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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: March 31, 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
INCORPORATION OR ORGANIZATION)
    
    (IRS EMPLOYER IDENTIFICATION NO.)1515 FD Roosevelt Avenue
Guaynabo, 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 May 14,
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March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of
Operations Three Months Ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of
Changes in Shareholders EquityThree Months Ended March 31, 2004 and Year Ended
December 31, 2003
    
    
    5Condensed Consolidated Statements of
Cash FlowsThree Months Ended March 31, 2004 and 2003
    
    
    6Notes to Condensed Consolidated
Financial Statements
    
    
    7Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and
Qualitative Disclosures about Market Risk
    
    
    41Item 4. Controls and
Procedures
    
    
    42Part II. Other
InformationItem 1. Legal
Proceedings
    
    
    43Item 2. Changes in Securities and
Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior
Securities
    
    
    43Item 4. Submission of Matters to a
Vote of Security Holders
    
    
    43Item 5. Other
Information
    
    
    43Item 6. Exhibits and Reports on
Form 8-K
    
    
    43Signatures
    
    
    44Exhibit Index
    
    
    45Collective Bargaining AgreementCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Required by 18 U.S.C. Section 1350
 2




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##### Table of Contents



PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Balance Sheets (In thousands) (Unaudited)March 31,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    43,026
    
    
    $
    21,732Accounts receivable, net of allowance for doubtful
accounts
of $128,999 and $131,106 in 2004 and 2003, respectively
    
    
    287,815
    
    
    
    287,247Deferred income tax
    
    
    27,224
    
    
    
    26,158Inventory and supplies, net
    
    
    15,034
    
    
    
    21,202Prepaid expenses
    
    
    41,692
    
    
    
    35,255Total current assets
    
    
    414,791
    
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,513,139
    
    
    
    1,558,246GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    189,324
    
    
    
    189,136DEFERRED INCOME TAX
    
    
    234,968
    
    
    
    246,794OTHER ASSETS
    
    
    112,209
    
    
    
    108,541TOTAL ASSETS
    
    $
    2,591,358
    
    
    $
    2,621,238LIABILITIES AND SHAREHOLDERS
EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    30,175
    
    
    $
    59,729Other current liabilities
    
    
    196,246
    
    
    
    213,480Total current liabilities
    
    
    226,421
    
    
    
    273,209LONG-TERM DEBT, excluding current portion
    
    
    803,292
    
    
    
    802,135PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    553,343
    
    
    
    594,113OTHER NON-CURRENT LIABILITIES
    
    
    229,078
    
    
    
    237,405Total liabilities
    
    
    1,812,134
    
    
    
    1,906,862MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY
    
    
    13,586
    
    
    
    13,025COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock
    
    
    703,884
    
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    (26,153
    )Subscription receivable
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    189,292
    
    
    
    164,520Accumulated other comprehensive loss, net of
taxes
    
    
    (101,385
    )
    
    
    (101,385
    )Total shareholders equity
    
    
    765,638
    
    
    
    701,351TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    2,591,358
    
    
    $
    2,621,238
 The accompanying
notes are an integral part of these financial statements. 3




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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries 
 Condensed Consolidated Statements of Operations (In thousands) As Restated(See Note 2)For the Three Months EndedMarch 31,2004
    
    2003(Unaudited)REVENUES:Local services
    
    $
    136,068
    
    
    $
    145,038Long distance services
    
    
    38,737
    
    
    
    32,862Access services
    
    
    73,303
    
    
    
    81,855Cellular services
    
    
    47,837
    
    
    
    47,454Paging services
    
    
    
    
    
    
    611Directory services and other
    
    
    20,879
    
    
    
    17,622Total revenues
    
    
    316,824
    
    
    
    325,442OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    99,495
    
    
    
    102,897Other operating expenses
    
    
    100,858
    
    
    
    98,414Early
retirement and voluntary separation provision
    
    
    1,635
    
    
    
    1,443Depreciation and amortization
    
    
    64,478
    
    
    
    60,503Total operating costs and expenses
    
    
    266,466
    
    
    
    263,257OPERATING INCOME
    
    
    50,358
    
    
    
    62,185OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (10,348
    )
    
    
    (10,183
    )Equity income from joint venture
    
    
    657
    
    
    
    786Minority interest in consolidated
subsidiary
    
    
    (560
    )
    
    
    (433
    )Total other expense, net
    
    
    (10,251
    )
    
    
    (9,830
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    40,107
    
    
    
    52,355INCOME TAX EXPENSE
    
    
    15,335
    
    
    
    19,945INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    24,772
    
    
    
    32,410CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of taxes of $40,672
    
    
    
    
    
    
    58,529NET INCOME
    
    $
    24,772
    
    
    $
    90,939
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income, for the three months ended
March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,772
    
    
    
    
    
    
    
    24,772Accretion of discount on subscription
receivable
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (485
    )PRTA capital contribution
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000BALANCE, MARCH 31, 2004
    
    $
    703,884
    
    
    $
    (26,153
    )
    
    $
    
    
    
    $
    189,292
    
    
    $
    (101,385
    )
    
    $
    765,638
 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 Three Months EndedMarch 31,2004
    
    2003(Unaudited)CASH FLOWS FROM OPERATING ACTVITIES:Net income
    
    $
    24,772
    
    
    $
    90,939Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    64,478
    
    
    
    60,503Provision for uncollectible accounts
    
    
    15,430
    
    
    
    14,525Cumulative effect of accounting change
    
    
    
    
    
    
    (58,529
    )Deferred income tax
    
    
    10,761
    
    
    
    Accretion of discount on subscription
receivable
    
    
    (485
    )
    
    
    (1,199
    )Equity income from joint venture
    

    
    (657
    )
    
    
    (786
    )Early
retirement and voluntary separation provision
    
    
    1,635
    
    
    
    1,443Minority interest in consolidated
subsidiary
    
    
    560
    
    
    
    433Changes in assets and liabilities:Accounts receivable
    
    
    (15,998
    )
    
    
    (6,839
    )Inventory and supplies
    
    
    6,168
    
    
    
    2,253Prepaid expenses and other assets
    
    
    (7,631
    )
    
    
    (10,247
    )Other current and non-current liabilities
    
    
    (26,356
    )
    
    
    17,749Pension and other post-employment benefits
    
    
    (42,280
    )
    
    
    (51,125
    )Net cash provided by operating activities
    
    
    30,397
    
    
    
    59,120CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (19,623
    )
    
    
    (31,986
    )Net salvage on retirements and other
    
    
    64
    
    
    
    115Net cash used in investing activities
    
    
    (19,559
    )
    
    
    (31,871
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    40,000Net repayments of short-term debt, including capital
leases
    
    
    (29,544
    )
    
    
    (77,730
    )Dividends paid
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    10,456
    
    
    
    (37,730
    )NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    21,294
    
    
    
    (10,481
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    21,732
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    43,026
    
    
    $
    23,186
 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, Inc. (Verizon Wireless). The Companys off-island
long distance service is provided by PRTLD. The Companys dial-up Internet
access service is provided by Coqui.net. The Companys directory publishing
revenues are generated by VISI.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico)
LLC, acquired a 40% interest 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.PRTC/Verizon Wireless MergerOn May 1, 2002, the Company completed a tax-free reorganization whereby it
merged Verizon Wireless Puerto Rico, Inc. (Verizon Wireless), a wholly
owned subsidiary of the Company, into PRTC. Prior to the merger, the Company
created a new wholly owned subsidiary, PRTLD, to carry the off-island long
distance business previously provided by Verizon Wireless. The objectives of
the reorganization were to (i) integrate the wireline and wireless operations
without jeopardizing the continuity of the off-island long distance license,
(ii) simplify the overall corporate structure to reduce administrative costs,
and (iii) provide better control and monitoring of the off-island long
distance business and increase its potential for growth in Puerto Rico. As a
result of this merger, the Company released a deferred tax valuation
allowance related to the Acquisition of $93 million, approximately $51
million of which was recorded against goodwill and $42 million was recorded
as a deferred tax benefit in the Companys consolidated statement of income
for the second quarter of 2002 in accordance with Statements of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. 7




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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.RestatementThe Companys results of operations for the quarter ended March 31, 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 PronouncementsBusiness Combinations and Accounting for Goodwill and Other IntangiblesThe Company adopted SFAS No. 142 Goodwill and Other Intangible Assets,
effective January 1, 2002, which provides guidance on the initial recognition
and measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 no longer permits the amortization of
goodwill and other indefinite-lived intangible assets. Instead, these assets
must be reviewed annually (or, under certain conditions, more frequently) for
impairment in accordance with this statement. This impairment test uses fair
value approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The 8




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Company has evaluated its assets using the fair value approach for each
reporting unit to determine if there is an impairment exposure (transitional
impairment test) and the impact it would have on the Companys results of
operations for 2003.The Company is currently undergoing its annual evaluation of assets, to
determine if there is an impairment exposure and any impact in the Company
results of operations of 2004.Asset Retirement ObligationsOn January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred
and capitalize that amount as part of the book value of the long-lived asset.
We have determined that PRT does not have a material legal obligation to
remove long-lived assets as described by this statement. However, we have
included estimated removal costs in our group depreciation models. These
costs have increased depreciation expense and accumulated depreciation for
future removal costs for existing assets. These removal costs are recorded
as a reduction to accumulated depreciation when the assets are retired and
removal costs are incurred.For some assets, such as telephone poles, the removal costs exceed salvage
value. Under the provisions of SFAS No. 143, we are required to exclude
costs of removal from our depreciation rates for assets for which the removal
costs exceed salvage. Accordingly, in connection with the initial adoption
of this standard on January 1, 2003, we have reversed accrued costs of
removal in excess of salvage from our accumulated depreciation accounts for
these assets. The adjustment was recorded as a cumulative effect of an
accounting change, resulting in the recognition of an estimated gain of $117
million ($71 million after-tax). Effective January 1, 2003, we began
expensing costs of removal in excess of salvage for these assets as incurred.
The impact of this change in accounting resulted in a decrease in
depreciation expense and an increase in operational and support expenses.
The net increase to operating income in 2003, excluding the cumulative effect
adjustment, was approximately $12 million ($7 million after-tax).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 9




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whether an arrangement involving multiple deliverables contains more than one
unit of accounting. The consensus guidance will be applicable to agreements
entered into in quarters beginning after June 15, 2003. The Company
evaluated the impact of the adoption of EITF No. 00-21 and concluded that
there is no material effect on its results of operations and financial
condition.5.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of: Remaining Useful
    
    March 31,
    
    December 31,Lives (Yrs)
    
    2004
    
    2003Current
    
    Previous
    
    (In thousands)Outside plant
    
    
    8.5
    
    
    
    8.5
    
    
    $
    2,105,610
    
    
    $
    2,097,902Central office and
transmission equipment
    
    
    4.1
    
    
    
    4.1
    
    
    
    1,186,689
    
    
    
    1,184,357Equipment and other
    
    
    3.2
    
    
    
    3.2
    
    
    
    321,441
    
    
    
    323,459Buildings
    
    
    14.3
    
    
    
    14.3
    
    
    
    317,699
    
    
    
    316,052Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    26,400
    
    
    
    26,400Gross plant in service
    
    
    
    
    
    
    
    
    
    
    3,957,839
    
    
    
    3,948,170Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,495,242
    
    
    
    2,455,127Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,462,597
    
    
    
    1,493,043Construction in progress
    
    
    
    
    
    
    
    
    
    
    50,542
    
    
    
    65,203Total
    
    
    
    
    
    
    
    
    
    $
    1,513,139
    
    
    $
    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 $13.2 million. As of March 31, 2004, the Company had
capitalized cost of $3.6 million associated with the new systems.6.
    
    GoodwillFollowing is a breakdown of goodwill by reporting unit. Carrying ValueMarch 31,
    
    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 ValueMarch 31,
    
    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
 March 31, 2004
    
    December 31, 2003(In thousands)Cost
    
    Acc. Amort
    
    Book Value
    
    Cost
    
    Acc. Amort
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    10,143
    
    
    $
    38,257
    
    
    $
    48,400
    
    
    $
    9,502
    
    
    $
    38,898Software licenses
    
    
    70,922
    
    
    
    28,830
    
    
    
    42,092
    
    
    
    67,068
    
    
    
    25,805
    
    
    
    41,263Customer base
    
    
    15,544
    
    
    
    15,544
    
    
    
    
    
    
    
    15,544
    
    
    
    15,544
    
    
    
    Other
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    500
    
    
    
    Total Definite Life
    
    $
    135,366
    
    
    $
    55,017
    
    
    $
    80,349
    
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    80,161Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    $
    108,975
    
    
    
    
    
    
    
    
    
    
    $
    108,975Total
    
    $
    135,366
    
    
    $
    55,017
    
    
    $
    189,324
    
    
    $
    131,512
    
    
    $
    51,351
    
    
    $
    189,136
  8.
    
    Other assetsOther assets consist of: March 31,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation costs
    
    $
    69,885
    
    
    $
    69,347Notes receivable-equipment sales
    
    
    9,918
    
    
    
    10,446Deferred pension asset
    
    
    19,785
    
    
    
    19,785Deferred financing costs, net
    
    
    2,931
    
    
    
    3,146Other deferred costs
    
    
    1,952
    
    
    
    1,426Interest rate swap
    
    
    4,629
    
    
    
    2,811Investment in Verizon Information Services
    
    
    657
    
    
    
    Other assets
    
    
    2,452
    
    
    
    1,580Total
    
    $
    112,209
    
    
    $
    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 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 March 31, Pension and Lump Sum Benefits
    
    Post-Retirement Benefits(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    5,186
    
    
    $
    4,523
    
    
    $
    2,565
    
    
    $
    2,175Interest cost
    
    
    17,567
    
    
    
    16,825
    
    
    
    9,652
    
    
    
    8,878Expected return on plan assets
    
    
    (14,910
    )
    
    
    (11,578
    )
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    90
    
    
    
    107
    
    
    
    551
    
    
    
    550Prior service cost (benefit)
    
    
    1,179
    
    
    
    1,186
    
    
    
    (628
    )
    
    
    (628
    )Actuarial loss, net
    
    
    3,518
    
    
    
    3,281
    
    
    
    4,421
    
    
    
    3,926Net amortization and deferral
    
    
    12,630
    
    
    
    14,344
    
    
    
    16,561
    
    
    
    14,901Effect of early retirement program
    
    
    939
    
    
    
    
    
    
    
    696
    
    
    
    Total
    
    $
    13,569
    
    
    $
    14,344
    
    
    $
    17,257
    
    
    $
    14,901
  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 the effects of the Act on the
plan. Specific authoritative guidance on the accounting for the federal
subsidy is pending and that guidance, when issued, could require the sponsor
to change previously reported information. The sponsor would need to amend
the plan in order to benefit from the new legislation as part of the Acts
possible economic consequences.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. 12




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##### Table of Contents



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: March 31,
    
    December 31,2004
    
    2003(In thousands)Accounts payable
    
    $
    19,160
    
    
    $
    56,430Accrued expenses
    
    
    77,015
    
    
    
    75,999Employee benefit accruals
    
    
    51,881
    
    
    
    44,697Carrier payables
    
    
    27,616
    
    
    
    28,583Taxes
    
    
    2,608
    
    
    
    1,420Interest
    
    
    17,966
    
    
    
    6,351Total
    
    $
    196,246
    
    
    $
    213,480
  13.
    
    DebtDebt consists of: March 31,
    
    December 31,2004
    
    2003(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    399,948
    
    
    $
    399,943Due May 15, 2009 at 6.80%
    
    
    299,901
    
    
    
    299,896Term credit facilities:Due May 16, 2004 at 70 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
    
    
    5,666
    
    
    
    6,337Interest rate swap
    
    
    4,629
    
    
    
    2,811Capital leases
    
    
    323
    
    
    
    377Total
    
    
    833,467
    
    
    
    861,864Less short-term debt
    
    
    30,175
    
    
    
    59,729Long-term debt
    
    $
    803,292
    
    
    $
    802,135
 13




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##### Table of Contents



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 the Companys
significant subsidiaries, and bear interest at the applicable Eurodollar rate
plus a margin or at the base rate; which is the higher of the base rate
publicly announced by the administrative agent from time to time or the
Federal Funds rate plus 0.5%, plus a margin. The Company is also required to
pay a quarterly facility fee on commitments under the facility and a
quarterly utilization fee on borrowed amounts that exceed 50% of the
commitments under the facility. Accrued interest on Eurodollar rate
borrowings is payable based on elected intervals of one, two, three or six
months or other interest period as the Company may select, subject to certain
conditions. Accrued interest on base rate borrowings is payable quarterly.This facility matures on March 1, 2005, on which date the Company has the
right to convert outstanding amounts into a term loan that matures on March
1, 2006. This facility contains negative covenants, including covenants
which limit the Companys ability to grant or permit liens on its or
subsidiaries properties, merge or sell all or substantially all of its
assets and permit its subsidiaries to incur debt. This facility also
requires that the Company maintain certain financial ratios. Upon the
occurrence of a default or an event of default, the lenders have various
remedies or rights, which may include termination of the lenders obligations
to make advances and declare all borrowed amounts and interest thereon
immediately due and payable. The intended purpose of this facility is for
working facility purposes and serves as backstop facility for commercial
paper program.At March 31, 2004, the Company had a $40 million working capital credit
facility with Banco Popular de Puerto Rico, an affiliate of Popular, Inc.
Amounts outstanding under this facility bear interest at a rate of 30 basis
points over LIBOR. At March 31, 2004, the Company had no outstanding balance
under this facility. This facility serves as additional backstop for the
commercial paper program.At December 31, 2002, the Company had $225 million in term credit facilities
with maturities ranging from two to three years, and bearing interest from 60
to 100 basis points over LIBOR. By October 29, 2003 the Company repaid one
of the $50 million term loans, and prepaid principal in an aggregate amount
of $62 million of the outstanding term credit loans, while reducing interest
rate to 70 basis points over LIBOR.On August 31, 2001, the Company entered into an interest rate swap contract
with a notional amount of $150 million. In September 2002, the Company drew
the value out of the hedge position without changing the fixed/floating
funding mix of the original swap transaction. This transaction resulted in
cash proceeds of $11 million, reflected in cash from operations as required
by SFAS No. 104, and created a deferred derivative, which will be amortized
until 2006. The purpose of the swap is to hedge against changes in the fair
market value of the Companys senior notes to achieve a targeted mix of fixed
and variable rate debt. The swap receives interest at a fixed rate of 6.65%
and pays interest at a net variable rate equal to six month LIBOR plus 170
basis points, with semiannual settlements and reset dates every May 15 and
November 15 until maturity of the May 15, 2006 senior notes. The swap was
entered into at market and as a result, there was no exchange of premium at
the initial date of the swap. The Company designates the swap as a hedge of
the changes in fair market value of the senior notes due to changes in the
designated benchmark interest rate. PRTC is the guarantor of the interest
rate swap. 14




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##### Table of Contents



Aggregate maturities of the senior notes and term credit facilities are as
follow: Year
    
    Amount(In thousands)2004
    
    
    30,0002005
    
    
    93,0002006
    
    
    400,0002009
    
    
    300,000Total
    
    $
    823,000
 Currently, the Company is in compliance
with debt covenant agreements and
with the financial ratios as specified in term facilities. 14. Other Non-Current Liabilities Other non-current liabilities consist of: March 31,
    
    December 31,2004
    
    2003(In thousands)Deferred activation and installation
revenues
    
    $
    69,886
    
    
    $
    69,347Deferred directory-publishing revenues
    
    
    7,942
    
    
    
    12,877Customer deposits

    
    
    26,671
    
    
    
    26,954Other liabilities
    
    
    124,579
    
    
    
    128,227Total
    
    $
    229,078
    
    
    $
    237,405
  15.
    
    Shareholders EquityCommon StockCommon stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at March 31, 2004 and
December 31, 2003.Subscription ReceivableThe subscription receivable reflects future receipts from the Puerto Rico
Telephone Authority (PRTA) 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 will use the $200 million capital contribution to partially fund its
underfunded pension and other post-employment benefit obligations. The stock
purchase agreement requires that the Company contribute $66 million, which
includes the $40 million received from PRTA, to the pension plan immediately
upon receipt of the proceeds each year. The Company received the fifth and
final $40 million installment in March 2004 and made the required pension
payment of $66 million.Accumulated Other Comprehensive 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. 15




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##### Table of Contents



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 shareholders dividend policy 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.On March 2003, the Company declared a $17.8 million dividend for the fourth
quarter of 2002, which was paid in the second quarter of 2003. In addition,
in the second quarter of 2003, the Company paid a $50.3 million dividend for
the first quarter. No dividend was declared during the quarter ended March
31, 2004, corresponding to the fourth quarter of 2003. The senior notes
indentures and credit facility agreements do not contain dividend
restrictions.16.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial
instruments are as follows: March 31,
    
    December 31,2004
    
    2003Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    43,026
    
    
    $
    43,026
    
    
    $
    21,732
    
    
    $
    21,732Accounts receivable
    
    
    287,815
    
    
    
    287,815
    
    
    
    287,247
    
    
    
    287,247Liabilities:Other current liabilities
    
    $
    196,246
    
    
    $
    196,246
    
    
    $
    213,480
    
    
    $
    213,480Short-term debt
    
    
    30,175
    
    
    
    30,175
    
    
    
    59,729
    
    
    
    59,729Long-term debt,
including interest rate
swap
    
    
    803,292
    
    
    
    872,359
    
    
    
    802,135
    
    
    
    872,822
 16




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##### Table of Contents



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 follows: For the Three Months EndedMarch 31,2004
    
    2003(in thousands)Wireline:RevenuesLocal services
    
    $
    138,595
    
    
    $
    146,128Long distance services
    
    
    38,855
    
    
    
    33,999Access services
    
    
    73,678
    
    
    
    82,560Directory services and other
    
    
    16,579
    
    
    
    14,599Total revenues
    
    $
    267,707
    
    
    $
    277,286Operating income
    
    $
    51,971
    
    
    $
    62,801Wireless:Revenues and salesCellular services
    
    $
    48,151
    
    
    $
    47,385Paging services
    
    
    
    
    
    
    611Equipment sales and other
    
    
    4,113
    
    
    
    2,885Total revenues and sales
    
    $
    52,264
    
    
    $
    50,881Operating
loss
    
    $
    (1,613
    )
    
    $
    (616
    )Consolidated:Revenues for reportable segments
    
    $
    319,971
    
    
    $
    328,167Elimination of intersegment revenues
    
    
    (3,147
    )
    
    
    (2,725
    )Consolidated revenues
    
    $
    316,824
    
    
    $
    325,442Operating income
    
    $
    50,358
    
    
    $
    62,185
 As of
    
    As ofMarch 31,
    
    March 31,Assets
    
    2004
    
    2003Wireline assets
    
    $
    2,593,965
    
    
    $
    2,702,453Wireless assets
    
    
    310,671
    
    
    
    287,859Segment assets
    
    $
    2,904,636
    
    
    $
    2,990,312Elimination of intersegment assets
    
    
    (313,278
    )
    
    
    (243,440
    )Consolidated assets
    
    $
    2,591,358
    
    
    $
    2,746,872
 18




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##### Table of Contents



18.
    
    Condensed Consolidating InformationThe following summarizes the unaudited condensed consolidating financial
information as of March 31, 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
March 31, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9
    
    
    $
    31,850
    
    
    $
    11,167
    
    
    $
    
    
    
    $
    43,026Intercompany accounts receivable
    
    
    1,081,868
    
    
    
    82,253
    
    
    
    42,800
    
    
    
    (1,206,921
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    287,780
    
    
    
    35
    
    
    
    
    
    
    
    287,815Deferred income tax
    
    
    718
    
    
    
    26,475
    
    
    
    31
    
    
    
    
    
    
    
    27,224Inventory and supplies, net
    
    
    
    
    
    
    15,034
    
    
    
    
    
    
    
    
    
    
    
    15,034Prepaid expenses
    
    
    
    
    
    
    41,085
    
    
    
    607
    
    
    
    
    
    
    
    41,692Total current assets
    
    
    1,082,595
    
    
    
    484,477
    
    
    
    54,640
    
    
    
    (1,206,921
    )
    
    
    414,791PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,501,780
    
    
    
    11,359
    
    
    
    
    
    
    
    1,513,139GODDWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    291,580
    
    
    
    24,671
    
    
    
    
    
    
    
    316,251DEFERRED INCOME TAX
    
    
    
    
    
    
    235,570
    
    
    
    (602
    )
    
    
    
    
    
    
    234,968INVESTMENT IN SUBSIDIARIES
    
    
    593,965
    
    
    
    
    
    
    
    
    
    
    
    (593,965
    )
    
    
    OTHER ASSETS
    
    
    14,808
    
    
    
    106,000
    
    
    
    (1
    )
    
    
    (8,598
    )
    
    
    112,209TOTAL ASSETS
    
    $
    1,691,368
    
    
    $
    2,619,407
    
    
    $
    90,067
    
    
    $
    (1,809,484
    )
    
    $
    2,591,358LIABILITIES AND SHAREHOLDERS
EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    30,000
    
    
    $
    30,175
    
    
    $
    
    
    
    $
    (30,000
    )
    
    $
    30,175Intercompany accounts payable
    
    
    74,494
    
    
    
    284,214
    
    
    
    28,294
    
    
    
    (387,002
    )
    
    
    Other current liabilities
    
    
    18,092
    
    
    
    169,752
    
    
    
    8,402
    
    
    
    
    
    
    
    196,246Total current liabilities
    
    
    122,586
    
    
    
    484,141
    
    
    
    36,696
    
    
    
    (417,002
    )
    
    
    226,421LONG-TERM DEBT, excluding current portion
    
    
    803,144
    
    
    
    792,997
    
    
    
    
    
    
    
    (792,849
    )
    
    
    803,292OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    788,086
    
    
    
    
    
    
    
    (5,665
    )
    
    
    782,421Total liabilities
    
    
    925,730
    
    
    
    2,065,224
    
    
    
    36,696
    
    
    
    (1,215,516
    )
    
    
    1,812,134MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,586
    
    
    
    13,586COMMITMENTS AND CONTINGENCIESSHAREHOLDERS 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
    )Subscription receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Retained earnings
    
    
    189,292
    
    
    
    170,267
    
    
    
    12,228
    
    
    
    (182,495
    )
    
    
    189,292Accumulated other comprehensive loss
    
    
    (101,385
    )
    
    
    (101,385
    )
    
    
    
    
    
    
    101,385
    
    
    
    (101,385
    )Total shareholders equity
    
    
    765,638
    
    
    
    554,183
    
    
    
    53,371
    
    
    
    (607,554
    )
    
    
    765,546TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    1,691,368
    
    
    $
    2,619,407
    
    
    $
    90,067
    
    
    $
    (1,809,484
    )
    
    $
    2,591,358
 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
    
    
    
    
    
    
    
    34,255Total current assets
    
    
    1,059,753
    
    
    
    467,090
    
    
    
    50,721
    
    
    
    (1,185,970
    )
    
    
    391,594PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,546,503
    
    
    
    11,743
    
    
    
    
    
    
    
    1,558,246GOODWILL 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
    
    
    
    13,025COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury
stock
    
    
    703,884
    
    
    
    485,591
    
    
    
    41,143
    
    
    
    (526,734
    )
    
    
    703,884Deferred ESOP compensation
    
    
    (26,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )Subscription receivable
    
    
    (39,515
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,515
    )Retained earnings
    
    
    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 March 31, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    130,983
    
    
    $
    8,232
    
    
    $
    (3,147
    )
    
    $
    136,068Long distance services
    
    
    
    
    
    
    27,260
    
    
    
    11,496
    
    
    
    (19
    )
    
    
    38,737Access services
    
    
    
    
    
    
    75,316
    
    
    
    
    
    
    
    (2,013
    )
    
    
    73,303Cellular services
    
    
    
    
    
    
    47,837
    
    
    
    
    
    
    
    
    
    
    
    47,837Paging services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Directory and other services and sales
    
    
    
    
    
    
    23,013
    
    
    
    
    
    
    
    (2,134
    )
    
    
    20,879Total revenues
    
    
    
    
    
    
    304,409
    
    
    
    19,728
    
    
    
    (7,313
    )
    
    
    316,824OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    98,659
    
    
    
    836
    
    
    
    
    
    
    
    99,495Other operating expenses
    
    
    
    
    
    
    94,656
    
    
    
    13,515
    
    
    
    (7,313
    )
    
    
    100,858Early retirement provision
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    
    
    
    
    63,911
    
    
    
    567
    
    
    
    
    
    
    
    64,478Total operating costs and expenses
    
    
    
    
    
    
    258,861
    
    
    
    14,918
    
    
    
    (7,313
    )
    
    
    266,466OPERATING INCOME
    
    
    
    
    
    
    45,548
    
    
    
    4,810
    
    
    
    
    
    
    
    50,358OTHER INCOME (EXPENSE), NET
    
    
    23,948
    
    
    
    (9,753
    )
    
    
    62
    
    
    
    (24,508
    )
    
    
    (10,251
    )INCOME (LOSS) BEFORE INCOME TAX
EXPENSE
    
    
    23,948
    
    
    
    35,795
    
    
    
    4,872
    
    
    
    (24,508
    )
    
    
    40,107INCOME TAX EXPENSE
    
    
    (824
    )
    
    
    14,333
    
    
    
    1,826
    
    
    
    
    
    
    
    15,335NET INCOME (LOSS)
    
    $
    24,772
    
    
    $
    21,462
    
    
    $
    3,046
    
    
    $
    (24,508
    )
    
    $
    24,772
 22




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##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended March 31, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    
    
    
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    140,113
    
    
    $
    7,089
    
    
    $
    (2,164
    )
    
    $
    145,038Long distance services
    
    
    
    
    
    
    24,545
    
    
    
    8,344
    
    
    
    (27
    )
    
    
    32,862Access services
    
    
    
    
    
    
    82,987
    
    
    
    
    
    
    
    (1,132
    )
    
    
    81,855Cellular services
    
    
    
    
    
    
    47,454
    
    
    
    
    
    
    
    
    
    
    
    47,454Paging services
    
    
    
    
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    611Directory and other services and sales
    
    
    
    
    
    
    18,999
    
    
    
    
    
    
    
    (1,377
    )
    
    
    17,622Total revenues
    
    
    
    
    
    
    314,709
    
    
    
    15,433
    
    
    
    (4,700
    )
    
    
    325,442OPERATING COSTS AND EXPENSES:Labor and benefits
    
    
    
    
    
    
    102,083
    
    
    
    814
    
    
    
    
    
    
    
    102,897Other operating expenses
    
    
    
    
    
    
    93,680
    
    
    
    9,434
    
    
    
    (4,700
    )
    
    
    98,414Voluntary separation provision
    
    
    
    
    
    
    1,443
    
    
    
    
    
    
    
    
    
    
    
    1,443Depreciation and amortization
    
    
    
    
    
    
    59,799
    
    
    
    704
    
    
    
    
    
    
    
    60,503Total operating costs and expenses
    
    
    
    
    
    
    257,005
    
    
    
    10,952
    
    
    
    (4,700
    )
    
    
    263,257OPERATING INCOME
    
    
    
    
    
    
    57,704
    
    
    
    4,481
    
    
    
    
    
    
    
    62,185OTHER INCOME (EXPENSE), NET
    
    
    90,939
    
    
    
    (9,437
    )
    
    
    40
    
    
    
    (91,372
    )
    
    
    (9,830
    )INCOME (LOSS) BEFORE INCOME TAX
EXPENSE
    
    
    90,939
    
    
    
    48,267
    
    
    
    4,521
    
    
    
    (91,372
    )
    
    
    52,355INCOME TAX EXPENSE
    
    
    
    
    
    
    18,293
    
    
    
    1,652
    
    
    
    
    
    
    
    19,945INCOME (LOSS) BEFORE CUMULATIVE EFFECT
    
    
    90,939
    
    
    
    29,974
    
    
    
    2,869
    
    
    
    (91,372
    )
    
    
    32,410CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax of $40,672
    
    
    
    
    
    
    58,529
    
    
    
    
    
    
    
    
    
    
    
    58,529NET INCOME (LOSS)
    
    $
    90,939
    
    
    $
    88,503
    
    
    $
    2,869
    
    
    $
    (91,372
    )
    
    $
    90,939
 23




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the three months ended March 31, 2004
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiary
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY OPERATING:
    
    $
    (672
    )
    
    $
    29,186
    
    
    $
    1,883
    
    
    $
    30,397CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal
costs
    
    
    
    
    
    
    (19,614
    )
    
    
    (9
    )
    
    
    (19,623
    )Net salvage on retirements
    
    
    
    
    
    
    65
    
    
    
    (1
    )
    
    
    64Net cash used in investing activities
    
    
    
    
    
    
    (19,549
    )
    
    
    (10
    )
    
    
    (19,559
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (29,490
    )
    
    
    (54
    )
    
    
    
    
    
    
    (29,544
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Borrowings/(repayment) intercompany loans
    
    
    (9,829
    )
    
    
    9,829
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    681
    
    
    
    9,775
    
    
    
    
    
    
    
    10,456NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    9
    
    
    
    19,412
    
    
    
    1,873
    
    
    
    21,294CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    
    
    
    
    12,438
    
    
    
    9,294
    
    
    
    21,732CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    9
    
    
    $
    31,850
    
    
    $
    11,167
    
    
    $
    43,026
 24




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the three months ended March 31, 2003
(In thousands) Guarantor
    
    Non-Guarantor
    
    TotalParent
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING
ACTVITIES:
    
    $
    
    
    
    $
    58,628
    
    
    $
    492
    
    
    $
    59,120CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal
costs
    
    
    
    
    
    
    (31,891
    )
    
    
    (95
    )
    
    
    (31,986
    )Net salvage on retirements
    
    
    
    
    
    
    221
    
    
    
    (106
    )
    
    
    115Net cash used in investing activities
    
    
    
    
    
    
    (31,670
    )
    
    
    (201
    )
    
    
    (31,871
    )CASH FLOWS FROM FINANCING ACTIVITIES:Capital contribution
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net repayments of short-term debt, including
capital leases
    
    
    (77,691
    )
    
    
    (39
    )
    
    
    
    
    
    
    (77,730
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Borrowings/(repayment) intercompany loans
    
    
    37,424
    
    
    
    (37,424
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    (267
    )
    
    
    (37,463
    )
    
    
    
    
    
    
    (37,730
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (267
    )
    
    
    (10,505
    )
    
    
    291
    
    
    
    (10,481
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    1
    
    
    
    27,009
    
    
    
    6,657
    
    
    
    33,667CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (266
    )
    
    $
    16,504
    
    
    $
    6,948
    
    
    $
    23,186
 25




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##### Table of Contents



19.
    
    Supplemental Cash Flow InformationCash paid for interest for the quarters ended March 31, 2004 and 2003
amounted to approximately $1 million for both quarters.20.
    
    Contingencies and Regulatory and Other MattersThe 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. 26




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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 March 31, 2004, we had approximately 1.2
million access lines in service, including 926,000 residential and 288,000
business lines. Since November 2001, we have been marketing our cellular
service under the Verizon Wireless brand as part of a strategy to align our
product and service offerings with those of Verizon Wireless in the U.S. We have 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 has made forward-looking statements. These
statements are based on the Companys estimates and assumptions and are subject
to certain risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations, as
well as those statements preceded or followed by 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; (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. 27




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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 and tax purposes. The Company
records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would
not be able to realize all or part of its net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to income in the
period such determination was made. As
discussed in Note 1 to the unaudited condensed consolidated financial
statements, on May 1, 2002, the Company completed a tax-free reorganization
whereby it merged Verizon Wireless into PRTC. As a result of this merger, the
Company released a deferred tax valuation allowance related to the Acquisition
of approximately $93 million, approximately $51 million of which was recorded
against goodwill and approximately $42 million of which was recorded as a
deferred tax benefit in the Companys consolidated statement of income during
the second quarter of 2002 in accordance with SFAS No. 109. Management
believes that sufficient book and tax income will be generated by the merged
company to realize the benefits of these tax assets. 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 results 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, 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. See
Note 5 to the unaudited condensed consolidated financial statements for further
details. 28




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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 years data
have been made to conform to the 2003 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 revenues; 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. 29




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REVENUES Three Months Ended March 31,2004
    
    2003(Dollars in Millions)WIRELINE:Local
    
    $
    136
    
    
    
    45
    %
    
    $
    145
    
    
    
    45
    %Network Access
    
    
    73
    
    
    
    26
    
    
    
    82
    
    
    
    26Long Distance
    
    
    39
    
    
    
    10
    
    
    
    33
    
    
    
    10Directory and Other
    
    
    17
    
    
    
    3
    
    
    
    15
    
    
    
    3Total Wireline
    
    
    265
    
    
    
    84
    %
    
    
    275
    
    
    
    84
    %WIRELESS:Postpaid Cellular
    
    
    43
    
    
    
    13
    
    
    
    40
    

    
    
    13Prepaid Cellular
    
    
    5
    
    
    
    2
    
    
    
    7
    
    
    
    2Total Cellular
    
    
    48
    
    
    
    15
    
    
    
    47
    
    
    
    15Wireless Equipment
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    1Total Wireless
    
    
    52
    
    
    
    16
    %
    
    
    50
    
    
    
    16
    %Revenues
    
    $
    317
    
    
    
    100
    %
    
    $
    325
    
    
    
    100
    %
 EXPENSES AND CHARGES Three Months EndedMarch 31,2004
    
    2003(Dollars in Millions)WIRELINE:Labor and benefits
    
    $
    91
    
    
    $
    95Other operating expenses
    
    
    73
    
    
    
    69Total Wireline
    
    
    164
    
    
    
    164WIRELESS:Labor and benefits
    
    $
    8
    
    
    $
    8Other operating expenses
    
    
    29
    
    
    
    29Total Wireless
    
    
    37
    
    
    
    37OPERATING COSTS AND EXPENSES
    
    
    201
    
    
    
    201OTHER:Early retirement and voluntary separation
provision
    
    
    2
    
    
    
    1Depreciation and amortization
    
    
    64
    
    
    
    61Interest expense and others
    
    
    10
    
    
    
    10Equity income in joint venture
    
    
    (1
    )
    
    
    (1
    )Minority interest in consolidated
subsidiary
    
    
    1
    
    
    
    Income tax expense

    
    
    15
    
    
    
    20Cumulative effect of accounting change, net of
taxes
    
    
    
    
    
    
    (58
    )Net income
    
    $
    25
    
    
    $
    91
 OPERATING DATA Three Months EndedMarch 31,2004
    
    2003Access Lines in Service (000s):Residential
    
    
    926
    
    
    
    954Business
    
    
    288
    
    
    
    300Total
    
    
    1,214
    
    
    
    1,254Cellular Customers (000s):Postpaid
    
    
    240
    
    
    
    229Prepaid
    
    
    107
    
    
    
    120Total
    
    
    347
    
    
    
    349Postpaid Cellular ARPU
    
    $
    50
    
    
    $
    52Prepaid Cellular ARPU
    
    $
    16
    
    
    $
    20Combined Cellular ARPU
    
    $
    39
    
    
    $
    41Paging Customers (000s)
    
    
    
    
    
    
    12
 30




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QUARTER ENDED MARCH 31, 2004 COMPARED WITH QUARTER ENDED MARCH 31,
2003 REVENUES. Revenues for the quarter ended
March 31, 2004 decreased $8
million, or 2%, to $317 million from $325 million for the same period in 2003. WIRELINE: Wireline
revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the quarter ended
March 31, 2004 decreased $10 million, or 4%, to $265 million from $275 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 March 31, 2004 decreased $9 million, or 6%, to
$136 million from $145 million in the comparable 2003 period. The decrease is
due to decreased revenues from local voice services of $8 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 of
$10 million mainly due to lower access lines partially offset by an increase in
deferred activation and installation revenues of $2 million. The decrease in
local data services was driven by a decrease in high speed special services of
$2 million partially offset in part by an increase in Internet access revenues
of $1 million. 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 March 31, 2004 decreased $9 million, or 11%, to $73 million
compared to $82 million for the same 2003 period. The decrease was driven by a
decrease in intra-island access revenues of $5 million, a decrease in carrier
common line access revenues of $3 million and a decrease in off-island
switching revenues of $1 million. 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 March 31,
2004 increased $6 million, or 18%, to $39 million from $33 million for the same
2003 period. The increase was due to an increase in on-island private lines
revenues of $3 million mainly due to increase in client base and an increase in
intra-island long distance revenues of $2 million mainly due to higher traffic. Directory
and other revenues include revenues from directory publishing
rights, telecommunication equipment and billing and collection services
provided to competing long distance operators. Directory and other revenues
for the quarter ended March 31, 2004 increased $2 million, or 13%, to $17
million from $15 million for the quarter ended March 31, 2003, mainly due to an
increase in wireline equipment sales of $1 million. WIRELESS: Revenues
from cellular services and related equipment sales for the three
months ended March 31, 2004 increased $2 million, or 4%, to $52 million from
$50 million for the comparable 2003 period. Cellular service revenues increased
$1 million, or 2%, to $48 million from $47 million for the quarter ended March
31, 2003. The increase was primarily the result of an increase of 11,000 post
paid cellular customers during the first quarter of 2004 compared to the
quarter ended March 31, 2003 due to attractive price plans and implementation
of marketing strategies to align the Companys product and service offerings
with those of Verizon Wireless in the U.S. Wireless
equipment sales increased $1 million, or 33%, to $4 million for
the quarter ended March 31, 2004 from $3 million for the comparable 2003
period. This increase is a result of the post paid contract renewals. 31




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OPERATING
COSTS AND EXPENSES. Operating costs and expenses for the
quarter ended March 31, 2004 of $201 million remained relatively constant
compared to same period in 2003. WIRELINE: Wireline
expenses for the quarter ended March 31, 2004 of $164 million
decreased slightly as compared to the same period in 2003. Labor and
benefit expenses decreased $4 million to $91 million from $95
million reported for the quarter ended March 31, 2003, mainly due to a decrease
in salary expense of $2 million and a decrease in expatriate expenses of $1
million resulted of a headcount reduction for quarter ended March 31, 2004
compared to the quarter ended March 31, 2003 and a decrease in contractor
expenses of $1 million as part of cost-containment iniciatives. Other
operating expenses of $73 million for the quarter ended March 31,
2004, increased $4 million, or 6%, compared to the same 2003 period. The
increase is primarily due to higher interconnection charges of $7 million that
resulted from the lack of an interconnection settlement agreement during the
quarter ended March 31, 2004. This increase was partially offset by lower
management fees of $3 million due to the expiration of the Verizon management
and technology license agreement on March 2, 2004. WIRELESS: Wireless
expenses for the quarter ended March 31, 2004 of $37 million
remained constant as compared to the same period in 2003. Also, labor and
benefit expenses of $8 million and other operating expenses of $29 million for
the quarter ended March 31, 2004, remained constant as compared to the same
period in 2003. 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 recorded during the first quarter of 2003. DEPRECIATION AND AMORTIZATION EXPENSE.
Depreciation and amortization
expense of $64 million for the quarter ended March 31, 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 of the TDMA
and CDMA networks and in software amortization. INTEREST EXPENSE. Interest expense of
$11 million for the quarter ended
March 31, 2004 was $1 million higher than for the comparable 2003 period as a
result of lower interest accretion on the Government subscription receivable
due to the final $40 million installment received in March 2004. EQUITY INCOME FROM JOINT VENTURE.
Earnings of $1 million for the quarter
ended March 31, 2004 were generated from our 24% interest in Verizon
Information Services, Inc., the largest yellow page publishing company in
Puerto Rico and remained constant as compared to the same period in 2003. INCOME TAXES. A $15 million tax
provision for the quarter ended March 31,
2004 reflects a 38% effective tax rate. The difference between the effective
and the statutory tax rate of 39% equates to $1 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 $116.5 million ($71.1 million after-tax).
Effective January 1, 2003, we began expensing costs of removal in excess of
salvage value for these assets as incurred. 32




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Effective January 1, 2003, the
Company changed its method of accounting
for revenues from directory publishing rights and related expenses from the
point-of-publication method to the amortization method. Although both methods
fully comply with accounting principles generally accepted in the United
States, the Company adopted the amortization method because it is becoming the
industry standard. The cumulative effect of applying this accounting change to
prior years was recognized as of January 1, 2003 as a one-time, non-cash loss
of $17 million ($13 million, after tax). 33




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LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED FINANCIAL CONDITION QUARTER ENDED MARCH 31, 2004 COMPARED WITH QUARTER ENDED MARCH 31,
2003 Three Months Ended March 31,2004
    
    2003
    
    Change(Dollars in Millions)Cash provided by (used in):Operations
    
    $
    30
    
    
    $
    59
    
    
    $
    (29
    )Investing
    
    
    (20
    )
    
    
    (32
    )
    
    
    12Financing
    
    
    10
    
    
    
    (38
    )
    
    
    48
 OVERALL LIQUIDITY ASSESSMENT The Company
believes that cash from operations is sufficient to meet
working capital needs. Current assets exceeded current liabilities at March
31, 2004 by $188 million. We believe our sources of funds, from operations and
from readily available external financing arrangements, are sufficient to meet
ongoing operating, financing and investing requirements. We expect that
presently foreseeable capital requirements will continue to be financed through
internally generated funds. 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,
undrawn $360 million 364-day revolving credit facility maturing in March 2005;
as well as, an undrawn $40 million working capital credit facility maturing in
June 2004. See Note 13 to the unaudited condensed consolidated financial
statements for more detailed information. OPERATIONS Cash from
operations continued to be our primary source of funds. The $29
million decrease in cash from operations for the quarter ended March 31, 2004
as compared to the same period in 2003 was primarily due to a decrease in
interconnection agreement collection of $8 million, an increase in early retirement and
voluntary separation program payments of $3 million, an increase in real
property tax payment of $1 million, a $16 million tax effect related to the
incremental pension funding, lower medical plan expenses of $3 million, offset
by a decrease in pension plan contributions of $8 million. INVESTING Net cash
used in investing activities for the year ended March 31, 2004
was $20 million compared to $32 million for the same period in 2003. The
decrease in cash used in investing activities of $12 million is mainly due to a
decrease in capital expenditures and costs of removal as a result of decreased
spending on specific software projects, as well as a general decrease in
spending as the Company aligned its capital spending with softening demand for
new wireline service. Also, effective January 1, 2003, under SFAS No. 143,
costs of removal are expensed when incurred. We have
invested approximately $1.1 billion from the date of the
Acquisition through March 31, 2004 to expand and enhance our networks. Our
2004 capital expenditure program is approximately $160 million, which we expect
to finance through internally generated funds. FINANCING Debt,
excluding capital leases, decreased $28 million for the quarter
ended March 31, 2004 and $77 million for the quarter ended March 31, 2003.
Borrowings under bank loans, working capital facilities and commercial paper
decreased from $93 million at December 31, 2003 to $63 million at March 31,
2004 and from $98 million at December 31, 2002 to $20 million at March 31,
2003. 34




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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 final $40 million installment in cash from PRTA.
See Note 15 to the unaudited condensed consolidated financial statements for
more information. 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 March 31, 2004. Additional detail about these items
is included in the notes to the unaudited consolidated financial statements. Payments Due In PeriodContractual Obligations &
    
    
    (Dollars in Millions)Other Commercial Commitments:
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong Term Debt, including interest rate
swap
    
    $
    710
    
    
    $
    
    
    
    $
    
    
    
    $
    410
    
    
    $
    
    
    
    $
    
    
    
    $
    300Term Credit Facilities
    
    
    123
    
    
    
    30
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit Obligations
    
    
    423
    
    
    
    153
    
    
    
    141
    
    
    
    89
    
    
    
    32
    
    
    
    8
    
    
    
    Operating Leases
    
    
    47
    
    
    
    12
    
    
    
    10
    
    
    
    7
    
    
    
    4
    
    
    
    2
    
    
    
    12Total
    
    $
    1,303
    
    
    $
    195
    
    
    $
    244
    
    
    $
    506
    
    
    $
    36
    
    
    $
    10
    
    
    $
    312
 35




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REGULATORY AND OTHER MATTERS REGULATORY AND COMPETITIVE TRENDS Regulatory
activity at the federal and local levels was primarily directed
at meeting challenges in maintaining support for local exchange rates and
Universal Service while effecting the rate rebalancing and regulatory
restructuring required by an increasingly competitive environment. Among the
issues generating regulatory activity are: local number portability
requirements, interconnection agreements, the FCCs triennial review and
reverse toll billing elimination. We
continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to interconnect their networks with ours. INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE On
February 28, 2002, the TRB issued a Resolution and Order (the February
2002 Order) with respect to the reconsideration requested by the Company of
the TRBs October 10, 2001 order to reduce the access rates the Company charges
to long distance carriers to originate and terminate intra-island long distance
calls through the Companys network. The
February 2002 Order requires new rates for intra-island access to be
implemented through phased-rate reductions over four years. The prospective
access rate reductions (on a two-way basis) were ordered to take place on April
1st of each year as follows: April 2002: From 9.3 cents per minute to
7.9 cents per minute April 2003: From 7.9 cents per minute to
6.5 cents per minute April 2004: From 6.5 cents per minute to
5.0 cents per minute April 2005: From 5.0 cents per minute to
2.1 cents per minute The
February 2002 Order also requires PRTC to pay a $68 million refund to
end-user customers. The TRB calculated this amount based on the difference
between the 9.3 cents and 7.9 cents rate for TRB-estimated traffic from the
period beginning on April 1, 2000 through March 31, 2002. The refund could be
made in 12 equal quarterly installments beginning on April 1, 2002. The
Company filed with the Puerto Rico Circuit Court of Appeals (the Court) an
appeal of the February 2002 Order in which the Company alleged that the TRB
made errors of law and procedure in its determination of access charges and its
order requiring the Company to make the cash refund. On March 27, 2002, the
Court stayed the refund and the rate reduction until the hearing of the appeal. On
April 2, 2002, AT&T, Sprint and LTD (the Carriers) filed a petition
with the Court for review of the February 2002 Order, requesting 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 the Court erred in applying those standards to the
facts of the case. On October 2, 2003, the Court denied PRTCs
reconsideration. As a result of the Courts decision, the Company established a
pre-tax reserve of $73 million, including interest, in September 2003 for the
end-user and AT&T refund referred to in the February 2002 Order. This reserve
is in addition to the reserve established in connection with the stay of the
TRB Order on Reconsideration issued by the Court. On
October 30, 2003, the Company filed a petition for a writ for
certiorari before the Puerto Rico Supreme Court challenging the $68 million
refund portion of the Order. The prospective phase down portion of the Order
was settled with certain major carriers and implementing tariffs filed with the
TRB as noted in the next paragraph. 36




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In
November 2003, the Company proposed, and two members of the TRB
indicated their support for, a plan to revise the TRBs end-user refund order
and end the dispute over this issue. First, PRTC has filed tariffs
implementing the reduction in intra-island access charges ordered by the TRB in
its Order on Reconsideration of February 27, 2002. The composite per minute
access rate was reduced from 9.3 cents to 6.5 cents on January 1, 2004 and will
decrease according to the TRB phase reduction schedule, which will end 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. Third, the plan
included a number of other elements benefiting consumers; elimination of
touchtone charges; one time credits for single line residential customers equal
to their basic monthly service rate in December 2003 and June 2005; and a
commitment not to raise residential rates through December 2006 without
providing certain information to the TRB in advance. While the TRB has
accepted and approved these commitments, it has not issued a final resolution
and order to terminate the refund provisions in the Order and there has been
litigation relating to aspects of the plan at the TRB and Puerto Rico Supreme
Court. The 2003 cash flow impact was a reduction of $16 million to the pre-tax
reserve. On
February 4, 2004, Centennial filed with the Puerto Rico Supreme Court
an opposition to PRTCs request that the Court hold the case in abeyance until
the TRB issued a Resolution and Order confirming the commitments negotiated in
November 2003. On April 6, 2004, Centennial filed a motion requesting
dismissal of the case, arguing that the settlement between the TRB and PRTC
rendered the case moot. In the alternative, Centennial also argued that the
TRB lacks jurisdiction to modify the end user refund order, pending the
petition for certiorari before the Puerto Rico Supreme Court. Centennial
claimed that the commitment negotiated in November 2003 with respect to the $68
million refund was null and void. On April 15, 2004, PRTC responded to and
opposed Centennials filing. On
April 23, 2004, PRTC and Centennial entered into a settlement agreement
and on April 29, 2004, jointly filed a motion with the Supreme Court informing
the Court of the settlement. Centennial withdrew its opposition to PRTCs
petition and on April 30, 2004, the Puerto Rico Supreme Court issued a
Resolution denying PRTCs petition for certiorari on the grounds of mootness. EXTENDED AREA SERVICE (EAS) LOCAL CALLING ZONE DISPUTE In
December 2003, AT&T and Sprint, (later followed by TLD) challenged
PRTCs actions in implementing the reduction of calling areas before the TRB,
and sought an injunction to further reductions in the number of calling areas.
PRTC has opposed the request for the injunction and intends to fulfill its
commitments to the TRB. The TRB considered the matter in a hearing held on
April 28, 30 and May 3, 2004 and determined that the carriers request for
injunctive relief did not proceed. The TRB allowed PRTC to implement its EAS
Phase IV as scheduled on May 4, 2004 and ordered PRTC to sustain from further
EAS implementation until an expedited investigation process is completed. On
May 6, 2004, PRTC submitted to the TRB and to the claimants a proposed
expedited schedule in an effort to resolve the investigation prior to the next
EAS implementation scheduled for June 7, 2004 (Metro area). CARRIER ACCESS BILLING During the
first and second quarter of 2003, some carriers made a series
of billing claims against the Company regarding tariff interpretation, traffic
routing at the network level and misclassification of access traffic for
determination of applicable access elements. The Company
entered into negotiations with the major carriers and settled
the billing claims and phased-rate reductions required by the February 2002
Order. The cash flow effect of the settlement was $27 million in 2003.
Management expects an additional cash flow effect of $8 million for the
remaining carriers in 2004 and deems there are no other material impacts to the
Companys financial results. PUBLIC TELEPHONE SERVICE PROVIDER  ANTI COMPETITIVE ACTIONS On
November 8, 2001, Teléfonos Públicos de Puerto Rico, Inc. (TPPR), the
largest competitive provider of public pay phones in Puerto Rico filed a suit
in the United States District Court of Puerto Rico, claiming predatory,
exclusionary and anticompetitive acts and seeking $75 million in damages. We
filed a motion to dismiss the case and are awaiting a decision from the court.
At present, discovery is under way. 37




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Pan
American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three other competitive providers of public pay
phone in Puerto Rico, also filed a similar suit in the United States District
Court of Puerto Rico on September 4, 2002 on the same grounds. On November 8,
2002, after having evaluated and determined that this suit is similar to TPPRs
suit, we filed a motion to dismiss the case and/or in the alternative to
consolidate with the TPPR above complaint. 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 suit in the United States bankruptcy court in the District of Delaware,
claiming anti competitive acts. The claims have since been transferred to the
United States District Court of Delaware and the disputes between the two
parties include PRTCs amended administrative claim against PSA, and PSAs
complaint for over $9 million against PRTC. PRTCs motion to change of venue
to Puerto Rico was granted by the U.S. 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 monies 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 services
under contract to the PRDOE. The outstanding amount that PRDOE currently owes
to PRTC is $34 million. Under the E-Rate program, 89% of this amount will 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, at PRTCs request, dismissed the case without
prejudice. PRTC and PRDOE have agreed to try to resolve issues relating to the
amounts due out of court. The FCC has directed SLD to audit the billings for
the Reeducate Program for years four and five of the program before the funds
will be released. That audit is expected to begin shortly. In
addition, PRTC, along with the PRDOE, expects to testify at a
Congressional hearing on the E-Rate program scheduled for May 19, 2004. TOUCHTONE CHARGES On
November 17, 2003, six residential subscribers and eight business
service subscribers filed a class action suit with the Superior Court of Puerto
Rico (the Superior Court) under the Puerto Rico
Telecommunications Act of 1996 (Act) and the Puerto Rico Class Action Act of
1971. The plaintiffs claim that the Companys charges for touchtone service
are not based on cost, and are therefore in violation of the Act. They have
requested that the Court (i) issue an Order certifying the case as a class
action, (ii) designate the plaintiffs as representative of the class, (iii)
find that the charges are illegal, and (iv) order the Company to reimburse
every subscriber for excess payments made since September 1996. On December
30, 2003, PRTC filed its corresponding answer to the complaint and requested
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 a discovery proceeding. 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 that
hearing, the Court ruled that at this stage of the proceedings the
discovery process will be directed toward the issue of the certification of the
proposed class. 38




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CTI ASSET TRANSFER Prior to
the Acquisition, PRTC transferred its net wireless assets on
September 1, 1998 to CTI (which became Verizon Wireless, a division of PRTC, on
May 1, 2002). Our predecessors later filed a waiver request in 1998 with the
FCC to record this transfer at book value instead of fair value. Since our
predecessors had not included the costs of wireless operations in the regulated
rate setting process, we believe that ratepayers did not bear the cost of our
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. The TRB
stated in the February 2002 Order that any prospective rate
increase must first be applied against the gain in 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 among the items subject to audit the CTI asset transfer. The audit is
at 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 The FCC
requires companies that set interstate access rates based on a
price cap formula to use the price cap formula for all of their affiliates.
The price cap formula is based on a plan called Coalition of Affordable Local
and Long Distance Service that uses rate-of-return as a basis for setting
rates. The Company was previously required to implement price caps by March 2,
2000. However,
the FCC delayed conversion to price cap regulation until June 30,
2002, and the Company has requested a further extension until June 30, 2003.
Under an order issued by the FCC on April 18, 2002, the Company is no longer
required to file a waiver request until the FCC completes its review of the
all-or-nothing rule. In addition, upon the issuance of an Order and Section
Further Notice of Proposed Rulemaking by the FCC on February 28, 2004, the FCC
deferred further action on the all-or-nothing rule until they review 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 their decision shall continue in
effect until they issue a final order on this matter. INTERSTATE HIGH COST SUBSIDY On
October 21, 1999, the FCC adopted a new high cost support mechanism,
which has resulted in the phase out of the Companys high cost subsidy
revenues. These revenues were $49 million in 2000, $33 million in 2001 and $4
million for 2002. On February 28, 2003, PRTC sent a letter to the FCC,
requesting that the FCC take action to restore the high-cost universal service
support that the Company lost due to FCC policies adopted for non-rural
companies based on the cost characteristics of mainland companies. PRTC
requested that the FCC address the loss of its universal service support by
adopting rules for insular areas that are similar to those applied to rural
carriers. On October 27, 2003, the FCC issued an order rejecting PRTCs
request for reconsideration of its non-rural high cost support mechanism. The
order did not address PRTCs request to restore the high-cost universal service
support. On January 14, 2004, PRTC filed a petition for clarification and/or
reconsideration of several portions of the FCC Order of October 27, 2003 based
on the grounds that the FCC has not acted upon the specific mandate of Section
254 to provide support for insular areas. MESSAGE PROCESSING AND BILLING SYSTEM The Company
has an agreement with a provider for the implementation of a
traffic polling and billing software system for its wireline operations. While
the traffic polling portion has been implemented, management 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. 39




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BROTHERHOOD OF INDEPENDENT TELEPHONE WORKERS (HIETEL) UNION
CONTRACT In
October 2003, one of our union contracts, a collective bargaining
agreement with the HIETEL expired. The Company signed a new agreement with
HIETEL on April 15, 2004. TRB AUDIT As provided
by law, the TRB is currently conducting an ordinary audit of
our affiliate transactions and regulatory accounting. We do not expect 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 (OSS) 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. PRTC plans to seek
reconsideration of portions of the arbitrators order. RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of
recent accounting pronouncements, see Note 4 to our
unaudited condensed consolidated financial statements. 40




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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 March 31, 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)March 31, 2004:Senior notes
    
    $
    699,849
    
    
    $
    768,916
    
    
    $
    746,109
    
    
    $
    792,716Interest rate swap
    
    
    4,629
    
    
    
    4,629
    
    
    
    1,315
    
    
    
    7,980Total
    
    $
    704,478
    
    
    $
    773,545
    
    
    $
    747,424
    
    
    $
    800,696December 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
 41




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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. 42




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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. 43




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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:
    
    May 14, 2004By:
    
    /s/ Adail OrtizName:
    
    Adail OrtizTitle:
    
    Vice President Finance and Chief Financial OfficerDate:
    
    May 14, 2004By:
    
    /s/ Raúl E. GarcíaName:
    
    Raúl E. GarcíaTitle:
    
    ControllerDate:
    
    May 14, 2004
 44




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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)).
 45




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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)).
 46




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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Plan of Reorganization and Agreement of Merger, dated as of May
1, 2002, between Puerto Rico Telephone Company, Inc. and Verizon
Wireless Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.25 of the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).10.19
    
    $90,000,000 working capital revolving credit agreement dated as
of May 16, 2002, among Telecomunicaciones de Puerto Rico, Inc.,
as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Banco Popular de Puerto Rico, as Lender and Administrative
Agent. (Incorporated by reference to Exhibit 10.26 of the
Companys Quarterly Report on Form 10-Q for the period ended June
30, 2002 (File 333-85503)).10.20
    
    $50,000,000 2-Year term credit agreement dated as of May 16,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and Banco
Bilbao Vizcaya Argentaria, S.A., as Lender and Banco Bilbao
Vizcaya Puerto Rico, as Administrative Agent. (Incorporated by
reference to Exhibit 10.27 of the Companys Quarterly Report on
Form 10-Q for the period ended June 30, 2002 (File 333-85503)).10.21
    
    $50,000,000 2-Year term credit agreement dated as of May 31,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and HSBC Bank
USA, as Lender. (Incorporated by reference to Exhibit 10.28 of
the Companys Quarterly Report on Form 10-Q for the period ended
June 30, 2002 (File 333-85503)).10.22
    
    $50,000,000 3-Year term credit agreement dated as of June 24,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, and
Australia and New Zealand Banking Group Limited, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit
10.29 of the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).10.23
    
    $75,000,000 3-Year term credit agreement dated as of August 19,
2002, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, and The Bank
of Nova Scotia, as Lender and Administrative Agent. (Incorporated
by reference to Exhibit 10.28 of the Companys Quarterly Report
on Form 10-Q for the period ended September 30, 2002 (File
333-85503)).10.24
    
    Letter Amendment to the $90 million working capital revolving
credit agreement dated as of December 31, 2002. (Incorporated by
reference to Exhibit 10.28 of the Companys Annual Report on Form
10-K for the year ended December 31, 2002 (File 333-85503)).10.25
    
    Assignment and Acceptance agreement, dated as of December 31,
2002, relating to the $50 million 3-Year Term Credit Agreement,
dated as of June 24, 2002. (Incorporated by reference to Exhibit
10.29 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2002 (File 333-85503)).10.26
    
    Collective Bargaining Agreement between the Puerto Rico Telephone
Company and the Independent Union of Telephone Employees of
Puerto Rico effective from January 18, 2003 until January 17,
2006. Approved on February 13, 2003. (Incorporated by reference
to Exhibit 10.30 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2002 (File 333-85503)).10.27
    
    Second Allonge to the $90 million working capital revolving
credit agreement dated as of June 30, 2003. (Incorporated by
reference to Exhibit 10.31 of the Companys Quarterly Report on
Form 10-Q for the period ended June 30, 2003 (File 333-85503)).10.28
    
    364-Day Credit Agreement dated as of March 2, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico
Telephone Company, Inc., as Guarantor, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Banco Bilbao
Vizcaya Argentaria Puerto Rico, as Syndication Agent, and Banco
Popular de Puerto Rico, Firstbank Puerto Rico and Scotiabank de
Puerto Rico, as Co-documentation Agents. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on Form
10-K for the year ended December 31, 2003 (File 333-85503)).
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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. (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).
 48