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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: June 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 August 16, 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June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations Three Months Ended June 30, 2004 and 2003; Six Months Ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Changes in Shareholders EquitySix Months Ended June 30, 2004 and Year Ended December 31, 2003
    
    
    5Condensed Consolidated Statements of Cash FlowsSix Months Ended June 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    47Part II. Other InformationItem 1. Legal Proceedings
    
    
    48Item 2. Changes in Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48Item 5. Other Information
    
    
    48Item 6. Exhibits and Reports on Form 8-K
    
    
    48Signatures
    
    
    49Exhibit Index
    
    
    50$40,000,000 Working Capital Revolving Credit AgreementCollective Bargaining Agreement, Approved February 13, 2003Collective Bargaining Agreement, Approved April 15, 2004$30,000,000 1-Year Term Credit AgreementCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Required by 18 U.S.C. Section 1350
  2




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Balance Sheets (In thousands) (Unaudited)June 30,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    79,007
    
    
    $
    21,732Accounts receivable, net of allowance for doubtful accounts
of $131,632 and $131,106 in 2004 and 2003, respectively
    
    
    272,757
    
    
    
    287,247Deferred income tax
    
    
    30,986
    
    
    
    26,158Inventory and supplies, net
    
    
    17,867
    
    
    
    21,202Prepaid expenses
    
    
    27,707
    
    
    
    35,255Total current assets
    
    
    428,324
    
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,494,781
    
    
    
    1,558,246GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    187,529
    
    
    
    189,136DEFERRED INCOME TAX
    
    
    208,266
    
    
    
    246,794OTHER ASSETS
    
    
    109,071
    
    
    
    108,541TOTAL ASSETS
    
    $
    2,554,898
    
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    60,129
    
    
    $
    59,729Other current liabilities
    
    
    173,069
    
    
    
    213,480Total current liabilities
    
    
    233,198
    
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    768,623
    
    
    
    802,135PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    548,372
    
    
    
    594,113OTHER NON-CURRENT LIABILITIES
    
    
    184,054
    
    
    
    237,405Total liabilities
    
    $
    1,734,247
    
    
    $
    1,906,862MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    14,244
    
    
    
    13,025SHAREHOLDERS EQUITY:Common stock
    
    $
    703,884
    
    
    $
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    (26,153
    )Subscription receivable
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    230,061
    
    
    
    164,520Accumulated other comprehensive loss, net of taxes
    
    
    (101,385
    )
    
    
    (101,385
    )Total shareholders equity
    
    
    806,407
    
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,554,898
    
    
    $
    2,621,238
 The accompanying notes are an integral part of these financial statements. 3




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Operations (in thousands) For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,As Restated(See note 2)2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)REVENUES:Local services
    
    $
    137,066
    
    
    $
    147,500
    
    
    $
    273,134
    
    
    $
    292,538Long distance services
    
    
    33,757
    
    
    
    33,818
    
    
    
    72,494
    
    
    
    66,680Access services
    
    
    73,278
    
    
    
    77,874
    
    
    
    146,581
    
    
    
    159,729Cellular services
    
    
    47,620
    
    
    
    46,575
    
    
    
    95,457
    
    
    
    94,029Paging services
    
    
    
    
    
    
    192
    
    
    
    
    
    
    
    803Directory services and other
    
    
    20,017
    
    
    
    20,708
    
    
    
    40,896
    
    
    
    38,330Total revenues
    
    
    311,738
    
    
    
    326,667
    
    
    
    628,562
    
    
    
    652,109OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    92,686
    
    
    
    100,115
    
    
    
    192,181
    
    
    
    203,012Other operating expenses
    
    
    54,807
    
    
    
    134,331
    
    
    
    155,665
    
    
    
    232,745Early retirement and voluntary separation
provision
    
    
    
    
    
    
    3,257
    
    
    
    1,635
    
    
    
    4,700Depreciation and amortization
    
    
    65,907
    
    
    
    62,776
    
    
    
    130,385
    
    
    
    123,279Total operating costs and expenses
    
    
    213,400
    
    
    
    300,479
    
    
    
    479,866
    
    
    
    563,736OPERATING INCOME
    
    
    98,338
    
    
    
    26,188
    
    
    
    148,696
    
    
    
    88,373OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (11,110
    )
    
    
    (13,682
    )
    
    
    (21,458
    )
    
    
    (23,865
    )Equity income from joint venture
    
    
    678
    
    
    
    515
    
    
    
    1,335
    
    
    
    1,301Minority interest in consolidated subsidiary
    
    
    (658
    )
    
    
    (397
    )
    
    
    (1,218
    )
    
    
    (830
    )Total other income (expense), net
    
    
    (11,090
    )
    
    
    (13,564
    )
    
    
    (21,341
    )
    
    
    (23,394
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    87,248
    
    
    
    12,624
    
    
    
    127,355
    
    
    
    64,979INCOME TAX EXPENSE (BENEFIT)
    
    
    34,093
    
    
    
    4,356
    
    
    
    49,428
    
    
    
    24,301INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    53,155
    
    
    
    8,268
    
    
    
    77,927
    
    
    
    40,678CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net
of income tax provision of $40,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    53,155
    
    
    $
    8,268
    
    
    $
    77,927
    
    
    $
    99,207
 The accompanying notes are an integral part of these financial statements. 4




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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Changes in Shareholders Equity (In thousands) AccumulatedDeferred
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    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 declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,386
    )
    
    
    
    
    
    
    (12,386
    )Net income, for the six months ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,927
    
    
    
    
    
    
    
    77,927Accretion of discount on subscription receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000BALANCE, JUNE 30, 2004
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    
    
    
    $
    230,061
    
    
    $
    (101,385
    )
    
    $
    806,407
 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 (in thousands) For the Six Months EndedJune 30,2004
    
    2003(Unaudited)CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    77,927
    
    
    $
    99,207Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    130,385
    
    
    
    123,279Provision for uncollectible accounts
    
    
    29,374
    
    
    
    30,599Cumulative effect of accounting change
    
    
    
    
    
    
    (58,529
    )Abandoned software project
    
    
    
    
    
    
    32,262Deferred income tax
    
    
    33,700
    
    
    
    77Accretion of discount on subscription receivable
    
    
    (485
    )
    
    
    (1,940
    )Equity income from joint venture
    
    
    (1,335
    )
    
    
    (1,301
    )Voluntary separation and retirement provision
    
    
    1,635
    
    
    
    4,700Minority interest in consolidated subsidiary
    
    
    1,218
    
    
    
    830Gain on sale of land and building
    
    
    (248
    )
    
    
    (824
    )Changes in assets and liabilities:Accounts receivable
    
    
    (14,884
    )
    
    
    (15,631
    )Inventory and supplies
    
    
    3,335
    
    
    
    4,207Prepaid expenses and other assets
    
    
    6,143
    
    
    
    (5,680
    )Other current and non-current liabilities
    
    
    (107,533
    )
    
    
    (29,380
    )Pension and other post-employment benefits
    
    
    (47,376
    )
    
    
    (28,842
    )Net cash provided by operating activities
    
    
    111,856
    
    
    
    153,034CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (66,133
    )
    
    
    (69,335
    )Proceeds from sale of land and building
    
    
    930
    
    
    
    6,000Net salvage on retirements and other
    
    
    202
    
    
    
    183Net cash used in investing activities
    
    
    (65,001
    )
    
    
    (63,152
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (29,580
    )
    
    
    (75,783
    )Borrowings of long-term debt
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    (68,125
    )Net cash provided by/ (used in) financing activities
    
    
    10,420
    
    
    
    (103,908
    )NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    57,275
    
    
    
    (14,026
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    21,732
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    79,007
    
    
    $
    19,641
 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 StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the
Companyor we), holds 100% of the common stock of Puerto Rico Telephone
Company, Inc. (PRTC), PRT Larga Distancia, Inc. (PRTLD), and Datacom
Caribe, Inc. (Datacom). The Company also holds a 67% interest in Coqui.net
Corporation (Coqui.net), in which Popular, Inc., one of our shareholders,
holds the remaining 33% interest. The Company also holds a 24% interest in
Verizon Information Services Puerto Rico, Inc. S. en C. (VISI), in which
GTE Holdings (Puerto Rico) LLC, our majority shareholder also holds a 36%
interest. The Company is the largest telecommunications service provider in
Puerto Rico. PRTC is the incumbent local exchange carrier for the island of
Puerto Rico. Wireline service is provided by PRTC and cellular service is
provided by the wireless division of PRTC, under the brand of Verizon
Wireless Puerto Rico (Verizon Wireless). The Companys off-island long
distance service is provided by PRTLD. The Companys dial-up Internet access
service is provided by Coqui.net and the directory publishing revenues are
generated by VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico)
LLC, acquired a 40% interest and management control over the Company on March
2, 1999 from 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 PoliciesBasis of PresentationThe 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 AssetsAssets are assessed for impairment when changes in circumstances indicate
that their carrying values are not recoverable. Effective, January 1, 2002,
the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Losses are recognized in circumstances where
impairment exists, at the amount by which the carrying value of assets
exceeds fair value. Fair value is determined based on quoted market prices,
if not available, the estimate of fair value is based on various valuation
techniques, including a discounted value of estimated future cash flows and
fundamental analysis. 7




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For the last three years, the Company has been operating a TDMA network and
CDMA network for its wireless clients. During 2003 management decided to
migrate in 2004 all TDMA clients to the CDMA network and subsequently dispose
of the TDMA network. The expected undiscounted future cash flow from
operations on the TDMA network was estimated to be $27 million ($47.4 million
estimated cash flows from operations less $20.4 million of related expenses).
The discounted fair value of the network was estimated to $26 million and
was determined by discounting anticipated discounted future cash flows at a
risk free rate of 3.76%.Since the estimated fair value of $26 million is lower than the $37.8 million
carrying amount of the TDMA network as of December 31, 2003, the Company
recorded an impairment loss of $11.8 million.RestatementThe Companys results of operations for the quarter ended June 30, 2003
have been restated from amounts previously reported. The restated
amounts reflect a change in accounting for directory publishing
revenues, effective January 1, 2003 (see Note 3).ReclassificationsReclassifications of prior periods data have been made to conform to the
current periods presentation.3.
    
    Accounting Change for Directory Revenue RecognitionEffective January 1, 2003, the Company changed its method of accounting for
directory-publishing revenues and related expenses from the
point-of-publication method to the amortization method.Under the point-of-publication method, such revenues and related expenses are
recognized on the date that the directory is published and substantially
delivered. Under the amortization method, pre-publication revenues and
expenses are deferred and capitalized, respectively. Subsequent to
publication, revenues are recognized and expenses amortized over the lives of
the directories, which is generally one year.While both methods fully comply with accounting principles generally
accepted in the United States, the Company adopted the amortization
method because it is becoming the industry standard.The cumulative effect of applying this accounting change to prior years
was recognized as of January 1, 2003 as a one-time, non-cash loss of $17
million ($13 million, after tax). The effect of applying the new method for
the quarter ended March 31, 2003 was a one-time non-cash revenue increase of
$3 million, which was included in operating income.4.
    
    Summary of Recent Accounting PronouncementsAsset Retirement ObligationsOn January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred
and capitalize that amount as part of the book value of the long-lived asset.
We have determined that PRT does not have a material legal obligation to
remove long-lived assets as described by this statement. However, we have
included estimated removal costs in our group depreciation models. These
costs have increased depreciation expense and accumulated depreciation for
future removal costs for existing assets. These removal costs are recorded
as a reduction to accumulated depreciation when the assets are retired and
removal costs are incurred.For some assets, such as telephone poles, the removal costs exceed salvage
value. Under the provisions of SFAS No. 143, we are required to exclude
costs of removal from our depreciation rates for assets for which the removal
costs exceed salvage. Accordingly, in connection with the initial adoption
of this standard on January 1, 2003, we have reversed accrued costs of
removal in excess of salvage from our accumulated depreciation accounts for
these assets. The adjustment was recorded as a cumulative effect of an
accounting change, resulting in the recognition of an estimated gain 8




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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).Amendments of Statement 133 on Derivative Instruments and Hedging
ActivitiesIn April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied
prospectively. However, the provisions of this statement that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters
beginning prior to June 15, 2003 continue to be applied in accordance with
their respective effective dates. The Company evaluated the impact of the
adoption of SFAS No. 149 and concluded that there is no material effect on
its results of operations and financial condition.Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and EquityIn May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
standard clarifies the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. The requirements of this statement apply to issuers
classification and measurement of freestanding financial instruments,
including those that comprise more than one option or forward contract. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company evaluated the
impact of the adoption of SFAS No. 150 and concluded that there is no
material effect on its results of operations and financial condition.Accounting for Revenue Arrangements with Multiple DeliverablesIn November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF No. 00-21 addresses how to account for
arrangements that may involve multiple revenue-generating activities.
Specifically, the issue addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting.
The consensus guidance will be applicable to agreements entered into in
quarters beginning after June 15, 2003. The Company evaluated the impact of
the adoption of EITF No. 00-21 and concluded that there is no material effect
on its results of operations and financial condition. 9




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##### Table of Contents



5.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of: Remaining Useful
    
    June 30,
    
    December 31,Lives (Yrs)
    
    2004
    
    2003Current
    
    Previous
    
    (In thousands)Outside plant
    
    
    8.5
    
    
    
    8.5
    
    
    $
    2,116,875
    
    
    $
    2,097,902Central office and
transmission equipment
    
    
    4.1
    
    
    
    4.1
    
    
    
    1,195,079
    
    
    
    1,184,357Equipment and other
    
    
    3.2
    
    
    
    3.2
    
    
    
    303,318
    
    
    
    323,459Buildings
    
    
    14.3
    
    
    
    14.3
    
    
    
    318,554
    
    
    
    316,052Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    26,266
    
    
    
    26,400Gross plant in service
    
    
    
    
    
    
    
    
    
    
    3,960,092
    
    
    
    3,948,170Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,531,644
    
    
    
    2,455,127Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,428,448
    
    
    
    1,493,043Construction in progress
    
    
    
    
    
    
    
    
    
    
    66,333
    
    
    
    65,203Total
    
    
    
    
    
    
    
    
    
    $
    1,494,781
    
    
    $
    1,558,246
  Under the provisions of SFAS No. 143, we are required to exclude costs of
removal from our depreciation rates for assets for which the removal costs
exceed salvage. Accordingly, in connection with the initial adoption of this
standard on January 1, 2003, we have reversed accrued costs of removal in
excess of salvage from our accumulated depreciation accounts for these
assets. The adjustment was recorded as a cumulative effect of an accounting
change, resulting in the recognition of an estimated gain of $117 million
($71 million after-tax). Effective January 1, 2003, the Company began
expensing costs of removal in excess of salvage for these assets as incurred.
The impact of this change in accounting will result in a decrease in
depreciation expense and an increase 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 are expected to be operational during the fourth
quarter of 2004 at projected capitalized costs for software and labor of
approximately $13 million. As of June 30, 2004, the Company had capitalized
costs of $8 million associated with the new systems.The Company is currently undergoing its periodic review of plant useful lives
estimates. The review incorporates the impact of technology, future
competition and assumptions employed in the industry relative to depreciation
and retirement rates.6.
    
    GoodwillFollowing is a breakdown of goodwill. Carrying ValueJune 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 Carrying ValueJune 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
 June 30, 2004
    
    December 31, 2003(In thousands)Cost
    
    Acc. Amort
    
    Book Value
    
    Cost
    
    Acc. Amort
    
    Book ValueDefinite LifeWireline trade name
    
    $
    48,400
    
    
    $
    10,785
    
    
    $
    37,615
    
    
    $
    48,400
    
    
    $
    9,502
    
    
    $
    38,898Software licenses
    
    
    73,411
    
    
    
    32,472
    
    
    
    40,939
    
    
    
    67,068
    
    
    
    25,805
    
    
    
    41,263Customer base
    
    
    15,544
    
    
    
    15,544
    
    
    
    
    
    
    
    15,544
    
    
    
    15,544
    
    
    
    Other
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    500
    
    
    
    Total Definite Life
    
    $
    137,855
    
    
    $
    59,301
    
    
    $
    78,554
    
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    80,161Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    $
    108,975
    
    
    
    
    
    
    
    
    
    
    $
    108,975Total
    
    $
    137,855
    
    
    $
    59,301
    
    
    $
    187,529
    
    
    $
    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, the Company has evaluated its assets using the fair value
approach for each reporting unit to determine if there is an impairment
exposure (transitional impairment test) and the impact it would have on the
Companys results of operations. The evaluation of the two reporting units
revealed no impairment exposure.The Company is currently undergoing its annual evaluation of assets to
determine if there is an impairment exposure and related impact, if any, to
the Company results of operations of 2004.8.
    
    Other assetsOther assets consist of: June 30 ,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation costs
    
    $
    71,980
    
    
    $
    69,347Notes receivable-equipment sales
    
    
    8,890
    
    
    
    10,446Deferred pension asset
    
    
    19,785
    
    
    
    19,785Deferred financing costs, net
    
    
    2,715
    
    
    
    3,146Other deferred costs
    
    
    1,824
    
    
    
    1,426Interest rate swap
    
    
    620
    
    
    
    2,811Investment in Verizon Information Services
    
    
    1,335
    
    
    
    Other assets
    
    
    1,922
    
    
    
    1,580Total
    
    $
    109,071
    
    
    $
    108,541
 11




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##### Table of Contents



9.
    
    Pension PlanThe Company has noncontributory pension plans for full-time employees, which
are tax qualified as they meet Employee Retirement Income Security Act of
1974 (the ERISA) requirements. The Company realizes tax deductions when
contributions are made to the trusts. The trusts invest in equity and fixed
income securities to meet the benefit obligation.The pension benefit is composed of two elements. An employee receives
an annuity at retirement when they reach the rule of 85 (age plus years of
service). The annuity is calculated by applying a percentage times years of
service to the last three years of salary. The second element is a lump sum
based on years of service, 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,
for the HIETEL union and management employees. Health care and life
insurance benefits are provided to retirees.The components of the net pension and other post-employment benefit
expenses for the quarters ended June 30,(In thousands) Pension and Lump Sum Benefit
    
    Post-Retirement BenefitsThree months ended June 30,
    
    Six months ended June 30,
    
    Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    5,186
    
    
    $
    4,523
    
    
    $
    10,372
    
    
    $
    9,046
    
    
    $
    2,565
    
    
    $
    2,175
    
    
    $
    5,130
    
    
    $
    4,350Interest cost
    
    
    17,567
    
    
    
    16,825
    
    
    
    35,134
    
    
    
    33,650
    
    
    
    9,652
    
    
    
    8,878
    
    
    
    19,304
    
    
    
    17,756Expected return on plan assets
    
    
    (14,910
    )
    
    
    (11,578
    )
    
    
    (29,820
    )
    
    
    (23,156
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    90
    
    
    
    107
    
    
    
    180
    
    
    
    214
    
    
    
    551
    
    
    
    550
    
    
    
    1,102
    
    
    
    1,100Prior service cost (benefit)
    
    
    1,179
    
    
    
    1,186
    
    
    
    2,358
    
    
    
    2,372
    
    
    
    (628
    )
    
    
    (628
    )
    
    
    (1,256
    )
    
    
    (1,256
    )Actuarial gain, net
    
    
    3,518
    
    
    
    3,281
    
    
    
    7,036
    
    
    
    6,562
    
    
    
    4,421
    
    
    
    3,926
    
    
    
    8,842
    
    
    
    7,852Net periodic benefit cost
    
    
    12,630
    
    
    
    14,344
    
    
    
    25,260
    
    
    
    28,688
    
    
    
    16,561
    
    
    
    14,901
    
    
    
    33,122
    
    
    
    29,802Effect of early retirement program
    
    
    
    
    
    
    957
    
    
    
    939
    
    
    
    957
    
    
    
    
    
    
    
    722
    
    
    
    696
    
    
    
    722Total
    
    $
    12,630
    
    
    $
    15,301
    
    
    $
    26,199
    
    
    $
    29,645
    
    
    $
    16,561
    
    
    $
    15,623
    
    
    $
    33,818
    
    
    $
    30,524
  Cash FlowsThe Company expects to contribute $153 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 June 30, 2004, $93
million of pension plan contributions have been made.Medicare Drug ActOn December 8, 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (Medicare Drug Act) was signed into law. The
Medicare Drug Act introduces a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. Any measure of the accumulated postretirement
benefit obligation or net periodic post retirement cost in the financial
statements or accompanying notes do not reflect any amount associated with
the subsidy because federal regulations for determining actuarial equivalence
have not yet been issued in either proposed or final form, which impacts our
ability to estimate the full adoption effects. Without a firm definition of
actuarial equivalence, we are unable to determine if the prescription drug
benefits provided to the Companys plan participants are actuarially
equivalent to Medicare Part D benefits and are therefore unable to quantify
any potential impact at this time. 12




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##### Table of Contents



10.
    
    Early Retirement and Voluntary Separation ProvisionIn 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.11.
    
    Deferred ESOP CompensationThe Employee Stock Ownership Plan (ESOP) acquired a 3% interest in the
Company in 1999 with a $26 million, twenty-year note borrowed from the
Company to establish a contributory investment fund for employees. The ESOP
only invests in shares of the Companys common stock. Shares are held by the
ESOPs trustee and maintained in a suspense account until they are released
to employee participants. The yearly release of shares to participants is
based on the greater of participant contributions plus a Company match of 30%
up to 5% of wages or a minimum based on an amortization schedule. The
minimum is based on the ratio of annual debt service to total debt service
multiplied by the initial 750,000 shares.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 LiabilitiesOther current liabilities consist of: June 30 ,
    
    December 31,2004
    
    2003(In thousands)Accounts payable
    
    $
    20,095
    
    
    $
    58,625Accrued expenses
    
    
    63,471
    
    
    
    75,999Employee benefit accruals
    
    
    56,997
    
    
    
    44,697Carrier payables
    
    
    25,630
    
    
    
    26,388Taxes
    
    
    540
    
    
    
    1,420Interest
    
    
    6,336
    
    
    
    6,351Total
    
    $
    173,069
    
    
    $
    213,480
 13




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##### Table of Contents



13.
    
    DebtDebt consists of: March 31,
    
    December 31,2004
    
    2003(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    399,954
    
    
    $
    399,943Due May 15, 2009 at 6.80%
    
    
    299,905
    
    
    
    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
    
    
    4,996
    
    
    
    6,337Interest rate swap
    
    
    620
    
    
    
    2,811Capital leases
    
    
    277
    
    
    
    377Total
    
    
    828,752
    
    
    
    861,864Less short-term debt
    
    
    60,129
    
    
    
    59,729Long-term debt
    
    $
    768,623
    
    
    $
    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 dealer agreement was signed in November 2000. In March
2004, the Companys existing $400 million bank note credit facility matured.
On March 2, 2004 the Company entered into a new unsecured, $360 million
364-day revolving credit facility with a syndicate of banks and other lenders
for whom Citibank, N.A. acts as administrative agent, Banco Bilbao Vizcaya
Argentaria Puerto Rico acts as syndication agent and Banco Popular de Puerto
Rico, FirstBank Puerto Rico and Scotiabank de Puerto Rico act as
co-documentation agents.Amounts borrowed under this facility are guaranteed by PRTC, and 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 facility 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
June 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 June 30, 2004, the unamortized balance of the deferred
derivative is $5 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
with the financial ratios as specified by term facilities.14.
    
    Other Non-Current LiabilitiesOther non-current liabilities consist of: June 30,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation revenues
    
    $
    71,747
    
    
    $
    69,347Deferred directory-publishing revenues
    
    
    3,008
    
    
    
    12,877Customer deposits
    
    
    26,182
    
    
    
    26,954Other liabilities
    
    
    83,117
    
    
    
    128,227Total
    
    $
    184,054
    
    
    $
    237,405
 15




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##### Table of Contents



15.
    
    Shareholders EquityCommon StockCommon stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at June 30, 2004 and
December 31, 2003.Subscription ReceivableThe subscription receivable reflects receipts from the PRTA originally
recorded at its present value (at an 8% discount rate). As part of the
Acquisition agreement, the PRTA agreed to contribute a total of $200 million
in cash or stock as a capital contribution in equal installments of $40
million over five years beginning on March 2, 2000. The Company employed the
$200 million capital contribution to partially fund its underfunded 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 LossThe accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs which are reflected as an other
asset, associated with the hourly employee pension fund since the accumulated
benefit obligation exceeds the fair value of plan assets.The accumulated other comprehensive loss amount as of December 31, 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.DividendsThe Companys shareholders agreement requires the payment of dividends equal
to at least 50% of consolidated net income to be paid in the following
quarter to the extent funds are legally available.Dividends payments were made in the following periods: 2004
    
    2003(In thousands)
    
    (In thousands)4th Quarter
    
    $
    
    
    
    4th Quarter
    
    $
    3rd Quarter
    
    
    12,386
    
    
    3rd Quarter
    
    
    2nd Quarter
    
    
    
    
    
    2nd Quarter
    
    
    68,1251st Quarter
    
    
    
    
    
    1st Quarter
    
    
    Total
    
    $
    12,386
    
    
    Total
    
    $
    68,125
  The senior notes indentures and credit facility agreements do not contain
dividend restrictions. 16




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##### Table of Contents



16.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial
instruments are as follows: June 30,
    
    December 31,2004
    
    2003Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    79,007
    
    
    $
    79,007
    
    
    $
    21,732
    
    
    $
    21,732Accounts receivable
    
    
    272,757
    
    
    
    272,757
    
    
    
    287,247
    
    
    
    287,247Liabilities:Other current liabilities
    
    $
    173,069
    
    
    $
    173,069
    
    
    $
    213,480
    
    
    $
    213,480Short-term debt
    
    
    60,129
    
    
    
    60,129
    
    
    
    59,729
    
    
    
    59,729Long-term debt,
including interest rate
swap
    
    
    768,623
    
    
    
    814,864
    
    
    
    802,135
    
    
    
    872,822
  17.
    
    Segment ReportingThe Company has two reportable segments: Wireline and Wireless.The Wireline segment consists of:  
    
    Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services, high-speed
private line services, Internet access and public phone service;
    
    Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;
    
    Long distance services including direct dial on-island and
off-island, operator assisted calls, prepaid calling card and high-speed
private line services;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services
to competing long distance operators in Puerto Rico.  The Wireless segment consists of:  
    
    Cellular service; and
    
    Wireless equipment sales.  The accounting policies of the segments are the same as those followed by the
Company (see Note 2). The Company accounts for intersegment revenues at
market prices. 17




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##### Table of Contents



Segment results for the Company are as follow: For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Wireline:Revenues-Local services
    
    $
    139,525
    
    
    $
    148,794
    
    
    $
    278,120
    
    
    $
    294,922Long distance services
    
    
    34,537
    
    
    
    34,770
    
    
    
    73,392
    
    
    
    68,769Access services
    
    
    74,000
    
    
    
    78,601
    
    
    
    147,678
    
    
    
    161,161Directory services and other
    
    
    16,268
    
    
    
    17,576
    
    
    
    32,847
    
    
    
    32,175Total revenues
    
    $
    264,330
    
    
    $
    279,741
    
    
    $
    532,037
    
    
    $
    557,027Operating income
    
    $
    100,926
    
    
    $
    28,189
    
    
    $
    152,897
    
    
    $
    90,990Wireless:Revenues-Cellular services
    
    $
    47,566
    
    
    $
    46,757
    
    
    $
    95,717
    
    
    $
    94,142Paging services
    
    
    
    
    
    
    192
    
    
    
    
    
    
    
    803Equipment sales and other
    
    
    3,932
    
    
    
    2,990
    
    
    
    8,045
    
    
    
    5,875Total revenues
    
    $
    51,498
    
    
    $
    49,939
    
    
    $
    103,762
    
    
    $
    100,820Operating income
    
    $
    (2,588
    )
    
    $
    (2,001
    )
    
    $
    (4,201
    )
    
    $
    (2,617
    )Consolidated:Revenues for reportable segments
    
    $
    315,828
    
    
    $
    329,680
    
    
    $
    635,799
    
    
    $
    657,847Elimination of intersegment revenues
    
    
    (4,090
    )
    
    
    (3,013
    )
    
    
    (7,237
    )
    
    
    (5,738
    )Consolidated revenues
    
    $
    311,738
    
    
    $
    326,667
    
    
    $
    628,562
    
    
    $
    652,109Operating income
    
    $
    98,338
    
    
    $
    26,188
    
    
    $
    148,696
    
    
    $
    88,373
 As of
    
    As ofJune 30,
    
    December 31,Assets
    
    2004
    
    2003Wireline assets
    
    $
    2,550,118
    
    
    $
    2,599,277Wireless assets
    
    
    333,347
    
    
    
    314,172Segment assets
    
    $
    2,883,465
    
    
    $
    2,913,449Elimination of intersegment assets
    
    
    (328,567
    )
    
    
    (292,211
    )Consolidated assets
    
    $
    2,554,898
    
    
    $
    2,621,238
 18




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##### Table of Contents



18.
    
    Condensed Consolidating InformationThe following summarizes the unaudited condensed consolidating financial
information as of June 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. 19




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##### Table of Contents



Condensed Consolidating Balance Sheets
June 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9
    
    
    $
    66,341
    
    
    $
    12,657
    
    
    $
    
    
    
    $
    79,007Intercompany accounts receivable
    
    
    1,070,237
    
    
    
    84,117
    
    
    
    43,522
    
    
    
    (1,197,876
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    272,811
    
    
    
    (54
    )
    
    
    
    
    
    
    272,757Deferred income tax
    
    
    718
    
    
    
    30,237
    
    
    
    31
    
    
    
    
    
    
    
    30,986Inventory and supplies, net
    
    
    
    
    
    
    17,867
    
    
    
    
    
    
    
    
    
    
    
    17,867Prepaid expenses
    
    
    
    
    
    
    26,513
    
    
    
    1,194
    
    
    
    
    
    
    
    27,707Total current assets
    
    
    1,070,964
    
    
    
    497,886
    
    
    
    57,350
    
    
    
    (1,197,876
    )
    
    
    428,324PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,483,955
    
    
    
    10,826
    
    
    
    
    
    
    
    1,494,781GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    289,814
    
    
    
    24,642
    
    
    
    
    
    
    
    314,456DEFERRED INCOME TAX
    
    
    
    
    
    
    208,868
    
    
    
    (602
    )
    
    
    
    
    
    
    208,266INVESTMENT IN SUBSIDIARIES
    
    
    634,576
    
    
    
    
    
    
    
    
    
    
    
    (634,576
    )
    
    
    OTHER ASSETS
    
    
    9,340
    
    
    
    107,442
    
    
    
    (1
    )
    
    
    (7,710
    )
    
    
    109,071TOTAL ASSETS
    
    $
    1,714,880
    
    
    $
    2,587,965
    
    
    $
    92,215
    
    
    $
    (1,840,162
    )
    
    $
    2,554,898LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    60,000
    
    
    $
    60,129
    
    
    $
    
    
    
    $
    (60,000
    )
    
    $
    60,129Intercompany accounts payable
    
    
    73,537
    
    
    
    271,937
    
    
    
    32,257
    
    
    
    (377,731
    )
    
    
    Other current liabilities
    
    
    6,461
    
    
    
    161,119
    
    
    
    5,489
    
    
    
    
    
    
    
    173,069Total current liabilities
    
    
    139,998
    
    
    
    493,185
    
    
    
    37,746
    
    
    
    (437,731
    )
    
    
    233,198LONG-TERM DEBT, excluding current portion
    
    
    768,475
    
    
    
    763,007
    
    
    
    
    
    
    
    (762,859
    )
    
    
    768,623OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    737,422
    
    
    
    
    
    
    
    (4,996
    )
    
    
    732,426Total liabilities
    
    
    908,473
    
    
    
    1,993,614
    
    
    
    37,746
    
    
    
    (1,205,586
    )
    
    
    1,734,247MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,244
    
    
    
    14,244SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    703,884
    
    
    
    485,301
    
    
    
    41,143
    
    
    
    (526,444
    )
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )Retained earnings
    
    
    230,061
    
    
    
    210,435
    
    
    
    13,326
    
    
    
    (223,761
    )
    
    
    230,061Accumulated other comprehensive loss
    
    
    (101,385
    )
    
    
    (101,385
    )
    
    
    
    
    
    
    101,385
    
    
    
    (101,385
    )Total shareholders equity
    
    
    806,407
    
    
    
    594,351
    
    
    
    54,469
    
    
    
    (648,820
    )
    
    
    806,407TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,714,880
    
    
    $
    2,587,965
    
    
    $
    92,215
    
    
    $
    (1,840,162
    )
    
    $
    2,554,898
 20




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##### Table of Contents



Condensed Consolidating Balance Sheets
December 31, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    12,438
    
    
    $
    9,294
    
    
    $
    
    
    
    $
    21,732Intercompany accounts receivable
    
    
    1,059,752
    
    
    
    85,610
    
    
    
    40,608
    
    
    
    (1,185,970
    )
    
    
    Accounts receivable, net
    
    
    1
    
    
    
    287,193
    
    
    
    53
    
    
    
    
    
    
    
    287,247Deferred income tax
    
    
    
    
    
    
    26,158
    
    
    
    
    
    
    
    
    
    
    
    26,158Inventory and supplies, net
    
    
    
    
    
    
    21,202
    
    
    
    
    
    
    
    
    
    
    
    21,202Prepaid expenses
    
    
    
    
    
    
    34,489
    
    
    
    766
    
    
    
    
    
    
    
    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
 21




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended June 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    131,640
    
    
    $
    8,556
    
    
    $
    (3,130
    )
    
    $
    137,066Long distance services
    
    
    
    
    
    
    25,497
    
    
    
    8,283
    
    
    
    (23
    )
    
    
    33,757Access services
    
    
    
    
    
    
    75,018
    
    
    
    
    
    
    
    (1,740
    )
    
    
    73,278Cellular services
    
    
    
    
    
    
    47,620
    
    
    
    
    
    
    
    
    
    
    
    47,620Paging services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Directory and other services and sales
    
    
    
    
    
    
    22,474
    
    
    
    
    
    
    
    (2,457
    )
    
    
    20,017Total revenues
    
    
    
    
    
    
    302,249
    
    
    
    16,839
    
    
    
    (7,350
    )
    
    
    311,738OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    91,852
    
    
    
    834
    
    
    
    
    
    
    
    92,686Other operating expenses
    
    
    178
    
    
    
    48,789
    
    
    
    13,190
    
    
    
    (7,350
    )
    
    
    54,807Early retirement provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    65,341
    
    
    
    566
    
    
    
    
    
    
    
    65,907Total operating costs and expenses
    
    
    178
    
    
    
    205,982
    
    
    
    14,590
    
    
    
    (7,350
    )
    
    
    213,400OPERATING INCOME
    
    
    (178
    )
    
    
    96,267
    
    
    
    2,249
    
    
    
    
    
    
    
    98,338OTHER INCOME (EXPENSE), NET
    
    
    53,263
    
    
    
    (10,543
    )
    
    
    111
    
    
    
    (53,921
    )
    
    
    (11,090
    )INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    53,085
    
    
    
    85,724
    
    
    
    2,360
    
    
    
    (53,921
    )
    
    
    87,248INCOME TAX EXPENSE (BENEFIT)
    
    
    (70
    )
    
    
    33,171
    
    
    
    992
    
    
    
    
    
    
    
    34,093NET INCOME (LOSS)
    
    $
    53,155
    
    
    $
    52,553
    
    
    $
    1,368
    
    
    $
    (53,921
    )
    
    $
    53,155
 22




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended June 30, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    142,684
    
    
    $
    7,241
    
    
    $
    (2,425
    )
    
    $
    147,500Long distance services
    
    
    
    
    
    
    25,253
    
    
    
    8,601
    
    
    
    (36
    )
    
    
    33,818Access services
    
    
    
    
    
    
    79,040
    
    
    
    
    
    
    
    (1,166
    )
    
    
    77,874Cellular services
    
    
    
    
    
    
    46,575
    
    
    
    
    
    
    
    
    
    
    
    46,575Paging services
    
    
    
    
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    192Directory and other services and sales
    
    
    
    
    
    
    22,168
    
    
    
    
    
    
    
    (1,460
    )
    
    
    20,708Total revenues
    
    
    
    
    
    
    315,912
    
    
    
    15,842
    
    
    
    (5,087
    )
    
    
    326,667OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    99,337
    
    
    
    778
    
    
    
    
    
    
    
    100,115Other operating expenses
    
    
    
    
    
    
    128,810
    
    
    
    10,608
    
    
    
    (5,087
    )
    
    
    134,331Voluntary separation and retirement provision
    
    
    
    
    
    
    3,257
    
    
    
    
    
    
    
    
    
    
    
    3,257Depreciation and amortization
    
    
    
    
    
    
    62,028
    
    
    
    748
    
    
    
    
    
    
    
    62,776Total operating costs and expenses
    
    
    
    
    
    
    293,432
    
    
    
    12,134
    
    
    
    (5,087
    )
    
    
    300,479OPERATING INCOME
    
    
    
    
    
    
    22,480
    
    
    
    3,708
    
    
    
    
    
    
    
    26,188OTHER INCOME (EXPENSE), net
    
    
    8,268
    
    
    
    (13,221
    )
    
    
    54
    
    
    
    (8,665
    )
    
    
    (13,564
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    8,268
    
    
    
    9,259
    
    
    
    3,762
    
    
    
    (8,665
    )
    
    
    12,624INCOME TAX EXPENSE
    
    
    
    
    
    
    2,820
    
    
    
    1,536
    
    
    
    
    
    
    
    4,356NET INCOME
    
    $
    8,268
    
    
    $
    6,439
    
    
    $
    2,226
    
    
    $
    (8,665
    )
    
    $
    8,268
 23




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the six months ended June 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    262,623
    
    
    $
    16,788
    
    
    $
    (6,277
    )
    
    $
    273,134Long distance services
    
    
    
    
    
    
    52,757
    
    
    
    19,779
    
    
    
    (42
    )
    
    
    72,494Access services
    
    
    
    
    
    
    150,334
    
    
    
    
    
    
    
    (3,753
    )
    
    
    146,581Cellular services
    
    
    
    
    
    
    95,457
    
    
    
    
    
    
    
    
    
    
    
    95,457Directory and other services and sales
    
    
    
    
    
    
    45,487
    
    
    
    
    
    
    
    (4,591
    )
    
    
    40,896Total revenues
    
    
    
    
    
    
    606,658
    
    
    
    36,567
    
    
    
    (14,663
    )
    
    
    628,562OPERATING COSTS AND EXPENSES:Labor and benefits

    
    
    
    
    
    
    190,511
    
    
    
    1,670
    
    
    
    
    
    
    
    192,181Other operating expenses
    
    
    178
    
    
    
    143,445
    
    
    
    26,705
    
    
    
    (14,663
    )
    
    
    155,665Early retirement provision
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    
    
    
    
    129,252
    
    
    
    1,133
    
    
    
    
    
    
    
    130,385Total operating costs and expenses
    
    
    178
    
    
    
    464,843
    
    
    
    29,508
    
    
    
    (14,663
    )
    
    
    479,866OPERATING INCOME
    
    
    (178
    )
    
    
    141,815
    
    
    
    7,059
    
    
    
    
    
    
    
    148,696OTHER INCOME (EXPENSE), net
    
    
    77,211
    
    
    
    (20,296
    )
    
    
    173
    
    
    
    (78,429
    )
    
    
    (21,341
    )INCOME BEFORE INCOME TAX
    
    
    77,033
    
    
    
    121,519
    
    
    
    7,232
    
    
    
    (78,429
    )
    
    
    127,355INCOME TAX EXPENSE (BENEFIT)
    
    
    (894
    )
    
    
    47,504
    
    
    
    2,818
    
    
    
    
    
    
    
    49,428$
    77,927
    
    
    $
    74,015
    
    
    $
    4,414
    
    
    $
    (78,429
    )
    
    $
    77,927
 24




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the six months ended June 30, 2003
(in thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    282,797
    
    
    $
    14,330
    
    
    $
    (4,589
    )
    
    $
    292,538Long distance services
    
    
    
    
    
    
    49,798
    
    
    
    16,945
    
    
    
    (63
    )
    
    
    66,680Access services
    
    
    
    
    
    
    162,027
    
    
    
    
    
    
    
    (2,298
    )
    
    
    159,729Cellular services
    
    
    
    
    
    
    94,029
    
    
    
    
    
    
    
    
    
    
    
    94,029Paging services
    
    
    
    
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    803Directory and other services and sales
    
    
    
    
    
    
    41,167
    
    
    
    
    
    
    
    (2,837
    )
    
    
    38,330Total revenues
    
    
    
    
    
    
    630,621
    
    
    
    31,275
    
    
    
    (9,787
    )
    
    
    652,109OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    201,420
    
    
    
    1,592
    
    
    
    
    
    
    
    203,012Other operating expenses
    
    
    
    
    
    
    222,490
    
    
    
    20,042
    
    
    
    (9,787
    )
    
    
    232,745Voluntary separation and retirement provision
    
    
    
    
    
    
    4,700
    
    
    
    
    
    
    
    
    
    
    
    4,700Depreciation and amortization
    
    
    
    
    
    
    121,827
    
    
    
    1,452
    
    
    
    
    
    
    
    123,279Total operating costs and expenses
    
    
    
    
    
    
    550,437
    
    
    
    23,086
    
    
    
    (9,787
    )
    
    
    563,736OPERATING INCOME
    
    
    
    
    
    
    80,184
    
    
    
    8,189
    
    
    
    
    
    
    
    88,373OTHER INCOME (EXPENSE), net
    
    
    99,207
    
    
    
    (22,658
    )
    
    
    94
    
    
    
    (100,037
    )
    
    
    (23,394
    )INCOME BEFORE INCOME TAX
    
    
    99,207
    
    
    
    57,526
    
    
    
    8,283
    
    
    
    
    
    
    
    64,979INCOME TAX EXPENSE
    
    
    
    
    
    
    21,113
    
    
    
    3,188
    
    
    
    (100,037
    )
    
    
    24,301INCOME BEFORE CUMULATIVE EFFECT
    
    
    99,207
    
    
    
    36,413
    
    
    
    5,095
    
    
    
    (100,037
    )
    
    
    40,678CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax of $40,672
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    99,207
    
    
    $
    94,942
    
    
    $
    5,095
    
    
    $
    (100,037
    )
    
    $
    99,207
 25




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (1,934
    )
    
    $
    110,413
    
    
    $
    3,377
    
    
    $
    111,856CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (66,120
    )
    
    
    (13
    )
    
    
    (66,133
    )Proceeds from sale of building
    
    
    
    
    
    
    930
    
    
    
    
    
    
    
    930Net salvage on retirements
    
    
    
    
    
    
    203
    
    
    
    (1
    )
    
    
    202Net cash used in investing activities
    
    
    
    
    
    
    (64,987
    )
    
    
    (14
    )
    
    
    (65,001
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (29,480
    )
    
    
    (100
    )
    
    
    
    
    
    
    (29,580
    )Borrowings/(repayment) intercompany loans
    
    
    (8,577
    )
    
    
    8,577
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    1,943
    
    
    
    8,477
    
    
    
    
    
    
    
    10,420NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    9
    
    
    
    53,903
    
    
    
    3,363
    
    
    
    57,275CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    
    
    
    
    12,438
    
    
    
    9,294
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    9
    
    
    $
    66,341
    
    
    $
    12,657
    
    
    $
    79,007
 26




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2003
(in thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    (201
    )
    
    $
    152,089
    
    
    $
    1,146
    
    
    $
    153,034CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (69,049
    )
    
    
    (286
    )
    
    
    (69,335
    )Net salvage on retirements
    
    
    
    
    
    
    364
    
    
    
    (181
    )
    
    
    183Proceeds from sale of building
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Net cash used in investing activities
    
    
    
    
    
    
    (62,685
    )
    
    
    (467
    )
    
    
    (63,152
    )CASH FLOWS FROM FINANCING ACTIVITIES:Due to Parent Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (75,682
    )
    
    
    (101
    )
    
    
    
    
    
    
    (75,783
    )Borrowings of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid
    
    
    (68,125
    )
    
    
    
    
    
    
    
    
    
    
    (68,125
    )Borrowings/(repayments) intercompany loans
    
    
    103,994
    
    
    
    (103,994
    )
    
    
    
    
    
    
    Cash transferred from an affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    187
    
    
    
    (104,095
    )
    
    
    
    
    
    
    (103,908
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (14
    )
    
    
    (14,691
    )
    
    
    679
    
    
    
    (14,026

    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    1
    
    
    
    27,009
    
    
    
    6,657
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (13
    )
    
    $
    12,318
    
    
    $
    7,336
    
    
    $
    19,641
 27




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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 made the
decision to abandon the billing portion of the software system. The amount
of capitalized costs for software and labor related to the billing portion of
$32.3 million was written off and included in operating expenses during the
second quarter of 2003.  In September 2003, the Company established a pre-tax reserve of $73 million,
including interest, for the end-user and AT&T refund referred to in the TRB
Resolution and Order of February 28, 2002. See Managements Discussion
and Analysis of Financial Condition and Results of Operations - Regulatory
and Other Matters  Intra-Island Long Distance Access Rate Dispute for more
information regarding the TRB Resolution and Order of February 28, 2002. In
November 2003, the Company proposed, and two members of the TRB indicated
their support for, a plan to revise the Boards end-user refund order and end
the dispute over this issue. As a result, the 2003 cash flow impact was a
reduction of $16 million to the pre-tax reserve. After a hearing in June
2004, the TRB terminated a stay it had issued and allowed the Company to
continue to implement an 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. 28




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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 June 30, 2004, we had approximately 1.2
million access lines in service, including 909,000 residential and 285,000
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. 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. 29




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##### Table of Contents



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. 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. The Company is currently undergoing its periodic
review of plant useful lives estimates. See Note 5 to the unaudited condensed
consolidated financial statements for further details. 30




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##### Table of Contents



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. 31




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##### Table of Contents



REVENUES Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In millions)
    
    (In millions)WIRELINE:Local
    
    $
    137
    
    
    
    44
    %
    
    $
    148
    
    
    
    45
    %
    
    $
    273
    
    
    
    43
    %
    
    $
    293
    
    
    
    45
    %Network Access
    
    
    73
    
    
    
    23
    
    
    
    78
    
    
    
    24
    
    
    
    147
    
    
    
    23
    
    
    
    160
    
    
    
    25Long Distance
    
    
    34
    
    
    
    11
    
    
    
    34
    
    
    
    11
    
    
    
    72
    
    
    
    12
    
    
    
    67
    
    
    
    10Directory and Other
    
    
    16
    
    
    
    6
    
    
    
    17
    
    
    
    5
    
    
    
    33
    
    
    
    5
    
    
    
    32
    
    
    
    5Total Wireline
    
    
    260
    
    
    
    84
    %
    
    
    277
    
    
    
    85
    %
    
    
    525
    
    
    
    83
    %
    
    
    552
    
    
    
    85
    %WIRELESS:Postpaid Cellular
    
    
    42
    
    
    
    13
    
    
    
    40
    
    
    
    12
    
    
    
    85
    
    
    
    14
    
    
    
    80
    
    
    
    12Prepaid Cellular
    
    
    6
    
    
    
    2
    
    
    
    7
    
    
    
    2
    
    
    
    11
    
    
    
    2
    
    
    
    14
    
    
    
    2Total Cellular
    
    
    48
    
    
    
    15
    
    
    
    47
    
    
    
    14
    
    
    
    96
    
    
    
    16
    
    
    
    94
    
    
    
    14Wireless Equipment
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    8
    
    
    
    1
    
    
    
    6
    
    
    
    1Total Wireless
    
    
    52
    
    
    
    16
    %
    
    
    50
    
    
    
    15
    %
    
    
    104
    
    
    
    17
    %
    
    
    100
    
    
    
    15
    %Revenues
    
    $
    312
    
    
    
    100
    %
    
    $
    327
    
    
    
    100
    %
    
    $
    629
    
    
    
    100
    %
    
    $
    652
    
    
    
    100
    %
 EXPENSES AND CHARGES Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In millions)
    
    (In millions)WIRELINE:Labor and benefits
    
    $
    86
    
    
    $
    92
    
    
    $
    177
    
    
    $
    187Other operating expenses
    
    
    25
    
    
    
    105
    
    
    
    98
    
    
    
    174Total Wireline
    
    
    111
    
    
    
    197
    
    
    
    275
    
    
    
    361WIRELESS:Labor and benefits
    
    
    7
    
    
    
    8
    
    
    
    15
    
    
    
    16Other operating expenses
    
    
    29
    
    
    
    31
    
    
    
    58
    
    
    
    59Total Wireless
    
    
    36
    
    
    
    39
    
    
    
    73
    
    
    
    75OPERATING COSTS AND EXPENSES
    
    
    147
    
    
    
    236
    
    
    
    348
    
    
    
    436OTHER:Voluntary separation and retirement provision
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    5Depreciation and amortization
    
    
    66
    
    
    
    63
    
    
    
    130
    
    
    
    123Interest expense and others
    
    
    11
    
    
    
    14
    
    
    
    22
    
    
    
    24Equity income in joint venture
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Minority interest in consolidated subsidiary
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1Income tax (benefit) expense
    
    
    34
    
    
    
    4
    
    
    
    49
    
    
    
    24Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )Net income
    
    $
    53
    
    
    $
    8
    
    
    $
    78
    
    
    $
    99
 OPERATING DATA Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Access Lines in Service (000s):Residential
    
    
    909
    
    
    
    953
    
    
    
    909
    
    
    
    953Business
    
    
    285
    
    
    
    297
    
    
    
    285
    
    
    
    297Total
    
    
    1,194
    
    
    
    1,250
    
    
    
    1,194
    
    
    
    1,250Cellular Customers (000s):Postpaid
    
    
    246
    
    
    
    233
    
    
    
    246
    
    
    
    233Prepaid
    
    
    103
    
    
    
    120
    
    
    
    103
    
    
    
    120Total
    
    
    349
    
    
    
    353
    
    
    
    349
    
    
    
    353Postpaid Cellular Average
Revenue Per Unit (ARPU)
    
    $
    49
    
    
    $
    53
    
    
    $
    50
    
    
    $
    52Prepaid Cellular ARPU
    
    
    17
    
    
    
    19
    
    
    
    16
    
    
    
    20Combined Cellular ARPU
    
    
    40
    
    
    
    41
    
    
    
    39
    
    
    
    41
 32




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QUARTER ENDED JUNE 30, 2004 COMPARED WITH QUARTER ENDED JUNE 30, 2003 REVENUES. Revenues for the quarter ended June 30, 2004 decreased $15
million, or 5%, to $312 million from $327 million for the same period in 2003. WIRELINE: Wireline revenues include local service, network access, long distance,
directory and other revenues. Wireline revenues for the quarter ended June 30,
2004 decreased $17 million, or 7%, to $260 million from $277 million for the
same period in 2003. 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 June 30, 2004 decreased $11 million, or 8%, to
$137 million from $148 million for the comparable 2003 period. The decrease is
due to decreased revenues from local voice services of $10 million and
decreased revenues from local data services of $1 million. The decrease in
revenues from local voice services was driven by a decrease in revenues from
basic voice services of $10 million mainly due to lower access lines. The
decrease in local data services was driven by a decrease in high speed special
services of $2 million due to a rate reduction, which was partially offset by
an increase in Internet access revenues of $1 million due to an increase in
internet customers. 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 June 30, 2004 decreased $5 million, or 7%, to $73 million
compared to $78 million for the same 2003 period. The decrease was driven by a
decrease in intra-island access revenues of $7 million due to the
implementation of the first, second and third phase rate reduction required by
the TRB in its Resolution and Order issued on February 28, 2002 (the February
2002 Order), which was offset in part by an increase in off-island switching
revenues of $2 million. See Regulatory and Other Matters  Intra-Island Long
Distance Access Rate Dispute 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 June 30, 2004
of $34 million remained constant compared to the same period in 2003. 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 June 30, 2004 decreased $1 million, or 6%,
to $16 million from $17 million for the same period in 2003 due to a decrease
in revenues from wireline equipment sales of $1 million. WIRELESS: Revenues from cellular services and related equipment sales for the three
months ended June 30, 2004 increased $2 million, or 4%, to $52 million from $50
million for the comparable 2003 period. Cellular service revenues for the quarter ended June 30, 2004 increased $1
million, or 2%, to $48 million from $47 million for the same period in 2003.
The increase was primarily the result of an increase of 13,000 post paid
cellular customers for the second 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. Revenues from wireless equipment sales increased $1 million, or 33%, to $4
million for the quarter ended June 30, 2004 from $3 million for the comparable
2003 period. This increase is a result of postpaid contract renewals. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
quarter ended June 30, 2004 decreased $89 million, or 38%, to $147 million from
$236 million reported for the same period in 2003. WIRELINE: Wireline expenses for the quarter ended June 30, 2004 decreased $86
million, or 44%, to $111 million from $197 million for the same period in 2003. 33




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##### Table of Contents



Labor and benefit expenses for the quarter ended June 30, 2004 decreased
$6 million, or 7%, to $86 million from $92 million for the same period in 2003,
which was due to a decrease in salary expense of $4 million and a decrease in
expatriate expenses of $1 million resulting from a headcount reduction for the
quarter ended June 30, 2004 compared to the same period in 2003 and a decrease
in contractor expenses of $1 million as part of cost-containment initiatives. Other operating expenses for the quarter ended June 30, 2004, decreased
$80 million, or 77%, to $25 million from $105 million for the same period in
2003. The decrease was primarily due to $29 million associated with the
write-off of the billing software system abandoned by the Company and
recognized for the quarter ended June 30, 2003, the partial reversal of $43
million of the pre-tax reserve for the end-user and AT&T refund referred to in
the February 2002 Order, a decrease in management fees of $4 million as the
Verizon Management and Technology License Agreement expired on March 2, 2004
and a decrease in bad debt expense of $2 million. See -Regulatory and Other
Matters  Intra-Island Long Distance Access Rate Dispute. WIRELESS: Wireless expenses for the quarter ended June 30, 2004 decreased $3
million, or 8%, to $36 million from $39 million for the same period in 2003. Labor and benefit expenses for the quarter ended June 30, 2004 decreased
$1 million, or 13%, to $7 million from $8 million for the same period in 2003,
which was due to a decrease in salary expenses and expatriate expenses of $1
million resulting from a headcount reduction for the quarter ended June 30,
2004 compared to the same period in 2003. Other operating expenses for the quarter ended June 30, 2004 decreased $2
million, or 7%, to $29 million from $31 million for the comparable 2003 period.
The decrease was due to a decrease in management fees of $1 million due to the
expiration of the Verizon Management and Technology License Agreement on March
2, 2004 and a decrease in cellular roaming expense of $1 million. EARLY 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. 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 a
provision of $3.3 million. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $66 million for the quarter ended June 30, 2004 was $3 million

higher than for the comparable 2003 period. The increase in depreciation and
amortization expense is mainly due to an increase in depreciation expense
related to the TDMA and CDMA networks resulting from the 2003 management
decision to migrate in 2004 all TDMA clients to the CDMA and an increase in
software amortization expense. INTEREST EXPENSE. Interest expense of $11 million for the quarter ended
June 30, 2004 was $3 million lower than for the comparable 2003 period due to a
decrease in capitalized interest of $3 million associated with the write-off of
the billing software system which was abandoned by the Company and recognized
for the quarter ended June 30, 2003. EQUITY INCOME FROM JOINT VENTURE. Equity income from joint venture for
the quarter ended June 30, 2004 remianed constant at $1 million in comparison
with the same period in 2003. This equity income was generated from our 24%
interest in VISI, the largest yellow page publishing company in Puerto Rico. INCOME TAXES. A $34 million tax provision for the quarter ended June 30,
2004 reflects a 39% effective and statutory tax rate. 34




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SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003. REVENUES.
Revenues for the six months ended June 30, 2004 decreased $23
million, or 4%, to $629 million from $652 million for the same period in 2003. WIRELINE: Wireline revenues include local service, network access, long distance,
directory and other revenues. Wireline revenues for the six months ended June
30, 2004 decreased $27 million, or 5%, to $525 million from $552 million for
the same period in 2003. 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 six months ended June 30, 2004 decreased $20 million, or 7%,
to $273 million from $293 million for the same period in 2003. The decrease
was driven by a decrease in revenues from basic voice services of $20 million
mainly due to 5% fewer access lines. 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 six months ended June 30, 2004 decreased $13 million, or 9%, to $147
million compared to $160 million for the same period in 2003. The decrease was
driven by a decrease in intra-island access revenues of $12 million due to the
implementation of the first, second and third phase of the rate reductions
required by the TRB in the February 2002 Order. 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 six months ended June 30,
2004 increased $5 million, or 8%, to $72 from $67 million for the same 2003
period. The increase was due to an increase in on-island private line revenues
of $6 million resulting from an increase in the client base, which was
partially offset by a decrease in intra-island long distance revenues of $1
million due to a decrease in operator services revenue. 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 six months ended June 30, 2004 increased $1 million, or
4%, to $33 million from $32 million for same period in 2003. The increase was
mainly due to an increase in revenues from other services of $3 million due to
an increase in unbundled network services, which was offset in part by a
decrease in revenues from billing and collection services of $1 million and a
decrease in revenues from wireline equipment sales of $1 million. WIRELESS: Revenues from cellular services and related equipment sales for the six
months ended June 30, 2004 increased $4 million, or 4%, to $104 million from
$100 million for the comparable 2003 period. Cellular service revenues for the
six months ended June 30, 2004 increased $2 million, or 3%, to $96 million from
$94 million for the same period in 2003. This increase was primarily the
result of an increase of 13,000 post paid cellular customers for the six months
ended June 30, 2004 compared to the same period in 2003 due to attractive price
plans and the implementation of marketing strategies to align the Companys
product and service offerings with those of Verizon Wireless in the United
States. Revenues from wireless equipment sales increased $2 million, or 34%, to $8
million for the six months ended June 30, 2004 from $6 million for the
comparable 2003 period. This increase is a result of postpaid contract
renewals. 35




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OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six
months ended June 30, 2004 decreased $88 million, or 21%, to $348 million from
$436 million for the same period in 2003. WIRELINE: Wireline expenses for the six months ended June 30, 2004 decreased $86
million, or 24%, to $275 million from $361 million for the same period in 2003. Labor and benefit expenses for the six months ended June 30, 2004
decreased $10 million, or 6%, to $177 million from $187 million for the same
period in 2003, which was due to a decrease in salary expenses of $6 million
and a decrease in expatriate expenses of $2 million as a result of a headcount
reduction for the six months ended June 30, 2004 compared with the same period
in 2003 and a decrease in contractor expenses of $2 million as part of
cost-containment initiatives. Other operating expenses for the six months ended June 30, 2004 decreased
$76 million, or 44%, to $98 million from $174 for the same 2003 period. The
decrease was due to the $29 million associated with the write-off of the
billing software system which was abandoned by the Company and recognized for
the six months ended June 30, 2003, the partial reversal of $43 million of the
pre-tax reserve for the end-user and AT&T refund referred to in the February
2002 Order and a decrease in management fees of $7 million as the Verizon
Management and Technology License Agreement expired on March 2, 2004. See
"-Regulatory and Other Matters  Intra-Island Long Distance Access Rate
Dispute. These decreases were partially offset by higher interconnection
charges of $5 million due to higher traffic. WIRELESS: Wireless expenses for the six months ended June 30, 2004, decreased $2
million, or 3%, to $73 million from $75 million for the same period in 2003. Labor and benefit expenses for the six months ended June 30, 2004
decreased $1 million, or 7%, to $15 million from $16 million for the same
period in 2003, which was due to a decrease in salary expenses, expatriate
expenses and sick day payouts and disability expenses of $1 million as a result
of a headcount reduction for the six months ended June 30, 2004 compared with
the same period in 2003. Other operating expenses for the six months ended June 30, 2004 decreased
$1 million, or 2%, to $58 million from $59 million for the comparable 2003
period. The decrease was due to lower commission expenses of $1 million. EARLY 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 $130 million for the six months ended June 30, 2004 was $7 million
higher than for the comparable 2003 period. The increase in depreciation and
amortization expense is mainly due to an increase in depreciation expense
related to the TDMA and CDMA networks that resulted from the 2003 management
decision to migrate in 2004 all TDMA clients to the CDMA and an increase in
software amortization. INTEREST EXPENSE. Interest expense of $22 million for the six months
ended June 30, 2004 was $2 million lower than for the same 2003 period due to a
decrease in capitalized interest of $3 million associated with the write-off of
the billing software system which was abandoned by the Company and recognized
for the six months ended June 30, 2003. EQUITY INCOME FROM JOINT VENTURE. Equity income from joint venture for
the six months ended June 30, 2004, remained constant at $1 million in
comparison with the the same period in 2003. This equity income was generated
from our 24% interest in VISI, the largest yellow page publishing company in
Puerto Rico. 36




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##### Table of Contents



MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. The $1 million minority
interest included in the Companys results of operations for the six months
ended June 30, 2004 reflects the 33% interest in Coqui.net, which is held by
Popular, Inc., one of our shareholders. INCOME TAXES. A $49 million tax provision for the six months ended June
30, 2004 reflects a 38.6% effective tax rate. The difference between the
effective and the statutory tax rate of 39% equates to $2 million, primarily
reflecting permanent differences related to 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). 37




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LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED FINANCIAL CONDITION SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003 Six Months Ended June 30,2004
    
    2003
    
    Change(in Millions)Net cash provided by (used in):Operations
    
    $
    112
    
    
    $
    153
    
    
    $
    (41
    )Investing
    
    
    (65
    )
    
    
    (63
    )
    
    
    (2
    )Financing
    
    
    10
    
    
    
    (104
    )
    
    
    114
 OVERALL LIQUIDITY ASSESSMENT The Company believes that cash provided by operations is sufficient to
meet its working capital needs. At June 30, 2004, current assets exceeded
current liabilities by $195 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. In March 2004, the Companys $400 million bank note credit facility
matured. On March 2, 2004, the Company entered into a new unsecured, undrawn
$360 million 364-day revolving credit facility which matures in March 2005, as
well as an undrawn $40 million working capital credit facility which matured in
June 2004. In June 2004, the Company renewed the $40 million working capital
credit facility with a maturity date of 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 six months ended June 30, 2004, net cash provided by
operating activities was $112 million compared to $153 million for the same
period in 2003. The $41 million decrease was primarily due to a $8 million in
collections under interconnection agreements, a $20 million increase in pension
plan contributions due to the implementation of managements strategy to fully
fund the pension plans, a $3 million increase in early retirement and voluntary
separation program payments and a $26 million decrease in collections directly
associated with the decrease in revenues due to fewer access lines, which was
offset in part by a $17 million decrease in income tax payments related to the
increase in pension funding. INVESTING Net cash used in investing activities for the six months ended June 30,
2004 was $65 million compared to $63 million for the same period in 2003. The
$2 million increase in cash used in investing activities was due to a $5
million decrease in proceeds from the sale of buildings and a $3 million
decrease in capital expenditures and costs of removal as a result of decreased
spending on specific software projects, as well as a general decrease in
spending as the Company aligned its capital spending with softening demand for
new wireline service. We have invested approximately $1.2 billion from the date of the
Acquisition through June 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. 38




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##### Table of Contents



FINANCING Net cash provided by financing activities for the six months ended June
30, 2004 was $10 million, while net cash used in financing activities for the
same period in 2003 was $104 million. We reduced outstanding debt, including
capital leases by $30 million for the six months ended June 30, 2004 and $76
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 June 30, 2004 and from $323 million at
December 31, 2002 to $247 million at June 30, 2003. In the Acquisition, PRTA agreed to contribute cash or stock worth a total
of $200 million as a capital contribution in five equal $40 million
installments over five years beginning on March 2, 2000 to partially fund its
underfunded pension and other post-employment benefit obligations. In March
2004, 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 six months ended June 30, 2004,
the Company did not pay any dividends. In the first quarter of 2004, however,
the Company declared dividends in the amount of $12 million, which were not
paid until July 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 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 that are material to investors. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The following table provides a summary of our contractual obligations and
commercial commitments at June 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
    
    
    423
    
    
    
    153
    
    
    
    141
    
    
    
    89
    
    
    
    32
    
    
    
    8
    
    
    
    Operating Leases
    
    
    47
    
    
    
    12
    
    
    
    10
    
    
    
    7
    
    
    
    4
    
    
    
    2
    
    
    
    12Total
    
    $
    1,298
    
    
    $
    165
    
    
    $
    274
    
    
    $
    501
    
    
    $
    36
    
    
    $
    10
    
    
    $
    312
 39




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REGULATORY AND OTHER MATTERS REGULATORY AND COMPETITIVE TRENDS Regulatory activity at the federal and local levels has been primarily
directed at meeting challenges in maintaining support for local exchange rates
and Universal Service while affecting the rate rebalancing and regulatory
restructuring required by an increasingly competitive environment. Among the
issues generating regulatory activity are: local number portability
requirements, interconnection agreements, the FCCs triennial review and the
elimination of reverse toll billing. We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to interconnect their networks with ours. INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE On February 28, 2002, the TRB issued 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 beginning on April 1, 2000 through March 31, 2002. PRTC was allowed to
pay the refund in 12 equal quarterly installments beginning on April 1, 2002.
The Company filed with the Puerto Rico Circuit Court of Appeals (the Court)
an appeal of the February 2002 Order in which the Company alleged that the TRB
made errors of law and procedure in its determination of access charges and its
order requiring the Company to pay the cash refund. On March 27, 2002, the
Court stayed the refund and the rate reduction until the hearing of the appeal. On April 2, 2002, AT&T, Sprint and TLD (the Carriers) filed a petition
with the Court for review of the February 2002 Order, requesting that the Court
order the rate reduction without a phase-in period, remand the case back to the
TRB, direct the TRB to calculate the refund from the period beginning on April
1997 instead of April 2000, and require that the refund be paid to the Carriers
instead of end-user customers. The hearing involving oral presentations by the parties was held on
February 19, 2003. On April 22, 2003, the parties filed their corresponding
post-hearing final briefs submitting the case for adjudication. On August 19,
2003, the Court issued its final decision on the proceeding confirming the
February 2002 Order 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, it erred in applying those standards to the facts
of the case. On October 2, 2003, the Court denied PRTCs reconsideration. As
a result of the Courts decision, the Company established a pre-tax reserve of
$73 million, including interest, in September 2003 for the end-user and AT&T
refund referred to in the February 2002 Order. This reserve is in addition to
the reserve established in connection with the stay of the February 2002 Order
on Reconsideration issued by the Court. On October 30, 2003, the Company filed a petition for a writ for
certiorari before the Puerto Rico Supreme Court challenging the $68 million
refund portion of the February 2002 Order. The prospective phase down portion
of the February 2002 Order was settled with certain major carriers and
implementing tariffs were filed with the TRB as discussed below. In November 2003, the Company proposed, and two members of the TRB
indicated their support for an integrated plan to revise the refund portion of
the February 2002 Order and end the dispute over this issue. First, PRTC filed
tariffs 40




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implementing the reduction in intra-island access charges ordered by the
TRB in its February 2002 Order. The composite per minute access rate was
reduced from 9.3 cents to 6.5 cents on January 1, 2004 and to 5.0 cents on
April 1, 2004, and will decrease to 2.1 cents on April 1, 2005. Second, PRTC
agreed to implement a phased reduction in the number of local exchange calling
areas from 68 to 10, the first phase of which became effective in February
2004, coupled with the deferred implementation of a flat charge designed to
offset the resulting revenue losses. Five of the 10 new calling zones have
been implemented, and the remaining five zones will be implemented by the end
of October, 2004. Third, the plan included a number of other elements
benefiting consumers: elimination of touchtone charges; one-time credits for
single line residential customers equal to their basic monthly service rate in
December 2003 and June 2005; and a commitment not to raise residential rates
through December 2006 without providing certain information to the TRB in
advance. While the TRB has indicated their support to these commitments, it
has not issued a final resolution and order to terminate the refund provisions
in the Order. The plans impact on cash flow for 2003 was a reduction of $16
million in the pre-tax reserve associated with the December 2003 single line of
credit refund. On February 4, 2004, Centennial filed with the Puerto Rico Supreme Court
an opposition to PRTCs petition requesting that the Court hold the case in
abeyance until the TRB issued a Resolution and Order confirming the commitments
which were negotiated in November 2003. On April 6, 2004, Centennial filed a
motion to dismiss the petition, 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 refund portion of the February 2002
Order, pending the petition for certiorari before the Puerto Rico Supreme
Court. As such, 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
relating to PRTCs petition. On April 29, 2004, PRTC and Centennial jointly
filed a motion with the Puerto Rico Supreme Court, providing notice 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 mootness. EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE In December 2003, AT&T and Sprint, (and later 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 which was
held on April 28, April 30 and May 3, 2004 and determined that the carriers
request for injunctive relief should not proceed. The TRB allowed PRTC to
implement its EAS Phase IV, which covers Puerto Ricos east area, as scheduled
on May 4, 2004, but ordered a stay to suspend the next pahase of the EAS
implementation until an investigation 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. As a result of the TRBs determination subsequent to the hearing of June
2, 2004, the Company reduced the reserve originally established on September
2003, mentioned above, to $14 million. As of July 2004, the Company has implemented six phases among the major
metropolitan areas with the remaining four phases scheduled for completion in
2004. 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. 41




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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. We filed a motion to dismiss the lawsuit and are awaiting a decision
from the court. The lawsuit is currently in the discovery stage. 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, after having evaluated and determined that this lawsuit is
similar to TPPRs lawsuit, we filed a motion to dismiss the lawsuit and/or in
the alternative to consolidate the lawsuit with TPPRs lawsuit. The Court
dismissed PRTCs motion to dismiss without prejudice. However, the motion for
consolidation has not yet been resolved. 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 complaint for over $9 million against 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. The Companys management believes that all of these claims are without
merit. PUERTO RICO DEPARTMENT OF EDUCATION (THE PRDOE) DEBT On June 30, 2003, PRTC filed a complaint against the PRDOE with the 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 service 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 is approximately $1.2 million,
after SLD paid its corresponding percentage (87%) under the program. On March 4, 2004, PRTC filed a motion to dismiss the complaint based on an
agreement with the PRDOE to attempt to settle the amounts owed out of court.
On March 24, 2004, the court dismissed the case without prejudice. In November 2003, the FCC directed SLD to audit the PRDOEs compliance
with the E-Rate program rules as well as billings for the Reeducate Program for
years one through three of the program before the funds will be released. The
audit of the PRDOE began on May 15, 2004. The auditor has contacted PRTC and
PRTC is cooperating with the audit. There is no scheduled timetable for the
completion of the audit process. Upon completion of that audit, SLD will
determine if any need exists 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. TOUCHTONE CHARGES 42




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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 are therefore in violation 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. PRTC will ask the Superior Court to first
decide the threshold issue of class certification. On February 23, 2004, the
Superior Court issued an order scheduling a status conference for April 30,
2004. At the hearing, 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. Therefore, 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 interrodatories on July 6 and
July 16, 2004, respectively. Disagreeing with the Superior Courts decision
ordering PRTC to submit responses to the discovery on the merits without having
certified the class, PRTC filed a writ of certiorari with the Puerto Rico Court
of Appeals seeking reversal of the Superior Courts order allowing unlimited
discovery including class certification on July 16, 2004. 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
predecessors 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 based on the fact that the wireless entity was set up after the
last regulated intrastate rate increase in 1982 and therefore these costs were
not included in setting such rates. Currently, the TRB is performing an agreed upon procedures audit, which
includes an audit of the CTI asset transfer. The audit is the field work
stage. While we believe that the resolution of this matter and any related
proceedings will not have a material effect on the Companys financial
condition and results of operations, we cannot 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 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 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. 43




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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 priciples. 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 on the expected timing for the completion of this proceeding. INTERSTATE HIGH COST SUBSIDY On October 21, 1999, the FCC adopted a new high cost loop support
mechanism for non-rural companies, which has resulted in the phase out of the
Companys high cost loop subsidy revenues. The Company is classified as a
non-rural telephone company under the United States Telecommunications Act of
1996. The Companys high cost loop revenues were $49 million in 2000, $33
million in 2001 and $4 million in 2002. On February 28, 2003, PRTC sent a
letter to the FCC, requesting that the FCC take action to restore the high-cost
loop universal service support that the Company lost due to FCC policies
adopted for non-rural telephone companies and arguing that the non-rural
telephone company mechanism is based on cost characteristics of mainland
telephone companies. PRTC requested that the FCC address the loss of its high
cost loop universal service support by adopting rules for insular areas that
are similar to those applied to rural carriers. If rural carrier rules were
applied to PRTC it would continue to receive high cost loop support as it had
prior to the adoption of the FCCs 1999 rules for non-rural telephone
companies. On October 27, 2003, the FCC issued an order rejecting PRTCs
request for reconsideration that it be considered a rural carrier. However,
the order did not address, however, 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 a high wholesale discount, 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. In addition, a
request for stay of the new interconnection agreement until the reconsideration
was finally resolved. At the same time, WorldNet also filed a request for
reconsideration. On June 17, 2004, the TRB issued a Resolution and Order
accepting both, PRTC and WorldNets, 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 June 7, 2004). On June 25, 2004,
PRTCs motion for a stay was granted. 44




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RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements, see Note 4 to our
unaudited condensed consolidated financial statements. 45




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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 interest rate changes on our senior notes and interest rate swap
agreements. The following table summarizes the fair value of our senior notes and
interest rate swap at June 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 it is not
significantly affected by changes in market interest rates. Fair ValueAssuming 100 Basis PointBook Value
    
    Fair Value
    
    Increase
    
    Decrease(In thousands)June 30, 2004:Senior notes
    
    $
    699,859
    
    
    $
    746,100
    
    
    $
    725,599
    
    
    $
    767,451Interest rate swap
    
    
    620
    
    
    
    620
    
    
    
    (743
    )
    
    
    1,435Total
    
    $
    700,479
    
    
    $
    746,720
    
    
    $
    724,856
    
    
    $
    768,886December 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
 46




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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) that are designed to ensure that information required to be disclosed
in the Companys reports is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. In designing
and evaluating the Companys disclosure controls and procedures, the Companys
chief executive officer and chief financial officer recognized that any
controls and procedures, no matter how well-designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Companys chief executive officer and chief financial officer have evaluated
the effectiveness of the Companys disclosure controls and procedures, as of
the end of the period covered by this report (the Evaluation Date). They
have concluded that as of the Evaluation Date, the Companys disclosure
controls and procedures were effective at the reasonable assurance level. There has been no change in the Companys internal control over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 47




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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. Changes in 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 and Reports on Form 8-K a) See Exhibit Index on page following signatures. b) No reports on Form 8-K were filed during the quarter for which
this report is filed. 48




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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:
    
    August 16, 2004By:
    /s/ Adail OrtizName:
    
    Adail OrtizTitle:
    
    Vice President Finance and
Chief Financial OfficerDate:
    
    August 16, 2004By:
    /s/ Raúl E. GarcíaName:
    
    Raúl E. GarcíaTitle:
    
    ControllerDate:
    
    August 16, 2004
 49




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EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as amended
(File 333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation of
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on Form
10-K for the year ended December 31, 1999 (File 333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc. (Incorporated
by reference to Exhibit 3.4 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New York.
(Incorporated by reference to Exhibit 4.1 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., Puerto Rico Telephone Authority and the
shareholders of Telecomunicaciones de Puerto Rico, Inc., who
shall from time to time be parties thereto as provided therein.
(Incorporated by reference to Exhibit 10.5 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.2
    
    Amended and Restated Puerto Rico Management Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.6 of the Companys Registration Statement filed on
Form S-4, as amended (File 333-85503)).10.3
    
    Amended and Restated U.S. Management Agreement, dated as of March
2, 1999, by and among Telecomunicaciones de Puerto Rico, Inc.,
Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.7 of the Companys Registration Statement filed on
Form S-4, as amended (File 333-85503)).10.4
    
    Amended and Restated Technology Transfer Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference to
Exhibit 10.8 of the Companys Registration Statement filed on
Form S-4, as amended (File 333-85503)).10.5
    
    Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority, and
the Government Development Bank for Puerto Rico. (Incorporated
by reference to Exhibit 10.9 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.6
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.7
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and Telecomunicaciones de
Puerto Rico, Inc. (Incorporated by reference to Exhibit 10.13
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.8
    
    Pledge Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of Telecomunicaciones
de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 10.15 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).
 50




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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)).
 51




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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)).
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 on10.27
    
    Form 10-Q for the period ended June 30, 2003 (File 333-85503)).10.28
    
    364-Day Credit Agreement dated as of March 2, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico
Telephone Company, Inc., as Guarantor, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Banco Bilbao
Vizcaya Argentaria Puerto Rico, as Syndication Agent, and Banco
Popular de Puerto Rico, Firstbank Puerto Rico and Scotiabank de
Puerto Rico, as Co-documentation Agents. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on Form
10-K for the year ended December 31, 2003 (File 333-85503)).
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.29
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Brotherhood of Telephone Company
Employees effective from January 1, 2004 until December 31, 2008.
Approved on April 15, 2004. (Incorporated by reference to
Exhibit 10.29 of the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 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. (Filed herewith).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. (Filed
herewith).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. (Filed herewith).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.
(Filed herewith).31.1
    
    Certification of Principal Executive Officer (Filed herewith).31.2
    
    Certification of Principal Financial Officer (Filed herewith).32.1
    
    Certification Required by 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
herewith).
 53