    (1,195,450
    )
    
    
    1,906,862MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,025
    
    
    
    13,025SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    703,884
    
    
    
    485,591
    
    
    
    41,143
    
    
    
    (526,734
    )
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )Subscription receivable
    
    
    (39,515
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    164,520
    
    
    
    148,801
    
    
    
    9,745
    
    
    
    (158,546
    )
    
    
    164,520Accumulated other comprehensive loss
    
    
    (101,385
    )
    
    
    (101,385
    )
    
    
    
    
    
    
    101,385
    
    
    
    (101,385
    )Total shareholders equity
    
    
    701,351
    
    
    
    533,007
    
    
    
    50,888
    
    
    
    (583,895
    )
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,643,256
    
    
    $
    2,657,621
    
    
    $
    86,681
    
    
    $
    (1,766,320
    )
    
    $
    2,621,238
 22




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended September 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    131,698
    
    
    $
    8,473
    
    
    $
    (2,931
    )
    
    $
    137,240Access services
    
    
    
    
    
    
    61,033
    
    
    
    
    
    
    
    (1,564
    )
    
    
    59,469Long distance services
    
    
    
    
    
    
    22,320
    
    
    
    8,639
    
    
    
    (53
    )
    
    
    30,906Cellular services
    
    
    
    
    
    
    49,425
    
    
    
    
    
    
    
    
    
    
    
    49,425Directory and other services and sales
    
    
    
    
    
    
    26,237
    
    
    
    
    
    
    
    (2,336
    )
    
    
    23,901Total revenues
    
    
    
    
    
    
    290,713
    
    
    
    17,112
    
    
    
    (6,884
    )
    
    
    300,941OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    87,621
    
    
    
    835
    
    
    
    
    
    
    
    88,456Other operating expenses
    
    
    
    
    
    
    91,509
    
    
    
    13,646
    
    
    
    (6,883
    )
    
    
    98,272Depreciation and amortization
    
    
    
    
    
    
    64,184
    
    
    
    567
    
    
    
    
    
    
    
    64,751Total operating costs and expenses
    
    
    
    
    
    
    243,314
    
    
    
    15,048
    
    
    
    (6,883
    )
    
    
    251,479OPERATING INCOME
    
    
    
    
    
    
    47,399
    
    
    
    2,064
    
    
    
    (1
    )
    
    
    49,462OTHER INCOME (EXPENSE), NET
    
    
    24,496
    
    
    
    (10,568
    )
    
    
    121
    
    
    
    (25,163
    )
    
    
    (11,114
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    24,496
    
    
    
    36,831
    
    
    
    2,185
    
    
    
    (25,164
    )
    
    
    38,348INCOME TAX EXPENSE
    
    
    536
    
    
    
    12,994
    
    
    
    858
    
    
    
    
    
    
    
    14,388NET INCOME
    
    $
    23,960
    
    
    $
    23,837
    
    
    $
    1,327
    
    
    $
    (25,164
    )
    
    $
    23,960
 23




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended September 30, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    137,682
    
    
    $
    7,787
    
    
    $
    (3,084
    )
    
    $
    142,385Access services
    
    
    
    
    
    
    65,385
    
    
    
    
    
    
    
    (1,688
    )
    
    
    63,697Long distance services
    
    
    
    
    
    
    25,979
    
    
    
    9,627
    
    
    
    (26
    )
    
    
    35,580Cellular services
    
    
    
    
    
    
    46,295
    
    
    
    
    
    
    
    
    
    
    
    46,295Paging services
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    223Directory and other services and sales
    
    
    
    
    
    
    22,745
    
    
    
    
    
    
    
    (2,089
    )
    
    
    20,656Total revenues
    
    
    
    
    
    
    298,309
    
    
    
    17,414
    
    
    
    (6,887
    )
    
    
    308,836OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    99,634
    
    
    
    794
    
    
    
    
    
    
    
    100,428Other operating expenses
    
    
    
    
    
    
    168,886
    
    
    
    13,178
    
    
    
    (6,887
    )
    
    
    175,177Depreciation and amortization
    
    
    
    
    
    
    63,106
    
    
    
    745
    
    
    
    
    
    
    
    63,851Total operating costs and expenses
    
    
    
    
    
    
    331,626
    
    
    
    14,717
    
    
    
    (6,887
    )
    
    
    339,456OPERATING (LOSS) INCOME
    
    
    
    
    
    
    (33,317
    )
    
    
    2,697
    
    
    
    
    
    
    
    (30,620
    )OTHER INCOME (EXPENSE), net
    
    
    (29,707
    )
    
    
    (18,379
    )
    
    
    92
    
    
    
    29,350
    
    
    
    (18,644
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    (29,707
    )
    
    
    (51,696
    )
    
    
    2,789
    
    
    
    29,350
    
    
    
    (49,264
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    
    
    
    
    (20,898
    )
    
    
    1,341
    
    
    
    
    
    
    
    (19,557
    )NET INCOME (LOSS)
    
    $
    (29,707
    )
    
    $
    (30,798
    )
    
    $
    1,448
    
    
    $
    29,350
    
    
    $
    (29,707
    )
 24




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    394,321
    
    
    $
    25,261
    
    
    $
    (9,208
    )
    
    $
    410,374Access services
    
    
    
    
    
    
    211,366
    
    
    
    
    
    
    
    (5,316
    )
    
    
    206,050Long distance services
    
    
    
    
    
    
    75,077
    
    
    
    28,418
    
    
    
    (95
    )
    
    
    103,400Cellular services
    
    
    
    
    
    
    144,882
    
    
    
    
    
    
    
    
    
    
    
    144,882Directory and other services and sales
    
    
    
    
    
    
    71,724
    
    
    
    
    
    
    
    (6,927
    )
    
    
    64,797Total revenues
    
    
    
    
    
    
    897,370
    
    
    
    53,679
    
    
    
    (21,546
    )
    
    
    929,503OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    278,132
    
    
    
    2,505
    
    
    
    
    
    
    
    280,637Other operating expenses
    
    
    178
    
    
    
    234,954
    
    
    
    40,351
    
    
    
    (21,546
    )
    
    
    253,937Early retirement provision
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    
    
    
    
    193,436
    
    
    
    1,700
    
    
    
    
    
    
    
    195,136Total operating costs and expenses
    
    
    178
    
    
    
    708,157
    
    
    
    44,556
    
    
    
    (21,546
    )
    
    
    731,345OPERATING INCOME (LOSS)
    
    
    (178
    )
    
    
    189,213
    
    
    
    9,123
    
    
    
    
    
    
    
    198,158OTHER INCOME (EXPENSE), NET
    
    
    101,707
    
    
    
    (30,864
    )
    
    
    294
    
    
    
    (103,592
    )
    
    
    (32,455
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    101,529
    
    
    
    158,349
    
    
    
    9,417
    
    
    
    (103,592
    )
    
    
    165,703INCOME TAX EXPENSE (BENEFIT)
    
    
    (358
    )
    
    
    60,498
    
    
    
    3,676
    
    
    
    
    
    
    
    63,816NET INCOME
    
    $
    101,887
    
    
    $
    97,851
    
    
    $
    5,741
    
    
    $
    (103,592
    )
    
    $
    101,887
 25




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    420,479
    
    
    $
    22,117
    
    
    $
    (7,673
    )
    
    $
    434,923Access services
    
    
    
    
    
    
    227,412
    
    
    
    
    
    
    
    (3,986
    )
    
    
    223,426Long distance services
    
    
    
    
    
    
    75,777
    
    
    
    26,572
    
    
    
    (89
    )
    
    
    102,260Cellular services
    
    
    
    
    
    
    140,324
    
    
    
    
    
    
    
    
    
    
    
    140,324Paging services
    
    
    
    
    
    
    1,026
    
    
    
    
    
    
    
    
    
    
    
    1,026Directory and other services and sales
    
    
    
    
    
    
    63,912
    
    
    
    
    
    
    
    (4,926
    )
    
    
    58,986Total revenues
    
    
    
    
    
    
    928,930
    
    
    
    48,689
    
    
    
    (16,674
    )
    
    
    960,945OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    301,054
    
    
    
    2,386
    
    
    
    
    
    
    
    303,440Other operating expenses
    
    
    
    
    
    
    391,376
    
    
    
    33,220
    
    
    
    (16,674
    )
    
    
    407,922Voluntary separation and retirement provision
    
    
    
    
    
    
    4,700
    
    
    
    
    
    
    
    
    
    
    
    4,700Depreciation and amortization
    
    
    
    
    
    
    184,933
    
    
    
    2,197
    
    
    
    
    
    
    
    187,130Total operating costs and expenses
    
    
    
    
    
    
    882,063
    
    
    
    37,803
    
    
    
    (16,674
    )
    
    
    903,192OPERATING INCOME
    
    
    
    
    
    
    46,867
    
    
    
    10,886
    
    
    
    
    
    
    
    57,753OTHER INCOME (EXPENSE), net
    
    
    69,500
    
    
    
    (41,037
    )
    
    
    186
    
    
    
    (70,687
    )
    
    
    (42,038
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    69,500
    
    
    
    5,830
    
    
    
    11,072
    
    
    
    (70,687
    )
    
    
    15,715INCOME TAX EXPENSE
    
    
    
    
    
    
    215
    
    
    
    4,529
    
    
    
    
    
    
    
    4,744INCOME BEFORE CUMULATIVE EFFECT
    
    
    69,500
    
    
    
    5,615
    
    
    
    6,543
    
    
    
    (70,687
    )
    
    
    10,971CUMULATIVE EFFECT OF ACCOUNTING CHANGES
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    69,500
    
    
    $
    64,144
    
    
    $
    6,543
    
    
    $
    (70,687
    )
    
    $
    69,500
 26




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (106
    )
    
    $
    198,567
    
    
    $
    6,428
    
    
    $
    204,889CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (104,431
    )
    
    
    (25
    )
    
    
    (104,456
    )Proceeds from sale of building
    
    
    
    
    
    
    1,073
    
    
    
    
    
    
    
    1,073Net salvage on retirements
    
    
    
    
    
    
    215
    
    
    
    (1
    )
    
    
    214Net cash used in investing activities
    
    
    
    
    
    
    (103,143
    )
    
    
    (26
    )
    
    
    (103,169
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    capital leases
    
    
    (29,470
    )
    
    
    (147
    )
    
    
    
    
    
    
    (29,617
    )Dividends paid
    
    
    (12,386
    )
    
    
    
    
    
    
    
    
    
    
    (12,386
    )Borrowings/(repayment) intercompany loans
    
    
    1,971
    
    
    
    (1,971
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    115
    
    
    
    (2,118
    )
    
    
    
    
    
    
    (2,003
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    9
    
    
    
    93,306
    
    
    
    6,402
    
    
    
    99,717CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    
    
    
    
    12,438
    
    
    
    9,294
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    9
    
    
    $
    105,744
    
    
    $
    15,696
    
    
    $
    121,449
 27




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    $
    (201
    )
    
    $
    264,222
    
    
    $
    46
    
    
    $
    264,067CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (109,657
    )
    
    
    (402
    )
    
    
    (110,059
    )Net salvage on retirements
    
    
    
    
    
    
    787
    
    
    
    (235
    )
    
    
    552Proceeds from sales of building
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Net cash used in investing activities
    
    
    
    
    
    
    (102,870
    )
    
    
    (637
    )
    
    
    (103,507
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net (repayments) of short-term debt, including
capital leases
    
    
    (141,672
    )
    
    
    (127
    )
    
    
    
    
    
    
    (141,799
    )Dividends paid
    
    
    (68,125
    )
    
    
    
    
    
    
    
    
    
    
    (68,125
    )Borrowings/(repayments) intercompany loans
    
    
    170,022
    
    
    
    (170,022
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    225
    
    
    
    (170,149
    )
    
    
    
    
    
    
    (169,924
    )NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    24
    
    
    
    (8,797
    )
    
    
    (591
    )
    
    
    (9,364
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    1
    
    
    
    27,009
    
    
    
    6,657
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    25
    
    
    $
    18,212
    
    
    $
    6,066
    
    
    $
    24,303
 28




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##### Table of Contents



19. Contingencies and Regulatory and Other Matters The Company is a defendant in various legal matters arising in the
ordinary course of business. Management, after consultation with legal
counsel, believes at this time that the resolution of these matters will not
have a material adverse effect on the Companys financial condition and
results of operations. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Regulatory and Other Matters
for more information regarding legal and regulatory matters, including a
regulatory dispute regarding intra-island access fees charged to long
distance carriers. In connection with the privatization of the Company, PRTA agreed to
indemnify, defend and hold the Company harmless from specified litigation in
excess of $50 million in the aggregate, including one environmental matter. The Company is regulated by the United States Federal Communications
Commission (the FCC) for inter-state wireline services and by the Puerto
Rico Telecommunications Board (TRB) for intra-island wireline services. The Company has an agreement with a provider for the implementation of a
traffic polling and billing software system for its wireline operations.
While the traffic polling portion has been implemented, management decided to
abandon the billing portion of the software system. The amount of
capitalized costs for software and labor related to the billing portion of
$32.3 million was written off and included in operating expenses during the
second quarter of 2003. In September 2003, the Company established a pre-tax reserve of $73 million,
including interest, for the end-user and AT&T refund referred to in the TRB
Resolution and Order of February 28, 2002. See Managements Discussion
and Analysis of Financial Condition and Results of Operations  Regulatory
and Other Matters  Intra-Island Long Distance Access Rate Dispute for more
information regarding the TRB Resolution and Order of February 28, 2002. In
November 2003, the Company proposed, and two members of the TRB indicated
their support for, an integrated plan to revise the Boards end-user refund
order and end the dispute over this issue. As a result, the 2003 cash flow
impact was a reduction of $16 million to the pre-tax reserve. After a
hearing in June 2004, the TRB terminated a stay it had issued and allowed the
Company to continue to implement the EAS expansion plan which was part of the
integrated plan, subject to certain customer information and data collection
requirements relating to the impact of the plan on measured service
customers. As a result, the Company reduced the pre-established reserve to
$14 million, which is associated with the anticipated single line credit
planned for 2005. In September 2004, the Company suffered damages resulting from Tropical Storm
Jeanne. Business interruption and other losses are estimated at $12 million.
At this point, the Company is unable to determine the collection, if any, on
the insurance policy claim. 29




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW We are the largest telecommunications service provider in Puerto Rico and
the seventh largest local exchange carrier in the United States as measured by
access lines in service. Wireline service, which has been provided since 1914,
is marketed under the PRT brand. At September 30, 2004, we had approximately
1.2 million access lines in service, including 897,000 residential and 284,000
business lines. Since November 2001, we have been marketing our cellular
service under the Verizon Wireless brand as part of a strategy to align our
product and service offerings with those of Verizon Wireless in the United
States. We have two reportable segments: Wireline and Wireless. Wireline service
is provided by PRTC and wireless services are provided by Verizon Wireless.
The Companys off-island long distance service is provided by PRTLD and its
dial-up Internet access service is provided by Coqui.net. Directory publishing
revenues are generated by VISI. The sections that follow provide information aspects of our operations and
investments, both at the consolidated and segment levels, and include
discussions of our results of operations, financial position and sources and
uses of cash, as well as significant future commitments. In addition, we have
highlighted key trends and uncertainties to the extent practicable. The
content and organization of the financial and non-financial data presented in
these sections are consistent with information used by our chief operating
decision makers for, among other purposes, evaluating performance and
allocating resources. We also monitor several key economic indicators as well
as the state of the economy in general, primarily in Puerto Rico, in evaluating
our operating results and analyzing and understanding business trends. Our results of operations, financial position and sources and uses of cash
in the current and future periods reflect the managements focus on the
following four key areas:  
    
    Revenue Growth  Our emphasis is on revenue transformation, devoting
resources to growth markets such as wireless services and data as well
as expanded services to enterprise markets. In the nine months ended
September 30, 2004, revenues from the growth of wireless area, in
particular post-paid cellular services increased by 8% compared to the
same period in 2003 and wireless represented 16% of total revenues, up
from 15% of total revenues for the nine months ended September 30, 2003.
The Company added approximately 25,000 post-paid wireless customers.  
    
    Operational Efficiency  While focusing resources on growth markets,
we are continually challenging our management team to lower expenses in
all segments through technology-assisted productivity improvements. The
effect of these and other efforts, such as labor agreements and early
retirement and voluntary separation plans, has been to decrease the
Companys cost structure. The Company has reduced workforce levels by
approximately 2,800 since 1998, which will provide ongoing expense
benefits. Labor and benefits expenses declined by approximately $23
million for the nine months ended September 30, 2004 compared to the
same period in 2003 largely as a result of early retirement and
voluntary separation plans in 2003.  
    
    Capital Allocation  Capital spending has been, and will continue to
be directed toward growth markets. High-speed wireless data,
replacement of TDMA networks as well as voice over the Internet and
expanded services to enterprise markets, are examples of areas of
capital spending in support of these growth markets.  
    
    Cash Flow Generation  The financial statements reflect the emphasis
by management on using cash provided by our operating and investing
activities towards reducing our debt and funding our pension plans. Supporting these key focus areas are continuing initiatives to more
effectively package and add more value to our products and services.
Innovative product bundles include local wireline services, long distance,
wireless and broad band data for consumer and general business retail
customers. 30




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##### Table of Contents



CONSOLIDATED RESULTS OF OPERATIONS In this section, we discuss our overall results of operations and
highlight special and non-recurring items. In the following section, we review
the performance of our two segments. We believe this presentation will assist
readers in better understanding our results of operations and trends from
period to period. Consolidated Revenues Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % Change(In millions)
    
    
    
    
    
    ( In millions )Local
    
    $
    137
    
    
    $
    142
    
    
    
    (4
    )%
    
    $
    410
    
    
    $
    435
    
    
    
    (6
    )%Network Access
    
    
    59
    
    
    
    64
    
    
    
    (8
    )
    
    
    206
    
    
    
    223
    
    
    
    (8
    )Long Distance
    
    
    31
    
    
    
    36
    
    
    
    (14
    )
    
    
    103
    
    
    
    102
    
    
    
    1Cellular
    
    
    49
    
    
    
    46
    
    
    
    7
    
    
    
    145
    
    
    
    141
    
    
    
    3Paging
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Directory and Other
    
    
    25
    
    
    
    21
    
    
    
    19
    
    
    
    65
    
    
    
    59
    
    
    
    10Consolidated revenues
    
    $
    301
    
    
    $
    309
    
    
    
    (3
    )
    
    $
    929
    
    
    $
    961
    
    
    
    (3
    )
 Consolidated revenues for the third quarter of 2004 decreased by $8
million, or 3%, to $301 million from $309 million for the same period in 2003.
For the nine months ended September 30, 2004, consolidated revenues decreased
$32 million, or 3%, to $929 million from $961 million for the same period in
2003. These decreases were primarily the result of lower revenues from local
basic services and network access, partially offset by higher directory and
other services revenues. Local service revenues for the quarter ended September 30, 2004 decreased
$5 million, or 4%, to $137 million from $142 million for the comparable 2003
period. For the nine months ended September 30, 2004, local service revenues
decreased $25 million, or 6%, to $410 million from $435 million for the same
period in 2003. These decreases were primarily due to a decline in basic voice
services driven by a 5% decrease in access lines, the absence of touchtone
billing and a decrease in public phone services. Network access revenues for the quarter ended September 30, 2004 decreased
$5 million, or 8%, to $59 million when compared to $64 million for the same
period in 2003. For the nine months ended September 30, 2004, network access
revenues decreased $17 million, or 8%, to $206 million when compared to $223
million for the same period in 2003. These decreases were driven by a decrease
in intra-island access revenues due to the implementation of phase rate
reduction required by the TRB in its Resolution and Order issued on February
28, 2002 (the February 2002 Order). See
Regulatory and Other Matters 
Intra-Island Long Distance Access Rate Dispute. Directory and other revenues for the quarter ended September 30, 2004
increased $4 million, or 19%, to $25 million from $21 million for the same
period in 2003. For the nine months ended September 30, 2004, directory and
other revenues increased $6 million, or 10%, to $65 million from $59 million
for the same period in 2003. These increases were mainly due to increased
revenues from unbundled network services. Consolidated Operating Expenses Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    %Change
    
    2004
    
    2003
    
    %Change(In millions)
    
    
    
    
    
    (In millions)Labor and benefits
    
    $
    88
    
    
    $
    100
    
    
    
    (12
    )%
    
    $
    281
    
    
    $
    303
    
    
    
    (7
    )%Other operating expenses
    
    
    98
    
    
    
    175
    
    
    
    (44
    )
    
    
    254
    
    
    
    408
    
    
    
    (38
    )Total consolidated operating expenses
    
    $
    186
    
    
    $
    275
    
    
    
    (32
    )
    
    $
    535
    
    
    $
    711
    
    
    
    (25
    )
 Consolidated operating expenses for the quarter ended September 30, 2004
decreased $89 million, or 32%, to $186 million from $275 million for the same
period in 2003. For the nine months ended September 30, 2004, consolidated
operating expenses decreased $176 million, or 25%, to $535 million from $711
million for the same period in 2003. Labor and benefit expenses for the quarter ended September 30, 2004
decreased $12 million, or 12%, to $88 million from $100 million for the same
period in 2003. For the nine months ended September 30, 2004, labor and
benefit expenses decreased $22 million, or 7%, to $281 million from $303
million for the same period in 2003. These decreases were mainly due to a
decrease in pension and OPEB expenses mainly associated with the Companys
recognition of the Medicare Drug 31




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##### Table of Contents



Act 2003 as determined by our actuaries. See
Note 9 to the unaudited condensed consolidated financial statements. Other operating expenses for the quarter ended September 30, 2004
decreased $77 million, or 44%, to $98 million from $175 million for the same
period in 2003. For the nine months ended September 30, 2004, other operating
expenses decreased $154 million, or 38%, to $254 million from $408 million for
the same 2003 period. These decreases were primarily due to the absence of the
pre-tax reserve for the end-user and AT&T refund directed by the TRB in its
February 2002 Order which was recognized during the quarter ended September 30,
2003. See Regulatory and Other Matters  Intra-Island Long Distance Access
Rate Dispute. Other factors contributing to the reduction were a decrease in
bad debt expense due to a settlement with the PRDOE with respect to amounts
owed and a decrease in management fees as the Verizon Management and Technology
License Agreements expired on March 2, 2004 and replaced by a new Service
Agreement. See Regulatory and Other Matters  Puerto Rico Department of
Education (the PRDOE) Debt. Other Consolidated Results Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    %Change
    
    2004
    
    2003
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Retirement and voluntary separation provision
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    2
    
    
    $
    5
    
    
    
    (60
    )%Depreciation and amortization
    
    
    65
    
    
    
    64
    
    
    
    2
    
    
    
    195
    
    
    
    187
    
    
    
    4Interest expense and others
    
    
    11
    
    
    
    19
    
    
    
    (42
    )
    
    
    33
    
    
    
    43
    
    
    
    (23
    )Equity income in joint venture
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    100Income tax (benefit) expense
    
    
    14
    
    
    
    (19
    )
    
    
    (174
    )
    
    
    64
    
    
    
    5
    
    
    
    1,180Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (100
    )Total Other Consolidated Results
    
    $
    90
    
    
    $
    63
    
    
    
    43
    
    
    $
    294
    
    
    $
    180
    
    
    
    63
 Retirement and voluntary separation provisions In January 2004, 19 qualified management employees accepted the early
retirement program offered by the Company in December 2003, which resulted in a
provision of $1.6 million. In January 2003, 29 qualified management employees accepted the voluntary
separation program offered by the Company in December 2002, which resulted in a
provision of $1.4 million. During the second quarter of 2003, 191 union
employees accepted a combined voluntary separation program and retirement
program offered by the Company that closed on June 20, 2003 and June 30, 2003,
respectively, which resulted in an additional provision of $3.3 million. Depreciation and amortization expense Depreciation and amortization expense of $65 million for the quarter ended
September 30, 2004 was $1 million higher than the same period in 2003.
Depreciation and amortization expense of $195 million for the nine months ended
September 30, 2004 was $8 million higher, or 4%, than the same period in 2003.
The increase in depreciation and amortization expense is mainly due to the
accelerated depreciation on TDMA network resulting from managements decision
during 2003 to migrate all TDMA customers to the CDMA platform in 2004 and an
increase in software amortization expense due to the implementation of various
operational support systems. Interest expense and other Interest expense of $11 million for the quarter ended September 30, 2004
was $8 million, or 42%, lower than for the comparable 2003 period. The
decrease was primarily due to the absence of the interest associated with the
pre-tax reserve recognized during the same 2003 period for the end-user and
AT&T refund referred to in the February 2002 Order. Interest expense of $33 million for the nine months ended September 30,
2004 was $10 million lower, or 23%, than
for the same 2003 period due to a decrease in capitalized interest of $3
million resulting from the write-off of the billing software system, during the
six months ended June 30, 2003 and a decrease in other interest expense of $8
million associated with the partial reversal during the nine months ended
September 30, 2004 of the pre-tax reserve for the end-user and the AT&T refund
referred to in the February 2002 Order. 32




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##### Table of Contents



Equity income from joint venture Equity income was generated from our 24% interest in VISI, the largest
yellow page publishing company in Puerto Rico. For the quarter ended September
30, 2004, equity income remained constant at $1 million compared to the same
period in 2003. Also, for the nine months ended September 30, 2004, equity
income remained constant at $2 million compared to the same period in 2003 Minority interest in consolidated subsidiary The $1 million and $2 million minority interest included in the Companys
results of operations for the quarter ended September 30, 2004 and for the nine
months ended September 30, 2004, respectively, reflect the 33% interest in
Coqui.net, that is held by Popular, Inc., one of our shareholders. Income taxes The effective income tax rate is the provision for income taxes as a
percentage of income before tax from continuing operations. A $14 million tax
provision for the quarter ended September 30, 2004 reflects a 37.5% effective
tax rate. For the nine months ended September 30, 2004, a $63.8 million tax
provision reflects a 38.5% effective tax rate. The difference between the
effective and the statutory tax rate (39%) equates $1.4 million, primarily
reflecting permanent differences related to recognition of equity income from
the joint venture and amortization of tax-deductible goodwill. Cumulative effect of accounting change Under the provisions of SFAS No. 143, we are required to exclude costs of
removal from our depreciation rates for assets for which the removal costs
exceed salvage value. Accordingly, in connection with the initial adoption of
this standard on January 1, 2003, we have reversed accrued costs of removal in
excess of salvage value from our accumulated depreciation accounts for these
assets. The adjustment was recorded as a cumulative effect of an accounting
change, resulting in the recognition of an estimated gain of $117 million ($71
million after-tax). Effective January 1, 2003, we began expensing costs of
removal in excess of salvage value for these assets in the period in which they
are incurred. Effective January 1, 2003, the Company changed its method of accounting
for revenues from directory publishing rights and related expenses from the
point-of-publication method to the amortization method. Although both methods
fully comply with accounting principles generally accepted in the United
States, the Company adopted the amortization method because it is becoming the
industry standard. The cumulative effect of applying this accounting change to
prior years was recognized as of January 1, 2003 as a one-time, non-cash loss
of $17 million ($13 million, after tax). 33




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##### Table of Contents



SEGMENT RESULTS OF OPERATIONS The Company has two reportable segments, Wireline and Wireless. See Note
17 to the unaudited condensed consolidated financial statements for additional
information on the Companys segments. Reclassifications of prior periods
data have been made to conform to the current periods presentation. The Wireline segment consists of:  
    
    Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services, high-speed
private line services, Internet access and public phone service;  
    
    Long distance services including direct dial on-island and
off-island, operator assisted calls, prepaid calling card and high-speed
private line services;  
    
    Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on 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:  
    
    Cellular services; and  
    
    Wireless equipment sales. 34




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##### Table of Contents



Wireline Revenues Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % Change(In millions)
    
    
    
    
    

    (In millions)Local
    
    $
    139
    
    
    $
    145
    
    
    
    (4
    )%
    
    $
    417
    
    
    $
    440
    
    
    
    (5
    )%Network Access
    
    
    60
    
    
    
    64
    
    
    
    (6
    )
    
    
    207
    
    
    
    225
    
    
    
    (8
    )Long Distance
    
    
    31
    
    
    
    36
    
    
    
    (14
    )
    
    
    105
    
    
    
    104
    
    
    
    1Directory and Other
    
    
    18
    
    
    
    17
    
    
    
    6
    
    
    
    51
    
    
    
    49
    
    
    
    4Total Wireline
    
    $
    248
    
    
    $
    262
    
    
    
    (5
    )
    
    $
    780
    
    
    $
    818
    
    
    
    (5
    )
 OPERATING DATA Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeAccess Lines in Service (000s):Residential
    
    
    897
    
    
    
    949
    
    
    
    (5
    )%
    
    
    897
    
    
    
    949
    
    
    
    (5
    )%Business
    
    
    284
    
    
    
    293
    
    
    
    (3
    )
    
    
    284
    
    
    
    293
    
    
    
    (3
    )Total
    
    
    1,181
    
    
    
    1,242
    
    
    
    (5
    )
    
    
    1,181
    
    
    
    1,242
    
    
    
    (5
    )
 Wireline revenues include local service, network access, long distance,
directory and other revenues. For the quarter ended September 30, 2004,
wireline revenues decreased $14 million, or 5%, to $248 million from $262
million for the same period in 2003. For the nine months ended September 30,
2004, wireline revenues decreased $38 million, or 5%, to $780 million from $818
million for the same period in 2003. Local Services Local service revenues include revenues from basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service
revenues for the quarter ended September 30, 2004 decreased $6 million, or 4%,
to $139 million from $145 million for the same period in 2003. The decrease is
due to decreased revenues from local voice services of $7 million partially
offset by increased revenues from local data services of $2 million. The
decrease in revenues from local voice services was driven mainly due to lower
access lines and a decrease in public phone revenues of $2 million. The
increase in local data service revenues was primarily driven by an increase in
the number of customers requesting our high-speed special services and internet
services, which resulted in a $1 million increase in both high-speed special
services and internet service revenue. Local service revenues for the nine months ended September 30, 2004
decreased $23 million, or 5%, to $417 million from $440 million for the same
period in 2003. The decrease was driven by a decrease in revenues from basic
voice services of $25 million mainly due to 5% fewer access lines and the
elimination of touchtone charges. Network Access Network access revenues include revenues from services provided to long
distance carriers, competitive local exchange carriers, and cellular and paging
operators to originate and terminate calls on our network. These revenues for
the quarter ended September 30, 2004 decreased $4 million, or 6%, to $60
million, compared to $64 million for the same period in 2003. The decrease was
driven by a decrease in intra-island access revenues of $9 million due to the
implementation of phased rate reduction required by the TRB in the February
2002 Order and included in the integrated plan and a decrease in off-island
special revenues of $1 million, which were offset in part by an increase in
off-island switching revenues of $6
million. See Regulatory and Other Matters  Intra-Island Long Distance Access
Rate Dispute. These revenues for the nine months ended September 30, 2004 decreased $18
million, or 8%, to $207 million compared to $225 million for the same period in
2003. The decrease was driven by a decrease in intra-island access revenues of
$20 million due to the implementation of phased rate reductions required by the
TRB in the February 2002 Order and agreed to as part of the integrated plan,
partially offset by an increase in subscriber line charges of $3 million. 35




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##### Table of Contents



Long Distance Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line long
distance revenues. Long distance revenues for the quarter ended September 30,
2004 decreased $5 million, or 14%, to $31 million from $36 million for the same
period in 2003 as a result of the impact of the Extended Area Service (EAS)
implementation and a decrease in long distance call volumes. See Regulatory
and Other Matters  Extended Area Service (EAS) Local Calling Zone Dispute. Long distance revenues for the nine months ended September 30, 2004
increased $1 million, or 1%, to $105 million from $104 million for the same
2003 period. The increase was due to an increase in on-island private line
revenues of $9 million resulting from an increase in the client base, which was
partially offset by a decrease in intra-island long distance revenues of $7
million and in off-island long distance revenues of $1 million as a result of
the impact of the EAS implementation and a decrease in long distance call
volumes. Directory and Other Directory and other revenues include revenues from directory publishing
rights, telecommunication equipment sales and billing and collection services
provided to competing long distance operators in Puerto Rico. Directory and
other revenues for the quarter ended September 30, 2004 increased $1 million,
or 6%, to $18 million from $17 million for the same period in 2003 due to an
increase in directory revenues of $5 million, which was partially offset by a
decrease in wireline equipment sales of $1 million, a decrease in billing and
collections revenues of $1 million and a decrease in revenues from other
services to carriers of $1 million. Directory and other revenues for the nine months ended September 30, 2004
increased $2 million, or 4%, to $51 million from $49 million for same period in
2003. The increase was mainly due to an increase of $7 million in unbundled
network services, which was offset, in part, by a decrease in revenues from
billing and collection services of $2 million, a decrease in revenues from
wireline equipment sales of $3 million and a decrease in other service revenues
to carriers of $1 million. Wireline Expense and Charges Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    %Change
    
    2004
    
    2003
    
    %Change(In millions)
    
    
    
    
    

    (In millions)Labor and benefits
    
    $
    80
    
    
    $
    93
    
    
    
    (14
    )%
    
    $
    257
    
    
    $
    280
    
    
    
    (8
    )%Other operating expenses
    
    
    66
    
    
    
    146
    
    
    
    (55
    )
    
    
    162
    
    
    
    320
    
    
    
    (49
    )Total Wireline
    
    $
    146
    
    
    $
    239
    
    
    
    (39
    )
    
    $
    419
    
    
    $
    600
    
    
    
    (30
    )
 Wireline expenses for the quarter ended September 30, 2004 decreased $93
million, or 39%, to $146 million from $239 million for the same period in 2003.
Wireline expenses for the nine months ended September 30, 2004 decreased $181
million, or 30%, to $419 million from $600 million for the same period in 2003. Labor and benefits Labor and benefit expenses for the quarter ended September 30, 2004
decreased $13 million, or 14%, to $80 million from $93 million for the same
period in 2003, due to a decrease in pension and OPEB expenses of $8 million
and a headcount reduction which resulted in a decrease in salary expenses of $2
million and a decrease in expatriate expenses of $3 million. Labor and benefit expenses for the nine months ended September 30, 2004
decreased $23 million, or 8%, to $257 million from $280 million for the same
period in 2003, due to a decrease in pension and OPEB expenses of $9 million,
and a headcount reduction which resulted in a decrease in salary expenses of $8
million and a decrease in expatriate expenses of $5 million. 36




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##### Table of Contents



Other operating expenses Other operating expenses for the quarter ended September 30, 2004
decreased $80 million, or 55%, to $66 million from $146 million for the same
period in 2003. The decrease was due to the absence of the pre-tax reserve,
established during the same period in 2003, of $66 million for the end-user and
AT&T refund previously referred to, which was recognized during the quarter
ended September 30, 2003. See -Regulatory and Other
Matters  Intra-Island
Long Distance Access Rate Dispute. In addition, bad debt expense decreased
$16 million due to PRTCs agreement with the Puerto Rico Department of
Education (The PRDOE) to settle the amounts owed by the PRDOE under the PRDOEs
Reeducate Program out of court. See Regulatory and Other
Matters  Puerto
Rico Department of Education (The PRDOE) Debt. These decreases were offset
in part by higher regulatory fees of $2 million mainly due to an increase in
revenues subject to regulatory fees. Other operating expenses for the nine months ended September 30, 2004
decreased $158 million, or 49%, to $162 million from $320 million for the same
2003 period. The decrease was primarily due to the fact that the 2003 results
included a $29 million write-off of the billing software system which was
abandoned by the Company and recognized for the nine months ended September 30,
2003, and a $66 million pretax reserve for the end user and AT&T refund
previously referred to. Of the latter reserve, $43 million was reversed during
the nine months ended September 30, 2004. See Regulatory
and Other Matters 
Intra-Island Long Distance Access Rate Dispute. Two other changes contributed
to the reduction in expenses: a decrease in management fees of $7 million as
the Verizon Management and Technology License Agreements expired on March 2,
2004 and was replaced by a new Service Agreement and a decrease in bad debt
expense of $19 million due to PRTCs agreement with the PRDOE. See Regulatory
and Other Matters  Puerto Rico Department of Education (The PRDOE) Debt.
These decreases were partially offset by higher off-island long distance access
charges of $3 million and higher regulatory fees of $2 million mainly due to an
increase in revenues subject to regulatory fees. Wireless Revenues Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % Change(In millions)
    
    
    
    
    

    (In millions)Postpaid Cellular
    
    $
    46
    
    
    $
    40
    
    
    
    15
    %
    
    $
    131
    
    
    $
    121
    
    
    
    8
    %Prepaid Cellular
    
    
    4
    
    
    
    7
    
    
    
    (43
    )
    
    
    14
    
    
    
    20
    
    
    
    (30
    )Total Cellular
    
    
    50
    
    
    
    47
    
    
    
    6
    
    
    
    145
    
    
    
    141
    
    
    
    3Paging
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Wireless Equipment
    
    
    6
    
    
    
    4
    
    
    
    50
    
    
    
    14
    
    
    
    9
    
    
    
    56Total Wireless
    
    $
    56
    
    
    $
    51
    
    
    
    10
    
    
    $
    159
    
    
    $
    151
    
    
    
    5
 OPERATING DATA Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeCellular Customers (000s):Postpaid
    
    
    262
    
    
    
    237
    
    
    
    11
    %
    
    
    262
    
    
    
    237
    
    
    
    11
    %Prepaid
    
    
    89
    
    
    
    117
    
    
    
    (24
    )
    
    
    89
    
    
    
    117
    
    
    
    (24
    )Total
    
    
    351
    
    
    
    354
    
    
    
    (1
    )
    
    
    351
    
    
    
    354
    
    
    
    (1
    )Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    50
    
    
    $
    51
    
    
    
    (2
    )%
    
    $
    49
    
    
    $
    52
    
    
    
    (6
    )%Prepaid Cellular ARPU
    
    
    16
    
    
    
    17
    
    
    
    (6
    )
    
    
    17
    
    
    
    19
    
    
    
    (11
    )Combined Cellular ARPU
    
    
    41
    
    
    
    40
    
    
    
    3
    
    
    
    40
    
    
    
    40
    
    
    
    
 Revenues from cellular services and related equipment sales for the three
months ended September 30, 2004 increased $5 million, or 10%, to $56 million
from $51 million for the comparable 2003 period. Revenues from cellular
services and related equipment sales for the nine months ended September 30,
2004 increased $8 million, or 5%, to $159 million from $151 million for the
comparable 2003 period. 37




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##### Table of Contents



Cellular Services Cellular service revenues for the quarter ended September 30, 2004
increased $3 million, or 6%, to $50 million from $47 million for the same
period in 2003. For the nine months ended September 30, 2004, cellular
services increased $4 million, or 3%, to $145 million from $141 million for the
same period in 2003. These increases were primarily the result of an increase
of 25,000 post paid cellular customers for the third quarter of 2004 compared
to the same period in 2003 due to attractive price plans and the implementation
of marketing strategies to align the Companys product and service offerings
with those of Verizon Wireless in the United States. Wireless Equipment Revenues from wireless equipment sales increased $2 million, or 50%, to $6
million for the quarter ended September 30, 2004 from $4 million for the
comparable 2003 period and increased $5 million, or 56%, to $14 million for the
nine months ended September 30, 2004 from $9 million for the comparable 2003
period. These increases are the result of postpaid contract renewals and
customer adquisitions. Wireless Expenses and
Changes Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    %Change
    
    2004
    
    2003
    
    %Change(In millions)
    
    
    
    
    

    (In millions)Labor and benefits
    
    $
    8
    
    
    $
    8
    
    
    
    
    %
    
    $
    23
    
    
    $
    24
    
    
    
    (4
    )%Other operating expenses
    
    
    33
    
    
    
    29
    
    
    
    14
    
    
    
    91
    
    
    
    87
    
    
    
    5Total Wireless
    
    $
    41
    
    
    $
    37
    
    
    
    11
    
    
    $
    114
    
    
    $
    111
    
    
    
    3
 Wireless expenses for the quarter ended September 30, 2004 increased $4
million, or 11%, to $41 million from $37 million for the same period in 2003.
Wireless expenses for the nine months ended September 30, 2004 increased $3
million, or 3%, to $114 million from $111 million for the same period in 2003. Labor and benefits Labor and benefit expenses for the quarter ended September 30, 2004
remained constant at $8 million compared to the same period in 2003. Labor and benefit expenses for the nine months ended September 30, 2004
decreased $1 million, or 4%, to $23 million from $24 million for the same
period in 2003, which was due to a decrease in salary-related expenses
resulting from fewer employees for the nine months ended September 30, 2004
compared with the same period in 2003. Other operating expenses Other operating expenses for the quarter ended September 30, 200
Net cash used in investing activities for the nine months ended September
30, 2004 was $103 million compared to $104 million for the same period in 2003.
The $1 million decrease in net cash used in investing activities was due to a
$6 million decrease in capital expenditures and costs of removal as a result of
decreased spending on specific software projects, as well as a general decrease
in spending as the Company aligned its capital spending with softening demand
for new wireline service, offset by a $5 million decrease in proceeds from the
sale of buildings in 2003. Other operating expenses for the nine months ended September 30, 2004
increased $4 million, or 5%, to $91 million from $87 million for the comparable
2003 period. The increase was due to a higher subsidy on equipment sales of $7
million partially offset by a decrease in cellular roaming expenses of $3
million due to the termination of a $3 million contract with a wireless service
provider for the usage of their CDMA network at the end of the third quarter of
2003. 38




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED FINANCIAL CONDITION NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003 Nine Months Ended September 30,2004
    
    2003
    
    Change(Dollars in Millions)Net cash provided by (used in):Operations
    
    $
    205
    
    
    $
    264
    
    
    $
    (59
    )Investing
    
    
    (103
    )
    
    
    (104
    )
    
    
    1Financing
    
    
    (2
    )
    
    
    (170
    )
    
    
    168
 OVERALL LIQUIDITY ASSESSMENT The Company believes that cash provided by operations is sufficient to
meet its working capital needs. At September 30, 2004, current assets exceeded
current liabilities by $137 million. We believe our sources of funds, from
operations and from readily available external financing arrangements, are
sufficient to meet ongoing requirements related to operating, financing and
investing activities. We expect that presently foreseeable capital
requirements will continue to be financed through internally generated funds. On March 2, 2004, the Company entered into a new unsecured, undrawn $360
million 364-day revolving credit facility, which matures in March 2005. An
undrawn $40 million working capital credit facility, which matured in June 2004
was renewed and matures on June 30, 2005. See Note 13 to the unaudited
condensed consolidated financial statements for more detailed information. OPERATIONS Net cash provided by operating activities continued to be our primary source of
funds. For the nine months ended September 30, 2004, net cash provided by
operating activities was $205 million compared to $264 million for the same
period in 2003. The $59 million decrease was primarily due to a $66 million
increase in pension plan contributions, which are part of managements strategy
to fully fund the pension plans by 2007 partially offset by a decrease in OPEB
disbursements of $8 million associated with the Companys recognition of the
effects of the Medicare Drug Act. See Note 9 to the unaudited condensed
consolidated financial statements for more detailed information. INVESTING Net cash used in investing activities for the nine months ended September
30, 2004 was $103 million compared to $104 million for the same period in 2003.
The $1 million decrease in net cash used in investing activities was due to a
$6 million decrease in capital expenditures and costs of removal as a result of
decreased spending on specific software projects, as well as a general decrease
in spending as the Company aligned its capital spending with softening demand
for new wireline service, offset by a $5 million decrease in proceeds from the
sale of buildings in 2003. We have invested approximately $1.2 billion from the date of the
Acquisition through September 30, 2004 to expand and enhance our networks. Our
planned capital expenditures for 2004 are approximately $160 million, which we
expect to finance with internally generated funds. 39




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##### Table of Contents



FINANCING Net cash used in financing activities for the nine months ended September
30, 2004 and 2003 was $2 million and $170 million, respectively. We reduced
outstanding debt, including capital leases by $30 million for the nine months
ended September 30, 2004 and by $142 million for the same period in 2003.
Borrowings under term credit facilities, working capital facilities and
commercial paper decreased from $153 million at December 31, 2003 to $123
million at September 30, 2004 and from $323 million at December 31, 2002 to
$181 million at September 30, 2003. In connection with the Acquisition, PRTA agreed to contribute cash or
stock worth a total of $200 million as a capital contribution in five equal $40
million installments over five years beginning on March 2, 2000 to partially
fund its under funded pension and other post-employment benefit obligations.
In March 2004, the Company received the fifth and final $40 million installment
in cash from PRTA. See Note 15 to the unaudited condensed consolidated
financial statements for more information. The shareholders agreement requires the payment of dividends equal to at
least 50% of our consolidated net income, payable quarterly to the extent that
funds are legally available therefore. For the nine months ended September 30,
2004, the Company paid dividends in the amount of $12 million, which were
declared in the first quarter of 2004. Dividends in the amount of $27 million
were declared in the third quarter of 2004 were not paid until October 2004.
For the six months ended June 30, 2003, the Company paid dividends in the
amount of $68 million, which were declared in the first quarter of 2003 and the
fourth quarter of 2002. The senior notes indentures and credit facility
agreements do not contain restrictions on the payment of dividends. OFF-BALANCE SHEET ARRANGEMENTS The Company currently does not have any off-balance sheet arrangements
that have or are reasonably likely to have a material current or future effect
on the Companys financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The following table provides a summary of our contractual obligations and
commercial commitments at September 30, 2004. Additional detail about these
items is included in the notes to the unaudited consolidated financial
statements. Contractual Obligations &Other Commercial Commitments:
    
    Payments Due In Period(Dollars in Millions)Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong Term Debt, including interest rate swap
    
    $
    705
    
    
    $
    
    
    
    $
    
    
    
    $
    405
    
    
    $
    
    
    
    $
    
    
    
    $
    300Term Credit Facilities
    
    
    123
    
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit Obligations
    
    
    528
    
    
    
    177
    
    
    
    127
    
    
    
    111
    
    
    
    87
    
    
    
    16
    
    
    
    10Operating Leases
    
    
    47
    
    
    
    12
    
    
    
    10
    
    
    
    7
    
    
    
    4
    
    
    
    2
    
    
    
    12Total
    
    $
    1,403
    
    
    $
    189
    
    
    $
    260
    
    
    $
    523
    
    
    $
    91
    
    
    $
    18
    
    
    $
    322
 40




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##### Table of Contents



REGULATORY AND OTHER MATTERS REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels has been primarily
directed at meeting challenges in maintaining support for local exchange rates
and Universal Service while effecting the rate rebalancing and restructuring
required by an increasingly competitive environment. Among the issues
generating regulatory activity are the expansion of local calling areas, local
number portability requirements, interconnection agreements, the FCCs
triennial review and the elimination of reverse toll billing. We have continued to meet the wholesale requirements of new competitors
and have signed agreements with wireless and wireline carriers. These
agreements permit these carriers to purchase unbundled network elements, resell
retail services, and interconnect their networks with ours. INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE On February 28, 2002, the TRB issued a Resolution and Order (the February
2002 Order) with respect to the reconsideration requested by the Company of
the TRBs October 10, 2001 order to reduce the access rates the Company charges
to long distance carriers to originate and terminate intra-island long distance
calls on the Companys network. The February 2002 Order requires new rates for intra-island access to be
implemented through phased-rate reductions over four years. The prospective
access rate reductions (on a two-way basis) were ordered to go into effect on
April 1st of each year as follows: April 2002: From 9.3 cents per minute to 7.9 cents per minute
April 2003: From 7.9 cents per minute to 6.5 cents per minute
April 2004: From 6.5 cents per minute to 5.0 cents per minute
April 2005: From 5.0 cents per minute to 2.1 cents per minute The February 2002 Order also requires PRTC to pay a $68 million refund to
end-user customers. The TRB calculated this amount based on the difference
between the 9.3 cents and 7.9 cents rate for TRB estimated traffic from the
period April 1, 2000 through March 31, 2002. The refund can be made in 12
quarterly, equal installments starting April 1, 2002. The Company filed with
the Puerto Rico Circuit Court of Appeals (Court) an appeal of the February
2002 Order in which the Company alleges that the TRB made errors of law and
procedure in its determination of access charges and its order to make the cash
refund. On April 2, 2002, AT&T, Sprint and LTD (the Carriers) filed a petition
with the Court for review of the February 2002 Order, requesting the Court to
order the rate reduction without a phase-in period, remand the case back to the
TRB and direct the TRB to calculate the refund from and after April 1997
instead of April 2000, with the Carriers receiving the refund instead of the
end-user customers. The hearing involving oral presentations by the parties was held on
February 19, 2003. On April 22, 2003, the parties filed their corresponding
post-hearing final briefs submitting the case for final adjudication. On
August 19, 2003, the Court issued its final decision on the proceeding
confirming the TRB Order on Reconsideration of February 28, 2002 in all
respects and rejecting the claims of PRTC and the Carriers. On September 4,
2003, PRTC requested reconsideration of the Courts determination on the
grounds that although the Court correctly described the applicable legal
standards the Court erred in applying those standards to the facts of the case.
On October 2, 2003, the Court denied PRTCs reconsideration request. As a
result of the Courts decision, the Company established a pre-tax reserve of
$73 million, including interest, in September 2003 (3rd quarter) for the
end-user and AT&T refund referred to in the February 2002 Order. This reserve
is in addition to the reserve established in connection with the stay of the
TRB Order on Reconsideration issued by the Court. On October 30, 2003, the Company filed a petition for a writ for
certiorari before PR Supreme Court challenging the $68 million refund portion
of the Order. The phased-rate reduction portion of the Order was settled with
the major carriers. See Carrier Access Billing. 41




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##### Table of Contents



In November 2003, the Company proposed, and two members of the TRB
indicated their support for, a plan to revise the TRBs end-user refund order
and end the dispute over this issue. First, PRTC has filed tariffs
implementing the reduction in intra-island access charges ordered by the TRB in
its Order on Reconsideration of February 27, 2002. The composite per minute
access rate was reduced from 9.3 cents to 6.5 cents on January 1, 2004 and will
continue to decrease in accordance with the TRB phase reduction schedule, which
will end on April 1, 2005. In addition, PRTC agreed to implement a phased
reduction in the number of local exchange calling areas from 68 to 10, the
first phase of which became effective in February 2004, coupled with the
deferred implementation of a flat charge designed to offset the resulting
revenue losses. The plan included a number of other elements benefiting
consumers; elimination of touchtone charges; one time credits for single line
residential customers equal to their basic monthly service rate in December
2003 and June 2005 of approximately $14 million; and a commitment not to raise
residential rates through December 2006 without providing certain information
to the TRB in advance. The 2003 cash flow impact was a reduction of $16
million to the pre-tax reserve associated with one of the two one-time single
line credits. On February 4, 2004, Centennial filed with the Puerto Rico Supreme Court
an opposition to PRTCs request that the Court hold the case in abeyance until
the TRB issued a Resolution and Order confirming the commitments negotiated in
November 2003. On April 6, 2004, Centennial filed a motion requesting
dismissal of the case, arguing that the settlement between the TRB and PRTC
rendered the case moot. In the alternative, Centennial also argued that the
TRB lacks jurisdiction to modify the end user refund order, pending the
petition for certiorari before the Puerto Rico Supreme Court. Centennial
claimed that the commitment negotiated in November 2003 with respect to the $68
million refund was null and void. On April 15, 2004, PRTC responded to and
opposed Centennials filing. On April 23, 2004, PRTC and Centennial entered into a settlement agreement
and on April 29, 2004, jointly filed a motion with the Supreme Court informing
the Supreme Court of the settlement. Centennial withdrew its opposition to
PRTCs petition and on April 30, 2004, the Puerto Rico Supreme Court issued a
Resolution denying PRTCs petition for certiorari on the grounds of that the
issue was moot. As a result of the TRBs support of the revision to the end-user refund
order through agreed rate reductions and consolidation of calling areas, the
final settlement of carrier access rate disputes and the Supreme Court
resolution rendering the litigation moot; the Company revised the
pre-established contingency at $14 million, associated with the expected June
2005 single line credit. EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE In December 2003, AT&T and Sprint, (later followed by TLD) challenged
PRTCs actions in implementing the reduction of calling areas before the TRB,
and sought an injunction to further reductions in the number of calling areas.
PRTC has opposed the request for the injunction and intends to fulfill its
commitments to the TRB. The TRB considered the matter in a hearing held on
April 28, 30 and May 3, 2004 and determined that the carriers request for
injunctive relief should not proceed. The TRB allowed PRTC to implement its
EAS Phase IV as scheduled on May 4, 2004 and ordered PRTC to sustain from
further EAS implementation until an expedited investigation process is
completed. On May 6, 2004, PRTC submitted to the TRB and to the carriers a proposed
expedited schedule in an effort to resolve the investigation prior to the next
phase of the EAS implementation, which was scheduled for June 7, 2004 and
covers Puerto Ricos metro area. A hearing on the investigation was held on
June 2, 2004. After the hearing, the TRB terminated the stay it had issued and allowed
PRTC to continue to the next phase of the EAS implementation, subject to the
satisfaction of certain customer information and data collection requirements
relating to the impact of the EAS implementation on measured service customers.
On June 7, 2004, the TRB allowed the Company to continue with the
implementation of the metro area zone, which is the largest zone. As a result of the TRBs determination subsequent to the hearing of June
2, 2004, the Company reduced the reserve originally established in September
2003 to $14 million. On July 8, 2004, the TRB issued a Resolution and Order initiating the
investigation process regarding the EAS implementation impact on measured
service customers. The TRB ordered PRTC to submit monthly reports that would
reflect the impact on measured service customers. PRTC complied with the
filing of the first two reports on September 7 and October 7, 2004. PRTC is
also required to file a report on its customer information program with respect
to EAS on that date. 42




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##### Table of Contents



On September 20 and September 22, 2004, AT&T and Sprint filed a motion
requesting authorization to amend the complaint and and to obtain discovery
from PRTC. On October 4, 2004, PRTC opposed to both motions. A resolution on
both motions is pending. As of October 4, 2004, PRTC has completed all phases of its EAS
implementation program. CARRIER ACCESS BILLING During the first and second quarters of 2003, certain carriers made a
series of billing claims against the Company regarding tariff interpretation,
traffic routing at the network level and misclassification of access traffic
for determination of applicable access elements. The Company entered into negotiations with the major carriers and settled
the billing claims and phased-rate reductions required by the February 2002
Order. The Company does not believe that the impact of these settlements will
have a material effect on the Companys results of operations. PUBLIC TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS On November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the
largest competitive provider of public pay phones in Puerto Rico filed a
lawsuit against us in the United States District Court of Puerto Rico, claiming
predatory, exclusionary and anticompetitive acts and seeking $75 million in
damages. The Company filed a motion to dismiss the lawsuit which was largely
denied by the Court on August 2004. The lawsuit is currently in the discovery
stage and trial is scheduled to begin November 22, 2004. The Companys
management believes that TPPRs claim is without merit. Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three other competitive providers of public pay
phones in Puerto Rico, also filed a similar lawsuit against us in the United
States District Court of Puerto Rico on September 4, 2002 on the same grounds.
On November 8, 2002, we filed a motion to dismiss the lawsuit and/or in the
alternative to consolidate the lawsuit with TPPRs lawsuit. The Court denied
the motion to dismiss without prejudice. On September 7, 2004, the parties
filed a joint motion for dismissal with prejudice after reaching a settlement
agreement which puts an end to all claims and controversies between them in the
proceeding. On October 4, 2004, the Court dismissed the case with prejudice. On August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico,
filed a lawsuit against PRTC in the United States bankruptcy court in the
District of Delaware, claiming anti competitive acts. The claims have since
been transferred to the United States District Court of Delaware and the
disputes between the two parties include PRTCs amended administrative claim
against PSA, and PSAs claim for over $9 million from PRTC. PRTCs motion to
change venue to Puerto Rico was granted by the United States District Court of
Delaware and the motion to dismiss is currently pending before the United
States District Court of Puerto Rico. On September 24, 2004, the Court issued
an Opinion and Order granting PRTCs motion to dismiss. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the Puerto
Rico Superior Court, seeking collection of fees due for services rendered under
the PRDOEs Reeducate Program, which is based on the Federal E-Rate Program,
from 1999 to June 30, 2003. The Reeducate Program funds Internet connections
for schools throughout Puerto Rico and PRTC has provided contracted services to
the PRDOE. Based on PRTCs review of its services rendered under the Reeducate
Program, the outstanding amount that PRDOE currently owes to PRTC is $34
million. Under the E-Rate program, 89% of this amount is to be paid by the
FCCs School & Libraries Division (SLD), which administers the Federal E-Rate
Program, if the funding for the fourth and fifth years under the program is
released. PRTC is currently evaluating the outstanding amounts owed by PRDOE
for the third year under the program, which we believe is approximately $1.2
million, after SLD paid its corresponding percentage (87%) under the program. On March 4, 2004, PRTC filed a motion to dismiss the complaint based on an
agreement with the PRDOE to attempt to settle the amounts owed out of court.
On March 24, 2004, the court dismissed the case without prejudice. 43




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In November 2003, the FCC directed SLD to audit the PRDOEs compliance
with the E-Rate program rules as well as billings for the Reeducate Program for
years one through three of the program before the funds will be released. The
audit of the PRDOE began on May 15, 2004. The auditor has contacted PRTC and
PRTC is cooperating with the audit. There is no scheduled timetable for the
completion of the audit process. Upon completion of that audit, SLD will
determine if there is a need to recover any, or all, of the funds that were
distributed during those years to the PRDOE and its vendors, including PRTC. On June 17, 2004, the United States House Energy and Commerce Committee
Subcommittee on Oversight and Investigations held a hearing entitled Problems
with the E-Rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our
Nations Schools to the Internet. Representatives from PRTC, as well as
representatives from the PRDOE testified at the hearing. This hearing was one
of a series of ongoing hearings focused upon the E-Rate program. At the beginning of July, 2004, the Universal Service Administrative
Company (USAC), the E-Rate programs administrator commenced the audit directed
by the FCC. The audit was divided into two time periods: Years 1 to 3 (1999
to June 2001) and Years 4 and 5 (July 2001 to June 2003). PRTC has been
providing information with respect to contracts, billing, payments and the
network designed and installed by PRTC, and service levels provided in response
to requests from the auditors. On July 30, 2004, the FCC released its Fourth Report and Order addressing
the manner in which funds would be recovered under the E-Rate program. On
August 13, 2004, the FCC released its Fifth Report and Order (Order) in the
same proceeding adopting measures to address issues raised in audit conducted
as part of ongoing oversight of the schools and libraries support mechanisms
and programmatic concerns noted by its Office of Inspector General. Based on
the standards established by the FCC, PRTC does not believe that amounts it has
received from the E-Rate program are subject to recovery. PRTC is implementing
procedures to ensure compliance with the requirements established by the Order. TOUCHTONE CHARGES On November 17, 2003, six residential subscribers and eight business
service subscribers filed a class action suit with the Superior Court of Puerto
Rico (the Superior Court) under the Puerto Rico Telecommunications Act of
1996 (Act) and the Puerto Rico Class Action Act of 1971. The plaintiffs have
claimed that the Companys charges for touchtone service are not based on cost,
and therefore violate of the Act. The plaintiffs have requested that the
Superior Court (i) issue an order certifying the case as a class action, (ii)
designate the plaintiffs as representative of the class, (iii) find that the
charges are illegal, and (iv) order the Company to reimburse every subscriber
for excess payments made since September 1996. On December 30, 2003, PRTC
filed its answer to the complaint and requested dismissal on the grounds that
the claim is not a legitimate class action suit. On February 17, 2004, the
plaintiffs filed their first set of interrogatories and request for admissions
to initiate discovery. A status conference was held on April 30, 2004 and the Superior Court
ruled that at this stage of the proceedings the discovery process would
be addressed, but not limited to the determination of the class. On June 28, 2004, a second hearing was held. During this hearing PRTC was
ordered to submit responses to the plaintiffs request for admissions and to
their first and second sets of interrogatories. PRTC submitted its responses
to the plaintiffs request for admissions and to their first and second sets of
interrogatories on July 6 and July 16, 2004, respectively. However, these
responses were limited to the issue of class certifications, and the
interrogatories and requests for admissions relating to the merits of the case
were objected and a protective order was requested. The Superior Court denied
PRTCs requests and ordered full responses. On July 16, 2004, PRTC filed a
writ of certiorari with the Puerto Rico Court of Appeals seeking reversal of
the Superior Courts order allowing discovery concerning the merits of the case
before the class certification issue is resolved. On October 13, 2004,
plaintiffs filed a motion opposing to PRTCs writ of certiorari. A
determination is pending before the Court of Appeals. On October 8, 2004, plaintiffs filed with the Superior Court a motion
requesting the dismissal and substitution of one of the plaintiffs. 44




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CTI ASSET TRANSFER Prior to the Acquisition, PRTC transferred its net wireless assets on
September 1, 1998 to CTI (which became Verizon Wireless, a division of PRTC, on
May 1, 2002). Our predecessors later filed a waiver request in 1998 with the
FCC to record this transfer at book value instead of fair value. Since our
predecessors had not included the costs of wireless operations in the regulated
rate setting process, we believe that ratepayers did not bear the cost of our
predecessors wireless investment. The FCC denied the Companys petition in April 2001, but recognized that
while there were questions concerning certain costs and expenses, the cellular
and paging assets had been removed from the interstate rate base. In the February 2002 Order, the TRB provided that any prospective rate
increase must first be applied against the gain from the wireless asset
transfer, equating to $56 million applicable to intrastate. We plan to contest
this position on the grounds that the wireless entity was set up after the last
regulated intrastate rate increase in 1982 and therefore these costs were not
included in setting such rates. Currently, the TRB is performing an agreed upon procedures audit, which
includes an audit of the CTI asset transfer. The audit is in the field work
stage. While we believe that the resolution of this matter and any related
proceedings will not have a material impact on the Companys financial
condition and results of operations, we cannot predict the effect of any
further regulatory actions. PRICE CAP REGULATION Under the FCCs all or nothing rule, telecommunications carriers that
set interstate access rates based on a price cap formula are required to use
the price cap formula for all of their affiliates. The price cap formula is
based on a plan adopted by the FCC called the Coalition of Affordable Local and
Long Distance Service (CALLS), which uses rate-of-return as a basis for
setting rates. The Company would have been required to implement price caps by
March 2, 2000 under the FCCs rules. Prior to March 2, 2000, the Company had
set its interstate access rates based on rate-of-return principles. However, the FCC delayed conversion to price cap regulation until June 30,
2002, and the Company requested an extension until June 30, 2003. Under an
order issued by the FCC on April 18, 2002, the Company is no longer required to
file a waiver request until the FCC completes its review of the
all-or-nothing rule. In addition, upon the issuance of an Order and Second
Further Notice of Proposed Rulemaking (the Order) by the FCC on February 28,
2004, the FCC deferred further action on the all-or-nothing rule until it
reviews the record compiled in response to the further notice included in the
Order. Additionally, in the Order the FCC stated that all outstanding interim
waivers of the all-or-nothing rule that depend on the FCCs decision shall
continue to be effective until the FCC issues a final order on this matter. As
a result, the Company currently continues to set its interstate access rates
based on rate-of-return principles. On May 10, 2004, PRTC filed comments in response to the Order, requesting
that the FCC eliminate the all or nothing rule or, in the alternative, if the
rule is not eliminated, that the FCC grant PRTCs 1999 waiver request to permit
PRTC to remain a carrier that sets its interstate access rates based on
rate-of-return principles. The basis of PRTCs request is that if PRTC were no
longer eligible to receive Interstate Common Line Support (ICLS), PRTC would
require $139 million in additional universal service support to offset lost
ICLS revenues and that the CALLS plan cannot accommodate PRTC since there is a
$650 million cap on the equivalent support in the CALLS plan, which was based
on the anticipated universal service needs of price cap carriers that were
participating in the plan at the time of its adoption. There has been no
announcement regarding the expected timing for the completion of this
proceeding. INTERSTATE HIGH COST SUBSIDY On October 21, 1999, the FCC adopted a new high cost loop support
mechanism for non-rural companies, which has resulted in the phase out of the
Companys high cost loop subsidy revenues. The Company is classified as a
non-rural telephone company under the United States Telecommunications Act of
1996. The Companys high cost loop revenues were $49 million in 2000, $33
million in 2001 and $4 million in 2002. On February 28, 2003, PRTC sent a
letter to the FCC, requesting that the FCC take action to restore the high-cost
loop universal service support that the Company lost due to FCC policies
adopted for non-rural telephone companies and arguing that the non-rural
telephone company mechanism is based on cost characteristics of mainland
telephone companies. PRTC requested that the FCC address the loss of its high
cost loop universal service support by adopting rules for insular areas that
are similar to those applied to rural carriers. If rural carrier rules were
applied to PRTC it would continue to receive high cost loop support as it had
prior to the adoption of the FCCs 45




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1999 rules for non-rural telephone companies. On October 27, 2003, the FCC
issued an order rejecting PRTCs request for reconsideration that it be
considered a rural carrier. However, the order did not address PRTCs request
to restore the high-cost universal service support based on the establishment
of a new high cost loop support mechanism for insular carriers. On January 14,
2004, PRTC filed a petition for clarification and/or reconsideration of several
portions of the FCC Order of October 27, 2003 on the grounds that the FCC has
not acted upon the specific mandate of Section 254 to provide support for
insular areas. No announcement has been made regarding the expected timing for
addressing this issue. TRB AGREED UPON PROCEDURES AUDIT As required by law, the TRB is currently conducting an ordinary audit of
our affiliate transactions and regulatory accounting. We do not expect the
results of this audit to have a material impact on the Companys financial
condition and result of operations. WORLDNET ARBITRATION PROCEEDING Recently, an arbitrator resolved a dispute related to an interconnection
contract between PRTC and WorldNet and rendered a decision which, among other
things, requires PRTC to agree to contract terms establishing numerous service
quality metrics, liquidated damages provisions, reduced prices for certain
network elements, continuation of wholesale discounts, certain Operational
Support System parity standards, and certain requirements with respect to
bundled services. PRTC is examining the impact of this decision. In
accordance with the applicable rules, the parties have executed and filed the
arbitrated contract with the TRB. On June 7, 2004, PRTC filed a request for reconsideration of the TRBs
Resolution and Order which adopted the arbitrators decision and a request for
stay of the new interconnection agreement until the reconsideration was finally
resolved. WorldNet also filed a request for reconsideration. On June 17,
2004, the TRB issued a Resolution and Order accepting both motions for
reconsideration and notified the parties that a final decision on both motions
would be issued within ninety days from the date of the filing, (i.e., by
September 7, 2004). On June 25, 2004, PRTCs motion for a stay was granted. On September 7, 2004, the TRB issued its Order on Reconsideration
requiring PRTC and WorldNet to submit a revised interconnection agreement by
October 22, 2004, which was subsequently extended to October 29, 2004. The new
agreement must be implemented within a period of six (6) months following the
filing of the same. PRTC believes that some of the TRBs determinations in the Order on
Reconsideration are contrary to law, and on October 7, 2004, filed before the
Federal District Court for the District of Puerto Rico (District Court) an
appeal of the TRBs Order on Reconsideration (Order) of September 7, 2004. In
addition, we filed an emergency motion for a partial stay of the Order with the
TRB. Worldnet has also appealed the TRBs Order of September 7, 2004 to the
Federal District Court. PRTC and Worldnet are continuing to negotiate a new interconnection
agreement to meet the filing deadline established by the TRB. 46




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS In this report, the Company makes forward-looking statements. These
statements are based on the Companys estimates and assumptions and are subject
to certain risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations, as
well as those statements preceded or followed by the words anticipates,
believes, estimates, expects, hopes, targets or similar expressions. Future results could be affected by subsequent events and could differ
materially from those expressed in the forward-looking statements. If future
events and actual performance differ from the Companys assumptions, the actual
results could vary significantly from the performance projected in the
forward-looking statements. The following important factors could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in Puerto Rico, including new legislation; (2) material changes in
available technology; (3) the final resolution of regulatory initiatives and
proceedings, including arbitration proceedings pertaining to, among other
matters, the terms of interconnection, access charges, universal service,
unbundled network elements and resale rates; (4) changes in the Companys
accounting assumptions that may be required by regulatory agencies, including
the SEC, or that result from changes in the accounting rules or their
application, which could result in an impact on earnings; and (5) the extent,
timing, success and overall effects of competition from others in the Puerto
Rico telecommunications service industry. CRITICAL ACCOUNTING POLICIES General The Companys discussion and analysis of its financial condition and
results of operations are based upon the Companys unaudited condensed
consolidated financial statements, which have been prepared in accordance with
the accounting principles generally accepted in the United States for interim
financial information and the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States for annual financial statements have been condensed or omitted
pursuant to such rules and regulations. The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported interim amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, the Company evaluates its estimates,
including those related to bad debts, intangible assets, income taxes,
financing operations, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Because of uncertainties inherent in the
estimation process, the Companys estimate of losses and the related allowance
may change. The Company does not depend on any single customer for its
business. 47




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Deferred Taxes The Company uses an asset and liability approach in accounting for income
taxes in accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for temporary
differences between the way certain income and expense items are reported for
financial reporting purposes and for tax purposes. The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period in
which such determination was made. Likewise, should the Company determine that
it would not be able to realize all or part of its net deferred tax asset in
the future, an adjustment to the deferred tax asset would be charged to income
in the period such determination was made. As provided by law, the Puerto Rico Treasury Department is currently
conducting an ordinary audit of our corporate income tax returns. We do not
expect the results of this audit to have a material impact on the Companys
financial condition and result of operations. Property, Plant and Equipment and Depreciation Property, plant and equipment is stated at original cost, plus interest on
funds borrowed to finance capital additions. Repair and maintenance costs are
expensed as incurred. Depreciable property disposed of in the ordinary course
of business, less any salvage value, is charged to accumulated depreciation
with no gain or loss recognized. Gains or losses from the sale of land are
recorded in the Companys consolidated statement of operations. The Companys depreciation expense is based on the composite group
remaining life method using straight-line composite rates. This method
provides for the recognition of the cost of the remaining net investment in
telephone plant over the remaining asset lives. This method also requires a
periodic evaluation of the average remaining useful lives related to the
expected recoverability of the carrying value of assets based on changes in
technology, environmental factors, the federal and local regulatory
environment, industry and other competitive forces. Effective July 1, 2002,
the Company revised its accounting estimates relating to depreciation based on
a detailed review of the lives underlying the depreciation rates. The
depreciation rate revisions reflect expected useful lives resulting from the
impact of technology and future competition and more closely approximate the
assumptions used by other telephone companies. These revisions resulted in a
decrease in depreciation expense of approximately $12 million for the year
ended December 31, 2003. Effective July 2004, the Company performed its
periodic review of its plant useful lives estimates based on a comprehensive
analysis of the lives underlying the depreciation rates. The revision resulted
in a decrease in depreciation expense by approximately $1.7 million for the
quarter ended September 30, 2004 and approximately $3.3 million for the year
2004. The Company revised the method to calculate the composite useful lives to
be consistent with the current depreciation study. RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements, see Note 4 to our
unaudited condensed consolidated financial statements. 48




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY We are exposed to market risk in the normal course of business, resulting
primarily from changes in the interest rates on our senior notes and interest
rate swap agreements. The following table summarizes the fair value of our senior notes and
interest rate swap agreements at September 30, 2004 and December 31, 2003 and
provides a sensitivity analysis of the fair values of these instruments
assuming a 100 basis point increase or decrease in the yield curve. The
sensitivity analysis does not include the fair values of our floating-rate debt
since they are not significantly affected by changes in market interest rates. Fair ValueAssuming 100 BasisBook Value
    
    Fair Value
    
    Increase
    
    Decrease(In thousands)September 30, 2004:Senior notes
    
    $
    699,869
    
    
    $
    753,010
    
    
    $
    733,666
    
    
    $
    773,111Interest rate swap
    
    
    1,757
    
    
    
    1,757
    
    
    
    (802
    )
    
    
    4,338Total
    
    $
    701,626
    
    
    $
    754,767
    
    
    $
    732,864
    
    
    $
    777,449December 31, 2003:Senior notes
    
    $
    699,839
    
    
    $
    770,526
    
    
    $
    746,165
    
    
    $
    795,974Interest rate swap
    
    
    2,811
    
    
    
    2,811
    
    
    
    (467
    )
    
    
    6,133Total
    
    $
    702,650
    
    
    $
    773,337
    
    
    $
    745,698
    
    
    $
    802,107
 49




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act)) that are designed to ensure that information
required to be disclosed in the Companys reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SECs rules and forms. In designing and
evaluating the Companys disclosure controls and procedures, the Companys
chief executive officer and chief financial officer recognized that any
controls and procedures, no matter how well-designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Companys chief executive officer and chief financial officer have evaluated
the effectiveness of the Companys disclosure controls and procedures, as of
the end of the period covered by this report (the Evaluation Date). They
have concluded that as of the Evaluation Date, the Companys disclosure
controls and procedures were effective at the reasonable assurance level. There has been no change in the Companys internal control over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 50




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings The Company is a defendant in various legal matters arising in the
ordinary course of business. Management, after consultation with legal
counsel, believes that the resolution of these matters will not have a material
adverse effect on the Companys financial position and results of operations.
See Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Regulatory and Other Matters, which is
incorporated herein by reference, for more information regarding legal and
regulatory matters, including a regulatory dispute regarding intra-island
access fees charged to long distance carriers. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. 
 Item 3. Defaults Upon Senior Securities Not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5. Other Information Not applicable. 
 Item 6. Exhibits See Exhibit Index on page following signatures. 51




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. TELECOMUNICACIONES DE PUERTO RICO, INC. By:
    
    /s/ Cristina M. LambertName: Cristina M. LambertTitle: President and Chief Executive OfficerDate: November 15, 2004By:
    
    /s/ Adail OrtizName: Adail OrtizTitle: Vice President Finance and Chief Financial OfficerDate: November 15, 2004By:
    
    /s/ Raúl E. GarcíaName: Raúl E. GarcíaTitle: ControllerDate: November 15, 2004
 52




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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
    
    Amended and Restated Puerto Rico Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.6 of the Companys Registration Statement filed on Form
S-4, as amended (File 333-85503)).10.3
    
    Amended and Restated U.S. Management Agreement, dated as of March
2, 1999, by and among Telecomunicaciones de Puerto Rico, Inc.,
Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.7 of the Companys Registration Statement filed on Form
S-4, as amended (File 333-85503)).10.4
    
    Amended and Restated Technology Transfer Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.8 of the Companys Registration Statement filed on Form
S-4, as amended (File 333-85503)).10.5
    
    Non-Competition Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc, GTE Holdings (Puerto Rico)
LLC, GTE International Telecommunications Incorporated, Popular,
Inc., Puerto Rico Telephone Authority, and the Government
Development Bank for Puerto Rico. (Incorporated by reference to
Exhibit 10.9 of the Companys Registration Statement filed on Form
S-4, as amended (File 333-85503)).10.6
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration Statement
filed on Form S-4, as amended (File 333-85503)).10.7
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.13 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.8
    
    Pledge Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.15 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).
 53




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EXHIBITNUMBER
    
    DESCRIPTION10.9
    
    Tag Along Agreement, dated as of March 2, 1999, by and among GTE
Holdings (Puerto Rico) LLC, GTE International Telecommunications
Incorporated, and the Trust of the Employee Stock Ownership Plan
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.16 of the Companys Registration Statement
filed on Form S-4, as amended (File 333-85503)).10.10
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefónica, Inc., as
Guarantors; and Merrill Lynch Money Markets Inc., as Dealer for
notes with maturities up to 240 days; Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Dealer for notes with maturities
over 270 days up to 365 days. Concerning notes to be issued
pursuant to an Issuing and Paying Agency Agreement dated as of
November 9, 2000 between the Issuer and The Chase Manhattan Bank,
as Issuing and Paying Agent. (Incorporated by reference to
Exhibit 10.25 of the Companys Annual Report on Form 10-K for the
year ended December 31, 2000 (File 333-85503)).10.11
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefónica, Inc., as
Guarantors; and Salomon Smith Barney Inc., as Dealer. Concerning
notes to be issued pursuant to an Issuing and Paying Agency
Agreement dated as of November 9, 2000 between the Issuer and The
Chase Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.26 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2000 (File 333-85503)).10.12
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefónica, Inc., as
Guarantors; and Banc of America Securities LLC. Concerning notes
to be issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.27 of the Companys Annual Report on Form
10-K for the year ended December 31, 2000 (File 333-85503)).10.13
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefónica, Inc., as
Guarantors; and Popular Securities, Inc., as Dealer for notes with
maturities up to 365 days. Concerning notes to be issued pursuant
to an Issuing and Paying Agency Agreement dated as of November 9,
2000 between the Issuer and The Chase Manhattan Bank, as Issuing
and Paying Agent. (Incorporated by reference to Exhibit 10.28 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.14
    
    Issuing and Paying Agency Agreement dated as of November 9, 2000,
by and among Telecomunicaciones de Puerto Rico, Inc., as Issuer,
Puerto Rico Telephone Company and Celulares Telefónica, Inc., as
Guarantors, and The Chase Manhattan Bank, as Issuing and Paying
Agent. (Incorporated by reference to Exhibit 10.29 of the
Companys Annual Report on Form 10-K for the year ended December
31, 2000 (File 333-85503)).10.15
    
    Letter Amendment, to the March 2, 1999 Shareholders Agreement,
dated as of May 25, 2001, by and among Telecomunicaciones de
Puerto Rico, Inc., GTE Holdings (Puerto Rico) LLC, GTE
International Telecommunications Incorporated, Popular, Inc., and
the Puerto Rico Telephone Authority. (Incorporated by reference
to Exhibit 10.25 of the Companys Quarterly Report on Form 10-Q
for the period ended June 30, 2001 (File 333-85503)).10.16
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc., as
Guarantors, and Bank of America, N.A., as the Bank. (Incorporated
by reference to Exhibit 10.27 of the Companys Quarterly Report on
Form 10-Q for the period ended September 31, 2001 (File
333-85503)).10.17
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc., as
Guarantors, and Citibank, N.A., as the Bank. (Incorporated by
reference to Exhibit 10.28 of the Companys Quarterly Report on
Form 10-Q for the period ended September 31, 2001 (File
333-85503)).
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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Plan of Reorganization and Agreement of Merger, dated as of May 1,
2002, between Puerto Rico Telephone Company, Inc. and Verizon
Wireless Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.25 of the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).10.19
    
    $90,000,000 working capital revolving credit agreement dated as of
May 16, 2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, and
Banco Popular de Puerto Rico, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.26 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30, 2002
(File 333-85503)).10.20
    
    $50,000,000 2-Year term credit agreement dated as of May 16, 2002,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, and Banco Bilbao
Vizcaya Argentaria, S.A., as Lender and Banco Bilbao Vizcaya
Puerto Rico, as Administrative Agent. (Incorporated by reference
to Exhibit 10.27 of the Companys Quarterly Report on Form 10-Q
for the period ended June 30, 2002 (File 333-85503)).10.21
    
    $50,000,000 2-Year term credit agreement dated as of May 31, 2002,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, and HSBC Bank USA, as
Lender. (Incorporated by reference to Exhibit 10.28 of the
Companys Quarterly Report on Form 10-Q for the period ended June
30, 2002 (File 333-85503)).10.22
    
    $50,000,000 3-Year term credit agreement dated as of June 24,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and Australia
and New Zealand Banking Group Limited, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit 10.29
of the Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2002 (File 333-85503)).10.23
    
    $75,000,000 3-Year term credit agreement dated as of August 19,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and The Bank of
Nova Scotia, as Lender and Administrative Agent. (Incorporated by
reference to Exhibit 10.28 of the Companys Quarterly Report on
Form 10-Q for the period ended September 30, 2002 (File
333-85503)).10.24
    
    Letter Amendment to the $90 million working capital revolving
credit agreement dated as of December 31, 2002. (Incorporated by
reference to Exhibit 10.28 of the Companys Annual Report on Form
10-K for the year ended December 31, 2002 (File 333-85503)).10.25
    
    Assignment and Acceptance agreement, dated as of December 31,
2002, relating to the $50 million 3-Year Term Credit Agreement,
dated as of June 24, 2002. (Incorporated by reference to Exhibit
10.29 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2002 (File 333-85503)).10.26
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Union of Telephone Employees of Puerto
Rico effective from January 18, 2003 until January 17, 2006.
Approved on February 13, 2003. (Incorporated by reference to
Exhibit 10.30 of the Companys Annual Report on Form 10-K for the
year ended December 31, 2002 (File 333-85503)).10.27
    
    Second Allonge to the $90 million working capital revolving credit
agreement dated as of June 30, 2003. (Incorporated by reference to
Exhibit 10.31 of the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2003 (File 333-85503)).10.28
    
    364-Day Credit Agreement dated as of March 2, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico
Telephone Company, Inc., as Guarantor, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Banco Bilbao
Vizcaya Argentaria Puerto Rico, as Syndication Agent, and Banco
Popular de Puerto Rico, Firstbank Puerto Rico and Scotiabank de
Puerto Rico, as Co-documentation Agents. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on Form
10-K for the year ended December 31, 2003 (File 333-85503)).
 55




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.29
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Brotherhood of Telephone Company
Employees effective from January 1, 2004 until December 31, 2008.
Approved on April 15, 2004. (Incorporated by reference to Exhibit
10.29 of the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (File 333-85503)).10.30
    
    $40,000,000 working capital revolving credit agreement dated as of
June 30, 2004, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor and
Banco Popular de Puerto Rico, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.30 of the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 (File 333-85503))10.31
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Union of Telephone Employees of Puerto
Rico effective from January 18, 2003 until January 17, 2006.
Approved on February 13, 2003. English Version. (Incorporated by
reference to Exhibit 10.31 of the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004
(File 333-85503))10.32
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Brotherhood of Telephone Company
Employees effective from January 1, 2004 until December 31, 2008.
Approved on April 15, 2004.
English Version. (Incorporated by
reference to Exhibit 10.32 of the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004
(File 333-85503))10.33
    
    $30,000,000 1-Year term credit agreement dated as of May 17, 2004,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor and Banco Bilbao
Vizcaya Argentaria Puerto Rico, as Administrative Agent. (Incorporated by
reference to Exhibit 10.33 of the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004
(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).
 56